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Russian mining company Mechel OAO (MTL - Analyst Report) has announced the commencement of the production of first volumes of the coking coal concentrate at the Elga mine following the commissioning of a seasonal washing plant at the site. The mine has one of the largest coking coal deposits globally.  

The launch of the new washing plant, which fully complies with international standards, represents a major milestone for the Moscow-based company. The plant, in which all the processing systems are controlled in a real-time mode, has an annual processing capacity of up to 3 million tons. The company has invested roughly $64.7 million on the plant.

Mechel, in early 2012, announced the completion of the construction of a railroad that connects the Elga coal deposit to Baikal-Amur mainline. The launch of the washing plant now enables the company to mine and process coking coal at Elga on production scale.  

Mechel, which competes with ArcelorMittal (MT - Analyst Report) among others, 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 slipped into a loss in the second quarter of 2012. It posted a net loss of $823 million in the quarter, in stark contrast to a profit of $191.9 million registered a year ago. Revenues fell 11% year over year to roughly $3.09 billion. The results were affected by weak market conditions and foreign exchange losses.

We are encouraged by the incremental opportunities stemming from the Elga mine which is expected to reinforce Mechel’s position as a metallurgical coal producer through capacity expansion.  

However, Mechel’s large capital-spending program and high debt level are matters of concern. The company could be handicapped because of its high leverage and interest burden and may not be able to keep up with its huge capital spending program.

Mechel currently carries a Zacks #4 Rank, which translates into a short-term (1 to 3 months) Sell rating. We have a long-term Neutral recommendation on the stock.

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