Mytilineos Holdings. OVERWEIGHT Previous Rating: Under Review. Growth story becomes more clear. Euroxx Research Industrials. Resume of Coverage

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1 Euroxx Research Industrials Resume of Coverage November 22, 2010 Mytilineos Holdings OVERWEIGHT Previous Rating: Under Review Share Price: 4.27 (close of November 19) 12M Price Target: 6.50 Previous Target: U/R Expected Total Return: 52.1% Estimates e 2011e 2012e Sales ( m) ,306 1,422 EBITDA( m) Net profit ( m) EPS ( ) EPS growth (%) -23.7% 370% 19.7% 10.3% Source: Hellenic Exchanges, Euroxx Research Ratios e 2011e 2012e P/E (x) EV/EBITDA (x) EV/EBIT (x) EV/Turnover (x) Div Yield (%) 0.0% 5.0% 5.9% 6.5% P/BV (x) Source: Hellenic Exchanges, Euroxx Research Stock Performance 3M 6M 12M YTD Absolute -9.1% -7.2% -19.6% -14.9% Difference (ATG) 0.3% 1.6% 20.6% 17.1% Stock Data: Market Cap ( m) 500 Outstanding shares (#) 116,984,340 Daily volume (#) 187,934 Low / High 52 w ( ) Free float 60.8% Bloomberg / Reuters MYTIL GA / MYTr.AT Company Description: The Mytilineos group is a leading Greek industry active in Metallurgy & Mining, Energy, EPC projects and the Vehicle industry. Established in Greece in 1990, the group s holding company, Mytilineos Holdings, is listed on the Athens Exchange, has a consolidated turnover of approximately 700m and employs over 2,700 people in Greece and abroad. Marios Theofanopoulos Industrials/Refining theofanopoulos@euroxx.gr Growth story becomes more clear Mytilineos is active in Metallurgy & Mining, Energy and EPC sectors with substantial synergies evolving between the 3 activities. Outlook is improving regarding the business environment of the 3 sectors, while key uncertainties of the past have been resolved. The Metallurgy & Mining activity is expected to benefit by the recovery of aluminium prices and the operation of the cogeneration plant. Furthermore, after the successful conclusion of the arbitration with PPC, AoG s electricity cost has now stabilized at low levels that enable very efficient operation of the smelter. Group figures will be significantly boosted by the EPC sector. METKA s backlog is currently standing at the record high of 2.4bn, while 90% of it refers to projects outside Greece. Its latest success to sign a further 724MW CCGT in Syria underscores its drive to evolve to one of the leading players in the energy thirsty markets of SE Europe and Middle East. In addition, natural gas could become base load post 2013, when CO2 free allowances will be abolished, providing Metka with ample opportunities for backlog replenishment. Going forward, the Energy sector is expected to become a key growth driver of the group. After the acquisition of Endesa Hellas, Mytilineos will establish itself as the largest IPP in Greece with a capacity of 1.2GW in operation by The EU/ECB/IMF is pushing for the quicker liberalization of the electricity market, while the group has speeded up developments regarding the opening of the natural gas market. The aforementioned positive trends will reflect in significant growth rates from FY 10 onwards. Specifically, we expect e revenue and net profit CAGR of 29% and 84% respectively. Overall, we believe Mytilineos group is well placed to outperform the market with Metka as its flagship and with improved performance from the metallurgy and energy activities going forward. We resume coverage on Mytilineos group with an Overweight recommendation and a TP of Please refer to important disclosures in the Disclosure Appendix.

2 Table of Contents Investment Positives... 3 Investment Risks... 4 Investment Thesis... 4 Group Profile... 5 Business Outlook M 10 Results Financial Forecasts Valuation Consensus Summary of Financials Important Disclosures Euroxx Research / Mytilineos Holdings 2

3 Investment positives 3 activities with significant synergies between them Vertical integration Hedging policy to safeguard financials Demand for alumina secured EPC backlog provides visibility for 3-4 years Strong partnerships / central player in energy thirsty markets Largest IPP with 1.2GW by 2011 The group operates a diversified business portfolio with activities in metallurgy & mining, EPC projects and power generation. Significant synergies arise between the 3 business units since Metka specializes in the construction of energy projects, while the cogeneration plant provides cheap energy to the aluminium smelter. The group has made significant progress in extending its vertical integration. Metka has transformed into an EPC contractor. AoG receives half of its bauxite requirements from own bauxite reserves through the wholly owned subsidiary Delphi Distomon. The energy activity provides electricity and steam to AoG, sells loads at the wholesale market and targets the retail electricity market as well. The group is alert and effective in managing the inherent volatility of the commodity markets. This ability was proven by the successful hedging policy that has supported the metallurgy sector s profitability in 2009 and Notably, 100% of 2009 aluminium production and 50% of 2010 production has been sold through derivative contracts in much higher prices than current market levels. Further, note that the group has already began to hedge 2011 production at aluminium prices of $2,450 per ton. The contract with Glencore AG regarding the sale agreement of 5m tns of alumina within the next 10 years provides revenue visibility and enables Mytilineos to proceed with the debottlenecking process and increase its alumina production to 1.1m tns pa. The value of the agreement is expected to exceed $2bn. METKA s backlog is currently standing at the record high of 2.4bn, while 90% of it refers to projects outside Greece. Its latest success to sign a further 724MW CCGT in Syria underscores its drive to become one of the leading players in the broader region of SE Europe and Middle East. Metka is building strong relationships with global utilities and clients of international status. It has partnered with OMV, RWE and Ansaldo for projects in Turkey, Syria and Romania. Such partnerships enable Metka to consolidate its presence in emerging markets and secure its backlog replenishment. Mytilineos group will become the largest Independent Power Producer in Greece with an energy portfolio of 1.2GW installed by The EU is pushing for the quicker liberalization of the electricity market, while Mytilineos group has speeded up developments regarding the liberalization of the natural gas market. Euroxx Research / Mytilineos Holdings 3

4 Investment risks Volatility of commodity prices EPC projects execution risks Energy market risks Currency risk The group s activities expose it to the volatility of the commodity prices, such as aluminium, zinc, lead as well as fuel oil as a production cost. As a base metals company, the valuation of AoG is substantially influenced by the aluminium and raw materials prices. The smooth execution of the projects undertaken is a major risk for Metka given that it currently runs 7 projects within and outside Greece simultaneously. Furthermore, delays in the development of existing projects and delays in the assignment of new projects introduce downside risk to Metka s valuation. The energy activity is expected to provide significant contribution to group figures from 2011 onwards. Any delays in the full commercial operation of the group s thermal plants impose downside risk to our estimates. Furthermore, low SMPs or high gas prices may hinder the profitable operation of the thermal plants in the medium term. The group is activated on a global scale and consequently is exposed to foreign exchange risk stemming mainly from the US dollar. This kind of risk concentrates to metallurgy revenues which are totally conducted in US dollar. Investment thesis Mytilineos group has recently resolved two long-standing issues that have dampened its growth story so far. Firstly, it has acquired the full energy portfolio of Endesa Hellas. Having established itself as the largest Independent Power Producer with installed capacity of 1.2GW by 2011, Mytilineos is well placed to benefit from the progressing liberalization of electricity and natural gas markets. The second issue of the arbitration with PPC regarding the electricity supply to AoG was also resolved recently on mutually favorable terms. With the advent of the cogeneration plant, the electricity cost for aluminium has now stabilized at low levels enabling very efficient metallurgy operations. These developments coupled with the establishment of Metka as a key EPC player in the energy-thirsty markets of SE Europe and Middle East provide us with confidence that Mytilineos group will outperform the market. Overall, we feel Mytilineos group is well placed to benefit from future business trends in its 3 sectors of activity and resume coverage with an Overweight recommendation and a TP of Euroxx Research / Mytilineos Holdings 4

5 Group Profile Metallurgy & Mining sector The entire M&M complex was acquired from Alcan in Since then Mytilineos has developed into a leading industrial producer of alumina and aluminium in South Eastern Europe. Production facilities occupy an area of 7,035km 2 and constitute a vertically integrated production unit including bauxite mines, alumina refinery, smelter and self owned port facilities for large tonnage ships. Vertical integration of AoG The main strength of Aluminium of Greece (AoG) is its vertical integration since it gets approximately half of its bauxite raw material needs from the wholly owned Delfi Distomon subsidiary. Approximately half of AoG s alumina production is sold to the market at LME prices while the rest is used for the production of aluminium. About 55% of the aluminium production is marketed in Greece, while the rest is exported. Based on AoG s current capacity, c1.8m tns of bauxite are converted into c780k tns of alumina, 320K tns of which are used to produce approximately c165k tns of aluminium, while the rest 460K tns of alumina are being sold to the market through long term contracts. A stable contract with Glencore and the on-going debottlenecking process are expected to enable AoG return to nearly full capacity levels in Bauxite Steam Soda Alumina (OX) Electricity Aluminium (Al) AoG s energy costs (electricity, fuel & steam) in FY 10e are expected to comprise 50% of its total production cost Aluminium production is a particularly energy intensive business since the energy cost comprises 50% of the total production cost according to our 2010 estimates. Specifically, electricity is expected to account for 29% and the fuel & steam cost for 19% of total 2010e costs. A significant part of the electricity and steam requirements are supplied by the 334MW CHP plant of the group. AoG production cost 2010e 20% 29% 8% 24% 19% Electricity Fuel & steam Materials Labour Maintenance & other Euroxx Research / Mytilineos Holdings 5

6 EPC sector In the EPC projects sector, Mytilineos group is active through METKA. Founded in 1962, METKA undertakes projects regarding construction of energy plants, defense mechanisms and infrastructure. It holds a world class manufacturing capability with high added value profile, while it collaborates with all world class technology providers, including GE, Alstom, and Siemens. Strong backlog currently at 2.4bn After winning recently a second contract in Syria for the construction of a 724MW CCGT plant, Metka s backlog increased by a further 680m to stand to a record high of 2.4bn. About 90% of this backlog refers now to projects outside Greece indicating that Metka is little exposed to the adverse domestic macro environment. On the contrary, it is further strengthening its presence in the wider region including SE Europe and the Middle East. Specifically, it has projects under construction of 1bn in Turkey and two projects in Syria of a total budget of 1.3bn, both of which are markets with booming energy needs. Note that currently Metka is carrying out EPC contracts for 7 major projects simultaneously. Below we present the backlog of the major projects currently contracted to the Metka group: PPC: 430MW in Aliveri, natural gas fired combined cycle. Alstom sub supplier for the main equipment. Contract value of 220m Protergia: 430MW in Ag. Nikolaos, natural gas fired combined cycle. GE sub supplier for the main equipment. Contract value of 232m Korinthos Power: 437MW in Ag. Theodori, combined cycle natural gas driven power station. Contract value of 285m RWE/Turcas: 775MW in Turkey, natural gas fired combined cycle. Siemens sub supplier for the main equipment. Contract value of 470m OMV (Borasco): 870MW in Turkey, natural gas fired. GE sub supplier for the main equipment. Contract value of 475m OMV (Petrom): 860MW in Romania, natural gas fired. GE sub supplier for the main equipment. Contract value of 210m PEEGT: 700MW in Syria, natural gas fired. Ansaldo sub supplier for the main equipment. Contract value of 650m PEEGT: 724MW in Syria, natural gas fired. Ansaldo sub supplier for the main equipment. Contract value of 680m Euroxx Research / Mytilineos Holdings 6

7 Energy sector Acquisition of Endesa Hellas On March 2010 Mytilineos and Endesa reached an agreement for the acquisition of 50.01% of the share capital held by Endesa in the joint company Endesa Hellas. The total price to be paid by Mytilineos amounts to 140m and will be paid in installments scheduled until 1 July At the same time, Endesa will acquire one wind park and three hydro-electric plants with a total installed power generation capacity of around 14MW, which belong to Endesa Hellas portfolio, for a price of 20m. The abovementioned acquisition is a further step towards the creation of the largest independent electrical power producer in Greece establishing a portfolio of 1.2GW of installed capacity from thermal plants in operation by 2011 and over 800MW RES in different stages of development. Specifically, after the acquisition of Endesa Hellas (renamed to Protergia), the total energy portfolio of the group consists of: 334MW CHP Combined Heat & Power plant in Viotia (in operation) 444MW CCGT Merchant power plant in Viotia (under construction commercial operation by November 2010) 437MW CCGT Merchant power plant in Korinthos, 65% stake in JV with Motor Oil (under construction commercial operation by August 2011) 437MW CCGT Merchant power plant in Volos (licensing stage - to be completed by January 2013) Portfolio of Renewable Energy Generation Assets (Wind Parks, Hydroelectric Power Stations and Photovoltaic Parks) with total capacity of 1,000MW Electricity Trading Licence of 310MW CO2 Emission Trading platform Production License for a 600MW Coal-Fired Power Plant in Viotia region Euroxx Research / Mytilineos Holdings 7

8 Business Outlook Metallurgy & Mining Sector Sector trends International outlook Domestic outlook Aluminium pricing Effective hedging policy provided financial support in downturn In an interview at the Metal Buletin, the Chairman of the group commented that there are fundamental changes in the industry brought by funds, by the financing deals, the investment banks, by the Chinese role in the market as a consumer and a producer, by consolidation and by the ongoing scarcity of energy supplies in most parts of the world. The market environment for base metals shows signs of improvement benefiting largely from the worldwide economic recovery. Generally, aluminium availability remains tight supporting premiums at their high levels. Specifically, total world supply increased 17.1% y-o-y in H1 10 (mainly due to Chinese smelters that bring capacity back online), while total world consumption was up 25.6%. Demand in China has risen by 32% during H1 10 helped by stimulus measures. On the other hand, domestic aluminium demand will be negatively affected over the next twelve months by the adverse macro environment. Specifically, management expects local demand to remain flattish in 2010 compared to the previous year but decline 10-20% in In such an environment, the group will direct more sales to its traditional export markets in northern and southern Europe, since these markets feature increasing demand for value added products such as slabs and billets. Aluminium prices rallied during Q3 10 on the back of weak dollar, expectation of further quantitative easing by the US Federal Reserve and robust demand. The average aluminium price during 9M 10 rose to $2,115 per ton, up 36.1% y-o-y. Note that outlook for aluminium is positive since robust demand for the commodity is driving prices higher. In our model, we estimate the LME price of aluminium to settle at $2,200 per ton going forward. On the positive side, Mytilineos group has proven highly efficient in shielding itself against adverse commodity and currency movements. Mytilineos was the aluminium company that did the largest hedging in the world at the end of 2007 and in 2008 since it had almost half a million tonnes hedged at $3,000 per ton. A policy well implemented since at the start of 2008 the aluminium price stood at $2,400 per ton but plunged at $1500 per ton 12 months later. Note that 70k tons of the aluminium production for 2010 are hedged at $3,200 per ton. Euroxx Research / Mytilineos Holdings 8

9 Production costs finally stabilized at low levels A significant development is that the long-standing arbitration of AoG with PPC regarding the supply of electricity has been resolved with mutually beneficial terms. The agreement provides for the supply of AoG with a total of 4,710 hours of electrical power at a tariff of 40.7/MWh by PPC effective as of July 1, In effect, AoG secured electricity supply for 54% of the hours used, while the balance is to be supplied by the 334MW CHP plant. Going forward, and in order to derive our model estimates, we expect the electricity cost to settle at 42/MWh with the advent of the cogeneration plant operating on cheaper LNG. The duration of the agreement was set to 25 years, however a provision is included for renegotiation of its terms after , depending on the conditions that will prevail in the energy market at that time and on the respective CO 2 emission rights. Finally, the debt of AoG with PPC (created from the dispute regarding past electricity charges) is also settled with mutually acceptable terms. Specifically, the debt of c 80m will be repaid in instalments (with an upfront payment of 20m) and will bear an interest rate of Euribor plus 1%. Furthermore, the CHP plant helps to decrease the production costs of the AoG by supplying steam to the aluminium refinery and enabling it to reduce purchases of fuel oil. Note that energy is the most significant cost component in the production of aluminium and accounts for c50% of its total cost. Prospects for rest of 2010 Overall, the commodities sector, which is traditionally regarded as highly cyclical, continues to benefit from the improvement of the economic climate which begun during Q2 09, and especially from the strong demand originating from rapidly developing economies such as that of China. For the rest of the year, the metallurgy and mining sector is expected to continue profiting from the on-going recovery of aluminium prices, as well as from its successful risk-hedging policy against fluctuations in the prices of metals and against currency fluctuations. These measures, coupled with the benefits from the operation of the group s cogeneration plant and the group s strict cost controls, create positive prospects that allow forecasts of sustained profitability. Euroxx Research / Mytilineos Holdings 9

10 EPC Sector Metka started from a stated-owned construction company specializing in metallic projects. The second phase of its expansion involved it becoming an EPC contractor. Now it has entered the third phase of its development that involves expanding its activities abroad and acquiring an international status through strong partnerships with established utilities. Market/Environment International project portfolio New project in Syria Positive long term market factors for Metka, such as the need to reduce carbon emissions, the aging installed base and the industrialization of emerging economies, remain intact. Natural gas could become base load post 2013, when CO 2 free allowances will be abolished. Further, all the new conventional capacity additions will be in CCGTs and Metka will benefit since its expertise lies in power generation constructions. Regarding the EPC market, there has been evidence of a slowdown in the progress of energy investments in Western Europe. However, demand in the wider Southern Eastern Europe and the Middle East remains robust. Having established itself as a specialist contractor for EPC energy projects in Greece, Metka is now expanding to competitive markets abroad. It has diversified internationally its project portfolio by achieving contracts in Pakistan, Syria, Turkey and Romania. It is resilient to the adverse domestic outlook since only 10% of its existing backlog relates to domestic projects. Furthermore, domestic revenues are expected to account for 36% of total FY 10 revenues, while exposure on PPC has been reduced to an immaterial level. Metka increased further its international exposure after winning a second contract in Syria for the construction of a 724MW CCGT plant. The new project increased Metka s backlog by a further 680m to stand to a record high of 2.4bn. About 90% of this backlog is now out of Greece indicating that Metka is little exposed to the adverse domestic macro environment. The contract features an EBITDA margin of 19% prior to the management fee to Mytilineos holding company. Metka targets markets with substantial growth potential. It is further strengthening its presence in the wider region including SE Europe and the Middle East. Specifically, it has projects under construction of 1bn in Turkey and two projects in Syria of a total budget of 1.3bn, both of which are markets with booming energy needs. Metka is building strong relationships with global utilities and clients of international status. It has partnered with OMV and RWE for projects in Turkey and Romania. Such partnerships enable Metka to penetrate emerging markets and receive a stake of their significant growth potential. Specifically, Turkey has a market size of 40GW, while RWE expects it will need to expand significantly its power generation capacity in the next 10 years. Other international partnerships of Metka include Alstom, General Electric and Siemens in the energy sector and Raytheon, KMW, Lockheed Martin and HDW in the defense sector. Euroxx Research / Mytilineos Holdings 10

11 EPC Sector. Domestic market Sale of ETADE Regarding the domestic market, the fuel mix is changing with new gas-fired CCGT plants coming on stream and increasing penetration of renewable energy sources wind and photovoltaic. Furthermore, the need to replace old, high polluting technology facilities with new, environmental friendly ones and the energy market s liberalization will increase the demand for new capacity and is expected to replenish existing backlog. PPC has announced a heavy capex for the following years which involves investing in new units as well as replacing old and inefficient plants in order to meet EU environmental standards. Metka is the only local EPC contractor and has a proven successful long cooperation with Greece s electricity incumbent, so we expect it to undertake a substantial part of PPC s new investments. On January 2010 the management of Metka announced the sale to Terna of 100% of the shares of ETADE, a wholly owned subsidiary of Metka, for a price of 42.5m. ETADE held a 90% stake in the consortium for the construction of the Megalopolis V CCGT project with a budget of 500m. The suspension for more than 2 years of the activities for the Aliveri V CCGT and the consequences from postponement of its implementation for a time coinciding with the implementation of the Megalopolis project, led to the sale of ETADE being considered as the most appropriate course of action in order to protect the interests of Metka and establish the conditions for further expansion of its activities abroad. The contribution of the ETADE sale on the P&L is 42.5m revenue, 32.4m ebitda and 14.6m net profit. Projects Description MW Remaining Budget ( m) 9M' e 2011e 2012e 2013e 2014e EPC future PPC Lignite/Greece 600MW E. Hellas/Volos CC/Greece 437MW Backlog (Future) 565 EPC existing OMV(Borasco) CC/Turkey 870MW RWE/Turcas CC/Turkey 775MW Korinthos Power CC/Greece 437MW Protergia/St. Nicholas CC/Greece 430MW PPC/Ilarion Hydro/Greece PPC/Aliveri CC/Greece 430MW OMV(Petrom) CC/Romania 860MW PEEGT CC/Syria 700MW PEEGT CC/Syria 724MW Scrapping Greece Defence existing Infrastucture existing Backlog (Existing) 2,401 Source: Metka, Euroxx Research Euroxx Research / Mytilineos Holdings 11

12 Energy Sector Liberalization of the electricity market Market participants Electricity consumption The Greek electricity market (demand peak c10gw) is under liberalization. Most of the existing capacity is old and inefficient, underlining the need for new capacity and replacements, while PPC is looking for strategic partners to finance new commissioning plan. Simultaneously, the EU/IMF/ECB apply strong pressure on PPC to either reduce its production capacity or otherwise change it to facilitate the quicker opening of the market. PPC is the incumbent power producer with >97% market share in retail and around 93% in the wholesale market. Currently, there are 3 independent units in the market but PPC has overtaken the operation of Heron 147MW OCGT. Two new CCGTs namely Thisvi and Heron 2 have recently commenced trial operation. The dominant position of PPC will be challenged by IPPs (Mytilineos-Motor Oil, Terna- GDF-Suez, Helpe-Edison). Mytilineos replaced Iberdrola in the JV with Motor Oil and acquired the full control of Endesa Hellas buying out ENEL. Electricity consumption has grown with a yearly average of 3.7% in the decade peaking during the summer due to strong air cooling penetration in the commercial and residential sectors. However, the recession combined with mild weather resulted in a 7.1% decline during Total power demand is seen leveling off during the first 8 months of 2010 since it declined marginally to 35.8TWh, down 0.7% y-o-y. Going forward, the reference scenario of the 2009 study of the National Council for Energy Strategy predicts a 2.1% annual growth rate in demand during the period However, the economic recession could keep the average growth rate for the two year period in negative figures. SMP level Despite the reduced demand for electrical power and the increased power generation from hydro-electric plants, the System Marginal Price posted a light increase. Specifically, the average SMP for Jan-Aug 2010 rose to 52.3/MWh from 48.1/MWh prior period, up 8.7% y-o-y. Higher oil prices are expected to put an upward pressure on the SMP during the rest of the year. /MWh SMP level Avg 2008: 87.2 Avg Jan-Aug'10: 52.3 Avg 2009: Euroxx Research / Mytilineos Holdings 12

13 Electricity production factors Lignite Natural Gas Renewable energy sources The percentage of domestic lignite in electricity generation in the interconnected system has ranged from 56-63%, while Greece has reserves for another 50 years. Lignite production during the first 8 months of 2010 declined to 18.8TWh, down 9.8% y-o-y, and accounted for 59.9% of total electricity production from 64.3% prior period. Lignite will remain the central production factor of electricity, though its share is expected to decline. Its cost will rise significantly from 2013 onwards since it will incorporate the full CO2 cost. The share of natural gas in electricity production follows an upward trend as most planned recent investments have been in CCGTs, while all the new conventional capacity up to 2014 will be in CCGTs and perhaps some hundreds of OCGTs. However, in 2009 its share was just 19.4% because of the lower demand and increased production from hydro-electric plants. Natural gas increased its participation in the total energy output to 21.8% from 17.4% prior period and produced 6.8TWh of electricity, up 21.2% y-o-y. Hydro-electric production also increased to 4.4MWh, up 41.5% y-o-y, while crude oil usage fell to minor levels. Note that Greece is importing gas mainly from Russia and Turkey via pipeline and LNG from Algeria and occasionally from the spot market. Renewable energy sources (without large hydro) have traditionally participated with less than 5% in the mix, while their contribution in Jan-Aug 2010 rose to 4%. However, Greece hopes on important wind and solar potential. Law 3851/2010 dictates that 40% of the electricity consumed in 2020 should be generated by RES. According to this target, 9.5GW of RES capacity should be installed by 2014, while this figure should increase to 15GW in In order to reach these targets, a very favorable framework has been put into place to facilitate the RES penetration in the total production mix. This includes feed-in tariff for the energy produced and up to 40% subsidy for the construction of wind and solar parks. 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Power Production Mix 0.4% 3.5% 6.7% 6.6% 6.3% 6.9% 16.0% 19.4% 21.8% 20.3% 25.4% 26.0% 64.6% 58.3% 63.0% 59.9% 59.8% 58.3% 4.0% 1.8% 2.3% 3.9% 2.5% 3.1% 10.9% 12.5% 6.0% 5.8% 10.2% 14.0% Jan-Aug'10 Hydro-electric Renewables Lignite Natural gas Crude oil Euroxx Research / Mytilineos Holdings 13

14 Energy Sector Energy assets CHP plant in operation Natural gas market developments The group s investments in the Energy sector continue unabated, since a second thermal plant (444MW CCGT plant in Agios Nikolaos) is scheduled for the immediate future. In parallel, construction of a third 437MW CCGT plant in Agii Theodori, in collaboration with Motor Oil, is proceeding at a fast pace. The group is also strongly involved in the RES sector, with a portfolio representing a total installed operational capacity of 36MW and an additional total capacity of more than 1,000MW in various licensing and implementation stages. The CHP plant, fully owned by Mytilineos group, is operational since May 2009 selling electricity to the pool and providing steam to AoG for the production of alumina, while it has supplied the grid with loads of around 1TWh since January However, its full commercial operation is still pending and remains subject to the completion of the relevant electricity codes. Note that since May 2010 the CHP has been operating on LNG making it more efficient. Since early 2009 gas prices have decoupled from the price of oil. Specifically, average Brent prices during 9M 10 rose to $78/bbl vs $58/bbl prior period, up 34% y-o-y, while prices of natural gas rose by a modest 13% during the same period. Whether this trend is sustainable or not is debatable. Constant developments in the technology applied to shale gas extraction have brought down the overall cost of the process and have uncovered massive amounts of natural gas in shale rock. On the other hand, skeptics state that shale gas exploration is still too expensive and it carries environmental risks since it could contaminate drinking water supplies. Either way, under the current market environment, supplies of Liquid Natural Gas (LNG) from Africa and the Gulf (mainly Algeria and Qatar), which otherwise might have gone to the US, are now being directed to Europe. Furthermore, China s natural gas unconventional production continues to grow. Natural gas was introduced in the Greek market in 1997 whereby total consumption increased from 0.8bcm at that time to c4bcm in Demand fell by c15% in 2009 mainly due to reduced electricity generation, which accounts for c72% of natural gas end uses. The market is expected to reach 3.6bcm in 2010 and to double in 2020 at 8bcm. With an energy portfolio of 1200MW, Mytilineos will consume close to 1.2bcm pa. Euroxx Research / Mytilineos Holdings 14

15 Liberalization of the Greek natural gas market (including LNG) These figures indicate that Mytilineos had a great scope to push for the liberalization of the domestic natural gas market. Notably, since May the group operates on LNG thus reducing substantially its energy cost regarding both power production and metallurgy services. In 2009 Mytilineos group and Motor Oil joined forces in the natural gas market facilitating its liberalization. Specifically, they established an equal stake JV which will import and trade all kinds of natural gas (LNG, CNG). The natural gas will be used to fuel industrial facilities and power plants and for sale to third parties. Under the scope of the new JV, Mytilineos and Motor Oil announced the arrival of the first private LNG cargo for the two companies scheduled for unloading at the Revithousa LNG terminal in May From this shipment of 140,000 m 3 of LNG, 20,000 m 3 will be collected by Motor Oil, 70,000 m 3 by AoG and 50,000 m 3 will be made available to DEPA on the same privileged terms as those applicable for the initial buyers after a decision of the two groups following a proposal by DEPA. Further, M&M will supply PPC with 5 cargoes of total 290,500 m³ of LNG. The total cost of the supply will reach 56m, while PPC reckons will save 22m from avoiding the more expensive natural gas of DEPA. These conditions create a challenging environment for DEPA, which is not expected to benefit from the expected increase in natural gas demand by 10% in Euroxx Research / Mytilineos Holdings 15

16 9M 10 Results Mytilineos announced a strong set of 9M 10 results, positively influenced by increased international revenues from the EPC sector, the continued recovery in international aluminium prices and support from its successful hedging policy. On a Q3 10 basis: Sales reached 349.0m (+121.6% y-o-y) EBITDA settled at 50.4m (+54.3% y-o-y) EBITDA margin settled to 14.4% from 20.7% in Q3 09 Bottom line posted 19.9m gains vs 6.3m in Q3 09 (+219.0% y-o-y) On a 9M 10 basis: Adjusted sales from continuing operations reached 764.5m (+57.3% y-o-y) Adjusted EBITDA from continuing operations rose to 112.5m (+48.2% y-o-y) Adjusted EBITDA margin came in flattish at 15.4% from 15.6% in 9M 09 Adjusted net profit advanced to 48.8m (+173.5% y-o-y) The increase in sales is mainly attributed to the acceleration of the implementation of international projects at the EPC sector, which contributed revenues of 327.4m in 9M 10. EBITDA were boosted by the robust performance achieved by METKA, as well as by the improved sector conditions in the Metallurgy activity. Note that we have adjusted 9M 10 net profit from continuing operations of 63.4m downwards by 14.6m to account for the extraordinary gain related to the sale of ETADE. Further, 9M 10 net profit includes a 9.8m crisis levy. Positive drivers for the Metallurgy & Mining sector are its export orientation and the significant recovery in the international prices for aluminium (up 36.1 y-o-y), while group financials were supported from the hedging policy. Production costs were further reduced with the advent of the cogeneration plant which supplies steam to the alumina refinery and now operates under LNG. Regarding the energy activity, the group has continued unabated its investments in thermal plants, while simultaneously pushing for the liberalization of the natural gas market. Under its new JV with Motor Oil, M&M Natural Gas, it has been importing LNG to reduce its own energy cost in light of the full liberalization of the electricity market and to even supply industrial groups such as PPC. Finally, note that the 444MW CCGT in Agios Nikolaos is scheduled to start commercial operations in the immediate future, while the 437MW CCGT with Motor Oil is proceeding fast. Euroxx Research / Mytilineos Holdings 16

17 Mytilineos 9M'10 results P&L (in m) Q3'09 Q3'10 y-o-y 9M'09 9M'10 y-o-y Sales % % Sales (adj.) % % Gross profit % % Gross margin 25.4% 15.7% -9.7pp 18.4% 21.1% 2.7pp EBITDA % % EBITDA margin 20.7% 14.4% -6.3pp 15.6% 18.9% 3.3pp EBITDA (adj.) % % EBITDA (adj.) margin 20.7% 14.4% -6.3pp 15.6% 15.4% -0.3pp EBIT % % EBIT margin 17.7% 12.9% -4.8pp 12.7% 17.0% 4.2pp Pre-tax profit % % Tax pp % effective tax rate 54.7% 16.0% -38.7pp 37.6% 22.5% -15.2pp Minorities % % Net profit % % Net margin 4.0% 5.7% 1.7pp 3.7% 8.3% 4.6pp Net profit (adj.) % % Net (adj.) margin 15.6% 36.3% 20.7pp 19.9% 30.2% 10.3pp Source: Mytilineos, Euroxx Research Euroxx Research / Mytilineos Holdings 17

18 Financial forecasts AoG forecasts Efficient hedging supports margins Electricity and fuel costs remain the major cost element The group has successfully used hedges to safeguard its profitability from the volatility of metal prices. Specifically, 50% (or 70K tns according to our estimates) of its FY 10e aluminium production has been sold short at $3,110/tn. Going forward, we estimate a stable aluminium price of $2,200/tn. Electricity and fuel costs remain the most significant cost element for the group as they comprise c50% of AoG s cash costs. However, the electricity cost will be contained as much as possible due to the recently signed agreement with PPC and the operation of the CHP plant on LNG. Further, we also incorporate a flat selling price equal to 13.5% of the LME aluminium price into our model for alumina. AoG key assumptions e 2011e 2012e 2013e 2014e 2015e 2016e Al production sold (K tns) Ox production sold (K tns) Al prices ($/tn) 2,868 1,667 2,100 2,200 2,200 2,200 2,200 2,200 2,200 Al effective prices ($/tn) 2,825 2,800 2,625 2,200 2,200 2,200 2,200 2,200 2,200 Ox prices ($/tn) Coke avg. prices ($/tn) Pitch avg. prices ($/tn) Bauxite tropical prices ($/tn) Soda avg. prices ($/tn) /$ exchange rate Brent ($/bl) Electricity ( /ΜWh) Source: Euroxx Research Overall, we expect AoG to generate flattish revenues in FY 10e and FY 11e at c 400m, while EBITDA margin should settle at 14% in 2010 and decline to more sustainable levels going forward. P&L (in m) e 2011e 2012e 2013e 2014e 2015e 2016e Alumina (Ox) sales Aluminium (Al) sales Electrolysis & Hedging Sales (AoG) chng -0.9% -14.5% -1.3% 0.9% 3.6% 0.5% 0.5% 0.6% 0.6% Ox EBITDA Al EBITDA Metal hedging EBITDA (AoG) chng -47.3% 97.4% -38.5% -18.6% -14.7% -5.1% -2.6% -2.7% -2.8% Ox EBITDA mgn 4.6% 4.9% -4.5% -2.8% -3.7% -4.6% -5.1% -5.6% -6.1% Al EBITDA mgn 5.9% -17.9% 2.4% 16.8% 14.4% 14.3% 14.1% 14.0% 13.9% EBITDA (AoG) mgn 9.8% 22.7% 14.1% 11.4% 9.4% 8.9% 8.6% 8.3% 8.0% EBIT (AoG) chng -54.9% 131.5% -44.8% n.m n.m -7.7% -4.0% -4.2% -4.4% EBIT (AoG) mgn 7.3% 19.8% 11.1% 8.2% 6.3% 5.8% 5.5% 5.3% 5.0% EBT (AoG) chng -61.8% 165.8% -45.6% n.m n.m -6.2% -2.7% -4.3% -4.6% EBT (AoG) mgn 6.3% 19.5% 10.8% 8.0% 6.1% 5.7% 5.5% 5.2% 4.9% Source: Mytilineos group, Euroxx Research Euroxx Research / Mytilineos Holdings 18

19 METKA forecasts Fundamentals are positive for Metka Although some pressure on METKA s margins is anticipated in the following years, current backlog stands at record high ( 2.4bn), while further projects are under the bidding process. Natural gas could become base load post 2013, when CO 2 free allowances will be abolished. Further, all the new conventional capacity additions will be in CCGTs and Metka will benefit since its expertise lies in power generation constructions. Demand for power in the SE Europe and emerging markets is robust with Turkey calling for major investments in gas and indigenous plants. On our estimates, the adjusted EBITDA margin is expected to settle at 16.4% in 2010e and decline until it reaches 16.0% in 2014e. EBITDA Breakdown e 2011e 2012e 2013e 2014e CAGR 09/14e Energy Projects EBITDA (adj.) of Energy Projects % gross EBITDA mgn 17.5% 19.9% 19.5% 19.1% 19.3% 19.4% 19.1% Energy Projects EBITDA of Energy Projects gross EBITDA mgn 17.5% 19.9% 24.2% 19.1% 19.3% 19.4% 19.1% Defence Projects EBITDA of Defence Projects n.m EBITDA mgn 40.8% n.m n.m 40.0% 40.0% n.m n.m Construction Projects EBITDA of Construction Projects n.m EBITDA mgn 12.5% n.m 12.2% 8.0% 8.0% n.m n.m Total EBITDA (adj.) after mgnt fee % EBITDA mgn after mgnt fees 17.5% 18.3% 16.4% 16.6% 16.7% 16.2% 16.0% Total EBITDA after mgnt fee EBITDA mgn after mgnt fees 17.5% 18.3% 20.9% 16.6% 16.7% 16.2% 16.0% Source: Euroxx Research (adjusted figures exclude operating profits from the sale of ETADE) METKA s production capacity gradually approaches 1bn We see significant growth in all financial lines, since the record high backlog allows Metka to increase its production capacity and bring it above 750m revenues per year. P&L (in m) e 2011e 2012e 2013e Sales chng 34.2% -11.0% 77.5% 20.7% 5.5% 9.1% EBITDA (adj.) chng 17.1% -9.4% 54.7% 29.1% 5.6% 6.2% EBITDA margin (adj.) 17.5% 17.8% 16.4% 16.6% 16.7% 16.2% Pre tax profit Pre tax margin 15.2% 16.1% 20.1% 15.9% 16.0% 15.5% Tax Net profit (adj.) chng 12.6% -14.9% 42.9% 41.5% 8.2% 17.0% Net margin (adj.) 10.9% 10.4% 8.8% 9.8% 10.1% 10.8% Source: Metka, Euroxx Research (adjusted figures exclude sale of ETADE) Euroxx Research / Mytilineos Holdings 19

20 Energy sector forecasts Thermal energy Fuel costs, load factors and SMPs are the main factors that determine the profitability of thermal plants On our estimates, the contribution from the energy sector will come from two CCGT (combined cycle gas turbine) plants of total 840MW and one CHP (combined heat and power) plant of 334MW. The CHP plant has commenced operations since May 2009 but its results have not yet been consolidated due to the lack of the electricity codes. The two CCGTs will begin to contribute from late 2010 and mid As far as the RES are concerned these are already under operation. SMPs are seen gradually rising again on the back of soaring CO 2 emission costs. Gas effective price is linked to Brent ( /bl) and /$, while personnel and other operating costs follow Greek CPI. Finally we include a capacity charge of 35K per MW to be received by HTSO. CHP 334MW P&L - CHP 334MW e 2011e 2012e 2013e 2014e 2015e 2016e Net Capacity (MW) SMP effective ( /ΜWh) Load factor 70% 60% 65% 60% 60% 60% 60% 55% Volumes (GWh) 824 1,431 1,551 1,431 1,431 1,431 1,431 1,312 Electricity sales Capacity charge ( /ΜW) 35,000 35,000 35,000 35,000 35,000 35,000 35,000 35,000 Capacity charges CO2 emmisions g/gwh CO2 allowance (m tons) CO2 cost ( /ton) CO2 allowance Gas volumes (m tons) Gas effective price Steam Energy sales Energy sales Fuel Cost CO2 emissions Gross profit OPEX EBITDA D&A Tax Net profit Source: Euroxx Research (in m unless otherwise stated) Euroxx Research / Mytilineos Holdings 20

21 CCGT 444MW P&L - CCGT 444MW e 2011e 2012e 2013e 2014e 2015e 2016e Net Capacity (MW) SMP effective ( /MWh) Load factor 0.0% 5% 25% 30% 50% 50% 50% 55% Volumes (GWh) ,130 1,884 1,884 1,884 2,072 Electricity sales Capacity charge ( /ΜW) 35,000 35,000 35,000 35,000 35,000 35,000 35,000 35,000 Capacity charges CO2 emmisions g/gwh CO2 allowance (m tons) CO2 cost ( /ton) CO2 allowance Energy sales Fuel Cost CO2 emissions Gross profit OPEX EBITDA D&A Tax Net profit Source: Euroxx Research (in m unless otherwise stated) CCGT 437MW P&L - CCGT 437MW e 2011e 2012e 2013e 2014e 2015e 2016e Net Capacity (MW) SMP effective ( /ΜWh) Load factor 0.0% 0.0% 5% 15% 20% 25% 25% 70% Volumes (GWh) ,575 Electricity sales Capacity charge ( /ΜW) 35,000 35,000 35,000 35,000 35,000 35,000 35,000 35,000 Capacity charges CO2 emmisions g/gwh CO2 allowance (m tns) CO2 cost ( /tn) CO2 allowance Energy sales Fuel Cost CO2 emissions Gross profit OPEX EBITDA D&A Tax Net profit (0.8) Source: Euroxx Research (in m unless otherwise stated) Euroxx Research / Mytilineos Holdings 21

22 Renewable energy For renewable capacity we include in our estimates 35MW of wind RES capacity which are already under operation. We assume that Protergia RES will enjoy feed in tariffs for their 20 years of operation, while we do not assume replacement after the expiration of the concession period. Regarding the wind renewable energy we assume an investment cost of 1.4m per MW, 30% of which is subsidized, 61% is equity and only the rest 9% is debt financed. On our estimates load factor for wind RES is seen at 30%. Regarding wind RES costs, municipality tax is set at 3.0% of sales, while other OPEX are linked to the Greek CPI. WIND 35MW P&L (in m) e 2011e 2012e 2013e 2014e 2029e Energy sales Operation costs Gross profit mgn 90.0% 90.0% 89.9% 89.9% 89.9% 89.8% 89.4% Municipality tax Overheads EBITDA mgn 83.0% 82.9% 82.9% 82.8% 82.8% 82.8% 82.1% Depreciation Financials EBT Tax Net profit mgn 32.1% 33.5% 34.9% 36.4% 37.9% 39.4% 48.7% Source: Euroxx Research Euroxx Research / Mytilineos Holdings 22

23 Group financials Overall, Mytilineos group aims to exceed the 1bn of revenues in Going forward, main growth drivers will be the strong EPC performance and increased contribution from the energy sector. Notably, we see for the period e sales CAGR of 29%, EBITDA CAGR of 24.3% and bottom line to grow at a CAGR of 83.7%. Contribution from the energy portfolio will have a significant impact on the group figures from FY 11e onwards, while the EPC sector s contribution to group revenues is expected to grow at an annual rate of 48.1% from 2009 to The Metallurgy & Mining sector is expected to improve its performance since its electricity cost variable has now stabilized due to the agreement with PPC and the operation of the CHP on LNG. Furthermore, hedges for 50% of the aluminium production in 2010 will provide strength to the topline. In order to calculate the income tax, we assume that the group will distribute 35% of net profit. Net profit margin is expected to rise to 6.5% in 2010e and settle at 6.0% going forward. P&L (in m) e 2011e 2012e Metallurgy EPC Energy Other Sales ,306 1,422 Metallurgy EPC Energy Other EBITDA EBITDA mgn 10.4% 17.9% 19.3% 16.4% 16.1% Depreciation Profit from associates Net financials Profit before tax Tax Minorities Net profit Net profit mgn 2.0% 2.1% 6.5% 5.9% 6.0% Source: Euroxx Research Euroxx Research / Mytilineos Holdings 23