We recommend that our clients switch from coal producers to steel makers for the
following reasons:
• Expected output growth at Raspadskaya and Belon is already reflected in their
prices, which means that these stocks become a pure commodity play. Mechel
may still have upside potential stemming from additional output growth at the
Elga deposit, but the project details have yet to be disclosed;
• The recent surge in coal prices is due to tightened supply following poor weather
conditions in Australia and South Africa, alongside other temporary factors. We
regard these factors as one-off events and expect a partial resolution of the
current shortage by the end of this year. The anticipated launch of new mines in
Australia over the next few years should also lead to a decline in the coking coal
deficit;
• We do not anticipate significant growth in domestic coking coal demand over the
next five years. At the same time, we have identified a number of projects that
should eliminate the deficit for Zh-grade coal within the next two years;
• Major Russian steel makers offer exposure to feedstock price growth due to their
vertical integration with mining businesses;
• In contrast to coal producers, expected output growth for Russian steel makers is
still not fully reflected in their valuation. This includes the acquisition of Maxi
Group by NLMK and capacity expansion at Severstal.
Our top picks in the Russian steel universe include:
• NLMK as direct exposure to international steel price growth and a play on Maxi
Group consolidation;
• Severstal as a long-term play on value-added growth and efficiency
improvements.

CONTENTS
VALUATION OF COAL PRODUCERS 1
COMPARATIVE VALUATION 1
DCF 2
SENSITIVITY ANALYSIS 2
RUSSIAN COKING COAL MARKET 5
SUPPLY 5
DEMAND 7
SEA PORTS 9
PRICING 10
COST APPRECIATION 11
GLOBAL COKING COAL MARKET 12
SUPPLY 12
DEMAND 13
PRICING 14
RUSSIAN COAL MAJORS 18
MECHEL 18
RASPADSKAYA 22
BELON 26
VALUATION OF STEEL PRODUCERS 30
COMPARATIVE VALUATION 30
DCF 32
RUSSIAN STEEL MARKET 33
NEW STEEL PRICE ASSUMPTIONS 33
PRODUCT MIX OF RUSSIAN STEEL MAJORS 35
GROWTH IN DOMESTIC SALES: VALUE DRIVER FOR STEEL MAKERS 36
VERTICAL INTEGRATION 37
COST APPRECIATION 38
CAPEX NEEDS 40
RUSSIAN STEEL MAJORS 42
SEVERSTAL 42
EVRAZ 46
NLMK 50
MMK 54
APPENDIX. RUSSIAN STEEL CONSUMPTION 58
INTERNATIONAL COMPARISON 58
CORE GROWTH DRIVERS 60