Ukrainian Equity Market: Weekly Overview 30 August

Ukrainian Equity Market: Weekly Overview 30 August – 3 September, 2010

2A Republikas square, Riga, Latvia, LV-1010 Lidiya Mudra, Tel. +371 67010810, Fax +371 67778622 Financial Analyst www.citadeleam.lv [email protected]

UX Index UX index gained 0.85% during the week 2200 UX last week: Ukraine’s steelmakers increased crude steel output by 7.2% 2100 m/m in August +0.85% JKX Oil & Gas released 1H10 financials 2000

Kernel Holding published strong 2010FY results 1900 03-Sep-10: 2,011.03 Consumer prices in Ukraine grew by 1.2% m/m in August, 1800 breaking the streak of 4 consecutive months of deflation Jun Jul Aug Sep

Last week the Ukrainian stock market edged up slightly with its measure the UX index gaining 0.85%.

In the machine building sector, Luganskteplovoz, one of the leading locomotive producers in CIS, released it produced 36 sections of 2TE-116U locomotive in 8m10, including 30 for Russia, 4 for Kazakhstan and 2 for Mongolia. The number is slightly less than the company’s 2009 full year output of 38 locomotive sections.

In the metals & mining sector, Ukraine’s metallurgical producers reported their preliminary output results for August 2010. Ukraine’s steelmakers increased crude steel output by 7.2% m/m in August to 2.60m tonnes (-2.3% y/y) thanks to the restoration of production at Industrial Union of Donbas’ (IUD) mills (IUD’s Alchevsk Steel increased steel output by 62.8% m/m and Dzerzhinsky Steel by 38.8% m/m) and higher output at Mariupol Ilyich Steel (+15.7 m/m in August). Elsewhere, Azovstal raised output by 2.4% m/m in August, while Yenakievo Steel’s production volumes reduced by 1.2% m/m. For 8m10, the local steel mills produced 21.36m tonnes of crude steel (+12.9% y/y).

Ukraine’s coke production increased by 7.4% m/m to 1.50m tonnes (+1.8% y/y) in August, brining 8m10 output to 12.21m tonnes (+7.4% y/y). IUD’s Alchevsky Coke increased output the most in August (+19.7% m/m), benefiting from a recovery in demand from the group’s steel mills. Metinvest’s Avdiyivsky Coke also demonstrated production growth last month, increasing coke output by 13.7% m/m on the back of increased supplies to Mariupol Ilyich Steel. Yasynivsky Coke posted a 1.5% m/m cut in coke output.

Iron ore concentrate output in Ukraine slid down by 0.7% m/m to 5.44m tonnes (+2.4% y/y) last month. South Ore Mining turned out to be the only producer to record positive m/m dynamics in August, posting increase in iron ore concentrate output of a 9% m/m. At the same time, Metinvest’s Central Ore Mining and Inguletsky Ore Mining underperformed the sector, reporting declines of 5.3% m/m and 3.4% m/m respectively. 8m10 iron ore concentrate output was 42.65m tonnes (+25.6% y/y).

Pipe production in Ukraine grew by 7.7% m/m in August to 148.5ths tonnes (-15.1% y/y), bringing 8m10 output to 1.06m tonnes (- 1.2% y/y). Individual company performances in August were as follows: Metinvest-owned Khartsyzsky Pipe boosted its output figures by 70.5% m/m, Interpipe Novomoskovsk decreased pipe output by 5.6% m/m, while the production volumes of Interpipe NPR remained unchanged. For more detailed output data please see the table below.

Shareholders of Mariupol Ilyich Steel, Ukraine’s 2nd largest steelmaker, approved the subscription results of an additional share issue, which increased the company’s share capital by 3.7 times to UAH 3.092b, up from UAH 837.9m. The new shares are to be purchased by Metinvest, which will gain a 75% stake in the company.

In the oil & gas sector, JKX Oil & Gas released financial results for 1H10, posting net sales of $104.5m (+33% y/y) and a net income of $35.5m (+10.4% y/y). The results imply net margin of 33.6% (-6.9pp y/y). Over the period, the company’s production increased by 14.7% y/y to 11.7ths boepd. According to the release, overall production for 2010 full year is expected to be in excess of 10.5ths boepd (-10% y/y), implying lower production levels in 2H10 compared to 1H10 (-15% est.).

In the agricultural sector, Kernel Holding, a leading Ukrainian sunflower oil producers, published unaudited IFRS results for 2010 financial year (July 2009-June 2010), revealing net sales of $1.02b (-2.5% y/y), EBITDA of $190.7m (+0.3% y/y) and a net income of $152.7m (+15.7% y/y). The data imply an EBITDA margin of 18.7% (+0.5pp y/y) and net margin of 15.0% (+2pp y/y). The company explained its little-changed y/y results by largely flat agricultural commodity prices and overall difficult market conditions. Over the period, Kernel’s grain sales decreased by 1.5% y/y to 2.23m tonnes, while its bulk oil sales grew by 66.2% y/y to 362.3.6ths tonnes. The company’s grain terminal handled 3.26m of grain (+73.5% y/y) in 2010FY. For 2011FY, Kernel projects a 27.4% increase in revenues to $1.3b, a 33.7% growth in EBITDA to $255m and a 27.7% boost in net income to $195m that, in turn, implies EBITDA and net margins of a respective 19.6% (+0.9pp y/y) and 15% (unch. y/y). Economic Environment

According to the State Statistics Committee, consumer prices in Ukraine grew by 1.2% m/m in August, breaking the streak of 4 consecutive months of deflation. In annual terms, consumer inflation increased to 8.3% y/y vs. 6.8% y/y recorded in July. The main cause of the inflation in August was a 50% hike in domestic gas tariffs.

Industrial producers’ prices grew by 0.9% m/m in August vs. 0.2% decrease in July and 0.5% in June. In y/y terms, however, the PPI slowed to 23.3% from 24.4% in July. Last month, the most significant increase in prices was recorded in mining of fuel and energy minerals (+5.1% m/m) and refining (+2.6% m/m).

The National Bank of Ukraine (NBU) announced its gross international reserves grew by 5.9% m/m to $32.7b in August (+23.3% YTD).

Weekly Leaders / Laggards Largest Gainers Largest Losers Largest Turnover Turnover, Issuer Change Price Issuer Change Price Issuer USD 10.54% 3.20 GBP -18.00% 0.31 GBP Ferrexpo Ukrprodukt Ferrexpo 26.6m

8.98% 74.00 PLN -6.90% 48.88 UAH Astarta Sumy Frunze Machine Eng. JKX Oil&Gas 8.7m 7.10% 3.14 GBP -6.76% 0.09 GBP JKX Oil&Gas Landkom International Regal Petroleum 7.5m

5.38% 0.34 GBP -6.40% 2.34 EUR Regal Petroleum AgroGeneration Avdiyiv Coke 6.0m

4.57% 15.33 UAH -6.34% 3.25 EUR Avdiyiv Coke Sintal Agriculture Plc Kernel Holding 4.7m

Output Data

Steel output, ths tonnes Coke output, ths tonnes

Company Aug-10 y/y m/m 08M10 y/y Company Aug-10 y/y m/m 08M10 y/y

Dniprospetsstal 31 34.8% -11.4% 249 67.1% Avdiyivsky Coke 298 22.1% 13.7% 2 153 21.6%

Yenakievo Steel 223 4.1% -1.2% 1 713 8.3% Donetskkoks 26 13.0% -7.1% 234 50.0%

Azovstal 433 -8.3% 2.4% 3 726 34.0% Yasynivsky Coke 135 8.9% -1.5% 1 052 8.7%

Mariupol Ilyich Steel 486 15.7% 15.7% 3 592 32.1% Alchevsky Coke 207 -35.9% 19.7% 2 016 -12.9%

Alchevsk Steel 223 -41.5% 62.8% 1 986 -19.4% Bagliykoks 48 -7.7% 37.1% 439 14.3%

Mittal Steel Kryviy Rih 462 3.1% -6.3% 4 027 23.2% Zaporizhkoks 107 4.9% 0.9% 827 -1.0%

Zaporizhstal 289 4.7% -2.4% 2 230 2.7%

Iron ore concentrate output, ths tonnes Pipe output, ths tonnes

Company Aug-10 y/y m/m 08M10 y/y Company Aug-10 y/y m/m 08M10 y/y

South Ore Mining 785 11.3% 9.0% 5 869 38.4% INTERPIPE NRP 31.2 12.2% 0.0% 224.3 53.4%

Central Ore Mining 512 5.5% -5.3% 4 076 37.1% Dnipropetrovsk Pipe 6.5 12.1% 0.0% 52.6 50.3%

North Ore Mining 1 195 -4.4% 0.0% 9 711 11.2% INTERPIPE Novomoskovsk 18.7 -8.3% -5.6% 122.5 32.3%

Poltavsky Ore Mining 953 2.3% -1.8% 7 432 8.9% Khartsyzsky Pipe 25.3 -58.8% 70.5% 144.1 -65.0%

Inguletsky Ore Mining 1 332 5.4% -3.4% 10 420 50.5% Kominmet Pipe 13.8 -24.6% 11.3% 98.9 -20.7%

The information contained in this report was obtained in good faith from sources believed to be reliable. No guarantee, explicit or implicit, is provided with respect to completeness and accuracy of the information. The opinions expressed represent the current opinion of the authors and do not represent the opinion of Citadele Asset Management or any of its affiliates, subsidiaries or representatives. The opinions are subject to change without prior notice. Neither Citadele Asset Management nor any of its affiliates, subsidiaries or representatives accepts the liabilities arising from the possible use of the information contained in this report. This material is provided for informational purposes only and should not be construed as advice to buy, hold or sell a particular security or investment. Any investment you make shall be based solely on your own evaluation of your financial circumstances and investment objectives.