MARKET SURVEY. March 2015 RUSSIA S COAL INDUSTRY IN 2014 TABLE OF CONTENTS CORPORATE NEWS AGENCY

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1 CORPORATE NEWS AGENCY Interfax - CNA 2 Pervaya Tverskaya- Yamskaya Moscow, , Russia Tel. (7-499) cna@interfax.ru RUSSIA S COAL INDUSTRY IN 2014 March 2015 MARKET SURVEY TABLE OF CONTENTS RUSSIA S COAL INDUSTRY: MAJOR TRENDS... 4 Russia s coal consumption... 4 Russia s coal reserves... 5 Russia s coal industry: recent trends... 7 Growth trends... 7 Regional production trends Major coal projects Russian coal industry: transportation issues Railroad transportation Seaport facilities Prices for coal: trends in domestic and world markets Russian coal industry: foreign trade performance RUSSIAN COAL INDUSTRY: TOP COMPANIES, GROUPS, HOLDINGS.. 20 TOP RUSSIAN COAL PRODUCERS Siberian Coal Energy Company (SUEK) Structure Operations summary Kuzbassrazrezugol Structure Operations summary SBU-Coal Structure Operations summary Mechel (Yuzhny Kuzbass, Yakutugol) Structure Operations summary En+ Coal Structure Operations summary Sibuglemet Structure Operations summary Evraz Group Structure Operations summary Severstal (Vorkutaugol, Vorgashorskaya) Structure Operations summary... 50

2 Russian Coal Structure Operations summary Kuzbass Fuel Company Structure Operations summary Stroyservis Structure Operations summary MMK Coal Division (Belon) Structure Operations summary LIST OF TABLES Table 1 Russian Coal Reserves, million tons... 6 Table 2 Russian Coal Production by Main Types in , million tons... 7 Table 3 Average Monthly Growth in Output by Types of Coal in Russia in Table 4 Compound Annual Growth Rates (CAGR) of Rail Tariffs and Prices for Coal In Russia in Table 5 Russia's Exports of Bitumen Coal in , '000 tons Table 6 Russia's Imports of Bitumen Coal in , '000 tons Table 7 Top Russian Top Coal Producers in 2014, mln tons Table 8 Major Coal Holdings and Groups in Russian Coal Industry Table 9 SUEK s Key Consolidated Financials to IFRS in H1 2014, US$ mln Table 10 SUEK s Key Consolidated Financials to IFRS in , US$ mln Table 11 SUEK-Kuzbass Key Financials to RAS in , US$ mln Table 12 SUEK-Krasnoyarsk s Key Financials to RAS in , US$ mln Table 13 Kuzbassrazrezugol s Key Financials to RAS in , US$ mln Table 14 SBU-Coal Financials to RAS Consolidated by Key Companies in , US$ mln Table 15 Southern Kuzbass Key Financials to RAS in Jan.-Sept. 2014, US$ mln Table 16 Yakutugol s Key Financials to RAS in , US$ mln Table 17 Production and Sales Volumes of Mechel Steel Group in Jan.-Sept. 2014, '000 tons Table 18 Sibuglemet Key Non-Consolidated Financials to RAS in , US$ mln Table 19 Mezhdurechye s Key Financials to RAS in , US$ mln Table 20 Sibuglemet s Financials to RAS Consolidated by Key Companies in , US$ mln Table 21 Evraz Group Coal Production , 000 tons Table 22 Yuzhkuzbassugol s Key Financials to RAS in , US$ mln Table 23 Raspadskaya Key Financials to IFRS in H1 2014, US$ mln Table 24 Severstal Resources Coal Sales Volume in , tons Table 25 Vorkutaugol s Key Financials to RAS in , US$ mln Table 26 Russian Coal s Key Non-Consolidated Financials to RAS in , US$ mln Table 27 Russian Coal s Financials to RAS Consolidated by Key Companies in , US$ mln Table 28 Kuzbass Fuel Company s Key Financials to IFRS in H1 2014, US$ mln Table 29 Kuzbass Fuel Company s Key Financials to IFRS in H1 2013, US$ mln Table 30 Belon s Coal Output in , 000 tons Table 31 Belon s Key Financials to RAS in January-September 2014, US$ mln LIST OF GRAPHS Graph 1 Coal Sales in Local Market in , million tons... 4 Graph 2 Breakdown of Russian Coal Consumption by Major Users in

3 Graph 3 Russia's Coal Industry Via GDP in , year-to-year... 7 Graph 4 Russia's Monthly Growth Rates of Coal Production in 2014-January Graph 5 Russia's Coal Production in million tons... 9 Graph 6 Breakdown of Russia's Coal Production by Types of Coal in Graph 7 Commissioning of New Capacity in Coal Production in Russia in , 000 tons Graph 8 Transportation of Coal by Railways in Russia in , million tons Graph 9 Russia's Rail Tariff Growth Via Coal Export and Domestic Price Growth in , Y-to-Y Graph 10 Handling of Bitumen Coal by Russian Seaports in , million tons Graph 11 Average Export Prices for Russian Coal in , US$ per tonne Graph 12 Growth in Domestic Prices for Steam and Coking Coal in Graph 13 Ranking of Russian Top Coal Producers Growth in Output in Graph 14 SUEK Coal Production in , million tons Graph 15 SUEK s Sales Revenue by Segments in H Graph 16 SUEK s ROS by Segments in H Graph 17 Kuzbassrazrezugol Coal Production in , million tons Graph 18 SBU-Coal Production in , million tons Graph 19 Mechel Coal Production in Russia in , million tons Graph 20 En+ Coal Coal Production in , million tons Graph 21 Breakdown of En+ Coal Production by Mines Graph 22 Sibuglemet Coal Production in , million tons Graph 23 Evraz Group Coal Production in , million tons* Graph 24 Severstal Russian Coal Production in , million tons Graph 25 Russian Coal Consolidated Coal Production in , million tons Graph 26 Kuzbass Fuel Company Coal Production in , million tons Graph 27 Stroyservis Coal Production in , million tons Graph 28 Belon Coal Production in , million tons

4 RUSSIA S COAL INDUSTRY: MAJOR TRENDS Russia s coal consumption In 2014, Russian coal consumption contracted by 3.7% Russian consumption of coal hit the record in 2008, amounting to million tons. In 2009, it fell to the lowest level in the last five years, down by 10.0% against Growing economy boosted local coal sales by 8.8% to mln tons in Since 2011 domestic coal sales have been declining. In 2014, Russian coal consumption fell once again by 3.7% to million tons. The consumption of steam coal in Russia last year was down 5.1% at million tons. Local demand for coal for coking increased 1.2% to 38.5 million tons. In 2015, local coal demand is expected to contract further due to economic slowdon, increasing competition from cheaper natural gas, gasification of Russian regions. Graph 1 Coal Sales in Local Market in , million tons Source: The CDU TEK, Interfax-CNA s analysis 4

5 In 2014, electric power industry cut coal consumption by 5.0% The Russian electric power industry consumes most of the coal produced locally and imported from neighboring countries. Power and heat generation accounts for 48.9% of total Russian coal consumption. In 2014, Russia s electric power industry cut coal consumption by 5.0%, households and agriculture by 13.0%. Ferrous metals industry raised consumption of coal by 1.2%. Graph 2 Breakdown of Russian Coal Consumption by Major Users in Source: the Economic Development Ministry, Interfax-CNA s analysis Russia is seeking to increase role of coal in energy generation Meanwhile, Russia is seeking to increase role of coal in energy generation. In accordance with the energy strategy for up until 2030, Russian power stations are to boost share of coal from 26% currently to 34-36% in 2030, while share of natural gas shoul fall to 60-62% against 70%. Russia s coal reserves Russia accounts for for about 18% of world proved recoverable coal reserves Coal reserves are available in almost every country wordwide. Recoverable coal reserves are located in around 70 countries. Russia possesses an important share of world coal reserves. It accounts for about 18% of world proved recoverable coal reserves. 5

6 Russia's overall coal resources amount to 4.09 trillion tons standard fuel, and reserves to billion tons At the beginning of 2011 the Energy Ministry of RF put Russia's overall coal resources at 4.09 trillion tons standard fuel, and reserves billion tons. 89% of this is steam coal and 11% coking coal. Listed coking coal reserves on the state balance are 49.7 billion tons, including 39.7 billion tons of proven A+B+C1. About half of the proven reserves are high-grade (Gzh, Zh, KZh, K) and more than half of these (13.9 million tons, 66%) are GZh and Zh and 5.2 billion tons, 13%) are KZh and K grades. At present, 78% of all coking coal reserves (31.1 billion rubles) are in unlicensed properties. Licensed properties only contain 15% (A+В+С billion tons) of Russia's overall coal reserves (193.2 billion tons). Table 1 Russian Coal Reserves, million tons Reserves registered in the state balance Resources Total Total А+В+С 1 С 2 Total including P1 Total including open-pit Lignite Bituminous including coking Anthracite Source: the Coal Industry Development Program to 2030 Growth in coal reserves B+C1+C2 amounted to mln tons in 2013 Growth in coal reserves B+C1+C2 amounted to mln tons in Several important steam coal deposits were prepared for licensing in the Pechora basin, the Eastern Donbass, the Altai territory, the Sakhalin region, high-quality coking coal deposits in the Pechora basin, Kuzbass, the Southern Yakutia basin. Assessment of probable and possible reserves of Prigranichnaya area in the Southern Yakutia basin revealed high-quality coking coal resources amounting to 1 billion tons. 6

7 Russia s coal industry: recent trends Growth trends In 2014, coal industry grew by 0.7% Russia s coal industry s performance is much more dependent now on local economic growth. In , correlation ratio between coal industry and GDP growth reached 0.80 in comparison with 0.95 in In 2014, the Russian coal industry grew by 0.7% due to growth in steam and coking coal production, up 2.5 and 1.5% respectively. Lignite production plummeted by 5.3%. Graph 3 Russia's Coal Industry Via GDP in , year-to-year Source: The Federal Statistics Service Table 2 Russian Coal Production by Main Types in , million tons Change Total % Bituminous coal % Including coking coal % Lignite % Enriched coal n.a. n.a % Source: the Federal Statistics Service 7

8 Coal industry is following an upward trend Meanwhile, monthly growth rates of Russia s coal industry show that the industry is following a strong upward trend. Output of coal was up by average 2.2% per month in Q accelerating to 7.7% per month in Q In January 2015, it surged by 12.4% against the same period a year ago. Graph 4 Russia's Monthly Growth Rates of Coal Production in 2014-January 2015 Source: the Federal Statistics Service Table 3 Average Monthly Growth in Output by Types of Coal in Russia in 2014 Indicator Q Q Q Q Total -2.1% -5.4% 2.2% 7.7% Bituminous coal 3.5% -3.0% 1.3% 6.3% Including coking coal 1.3% -3.5% -1.6% 9.3% Lignite -18.8% -16.5% 6.1% 11.9% Source: the Federal Statistics Service, Interfax-CNA s analysis Coal output volume remains much lower than 1990 level In the coal industry followed growth path (with exception of 2002). Still, total output volume remained 17.5% lower than 1990 level when 395 million tons were extracted. In , Russian coal production showed a steady growth, reaching 89.6% of 1990 level. In 2013, coal output was down but production grew in Russia produced 356 mln tons of coal last year. Open-cast coal output fell by 0.6% while deep-mine production was up by 4.1%. Russia's Energy Ministry anticipates that coal production this year will be maintained at the 2014 level. 8

9 Graph 5 Russia's Coal Production in million tons Source: the Federal Statistics Service There are several key fundamentals currently undermining growth prospects of Russia s coal industry There are several key fundamentals currently undermining growth prospects of Russia s coal industry: Low domestic prices for natural gas set on non-market principles; Bottlenecks in the railway infrastructure, especially in direction of Far East; High coal transportation costs for export delivery; Declining domestic consumption of coal; Growth in depth of coal mines (from 380 m in 2000 to 441 m in 2012); About 91% of deep coal mines are vulnerable to mine accidents; High lethal injury rate (Russia 0.15 deaths per 1 mln tons of mined coal in comparison with 0.10 in Poland, 0.02 in the USA, in Australia); Weak competitive positions of the Russian industry of coal machinery (import penetration in the coal industry grew from 37.0% in 2010 to 49.6% in 2012). 9

10 Graph 6 Breakdown of Russia's Coal Production by Types of Coal in Source: the Federal Statistics Service, Interfax-CNA s analysis Bituminous steam coal accounts for more than half of Russian coal production Financial performance of the coal industry deteriorated last year Bituminous steam coal accounts for more than half of Russian coal production. Its share in Russia's total has grown considerably from 44.7% in 2001 to 59.5% in This type of coal forms the bulk of Russia's export deliveries - the most important revenue source for local coal producers. Financial performance of the coal industry deteriorated last year. The industry remained unprofitable. Its consolidated financial result (operating income minus operating loss) was again in the red amounting to RUB 65.1 billion in January-October 2014 against RUB 15.2 billion in corresponding period a year ago. Poor financial performance was caused mostly by falling demand from power utilities. Regional production trends The Kuznetsk coal basin increased output by 3.9% In 2014, the Donetsk coal basin (the Southern Federal District) increased output by 26.1% (down by 22.1% in 2013), the Kuznetsk coal basin (the Siberian Federal District) - by 3.9% (up 0.7% in 2013), the Southern Yakutiya - by 0.2% (down 1.7% in 2013). The Pechora coal basin (the Far Eastern Federal District) cut coal production by 5.8% (up 0.9% in 2013), the Kansko-Achinsk coal basin (the Siberian Federal District - down by 3.1% (down by 10.2% in 2013). The Kemerovo region is the top Russian coal producer The Kemerovo region is the top Russian coal producer accounting for 56% of the total. In 2014, its coal output grew by 3.0% to 209 mln tons. 10

11 The Kemerovo region is followed by the Krasnoyarsk territory with 12% of the total. Major coal projects In 2014, only million tons of new capacity in coal production was commissioned in Russia Commissioning of new capacity in coal production in Russia has been uneven in recent years. It reached a record level in 2012, amounting to million tons. In , the activity in construction of new capacity was maintained at record levels. In 2014, the situation changed for the worse. Only million tons of new capacity in coal production was commissioned in Russia, down by 56%. Graph 7 Commissioning of New Capacity in Coal Production in Russia in , 000 tons Source: the Federal Statistics Service Two large coal projects are expected to come on stream in coming years Tuva Energy & Industrial Company plans to start producing coal at the Elegest field by 2019 A robust performance of the world coal market in precrisis years increased interest in development of Russian coal reserves. Two ambitious coal projects are expected to come on stream in coming years Elegest in the Republic of Tyva and and Elga in the Sakha Republic. The issue of co-financing by the National Welfare Fund (NWF) for the project to build the Kyzyl-Kuragino rail line to coal fields in Tuva and a coal processing complex is receiving further consideration, Russian Economic Development Minister Alexei Ulyukayev said in February Tuva Energy & Industrial Company, owned by Ruslan Baisarov, plans to start producing coal at the Elegest field by The project involves 11

12 building a mining and washing plant, with a capacity more than 15 million tons of concentrate per year, the Kuragino-Kyzyl railroad and a coal port at Vanino. Overall project costs are an estimated 217 billion rubles, of which Tuva Energy & Industrial Company will provide 54 billion rubles. The company hopes to receive the other 163 billion rubles in the form of state support, billion rubles of it from the NWF. The construction of the railroad will be the most expensive part of the project and will cost, according to estimates, 156 billion rubles. The development of the field requires 40 billion rubles and the construction of the terminal at Vanino requires 12 billion rubles. The project also includes the construction of a combined heat and power plant in Kyzyl costing 9 billion rubles. According to the rules for spending NWF funds, the funds may amount to up to 40% of the cost of the entire project. Last summer the government endorsed the project's passport and it was expected that any NWF funding for the project might not have to be repaid for 20 years. The company will receive money from the NWF to finance construction of the Kyzyl-Kuragino railroad to the Elegest coal deposit at a yield equal to the inflation rate plus one percentage point. The deal was expected to be structured through a purchase of Tuva Energy & Industrial Company bonds. At the same time Baisarov said that the financing for the project is planned with 40% from the NWF, 25% from private funds and the remaining money will be raised from a syndicate of banks, which Vnesheconombank, Sberbank, and VTB. In July 2014, Mechel obtained an SGS certificate for coking coal from its Elga deposit in Yakutia In July 2014, Mechel obtained an SGS certificate for coking coal from its Elga deposit in Yakutia. SGS, which carried out inspection, verification, testing and certification, confirmed the high quality of the Elga deposit's coking coal. Independent lab testing showed that samples of coking coal from the Elga deposit are up to Russian and international standard. According to the test results, this coking coal is characterized by low content of phosphorus and sulfur and high vitrinite content. The test samples also have the requisite fluidity of the coal's plastic layer. A sample of coking coal was also successfully tested by a major Japanese steelmaking holding. Its experts concluded that the Elga deposit's coking coal can be efficiently used in making coke. Elga, which is located in Southern Yakutia, is the biggest coal field in Russia and one of the world's biggest coking coal deposits, with reserves of 2.2 billion tons to JORC standards. It is thought Mechel will supply most of the Elga coal to Asian countries. On July 28, Mechel signed a cooperation memorandum with South Korea's GS Global corporation, which provides for supplies of up to 2.8 million tons of steam coal. The group will supply up to 1.5 million tons of steam coal from the Elga deposit to GS Global's power stations, as well as up to 1 million tons of steam coal from the Elga deposit to Tongyang Cement & Energy, GS Global's subsidiary and leader of South Korea's construction industry. A strip mine at the Elga field in Yakutia went into operation in August 2011 and has produced more than 600,000 tons of raw coal so far. Mechel 12

13 managed in June last year to get the deadline for completing the first stage of a washing plant, capacity at least 9 million tons of coal per year, pushed back from the end of 2013 until The second stage of the complex is expected to achieve capacity of at least 18 million tons by the end of 2021 rather than by July 2018, as previously thought. Mechel is currently looking for a partner to develop the project and to which it is prepared to hand a minority stake in project operator LLC Elgaugol. Evraz is thinking of raising project financing a coal field in Tuva Russian steel major Evraz is thinking of raising project financing from Russian banks for the development of the Mezhegeiskoye coal field in Tuva. UK Mezhegeiugol, which is part of Yuzhkuzbassugol (an Evraz Group subsidiary), won back the rights to mine Mezhegei (Tuva region) coking coal. Evraz, part-owned by billionaire Roman Abramovich, bid $725 million for the field two years ago, but it renounced the license in 2009 due to weakening coal market conditions in the economic downturn. It regained the rights with a 950 million-ruble bid. The company plans to extract up to 8.4 million tons per year at the deposit, putting about $1.5 billion into its development. The deposit has in-place coal reserves of an estimated million tons and non-commercial reserves of 53.4 million tons. It is located 40 km from the town of Kyzyl. It is in the immediate vicinity of the Elegest deposit, the license to work which is held by United Industrial Corporation subsidiary OPK Mining. En+ and China's Shenhua could begin developing coal fields in the Chikoyskaya depression in Transbaikal territory En+ and China's Shenhua could begin developing coal fields in the Chikoyskaya depression in Transbaikal territory, according to a development program for Russia's coal industry to 2030, which was confirmed by a government order on June 21. A power plant could be built at the field as well, the document says. Overall investments in the project are estimated at 85 billion rubles, excluding VAT, of which 20%-30% could come from company funds and 70%-80% from borrowed funds. A feasibility study proposal is currently being carried out for evaluating the development of the Zashulan and Krasnochikoisky sections. Including the Zashulan section at fields of the depression, million tons of coal are planned to be produced per year using an open pit method. The project has preliminarily been set to take place in The joint venture set up by Vostsibugol, which is part of En+, and the major Chinese coal company Shenhua - Razrez Ugol LLC - won an auction for the right to prospect for and mine bituminous coal at the Zashulan deposit in Trans-Baikal Territory. The field's development is included in the list of projects that are part of the government's program. This includes a project of EuroSibEnergo - the development of the Kaa-Khemskoye and Chadanskoye coal field, the licenses to which are held by LLC Tuva Mining Company. Forecast 13

14 production volume is 10 million tons, and investments, excluding VAT, are 44 billion rubles, 20%-30% of which come from company funds and 70%-80% from borrowed funds. The program states that the development for these two fields is hampered by the lack of the Kyzyl-Kuragino railway line. The government program also includes a project to develop the Beiskoye coal field with investments of 22 billion rubles. Non-borrowed and borrowed funds for this are the same as for the other two projects. This should be carried out in Russia and China have signed a road map for the development of Russian- Chinese cooperation in the coal sector Russia and China have signed a road map for the development of Russian- Chinese cooperation in the coal sector. The road map calls for major Chinese companies to participate in projects in Russia, including to develop new technology for processing coal, supplies of mining and other Chinese equipment to Russia, and increasing shipments of coal products from Russia to China. The document includes projects that China's Shenhua and China Coal could implement with Russian companies. The Mezhegeiskoye coal operation in Tuva, with production capacity of 7 million tons per year, is an interesting project for joint implementation. The companies responsible for this project are Russian steel and mining group Evraz and China Coal. There are also plans to study the possibility of joint development of the Elga coal complex by Russia's Mechel and Shenhua. The Chinese company is also interested in the development of the Omsukchanskoye coal basin, including the construction of the necessary transport infrastructure, in the Magadan Region with LLC Eastern Mining Company. Shenhua is also one of the parties interested in the VST-Logistic project to develop shipments of coal to China by railway. The road map also includes the project of Rostec and Shenhua to develop the Ogodzhinskoye deposit and the project of En+ Group and the Chinese company for the Zashulanskoye coal deposit. Sberbank, VEB and the China Development Bank plan to work out a mechanism to provide credit for the projects included in the road map. 14

15 Russian coal industry: transportation issues Railroad transportation Transportation expenses remain the key factor influencing profitability of Russian coal producers Transportation expenses remain the key factor influencing profitability of Russian coal producers. Less than 10% of Russian coal production is located not far from seaports (coal mines of the Rostov region and the Far East). The Kemerovo region which accounts for about 64% of coal deliveries by rail, the Krasnoyarsk territory (about 8%) and the Irkutsk region (5%) are located about 5,000 km far from seaports in Far East and 5,500-6,500 km far from seaports on the Baltic sea and Murmansk seaport. In 2014, coal transportation by rail was up 1.5% Coal is the biggest cargo item for the railway accounting for 26% of total cargo turnover by volume. In 2013, Russia s coal transportation grew by 1.5% to million tons. Graph 8 Transportation of Coal by Railways in Russia in , million tons Source: the Federal Statistics Service, Interfax-CNA s analysis Coal costs in Russia are very sensitive to transportation costs Coal costs in Russia are still very sensitive to transportation costs, which can account for nearly 50% of all costs. For example, consolidated railway costs of SUEK amounted to 66% of distribution costs (costs to bring the coal from the mine to the point of sale) in H Transportation costs of Kuzbass Fuel Company amounted to 57.0% of COGS in January- September

16 Export coal price fell by 12.9% while rail tariff increase amounted to 1.0% Comparative growth trends in freight tariffs via coal price suggest low correlation ratio: with export price and 0.42 with domestic steam coal price. Such discrepancy can sometimes seriously undermine competitiveness of Russian coal producers in the world market as well as in local market where coal has to compete with gas and fuel oil in electricity generation. For example, in 2014 export coal price fell by 12.9% while rail tariff increase amounted to 5.5%. Growth of price for domestic steam coal (up 8.4%) outperformed the rail tariff increase last year. Graph 9 Russia's Rail Tariff Growth Via Coal Export and Domestic Price Growth in , Y-to-Y Source: Interfax-CNA s analysis Table 4 Compound Annual Growth Rates (CAGR) of Rail Tariffs and Prices for Coal In Russia in Indicator CAGR in CAGR in Growth in 2014 Freight tariff 10.4% 7.3% 5.5% Export price 16.2% -5.0% -12.9% Domestic price for steam coal 12.4% 12.2% 8.4% Domestic price for coking coal 32.6% -2.1% -9.4% Source: Interfax-CNA s analysis In January 2015 Russian Railways reduced the tariff surcharge on steam coal for export to 1.4% from 13.4% In 2014, growth of rail tariffs of Russian Railways was frozen by the Government. Meanwhile, since 2013 the FTS has given Russian Railways the right to offer discounts of up to 12.8% on its rates or impose a surcharge of up to 13.4% for carrying certain types of freight. In January 2015 Russian Railways reduced the tariff surcharge on steam coal for export to 1.4% from 13.4%. 16

17 Seaport facilities In 2014, coal handling surged by 15.1% to mln tons Bitumen coal is the third most important export cargo handled by Russian seaports (18.4% of the total in 2014 against 17.1% a year ago). Vostochny port, Murmansk, Vanino Balker Terminal, Ust-Luga, Posyet, Vysotsk, St.Petersburg, Vyborg are among top handlers of bitumen coal. In 2014, Russian seaports increased handling of coal by 15.1% to million tons (up by 13.3% in 2013). Graph 10 Handling of Bitumen Coal by Russian Seaports in , million tons Source: Association of Commercial Seaports of Russia Seaports of the Far Eastern basin handled the biggest share of Russia s coal exports Seaports of the Far Eastern basin handled the biggest share of Russia s coal exports 67 mln tons, up by 23%. Seaports of the Baltic basin handled 26 mln tons, up by 8%, seaports of the Arctic basin - 16 mln tons, up by 6.4%, seaports of the Azov and Black Sea basin mln tons, down by 3.7%. Vostochny Port (controlled by Kuzbassrazrezugol) in the Far East handled 21.8 mln tons, up by 23%, Daltransugol (controlled by SUEK) - 17 mln tons, up by 24%, Posyet (controlled by Mechel) - 5 mln tons, up by 22%, Evraz-Nakhodka Commercial Seaport 9.3 mln tons, up by 25%. 17

18 Prices for coal: trends in domestic and world markets Export coal price fell by 12.9% Average export prices for Russian coal are formed mainly by prices for high quality bituminous steam coal. Coking coal accounts for 12%-14% of Russian coal exports. Export prices for coal fell by 12.9% to $68.4 per ton in last December. Prices for coal sold to CIS were much higher - $83.4 per ton. Graph 11 Average Export Prices for Russian Coal in , US$ per tonne Source: the Federal Customs Service Graph 12 Growth in Domestic Prices for Steam and Coking Coal in Source: the Federal Statistics Service 18

19 In 2014, price for steam coal grew by 8.4% Prices for coking coal fell by 9.4% In the last three years average annual growth rate of domestic price for steam coal amounted to 8.6%. In 2014, the producers selling price grew by 8.4%. Average annual decline of domestic price for coking coal amounted to 14.5%. In 2014, the selling price fell once again, down by 9.4%. Russian coal industry: foreign trade performance In 2014, coal exports surged by volume by 10.2% Russia is the third largest coal exporter in the world after Australia and Indonesia. Russia exported million tons of coal in 2014, up 10.2%, the Federal Customs Service reported. Coal exports by value were down by 1.5% to $ billion owing to a drop in prices. Table 5 Russia's Exports of Bitumen Coal in , '000 tons The share of exports in coal output grew to 42.4% last year in comparison with 40.0% in Indicator Change Bitumen coal % Source: the Federal Customs Service, Interfax-CNA s analysis Non-CIS countries remained the top importers of Russian coal In 2014, non-cis countries remained the top importers of Russian coal. They accounted for 91.6% of the total deliveries. Coal exports surged by 11.7% by volume. Growth in coal exports was driven by demand from Asian countries, accounting for 45.5% of the total shipments last year. Among the top importers were China, South Korea, and Japan. The CIS countries cut coal imports from Russia by 6.5% last year. Russian coal imports fell by 5.2% Russia s coal imports fell by 5.2% to million tons, virtually all of which came from CIS countries. Kazakhstan is the key exporter of coal to Russia (98.2% of the total). Urals power plants use Kazakh coal from Ekibastus basin because of its favorable geographical position. Table 6 Russia's Imports of Bitumen Coal in , '000 tons Indicator Change Bitumen coal % Source: the Federa Customs Service, Interfax-CNA s analysis 19

20 RUSSIAN COAL INDUSTRY: TOP COMPANIES, GROUPS, HOLDINGS SUEK is the only Russian company in the list of world 10 top coal producers SUEK heads the list of top Russia s coal producers with 27.8% followed by Kuzbassrazrezugol (12.2%), SDS-Ugol (8.0%), Mechel (6.0%), Evraz (5.9%). SUEK is the only Russian company in the list of world 10 top coal producers. Table 7 Top Russian Top Coal Producers in 2014, mln tons Change SUEK % Kuzbassrazrezugol % SBU-Coal % Mechel % Evraz Group 11.7* % En+ Coal % Severstal % Sibuglemet % Kuzbass Fuel Company % Russian Coal n.a. n.a. Stroiservice % *taking into consideration 40% of coal output of Raspadskaya Source: companies data, Interfax-CNA s analysis Graph 13 Ranking of Russian Top Coal Producers Growth in Output in 2014 Source: companies data, Interfax-CNA s analysis 20

21 Russian coal sector has relatively high degree of consolidation Russian coal sector has relatively high degree of consolidation. There are 11 major groups and holdings accounting for 75% of Russian coal output and 78% of coking coal output. Two top groups (SUEK and United Mining and Metallurgical Company) control 40% of Russia s coal output. Table 8 Major Coal Holdings and Groups in Russian Coal Industry Coal holdings and groups Key companies and mines under control Share in Russia s coal output SUEK Coal mines in Kuzbass, Krasnoyarsk territory, Irkutsk and Chita regions, Far East 27.8% United Mining and Metallurgical Company Kuzbassrazrezugol 12.2% Siberian Business Union SBU-Coal 8.0% Southern Kuzbass, Razrez Krasnogorsky, Razrez Mechel Sibgirinsky, Razrez Tomusinski, Razrez Olzheransky, Yakutugol, Elgaugol 6.0% Yuzhkuzbassugol, 82% of Raspadskaya in Kemerovo Evraz Group region 5.9% En+ (Basic Element) Vostsibugol 3.4% Russian Coal Gukovugol, Amurugol, Stepnoy, Zadubrovski, Evtinsky, Belorussky mines 2.7%* Sibuglemet Mezhdurechye, Antonovskaya, Polosukhinskaya, Bolshevik 3.0% Severstal Group Vorkutaugol, Vorgashorskaya 3.2% Stroiservice Permyakovsky, Razrez Shestaki, Razrez Berezovski, Barzasskoye Tovarishestvo, Shakhta % MMK Belon 1.0% *estimate Source: Interfax-CNA s analysis Some new major coal producers could appear in Russia in coming years Some new major coal producers could appear in Russia in coming years. Zarechnaya Coal Company is planning to boost coal to 9.9 mln tons, up by 48%. The company plans to invest RuB4.584 bn in 2015 in comparison with RuB3.600 bn last year. 21

22 TOP RUSSIAN COAL PRODUCERS Siberian Coal Energy Company (SUEK) Structure 22

23 Operations summary Graph 14 SUEK Coal Production in , million tons Source: company data, Interfax-CNA s analysis Overview SUEK is Russia's leading coal company in terms of production. The company accounts for about 30% of coal production in the country and over 25% of Russian exports of steam coal. SUEK's branches and subsidiaries are located in the Zabaikalsk, Krasnoyarsk, Primorsky and Khabarovsk Territories, as well as the Kemerovo Region, Buryatia and Khahasia. Graph 15 SUEK s Sales Revenue by Segments in H SUEK supplies fuel to over 30 countries. The company has representative offices in Poland, Taiwan, Indonesia, China and South Korea. SUEK has proved and probable coal reserves of 5.8 billion tons. Source: company data, Interfax-CNA s analysis 23

24 Graph 16 SUEK s ROS by Segments in H Source: company data, Interfax-CNA s analysis Table 9 SUEK s Key Consolidated Financials to IFRS in H1 2014, US$ mln H H Change Total revenues % EBITDA % Net income EBITDA margin 23.7% 22.3% -1.4 ROS 70.8% -2.1% Source: the SPARK Database, Interfax-CNA s analysis Table 10 SUEK s Key Consolidated Financials to IFRS in , US$ mln Change Total revenues % EBITDA % Net income % EBITDA margin 26.5% 19.3% -7.3 ROS 17.2% 2.5% Source: the SPARK Database, Interfax-CNA s analysis Table 11 SUEK-Kuzbass Key Financials to RAS in , US$ mln Change Total revenues % Operating income Net income Operating margin -4.8% 2.8% 7.6 ROS -7.0% -6.3% 0.7 Source: the SPARK Database, Interfax-CNA s analysis 24

25 Table 12 SUEK-Krasnoyarsk s Key Financials to RAS in , US$ mln Change Total revenues % Operating income Net income Operating margin -5.4% 30.6% 36.0 ROS -4.4% 18.8% 23.2 Source: the SPARK Database, Interfax-CNA s analysis Production and sales SUEK raised coal production 2% last year to 98.9 million tons. Coal sales grew 3% to 95.4 million tons. Sales in Russia fell 1% to 49.8 million tons, of which 37.7 million tons was sold to the power industry. Exports grew 8% to 45.6 million tons, mostly to China, Britain, South Korea, Japan, the Netherlands, Taiwan and Germany. Financials Securities SUEK saw revenue decline 9.8% to $2.51 billion in the first half of 2014 under international financial reporting standards (IFRS), down from $2.78 billion in the same period last year. Cost of sales declined 5.7% to $1.23 billion. Distribution expenses were down 9% to $1.03 billion and administrative costs shrank to $60 million from $68 million. Operating profit fell to $186 million from $288 million. However, due to a smaller exchange rate loss ($72 million compared with $192 million), net profit nearly tripled to $49 million from $18 million in the first half of SUEK's principal shareholder, with 91.2% stake, is SUEK Plc., which is controlled by Andrei Melnichenko. Plans SUEK plans to invest an average of 18 billion-19 billion rubles annually (not including VAT) in in coal mining and processing and transportation infrastructure. This investment will enable the company to increase coal production by 10 million-15 million tons and boost coal exports by 10 million-12 million tons in the next five years. SUEK plans to steadily increase exports with the growth of the throughput capacity of railway and port infrastructure. The company primarily aims to boost sales in the Asia-Pacific region, where its main markets are China, Japan, South Korea and Taiwan. The company also intends to maintain its position as one of the biggest suppliers of thermal coal to countries in the Atlantic region. On the domestic market, SUEK will strive to strengthen its positions in all segments, including supplies for power plants, the housing and public utilities sector and industrial customers. An ever greater share of coal will be shipped under long-term contracts. 25

26 SUEK will continue to build new and modernize existing enrichment plants in Kemerovo Region, Khakasia, Buryatia and Khabarovsk Territory. This will make it possible to increase the volume of coal enrichment by 7 million-10 million tons in the next few years. SUEK also plans to gradually increase the share of valuable coal brands in its product mix. The company is continuing to develop its own logistics capacity, and has plans to expand the capacity of the key coal terminal at the Vanino port to 21 million tons or more per year. In the West, the company plans to ship a large portion of coal through the Murmansk commercial seaport, where there are also plans to expand capacity. 26

27 Kuzbassrazrezugol Structure Operations summary Overview Kuzbassrazrezugol Coal Company (KRU) is one of Russia's biggest high quality coal producers. The company focuses on open pit production. Kuzbassrazrezugol has licenses to 17 commercial coal fields in the Kuzbass. Coal reserves amount to 2,000 million tons. Exports account for about 25% of coal output. KRU exports are mostly sent to countries in Western Europe and Asia. The highest volume of shipments go via the Ust Luga (33%), Nakhodka (23%), Riga (18%) and Tuapse (11%) ports. KRU is run by UMMC Holding. The joint-stock company incorporates 27 enterprises representing a 27

28 specialized industrial technological complex. 7 mines are affiliates of parent company: Kedrovsky Razrez Mokhovsky Razrez Bachatsky Razrez Krasnobrodsky Razrez Taldinsky Razrez Kaltansky Razrez Baikaimskaya Mine Graph 17 Kuzbassrazrezugol Coal Production in , million tons Source: company data, Interfax-CNA s analysis Table 13 Kuzbassrazrezugol s Key Financials to RAS in , US$ mln Change Total revenues % Operating income % Net income Operating margin 21.1% 5.9% ROS 14.6% -3.2% * Kuzbassrazrezugol is to disclose its financials for 2014 in summer 2015 Source: the SPARK Database, Interfax-CNA s analysis 28

29 Production Kuzbassrazrezugol Coal Company cut coal production 0.8% to 43.4 million tons in Kuzbassrazrezugol shipped more than 42 million tons of coal last year, which is 3.3% more than in Supplies on the domestic market fell by 21% to 11.8 million tons of coal. Kuzbassrazrezugol Coal Company shipped 30.2 million tons of coal in 2014, up by 17%. In connection with the difficult situation in the sector, the company continued its strategy of raising exports last year. The amount of coal processing was 89% of the production volume. For the year at installations of the company's branches 38.7 million tons of coal were processed, which is almost 2.5 million tons more than in In 2014, Kuzbassrazrezugol boosted investment by 22% to RuB6.6 billion. Securities Cyprus-based Arumlake Holdings Limited holds % of the charter capital of OJSC Kuzbassrazrezugol Coal Company, which is managed by LLC UMMC-Holding, it said on a list of affiliated entities of the Kuzbass company from December 31, However, on Kuzbassrazrezugol's list of affiliated entities from September 30, 2014, there was no information about this company. Another % of Kuzbassrazrezugol's charter capital is owned by OJSC Ural Mining and Metallurgical Company (UMMC). Plans The total volume of coal production in 2015 is planned at 44.3 million tons. This year KRU is planning to maintain the strategy of increasing the share of exports in total coal supplies. The planned figure for coal exports in 2015 was not specified. Urals Mining and Metals Company may move back the dates for construction of a coal enrichment plant in the Kuzbass coal mining region. UMMC General Director Andrey Kozitsyn confirmed plans to build four enrichment plans by With construction of the four plants, UMMC will have capacity to enrich 90%-95% of the coal it produces. 29

30 SBU-Coal Structure 30

31 Operations summary Graph 18 SBU-Coal Production in , million tons Source: company data, Interfax-CNA s analysis Table 14 SBU-Coal Financials to RAS Consolidated by Key Companies in , US$ mln Change Total revenues % Operating income % Net income % Operating margin 3.1% 2.0% -1.0 ROS 8.4% 2.2% -6.2 * Key companies of SBU-Coal are to disclose their financials for 2014 in summer 2015 Source: the SPARK Database, Interfax-CNA s analysis Overview SBU-Coal, the sector holding of Siberian Business Union (SBU). The Siberian Business Union was established in August Company assets are managed through sector companies SBU-Ugol, SBU-Mash, Novotrans, SBU-Story, SBU-Alko, SBU-Media Holding and SBU- Energo. SBU-Coal includes several mines - Chernigovets, Razrez Kiselevskiy, Salek (Vostochny mine), Prokopyevskiy Coal Mine, Igatugol, Energetick and Kuprinskiy, Sibenergougol (Bungurskiy Southern Coal Mine), Yuzhnaya, Kiselevskaya, Listvyazhnaya, the Listvyazhnaya enrichment plant and 8 service companies. Prokopyevskugol mines have been managed by SDS Ugol since SBU-Coal exports over 60% of its production. 31

32 Chernigovets is the biggest unit contributing 36.5% to the total coal output. Razrez Kiselevsky and Yuzhnaya Mine are other major producers with 14.4% and 21.2% respectively. Production In 2014, SBU-Coal produced 28.5 million tons, up 16.3%. Coal shipments by SBU-Coal grew 8.6% last year to 25 million tons from 23 million tons, and 88% or 22 million tons of this was exported. Securities Strip mines produced 19.6 million tons and deep mines 8.9 million tons of coal in Throughput at washing plants rose 23% to 16.5 million tons. According to a list of the company's affiliates as of September 2014, SBU-Coal was owned by Mikhail Fedyayev, the president of SBU Holding, with 50%; and by Andrei Grindin, son of State Duma deputy Vladimir Grindin, with 37.5%. Plans SBU-Coal aims to mine more than 30 million tons of coal this year, up by 5.2%. Coal production will rise by boosting productivity at existing mines. SBU-Coal and Volga Group continued building of a coal terminal at Sukhodol Bay in Primorye last year. The terminal will be used to export coal to countries in the Asia-Pacific region, including South Korea, India, China and Japan. It will have capacity to ship 20 million tons of coal a year. Construction is scheduled to begin in July-September The first line of the terminal with capacity for up to 6 million tons a year is slated to enter operation in June The terminal's second and third lines, which will raise capacity to the design level, are scheduled to enter service in

33 Mechel (Yuzhny Kuzbass, Yakutugol) Structure 33

34 Operations summary Graph 19 Mechel Coal Production in Russia in , million tons Source: company data, Interfax-CNA s analysis Overview Southern Kuzbass is a major Russian coal producer. Coking coal accounts for 57% of the total coal output. Southern Kuzbass production assets include four open pits Krasnogorsky, Sibirginsky, Olzherassky and Tomusinsky as well as three underground mines Olzherasskaya-Novaya, Lenin and Sibirginskaya. The company plans to construct Olzherasskaya-Glubokaya and Erunakovskaya underground mines as well as increase mining production at Olzherasskaya-Novaya and Sibirginskaya underground mines and Krasnogorsky, Sibirginsky and Olzherassky open pits. Southern Kuzbass processing assets include five washing plants Sibir, Sibirginskaya, Kuzbasskaya, Krasnogorskaya and Tomusinskaya. Their combined capacity totals 23 million tons of coal per year. The company s key assets are located near the cities of Mezhdurechensk and Myski, Kemerovo Region. The Erunakovskoe deposit is the only exception, being located to the north-east of the city of Novokuznetsk where the company implements several development projects to increase production of metallurgical coal. Southern Kuzbass total JORC mineral reserves as of May 1, 2011, amount to some 700 million tons. Yakutugol is one of the Mechel Mining group s largest mining subsidiaries. Its assets include Neryungrinsk open pit, Elga open pit, Kangalassk open pit, Dzhebariki-Khaya underground mine as well as Neryungrinskaya washing plant. 34

35 Yakutugol is one of the few producers of hard coking coal in Russia. It also produces thermal coal and middlings which is a byproduct of coking coal processing. The company s annual raw coal production is about 10 million tons. Yakutugol s total JORC mineral reserves as of May 1, 2011, amount to some 2.44 billion tons with the Elga coal deposit accounting for 2.19 billion tons out of the total. Yakutugol s coking coal concentrate is shipped to CIS steel companies and exported to Pacific Asia. Thermal coal is sold domestically to power and cement plants as well as municipal companies in the Russia s Far East. Table 15 Southern Kuzbass Key Financials to RAS in Jan.-Sept. 2014, US$ mln Jan.-Sept Jan.-Sept Change Total revenues % Operating income Net income Operating margin 1.9% -1.7% -3.6 ROS -7.9% -35.2% Source: the SPARK Database, Interfax-CNA s analysis Table 16 Yakutugol s Key Financials to RAS in , US$ mln Change Total revenues % Operating income % Net income Operating margin 47.9% 21.2% ROS 25.7% -30.3% * Yakutugol is to disclose its financials for 2014 in summer 2015 Source: the SPARK Database, Interfax-CNA s analysis Table 17 Production and Sales Volumes of Mechel Steel Group in Jan.-Sept. 2014, '000 tons Indicator Jan.-Sept Jan.-Sept Change Production Coal (production) ,0% Sales Coking coal concentrate ,0% PCI ,0% Anthracites ,0% Steam coal ,0% Source: company data 35

36 Production Mechel cut coal production by 15.4% in Russia in Southern Kuzbass Coal cut coal production by 21.0% last year, producing million tons. Yakutugol cut coal production by 6.8% last year, producing million tons. Financial results Loans Southern Kuzbass Coal Company had net loss to Russian Accounting Standards (RAS) of 6.8 billion rubles in Jan.-Sept against of 1.7 billion rubles in Jan.-Sept Revenue fell 11% to 19.3 billion rubles. In December 2014, Yakutugol signed an agreement with Eurasian Development Bank (EDB) to reschedule repayment of an existing loan totaling about 2.1 billion rubles. Under the terms of the agreement, all principal payments due in have been moved back to the second quarter of The loan collateral and interest rate remain unchanged. Plans Mechel and China's Baosteel Resources have increased the size of their one-year contract for coking coal shipments to 1.4 million tons. Mechel will supply Baosteel Resources with up to 1.4 million tons of coking coal. The agreement will be valid from April 2015 through March 2016, with a possibility of further prolongation. Prices will be determined on a monthly basis. The memorandum also provides for a possibility of supplying Baosteel with other Mechel products, such as PCI and steam coal, as well as cooperation in other areas, including the possibility of collaboration with the economic development institutes in Russia and China. Mechel said it was fully meeting its obligations according to the earlier contract valid until the end of March, which provides for supplies of 1.2 million tons of coking coal a year (960,000 tons a year previously). Since April 2014 through December, over 1 million tons of coking coal was shipped to Baosteel enterprises in China's eastern and southern provinces, which accounts for 10% of Mechel's coal exports to Asia Pacific. 36

37 En+ Coal Structure 37

38 Operations summary Overview En+ Coal assets include six open-pit coal licence plots, which are located in proximity to the company s CHPs and dressing plant. Vostsibugol operates the coal segment of En+Coal. The company also has its own fleet of locomotives and rail cars for coal transportation from open-pit coal licence plots to CHPs and approximately 258 km of non-public railway track. EuroSibEnergo own coal reserves which amount to 1.26 billion tons. En+ Coal is also engaged in the exploration of new coal deposits in the territory of the Irkutsk Region, as it has the relevant licences. Coal assets: Mugunsky open-pit coal mine Cheremkhovsky open-pit coal mine Azeisky open-pit coal mine Zheronsky open-pit coal mine Irbeysky open-pit coal licence mine Golovinsky open-pit coal mine Trailing Kasyanovskaya dressing plant (production capacity is 4.1 million tons of raw coal per annum) Graph 20 En+ Coal Coal Production in , million tons Source: company data, Interfax-CNA s analysis 38

39 Graph 21 Breakdown of En+ Coal Production by Mines Source: company data, Interfax-CNA s analysis Production In 2014, aggregated coal production from company s assets amounted to 12.0 million tons, down by 23.6%. The company exported 0.7 mln tons of steam coal last year. Vostsibugol-Khakasiya, a subsidiary of subsidiary Vostsibugol, won the license for exploration and coal production at the Northwest Kirbinsky section of the Beysky coal deposit in Khakassia. According to preliminary calculations, investments in the project will total more than 11 billion rubles, and annual tax payment to the regional budget after the project reaches full capacity is expected at 400 million rubles. The area's commercial reserves for categories A+B+C1 are around 170 million tons, and the coal has high caloric content and low sulfur content. The company will conduct additional exploration on resources within the next three years, and will also prepare and confirm a field development plan. Vostsibugol-Khakasiya is planning to begin producing coal in The company is planning to produce coal through opencast mining at the field. The section will have capacity of 4 million tons of coal per year, and is able to reach 7 million tons if demand increases. The main consumers of coal from the Beysky deposit will be power companies and the housing and utility sector of Eastern Siberia, as well as companies from the Asian-Pacific region. Plans In 2015, Vostsibugol plans to produce 14.3 mln tons of steam coal, up by 19%. Vostsibugol plans to export about 7 mln tons of steam 39

40 coal in boosting exports to mln tons after China, Japan,, and South Korea are expected to be the key markets. En+ Coal and China's Shenhua could begin developing coal fields in the Chikoyskaya depression in Transbaikal territory, according to a development program for Russia's coal industry to A power plant could be built at the field as well, the document says. Overall investments in the project are estimated at 85 billion rubles, excluding VAT, of which 20%-30% could come from company funds and 70%-80% from borrowed funds.a feasibility study proposal is currently being carried out for evaluating the development of the Zashulan and Krasnochikoisky sections. Including the Zashulan section at fields of the depression, million tons of coal are planned to be produced per year using an open pit method. The project has preliminarily been set to take place in The joint venture set up by Vostsibugol, which is part of En+, and the major Chinese coal company Shenhua - Razrez Ugol LLC - won an auction for the right to prospect for and mine bituminous coal at the Zashulan deposit in Trans-Baikal Territory.The field's development is included in the list of projects that are part of the government's program. This includes a project of EuroSibEnergo - the development of the Kaa- Khemskoye and Chadanskoye coal field, the licenses to which are held by LLC Tuva Mining Company. Forecast production volume is 10 million tons, and investments, excluding VAT, are 44 billion rubles, 20%-30% of which come from company funds and 70%-80% from borrowed funds. The program states that the development for these two fields is hampered by the lack of the Kyzyl-Kuragino railway line. 40

41 Sibuglemet Structure Operations summary Overview Sibuglemet is a major Russian coking coal producer. Sibuglemet includes Mezhdurechye, Antonovskaya and Bolshevik deep mines, the Antonovskaya and Mezhdurechenskaya concentrating plants, as well as units that handle sales, procurements and transportation. Mezhdurechye is the key coal producing company of the holding accounting for 61% of the total, followed by Yuzhnaya (19%), Bolshevik Mine (11%), and Antonovskaya Mine (9%). 41

42 Graph 22 Sibuglemet Coal Production in , million tons Source: company data Table 18 Sibuglemet Key Non-Consolidated Financials to RAS in , US$ mln Change Total revenues % Operating income Net income Operating margin 3.5% -0.4% -4.0 ROS 3.1% -1.5% -4.7 * Sibuglemet is to disclose their financials for 2014 in summer 2015 Source: the SPARK Database, Interfax-CNA s analysis Table 19 Mezhdurechye s Key Financials to RAS in , US$ mln Change Total revenues % Operating income % Net income % Operating margin 45.6% 37.1% -8.5 ROS 37.9% 31.6% -6.3 *Mezhdurechye to disclose their financials for 2014 in summer 2015 Source: the SPARK Database, Interfax-CNA s analysis 42

43 Table 20 Sibuglemet s Financials to RAS Consolidated by Key Companies in , US$ mln Change Total revenues % Operating income % Net income % Operating margin 14.3% 10.8% -3.5 ROS 11.1% 8.5% -2.6 * Key companies of Sibuglemet are to disclose their financials for 2014 in summer 2015 Source: the SPARK Database, Interfax-CNA s analysis Production In 2014, Sibuglemet boosted coal production by 18% to 10.8 mln tons. South Coal Company, which is part of coal holding Sibuglemet, won an auction for subsoil usage rights to explore and produce coal at the Mrassky Gluboky section in Kemerovo region. The section has commercial C1 coal reserves of around 79.1 million tons, including around 57.3 million tons of coking coal of KS and OS grade and around 21.8 million tons of TS grade steam coal. Plans Sibuglemet plans to produce million tons of coal in 2015, up by 0.5%. 43

44 Evraz Group Structure 44

45 Operations summary Graph 23 Evraz Group Coal Production in , million tons* *In Evraz output includes 40% of Raspadskaya coal output Source: company data, Interfax-CNA s analysis Overview Evraz Group s coal division includes Yuzhkuzbassugol and Raspadskaya coal company. Yuzhkuzbassugol is the biggest Russian deep mine coal producer. The company accounts for 24.5% of deep mine production in Kuzbass and 18.5% in Russia. Yuzhkuzbassugol specializes in coking coal. Yuzhkuzbassugol underground mines account for 16% of the total coal output in Kuzbass and 13% in Russia. Coking coal represents 71% of company s total production by volume, or 14.2% of Kuzbass coking coal production. The remainder is production of steam coal. It supplies most of its coal to steel mills from the Evraz Group, the Mechel Group's Chelyabinsk Iron & Steel Works, Magnitogorsk Iron & Steel Works and Severstal. Yuzhkuzbassugol includes, as branches, the Yubileinaya (two sections 0 Yubileinaya itself and the former Ulyanovskaya mine), Abashevskaya, Alardinskaya, Gramoteinskaya, Yesaulskaya, Osinnikovskaya, Tomskaya and Kusheyakovskaya mines; and the Yerunakovskaya-8 mine that is under construction. Yuzhkuzbassugol is also the sole management body for LLC Mezhegeiugol Coal Company; CJSC Kazankovskaya Coal Company 45

46 (Tagaryshskaya mine; Yuzhkuzbassugol owns 50% of the company); OJSC Abashevskayay Enrichment Plant, OJSC Kuznetskaya Enrichment Plant; OJSC Osinnikovsky Repair and Mechanical Plant, and a number of auxiliary enterprises. December 2005, Evraz Group S.A. acquired a 50% stake in Yuzhkuzbassugol. In June 2007, Evraz acquired the 50% stake it hadn t already owned from Yuzhkuzbassugol managers. Raspadskaya is one of the leading coal producers in Russia. Evraz owns 82% of Raspadskaya shares, and the free float on the Moscow Exchange is 18%. Raspadskaya is a compact integrated coal mining and enrichment complex located in the Kemerovo region of the Russian Federation. Raspadskaya's license area is part of a very extensive coal field south-west of Tom- Usinsk area of the Kuznetsk coal basin which itself accounts for about three quarters of the total coking coal production in Russia. Raspadskaya's coal production is 100% coking coal. The company comprises a group of enterprises: Raspadskaya Mine: Underground mine with 4 long-wall faces, our largest coal mine and Russia's largest single underground mine; MUK-96: Underground mine with 1 long-wall face and the lowest cash cost mine of the group; Razrez Raspadsky: Open-pit mine that was the first in Russia to apply the advanced unmanned method of high-wall coal recovery (DSDS); Raspadskaya-Koksovaya: Underground mine under construction that will produce hard coking coal of the highly valuable grades K and KO; Raspadskaya Benefication Plant: State-of-the art preparation plant; Sales & marketing company and a management company for the group. Raspadskaya is one of the leading suppliers to the largest Russian smelters, including Evraz, NLMK, Magnitogorsk Iron & Steel Works, Mechel, Urals Steel, as well as Kemerovo Koks. 46

47 Table 21 Evraz Group Coal Production , 000 tons Indicator Change Raw coking coal (mined) % Yuzhkuzbassugol % Raspadskaya % Mezhegeyugol Coking coal concentrate (production) % Produced at Yuzhkuzbassugol coal washing plants % Produced at EVRAZ ZSMK coal washing plant % Produced at Raspadskaya coal washing plant % Raw steam coal (mined) % Steam coal concentrate (production) % Source: company data Table 22 Yuzhkuzbassugol s Key Financials to RAS in , US$ mln Change Total revenues % Operating income Net income Operating margin 11.2% -3.6% ROS 1.4% -11.9% Source: the SPARK Database, Interfax-CNA s analysis Table 23 Raspadskaya Key Financials to IFRS in H1 2014, US$ mln H H Change Total revenues % EBITDA Net income EBITDA margin 12.9% -3.4% ROS 33.2% -26.8% Source: the SPARK Database, Interfax-CNA s analysis Production In 2014, Evraz boosted raw coal production rose by 11.2% to 21.1 mln tons. Coal output with at Raspadskaya surged by 30.7%. Yuzhkuzbassugol cut coal production by 2.9%. Consolidated raw coking coal output and production of coking coal concentrate increased by 11% and 2% respectively due to strong performance of the Raspadskaya coal company. Raspadskaya boosted exports of coking coal concentrate by 41% 47

48 to 3.1 mln tons last year. The Federal Anti-Monopoly Service (FAS) approved the request of Raspadskaya Coal Company, which manages Russian coal producer Raspadskaya, to acquire rights allowing the company to act as sole executive body of Yuzhkuzbassugol. The FAS also cleared Raspadskaya to acquire rights as sole executive authority to a host of mines: Alardinskaya, Kusheyakovskaya, Uskovskaya, Abashevskaya, Osinnikovskaya and Yesaulskaya, as well as two enrichment plants, Kuznetskaya and Abashevskaya. The Raspadskaya group comprises an integrated coking coal mining complex, including the country's largest deep mine - the eponymous Raspadskaya, MUK-96 deep mine, Razrez Raspadskaya open-pit mine, the Raspadskaya-Koksovaya mine, an enrichment plant and infrastructure units. Evraz owns 82% of shares in Raspadskaya via a wholly owned subsidiary, Corber Enterprises Limited. The rest of shares are in free float. Financials Ratings Raspadskaya narrowed its net loss to about $67.4 million in the first half of 2014 under international financial reporting standards (IFRS) compared with a net loss of $67.7 million in the same period last year. Consolidated revenue fell 18.5% to $241.2 million. Fitch Ratings In December 2014, Fitch affirmed its long-term foreign and local currency issuer default ratings of "B+", assigned to Russian coal miner OJSC Raspadskaya. The outlook on the ratings is stable. Moody's Investors Service In July 2014, Moody's Investors Service changed to negative from stable the outlook on Raspadskaya OAO's B2 corporate family rating (CFR) and B2-PD probability of default rating (PDR). 48

49 Severstal (Vorkutaugol, Vorgashorskaya) Structure 49

50 Operations summary Graph 24 Severstal Russian Coal Production in , million tons Source: Interfax-CNA s analysis Overview Severstal s key coal assets include Vorkutaugol and Vorgashorskaya Mine. Vorkutaugol, Russia's biggest coking coal producer from the Komi republic. Vorkutaugol includes 7 coal mines, central benefication plant. Coking coal accounts for more than 90% of total output. Most coking coal is shipped to Severstal. Vorkutaugol had proved and probable 298 million tons, including the Vorgashorskaya mine. The Vorkutaugol reserves should be enough to last 28 years. Table 24 Severstal Resources Coal Sales Volume in , tons Indicator Change Coal: % Coking coal concentrate, including: % Vorkutaugol % PBS Coals % Raw coking coal, Vorkutaugol % Steam coal, including: % Vorkutaugol % PBS Coals % Source: company data 50

51 Table 25 Vorkutaugol s Key Financials to RAS in , US$ mln Change Total revenues % Operating income % Net income % Operating margin 17.8% 8.6% -9.2 ROS 9.5% 10.2% 0.6 Source: the SPARK Database, Interfax-CNA s analysis Production In 2014, Vorkutaugol cut coal output by 7% to 11.4 mln tons. Vorkutaugol s benefecation plant processed more than 6.4 mln tons of coal last year. Vorkutaugol s investments exceeded RuB 4 billion last year. In August 2014, Severstal closed a deal to sell its North American coking coal company PBS Coals Inc., which is based in the state of Pennsylvania, to Canadian company Corsa Coal Corp. Plans In 2015, Vorkutaugol plans to raise investment to RuB 5.3 billion. 51

52 Russian Coal Structure Operations summary Overview Russian Coal's is a major producer of steam coal anf lignite. It has coal assets in Rostov region; in the Kemerovo region; in Khakasia; and in the Amur region. Republic of Khakassia: Coal open-pit mine "Stepnoy" Products: steam coals (grade D). Kemerovo Region: Coal open-pit mine "Belorusskiy" Coal open-pit mine "Evtinskiy" Coal open-pit mine "Zadubrovskiy" Products: steam coals (grade D). 52

53 Amur Region: Coal open-pit mine "Erkovezkiy" Coal open-pit mine "Severo Vostochniy" Products: lignite (grade 2B). All export products satisfy European requirements of coal quality. The co-owner of Russneft Oil Company, Mikhail Gutseriyev, controls Russian Coal. Graph 25 Russian Coal Consolidated Coal Production in , million tons Source: The SPARK Database, Interfax-CNA s analysis Table 26 Russian Coal s Key Non-Consolidated Financials to RAS in , US$ mln Change Total revenues % Operating income % Net income % Operating margin 4.7% 7.4% 2.7 ROS 2.8% 4.8% 2.0 * Russian Coal is to disclose their financials for 2014 in summer 2015 Source: the SPARK Database, Interfax-CNA s analysis 53

54 Table 27 Russian Coal s Financials to RAS Consolidated by Key Companies in , US$ mln Change Total revenues % Operating income Net income Operating margin 0.3% -2.3% -2.6 ROS 0.2% -1.1% -1.3 * Key companies of Russian Coal are to disclose their financials for 2014 in summer 2015 Source: the SPARK Database, Interfax-CNA s analysis Production In 2013, Russian Coal cut coal production to mln tons, down by 16.1%. Russian Coal has not disclosed yet its production data for As of January 1, 2013, Russian Coal s A+B+C1; C2 reserves were estimated at mln tons. 54

55 Kuzbass Fuel Company Structure Operations summary Overview Kuzbass Fuel Company was set up by the Kemerovo regional administration as a state unitary enterprise in 2000, and was corporatized at the end of It supplies coal for households and utility providers. It is licensed to develop the Karakansky-Yuzhni, Vinogradovski and Cheremshanski coal fields by the open-cast method. Kuzbass Fuel Company produces 100% high-quality grade D steam coal under Russian classification. As of January 1, 2013, the company's JORC ordinary steam coal reserves totaled 391 million tons, and proven and probable reserves to be developed in totaled 174 million tons. KTK includes coal-producing enterprises (the Vinogradovsky, Karakansky-South and Cheremshansky open-pit mines), a distribution 55

56 network (OJSC Kuzbasstoplivosbyt, LLC Transugol, OJSC Altay Fuel Company, LLC Novosibirsk Fuel Corporation) and infrastructure enterprises (OJSC Kaskad-Energo, Anzhero-Sudzhenskaya Combined Heat and Power Plant, LLC TEKM). Graph 26 Kuzbass Fuel Company Coal Production in , million tons Source: company data, Interfax-CNA s analysis Table 28 Kuzbass Fuel Company s Key Financials to IFRS in H1 2014, US$ mln H H Change Total revenues % EBITDA % Net income EBITDA margin 10.9% 8.0% -2.9 ROS 2.1% -3.2% -5.3 Source: the SPARK Database, Interfax-CNA s analysis Table 29 Kuzbass Fuel Company s Key Financials to IFRS in H1 2013, US$ mln Change Total revenues % EBITDA % Net income % EBITDA margin 14.9% 10.8% -4.2 ROS 7.8% 2.8% -5.0 Source: the SPARK Database, Interfax-CNA s analysis 56

57 Production Kuzbass Fuel Company increased coal production 5% in 2014 to million tons. The main increase in production came from the Vinogradovsky section, where 4.17 million tons of coal were produced, 22% more in The company reduced production at the Cheremshansky section by 13% to 3.04 million tons. This section has the highest stripping ratio among the company's mines. Sales volumes last year, including the resale of coal acquired from other enterprises, fell by 3% to million tons. Sales on the domestic market fell 15% to 3.12 million tons and export sales rose 4% to 7.2 million tons or 70% of all sales). Overall coal processing rose 6% last year to 8.7 million tons. Processed coal accounted for 93% of commercial output. The volume of washed coal grew 18% to 3.16 million tons. Kuzbass Fuel Company, which has a sales division in Poland, registered a new subsidiary in this country in Q The list of Kuzbass Fuel Company's affiliated entities for Q said that the company has the right to manage more than 20% of the charter capital of Coal Terminal Logistics Sp. z o.o (Poland). At the same time, Kuzbass Fuel Company already has a subsidiary in Poland, which specializes in the company's coal sales - KTK Polska Sp. z o.o. Financials Kuzbass Fuel Company posted net loss under International Financial Reporting Standards (IFRS) of 469 million rubles in January-September 2014 versus net profit of 329 million rubles in the same period of last year.revenue declined 9% to billion rubles, while EBITDA fell 33% to billion rubles. The main factors influencing the financial result were negative currency differences, 491 million rubles for the nine months, and a continued decline in the Asian markets. At the current price level export sales to the Asia-Pacific region bring the company minor losses, but these shipments can not be interrupted in order to avoid the loss of a long-term attractive market and established customer base in South Korea and Japan. Net debt at September 30, 2014 stood at billion rubles, down 1% compared to June 30, Year-on-year it grew by 17%. The net debt to 12-month EBITDA ratio showed a 21% quarterly growth and stood at Securities General Director Igor Prokudin controls % of KTK shares through Haver Holding Limited, and Laycraft Ltd, which is wholly owned by board chairman Vadim Danilov, has 15.61%. Prosperity funds hold 15.41%. KTK is traded on the Moscow Exchange. The free float is 34.39%. 57

58 Stroyservis Structure Operations summary Overview The main business directions of Stroyservis are: coal mining, preparation (e.g. coal selection, cleaning and drying) and coke production as well as domestic and foreign sales of products. Besides, the company supplies a full range of products of the leading Russian manufacturers of metal to the domestic Russian market. The company also provides technological services for the transport of coal enterprises of Kuzbass, rail freight. The group of Stroyservis comprises 8 industrial plants and 4 branches. Businesses are located in: Prokopyevsk, Kiselevsk, Belovo towns and in Berezovsky, Belovsky and Gurievsk areas, Kemerovo region, as well as in Karpinsk town, Sverdlovsk region and in Gubakha town, Perm territory. Stroyservis is one of the largest metal traders in the region, with an annual turnover of 2.5 billion rubles. The central office for the implementation of rolled metal, pipes and metal located in Kemerovo. Branches operate in the cities of Novokuznetsk, Krasnoyarsk, Novosibirsk and Yekaterinburg. Under the corporative management of Stroyservis there are five coal mining enterprises: Barzasskoe Tovarischestvo, Razrez 58

59 Shestacki, Razrez Permyakovsky, Razrez Berezovski, and Shahta 12. The coal enterprises focus on open pit and underground mining of highquality stone, metallurgical and steam coal of different qualities. Graph 27 Stroyservis Coal Production in , million tons Source: company data, Interfax-CNA s analysis Production In 2014, Stroyservis raised coal production by 12.5% to 8.1 million tons. Stroiservis invested RuB 1.1 billion in its coal enterprises last year. Plans In 2015, Stroyservis plans to raise coal production by 3.7% to about 8.4 million tons. Stroiservis plans to invest RuB 1.0 billion in its coal enterprises in

60 MMK Coal Division (Belon) Structure 60