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Steam Coal Market

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Steam Coal Market TPSA BRE Bank Securities BRE Bank Securities 29 May 2009 Special comment Coal Mining Poland LW BOGDANKA Not Your Usual Coal Mine Free float 32.34% LW Bogdanka, located in the Lubelskie Coal Basin in eastern Poland, is one of the leading and most cost-effective steam-coal mines in the country. The coal from Bogdanka’s deposits is characterized by properties (calorific value, sulfur content) which fully meet the requirements of the energy Shareholder structure after C-stock share issue industry, buyer of 80 percent of the mine’s production. In Poland, 56% of State Treasury 65.50% electrical power is generated from bituminous coal, and 36% is produced Kozienice Power Plant 1.43% from lignite. In 2008, with sales approximating 5.5 million tons, Bogdanka New shares 32.34% produced 6.6% of Poland’s total coal output, and achieved a 10.8% market share in supplies to commercial power plants. In the absence of viable alternatives, coal is going to remain the main source of energy in Poland in Others 0.73% the next 20 years. Sector Outlook A unit cost of PLN 144 per metric ton ranks Bogdanka among the cheapest Over 50% of energy in Poland is generated from coal producers in Poland (the industry average is PLN 222.6 per ton). The bituminous coal, and new projects are coal-based as mine is ideally poised to benefit from issues faced by producers in the well. Output at Silesian mines is decreasing by the south-western coal-producing region of Upper Silesia (mines there are year. Due to these factors, LW Bogdanka, which is one struggling with decreasing output, lack of investment in exploration, of the cheapest producers, will find it easy to sell its mounting technological and geological obstacles, escalating salary output, including coal from the new field currently being demands), which currently meet 80% of national demand, but which incur launched. increasing unit costs (PLN 245/ton in early 2009). By selling its coal at prices below the costs incurred by competition in the Upper Silesian Coal Company profile Basin, Bogdanka minimizes earnings risks and maximizes the potential for LW Bogdanka is one of Poland’s biggest and most- future growth. cost effective steam-coal mines. In 2008, with 5.5 million tons of coal sold, it had a 6.6% share in In the best-case scenario for Silesian mines (in which they continue to break domestic production and a 10.8% share in supplies to even), as the price of crude oil increases, which is likely, the price of ARA commercial power plants. coal will go up as well (at present it is lower than the price of coal extracted in Poland), allowing the mines to keep prices at the current high levels. In case of LW Bogdanka, this entails a per-ton profit of at least PLN 50. In the Important dates more likely alternative scenario, there will be a decline in prices of 29.05 - Price range announced domestically-extracted coal (by 10-20%), entailing heavy losses for 1-5.06 - Individual and employee subscriptions producers, social turmoil and the need to reduce output (it is estimated that 4-5.06 - Bookbuilding of the 84m tons total output, ca. 20m tons are permanently unprofitable). 5.06 - Final price announced Given what happened with Polish shipyards, it is very unlikely that the 8-10.06 - Institutional subscriptions government should opt to grant state aid to the mines in need. For LW 19.06 - Share allocation Bogdanka, this means that selling coal from the Stefanów field will be easier. Given the growing share of imports in domestic consumption, the price of coal from the Polish mines should be more tightly correlated with ARA prices. Michał Marczak (48 22) 697 47 38 [email protected] Kamil Kliszcz (48 22) 697 47 06 [email protected] www.dibre.com.pl THIS29 maja DOCUMENT 2009 MAY NOT BE DISTRIBUTED IN THE UNITED STATES, JAPAN OR CANADA. BREBRE Bank Bank Securities Securities LW Bogdanka Being aware of the upcoming opportunities, in 2004, Bogdanka’s Management embarked on a project aimed at doubling the mine’s production capacity by expanding operations into the “Stefanów” coal field. To date, the company has spent over 466.5 million zlotys on the project. Mining in Stefanów is set start in 2011 (the expected additional coal output is 7.8 million tons), and the target capacity will be achieved in 2014. In addition to boosting output, the project will facilitate a 20 percent reduction in production costs. At the moment, Bogdanka’s licensed mine sites can yield an estimated 11.1 million tons (MMT) of coal a year until 2034. However, extraction from the recoverable reserves will be extended until 2043 through the upcoming implementation of an automated longwall plow system. Approximately 40 percent of installed power capacity in Poland is more than 30 years old, and will be shut down within the next 15-20 years, necessitating replacement of about 14 gigawatts of capacity (including 12 GW of coal-fired capacity) with budgets ranging between EUR 15 billion and EUR 20 billion depending on the type of fuel. From the point of view of Bogdanka, the most important aspect of these upgrades is that many of the coal-fired power plants which have started, or are about to start modernizing, are located within its sales territory. Equally importantly, some of these plants (including in Kozienice, Ostroł ęka, and Siekierki) are very likely to become eligible for free emission credits under the EU Energy and Climate package. This suggests that coal demand in eastern Poland in 2014 and 2015 will increase to a level well exceeding Bogdanka’s capacity as it will be after the launch of the “Stefanów” mine. Bodanka’s past and future earnings results factor in the costs related to the Stefanów project. In 2009, the company will book an additional one-time charge of PLN 36m, representing compensation paid to employees who will not receive stock options. Our financial projections for Bogdanka indicate an upturn in EBITDA after FY2011, driven by the launch of production from the first Stefanów longwall panel, paired with a decrease in costs (incl. the Stefanów OPEX, and unit costs of production). Bogdanka is expected to break even on the Stefanów investment in 2014. 29 May 2009 2 BREBRE Bank Bank Securities Securities LW Bogdanka IPO and Its Objectives Bogdanka is offering 11 million shares of “C” stock with a par value of PLN 5 each. The expected proceeds of PLN 450m will be used to complete the expansion of the mine site within the Stefanów coal field, in line with the company’s 2009-2015 Strategy. Stefanów is expected to double the mine’s annual coal capacity from 5.5MMT to 11.1MMT in 2014, and its launch will help to improve mining efficiency as well as to reduce unit costs. Specific allocations within the Stefanów project budget include: • An extraction and drilling shaft - PLN 53.4m; • Expansion of the “ZPMW” coal-handling facilities (including an increase in capacity from 1,200 to 2,400 tons per hour, a transportation system to move coal from the Stefanów field, and enlargement of the waste-dump area) – PLN 319.7m; • Other coalfield infrastructure (buildings, underground air-conditioning) – PLN 61.6m; • Expansion of the mine railway infrastructure – PLN 10.1m. Any remaining expenses related to the Stefanów field will be covered from Bogdanka’s own cash resources, and with external debt. Details of the expansion work and its outcomes are outlined later in this report. The IPO will increase Bogdanka’s share capital to PLN 301.2m. Holders of the C shares will have a combined interest in the mine of 32.34%, and the State Treasury will retain a stake of 65.5%. Minority shareholder the Kozienice Power Plant will hold 1.43% after dilution, and remaining interests will total 0.73%. Pre- and Post-IPO Shareholder Structure C shares Others Others 32.3% Kozienice 1.1% 0.7% Power Plant 2.1% State Kozienice Treasury Power State 96.8% Plant Treasury 1.4% 65.5% Source: LW Bogdanka 29 May 2009 3 BREBRE Bank Bank Securities Securities LW Bogdanka Business Profile Located in the Lubelskie Coal Basin in eastern Poland, Bogdanka is one of the leading and most cost-effective bituminous-coal mines in the country. The properties of the coal from Bogdanka fields (calorific value, sulfur content) fully meet the requirements of the Polish energy industry, which buys 80 percent of the mine’s output. In 2008, with sales approximating 5.5 million tons, Bogdanka produced 6.6% of Poland’s total coal output, and achieved a 10.8% market share in supplies to power plants. A unit cost of PLN 144 per ton (2008 IAS estimate) ranks Bogdanka among the cheapest producers in Poland (the average unit cost in the industry, as calculated using Polish Accounting Standards, is PLN 222.6/T). The company is developing a new mining site (“Stefanów”) which expected to double its capacity, and which cost a total of PLN 520m between 1999 and 2008. Mining in Stefanów is set start in 2011 (the expected additional coal output is 7.8MMT), and the target annual capacity of 11.1 MMT will be achieved in 2014. Bogdanka’s licensed recoverable resources are currently estimated at 11.1MMT annually until 2034, but they will increase once the company implements an automated longwall plowing system which facilitates cost-effective extraction from coal seams as thin as 1.2 meters. Coal resources in the Lubelskie Coal Basin • Expansion of the mine site in April 2008 increased the recoverable reserves to 260MMT.
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