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Mechel Posts Loss in 1Q, Announces Buyback

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Mechel OAO posted net loss (attributable to shareholders) of roughly $321 million for first-quarter 2013 compared to a profit of $218 million a year ago. Adjusted loss (excluding one-time items) was $233 million in the reported quarter.

Revenues for the first quarter came in at roughly $2.48 billion, down 15.9% from $2.95 billion in the year-ago period.

Mechel registered an operating income of $61 million in the first quarter compared with $317 million a year ago. A pick-up in the steel raw materials market, witnessed in the beginning of this year, helped the company to post operating profit in the quarter. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) declined 56.9% year over year to $210 million in the quarter.

In the quarter, Mechel divested its Romanian steelmaking assets, which had a negative impact on its results. The company expects the sale of loss-making assets to positively impact the steel division.
Segment Performance

Mining: The segment’s revenues from external customers in the first quarter were $769 million, down 18.6% from $945 million in the year-ago period.

The raw materials used in steel making faced volatile markets while prices in the spot market outgrew the long-term contract level. Mechel signed long-term contracts for coking coal supplies totalling up to 2.5 million tons a year with China's Baosteel Resources and Shasteel Group and South Korea's POSCO (PKX - Free Report) .

These contracts were a part of the company’s strategy to diversify and expand its market. Mechel also continues technical revamping of its enterprises and investment in promising projects.

Steel: Revenues from the Steel segment decreased 13.3% year over year to $1,430 million in the reported quarter. The prices and demand for the construction products remained stable in the quarter. Mechel also decreased the volume of billet and rod sales due to the sale of the Romanian assets and the halting of its Ukrainian plant.

The launch of the universal rolling mill at Chelyabinsk Metallurgical Plant is expected to have a major impact on the division's future activities.

Ferroalloy: Ferroalloy segment sales totaled $54 million in the quarter, down from $125 million in the year-ago quarter.

Mechel halted Southern Urals Nickel Plant's production facilities, which helped the division to attain improvement. The company reduced its supply of ferrosilicon to the domestic market, due to declining demand and reoriented its volumes toward export, where the market was more stable.

Power: The Power segment generated revenues of $227 million in the quarter compared with $230 million in the prior-year quarter. There was a seasonal high demand for the products and the division posted impressive results in the quarter.

Financial Position

Capital expenditure amounted to $172.4 million for the quarter, of which $101.7 million was invested in the mining segment, $60.2 million in the steel segment, $7 million in the ferroalloy segment and $3.5 million in the power segment. As of Mar 31, 2013, total debt was $9.3 billion while cash and cash equivalents amounted to $170 million.

Share Buyback

Mechel also announced its decision to buy back $100 million of ADRs representing its common shares. The buyback will be executed on behalf of Skyblock Limited, Mechel's fully-owned subsidiary. The buyback decision reflects the company’s confidence that the fundamental value of its shares is higher and meets the interests of its shareholders
Mechel currently retains a short-term Zacks Rank #3 (Hold).

Other companies in the steel industry with favorable Zacks Rank are Kobe Steel Ltd. and Shiloh Industries Inc. (SHLO - Free Report) . Both Kobe Steel and Shiloh Industries hold a Zacks Rank #1 (Strong Buy).

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