Russia's Vast Coal Resources Have Become Attractive To Foreign Investors

04.02.2010 (15:04) | OfficialWire

As commodity prices increased throughout the year, Russia's vast coal resources have become attractive to foreign investors. Particular interest has been exhibited from companies in South Korea, Japan and China as companies look to secure long term stable supplies of the energy resource.

South Korea's Hyundai Steel signed deals with Mechel and Siberian Anthracite in February and September respectively and South Korea's Pohang Iron & Steel Co (POSCO) also agreed to purchase coking coal from Russian company Sibuglemet begining in 2011. It has also been rumoured that unnamed Chinese investors are keen to develop infrastructure in the Far East regions of Russia to exploit the rich resources in the area. Though, Russia's reliance on its natural resources damaged the country as commodity prices crashed, there is still a lot of confidence that investment will return now that the market is recovering. In October 2009, it was reported that the Federal Service for the Financial Markets (FFMS) would be creating a draft amendment that would make it more difficult for Russian companies to raise funds through Initial Public Offerings (IPOs) in international markets. If passed, this will be a blow to companies who have found raising capital difficult domestically, due to high interest rates on hard to find commercial loans. The amendment proposes a reduction in the limits of shares allowed to be issued on international markets. Whilst the move comes as a means to strengthen the domestic market and encourage investment within Russia, it does make it more difficult for companies to raise capital at a time when it is most needed. Analysts anticipate that the draft amendment will simply force companies to search for loop holes as a means to circumvent the new regulations.

Throughout Q309 and Q409, news about the aluminium industry was dominated by the debt restructuring of giant producer UC RUSAL, and its intention to launch an IPO. By September 2009, it was announced that UC RUSAL, would restart its plans for an IPO on the Hong Kong stock exchange in a move that could raise US$2bn for the company. In order to move forward with the listing, the company still has to agree to the restructuring of its debts with domestic and international creditors. UC RUSAL's debts currently stand in excess of US$16bn. By the end of October, however, UC RUSAL had managed to pay off or agree repayment terms with its Russian creditors. It was estimated that half of its international lenders were in agreement to the current restructuring plans for the US$7.3bn debt. In November 2009, state support for the company was displayed with the announcement that the government might buy up to 3% of shares in the company through the IPO for between RUB14bn-18bn (US$488mn-627mn) which would give the company a valuation of US$20bn.

Meanwhile, In September 2009, Reuters reported that Atomredmetzoloto Uranium Holding Company (ARMZ) believed a recovery and hike in uranium prices would be seen in early 2010. As environmental concern sees more countries becoming interested in developing clean fuel sources and moving away from fossil fuels, demand for uranium is increasing steadily. The company also reported that it was meeting with French state-controlled nuclear reactor manufacturer Société des Participations du Commissariat à l'Energie Atomique (AREVA) to consider uranium projects together in Namibia where there are extensive resources of uranium. As well as starting to work with AREVA, the following month, ARMZ stated that they were also in talks with Canadian based Cameco Corp about potential uranium projects in Africa and Australia.

Industry Forecast

In the short term, Russia's mining sector is facing severe difficulties caused by falling commodities prices. In 2008, we estimated the mining sector declined by 11.0% in real terms, and we forecast a significant contraction in 2009. By the end of the forecast period, however, the market should have returned to strength as commodity prices recover and new reserves are developed. In 2014, we forecast the mining sector will be worth US$240bn.

(Companiesandmarkets.com and OfficialWire)

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