Mechel Recovers

Mechel OAO (MTL - Analyst Report), one of Russia’s leading mining and metallurgical companies, has reported results for its second quarter and first half of 2009. 

For the first half of 2009, Mechel reported revenues of $2.4 billion, down 54% from the year-ago period. The company reported net losses of $471.4 million in contrast to net income of $41.1 billion year over year. However, Mechel managed a net income of $219.3 million in the reported quarter after posting losses in the last two quarters. Revenues inched up 8.6% sequentially to $1.3 billion on higher sales volumes. Before this, revenues were impacted by weak demand for steel and coking coal as well as foreign exchange losses. 

The Steel segment generated 57% of revenues, which slipped 53.5% year over year to $1.40 billion in the first half of 2009. Unfavorable market conditions and low demand for steel from the end consumer markets – especially auto, construction and machinery − resulted in the decline. 

Revenues of $754.7 million in the quarter reflected an improvement of 17.3% from the previous quarter on steel sales volumes picking up slightly. During the first half of 2009, net losses in the Steel segment amounted to $321.5 million against net income of $467.4 million in the same period of 2008. However, Mechel reported a net income of $36.5 million in the quarter against net losses of $467.6 million in the year ago period. Steel production was up 27% to 1.4 billion tons in the quarter while coke output increased 34% to 723 million tons. 

In 2009, Mechel foresees demand for steel from the Middle East and Southeast Asia. The company plans to operate facilities at 100% capacity. 

By May 2009, Mechel had increased steel-making capacity utilization to 94%, metallurgical commodity products capacity utilization to 95%, including rolled products capacity to about 99%, hardware capacity to about 74%, while forgings and stampings crossed 58%. 

The Mining segment generated 27% revenues during the first half of 2009. Sales in the segment plunged 60.5% year-over-year to $674.8 million, driven by a sharp decline in the demand for coking coal. EBIDTA margin of 23.3% more than halved from 51% in the year-ago period driven by higher production costs. In the latest quarter, revenues declined 4% to $330.6 million. Net income was $49.7 million in contrast to a net loss of $65.8 million. 

Sequentially, production of coal was down 13% to 3 million tons. Coking coal production was up 19% to 1.2 million tons. Production of steam coal was down 27% year-over-year to 1.76 million tons. 

Mechel is banking on Asian markets, particularly, China, Japan and South Korea. In June 2009, Mechel through its subsidiary Mechel Trading AG signed a long-term contract with South Korean Hyundai Steel to supply 300,000 tons of coking coal per annum from 2010. The company has a total supply contract of 2.0 million tons of coking coal and 2.3 million tons of steam coal in 2009 produced at its Yakutugol and Southern Kuzbass mines. 

The Power segment produced 10% of revenues, which totaled $256.5 million, down 28.2% from the same quarter of the previous year. Mechel reported a net loss of $4.3 million compared with net income of $7.2 million in the year ago period. The economic crisis resulted in an overall demand for electricity. Moreover, Mechel’s power is expensive as compared to the liberalized electricity in Russia. Quarter on quarter, revenues were down 14.3% to $114.8 million and net losses amounted to $4.6 million. 

The Ferroalloy segment yielded 5% of revenues, or $131 million, down 52.9% year over year. Mechel reported a net loss of $202.6 million compared with a net income of $38.9 million. However, revenues increased 43.2% quarter on quarter to $77.2 million. Net income of $126.1 million was driven by higher production costs and lower product prices. Mechel is increasing its output of high quality ferrochrome, an alloy required to produce stainless and special steel. 

Mechel has a large capital-spending program. It reported capital expenditures of $223.2 million in the first half of 2009. Total debts were about $6.0 billion in the first half. Higher debts resulting in greater interest burden are a drag on the company’s profitability. Mechel has not provided any financial guidance for the rest of 2009.

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