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Mechel Reports Elga Results

MT MTL

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Russian coal miner and steelmaker Mechel OAO ((MTL - Analyst Report)) has announced the first results of mining at Yakutugol Holding Company OAO's Elga Coal Complex.

Sakha Republic’s Agency for Use of Mineral Resources gave permission to launch the first stage of the open-pit development of the Elga deposit. Construction of the Ulak-Elga railway link was completed ahead of schedule. A coal reloading facility at this site will allow the company to transport the Elga coal by truck until the railroad is completed which is scheduled by the end of December 2011. This represents another critical milestone toward development of the coal deposit which is Mechel’s largest project for coking coal.

Mining at the Elga deposit started in August 2011. The Elginsky open pit yielded some 21,000 tons of coal in less than a month. One work shift in Elga Coal Complex currently includes some 120 personnel. Over 75 equipment units are involved in the mining process. In addition to mining, leveling operation of the chief mine site is being held at the open pit.

By implementing the Elga project, Mechel is introducing a project unique in Russian business, a private railroad and an open pit with one of the world's largest coking coal production volumes. Commissioning of the Elga open pit and the railroad link to the Baikal-Amur Mainline will prove that Mechel OAO is one of the few companies in the world that can implement greenfield coking coal mining projects on a large scale.

Mining this deposit will enable Mechel to complement its coking coal product range and reinforce its international positions among leading producers of metallurgical coals.

In June 2011, the company reported its results for first quarter 2011. The company recorded a net income of $309.1 million in first quarter 2011 comprehensively beating last year’s consolidated net income of $82.6 million, a jump of 274.3% year over year.

Revenues in the first quarter 2011 soared 54.4% year over year to $2.9 billion based on the company’s relentless efforts to increase production.

Throughout the quarter the company made concerted efforts to enhance the coal production volumes by modernizing production facilities, perfecting the marketing structure, developing new high value-added products and lastly, by implementing strategic investment projects, which strengthened its market position.

Operating profits in the reported quarter climbed more than three times the first quarter profit in 2010 and amounted to $448.4 million, compared with the operating income of $147.6 million in the first quarter of 2010. Operating margin was 15.28% in the first quarter of 2011 versus 7.77% in the first quarter of 2010.

Mechel is a leading domestic steel and coal producer with a strong position in key businesses, including production of specialty steel and alloys. The company has the largest coal reserve base in Russia. It is focusing on growth and cost-cutting measures.

Mechel has also entered into various agreements to supply its rail products to large Russian metal mining companies. We are positive on the company’s favorable business profile with a high degree of backward integration and low-cost structure. Mechel’s key assets are located close to the major steel consuming markets.

In addition, the company owns and controls essential infrastructure, including ports, rolling stock and power plants, which provide access to export markets. However, Mechel’s large capital-spending program, high debt and substantial interest burden are matters of concern.

Currently, Mechel has a short-term (1 to 3 months) Zacks #3 Hold rating and a long-term (6 months) Neutral recommendation.

Mechel faces stiff competition from Arcelor Mittal ((MT - Analyst Report)) and Norilsk Nickel Mining and Metallurgical Co.

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