Stock Price Mar 04 Mar /03/ /06/ /09/ /12/ /02/2005 DY P/E

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1 Company report Mytilineos Group Basic Materials 8.30 Aluminum Wheels 21 March, 2005 Konstantinos Zouzoulas OPINION Upgraded to Outperform TARGET PRICE Previous 6.50 Key Data Reuters Code MYTr.AT Bloomberg Code MYTIL GA Market Cap ( m) Shares outstanding 40,520,340 Free Float 57% ASE General Index 2, ( ) High Low 52 weeks price range The acquisition of Aluminium of Greece will have a profound impact on Mytilineos as it offers a greater size to the group, a leading position in the metals market in SE Europe, a better-balanced portfolio of products and increased profitability. In addition, the acquisition is expected to work as a launch pad for the group s ambitions to enter into Greece s lucrative energy market by building two power plants in the near future. Metka is expected to greatly gain from the ALG acquisition since it will build ALG s power plant (and Mytilineos own plant next to ALG s if approved) and receive a significant and constant flow from ALG s maintenance expenditure. FY04 Group revenues advanced by 12.7% to 313.2m, while NI reached 9m, 45% higher than last year. Metka s FY04 revenues and NI settled 21% and 33% higher, respectively. For FY05, group revenues are seen at 961.1bn but are not comparable to 2004 due to the ELVO and ALG consolidation. We adjust higher our target price for Mytilineos Group to 12.10/share (from 6.50/share), while our recommendation is revised upwards to outperform. Metka s TP is also revised higher at 7.20/share (from 5.40/share) while we maintain our outperform recommendation on the company. Stock Price Mar 04 Mar 05 Relative Performance Mar 04 Mar 05 (1m) (3m) (12m) 1,000, % Avg Volume (k) Absolute perf. (%) Rel. perf. to GI (%) 126, , , % 31.7% 85.3% -3.9% 19.6% 48.3% , /03/ /06/ /09/ /12/ /02/ % 60.0% % 40.0% 30.0% % 10.0% 0.0% % 18/03/ /06/ /09/ /12/ /02/2005 Price ( ) Relative Year Net Sales ( EBITDA EBITDA EBT EAT EPS EPS DPS PEG EV/ EV / DY P/E P/B P/CF Debt / ROE (%) m) ( m) margin ( m) ( m) ( ) chg (%) ( ) (YoY) EBITDA Sales Equity % % % % 0.00% % % % % 4.84% % % % % 9.61% 2004e % % % % 17.26% 2005p % % % % 30.45% 2006p % % % % 21.89% 2007p 1, % % % % 21.14% 2008p 1, % % % % 21.20% Pro-forma accounts (including ALG and ELVO)

2 Mytilineos Group 21 March, 2005 Table of contents Investment Summary...3 The new Group profile...7 Aluminium of Greece...10 Mytilineos parent - Core metal business...16 METKA: Big winner from the ALG deal...24 ELVO...30 Group financials...32 Group valuation MARFIN ANALYSIS

3 21 March, 2005 Mytilineos Group Investment Summary The acquisition of Aluminium of Greece (ALG) is expected to have a profound impact on Mytilineos as it offers greater size to the group, a leading position in south-eastern Europe s metal market, a better-balanced portfolio of products, increased profitability (see the alumina contract) and increased intra-group synergies. In addition, the deal gives Mytilineos the opportunity to use ALG as a springboard to enter into Greece s lucrative energy sector and turn the group into one of the primary private producers of energy in Greece. Although there are still more pieces of the puzzle to fall in place, it is obvious that the acquisition is turning Mytilineos into a considerable industrial player, while it adds significant value to the group. Following the acquisition and the positive impact on the group we increase our target price for Mytilineos Holdings and its Metka subsidiary to and 7.20per share from 6.50 and 5.40 per share respectively. Our recommendation for both Mytilineos Holdings and Metka is revised to Outperform. The direct impact of the acquisition In late December 2004, Mytilineos Group announced the agreement to acquire 46% of Aluminium of Greece from Alcan for 69m, while a further 7% would be acquired by related to the group entities and shareholders (Evangelos and Ioannis Mytilineos). The deal, which was completed in mid March, provides Mytilineos Holdings with a company that had revenues of 357.3m and EBT of 48m in 2004, while its cash position reached 120m (at the end of 2004). Furthermore, the deal transferred to Mytilineos a lucrative 6-year contract under which, Mytilineos could buy up to 440,000t of alumina p.a. at a specific price (12.75% of LME aluminium price), which then could sell it at market prices (currently sold at c22% of LME aluminium price). The difference between the buy and sell price is pure profit for the group. For FY05 this profit is estimated at c 55m. Mytilineos from its part needs to invest a total of c 310m during the next 3 years in order to 1) build a 320MW CCGT (Combined Cycle Gas Turbine) power plant to accommodate ALG s operations and 2) make substantial operational and efficiency improvements in ALG s plant that will significantly boost production. Overall, the deal provides Mytilineos with a well-run, well-managed company and a significant alumina producer in the region. In addition, ALG allows the group to diversify its income stream, while further enhancing its reach into the Balkans metal market. Finally, the acquisition is viewed as value enhancing for Mytilineos given the potential synergies among operations, the opportunity to sell alumina with considerably higher margins and the fact that the company owns significant undervalued assets (i.e. the corporate building). On the other hand, the acquisition brings significant risks to Mytilineos that mainly have to do with ALG s cost base. ALG s current contract with PPC to provide lowpriced electricity expires in March of Taking the view that PPC is not going to accept a 1-year grace period, the electricity cost for ALG (c20% of the company s FY03 GOGS or c 55m) is going to almost double in 2006, significantly pressuring ALG s operating profitability. In our model we do not account for the probability that in 2006 ALG will seek to import electricity from Greece s northern borders in order to considerably ease the impact from the expiration of the PPC contract. The company s new CCGT unit is expected to be operational in early Still, even with the new electricity unit up and running, the energy cost is expected to be significant higher than current levels and fluctuate in accordance with the cost of MARFIN ANALYSIS 3

4 Mytilineos Group 21 March, 2005 natural gas. Furthermore, increased investments are going to increase the company s depreciation expense (starting in 2007), further pressuring the ALG s bottom line. The indirect impact of the aquisition The licence to built and operate ALG s 320MW power plant gives Mytilineos Group the opportunity to be one of the first IPP s (Independent Power Producers) in Greece, without though seeking any agreements with HTSO to sell electricity, since all the produced capacity could be used for own purposes. Nevertheless, since ALG is already connected to the grid (as it currently receives electricity from PPC), it will be relatively easy for the company, if decided, to sell electricity to HTSO, without occurring any additional cost (the cost to build a line). Furthermore, the acquisition could give Mytilineos Group the opportunity to seek transferring its current licence for a 400MW CCGT plant from Volos to Aspra Spitia, where ALG s plant is located (the group has already filed for this transfer). If the transfer is approved, then there could be an opportunity for significant cost savings for the group (no need to build a gas line to receive gas, no need to build a line to provide electricity, lower tolls to sell electricity, lower operating cost etc.). Metka will also gain by overtaking ALG s maintenance works and maintenance capex. Finally, another important positive impact of the acquisition for Mytilineos is the fact that the group emerges as a significant industrial player in Greece with increasing negotiating power towards other companies but also towards the authorities as it now employs c4,800 employees (including ELVO). Aluminium of Greece prospects and risks Given ALG s current production limitations (additional quantity of alumina and aluminium is expected to come to market in 2007), the two factors that influence its revenues are aluminium prices and the exchange rate fluctuations. These factors could present ALG with a benefit or a risk, depending which way they go. The weakening of the US Dollar vs. the Euro has an adverse impact on profitability since the company sells in US Dollars but has a Euro denominated cost base. Currently the US Dollar is at low levels vs. the Euro. On the other hand, global demand and supply has boosted aluminium prices at high levels, while they are expected to remain at these levels for several more months. The other major risk regarding ALG has to do with the timing of the construction of its own CCGT power plant. As the current agreement with PPC (for a contract with a fixed and very low electricity rate) expires in early 2006, any delay of the power plant construction will have an adverse impact on the company s bottom line. In our forecasts for ALG, we assume that after the contract expires ALG will have to pay market electricity rates that effectively minimizes the company s gross profit. From 2007 onwards, we include in our forecasts the new power plant but we note that ALG s energy s cost will remain high (not as high as if it had to pay PPC s rates) given the relatively high cost of natural gas used by the plant. FY04 ALG revenues settled at 357.3m (+12.9%) and net profit at 27m (+280%) helped by the sharp rise of the aluminium price and a lower effective tax rate. For FY05 we expect aluminium prices to remain close to current high levels further boosting the group s top and bottom line. The expected growth is despite the estimated continuing slide of the US dollar. FY05 revenues are seen up by 3.8%, while net income is forecast 29% higher helped by the lowering of the corporate tax rate. 4 MARFIN ANALYSIS

5 21 March, 2005 Mytilineos Group Metka outlook: bright Metka, the energy (and partially the defence) arm of the group is set to greatly gain from the ALG acquisition. Metka will build ALG s 320MW CCGT electricity plant within the next months, further enhancing its already strong backlog. The cost of the plant is estimated at c 200, of which m represent works directly attributed to Metka (the rest of the cost is related to the purchase of the plant s turbines). Apart from increased revenues, the project is expected to demonstrate the company s ability to undertake and complete successfully significant energy projects, at a time when a number of companies seek to enter the Greek energy market with new electricity plants. Equally important for Metka is the revenue stream from ALG s maintenance projects and maintenance capex. These revenues are estimated to surpass 25m per year (partially accounted in our model). Regarding Metka s outlook and valuation, we have to emphasize again the opportunities presented in the energy sector (and partially in the defence area since Metka has a 12.94% stake in ELVO). We continue to be positive on Metka not only because of the impact of the ALG acquisition, but also because of its significant existing backlog, its healthy balance sheet and the relatively good earnings visibility (partially as a result of increased demand for investments to replace generation capacity in order to meet future environmental requirements). Regarding the significance of the energy sector for Metka we have to mention Mytilineos own plans in the energy market since it has a licence to build its own 400MW CCGT plant. To this end, Mytilineos will try to transfer its licence next to ALG s plant, and if successful Metka will build a second electricity plant in the near future. In FY04 Metka s revenues reached m (+21.3%) with net income settling at 16.72m (+33%). In FY05 revenues are seen at 270m (+64%) while net income is expected to reach 34m (+126%). We derive a fair value on Metka by using a DCF exercise. The exercise returns a fair value for the company of 361.7m, which points to a target price for the group of 7.20 per share and to an Outperform rating. Core metal business: positive impact from the ALG acquisition but low visibility persists As mentioned earlier, the addition of ALG is expected to help Mytilineos create a strong, vertically integrated player in SE Europe s metal market. Therefore, the impact of the acquisition into the group s core metal trading business will be significant, as it will increase its size and scope, create significant synergies and allow the transfer of know-how from ALG to Mytilineos. Furthermore, increasing the ties with Alcan, a prominent player in the aluminium market, could also have a positive impact on the division. Finally, we have to emphasize the transfer of Alcan s valuable contract that could benefit Mytilineos by an estimated present value of 112m over the remaining 5½ years if the contract. After the contract ends and given that ALG will increase its alumina production (starting in 2007), Mytilineos could further benefit by buying alumina from ALG at low prices and selling at the spot. Still, we have to repeat that metal trading is the group s less predictable segment due to the cyclical nature of the business and the subsequent volatility of the commodities market. Peer group comparison in terms of profitability, efficiency and leverage ratios do not favour Mytilineos and consequently require the assignment of a hefty discount on any valuation exercise for the division. Nevertheless, at least in the short-term, the group is well placed to benefit from rising metal prices, mainly driven by strong demand and tight supply. In the long-term however, the group will need to address the low efficiency levels of this segment and on the other hand MARFIN ANALYSIS 5

6 Mytilineos Group 21 March, 2005 bear the possible consequences in the advent of a slowdown in China (which was the primary recovery trigger in the sector) or rising interest rates or both. We derive a total value of m for Mytilineos parent company (core metal business only), based on a combined DCF and peer group valuation comparison (DJ Stoxx Basic Materials index used as benchmark). ELVO: uncertainties loom Mytilineos Group holds a 43% stake in ELVO, the group s defence arm. As the largest part of ELVO s revenues is directly related to the government s defence spending, any cutbacks or program delays negatively affect the company. ELVO s current backlog amounts to c 125m vs. 293m by the end of The drop in the backlog is a direct result of the government s decision to reconsider its defence program and its investments to defence related projects. Nevertheless, the company recons that projects worth c 300m to cover pressing needs of the army forces will be allotted from the Ministry of Defence to ELVO in the immediate future. Furthermore, ELVO expects that it will be able to grab a significant amount (20%- 40%) of the c 4bn in defence related projects the Ministry of Defence will tender in the next 5 years (during the period ). In an effort to diversify, the company is also expanding its presence into the civil projects area as it is bidding (or prepares to bid) for a number of projects that involve the supply of busses, trolleys and fire vehicles. This development could provide with further sales visibility. Nevertheless we adopt a conservative view and we forecast a revenue CAGR of 0.3% with deteriorating margins. These assumptions derive a DCF fair value of 97.1m for ELVO. Mytilineos Holdings FY04 forecasts Mytilineos Group FY04 revenues advanced by 12.7% 313.2m helped by strong Metka sales and rising metal prices. EBITDA settled at 39.3m, +6.4% and EBT at 26.4m, +34.3%. Note that both FY03 and FY04 results include 8.15m and 8.67m in amortization charges recorder as administrative expenses (FY03 numbers were restated). For FY05, we include in our numbers the first time the full consolidation of ELVO (required by the IFRS) and Aluminium of Greece. Revenues of the new entity are expected to settle at 961.1m, while EBITDA, EBT and net income are seen reaching 206.6m, 182.8m and 91.7m respectively. Note, that the full consolidation of ALG will lower amortization charges to c 2m vs. c 8m in FY04 (recorded as administrative expenses in FY04). This is because the acquisition of ALG will create negative goodwill, therefore the net goodwill for the group will be significantly reduced (to an estimated 40m). Valuation We value Mytilineos Holdings by employing a sum-of-parts approach after allowing for a 15% holding company discount. Our valuation methodology returns a fair value of per share for Mytilineos Group, implying a 46% upside potential from the current share price. We revise upwards our target price on the group to per share, while we upgrade recommendation to Outperform from neutral. 6 MARFIN ANALYSIS

7 21 March, 2005 Mytilineos Group The new Group profile Apart from the current activities of Mytilineos Holdings (i.e. operating in the metals, mining, energy, defence, vehicle manufacturing and construction sectors), following the acquisition of Aluminium of Greece the company now enters into the production of alumina and aluminium as well as bauxite (through ALG s subsidiary, Deplhi- Destomon). The acquisition enhances the group s domestic and international presence, without though, changing significantly the balance between domestic and international sales which stand at c50:50. Table 1: Mytilineos Holdings: Main subsidiaries Company Stake Aluminioum of Greece 46% Mytilineos Finance 100.0% ELEMKA 70.0% Geniki Sidirometalliki 50.0% METKA 65.8% SOMETRA 88.0% ELVO 22.5% Defence Industry joint venture 52.4% Mytilineos Hellenic Wind Power 56.0% Mytilineos Power Generation and Supplies 67.0% BEAT 35.0% EBETAM 8.6% Hellenic Copper Mines 39.2% Source: The Company Table 2: METKA: Main subsidiaries Company Stake Servisteel 100.0% ELVO 12.9% T.C.B % EKME 40.0% 3KP 40.0% Rodax 100.0% Mytilineos Power Generation and Supplies 33.0% Mytilineos Hellenic Wind Power 24.0% Source: The Company MARFIN ANALYSIS 7

8 Mytilineos Group 21 March, 2005 Figure 1: Mytilineos Group Mytilineos Group of Companies Metals and Metal Trading Energy Defence Alluminium of Greece / Delphi - Distomon (Bouxite) METKA & Subsidiaries ELVO Sometra smelter, Romania Mytilineos Power Generation and Supplies METKA Hellenic Copper Mines, Cyprus Mytilineos Hellenic Wind Power Source: The Company Figure 2: Mytilineos Holdings shareholders structure Institutional investors 19% Mytilineos family 43% Retail investors 38% Source: The Company Figure 3: METKA shareholders structure Retail investors 23% Institutional investors 10% Mytilineos SA. 67% Source: The Company 8 MARFIN ANALYSIS

9 21 March, 2005 Mytilineos Group Figure 4: ELVO shareholders structure General Industry of Defence Materials 8% METKA 13% Lainopoulos 6% Greek State 50% Mytilineos SA. 23% Source: The Company MARFIN ANALYSIS 9

10 Mytilineos Group 21 March, 2005 Aluminium of Greece The company Aluminium of Greece is a leading alumina and aluminium producer in southeastern Europe. It has an alumina production capacity of t p.a., while the production capacity of aluminium stands at t p.a. Aluminium of Greece also operates the 100% subsidiary, Delphi Distomon, a bauxite producing company. Delphi Distomon produces c800,000t of bauxite per year that represents c45% of the bauxite needed by Aluminium of Greece to produce alumina. The agreement with Mytilineos Mytilineos acquired a controlling stake in Aluminium of Greece from Alcan. Alcan came to own ALG after it gained control of the Group Pechiney. Alcan s decision to divest ALG was taken partly because ALG did not fit to Alcan s strategy and partly because it had to invest a significant amount to build a power plant and to commit to other production enhancing expenditures. Mytilineos acquired 46% of ALG at 6.95 per share or 69m. An additional 7% was acquired by related to Mytilineos entities, something that allowed Mytilineos group to avoid a mandatory tender for the rest of ALG s shares. Under the deal, after a year from the singing of the ALG deal, Alcan has a put option to sell the remaining 7.2% of ALG it owns to Mytilineos. In case Alcan does not exercise the option, Mytilineos has a six-month call option to acquire this stake from Alcan. Part of the agreement for the sale was that: Mytilineos will overtake the right to an existing 6-year contract (signed in the summer of 2004) to acquire alumina (440,000t p.a.) at a predetermined percentage rate of the aluminium price (12.75% of the LME aluminium price). This amount could be sold at market prices benefiting the group s core metal division. Mytilineos is expected to make a c 45.4m profit in 2005 from this agreement, as current spot prices are considerably higher than the buying price (current spot prise stands at 22% of the aluminium price, while our assumptions are based at a sale price of 20% of aluminium price). Based on a number of assumptions we have derived for a total present value of the contract (for the remaining 5½ years) of c 112m. Alcan will sell raw materials to ALG (bauxite - up to specific maximum amount) if requested by Mytilineos. Mytilineos will receive dividends for FY04 (recorded in FY05) of c 6.4m Investments Upon the agreement to buy ALG, Mytilineos announced a 3-year 313m capex this amount includes: 200m for the construction of a 320MW CCGT plant which will, most likely, be completed in early m investment for the de-bottlenecking of the alumina production that will increase capacity by 42% to 1,100,000t p.a. 10m investment in the production of aluminium (creeping) that will increase aluminium production by 9% to 180,000t p.a. 10 MARFIN ANALYSIS

11 21 March, 2005 Mytilineos Group 10.5m investment for the enhancing of the aluminium production capacity (wagstaff) that will allow the company to sell different, higher margin, products. c 10m per year maintenance capex (or 31.5m for the 3-year period). Table 1: ALG s capex m 2005f 2006f 2007f Total Purpose Maintenace Cost % of the total 10.8% 9.0% 10.5% 10.0% Wagstaff % of the total 7.4% 3.0% 0.0% 3.4% Creeping % of the total 4.2% 5.2% 0.0% 3.2% De-bottlenecking % of the total 15.9% 25.8% 14.7% 19.2% Co-generation plant % of the total 61.3% 56.7% 74.5% 63.9% Total Source: The Company make new, higher margin products Increase aluminium capacity by 9% Increase alumina capacity by 42% Build a 320MW CCGT plant The largest portion of the investments, the construction of the electricity plant, will be undertaken by the group s subsidiary, Metka. We note that ALG s current contract to buy low priced electricity from PPC (c20% of ALG s FY03 COGS) expires in early 2006, forcing ALG to buy electricity at the prevailing rates, something that will effectively double ALG s electricity cost. Works for the construction of the 320MW CCGT unit are expected to start immediately after the finalization of the deal, since all the necessary documentation and permissions have already been granted. The largest part of the c 313m capex is going to be financed by ALG s own funds. Specifically, ALG is expected to finance c 240m of the 3-year capex deriving from current cash and marketable securities 2) state subsidies 3) a 20m tax refund (see below) 4) the sale of the current ALG s corporate offices and 5) FY05 cash flow. The rest of the amount (c 73m) is expected to be funded by debt. Recall that ALG is currently debt free. MARFIN ANALYSIS 11

12 Mytilineos Group 21 March, 2005 Figure 5: LME Aluminium Futures Source: LME Strategy 31/7/ /11/ /3/ /7/ /11/ /3/ /7/ /11/ /3/ /7/ /11/ /3/ /7/ /11/ /3/ /7/ /11/ /3/ /7/ /11/ /3/ /7/ /11/2004 The merger of ALG with Mytilineos is expected to create synergies and economies of scale that will help ALG reduce operating costs but also give higher bargaining power to the new entity. Furthermore, the merger will create a strong, vertically integrated group that will make it easier to expand operations into new markets. Moreover, we should not exclude the possibility that ALG comes to an agreement to sell part of its electricity production to HTSO, especially during the period of overhauled production. Finally, Mytilineos management has indicated that in its effort to maximize the return of ALG assets could proceed to divestments that could include the sale of ALG current headquarters or other assets. Risks We point to the volatility of the aluminium price and the unpredictability of the exchange rate fluctuations as major risks for ALG. Yet, we mention that volatility is part of the nature of the aluminium business and we have to underline the fact that Mytilineos is familiar with these fluctuations as the origin of the group is as a metal trading company. The fact that Aluminium of Greece was until now mainly a producer (not a distributor) part of a bigger network (Pechiney, Alcan) is an additional risk. Now the company has, with the help of Mytilineos, to develop a distribution network to sell its products. Nevertheless, the agreement to sell a great part of its aluminium production to Alcan, along with Mytilineos experience to trade metals, reduces to a large extend this risk. The time of completion of the CCGT unit also posses a risk as further delays will have a direct and adverse effect on the company s bottom line. Another important risky factor is the price of gas, which will be used up to operate the CCGT unit. The price of gas in Greece is high while it fluctuates, to a large degree, in accordance with the oil price. This creates an uncertainty to the company s cost base. 12 MARFIN ANALYSIS

13 21 March, 2005 Mytilineos Group Finally, we have to mention the risk posing to ALG the fact that that it has not been audited by the tax authorities since Nevertheless, according to management this risk is minimal. Furthermore, the company expects a 20m refund in the near future related to charges by the Greek State. We have not accounted for this amount in our numbers. Table 2: Aluminium of Greece P&L estimates m e y-o-y 2006f y-o-y 2007f y-o-y 2008f y-o-y Turnover % % % % Cost of Goods Sold % % % % Gross Profit % % % % Gross margin 20.7% 20.0% 4.0% 11.5% 12.5% Operating Expenses % % % % Other Income % % % % EBITDA % % % % EBITDA margin 19.4% 18.9% 2.4% 10.0% 11.1% Depreciation % % % % EBIT % % % % Net Investment Inc. (Exp.) Net Interest Inc. (Exp.) % % % % Exceptionals (Net) % EBT % % % % Taxes % % % % Net Profit After Tax % % % % Minorities % % % EAT % % % % Dividends % Source: MARFIN ANALYSIS, The Company Forecasts Following a weak 2003, FY04 was a very strong year for ALG as the sharp rise in aluminium prices more than offset the depreciation of the US Dollar vs. the Euro. Revenues grew by 12.9% to m, while EBITDA rose by 84.7% to 69.3m boosted (in addition to the strong revenues) by the increased operating leverage. EBT settled at 48m or 160% higher last year. Going forward, we would expect aluminium prices to remain at high levels at least in the next months. We base our assumptions on the following: The aluminium market was in deficit in 2004 and is expected to remain in 2005, while demand for aluminium increases, driven by developing markets such as China and India. Although new capacity additions are expected, these additions will gradually come to market during the next 3 years US interest rates are expected to increase, but gradually, while high oil prices are seen to slow but not stop economic growth. In our model we account for a significant average increase (+9%) in the aluminium price in FY05, easing 5% in Regarding FX fluctuations, we pensile-in a further appreciation of the Euro vs. the US Dollar in Specifically, we incorporate in our model an average rate of /US$ 1.30 for FY05 from /US$ 1.24 in We also maintain the /US$ 1.30 average level at 2006 before we account for an appreciation of the US currency vs. the Euro. Based on our assumptions, we forecast that for FY05 ALG revenues will advance by 3.8% to 370.8m, while EBITDA is expected to edge 1.2% higher to 70m. Net income on the other hand is seen up by 29% to 35m as we do not incorporate any exceptional losses for the year in our forecasts (exceptional losses reached 8.6m in FY04). MARFIN ANALYSIS 13

14 Mytilineos Group 21 March, 2005 Aluminium of Greece is expected to have a challenging As we previously mentioned, we assume that aluminium prices will decline (we pensile in a 5% of the aluminium spot price), while we incorporate the assumption that the Euro/US$ rate will remain stable at the high 2005 forecast levels. These assumptions lead to a forecast drop of ALG s FY06 revenues by 4.5% to 354m. In addition to lower revenues, as the contract with PPC expires, (and without accounting for any hypothetical agreement between Mytilineos and PPC for a 1- year grace period), electricity costs (c20% of FY03 COGS) is expected to almost double. This will effectively reduce EBITDA margin by 1655bps and push EBITDA 88% lower compared to the previous year. Lower operating profitability is expected to force the company into net losses in Specifically, for FY06 we forecast net losses (before taxes) of 11.5m Note that there is a high probability that the group will seek to import electricity from Greece s northern borders for the period between the expiration of the contract with PPC and the date that ALG s own CCGT unit is up and running. Such a development will ease the impact from the expiration of the contract considerably, as the cost to buy electricity from Bulgaria or Serbia is lower than that from PPC. We do not incorporate in our model this positive for the group possibility, as we follow the worst-case scenario under which ALG will buy electricity from PPC. For FY07 we account for a further drop in aluminium prices (-6%). On the other hand though, in 2007 we expect ALG plant s renovation works to have been completed, increasing aluminium capacity by 9% and alumina capacity by 42%. This development is expected to boost sales by 23.7% for the year. Furthermore, we expect in early 2007 the new CCGT plant to come into place, helping reduce ALG s energy costs. Specifically, the new plant will 1) reduce electricity cost but it will also 2) minimize the cost of oil (energy used to produce alumina - estimated at c12% of COGS in 2003) since the energy needed will be provided from the CCGT plant. At this point, we have to mention that 1) the new plant is not expected to bring ALG s energy costs to the levels seen before 2006 (under the old contract with PPC) and that 2) even with the CCGT unit, the energy cost will continue to fluctuate due to the natural-gas price volatility. As the new CCGT is expected to reduce the company s operating costs from the high levels of 2006, EBITDA in FY07 is forecast to jump by 425% to 43.8m. Nevertheless, as works to the ALG plant come to an end, depreciation charge is seen jumping almost twofold to c 29m (we do not account for depreciation during the construction period but just for when the projects are operational). Higher depreciation charge will pressure the group s bottom line, which, nevertheless will manage to post a small profit. EBT for FY07 is estimated at 8.0m. Valuation We are using a DCF exercise to value Aluminium of Greece. Although we recognize the shortcomings of this method, as the aluminium industry is highly cyclical, we view that any direct comparison to its peers will lead us to rather perilous conclusions, given ALG s small size and the company specific issues. Our DCF exercise returns an equity value of 223.9m or 10.4per share. 14 MARFIN ANALYSIS

15 21 March, 2005 Mytilineos Group Table 3: Aluminium of Greece DCF valuation Risk Free 4.20% Beta 1.30 Risk premium 4.50% Cost of Eq % Cost of Debt 5.20% Cap Str (Debt) 30.00% WACC 8.6% Perpetuity Growth 1.5% Enterprise Value (mln) Net debt Equity Value (mln) No. of shares 21,578,040 Share Value 10.4 Source: MARFIN ANALYSIS, The Company MARFIN ANALYSIS 15

16 Mytilineos Group 21 March, 2005 Mytilineos parent - Core metal business Metals As we noted earlier, the merger with ALG will help Mytilineos to form a strong vertically integrated entity that well seek to expand its operations beyond southeastern Europe, where the group s major markets are currently located. Even before the acquisition of ALG, Mytilineos Group was one of Greece s largest metal traders having succeeded, through partnership agreements and takeovers, to manage some of Europe s most commercially important mineral deposits. The main trading activities of the group focus on: Non-ferrous base metals: copper, lead, zinc, aluminium and their alloys. Apart from aluminium and copper, which are sold mainly locally, the remaining products are provided for international markets. Ores and minerals: raw materials processed to obtain base metals. The group supplies copper, lead and zinc to a series of plants in Greece. Steel products: materials used in construction projects and metal manufacturing industries. Wires: raw materials in the manufacturing of wire ropes, wire netting and construction grids. and energy Following the merger with ALG, Mytilineos will be able to build a strong case to petition for a transfer of its own licence for a 400MW CCGT plant from Volos to Aspra Spitia, next to ALG s power plant. If the company attains the transfer, we should expect the start of the plant construction in the near future. Prospects of the core business - Metal prices Metal prices sharply advanced in 2004, driven mainly by rising demand (which outpaced the growth of global economies), inventory declines, as well as increasing expectations for overall production deficits. Copper prices increased by an impressive 61% on average in 2004 on fundamental grounds as worldwide demand rose on the back of China s rapid growth, while supply fell marginally resulting to an estimated balance deficit of c670,000 tonnes. Copper prices continued to rise in the first months on 2005 with the average price (1/1 11/3/2005) reaching US$ 3,214/t vs. an average of US$ 2,649/t the same period in Aluminium prices rose by 20% on average in 2004 driven mainly by increasing demand and limited supply. Global production growth is estimated at c7%, while demand in the US increased by 11% and Asia by c8% (China s demand is estimated to have grown by c16%-18%). Aluminium prices continued to rise in the first months on 2005 with the average price (1/1 11/3/2005) reaching US$ 1,988.3/t vs. an average of US$ 1,651/t the same period in Zinc and Lead prices posted a 27% and 71% rise in 2004, respectively. The increases are again a response to growing consumption on the one hand and the slow increases in mine production in the other. Prices of both metals continue to rise in MARFIN ANALYSIS

17 21 March, 2005 Mytilineos Group Table 4: Metal Prices US $/Tone Aluminum Copper Lead Zinc ,452 1, ,352 1, y-o-y -7% -2% -5% -13% ,432 1, y-o-y 6% 14% 13% 7% ,721 2, y-o-y 20% 61% 71% 27% Average prices 1/1/04 11/3/04 1,651 2, ,063 Average prices 1/1/05-11/3/05 1,988 3, ,309 y-o-y 20.4% 21.3% 16.6% 23.1% Current prices 2,021 3,354 1, ,420 Source: LME Figure 6: Mytilineos parent sales breakdown (2003) Lead 13% Aluminium 3% Other 10% Zinc 48% Steel products 13% Copper 13% Source: The Company Prospects / risks We expect underlying fundamentals in the commodities market to improve as a result of limited production growth and steady demand growth, which suggests further gains in commodity prices in the short term. Demand should be supported by the overall improving global economic conditions and continuous strong growth stemming from China. Chinese industrial production continues to rise at a fast pace while other leading economies are showing improved industrial activity. In addition, the closure of several production units combined with limited investments in new capacity point to moderate production growth and inventory declines. The fact that there is clear inverse correlation between metal prices and the strength of the US dollar, suggests that US dollar s current low levels against other currencies should provide a further support to metal prices. Mytilineos metal business should benefit from the high prices as well as the implemented investments, which aim at increasing capacity as well as improving efficiency of existing units. The company carries on a US$20m investment program aims at increasing capacity in Romanian zinc and lead smelter SOMETRA by 6% in The same time Hellenic Copper Mines plans c6% p.a. capacity increases in 2005 and On the other hand, recall that the company s contract in Serbia for the distribution of copper expires by the end of 2005 but with relatively small impact on the company. MARFIN ANALYSIS 17

18 Mytilineos Group 21 March, 2005 We should also note again the impact and the implications of the ALG acquisition on Mytilineos metal business. We point to the fact that Mytilineos took over Alcan s contract with ALG, under which Alcan was purchasing alumina at a fixed percentage to the LME aluminium price and could sell it at the prevailing rates, which currently are higher. As long as the prevailing rate (aluminium LME* prevailing rate) is above the contract rate (aluminium LME*12.75%), Mytilineos will be making a hefty profit. We have discounted the forecast profit from the contract and we have estimate that its current value stands at 112.6m. When the contract expires, Mytilineos could seek to renew the contract or come to any mutually (with ALG) beneficial agreement. Recall also that by 2007 the quantity of alumina for trading is expected to increase by c80% due to increased production (we have accounted for the quantity needed for the additional aluminium production). Main risk for Mytilineos is an environment of declining metal prices. Volatility in the commodities market could arise in the advent of rising US interest rates, possible slowdown of Chinese growth and upon speculative activity. Mytilineos 400MW CCGT licence As mentioned before, another positive effect of the ALG acquisition is the group s increasing exposure to Greece s electricity market. Recall that Mytilineos has already obtained a licence to construct a 400MW CCGT plant in Volos. The company has not yet proceeded with the construction of the plant in anticipation of further regulatory clarifications. Nevertheless, with the ALG acquisition, the group is shifting gears. The trigger is the company s attempt (has already filed with the regulatory authority) to transfer its Volos licence to Aspra Spitia, next to ALG s plant. If succeeds with the transfer, Mytilineos will enjoy a lower production cost and also it will avoid other significant costs. Specifically a potential transfer of a licence to Aspra Spitia will: Eliminate the cost of building a line to connect the plant to HTSO s grid, since the line already exists (the line that ALG currently use to receive electricity from PPC). Eliminate the cost of building a natural gas pipe line Eliminate a 10m tolls charge per year (Aspra Spitia are in zone 1, whereas Volos is in zone 3) Aspra Spitia is near the sea and sea water could be used for cooling the plant Finally, there are going to be economies of scale as the two plants are in close proximity. In our model we do not account for the construction of the 400MW CCGT plant so no outflows or revenues have been factored in for Mytilineos and Metka (Metka will construct the plant). Nevertheless, the decision to build this plant and it subsequent operation will have a profound impact on the group and will reshape the parent s (and Metka s) accounts. Forecasts The parent company posted a considerable top line growth in FY04 helped by increased metal prices and higher volume sales. In addition, revenues of the parent company benefited from the fee received for the management of ELVO. EBITDA settled at 13.6m (+54.5%). We note that FY03 results were restated to include amortization charges ( 8.15m in FY03 and 8.67m in FY04). EBT and net income for 2004 reached at 11.3m and 8.7m respectively. Apart from strong operating growth, the parent company was positively affected by increased dividend from 18 MARFIN ANALYSIS

19 21 March, 2005 Mytilineos Group Metka. Note that parent company s accounts include dividends distributed by Metka subsidiary (ie. investment income of 5.9 in 2004 stems mainly from the company s 65.8% stake in Metka that distributed total dividend of 8.3m in FY03). Going forward, we forecast higher metal prices in 2005, before declining in The same time we expect the group to increase the traded volumes, mainly due to alumina purchased from ALG. Finally, we assume that the /US$ will reach 1.30 in 2005 and remain at these levels in Note that from FY05 we do not include a management fee from ELVO, as we do not expect ELVO s per-tax revenues to rise above 40% (the level over which Mytilineos has a right for a management fee) in the foreseeable future. Given the above assumptions, revenues in FY05 are forecast at 252.5m, while gross margin is seen advancing by 1300bps thanks to the high margins achieved from selling ALG s alumina in the spot market. EBITDA is seen reaching 63.2m, while EBT is seen at 74.6m. Note, dividends from subsidiaries, is expected to reach 17.7m (including dividend from ALG). Figure 7: Forecast volume growth 1,400,000 1,200,000 1,000,000 In Tonnes 800, , , , e 2005f 2006f 2007f 2008f Source: MARFIN ANALYSIS, The Company In our forecasts we do not account for the 25m the company has to receive by court order from the Export Credit Insurance Organization (ECIO). The amount mentioned has to do with Mytilineos investment in Kosovo. The ECIO has asked for a ruling from the Supreme Court and the final decision is expected by the end of Overall we estimate a revenue CAGR for the metal division of 7.7% driven by the increased sales of alumina produced by ALG (c815 tonnes in 2007) along with expected higher metal prices between 2004 and MARFIN ANALYSIS 19

20 Mytilineos Group 21 March, 2005 Table 5: Mytilineos parent P&L estimates m e y-o-y 2006f y-o-y 2007f y-o-y 2008f y-o-y Turnover % % % % Cost of Goods Sold % % % % Gross Profit % % % % Gross margin Operating Expenses % % % % Other Income % % % % EBITDA % % % % EBITDA margin Depreciation % % % % EBIT % % % % Net Investment Inc. (Exp.) % % % % Net Interest Inc. (Exp.) % % % % Exceptionals (Net) 1.1 EBT % % % % Taxes % % % % Net Profit After Tax % % % % EAT % % % % Source: MARFIN ANALYSIS, The Company Valuation We use a combination of methods to value Mytilineos metal business. Specifically, in order to derive a value for the business, we run a DCF exercise that incorporates the additional revenues from the sale of alumina from Aluminium of Greece. alternatively, we value the firm through a peer group comparison by using as a benchmark the European DJ Stoxx Basic Materials index. In this approach, we exclude the impact from the sale of alumina from Aluminium of Greece in our multiples. Nevertheless, we discount the value of the alumina contract and we add this amount back to the value received from the peer group comparison. Our valuation exercise excludes any possible value stemming from METKA or ELVO as we contact separate valuation exercises, presented in deferent sections of the report. Our valuation returns a fair value for the metal division of m. For our DCF exercise we use the following assumptions: Table 6: DCF assumptions Risk free rate 4.5% Beta 1.5 Risk premium 5.5% Cost of Fquity 12.8% Cost of borrowing 4.5% Target gearing 25.0% WACC 10.7% Perpetuity growth 0.0% Source: MARFIN ANALYSIS, The Company 20 MARFIN ANALYSIS

21 21 March, 2005 Mytilineos Group Table 7: Core Metal Division DCF exercise Euro m Sales EBIT EBIT margin 23.4% 18.3% 14.9% 12.5% 12.2% 11.8% 11.5% 11.3% 10.9% 10.5% Depreciation Other items Gross cashflow Change in working capital Net operating cashflow Income tax paid Capex FCFF DCF Sum of PV Terminal value 71.7 Net debt Shareholder value Source: MARFIN ANALYSIS, The Company As far as the peer group comparison, we use the weighted average multiples of our selective peer group for 2005 which leads to a fair value of 77.2m for Mytilineos metal division. Note, that we have applied a hefty 50% discount to the weighted average sector multiples given the fact that 1) Mytilineos ROE stands considerable lower that the sector average, 2) EBITDA margins are also below average while net debt/ebitda far exceeds the sector average. Table 8: Valuation of the core metal division of Mytilineos parent company Weighted average Method Year multiple of peer group Applied discount Mytilineos value ( m) Applied weight Final value ( m) P/E % % 20.7 P/BV % % 21.6 P/CF % % 5.9 Mcap/Sales % % 29.0 Value of the metals division 77.2 Plus the value of the contract to sell alumina Total value of the metals division ` Source: MARFIN ANALYSIS, JCF Table 9: Peer group comparison (2005e) ROE EBITDA margin Net debt/ebitda Sector weighted average 18.0% 28.8% 0.7 Mytilineos SA 12.1% 7.3% 5.9 Source: MARFIN ANALYSIS, JCF MARFIN ANALYSIS 21

22 Mytilineos Group 21 March, 2005 Table 10: DJ Stoxx Basic Materials valuation Price/Book Price/Book Price/Cash Price/Cash Mcap/Sales Mcap/Sales P/E 04 P/E Flow 04 Flow Anglo American Plc Rio Tinto Bhp Billiton Group Upm Kymmene Norsk Hydro Arcelor (Ex Usinor) Stora Enso ThyssenKrupp AG Xstrata Plc Corus Group Lonmin Acerinox Norske Skogindustrier Umicore Holmen Ab Antofagasta Outokumpu Voestalpine AG Ssab Svenskt Stal Average Median Weighted average Source: JCF The value of the contract is estimated as follows: Table 11: Valuation of Alcan s contract 2005f 2006f 2007f 2008f 2009f 2010f Sales Volume Aluminium prices in US$ Alumina market Rate 21.0% 19.0% 15.0% 15.0% 14.0% 14.0% Mytilineos Buy Rate 12.8% 12.8% 12.8% 12.8% 12.8% 12.8% Profit in US$ EUR/US Profit in EUR Discounted Risk free rate 4.5% Beta 1.5 Risk premium 5.5% Cost of Fquity 12.8% Cost of borrowing 4.5% Target gearing 24% WACC 10.8% Sum of PV Source: MARFIN ANALYSIS To derive for a value for the division we have combined the tow methods mentioned and we have assigned them with an equal weight. 22 MARFIN ANALYSIS