30 March 2007

Novolipetsk Steel (NLMK) agrees to sell Prokopievskugol

Kuzbass Asset Holdings Limited, a subsidiary of OJSC Novolipetsk Steel (LSE: NLMK), has agreed to sell the Prokopievskugol Group of Companies to a Municipal State Company representing the City Administration of Prokopievsk. According to the agreement, the transaction price is USD1. The parties expect to complete the transaction during April 2007. The Prokopievskugol Group of Companies was acquired by NLMK in April 2006 as an integral, conditional part of its USD626 million acquisition of the Altai-koks coking facility. The ultimate price paid for the Prokopievskugol Group of Companies was USD62 million.

During its period of ownership, NLMK succeeded in alleviating the most acute problems of Prokopievskugol, including settlement of its USD16.9 million tax liabilities, amelioration of industrial safety and reduction of environmental impact. Today, all debt is repaid. There has been a 16% increase in wages, while the number of employees has being maintained at 15.9 thousand people. In 2006, financing of USD7.4 mln was allocated to improve mining safety in the framework of the “Industrial safety and emergency tolerance at Kuzbass coal mining facilities 2005 – 2010 program”. These efforts resulted in a 10% decrease in the accident rate during 2006 compared to 2005.

The high level of Prokopievskugol’s production costs and great difficulty of achieving cost reductions without substantial cuts in headcount determined NLMK’s decision to divest the asset. The costs of production at Prokopievskugol mines are twice as high as industry averages due to the low level of mechanization, resulting in high material, payroll and energy costs. The net losses of Prokopievskugol Group of Companies since consolidation by NLMK in April 2006 through December 2006 are around USD50 mln1.

The improvement of Prokopievskugol Group of Companies financial performance would require shutting down unprofitable mines and production facilities and reducing the number of employees. However, social aspects are vitally important for sustainable restructuring of Prokopievskugol. NLMK believes that the restructuring program at Prokopievskugol may be best carried out only with direct involvement of the local administration. Thus, NLMK accepted a proposal from the Kemerovo Region administration to divest Prokopievskugol for USD1 after settling all its debt obligations.
1 based on preliminary estimates.

About Prokopievskugol
In April 2006, OJSC Novolipetsk Steel (NLMK) has agreed to acquire from a group of investors an 82.2% interest in "Altai-koks" and a 100% interest in holding company Kuzbass Asset Holdings Limited, Gibraltar, which owns a 100% interest in Prokopievskugol Group of Companies. The purchase price for the transaction was USD626m including USD62m paid for assets of Prokopievskugol Group Companies.

The Prokopievskugol Group of Companies develops coking coal deposits of the Kuznetsk Basin. The Group includes seven mines (“Tyrganskaya”, “Krasnogorskaya”, “Koksovaya”, “Ziminka”, “Zenskobskaya”, “Dzerzhinsky” and “Voroshilov”), three processing plants and several service companies. In 2006, Prokopievskugol Group of Companies produced 4.721 million tonnes of coal. The production of coking coal concentrate amounted to 2.488 million tonnes.

Altai-koks is the leader among coke-chemical plants in Russia. It produces high-quality coke and chemical products. In 2006, Altai-koks coke production amounted to 2.967 million tonnes. The new coking battery was put into operation in Q4 2006. As a result, total capacity of Altai-koks amounted to 5 million tonnes per year. The acquisition of Altai-koks goes in line with NLMK’s strategy of developing 100% self-sufficiency in coke that takes into account projected increase in steel production and need to revamp coke facilities at the production site in Lipetsk. After purchase of several additional minority stakes in Altai-koks, NLMK’s total interest in the company is 93.6%.


Maria Simonova

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