Severstal Expands in U.S. in $1.3Bln Deal

Severstal will pay $1.3 billion to acquire North American coal miner PBS Coals in an all-cash deal giving it access to raw materials for its expanding network of U.S. steel mills.

Severstal, owned by billionaire Alexei Mordashov, said Friday that its mining division had agreed to pay 8.30 Canadian dollars ($7.97) per share to acquire PBS after the coal miner is folded into Canada's Penfold Capital Acquisition.

"The acquisition of PBS will help ensure that Severstal controls its operating costs by providing a guaranteed supply of metallurgical coal for our coke making operations in the U.S.," Severstal chief operating officer Gregory Mason said.

Severstal has spent more than $1.7 billion in the last year acquiring steel mills in the United States, where Russian companies with record profits to burn have snapped up about one-tenth of steel melting capacity. Coking coal and iron ore, both crucial for making steel, are in great demand as a China-led boom in steel consumption pushes prices for the raw materials to record highs.

The acquisition of PBS by its mining division, Severstal Resurs, represents the company's first venture into the raw materials sector in North America. Severstal Resurs already runs coal, iron ore and gold mines in Russia and Kazakhstan. "It's a good acquisition in that it allows Severstal to supply the needs of its North American assets," said Olga Okuneva, mining analyst at Deutsche Bank.

PBS shareholders owning a combined 66.8 percent of the company, including all its directors, have executed irrevocable lock-up agreements to sell to Severstal and a break fee of 41.9 million Canadian dollars has been agreed.

The deal, expected to close by mid-October, is conditional upon Canadian company Penfold acquiring PBS to form a publicly listed company called PBS Coals.

PBS operates six underground and six opencast mines in Pennsylvania. It produced 2.4 million tons of coal, including 1.5 million of coking coal, in the year to March 31, 2008. Total annual metallurgical coal capacity is 4 million tons.

PBS would supply Severstal's North American unit with about 40 percent of its coking coal needs, said Roman Deniskin, chief executive of Severstal Resources, the firm's mining division.

"Production of coking coal can be expected to double in the medium term," Deniskin told a conference call, without giving details of how the company would achieve this.

While the acquisition will afford Severstal greater ability to control its production costs in the United States, analysts said the company had yet to prove its ability to turn around the ailing U.S. steel assets that it has purchased. "The acquisition looks a bit expensive compared with Russian coking coal producers. But compared with North American coals, it's a bit cheaper," said Maxim Semenovykh, an analyst at Alfa Bank.

He estimated Severstal was paying about $450 per ton of raw coal capacity for PBS and compared this with $350 per ton for Raspadskaya, Russia's largest pure-play coking coal miner, and an average of $500 for U.S. coal miners.