1. Market Challenges

Long Investment & Manufacturing Cycle

Geological survey – equipment installation – burden removing extraction – transportation – storage – sale. In Russia the full cycle from geological survey to sale of coal – can take from 3 to 15 years.

Reserves

Investment attractiveness and capitalization of coalmining companies directly depends on coal reserves. So the coalmining companies have to increase their commercial and probable reserves. At the same time the investment efficiency of reserves increasing (via geological surveys, M&A transactions, etc.) is not always high – some reserves can be considered as "unpromising", etc.

Geological Risks

The Russian coalmining industry meets high geological risks like low probability of commercial reserves discovery at unexplored deposits, and high equivocation of detection of deposits' capacity and extraction coefficient.

Territorial Location

The territorial location of industry's objects (underground & open pit coalmines, enrichment plants, warehouses, etc.) is characterized by: a) presence of few "territorial clusters" of coalmining (connected with the correspondent coal basins); b) strong dissociation of mining and enrichment facilities – even within the single company; c) long distance of many coalmining assets from the state borders and seaports; d) new coal deposits are located in hard-to-reach regions of Siberia, Far East and Arctic that have weakly developed or absent infrastructure. These features of the territorial location of the Russian coal industry define: a) dependence of the coalmining business from railroad infrastructure – at all stage of technological cycle (from transporting of coal from mines to enrichment plants – to export); b) high cost of coal transportation; c) possibility of the state influence at private coal business – via railroad transport monopoly and railroad tariffs regulation.

Added Value

There is a possibility to create various added values at the different stages of coalmining business. The added value growths from initial at coal extraction – to maximal at coke-chemical products manufacturing. But the expenses and competition grow the same direction, that forces coal companies to "balance" their business strategies between low investments and low added value by one side and high investments and high added value by another.

High Capital Intensity

The coalmining business in Russia has high capital intensity, so the ROI period is too long for many investors.

Coalmining Market Absence

There is no rigorous domestic coalmining market in Russia . All deliveries of coal are being completed only by direct contracts between coalmining companies, consumers and intermediates. Moreover the prices of coal can differ in times – even for the same seller or buyer. There is no exchange coal trade, so there are no valid coal prices.

Strong Dependence on Export Trade

The Russian coalmining industry strongly depends on its export activity. Almost 20% of all coal extracted in Russia is being exported. Many large companies like "Yakutugol" export almost 2/3 of their coal. Such dependence on export makes the industry vulnerable before the global consummation level and prices fluctuations. Moreover, the Russia coal export is strongly connected with only few destinations like EU or China that makes the business even more risky.

Investments Deficiency

The level of wear of the coalmining equipment is too high at the Russian coalmines, so the industry requires high investments to the process of technical modernization. By the other hand, the private investors have no an access to Russia 's key coalmining assets because these assets are being owned by the largest metallurgical corporations. At the same time these current proprietors of coalmining assets prefer to invest their high profits to metallurgical assets recovery and modernization. The coalmining assets are not currently considered as the primary objects for investments.

Equipment Supply

By the years of so-called "economical reforms" the Russian coalmining industry has lost its contacts with the local manufacturers of mining equipment, machines, vehicles, etc. Moreover, under the influence of the factor of "orders absence" many Russian mining equipment manufacturers stopped their work or have lost the experience of such equipment production. So currently the Russian coalmining companies have to purchase equipment produced mainly outside Russia .

Global Competition

The Russian coalmining companies meet the global competition – both at domestic market (from Kazakhstan coal producers) and in their export activity. Being the world's fifth largest coal exporter Russia has to compete both with the countries that precede it in the top-list (like Australia , China , Indonesia , and SAR) and with next countries in the list (like the USA , Columbia , or Poland ).

Strong Variety of Mining Conditions

The Russian coalmining companies strongly differ in the geological/mining conditions of their business and, correspondently, in their costs. The spread in expenses between high-effective open pit coalmines of Kansko-Achinsky coal basin and high-cost underground coalmines of Pechora coal basin can be 10-15 times.

Industry Pressure

For coalmining companies there are considerable industry pressures from consolidation, mergers and acquisitions. Size/scale remains critical factor.

Low Growth Rates

Domestic and global markets are saturated. Extended marketing and sales activities lead only to slightly higher growth figures. There is substantial growth only in new markets (such as China ). For investors, coalmining industry is currently less attractive than other industries.

Low Return on Investment

Coalmining is an asset-intensive business. Margins are low.

Regulatory Pressures

Protected markets, customs regulations, and local content rules still are among the most important factors for or against a decision to start new coalmining project.

Environmental

Environmental forces, government regulation, and tax regulations have a great impact on the development on non-coal technologies of energy generation.

2. Strategies

Business Concentration

The main tendency in the Russian coal industry is consolidation of mining, enrichment, services and trade assets into large coalmining holdings. Currently no more than 10 largest coalmining holdings "determine the face" of Russia 's coalmining industry, providing almost 4/5 of all coal extraction/sales. Moreover, the largest of these players are not only coalmining holdings – they are the country's largest mining-and-metallurgical corporations with full technological cycle from coal and ore extraction to metal products export.

Manufacturing of Products with High Added Value

The Russian coalmining companies try to increase their profits by producing coal products with high added value – like enriched coking coal, coke-chemical products. Moreover, most of then prefer to use their own coal for manufacturing of the non-coal products with high added value – for example they use coking coal in the manufacturing of expensive steel products, increasing the total added value (in comparison with "simple" sale of coal to "external" consumers).

Decreasing of Costs

Decreasing of costs is considered by the Russian coalmining companies to be the key factor that influences the level of their competitiveness. They try to decrease all elements of cost – from transportation fees to costs of geology surveys.

Own Transport

The largest Russian coalmining companies have started to establish their own transportation facilities in various kinds of transport – from railroad to marine. They establish railroad operators, purchase wagons and locomotives; buy shares of coal-processing seaports or build new ports, etc. All these measures have to decrease the transportation costs as well as to avoid strong dependence of the coalmining companies from the transport monopolists (like "Russian Railroads" and similar).

Construction of Enrichment Facilities

To decrease the transportation fees as well as to increase the added values the Russian coalmining companies have started a program of construction of new enrichment plants directly near coalmines.

Usage of IT

The Russian coalmining companies have started a program of IT wide usage – for improvement of the level of corporate management. They purchase ERP, CRM, and similar IT-solutions, as well as improve their telecom infrastructure.

3. Issues & Bottlenecks

Licensing

• The extraordinary level of corruption among the Russian officials responsible for licensing
• Calculation of the economical efficiency of getting licenses at specific coal deposits and mines
• Calculation of the economical efficiency of the future business activity at specific coal deposits and mines
• Optimization of transportation model (transportation routes, etc.)
• These problems are more difficult for integrated coalmining and mining-and-metallurgical holdings that own and manages many coalmines in various regions of the country

Geology Surveys

• Selection of surveying methods and instruments
• Selection between geological surveys made by the coalmining company itself and by external providers
• Calculation of the influence of geological surveys at investment attractiveness of the company
• Social problems - camp-type organization of surveys
• Specific problems during surveys at permafrost areas

Complex Program of Deposit Development

• Compiling of complex economical and technological-and-manufacturing programs of deposit/mine development
• Optimization of the coal extraction annual schedules – accordingly the specific climate (winter season) and geological (permafrost areas) conditions
• Determination of the "cutting-in point" where the coalmine's transport will reload the coal to long-distance transport

Transportation and Installation of Mining Equipment

• Absence of transport infrastructure at new deposits
• Non-optimized system of equipment providers selection
• Lack of labor resources
• Delay in equipment delivery
• Mistakes in designing of coalmines
• Incorrect supplying strategy

Coal Extraction

• Industrial safety problems (gas emission, rock bursts, dust)
• High level of equipment's wear
• Energy supplying problems (faults, equipment wear)
• Increasing of the stake of hard-to-extract coal reserves
• Usage of mechanized methods of coal extraction
• Work at depleted deposits and mines
• Equipment failures

Sales & Distribution

• Creation and management of the distribution system
• Few "parallel" distribution systems within each company (export, for affiliated consumers, for "external" consumers, etc.)
• Various prices for various customers