Joint-Stock Holding Company Yakutugol is one of Russia's biggest coal mining companies. It operates four mining enterprises: the Neryungrinsky mine, the Kangalassky mine, the Dzhebariki Khaya underground mine and the Elga Coal Complex, the Neryungrinskaya Coal-Washing Plant, as well as auxiliary enterprises and facilities supporting the primary activity (motor depot for the company’s transport vehicles, loading and transportation department, repair office/shop, commercial department, etc.). If demand is sufficient, the Company’s total annual coal output reaches 11.5 million tonnes. OJSHC Yakutugol's surface and underground mines account for about 80% of the total coal output in the Sakha Republic / Yakutia. The Company exports a substantial part of its clean coal. As of April 1, 2013, OJSHC Yakutugol's annual sales revenue was estimated at ca. RUB 19 billion.

We regard the growing assets, the debt rescheduling arrangements with creditor banks, the successful development and operation of the Elga coal deposit and long maturity periods for most of the debt as the main positive rating drivers for OJSHC Yakutugol.

OJSHC Yakutugol's assets have been on a steady growth trend for the last six years. At the end of the first quarter of 2014, they increased more than 7 times against 2007 reaching RUB 90.1 billion.

Being committed to increasing its financial soundness, the Company's management team is taking active and effective measures to restructure its debt to banks. In mid-July 2014, Yakutugol signed an agreement with JSC VTB Bank to defer the principal repayment deadline for loans amounting to a total of RUB 5.7 billion to later date, with further debt restructuring agreements with other banks in the pipeline.

OJSHC Yakutugol has made an impressive progress in the development and operation of the Elga coal deposit in Yakutia. Elga is one of the world's largest deposits of high-quality coking coal (2.2 billion tonnes). Coal mining has mostly been surface mined since 2011; the same year saw the launch of a through-traffic 321-kilmieter long railway linking the deposit with the Baikal-Amur Mainline, the only large-scale transport project in Russia successfully implemented by a privately-held company. The development and operation of the Elga deposit is a powerful contribution not only to economic Yakutugol's performance, but to Russia’s coal production sector as a whole.

OJSHC Yakutugol's current debt profile is dominated by long-term debt obligations. The share of long-term loans in the Company's total debt is almost 73%. The financial stability ratio of OJSHC Yakutugol is 0.67 staying within generally acceptable limits.

At the same time, OJSHC Yakutugol's persistent heavy debt burden and the high dependence of the Company's business on coal prices in the domestic and global markets are putting pressure on the credit rating of OJSHC Yakutugol.

In the first quarter of 2014, OJSHC Yakutugol's loan debt increased by more than RUB 3.5 billion and totaled RUB 79.8 billion. The Company's debt-to-revenue ratio reached 4.24, while the interest coverage ratio dropped below zero.

While the core business of OJSHC Yakutugol remained profitable in 2014 (the gross profit margin exceeding 30%, the return on sales being 16%), the Company’s overall economic activity continued to generate losses as a result of a high loan servicing expenses. In the first quarter of 2014, the Company's net losses reached almost RUB 4.5 billion.

The main reason for OJSHC Yakutugol’s negative profitability is the low level of coking coal prices in the Russian and international markets. As long as the global economy is stagnating, coking coal prices are quite unlikely to climb back to pre-crisis levels over the forthcoming 12-month period, which may, to a certain extent, jeopardize the development of OJSHC Yakutugol.

The adverse coking coal pricing environment in Russia and in global markets forecasted for the forthcoming 12-month period is what has essentially motivated the negative outlook on the credit rating of OJSHC Yakutugol.

OJSHC Yakutugol established in 2003 on the basis of state unitary enterprise Yakutugol is one of Mechel Group's key coal producing businesses that has all the necessary licenses for coal mining operations. The Company has been part of the Mechel-Mining holding since 2008.

Full Company name: Joint-Stock Holding Company Yakutugol.

Short name: OJSHC Yakutugol.

OJSHC Yakutugol's reports are audited by CJSC ENERGY CONSULTING/Audit (state registration number 1047717034640), a member of nonprofit partnership Institute of Professional Auditors of Russia (IPAR), primary registration number 10202014620.

This press release is based on the Statement of assignment of a credit rating to OJSHC Yakutugol.

The rating, along with any information and conclusions provided in this press release, only conveys our opinion on the Company’s creditworthiness and shall not be construed as a recommendation to purchase or sell securities, or to lend funds.

AK&M Rating Agency shall not be held liable for any interpretations, inferences and consequences related to the application of results of the rating estimation procedure by any third parties.

AK&M Rating Agency is a leading independent national rating agency engaged in rating activities since 1993. CJSC AK&M Rating Agency is accredited by the Ministry of Finance of the Russian Federation (order no. 452 as of September 17, 2010) and is on the Central Bank of Russia's Register of Accredited Rating Agencies.

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