Actuality March 14, 2008

   Magnitogorsk Iron and Steel Works OJSC (MMK) purchased 50% stocks of Onarbay Enterprises Ltd, which owned 82,6% of Belon Group equity capital at the transaction moment. As the result, MMK became the indirect owner of 41,3% of one of the largest Russian coal and coal concentrate producers. The transaction value totaled $230,4 mln. We will remind that in October, 2007 MMK purchased only 10,75% of Belon stocks at Sapwood Investments Ltd. within the repo (transaction with recourse). But the last took advantage of the repurchase right and placed this interest to Onarbay Enterprises Ltd. book value.

   Now MMK will manage Belon on the almost fifty-fifty basis with the Management. The elections to the corporation directors’ board take place in May within the annual Belon Group meeting. Belon Group directors’ board will include: two MMK representatives, two independent directors and the other three places will belong to Sapwood representatives, the company controlled by Belon Group president Andrey Dobrov. The Group operation management will also belong to the present management headed by Dobrov. And MMK representative will hold the post of finance deputy director. The chairman of directors’ board and the main MMK beneficiary Viktor Rashnikov did not eliminate the possibility of further stake increase in Belon, but marked that such negotiations are not held yet.

   The key Belon Group activity is the coking and steam coals production. The coking coals are used directly in metallurgical conversion, and steam coals are burned on thermal power plants (MMK also includes power energy assets). It is interesting that the transaction value (over $230 mln) is approximately three times cheaper as compared to the Belon stocks price at the open market. The current Belon market capitalization is at the $1,5 bln level. As Belon Group press secretary Galina Firsova explained, "the transaction negotiations has been held since July, 2007, and all terms have been then agreed. Taking into account the less favorable coal market state of affairs at that moment, the price was rather fair. The transaction should had been closed in December, 2007, but it was postponed for a number of reasons. But the terms as agreed remained unchanged".

   However, in spite of such significant discount, such formation of Belon Group stockholders alliance comforts them both. First and foremost, the coal production company receives the guarantees of long-term produced coal sale and MMK receives the raw material risks’ insurance. MMK Corporation has not owned large assets in the coal area, unlike its rivals, until now. The annual MMK coking coal demands total 7 mln tons today. Last year the Works purchased 600 000 tons of Belon Group coal. In the future the deliveries will grow up to 2 mln tons and will increase at least to 1 mln tons. As Viktor Rashnikov marked, "this transaction becomes the important MMK strategic step towards the aim achievement for long-term stable provision of premium raw materials supplies. Strategic partnership strengthening with Belon Company will enable us additional competitive advantages". Taking into account the planned investments by 2012 Belon Group should provide the Works’ 55% demands for the coking coal concentrate and 60% – for steam coal. Moreover, this coal can be used as the fuel on the local MMK thermal power plant and as the fuel for steel blast-furnace production; the so-called pulverized coal injection (PCI) method.

   Secondly, Belon Group receives the most top market partner represented by MMK. And that predetermines further coal miners’ development: from new assets’ receipt to cheaper credits attraction. It is very important because, in accordance with Belon development strategy, the volume of coals’ production on the Company enterprises should increase up to 14-15 mln tons by 2012 (4,6 mln tons last year, including hardly over 2 mln tons of the coking coals). Namely, the coking coals concentrate production volume should increase up to 5,1 mln tons, and steam coals concentrate – up to 5 mln. The joint partners’ investments into the production expansion are estimated at around $500 mln. Moreover, the alliance members consider the opportunity of the coking coals production expansion within the framework of activity expansion. They plan to attain this due to the operating enterprises purchase and the new productions construction both on the existent Belon supplies (446 mln tons) and the MMK licenses for coal production given to Belon. The partners do not eliminate the possibility of the new energy-generating capacitates on the steam coals basis produced by Belon. The partnership also envisages the arrangement possibility of the modern mining company on Belon Group basis. This company will specialize in production and processing of both coal and other minerals.

   New alliance will help Belon to develop other business directions. Foremost, steam coal production and supplies (currently, the Group produces more). "Our partnership with MMK will also add the serious stimulus to all direction development of coal production and processing. The Group will pass to the new level of realization volumes within the framework of metal trading business", Dobrov is sure. The Works can substantially extend the dealer network of metal trading in the Siberian federal district by means of Belon Group. New Siberian Group also develops the construction direction and the alliance with MMK can come in very handy.

   By the way, Belon Group plans to hold the secondary public offering (SPO) on the Russian and foreign floors next year, in spite of transaction with MMK. Thus, Dobrov added that it was not the Group’s aim and it would be possible at the proper market state of affairs. The Group can offer 15-20% stocks for SPO in terms of the favorable state of affairs. However, the interest size depends "on the trading floor, investors’ desire, and underwriters’ terms". Both existent stocks and additional issue securities can be offered to the investors.