Mechel Completes Laying Tracks

Russian company Mechel OAO’s ( MTL - Analyst Report ) subsidiary Yakutugol Holding Company OAO has successfully completed the task of laying tracks from Ulak station to the Elga coal deposit, for a total expenditure of $1.25 billion.

Since February 2008, Mechel has started constructing the railway link to the Elga coal deposit, the last section of which was laid in December 2011. The completion of the track has enabled the traffic flow along the entire route from Baikal-Amur Mainline's Ulak station to the Elga deposit. Construction involved laying 321 kilometers of tracks.

Mechel Mining OAO's subsidiary, Metallurgshakhtspetsstroy ZAO, was the project's general contractor. The railway was built in difficult climatic and geological conditions. A total of 76 bridges were built in the course of the railway's construction. As earlier reported, mining at the Elga open pit began in August 2011, producing some 200,000 tonnes by the year end.

The launch of direct railway access to Elga Coal Complex in 2012 will significantly facilitate delivery of material necessary to increase production at Elga as well as allow rail transportation of coal mined at the deposit.

Recently, Mechel released its third-quarter 2011 earnings. The company recorded a net income of $25.7 million in the reported quarter, down 86.6% from the previous quarter’s consolidated net income of $191.9 million.

Revenues in the third quarter decreased 7.6% sequentially to $3.2 billion.

Operating income in the reported quarter climbed 11.2% sequentially to $529.5 million. Operating margin was 16.49% in the third quarter of 2011 versus 13.72% in the second quarter of 2011.

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 and mainly focuses on growth and cost-cutting measures.

The company owns and controls essential infrastructure, including ports, rolling stock and power plants, providing access to the 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 #5 Rank (Strong Sell 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.