Yuzhny GOK To Increase Charter Fund?

On March 2, 2006 the Kyiv Economic Court ruled in favor of an allegedly Privat-affiliated company Metallotehnika, and did not cancel a decision made at Yuzhny GOK’s (PGZK: BUY) April 26, 2005 AGM. The decision approved a three-fold increase in its charter fund through an additional issue of 4.3 bln of new shares. The State Property Fund of Ukraine (SPFU), which challenged the AGM’s decision in court in an attempt to revise PGZK’s privatization, already stated that it may appeal to the Supreme Court to challenge the recent Kyiv Economic Court ruling. Concorde Capital: Privat Group, which controls Yuzhny GOK, on par with Russia’s Smart Group, was clearly behind the new attempt to increase the company’s charter fund, in our view. While the exact purpose of the additional share issue is not clear, we think it may have to do with a possible sale of the company to a strategic buyer, as rumors about its takeover are in the air. Potential buyers could be Mittal Steel, Russia’s MetallInvest and possibly some Russian steel majors. The proceeds from the subscription would then be a partial payment by the new owner for the GOK, if current controlling shareholders decide to forfeit their preferential right to subscribe for the new shares. We have adjusted our target for the possible share issue as follows:

                                      Current                 Adjusted

Target, USD                     0.25                       0.12

Market price, USD           0.23                       0.11