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Mechel to Acquire Bluestone Coking Coal Assets
04/23/2009 - Mechel OAO will acquire 100% of the shares and interests of the coking coal assets of West Virginia based Bluestone Industries, creating one of the largest global producers of coking coa
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Bluestone's Coking Coal
With four mining complexes comprising eight active open pit and five underground mines, Bluestone's coking coal holdings in West Virginia include up to an estimated 725 million tonnes of reserves and resources (JORC Guidelines, subject to confirmation during a planned drilling program). The vast majority is premium quality, low volatility hard coking coal suitable for sale to steel producers.
Total in-place reserves in accordance with a 'Competent Person's Report' represent approximately 223.8 million tonnes, with proven reserves representing 49% of the total and probable reserves representing the remaining 51%.
The current 22-year mine plan is supported by approximately 155 million tonnes of recoverable reserves and resources (261 million tonnes in-place).
Bluestone has approximately 113 million tonnes of permitted reserves, with a further 82 million tonnes of reserves in the permitting process.
Established in 1971 and headquartered in Beckley, W.Va., Bluestone currently employs approximately 520 people and serves a diversified base of more than 30 customers, including some of the world's top coke and steel producers.
Mechel expects to continue to serve Bluestone's existing multi-national customer base, with the U.S. representing roughly half of total sales in 2008, and Europe and other areas representing the balance.
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The newly acquired Bluestone assets are -privately-held West Virginia-based coal businesses engaged in the mining, processing and sale of premium-quality hard coking coal. The aggregate merger consideration is $436 million paid in cash (including $36 million interest paid), approximately 83.3 million preferred shares, and the assumption of approximately $132 million of net debt.
Not included in the transaction are a number of other business activities conducted by the owners of Bluestone Coal Corp., including steam coal operations in Kentucky and other non-coal operations.
Bluestone sold 2.8 million tonnes of high-quality hard coking coal in 2008 and generated total sales of approximately $327 million and mine level EBITDA of approximately $94 million (subject to audit). The transaction is expected to be accretive to Mechel OAO 2009 earnings.
"The addition of Bluestone's production assets and large, high-quality coking coal reserves and resources establishes Mechel as one of the largest producers of coking coal in the world and provides us with additional scale that will drive added efficiencies through our business,” commented Igor Zyuzin, Mechel OAO's Chief Executive Officer. “Following the closing, we expect to have up to an estimated 725 million tonnes of coal reserves and resources in the U.S. (JORC Guidelines, subject to confirmation during a planned drilling program) and a more diversified asset base, including a strong foothold in North America and enhanced European, American and Asian sales channels."
"We also see significant opportunities for continued growth at Bluestone to reach production levels of more than 7 million tonnes per year of high quality hard coking coal concentrate and are committed to maintain the highest standards in performance, environmental responsibility and safety," continued Zyuzin. "We have been very impressed with the Bluestone management team and the 37-year record of growth and success they have achieved. We look forward to working with our new colleagues to continue this tradition of superior service and to build an even stronger company for the future."
The transaction also includes a contingent share value right (CVR) that guarantees a target total shareholder return from the preferred shares after five years from the Closing date. In addition, the transaction consideration includes the obligation to make a contingent cash payment based on additional coal reserves and resources identified within two years under a planned drilling program. Any potential CVR cash payment due to the actual total return from the preferred shares not meeting or exceeding the target return will be paid on the fifth anniversary of the Closing date and will equal the amount by which the Target Value exceeds the sum of the aggregate market value of the preferred shares and all dividends received. The starting Target Value is $986 million which could be increased up to $1,585 million or decreased by $200 million which is the limit of indemnifiable damages. Named increase is based on the additional tonnes of proven and probable reserves or measured and indicated resources limited by 196.9 million tonnes (JORC Guidelines) discovered during the Drilling program on the territories controlled by Bluestone on base of long-term rent agreements and ownership title.
The contingent cash payment based on the drilling program is an amount based on certain additional proven and probable coal reserves or measured and indicated resources discovered during the drilling program multiplied by an agreed price of $3.04 per tonne, which will be paid on the fifth anniversary of the Closing date.
The transaction documents contemplate that the parties will conduct a public offering of the preferred shares as soon as market conditions are favorable.
Hereafter, Mechel Mining OAO, the coal and iron ore subholding of Mechel OAO, will be the owner of 100% shares and interest of Bluestone through its affiliated companies. Mechel Mining OAO will guarantee certain obligations of the Mechel subsidiaries under the merger agreement. These guarantee obligations will be supported by a pledge of the shares of the Bluestone Coal Group companies and the newly created Mechel entities that will hold those shares. The parties intend to close the transaction—which is subject to certain conditions--no later than May 7, 2009.
"The acquisition of Bluestone further strengthens Mechel's position as one of the global leaders in coking coal and enhances the quality of products we bring to our customers and the geographies we serve,” added Zyuzin. “Also, using coking coal concentrates from our Russian assets, we will be able to work on blending our coal into new brands, thus increasing the overall value of Mechel's coal portfolio. The long-term drivers of demand for high-quality coking coal remain strong, and we believe this acquisition will further enhance our ability to capitalize on the opportunities in the marketplace, even under today's challenging conditions.
“We look forward to working closely with Bluestone's excellent management and employees to achieve our joint goals," concluded Zyuzin.
Mechel, one of Russia’s leading companies, unites producers of coal, iron ore concentrate, steel, rolled products, ferroalloys, nickel, hardware, heat, and electric power. Its business includes four segments—mining, steel, ferroalloys and power—and its products are marketed domestically and internationally.
