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Russian miner Mechel OAO (MTL - Analyst Report) posted consolidated net loss of $823 million in the second quarter of 2012, in stark contrast to a profit of $191.9 million registered in the year-ago quarter. Revenues for the quarter came in at roughly $3.09 billion, down 11.1% from $3.47 billion in the year-ago period.

The company registered an operating loss of $470.6 million in the second quarter compared with an operating income of $476.3 million a year ago, leading to a contraction in operating margin. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) declined 37.1% year over year to $385.4 million in the quarter.

For the first half of 2012, net loss amounted to $605 million compared with a net income of $501 million in the first half of 2011. Revenues for the first half came in at $6.04 billion, down 5.8% year over year.

In the first half of 2012, operating loss was $156.6 million compared with an operating income of $924.7 million in the first half of 2011. Adjusted EBITDA dropped 28% year over year to $848.8 million.

The company’s results were affected by weak environmental conditions and foreign exchange losses.

Segment Performance
Mining: The segment’s revenues from external customers in the second quarter were $881.2 million, down 20.2% from $1,103.8 million in the year-ago period. Operating income was $192.6 million, 1.3% lower than $474.5 million posted in the second quarter 2011. The adjusted EBITDA of the mining segment declined 45.9% year over year to $301.9 million in the quarter. For the first half of 2012, revenues declined 6.1% year over year to $1,813.9 million.

The mining segment remained under pressure in the quarter due to reduced demand and lower prices. The company is also making efforts to restore production capabilities, increase export sales and diversify its client base.

The company continued the development of the Elga mine and a three-million tons per annum seasonal coal washing plant was launched with commercial scale coal production and processing scheduled to commence in 2013. The company also resumed operations at its Sibirginsk mine.

Steel Mining: Revenues from the Steel Mining segment, which made up 61% of total revenues, decreased 7.9% from $1.9 billion a year ago. The segment reported an operating loss of $471 million versus last year’s operating income of $36.8 million. For the first half of 2012, revenues were $3.54 billion, down 7.1% year over year.

Ferroalloy: Ferroalloy segment sales totaled $132.4 million in the quarter, up 0.7% from last year, and constituted 4% of consolidated revenues. The segment recorded an operating loss of $135.3 million in the quarter as against an operating loss of $1.1 million last year. For the first half of 2012, sales increased 0.6% to $257.1 million.

Power: The Power segment generated about 6% of revenues, totaling $174.7 million in the quarter, a year-over-year decline of 1.2%. The segment’s operating loss was $56.2 million in the quarter, down from a loss of $0.2 million last year. For the first half of 2012, revenue increased 4% year over year to $418.1 million.

Financial Position

Capital expenditure for the first half of 2012 amounted to $577.7 million, of which $335.6 million was invested in the mining segment, $208.3 million in the steel segment, $28.0 million in the ferroalloy segment and $5.8 million in the power segment. As of June 30, 2012, total debt was at $8.8 billion while cash and cash equivalents amounted to $150.7 million.

Our Take

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 is mainly focusing on growth and cost-cutting measures. Mechel competes with ArcelorMittal (MT - Analyst Report), among others.

The company owns and controls essential infrastructure, including ports, rolling stock and power plants, which provide access to the export markets. However, as mentioned earlier, Mechel could be handicapped because of its high debt and interest burden, and might not be able to keep up with its huge capital spending program.

The company retains a short-term Zacks #4 Rank (Sell). We currently have a long-term (more than 6 months) Neutral recommendation on the stock.

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