Czech coal miner NWR could raise about €1bn in IPO

By bne IntelliNews April 11, 2008

Nicholas Watson in Prague -

It's perhaps no coincidence that a day after Nippon Steel agreed to pay BHP Billiton and Mitsubishi three times more for coking coal used to make steel, Central Europe's largest coal miner, New World Resources, announced it would brave the choppy waters of the international financial markets and launch what could be the region's largest-ever IPO.

New World Resources (NWR), a holding company of several mines and coking facilities including the Czech Republic's giant mining firm OKD, said on April 10 that it would sell 25-33% of old and new shares on the London, Prague and Warsaw stock exchanges in the second quarter of this year. The current shareholders of NWR are a mix of international private equity, investment companies and industry players, assembled by the larger-than-life Czech-born financier and businessman Zdenek Bakala. RPG Industries, Bakala's private equity vehicle, purchased the OKD assets back in November 2004 for a reputed €400m; estimates put the value of NWR after the IPO at about €3bn, though some say it could be as high as €4bn or even €5bn.

Morgan Stanley, Goldman Sachs and JPMorgan Cazenove are joint bookrunners for the offering. Citigroup, Barclays Capital, Erste Bank, Patria Finance and Wood & Company are co-lead managers.

The firm had been talking about an IPO for over a year, but a decision on it was held up by the turbulence in the world's capital markets caused by the US housing slump and by reported wrangling between the partners over the correct valuation of the company.

"We've been contemplating options for a long time and the reason for us not to decide at the end of last year was that international capital markets were undergoing some turmoil," says Bakala. "But the situation has calmed down and today it's obvious that natural resources are not being affected too much by the turbulence. We think today the market is healthy and active."

Indeed, commodity prices have enjoyed a spectacular rally over the first quarter of this year. And while Fitch Ratings predicts that commodity prices in general are unlikely to escape a demand-led slowdown resulting from the widely predicted global economic downturn, "prices probably will not fall by as much as in previous economic slowdowns and are likely to remain elevated relative to historical levels, reflecting robust, albeit moderating demand from emerging markets."

The outlook for coal prices is especially good given the rising demand from Asian steelmakers and increasing demand for power in those countries in Central and Eastern Europe so far largely unaffected by the troubles in developed markets further west. On April 9, the world's second-biggest maker of steel, Nippon Steel, said it had agreed to pay BHP Billiton and Mitsubishi $300 per tonne for the year started on April 1, a steep rise from the $98 a tonne it paid in the year just ended. BHP Chief Operating Officer Alberto Calderon told Bloomberg that the higher coal prices would mean an extra $7bn in annual sales for the company. Lakshmi Mittal, head of the world's largest steel manufacturer ArcelorMittal, said he expects the price of coking coal to rise by 150-200% this year.

"Several days ago I was talking to a major steelmaker in New York and over the coming year he sees prices growing by 150-200%," says Bakala. "It might not be that much, but all the factors for a price rise are there so we will be able to see a significant rise in prices for coal and coking coal, which is positive for us, negative for them."

Plenty in reserves

NWR has coal reserves of about 419m tonnes, which is enough for 30 years of production. In 2007, the company sold approximately 13.1m tonnes of coal, with 65% of production being coking coal and 35% steam coal. The firm wants to increase those reserves and is hunting for acquisitions in the region, particularly in Poland and Ukraine. In March, NWR filed an application with the Polish Ministry of the Environment to obtain a mining licence for the Debiensko area of southern Poland.

As one of the very few private sector and profitable coal miners in the region, NWR feels its in prime position to lead the consolidation of the industry in the region as governments privatise their coal mines. Bakala, fresh off the plane after a visit to Poland, said he'd had a meeting with Poland's economy minister, Waldemar Pawlak, who told him that the reformist government led by Prime Minister Donald Tusk is committed to privatising the coal industry, with the first privatisation coming as soon as this year with the sale of the Bogdanka mine in the east of the country. Deputy Treasury Minister Krzysztof Zuk told the newspaper Gazeta Wyborcza in March that government is also looking to float the coal firms Katowicki Holding Weglowy and Jastrzebska Spolka Weglowa, as well as the coking plant Koksownia Walbrzych on the stock exchange in 2009.

While the Polish government is not doubt sincere in its desire to privatise the coal sector, it will have its hands full trying to restructure an industry famous for its resistance to change. During communist times, coal miners were the favoured proletarian class, with special shops that stocked goods unavailable in the rest of the country. They still have a way with politicians: in 2005, thousands of angry miners brandishing axe handles descended on the Polish parliament, prompting the cowed politicians inside to vote through a fat early retirement package that applies only to miners. Since 1989, the government, together with institutions like the World Bank, has spent more than €1.17bn to restructure the industry, but miners are resisting further cuts,

How much NWR has to spend on its acquisition spree will depend in large part on how much it can raise in the IPO. Ebitda multiples that coal companies have traded at since 1997 range between 5 times annual Ebitda and 18 times, with the mid-cycle at 8 times. NWR said on April 10 that its Ebitda for 2007 grew about 24% to €351m; assuming Ebitda growth at a conservative 10% compound for 2008, then NWR should be valued at about €3.0bn, though some reports were quoting analyst predictions of over €4bn.

Josef Nemy, an analyst with Komercni Bank in Prague, adopts a more conservative line "The size of the issue could thus be around CZK70bn [EUR2.8bn] or only slightly higher, as the current market environment is still not very favourable and probably not supportive of a high premium over the sector average valuation," he says.

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