Updated August 22, 2008

On August, 22 the Russian company Severstal Resources, the mining division of Severstal, announced about the intention to purchase the business of the American company PBS Coals Corporation.

PBS that comprises six mines and six coal strip mines is engaged in extraction, processing and sale of coking and steam coal.

In the fiscal year ended March, 31, 2008, PBS extracted about 2,4 million tons of coal, as well as 1,5

million tons of coking coal.

PBS's coal supplies total 133,5 million tons, and coal resources – 228,3 million tons.

The deal is realized by means of the purchase

of Penfold Capital Acquisition Corporation after the amalgamation of PBS and Penfold. The deal price is C$ 8,30 per stock (US$ 7,95) with the full cash purchase, so the price of the American enterprise totals US$ 1,3 billion.

PBS has favorable location to Severstal's enterprises in the Northern Appalachian Coal Fields and can produce more than 4 million tons of coking coal per year.

"The raw material supplies are the core factor for increasing the potential of our business in the USA. The integration of our production chain, from coal mining and coking coal production to steel production, permits us to keep the high profitability and increase the price for our stockholders", as Severstal International chief executive Gregory Mason explained.

Also, Severstal Resources chief executive Roman Deniskin declared that Severstal Resources's business would benefit from the entry to the new geographical and export markets and from the wide range of the used technologies as well. According to him, PBS's enterprises will cover about the half of coking coal Severstal's American enterprises require.

Severstal Resources intends to finance its offer about the purchase of PBS's stocks by means of its own facilities. Severstal has some conditions including the amalgamation of Penfold with PBS Coals Corporation as a result of which Penfold will purchase PBS, and the newly incorporated public company will be named as PBS Coals Limited.

The deal is expected to close by mid-October.

The deal was unanimously approved by the directors' boards of PBS (and by the independent committee of PBS directors' board as well) and Penfold. Penfold and PBS have reached the agreement, and in accordance with it, the companies have obliged to back Severstal's offer. The agreement foresees PBS' s obligation s not to initiate any discussions of alternative deals. If the agreement is broken, PBS, under certain conditions, will have to pay Severstal a penalty of US$ 40 million. In its turn, Severstal has the right to raise the price, if PBS gets a competitive offer.

The owners of about 66,8% of PBS's circulating stocks, including all institutional owners and all PBS's directors and officials, have signed irrevocable agreements about the blocking of stocks according to which they have obliged to vote for the deal.

Moreover, the owners of nearly 4,7% of PBS Coals Limited's circulating stocks have signed agreements about the blocking of stocks with the less severe terms.

Expert comments
Oleg Petropavlovsky from BrokerCreditService Company

We estimate PBS Coals at US$ 1 363 million taking to account the prospects of its development.

Still, we assess the news as positive because Severstal can provide some of its US enterprises with the required coal concentrate due to this asset purchase.

So, one of the consumers of PBS Coals's products is former Esmark's division – Wheeling Pittsburgh Corp., as well as AK Steel (according to the reports of mass media, Severstal is interested in purchasing this company). Thus, Severstal will increase the profitability of its assets in the USA, since some of them are unprofitable.