CJSC AK&M Rating Agency affirmed the 'A' national scale credit rating (tier 3) assigned to Southern Kuzbass Coal Company OAO, with a negative outlook.

Once again, the Company's credit rating reflects its high production potential and strong positions in the Russian coal mining market. The Company accounts for about 4% of Russia's total coal output being the 5th biggest domestic coal producer.

In 2013, the Company ramped up the coal output by 8.4% year-on-year to 13.1 million tonnes surpassing the recognized domestic market leaders (SUEK, Kuzbassrazrezugol, SDS-COAL) in the production growth rate. The Company's sales also increased by 8.4% year-on-year to 11.7 million tonnes in 2013.

The Company's constant efforts to replenish the fleet of machinery and equipment, the prompt and highly competent running maintenance, repairs and overhauls ensure the acceptable operability of its basic production capacities, which we appreciate as a positive rating driver. In 2013, Southern Kuzbass Coal Company OAO added a total of RUB 1.3 billion in new fixed assets to its balance sheet; 90% of that amount was invested in machinery, equipment and vehicles. The underground mining and open mining equipment accounted for more than half of such fixed assets. As a whole, the Company's existing mining and coal cleaning capacities ensure a fairly high performance level.

The key constraint on the credit rating of Southern Kuzbass Coal Company OAO is the extremely heavy debt burden coupled with the continuing impairment of the Company's financial performance.

Owing to an adverse environment in the market of coal and coal products, the company posted net loss of RUB 1.1 billion in 2013 (against a net profit of RUB 2.8 billion in 2012). Things went from bad to worse in the first quarter of 2014, net loss amounting to RUB 2.2 billion. It is fair to note, however, that the balance sheet loss has not resulted from lower revenues alone; another key reason is the currency revaluation loss due to the domestic currency depreciation in 2013 and the first quarter of 2014. In particular, the forex loss in 2013 amounted to RUB 1.9 billion, almost twice above the amount of net loss.

The lower profits and weaker profitability pushed up the Company's debt burden. By the end of 2013, its debt to revenue ratio increased from 1.97 to 2.41, the net debt to EBITDA multiple reached 10.5x. The latter value is extremely high, although below that of Mechel OAO, the parent holding company (11.8x).

To a certain extent, the Company's considerable financial investments (RUB 72.5 billion as of April 1, 2014), most of them being intra-group loans provided to Mechel Group's enterprises, are technically offsetting the high debt burden. However, these can hardly be regarded as perfectly liquid assets, seeing as most of these enterprises are also facing certain financial difficulties. In 2013, a substantial part of financial investments (ca. RUB 28 billion) were revaluated as long-term assets, an indirect evidence of the above-stated issue.

The key systemic risk factors for the Company's operations arise from the situation in the domestic and global markets of metallurgical and power-generating coals, with prices changing both under the influence of macroeconomic and macrosocial factors and in the wake of natural and man-triggered disasters. If the coal prices stay flat, let alone go down, the enterprise may come across even greater difficulties negatively affecting its creditworthiness.

Southern Kuzbass Coal Company OAO is one of the key structural units of OJSC Mechel-Mining, Mechel Group's coal-mining holding. The enterprise is one of the leading coal producers in the region (the Kuznetsk Basin) and in Russia. In 2012, it accounted for about 3.7% of all the total coal output in the Russian Federation. More than 60% of its final products are metallurgical coals which are most in-demand in the domestic and foreign markets. Apart from the coal-mining capacities, Southern Kuzbass has coal-processing (coal preparation) enterprises. About 54% of its goods are exported.

As of April 1, 2014, the Company's assets totaled RUB 108.5 billion, equity capital amounted to RUB 26.9 billion, liabilities reached RUB 75.2 billion, equity capital RUB 15.5 billion.

This press release is based on the Statement of assignment of a credit rating to Southern Kuzbass Coal Company OAO.

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.

CJSC Analysis, Consulting and Marketing 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.

CJSC AK&M Rating Agency

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www.akmrating.ru

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