BRE Bank Securities

4 February 2010

Kopex BRE Bank Securities

BRE Bank Securities

Research Report 4 February 2010

Kopex

Reduce KOPE.WA; KPX.PW (New)

Machinery

Poland

Avg daily trading volume (3M)

Free float

Market cap

Target price

Current price PLN 25.35

PLN 21.66

PLN 1.9bn

PLN 0.5bn

PLN 2.74m

Profits Will Be Sluggish

2010 Outlook We expect Kopex to increase sales of mining services by 35%, and sales of mining machinery and equipment by 17%, in 2010. The profitability of the mining services business is supported by an ample portfolio of orders for highly specialized solutions. Sales of mining machines will generate lower returns this year because of strong competition. Revenues from industrial machines and equipment and electrical and electronic equipment are expected to dwindle due to a shortage of orders. The 2010 revenues of other business segments will be on a level with 2009. The segment of energy sales is expected to record a year-on-year shrinkage in profits as a result of reduced volatility in energy prices, and flat year-on-year movement in wholesale energy prices between 2009 and 2010.

Shareholder Structure

Company Profile

Kopex manufactures machinery and equipment for underground and surface mines, and offers specialist mining and construction solutions and modernization services. The company also trades in electricity, coal, liquid fuels, and coking coal.

Jakub Szkopek

(48 22) 697 47 40

jakub.szkopek@dibre.com.pl

www.dibre.com.pl

BRE Bank Securities does not rule out offering brokerage services to an issuer of securities being the subject of a recommendation. Information concerning a conflict of interest arising in connection with issuing a recommendation (should such a conflict exist) is located on the final page of this report.

Kopex vs. WIG

BRE Bank Securities

Kopex's high share price is a result of high expectations, including potential contract wins, strong earnings growth, and the possible acquisition of rival Remag. Meanwhile, though the company is indeed bidding for new orders totaling PLN 2 266.4m, many of these projects are either in very early stages of preparation, or do not have financing in place yet. For example, a PLN 56m contract for provision of mine development services to Thai energy provider Banpu (Indominco mine project) has been on hold for a long time due to a lack of financing. If the contract were canceled, Kopex would have to terminate the related forex risk hedging arrangements, resulting in a PLN 14m charge against net profit. Not exactly a household name in the mining industry, Kopex finds it hard to compete for international orders with globally recognized brands. Competition at home is also fierce, and local coal mines, most of which are heavily in debt, take full advantage of this to get big discounts from suppliers. As a consequence, profit margins on future contracts are bound to be tight. In the ongoing privatization process of Katowice-based mining equipment maker Remag, the bidder pool has been reduced to four prospective buyers, including Kopex and its main competitor Famur. Whoever wins the process, the acquisition is going to be pricey. Summing up, Kopex is overpriced, moreover, it faces a risk of protracted contract negotiations and delayed awards. We are initiating coverage with a reduce rating and a target price of PLN 21.66 a share.

(PLN m) 2007 2008 2009F 2010F Revenue 1290.2 1982.6 2399.0 2586.7

EBITDA 148.0 236.0 272.0 283.8

EBITDA margin 11.5% 11.9% 11.3% 11.0%

EBIT 105.7 174.9 188.5 197.3

Net income 500.7 90.3 101.6 123.3

P/E 3.4 19.0 18.5 15.3

P/CE 3.2 11.3 10.2 9.0

P/BV 0.9 0.8 0.8 0.8

EV/EBITDA 12.0 8.5 8.1 7.5 DYield 0.0% 0.0% 0.0% 0.0%

2011F 2737.8

297.6

10.9%

210.2

136.1

13.8

8.4

0.7

6.9 0.0%

Sector Outlook

Demand is increasing in the sector, on the part of Polish as well as foreign mines. In Poland, the key factor is the replacement of the old, worn out machinery. In case of foreign mines, we see investment aimed capacity expansion and improved safety.

Important Dates

Krzysztof Jędrzejewski 60.41% Aviva OFE Aviva BZ WBK S.A. 6.37% BZ WBK AIB Asset Management 5.99%

Pozostali 27.23%

01.03 - Consolidated Q409 report 30.04 - Consolidated FY2009 report 17.05 - Consolidated Q1 2010 report 31.08 - Consolidated H1 2010 report

8.5

12.5

16.5

20.5

24.5

28.5

09-02-02 09-05-02 09-08-02 09-11-02 10-02-02

PLN

Kopex WIG

Kopex

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Business Profile Kopex is a leading Polish manufacturer of mining machinery with an expanding international presence. The range of products and services targeted to Polish customers includes road headers, longwall shearer-loaders, complete longwall systems, scraper conveyors, hydraulic cylinders and control systems, drilling equipment, safety and protective equipment, mine lights, methane sensors and meters, communications systems, automation systems, coal preparation equipment, power plants and wind turbines, and machinery and equipment for power plants. Kopex also offers specialized services including mine shaft sinking and demolition, excavation of drifts and crosscuts, roof supports, piping installations, corrosion engineering, and underground construction. Last but not least, Kopex trades in electrical power, coal, steel products, and liquid fuels. In 2006, Kopex became a member of the European Energy Exchange, which enabled it to sell to and trade with international partners. Kopex’s international operations include sales of mining machinery and equipment, and provision of specialized mining and construction solutions and consulting services for all types of underground and opencast operations. The company’s track record includes coal dressing plants, methane removal stations, power plants, technology consulting, mine and power plant modernization, and many others. Kopex is building on its local experience to become an international brand. By combining the skills and expertise of its different subsidiary operations, the company is able to compete against such players as Joy Global and Bucyrus for jobs different parts of the world. By capturing machine orders from Australian and Chinese customers in 2007 and 2008, Kopex gained a foothold as a newcomer to a global market dominated by well-established players.

Revenue Composition

During the first three quarters of 2009, the biggest, 34.5% contribution to revenues came from sales of underground mining machinery. Major contracts completed in the period included a AUD 131m (PLN 341.9m) order for mechanical roof supports from an Australian customer, and a $85m (PLN 190m) order from Shenhua Ningxia Coal Industry Group (China). Kopex’s CEO Marian Kostempski noted a recovery in orders from Polish as well as international customers in late 2009. Kopex’s current portfolio of mining-machine orders is worth 130% more than in the same period a year ago. The second largest source of revenues (32.7%) were electricity sales, where Kopex has successfully been increasing trading volumes and achieving operating margins of 3.6%. In the future, the company plans to expand into power generation, possibly by building a farm of ten 20-megawatt wind turbines, and more probably by developing five biogas plants with a capacity of 1MW each with support from EU funding, expected to benefit from clean-energy subsidies. The third major revenue source (11%) for Kopex are sales of electrical and electronic machines and equipment to mines and manufacturing companies, which increased 4.8% year-on-year in Q1 2009, but which slowed down considerably in Q3 2009 due to a drop in orders, suggesting an overall year-on-year decline in 2009. The combined contribution of the other lines to the total revenues generated in the first nine months of 2009 was less than 10%. Revenues from mining services showed a whopping 44.6% y/y increase in the period ended 30 September 2009, generated on a large inflow of contracts from Polish mines which modernized and overhauled their existing shafts, and which, in many cases, were forced to dig into deeper and richer coal seams. In turn, Kopex reported major shrinkage in nine-month sales of opencast mining machines (-29.4% y/y), cast-iron and steel-iron castings (-50.1%), and manufacturing equipment (-29.4%), due to a slump in orders, including from the formerly frequent customer, the arms industry. At the moment, the company is looking for new customers for its casting foundry, which is working at partial capacity.

Kopex

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Revenue composition in H1 2009

Castings 0.7% Other

6.5%

Coal Sales 2.0%

Electric Power Sales 32.7%

Electric and Electronic Machinery 11.0%

Manuf acturing Machinery

1.4%

Opencast Mining Machinery 2.5%

Underground Mining Machinery 34.5%

Usługi górnicze 8,8%

Source: BRE Bank Securities In terms of operating profits, the most successful business segments in the first three quarters of 2009 were electronic and electrical machinery with a margin of 23.0%, and underground mining machinery with 12.3% (this value would have been 2.9% higher at 15.2% if it had not been for a loss-making contract booked by subsidiary Inbye). Moreover, power trading operations generated a handsome operating margin of 2.9%, achieved thanks to a 26.4% increase in electricity prices (Kopex had secured supplies of the power traded last year back in 2008, before the price hikes), and high volatility in electricity markets. The segment’s operating margin in the same period a year earlier was much lower at 0.9%, and we expect it to return to that level after 2009. The segments of castings and manufacturing equipment generated negative operating margins of 30.9% and 10.1% respectively during the period because of a year-on-year shrinkage in revenues (which amounted to a staggering 50.1% in case of the foundries). The Kopex foundries are currently undergoing major restructuring which includes downsizing and production-cost cuts. The first tangible effects are expected to materialize this year. After an initial PLN 5-6m boost to Q409 costs, the restructuring is expected to make casting production profitable again. The Kopex Group expanded considerably in the past three years. A merger with shearer-loader manufacturer Zabrzańskie Zakłady Mechaniczne (ZZM) in February 2006 provided a passage into international markets, which was later gradually expanded through further acquisitions of companies operating in the strategic areas of Kopex’s business. The M&A activity led to a significant increase in SG&A expenses. 2009 Q1-Q3 EBIT margins by business segment

Other5.6%

Castings-30.9%

Mining Serv ices

3.5%

Underground Mining Machinery

12.3%

Opencast Mining Machinery

5.8%

Manuf acturing Machinery

-10.1%

Electric and Electronic Machinery 23.0%

Energy Sales

2.9%Coal Sales

2.6%

-40%

0%

40%

Source: BRE Bank Securities By Q3 2009, exports accounted for 39.0% of Kopex’s total YTD sales. Market diversification makes the company immune to local economic fluctuations, but, on the other hand, it increases the costs of contract acquisition and delivery.

Kopex

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BRE Bank Securities

Sales by Country Mining Services

POLAND

82.3%

GERMANY 7.0%

INDO-NESIA 6.5%

ITALY 0.9%

FRANCE 3.3%

Opencast Mining Machines

GERMANY 38.3%

NORWAY

24.1%

POLAND 36.8%

SWEDEN 0.8%

Underground Mining Machines

CHINA 27.2%

CZECHREP.

2.3%

AUSTRALIA 13.2%

POLAND 55.5%

Manufacturing Machines

SLOVAKIA 6.3%ROMANIA

32.1%

POLAND 38.7%

BULGARIA 17.0%

MACE-DONIA 4.6%

GERMANY1.2%

Electric, Electronic Equipment

CZECHREP 15.8%

AMERICA 3.2%

SOUTH AFRICA 28.1%

SERBIA 1.8%

UK 2.1%RUSSIA 5.1%

POLAND 25.5%

GERMANY 16.9%

Coal

NORWAY 10.2%

SPAIN 17.9%

AUSTRIA 11.1%

SLOVAKIA 31.8%

UK 28.9%

Electricity

POLAND 56.3%

SLOVAKIA 3.6%

AUSTRIA 5.1%

GERMANY 21.9%

CZECH

REP 13.1%

Castings

SERBIA 33.3%

BOSNIA 1.2%

MACE-DONIA 4.4%

POLAND 61.0%

Source: Kopex

Kopex

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Macroeconomic Situation

Poland

Coal production in Poland is a fairly concentrated market. In 2007, 54 percent of the total domestic brown-coal output came from the PGE KWB coal mine in Bełchatów, and the rest of the supply was produced by coal mines in Turów, Pątnów, and Adamów. Annual brown coal production in Poland has remained relatively steady over recent years, hovering around 58 million tons. The market for hard coal is 90% controlled by three producers operating in the Upper Silesian Coal Basin: Kompania Węglowa, Katowicki Holding Giełdowy, and Jastrzębska Spółka Węglowa. Production figures for the years 2000 through 2007 indicate a downward trend in annual hard-coal output, resulting from closures of loss-making mines and workings, and from cheap imports. With many of the Upper Silesian mines now forced to extract from deeper and more challenging seams, their production costs increase, and they fall under competitive pressure from cheaper coal coming in from Russia and ARA (Amsterdam, Rotterdam, Antwerp) ports.

Hard- and brown-coal production, coal-fired power o utput in 2000-2007

0

20

40

60

80

100

120

2000 2001 2002 2003 2004 2005 2006 2007

130

135

140

145

150

155

160

Hard coal (MMT) Brown coal (MMT) Electric Power Production (TW*h)

Source: GUS Power plants are the principal buyers of hard coal. Fossil-fueled energy production increased in line with the GDP in the years 2000 through 2007, when it amounted to 155.7 TWh. Coal has not lost its importance as an energy source, and we expect its usage to increase going forward, fueled by growing energy demand. To satisfy the rising demand, coal producers need to bolster their capacity. The three largest hard-coal mines spent a combined PLN 16 820m on capital investments between 2003 and 2007, and their combined 2007 budget of PLN 733m was much lower than in preceding years. It is estimated that the Polish coal industry needs to invest between 15 and 20 billion zlotys by 2010 in capacity improvements including streamlining of mining processes and replacement of existing machinery which, for the most part, has been in use for a quarter of a century, and has been the cause of a number of mine accidents in recent years. New machines are not only safer, but also much more efficient, and they can contribute to a reductions in coal extraction costs. 2003 – 2007 capital investments by three largest Po lish hard-coal mines (PLN m) CAPEX

Company 2003 2004 2005 2006 2007

Kompania Węglowa S.A. -8 152 -1 634 -1 080 -317 28

Jastrzębska Spółka Węglowa S.A. -220 -903 -1 579 -888 -365

Katowicki Holding Węglowy S.A. -334 -301 -403 -276 -396 Source: BRE Bank Securities Two factors which could slow the pace of capacity development are tight access to credit, and competition from cheaper coal from Russia. With financial support from the government no longer a given, many mines are already heavily in debt, and their situation is further exacerbated by the restrictive credit policies of commercial banks. One solution to their financial woes are public stock offerings, which have a good chance of succeeding in an

TW*h

Kopex

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improving equity market, as demonstrated by the recent IPO of Lublin-based hard-coal producer LW Bogdanka. Competitive pressure from Russian coal is felt most by the mines of Upper Silesia, with their over-inflated payroll costs and largely exhausted upper coal beds. As they move deeper underground to work lower seams, their costs will increase even further. The differences between the prices of domestic and imported coal can be huge depending on exchange rate movements. Another way of raising investment capital, pioneered by Katowicki Holding Węglowy, are debt issues offered to mining machinery manufacturers and energy producers, redeemed in kind, with coal supplies. This solution benefits all stakeholders: the mines get the money they need to ensure more efficient coal extraction, and the manufacturers, for example Kopex or Famur, get coal which they can re-sell to commercial power plants.

International Markets

Coal prices are the main determinant of the scale of capital investment in the mining industry, and they have been trending downwards recently. In the long term, demand for fuels, coal, and electrical power is bound to increase on the back of economic momentum and population growth. The largest markets for energy are emerging economies such as China and India, which use coal as the main energy source. ARA coal prices (USD / 1000kg)

Source: BRE Bank Securities The industry responsible for a major portion of global coal demand are electric power producers. In 2006, the share of coal in the global power output stood at 41%, and we expect this ratio to remain around the same level in the future. Global electric power production by source (2006)

Nuclear Power 15%

Water 16%

Other 2%

Coal 41%

Petroleum 6%Natural Gas

20%

Source: BRE Bank Securities The world’s leading coal producers are China (2,761MMT), USA (1,007MMT), and India (490MMT). China and India are expected to accelerate coal production in coming years. In 2009, due to increased demand for coking coal and steam coal, China imports surged 90% to 40MMT, and imports to India increased 18% to 40MMT. With capacity usage ratios at 90% for Chinese mines and 65% for manufacturing companies, coal demand will no doubt continue to

50

100

150

200

250

Jan

08

Mar

08

May

08

Jul 0

8

Sep

08

Nov

08

Jan

09

Mar

09

May

09

Jul 0

9

Sep

09

Nov

09

Jan

10

Kopex

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expand in coming years, rising to an estimated 3.5 billion tons by 2030 from 1.7 billion tons in 2007. Demand from India will be fueled by regulatory changes aimed at attracting international investors. In the United States, coal production, and hence also mine capacity upgrades, may decrease because of the economic crisis, and due to the US government’s increasing support for renewable energy. For now, however, the US is expected to increase demand by 60-70MMT of coal a year. Coal-mine capacity upgrades are also expected in such countries as Indonesia, Australia, South Africa, and Russia. Leading coal producers in 2008 (MMT)

China

USA

India Australia Russia IndonesiaSouth Af rica

KazakhstanPoland

Colombia

0

500

1000

1500

2000

2500

3000

Source: BRE Bank Securities

With the deteriorating economic situation in the world and the decline in coal and crude oil prices, suppliers of mining equipment saw the number of orders shrink, especially in the case of orders from buyers planning to expand the capacity of their mines. The US was one place where the number of orders declined quite considerably, while the situation was better in Australia, China and Indonesia. In those countries, however, getting the required financing can still be a challenge, especially in the case of new projects. The situation looked the worst in the countries of the former USSR, where coal mines encountered liquidity problems. In these circumstances, competition tightened and mining machinery manufacturers were forced to cut their expenses. In the second half of 2009, a certain revival was seen in the market. At present, looking at the earnings of most foreign manufacturers, one could conclude that the situation is not as bad as was feared in early 2009. In the first three quarters of the year, Bucyrus and Joy Global increased their revenues by 12.4% and 10.3%, respectively. Coupled with cost-cutting efforts, the companies were able to improve their operating margins by 2.9pp and 4.6pp, respectively, and to record a considerable y/y increase in net profit. The situation in the market remains difficult, though. Approximately 6-9% of orders get cancelled, and companies have orders for the next 6-8 months rather than 12 months and more, which used to be the case and which is unlikely to happen again until late 2010. 2009 Q1-Q3 earnings results of Bucyrus and Joy Glob al

Bucyrus Joy Global (USD m) 1-3Q2009 Y/Y change 1-3Q2009 Y/Y change

Revenues 2006 12.40% 2635 10.3%

EBIT 359.7 33% 518 44.30%

EBIT margin 17.80% 2.9ppt 19.60% 4.6ppt

EBITDA 400.3 28% 559.4 35%

EBITDA margin 20% 2.5ppt 21.20% 3.9ppt

Net income 231.2 37.50% 330.6 29% Source: Kopex

This tough market is even tougher for such manufacturers as Kopex and Famur, whose brands are not yet widely recognizable globally. Despite their sincere desire to succeed abroad, we believe these companies may find it quite difficult in the current circumstances. After expanding its capacity through a number of acquisitions, Kopex gained the ability to compete for complex mining projects, like the PLN 108.5m mine order awarded in Q3 2009 by Jastrzębska Spółka Węglowa, where the company was the only bidder. Further, contracts won from customers in China and Australia have boosted Kopex’s image as a viable alternative to such players as Joy Global Inc. or Bucyrus Inc., offering value for money and speedy delivery. Kopex further strengthened its reliability as business partner by adding turnkey mine projects to its service mix.

Kopex

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The Market for Mining Machinery and Equipment Suppliers of mining machinery and equipment need to be able to offer customized solutions and expertise across different mining conditions, as well as tailor-made financing options (whether cash payments or leases) and aftermarket maintenance. But, since the suppliers typically employ similar technologies and performance features, their only competitive weapon are low prices and added-value services. In Poland, the market for mining machines is fiercely competitive, with a limited group of potential buyers demanding prices that are often unrealistically low. Last year, for example, several tenders announced by local mines attracted zero bids because they offered zero profits. Kopex’s main domestic rival, most notably in longwall shearers and powered roof supports, is Famur. Kopex offers high-performance shearer-loaders with standard cutting capacity of up to 1000KW to its Polish customers, and more powerful machines to international customers who have the infrastructure necessary to use them, and who mine more challenging deposits. Famur’s offer includes electric longwall shearers and several hydraulic-powered models with 600KW maximum capacity which, however, are rarely used nowadays. In addition to longwall shearers, Kopex and Famur are in intense rivalry over mechanical roof support orders. The solutions offered by Kopex are characterized by advanced control systems and patented safety mechanisms facilitating extended operation. In turn, Famur employs a technology that reduces the weight of the roof supports through the use of less steel. And since steel accounts for as much as 70% of the total cost of a support unit, the company is able to offer lower prices – a factor which is particularly important to Polish customers. In other parts of the world, the importance of prices as a criterion for vendor selection is high in Mexico, and lower in Australia and China where customers tend to pay more attention to quality. The average useful life of a longwall shearer is 8 to 10 years. During that time, the machine should undergo at least two major overhauls including replacement of components most prone to wear. An average mechanical roof-support system has a life of 10 years, after which it has to be replaced.

Earnings Results In First Three Quarters of 2009

After successful six months, Kopex’s financial performance declined in the third quarter of 2009 because a continuing inflow of orders from mines was offset by a shortage of orders for other products and services. 2009 third-quarter sales amounted to PLN 603.1m after a 19.6% increase versus Q3 2008. Domestic sales were up 16.0%, and international sales grew 25.7%. At home, sales were fueled by the acquisition of a PLN 227.9m contract for delivery and modernization of mining equipment with Kompania Węglowa, contracts for machine leases and maintenance from Katowicki Holding Węglowy (PLN 30.8m) and Jastrzębska Spółka Węglowa (PLN 40.2m), and a PLN 142.5m order from copper producer KGHM. Export revenues expanded thanks to a PLN 248m roof-support order from China’s Shenhua Ningxia Coal Industry Group, and a 26.4% increase in global energy prices. Due to a recent slowdown in the international business, Kopex has intensified customer acquisition efforts in Poland. Sales revenues by business segment (PLN m) 2008 1-3Q08 1-3Q09 Change 3Q08 3Q09 Change

Mining services 189.7 104.6 151.3 44.6% 39.6 53.9 36.1%

Underground mining machinery

603.5 391.4 633.8 61.9% 131.7 250.6 90.3%

Opencast mining machinery 84.9 58.9 41.6 -29.4% 20.9 13.3 -36.5%

Manufacturing machinery 50.3 41.1 30.6 -25.7% 15.1 15.5 2.8%

Electrical and electronic machinery

245.8 172.5 180.8 4.8% 89.2 59.1 -33.7%

Electricity sales 523.6 365.9 530.4 45.0% 139.3 166.9 19.8%

Coal sales 59.9 39.6 24.8 -37.5% 19.0 3.1 -83.7%

Castings 26.2 21.5 10.7 -50.1% 6.8 3.3 -50.8%

Other 198.8 124.2 109.2 -12.1% 42.6 37.3 -12.3%

Total 1 982.6 1 319.9 1 713.1 29.8% 504.2 603.1 19.6%

Source: BRE Bank Securities

Kopex

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The strongest year-on-year growth in Q309 revenues was recorded by the segment of underground mining machines (90.3%), mining services (36.1%), and energy trading (a 19.8% increase owed to a 26.4% y/y surge in wholesale electricity prices, a 21.2% depreciation in the value of the zloty, and a 18.2% spread between Polish and international wholesale electricity prices). The weakest performance was displayed by the segments of coal sales (-83.7 y/y), castings (-50.8%), and opencast mining machinery (-36.5%). The drop in coal sales was caused by a decline in orders from customers in Austria, Spain, Germany, Norway, and Slovakia, as well as a 54.2% plunge in global coal prices in the period. A slowdown in orders was also the reason behind the revenue contraction in the segments of castings and opencast mining machines, as well as the segments of electric and electronic equipment (which saw a 33.7% drop in revenues) and manufacturing machinery (as manufacturers put major purchases on hold because of the economic crisis). Kopex reported a consolidated EBIT of 39.9m for Q3 2009, representing a 2.7% increase from the same period a year earlier. The EBIT margin was down from 7.7% to 6.6%, mainly because of weaker sales of castings, electric and electronic equipment, and manufacturing machinery. Energy trading improved revenues in the period, but its margins remain lower than in other segments (2.9% YTD in Q309). P&L snapshot (PLN m) 2008 1-3Q2008 1-3Q2009 Change 3Q08 3Q09 Change Revenues 1 982.6 1 319.9 1 713.1 29.8% 504.2 603.1 19.6% Domestic sales 1 338.7 888.9 937.1 5.4% 317.0 367.7 16.0% Exports 643.9 431.0 776.0 80.0% 187.2 235.4 25.7% EBIT 174.9 107.0 143.0 33.6% 38.9 39.9 2.7% EBIT margin 8.8% 8.1% 8.3% 7.7% 6.6% EBITDA 236.0 151.9 196.1 29.1% 55.0 57.6 4.7% EBITDA margin 11.9% 11.5% 11.4% 10.9% 9.6% Net income 90.3 65.1 72.5 11.4% 21.3 20.8 -1.9%

Source: BRE Bank Securities The Q3 2009 EBITDA came in at PLN 57.6m after rising 4.7% year on year, but the EBITDA margin was down to 9.6%. The net profit for the quarter was 1.9% lower than a year earlier at PLN 20.8m. Kopex generated F/X losses in the period totaling PLN 12.1m. Cash Flows Negative cash flows of PLN 48.3m generated during the first nine months of 2009 depressed the cash position to PLN 113.3m. Operating Cash Flows Nine-month cash flows from operations were negative at PLN 60.6m. Inventories contracted 6.2%, short-term trade creditors decreased 37.8%, and short-term debtors increased 42.8%. All in all, working capital increased 8.9% in the first nine months of 2009, with sales up 29.8%. CAPEX Kopex spent PLN 123.3m on financial assets and plant and equipment in the first three quarters of 2009. The capital investments included machinery (PLN 70.3m), company acquisitions (PLN 31.5m), real estate (PLN 10.7m), intangible assets (PLN 6.0m), and new products and initiatives (PLN 4.7m). The overall cash flows from investing activities were a negative PLN 114.5m. Kopex’s original FY2009 CAPEX budget was PLN 220m, but the actual expenditure was probably lower in anticipation of the Remag acquisition. Debt Kopex’s net debt increased by PLN 135.0m, or 29.3%, during the first three quarters of 2009. Long-term debt expanded by 45.3%, and short-term debt rose 22.6%. The YTD cash flows from financing activities amounted to 126.8m at 30 September 2009.

Stock Offering

In November 2009, Kopex issued 6,700,000 new shares at PLN 23.50 apiece, raising PLN 157.5m less PLN 2.9m costs. The new issue accounts for 9.91% of the company’s outstanding shares. The new shares carry dividend rights for the full financial period ended December 31st, 2009. After the November offering, there are 74.3 million shares outstanding at the moment. Kopex allocated the SPO gains toward acquisitions in Poland and abroad.

Kopex

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Investments Biogas Plants As part of its plans to branch out into power generation, Kopex is going to develop renewable energy projects in the next five years. Once an official energy exchange is put in place in Poland, the company faces the risk of losing much of its share in the energy trading market. To offset that loss, Kopex is going to build biogas plants, the first of which are scheduled for completion in the first half of 2010. The cost of one plant is estimated at PLN 22m. Each 1MW plant is expected to generate between PLN 1m and 2m in annual profits (including renewable-energy incentives). The total investment is expected to be recovered within six years. Wind Energy In late 2009, Kopex announced that it was planning to build a wind farm near Łódź. The estimated costs of the 10 wind turbines with a capacity of 2MW each were not revealed. Kopex gathered experience in wind-farm development during three previous projects. Details of the project are yet to be determined.

Remag S.A. Kopex has long been interested in taking over government-controlled road-header manufacturer Remag, slated for privatization in 2010. The company has abandoned the original plan of making the acquisition jointly with rival Famur. Of the four suitors allowed to negotiate the takeover, Famur and Kopex stand to realize the strongest potential synergies. Interestingly, Famur’s competition for the takeover includes its majority shareholder TDJ Investment. The fourth bidder, coal trader Węglokoks, probably wants to expand into the market of mining machinery in light of decreasing coal production. Remag’s value is estimated at PLN 200-220m. The addition of Remag to the Kopex family would considerably strengthen the company’s presence in the road-header market. Even though Kopex owns two road headers itself, the acquisition would strengthen its technology portfolio and customer base. In 2008, Remag generated sales of PLN 147m (a 15.2% surge from 2007) and a net profit of PLN 21m (after an impressive 93.3% y/y increase). Its share capital is PLN 62m. Remag's P&L snapshot (PLN m) 2006 2007 2008 1Q2009

Revenues 137.0 128.0 147.5 41.9

EBITDA 22.0 24.0 40.2 8.8

Net profit 8.0 11.0 21.3 6.7

Share capital 62.0

EBITDA margin 16.1% 18.8% 27.2% 21.0%

Net margin 5.8% 8.6% 14.4% 16.0% Source: BRE Bank Securities

Investment Costs At the beginning of 2009, Kopex announced a CAPEX budget of PLN 220m, including a PLN 30m M&A budget. By 30 September 2009, the company had spent PLN 31.5m on acquisitions and PLN 123.3m on other capital investments. Capital investments (PLN m) 2008 1-3Q09 3Q09 2009 Budget

Mergers and acquisitions 104.2 31.5 1.2 30.0

Total 353.1 123.3 29.1 220.0 Source: BRE Bank Securities In the fourth quarter of 2009, Kopex acquired Waratah Engineering, Australian manufacturer of continuous miners, for an estimated PLN 18m (acquisition price + credit). Continuous mining technology is not used in Poland, but it is widely applied across the rest of the world. The acquisition is aimed at strengthening Kopex’s presence in Australia. In addition to Remag, Kopex has targeted three other Polish companies for acquisition, for which it has earmarked a budget of PLN 150m. The company’s 2009-2010 CAPEX budget without acquisitions is PLN 170m. Kopex’s extensive M&A activity in past years caused its net debt to expand from PLN 67.6m in 2007 to PLN 414m at 30 June 2009. A large debt, combined with tight access to bank

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financing, may reduce the company’s chances for obtaining investment loans in the near future. Preliminary arrangements for the Remag takeover are already in place (a PLN 140m five-year loan), but other investment plans will have to be scaled back in the months ahead, with focus shifted toward streamlining of the existing operations. In Q3 2009, the ratio of loan interest to EBITDA amounted to 0.15. Moreover, Kopex’s long-term debt has increased considerably over the past year, surging to PLN 198.7m from PLN 6.6m at 30 September 2008.

Financial Forecasts

We expect Kopex to report a 21.0% year-on-year increase in overall revenues in 2009. Sales of mining services will be 25% higher than a year earlier, fueled mainly by ongoing contracts. Kopex won a PLN 180.5m mine-shaft construction contract in July 2009, but, since a building permit for the project was only issued last December, the company will probably book only a small portion of the fee in the 2009 accounts. Revenues from sales of underground mining machinery are expected to show a strong 45% increase versus 2008, achieved thanks orders from Shenhua Ningxia Coal Industry Group (PLN 190m) Kompania Węglowa (PLN 22.8m), Katowicki Holding Węglowy (PLN 5.6m), and Jastrzębska Spółka Węglowa (PLN 19.3m). Sales of opencast mining machines were on a downward curve in 2009, displaying a drop by an estimated 35%. Kopex is forced to look abroad for buyers for its surface mining equipment in light of an order slump at home; some major purchases are planned by Poland’s leading opencast mine operator PGE, but they will not begin until 2015. Kopex is also expected to report a contraction in sales of manufacturing machinery (-25% y/y) and electric and electronic equipment (-8.5%), caused by a spending hiatus in a slumping manufacturing industry. A seasonal peak in power demand in Q4 2009, paired with increased electricity prices, are expected to drive Kopex’s 2009 revenues from energy trading by 45% relative to the year before. The segment’s margins will also be high on sales of power purchased back in 2008. Revenues from coal sales saw a 37% year-on-year drop in Q4 2009 due to a global slippage in prices. Polish coal is under competitive pressure from cheaper energy available from Russia and ARA ports. Sales of castings are expected to have shrunk 50% in 2009. Kopex’s consolidated 2009 revenues will approximate PLN 2,399.0m after a 21% increase from 2008.

Revenue composition (PLN m) Revenues 2008 1-3Q2009 9M 2008 / 2009 2009F 2008 / 2009F

Mining services 189.7 151.3 44.6% 237.1 25.0%

Underground mining machinery 603.5 633.8 61.9% 875.0 45.0%

Opencast mining machinery 84.9 41.6 -29.4% 55.2 -35.0%

Manufacturing machinery 50.3 30.6 -25.7% 37.7 -25.0%

Electric and electronic machinery 245.8 180.8 4.8% 224.9 -8.5%

Energy sales 523.6 530.4 45.0% 759.2 45.0%

Coal sales 59.9 24.8 -37.5% 37.7 -37.0%

Castings 26.2 10.7 -50.1% 13.1 -50.0%

Other 198.8 109.2 -12.1% 159.0 -20.0%

Total 1 982.6 1 713.1 29.8% 2 399.0 21.0% Source: BRE Bank Securities

We expect Kopex’s 2009 operating profit to reach PLN 188.5m, with the operating margin hovering around 7.9%, and we estimate that net profit will come in at PLN 101.6m.

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Order Backlog Kopex’s backlog of orders for mining services is currently worth PLN 400m, and the portfolio of orders for underground mining machines is PLN 1 600m. The following is an overview of major contracts captured by the company. Major contracts for mining services

Mining Services

Customer Contract Value (PLN m) Timeline

KGHM underground works 86 2009-2011

Jastrzębska Spółka Węglowa (Bzie Dębina) shaft deepening 108.5 2009-2012

ZGH Bolesław underground works 14.5 2009

Katowicki Holding Węglowy (KWK Wesoła) shaft modernization 75 2010-2014

Other 72

Total 356 Source: Kopex S.A. Major contracts for underground mining machines

Underground Mining Machines

Customer Contract Value (PLN m) Timeline

YCRT, Argentina complete longwall system 95 2010 Shenhua Ningxia Coal Group, China

roof supports 190 2009-1Q2010

Novosibirsk Oblast, Russia longwall shearers, repairs, parts 5 2010

Various Polish mines 96 2009-2010

Total 386 Source: Kopex. Contract Opportunities Kopex is competing for several lucrative contracts, and has a very good chance of capturing two orders from Italy and Turkey worth PLN 48.7m and PLN 17.6m respectively, both for continuation of earlier jobs performed by the company. Kopex is still waiting to start construction of an open-pit mine (Indominco) in Indonesia pending finalization of financing by the customer. The company has been on standby for a long time now, and faces risks with respect to currency hedging arrangements it has already entered into to secure the future cash flows from the contract. If the contract is canceled for any reason, Kopex will be forced to liquidate the hedges, incurring a loss of about PLN 14m. Another problematic assignment is a PLN 208m zinc-mine contract from Canada. One of Kopex’s consortium partners has backed out, and the company is forced to look for new co-builders in Canada, subject to approval by the customer. In Poland, Kopex is bidding for three contracts totaling PLN 343m, one of which is scheduled to be awarded in Q1 2010.

Potential orders for mining services Mining Services

Customer / Location Contract Value

(PLN m) Timeline Status

Sardinia, Italy shaft and crosscut works 48.7 2010-2012 contract continuation, good chance of win

CBI, Turkey rehabilitation of three shafts 17.6 2010-2011 contract continuation, good chance of win

Indominco, Indonesia continuation of ongoing engagement

56 2010 signed, pending finalization of financing

Canada deepening of two shafts (1100m) 208 2010-2013 awarded, pending replacement of one of consortium members

Poland (3 tenders) shaft deepening and modernization 343 2010-2015 a PLN 60m award scheduled for Q1 2010, two

other expected in H1 2010 Other 100

Total 773.4 Source: Kopex

As far as orders for mining machines, are concerned, Kopex is negotiating a PLN 11.8m delivery with a Russian prospect. Before the financial crisis, sales to Russia were responsible for PLN 200m of annual revenues, and the company is working on rebuilding its position there. Moreover, Kopex is competing to deliver mechanical roof supports and hydraulic pumps to a customer in Mexico. The contract will be hard to get given that it will be awarded to the lowest bidder, and Kopex’s solutions are not among the cheapest. But the company believes that it can offer a low price by outsourcing some of the work to a subsidiary in China. The award is expected to be made in the first half of 2010. Another potential roof-support customer is in

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Austria, and the prospective contract is worth PLN 159.6m. Further, Kopex is competing to supply conveyors to a mine in Macedonia. The buyer divided the PLN 218.4m order into three parts, and the first part was reportedly awarded to someone else, but the remaining two parts, worth EUR 30m each, are still up for grabs. Kopex is also preparing to compete for contracts in Kosovo (a potential order for conveyors and drive assemblies), and Vietnam (a complete production plant). As mentioned above, the company is waiting for two of its customers in Indonesia and Argentina to secure financing for two projects worth PLN 350m and PLN 95.2m respectively. Last but not least, Kopex is negotiating a PLN 357m order for two longwall systems with a prospect in South Africa. This is a bold move on the company’s part, as the order includes delivery of mechanical roof supports with a never-before seen height of 6 meters. Kopex is confident that it can meet the challenge.

Potential orders for mining machines Mining Machines

Customer / Location Contract Value (PLN m) Timeline Status

Novosibirsk Oblast, Russia longwall shearer 11.8 2010 negotiations in progress

Mexico roof support + hydraulic pumps 52.1 2010 award scheduled for H1 2010, competition is

strong

Longgu, China DURACHROM-coated props

4.2 2010 negotiations in progress

Westcliff and Gujarat, Australia

roof support 159.6 2010 award scheduled for H1 2010

Brod Gneotino, Macedonia conveyors EUR 30m 2010-2011 a tender has been announced

Kosovo conveyors + drive assemblies

88.2 2011 tender preparations in progress

Vietnam a complete processing plant 252 2010-2012 tender preparations, search for financing entity,

in progress

Indominco, Indonesia longwall system 350 2011-2014 continuation of ongoing work - good chance of win, customer is arranging for financing

YCRT, Argentina longwall system 95.2 2012 continuation of ongoing work – good chance of win – financing arrangements pending

Heidelberg, South Africa two longwall systems 357 2011-2014 direct negotiations Total 1493.0

Source: Kopex Summing up, considering that many of the tenders in which Kopex is competing are in very early stages, that many of the projects do not have financing in place yet, and that Kopex is a newcomer to many of the international markets and that it is not always able to demonstrate a relevant track record to prospective customers, investors should not expect a flurry of award news in the near future. Moreover, to gain a foothold in the new markets, the company will have to offer price incentives to potential partners that are going to reflect on its future margins.

Claims Famur, Kopex’s consortium partner in the $85m Shenhua Ningxia contract, issued a statement in November 2009 claiming liquidated damages in the amount of $12.75m (PLN 36.6m) for default under the consortium agreement. Moreover, Kopex’s other partner and Famur’s subsidiary Fazos, which was supposed to deliver the components of the roof supports ordered by the Chinese customer, filed a claim for compensation for PLN 51.9m currency hedging losses incurred in connection with the contract, and for PLN 22.2m in lost profits. Kopex refused to pay, and was later sued by the two companies. If the court rules against Kopex, the resulting compensation payments will significantly affect the company’s profits. A ruling is not expected in 2010.

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Valuation Based on DCF analysis and relative valuation, we set the nine-month price target on Kopex at PLN 21.66 per share.

(PLN) Weight Price Relative Valuation (PLN) 50% 20.00

DCF Analysis (PLN) 50% 20.01 price 20.00

9M target price 21.66 We compared Kopex with the world’s leading producers of underground and opencast mining machinery. We attached a 20% discount to Kopex’s valuation to account for the premium that the peer companies carry as rewards for their established positions and recognition among customers.

Relative Valuation

2008 P/E

2009E P/E

2010E P/E

2011E P/E

2008 EV/EBITDA

2009E EV/EBITDA

2010E EV/EBITDA

2011E EV/EBITDA

ATLAS COPCO AB-A SHS 13.4 19.5 16.9 14.1 8.4 11.7 10.4 9.0

JOY GLOBAL INC 14.2 11.3 16.0 13.1 7.9 6.6 8.7 7.4

EMECO HOLDINGS LTD 6.1 7.4 8.9 6.4 3.3 3.4 3.8 3.2

INDUSTREA LTD 7.9 7.9 6.9 6.1 7.0 5.7 5.1 4.6

BUCYRUS INTERNATIONAL INC 17.4 13.9 16.2 13.5 10.1 8.4 9.0 7.3

SANDVIK AB 12.2 - 24.8 14.6 7.8 33.9 11.2 8.5

FAMUR SA 8.6 16.0 16.2 13.4 2.9 7.7 8.3 6.8

Maximum 17.4 19.5 24.8 14.6 10.1 33.9 11.2 9.0

Minimum 6.1 7.4 6.9 6.1 2.9 3.4 3.8 3.2

Median 12.2 12.6 16.2 13.4 7.8 7.7 8.7 7.3

Kopex 7.7 17.5 15.3 13.8 4.2 8.1 7.5 6.9

Premium (discount) -36.0% -28.0% 5.9% -3.3% -10.5% -5.3% 17.5% 5.0%

Implied price

Median 12.2 12.6 16.2 13.4 7,8 7,7 8,7 7,3

Discount 20% 20% 20% 20% 20% 20%

Multiple weight 50.0% 50.0%

Year weight 33.3% 33.3% 33.3% 33.3% 33.3% 33.3%

Value per share 20.00 Source: BRE Bank Securities, Bloomberg

A comparison of forecasted P/E and EV/EBITDA multiples showed that Kopex is valued higher than its peers on FY2009 and FY2011 P/E ratios, but lower on FY2009 EV/EBITDA. The peer group is composed of Atlas Coco AB, supplier of mining structures and tools, Bucyrus INC., delivering comprehensive mining solutions, EMECO Holdings LTD, provider of opencast mining equipment, Famur, Kopex’s main rival in the home market, Industrea LTD, marketing mining machinery in China and Australia, which also operates in paper production and supply of automated manufacturing solutions, Joy Globay Inc, offering services and solutions to both underground and surface mines, and Sandvik AB, delivering solutions to metal manufacturers and the mining industry.

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DCF Analysis DCF Model Assumptions - Risk-free rate = 6.17% (10Y T-bond yield). - Expected FCF rate growth after FY2018 = 2.5%. - Beta = 1.0. - We assume that Kopex will not be paying dividends throughout the forecast years. - The valuation is based on net debt as at year-end 2009. - Future cash flows are discounted as of 31 January 2010. - We did not factor in the potential wind-farm projects, or the acquisition of Remag, in the valuation. - The valuation also does not include the PLN 110.8m compensation claims of Famur. - We predict that Kopex will generate higher gross margins on mining services, and lower margins on mining machinery and energy sales, in 2010. The gross margin on casting sales is expected to be in the positive territory.

Gross margin forecasts by business segment 1-3Q2009 3Q2009 4Q2009F 2009F 2010F 2011F 2012F 2013F 2014F

Mining services 13.6% 18.2% 20.2% 16.0% 22.0% 21.0% 21.5% 22.0% 22.0%

Underground mining machinery 25.1% 18.3% 19.2% 23.5% 21.0% 21.0% 21.5% 21.5% 21.5%

Opencast mining machinery 21.6% 34.2% 35.3% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0%

Manufacturing machinery 8.6% 6.4% 0.1% 7.0% 8.0% 15.0% 15.0% 15.0% 15.0%

Electric and electronic machinery 34.8% 36.9% 36.0% 35.0% 36.0% 36.0% 36.0% 36.0% 36.0%

Energy sales 4.2% 2.7% 2.5% 3.7% 2.0% 2.0% 2.0% 2.0% 2.0%

Coal sales 8.5% 4.6% 4.2% 7.0% 5.0% 7.0% 8.0% 8.0% 8.0%

Castings 2.6% -12.7% -0.5% 2.0% 6.0% 10.0% 15.5% 15.5% 15.5%

Other 15.5% 20.0% 18.6% 16.5% 16.5% 16.5% 16.5% 16.5% 16.5%

Total 17.3% 15.7% 14.6% 16.5% 16.6% 16.4% 16.6% 16.3% 16.3% Source: BRE Bank Securities

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DCF Valuation Model

(PLN m) 2010F 2011F 2012F 2013F 2014F 2015F 2016F 2017F 2018F 2019F +

Revenues 2 586.7 2 737.8 2 800.3 2 946.8 3 039.1 3 109.1 3 181.5 3 284.2 3 399.6 3 484.0 3 570.5

Change 7.8% 5.8% 2.3% 5.2% 3.1% 2.3% 2.3% 3.2% 3.5% 2.5% 2.5%

EBITDA 283.8 297.6 326.0 334.6 345.3 357.7 370.5 382.1 393.5 407.2 421.3

EBITDA margin 11.0% 10.9% 11.6% 11.4% 11.4% 11.5% 11.6% 11.6% 11.6% 11.7% 11.8%

Amortization & depreciation 86.5 87.4 91.2 91.7 92.1 92.6 93.1 93.6 94.2 94.7 95.2

EBIT 197.3 210.2 234.9 243.0 253.1 265.1 277.4 288.4 299.4 312.5 326.1

EBIT margin 7.6% 7.7% 8.4% 8.2% 8.3% 8.5% 8.7% 8.8% 8.8% 9.0% 9.1%

EBITDA 37.5 39.9 44.6 46.2 48.1 50.4 52.7 54.8 56.9 59.4 62.0

NOPLAT 159.8 170.3 190.2 196.8 205.0 214.7 224.7 233.6 242.5 253.1 264.1

CAPEX -127.0 -97.2 -101.1 -101.7 -102.4 -103.0 -103.7 -104.3 -105.0 -105.7 -106.4

Working capital -43.9 -42.3 -11.9 -42.5 -24.1 -16.5 -17.0 -26.5 -30.2 -19.9 -20.3

Other 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 1.0 5.0 0.5

FCF 75.5 118.2 168.4 144.2 170.7 187.8 197.1 196.4 202.4 227.2 233.2

WACC 10.6% 10.8% 11.0% 11.2% 11.2% 11.2% 11.2% 11.2% 11.2% 11.2% 11.2%

Discount factor 0.91 0.82 0.74 0.66 0.59 0.53 0.48 0.43 0.39 0.35 0.31

PV FCF 68.8 97.2 124.1 95.3 101.4 100.4 94.8 84.9 78.7 79.5 73.4

WACC

Cost of debt 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00%

Risk-free rate 6.17% 6.17% 6.17% 6.17% 6.17% 6.17% 6.17% 6.17% 6.17% 6.17% 6.17%

Risk premium 1.83% 1.83% 1.83% 1.83% 1.83% 1.83% 1.83% 1.83% 1.83% 1.83% 1.83%

Effective tax rate 19% 19% 19% 19% 19% 19% 19% 19% 19% 19% 19%

Net debt / EV 12.0% 8.8% 2.7% 0 0 0 0 0 0 0 0

Cost of Equity 11.2% 11.2% 11.2% 11.2% 11.2% 11.2% 11.2% 11.2% 11.2% 11.2% 11.2%

Risk premium 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%

Beta 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00

FCF growth after the forecast horizon 2.5% Sensitivity Analysis

Terminal value 2 689.2 FCF growth in perpetuity

Present value of the terminal value (PV TV) 941.0 0.0% 1.5% 2.5% 3.0% 5.0%

Present value of FCF in the forecast horizon 925.1 WACC +1.0ppt 16.27 17.53 18.58 18.31 21.92

Enterprise value (EV) 1 866.0 WACC +0.5ppt 17.38 18.82 20.03 19.87 24.15

Net debt 315.7 WACC 18.59 20.24 21.66 21.62 26.73

Other non-operating assets 0.0 WACC -0.5ppt 19.93 21.83 23.49 23.61 29.78

Minority interests 63.2 WACC 1.0ppt 21.40 23.61 25.56 25.88 33.41

Goodwill 1 487.2

Number of shares (millions) 74.3

Enterprise value per share (PLN) 20.01

Cost of equity (9M) 8.3%

Target Price 21.66

EV/EBITDA for the target price 6.8

P/E (FY10) for the target price 13.1

TV to EV 50.4%

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Income Statement (PLN m) 2007 2008 2009F 2010F 2011F 2012F 2013F 2014F

Revenues 1 290.2 1 982.6 2 399.0 2 586.7 2 737.8 2 800.3 2 946.8 3 039.1

Change 54.8% 53.7% 21.0% 7.8% 5.8% 2.3% 5.2% 3.1%

Mining services 189.7 104.6 151.3 237.1 320.1 336.1 346.2 356.6

Underground mining machinery 603.5 391.4 633.8 875.0 1 023.8 1 064.7 1 096.7 1 129.6

Opencast mining machinery 84.9 58.9 41.6 55.2 55.4 56.0 56.6 57.1

Manufacturing machinery 50.3 41.1 30.6 37.7 33.9 35.6 36.7 37.8

Electric and electronic machinery 245.8 172.5 180.8 224.9 207.0 217.3 223.8 230.5

Electricity sales 523.6 365.9 530.4 759.2 739.7 816.3 824.7 915.4

Coal sales 59.9 39.6 24.8 37.7 38.5 40.4 41.6 42.9

Castings 26.2 21.5 10.7 13.1 13.3 13.9 14.3 14.8

COGS 1 076.9 1 634.9 2 003.0 2 167.1 2 299.5 2 341.5 2 471.8 2 550.3

SG&A expenses 94.8 152.9 168.2 182.2 185.6 180.5 186.4 188.5

Selling expenses 44.1 30.5 37.2 40.1 42.5 43.4 45.7 47.1

Other net operating income/loss 31.3 10.6 -2.0 0.0 0.0 0.0 0.0 0.0

EBIT 105.7 174.9 188.5 197.3 210.2 234.9 243.0 253.1

Change 20.7% 65.4% 7.8% 4.6% 6.6% 11.7% 3.4% 4.2%

EBIT margin 8.2% 8.8% 7.9% 7.6% 7.7% 8.4% 8.2% 8.3%

Profit on financing activity 528.8 -40.1 -47.2 -35.1 -32.3 -28.1 -23.2 -18.1

Extraordinary gains/losses 0.0 0.0 -6.0 0.0 0.0 0.0 0.0 0.0

Other 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Pre-tax income 634.5 134.9 135.3 162.1 177.9 206.7 219.7 235.0

Tax 118.5 30.4 25.7 30.8 33.8 39.3 41.7 44.7

Minority interests -16.1 -14.3 -8.0 -8.0 -8.0 -8.0 -8.0 -8.0

Net income 500.7 90.3 101.6 123.3 136.1 159.5 170.0 182.4

change 679.0% -82.0% 12.6% 21.4% 10.3% 17.2% 6.6% 7.3%

Net margin 38.8% 4.6% 4.2% 4.8% 5.0% 5.7% 5.8% 6.0%

Amortization and depreciation 42.3 61.1 83.5 86.5 87.4 91.2 91.7 92.1

EBITDA 148.0 236.0 272.0 283.8 297.6 326.0 334.6 345.3

change 17.0% 59.5% 15.3% 4.3% 4.9% 9.6% 2.6% 3.2%

EBITDA margin 11.5% 11.9% 11.3% 11.0% 10.9% 11.6% 11.4% 11.4%

Shares at year-end (millions) 67.6 67.6 74.3 74.3 74.3 74.3 74.3 74.3

EPS 7.4 1.3 1.4 1.7 1.8 2.1 2.3 2.5

CEPS 8.0 2.2 2.5 2.8 3.0 3.4 3.5 3.7

ROAE 25.3% 4.4% 4.4% 5.1% 5.4% 6.0% 6.0% 6.0%

ROAA 19.2% 2.8% 2.9% 3.4% 3.6% 4.0% 4.1% 4.2%

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Balance Sheet (PLN m) 2007 2008 2009F 2010F 2011F 2012F 2013F 2014F

ASSETS 2 601.9 3 232.9 3 482.4 3 631.8 3 787.3 3 950.1 4 138.6 4 329.7

Fixed assets 1 620.2 1 854.0 1 892.4 1 932.8 1 942.6 1 952.5 1 962.6 1 972.8

Intangible assets 1 146.8 1 213.9 42.5 42.9 43.4 43.8 44.2 44.7

Property, plant and equipment 415.9 562.9 582.9 622.9 632.3 641.7 651.4 661.1

Goodwill 0.0 0.0 1 195.0 1 195.0 1 195.0 1 195.0 1 195.0 1 195.0

Long-term receivables 3.7 1.5 12.0 12.0 12.0 12.0 12.0 12.0

Long-term investments 29.8 30.7 20.0 20.0 20.0 20.0 20.0 20.0

Long-term prepayments 24.1 45.0 40.0 40.0 40.0 40.0 40.0 40.0

Current assets 981.7 1 378.9 1 590.0 1 698.9 1 844.6 1 997.5 2 176.0 2 356.9

Inventories 332.2 514.3 470.0 497.4 523.9 533.3 558.5 573.2

Short-term receivables 441.8 499.1 570.0 603.2 632.4 640.5 670.8 688.5

Trade receivables 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Short-term investments 28.7 17.4 45.2 17.4 17.4 17.4 17.4 17.4

Cash 149.4 164.1 283.3 342.0 418.0 547.7 657.1 797.1

Short-term prepayments 29.6 183.9 221.5 238.9 252.8 258.6 272.1 280.7

(PLN m) 2007 2008 2009F 2010F 2011F 2012F 2013F 2014F

LIABILITIES 2 601.9 3 232.9 3 482.4 3 631.8 3 787.3 3 950.1 4 138.6 4 329.7

Equity 1 976.6 2 034.0 2 285.0 2 400.3 2 528.4 2 679.9 2 841.8 3 016.2

Share capital 67.6 67.6 74.3 74.3 74.3 74.3 74.3 74.3

Capital reserve 1 412.4 1 866.4 2 090.7 2 090.7 2 090.7 2 090.7 2 090.7 2 090.7

Undistributed profits -3.4 -10.6 24.1 147.5 283.5 443.0 613.0 795.4

Minority interests 73.8 63.2 60.3 60.3 60.3 60.3 60.3 60.3

Long-term liabilities 14.9 141.6 251.0 251.0 251.0 251.0 251.0 251.0

Debt 14.9 136.8 201.0 201.0 201.0 201.0 201.0 201.0

Short-term liabilities 451.6 855.4 808.0 840.1 865.9 876.6 901.6 917.4

Trade creditors 249.5 531.6 410.0 442.1 467.9 478.6 503.6 519.4

Debt 202.1 323.9 398.0 398.0 398.0 398.0 398.0 398.0

Provisions 79.4 89.3 53.1 53.1 53.1 53.1 53.1 53.1

Other 5.7 49.3 25.0 27.0 28.5 29.2 30.7 31.7

Debt 217.0 460.7 599.0 599.0 599.0 599.0 599.0 599.0

Net debt 67.6 296.5 315.7 257.0 181.0 51.3 -58.1 -198.1

(Net debt / Equity) 3.4% 14.6% 13.8% 10.7% 7.2% 1.9% -2.0% -6.6%

(Net debt / EBITDA) 0.5 1.3 1.2 0.9 0.6 0.2 -0.2 -0.6

BVPS 29.2 30.1 30.7 32.3 34.0 36.1 38.2 40.6

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BRE Bank Securities

Cash Flows (PLN m) 2007 2008 2009F 2010F 2011F 2012F 2013F 2014F

Cash flows from operating activities -266.0 52.8 -24.3 193.1 205.5 258.9 234.4 260.5

Net income 500.7 90.3 101.6 123.3 136.1 159.5 170.0 182.4

Amortization and depreciation 42.3 61.1 83.5 86.5 87.4 91.2 91.7 92.1

Working capital -435.3 -45.5 -170.4 -43.9 -42.3 -11.9 -42.5 -24.1

Other -373.8 -53.1 -39.0 27.1 24.3 20.1 15.2 10.1

Cash flows from investing activities 395.70 -260.98 -144.13 -99.25 -97.15 -101.10 -101.72 -102.36

CAPEX -113.29 -157.76 -127.12 -126.97 -97.15 -101.10 -101.72 -102.36

Equity investments 508.99 -103.23 -17.01 27.72 0.00 0.00 0.00 0.00

Cash flows from financing activities -15.2 219.1 287.6 -35.1 -32.3 -28.1 -23.2 -18.1

Debt 0.3 234.2 90.4 -47.9 -47.9 -47.9 -47.9 -47.9

Dividends/share buy-back 0.0 -0.4 154.5 0.0 0.0 0.0 0.0 0.0

Other -15.5 -14.7 42.7 12.8 15.6 19.8 24.7 29.8

Change in cash 114.5 10.8 119.1 58.8 76.0 129.6 109.4 140.0

Cash at end of period 149.4 164.1 283.3 342.0 418.0 547.7 657.1 797.1

DPS (PLN) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

FCF -420.6 -0.5 -63.5 75.5 118.2 168.4 144.2 170.7

(CAPEX / Sales) -8.8% -8.0% -5.3% -4.9% -3.5% -3.6% -3.5% -3.4%

Market multiples 2007 2008 2009F 2010F 2011F 2012F 2013F 2014F

P/E 3.4 19.0 18.5 15.3 13.8 11.8 11.1 10.3

P/CE 3.2 11.3 10.2 9.0 8.4 7.5 7.2 6.9

P/BV 0.9 0.8 0.8 0.8 0.7 0.7 0.7 0.6

P/S 1.3 0.9 0.8 0.7 0.7 0.7 0.6 0.6

FCF/EV -23.6% 0.0% -2.9% 3.5% 5.7% 8.7% 7.9% 10.1%

EV/EBITDA 12.0 8.5 8.1 7.5 6.9 5.9 5.5 4.9

EV/EBIT 16.9 11.5 11.7 10.9 9.8 8.2 7.5 6.7

EV/S 1.4 1.0 0.9 0.8 0.8 0.7 0.6 0.6

DYield 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Price (PLN) 25.35 25.35 25.35 25.35 25.35 25.35 25.35 25.35

Shares at year-end (millions) 67.6 67.6 74.3 74.3 74.3 74.3 74.3 74.3

MC (PLN m) 1 714.5 1 714.5 1 884.3 1 884.3 1 884.3 1 884.3 1 884.3 1 884.3

Minority interests (PLN m) 73.8 63.2 60.3 60.3 60.3 60.3 60.3 60.3

EV (PLN m) 1 782.1 2 011.0 2 200.1 2 141.3 2 065.3 1 935.7 1 826.2 1 686.2

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BRE Bank Securities

BRE Bank Securities

Michał Marczak tel. (+48 22) 697 47 38 Managing Director

Head of Research michal.marczak@dibre.com.pl Strategy, Telco, Mining, Metals, Media

Research Department: Marta JeŜewska tel. (+48 22) 697 47 37 Deputy Director marta.jezewska@dibre.com.pl Banks

Analysts: Kamil Kliszcz tel. (+48 22) 697 47 06 kamil.kliszcz@dibre.com.pl Fuels, Chemicals, Energy, Retail Piotr Grzybowski tel. (+48 22) 697 47 17 piotr.grzybowski@dibre.com.pl IT, Media

Maciej Stokłosa tel. (+48 22) 697 47 41 maciej.stoklosa@dibre.com.pl Construction, Real-Estate Developers Jakub Szkopek tel. (+48 22) 697 47 40 jakub.szkopek@dibre.com.pl Manufacturers

Sales and Trading :

Piotr Dudziński tel. (+48 22) 697 48 22 Director piotr.dudzinski@dibre.com.pl Marzena Łempicka-Wilim tel. (+48 22) 697 48 95 Deputy Director marzena.lempicka@dibre.com.pl Traders: Emil Onyszczuk tel. (+48 22) 697 49 63 emil.onyszczuk@dibre.com.pl Grzegorz Stępien tel. (+48 22) 697 48 62 grzegorz.stepien@dibre.com.pl Tomasz Dudź tel. (+48 22) 697 49 68 tomasz.dudz@dibre.com.pl Michał Jakubowski tel. (+48 22) 697 47 44 michal.jakubowski@dibre.com.pl Tomasz Jakubiec tel. (+48 22) 697 47 31 tomasz.jakubiec@dibre.com.pl Grzegorz Strublewski tel. (+48 22) 697 48 76 grzegorz.strublewski@dibre.com.pl "Private Broker"

Jacek Szczepański tel. (+48 22) 697 48 26 Director jacek.szczepanski@dibre.com.pl Paweł Szczepanik tel. (+48 22) 697 49 47 Sales pawel.szczepanik@dibre.com.pl

Dom Inwestycyjny BRE Banku S.A. ul. Wspólna 47/49 00-950 Warszawa www.dibre.com.pl

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4 February 2010 21

BRE Bank Securities

BRE Bank Securities

BRE Bank Securities did not issue any ratings for K opex in the last nine months.

List of abbreviations and ratios contained in the report: EV – net debt + market value EBIT – Earnings Before Interest and Taxes EBITDA – EBIT + Depreciation and Amortisation P/CE – price to earnings with amortisation MC/S – market capitalisation to sales EBIT/EV – operating profit to economic value P/E – (Price/Earnings) – price divided by annual net profit per share ROE – (Return on Equity) – annual net profit divided by average equity P/BV – (Price/Book Value) – price divided by book value per share Net debt – credits + debt papers + interest bearing loans – cash and cash equivalents EBITDA margin – EBITDA/Sales Recommendations of BRE Bank Securities A recommendation is valid for a period of 6-9 months, unless a subsequent recommendation is issued within this period. Expected returns from individual recommendations are as follows: BUY – we expect that the rate of return from an investment will be at least 15% ACCUMULATE – we expect that the rate of return from an investment will range from 5% to 15% HOLD – we expect that the rate of return from an investment will range from –5% to +5% REDUCE – we expect that the rate of return from an investment will range from -5% to -15% SELL – we expect that an investment will bear a loss greater than 15% Recommendations are updated at least once every nine months. This document has been created and published by BRE Bank Securities S.A. The present report expresses the knowledge as well as opinions of the authors on day the report was prepared. The opinions and estimates contained herein constitute our best judgement at this date and time, and are subject to change without notice. The present report was prepared with due care and attention, observing principles of methodological correctness and objectivity, on the basis of sources available to the public, which BRE Bank Securities S.A. considers reliable, including information published by issuers, shares of which are subject to recommendations. However, BRE Bank Securities S.A., in no case, guarantees the accuracy and completeness of the report, in particular should sources on the basis of which the report was prepared prove to be inaccurate, incomplete or not fully consistent with the facts. BRE Bank Securities S.A. bears no responsibility for investment decisions taken on the basis of the present report or for any damages incurred as a result of investment decisions taken on the basis of the present report. This document does not constitute an offer or invitation to subscribe for or purchase any financial instruments and neither this document nor anything contained herein shall form the basis of any contract or commitment whatsoever. It is being furnished to you solely for your information and may not be reproduced or redistributed to any other person. This document nor any copy hereof is not to be distributed directly or indirectly in the United States, Australia, Canada or Japan. Recommendations are based on essential data from the entire history of a company being the subject of a recommendation, with particular emphasis on the period since the previous recommendation. Investing in shares is connected with a number of risks including, but not limited to, the macroeconomic situation of the country, changes in legal regulations as well as changes on commodity markets. Full elimination of these risks is virtually impossible. It is possible that BRE Bank Securities S.A. renders, will render or in the past has rendered services for companies and other entities mentioned in the present report. The present report was not transferred to the issuer prior to its publication. BRE Bank Securities S.A., its shareholders and employees may hold long or short positions in the issuer's shares or other financial instruments related to the issuer's shares. BRE Bank Securities S.A., its affiliates and/or clients may conduct or may have conducted transactions for their own account or for account of another with respect to the financial instruments mentioned in this report or related investments before the recipient has received this report. Copying or publishing the present report, in full or in part, or disseminating in any way information contained in the present report requires the prior written agreement of BRE Bank Securities S.A. Recommendations are addressed to all Clients of BRE Bank Securities S.A. This report is not for distribution to third parties. The activity of BRE Bank Securities S.A. is subject to the supervision of the Polish Financial Supervision Commission. Individuals who did not participate in the preparation of this recommendation, but had or could have had access to the recommendation prior to its publication, are employees of BRE Bank Securities S.A. authorised to access the premises in which recommendations are prepared, other than the analysts mentioned as the authors of the present recommendation. Strong and weak points of valuation methods used in recommendations: DCF – acknowledged as the most methodologically correct method of valuation; it is based in discounting financial flows generated by a company; its weak point is the significant susceptibility to a change of forecast assumptions in the model. Comparative – based on a comparison of valuation multipliers of companies from a given sector; simple in construction, reflects the current state of the market; weak points include substantial variability (fluctuations together with market indices) as well as difficulty in the selection of the group of comparable companies.