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Russian miner Mechel OAO (MTL - Analyst Report) posted consolidated net loss (attributable to shareholders) of roughly $1.11 billion for fourth-quarter 2012 compared to a profit of $201.2 million a year ago. The results were hurt by weak demand. Adjusted loss (excluding one-time items) was $160.9 million in the reported quarter.

For full-year 2012, loss was $1.66 billion compared with a profit of $727.9 million. Barring one time items, Mechel posted a profit of $23 million in 2012, down 97% from $736.3 million posted in 2011. Mechel is focused on deleveraging and has adopted the strategy to sell its non-core assets that have a negative impact on its results.

Revenues for the fourth quarter came in at roughly $2.52 billion, down 13.9% from $2.9 billion in the year-ago period.

For the full year, revenues were $11.3 billion, down 10% year over year.  

The company registered an operating loss of $933.4 million in the fourth quarter compared with an operating income of $377.5 million a year ago, leading to a contraction in operating margin. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) declined 81.3% year over year to $100.4 million in the quarter.

For the full year, operating loss was $897.9 million compared with an operating profit of $1.83 billion. Adjusted EBITDA stood at $1.33 billion, a decline of roughly 44.3% over the last year.

Segment Performance

Mining: The segment’s revenues from external customers in the fourth quarter were $675.9 million, down 36.3% from $1,061.4 million in the year-ago period.

For the full year, segment's revenue from external customers totaled $3.3 billion, down 21% from $4.2 billion in 2011. The segment faced difficult conditions and unresolved global economic problems had a negative impact on the division. This led to a massive drop in prices on almost all mining products as well as a decrease in demand in the traditional European and CIS markets.

Mechel took steps to control costs and re-oriented sales toward alternative markets. Despite a significant decrease in Mechel’ capital spending program in 2012, it continued to invest in its production assets.

Southern Kuzbass Coal Company and Korshunov Mining Plant acquired new coal transport equipment. Construction of a seasonal washing plant was completed in 2012 at the Elga deposit. Mechel also ensured full access to a major Pacific port, which guarantees exports to Asia Pacific.

Steel: Revenues from the Steel segment, increased 1% year over year to $1,557 million in the fourth quarter.

For the full year 2012, revenues decreased 5% year over year to $6.8 billion. The segment had increased production and sales for 2012. Despite a challenging market situation, Mechel managed to minimize the decrease in profit.

Ferroalloy: Ferroalloy segment sales totaled $68.6 million in the quarter, down from $115.9 million in the year-ago quarter.

For the full year, revenue from external customers amounted to $416.7 million, a decrease of 12.3% year over year. Due to the continuing weakness of the ferroalloys market Mechel decided to halt Southern Urals Nickel Plant as the plant was incurring losses as production costs were higher than the market price of the products.

Power: The Power segment generated revenues of $219.8 million in the quarter compared with $210.6 million the prior-year quarter.

For full-year 2012, the segment generated $757.2 million in revenues, an increase of 2.7% year over year. The segment's financial results were impacted by accounting losses due to the disposal of Mechel’s Bulgarian-based Toplofikatsia Rousse power plant.

Financial Position

Capital expenditure amounted to $1,028.8 million for 2012, of which $612.2 million was invested in the mining segment, $360.6 million in the steel segment, $46.3 million in the ferroalloy segment and $9.7 million in the power segment.

As of Dec 31, 2012, total debt was at $9.4 billion while cash and cash equivalents amounted to $295 million. In Apr 2013, Mechel signed an agreement with VTB Bank for approximately $1.3 billion loan.

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 owns and controls essential infrastructure, including ports, rolling stock and power plants, which provide access to the export markets. However, 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. Moreover, Mechel, like other top steel makers including ArcelorMittal (MT - Analyst Report), is facing weak demand in Europe.

Mechel currently retains a short-term Zacks Rank #4 (Sell).

Other companies in the steel industry with favorable Zacks Rank are Gibraltar Industries Inc. (ROCK - Analyst Report) and Shiloh Industries Inc. . All of them hold Zacks Rank #1 (Strong Buy).

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