SVST.L Regulatory News (SVST)

22 Aug 2008 11:06



Severstal Resources Reaches Agreement to Acquire PBS Coals

Acquisition of Coal Group To create value for severstal shareholders; Builds Vertically IntEgrated Operations in U.S.

MOSCOW, Russia - August 22, 2008: Through its mining division Severstal Resources, OAO Severstal (LSE: SVST; RTS: CHMF, "Severstal") today announced that it intends to acquire the business of PBS Coals Corporation ("PBS") by way of an acquisition of Penfold Capital Acquisition Corporation (TSX VENTURE: PNA.P) ("Penfold") following a business combination of PBS and Penfold for an all cash purchase price of C$8.30 per share, implying an enterprise value of US$1.3 billion. 

PBS is engaged in the mining, processing and sale of metallurgical and thermal coal in Somerset County, Pennsylvania, U.S. PBS's operations are located in the Northern Appalachian Coal Fields, situated between Severstal's North American production centres, and have the capacity to produce over 4 million tonnes of metallurgical coal. 

PBS's portfolio includes six underground and six surface mining operations. In the fiscal year ended March 31, 2008, PBS produced approximately 2.4 million clean tonnes of coal, including 1.5 million clean tonnes of coking coal. PBS has 133.5 million tonnes of in-place coal reserves and 228.3 million tonnes of in-place coal resources. In addition to its significant reserves, PBS has an experienced management team and a competitive cost position among international coal producers.

Through its acquisition of PBS, Severstal expects to create value for its shareholders through benefits from the vertical integration of its upstream operations; the increase in self-sufficiency with regard to the supply of primary raw materials available to its North American operations will allow Severstal to control its operating costs. PBS's central location will also mitigate transportation costs between Severstal's facilities. 

Roman Deniskin, CEO of Severstal Resources, commented: "Severstal Resources believes that the high demand for primary raw materials for steel production, including coking coal and iron ore, will continue due to the strong industrial fundamentals in global metals and mining. To keep pace with the global growth of the steel industry, our mining business is capitalizing on the opportunity to expand into a new geographic market, gain access to export markets and diversify its mining technologies. Our significant experience with coal mining in Russia leaves us well positioned to make the most of our acquisition of PBS, ensuring its continued growth by providing additional management and operational expertise. "

Gregory Mason, CEO of Severstal International and COO of OAO Severstal, added: "Securing the supply of raw materials is a critical piece to maximizing the full potential of our U.S. business. 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. The integration of our upstream production, from coal and coke making to steel making, will allow us to sustain profitability and return value to shareholders."

Severstal Resources has retained RBC Capital Markets as financial advisor and Torys LLP in New York and Toronto as legal counsel. PBS has retained Cormark Securities Inc. as financial advisor and Borden Ladner Gervais LLP as legal counsel. Penfold and the independent committee of the board of PBS have retained Haywood Securities Inc. as financial advisor and Gowling Lafleur Henderson LLP in Vancouver and Toronto as legal counsel. Haywood has provided an opinion to the independent committee of the board of directors of PBS and Penfold that the transaction is fair from a financial point of view to PBS and Penfold shareholders, respectively.

Severstal Resources expects to fund its proposed offer for PBS through cash on hand. The transaction is subject to a number of conditions including obtaining all necessary regulatory approvals. The transaction is expected to close by mid-October. Upon completion of the acquisition, PBS will operate as a business unit of Severstal Resources.

Notes to Editors on the Structure and Details of the Deal 

Severstal's takeover bid is conditional upon Penfold consummating a business combination with PBS, whereby Penfold will acquire PBS and the resulting public company will be known as PBS Coals Limited.

The transaction has been unanimously approved by the board of directors of both PBS (and the independent committee of the board of PBS) and Penfold and they have determined that the transaction is in the best interest of their respective shareholders.

Penfold and PBS have entered into a support agreement whereby they have agreed to support Severstal's bid. The support agreement includes a commitment by PBS and Penfold not to solicit or initiate discussions concerning alternative transactions. PBS has agreed to pay a break fee of C$41.9 million to Severstal in certain circumstances and has granted Severstal the right to match competing offers. 

Holders of approximately 66.8% of the outstanding shares of PBS, including all directors and officers of PBS, have executed irrevocable lock-up agreements whereby they have agreed to tender their shares to Severstal. Such holders together with the holders who have executed soft lock-up agreements to tender shares to Severstal represent approximately 71.5% of the outstanding shares of PBS.

About Severstal Resources:

Severstal Resources is a leading feedstock supplier in Russia to the iron-and-steel industry which manages the mining assets of Severstal. Severstal Resources incorporates the Karelsky Okatysh and Olcon iron ore complexes and Vorkutaugol, a coal mining complex. Stalmag, a niobium production facility is also part of Severstal Resources. In 2007, these operations produced 7.6 million tonnes of coking-coal, 1.8 million tonnes of steam coal, 10 million tonnes of iron-ore pellets and 4.7 million tonnes of iron-ore concentrate. In 2007, Severstal Resources established a gold business segment, which totalled 5.3 tonnes of gold output over the past year. 

In May, 2008 Severstal Resources reached an agreement to purchase up to a 61.5% stake in African Iron Ore Group Ltd, which owns the exploration rights for an iron ore deposit in the Putu Range area of Liberia, West Africa.

About Severstal:

OAO Severstal is an international steel producer with a listing on the Russian Trading System and the London Stock Exchange. Incorporated in 1993, the company focuses on high value added and unique niche products and has a successful track record of acquiring and integrating high-quality assets in North America and Europe. Severstal owns mining assets in Russia, thus securing its supplies of raw materials. In 2007, Severstal produced 17.5 million tonnes of steel with revenues of US$15.2 billion, EBITDA of US$3.7 billion and earnings per share of US$1.92.

About PBS

PBS is a private British Columbia Corporation which owns 87% of the equity of the PBS Coals Group of Companies, a privately held group of companies engaged in the mining, processing and sale of primarily metallurgical coal from their properties in West-Central Pennsylvania (the "PBS Group"). The PBS Group consists of PBS Coals, Inc., a Delaware corporation, and Rox Coal, Inc., a Pennsylvania corporation, and their subsidiaries and holding companies. 

About Penfold Capital Acquisition Corporation

Penfold Capital Acquisition Corporation is a Capital Pool Company and is part of the Penfold Capital group of companies.

Forward Looking Statements:

This communication may contain projections and other forward-looking statements regarding future events or the future financial performance of OAO Severstal (Severstal). Forward looking statements are identified by terms such as "expect," "believe," "anticipate," "estimate," "intend," "will," "could," "may" or "might", the negative of such terms, or other similar expressions. Severstal wishes to caution you that these statements are only predictions and that actual events or results may differ materially. Severstal does not intend to update these statements to reflect events and circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events. Factors that could cause the actual results to differ materially from those contained in projections or forward-looking statements of Severstal may include, among others, general economic conditions in the markets in which Severstal operates, the competitive environment in, and risks associated with operating in, such markets, market change in the steel and mining industries, as well as many other risks affecting Severstal and its operations.

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For further information:

For SeverStal

Dmitry Druzhinin, Investor Relations

Olga Antonova, Public Relations

+7 495 540 7766

or

Taylor Rafferty for Severstal

Michael Henson 

+1 212 889 4350 (o)

+1 917 902 0767 (m)

John Dudzinsky

+1 212 889 4350 (o)

+1 646 715 2980 (m)