Mechel has the strongest exposure to the mining sector among major Russian steelmakers. For many investors, the stock has become something of a proxy for the Russian coalmining sector, as the company’s coal assets account for an estimated 65% of its value. Mechel is developing Russia’s largest greenfield project, Elga, which is central to its investment case. The deposit has the potential to produce up to 15 mln tpy of coking concentrate, although this is a remote prospect at present. The company’s most pressing task is to complete a 315 km railway to the mine by end 2011, which is critical to support the project’s credibility. The steel business’ high operating leverage and low profitability, along with the huge importance of the Elga project’s valuation (which is essentially a far-dated option on the coking coal price), render Mechel a very high-beta play on the commodity cycle, with all of the risks and benefits of this type of investment.