Severstal Resources Reaches Agreement to Acquire PBS Coals

PBS is engaged in the mining, processing and sale of metallurgical and thermal coal in Somerset County, Pennsylvania, U.S.  PBS’s operations are located in the Northern Appalachian Coal Fields, situated between Severstal’s North American production centres, and have the capacity to produce over 4 mln tonnes of metallurgical coal.

PBS’s portfolio includes six underground and six surface mining operations.  In the fiscal year ended March 31, 2008, PBS produced approximately 2.4 mln clean tonnes of coal, including 1.5 mln clean tn of coking coal. PBS has 133.5 mln tn of in-place coal reserves and 228.3 mln tn of in-place coal resources.  In addition to its significant reserves, PBS has an experienced management team and a competitive cost position among international coal producers.

Through its acquisition of PBS, Severstal expects to create value for its shareholders through benefits from the vertical integration of its upstream operations; the increase in self-sufficiency with regard to the supply of primary raw materials available to its North American operations will allow Severstal to control its operating costs.  PBS’s central location will also mitigate transportation costs between Severstal’s facilities.

Roman Deniskin, CEO of Severstal Resources, commented: “Severstal Resources believes that the high demand for primary raw materials for steel production, including coking coal and iron ore, will continue due to the strong industrial fundamentals in global metals and mining.  To keep pace with the global growth of the steel industry, our mining business is capitalizing on the opportunity to expand into a new geographic market, gain access to export markets and diversify its mining technologies.  Our significant experience with coal mining in Russia leaves us well positioned to make the most of our acquisition of PBS, ensuring its continued growth by providing additional management and operational expertise. ”

Gregory Mason, CEO of Severstal International and COO of OAO Severstal, added: “Securing the supply of raw materials is a critical piece to maximizing the full potential of our U.S. business. The acquisition of PBS will help ensure that Severstal controls its operating costs by providing a guaranteed supply of metallurgical coal for our coke making operations in the U.S. The integration of our upstream production, from coal and coke making to steel making, will allow us to sustain profitability and return value to shareholders.”

Severstal Resources has retained RBC Capital Markets as financial advisor and Torys LLP  in New York and Toronto as legal counsel.  PBS has retained Cormark Securities Inc. as financial advisor and Borden Ladner Gervais LLP as legal counsel.  Penfold and the independent committee of the board of PBS have retained Haywood Securities Inc. as financial advisor and Gowling Lafleur Henderson LLP in Vancouver and Toronto as legal counsel.  Haywood has provided an opinion to the independent committee of the board of directors of PBS and Penfold that the transaction is fair from a financial point of view to PBS and Penfold shareholders, respectively.

Severstal Resources expects to fund its proposed offer for PBS through cash on hand.  The transaction is subject to a number of conditions including obtaining all necessary regulatory approvals.  The transaction is expected to close by mid-October. Upon completion of the acquisition, PBS will operate as a business unit of Severstal Resources.