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Mechel Posts Q2 and 1H13 Results

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Russian mining company Mechel OAO has released its operational results for the second quarter of 2013 and first half of 2013. Mechel’s coking coal sales increased 2% sequentially in the second quarter while it declined 8% in first-half 2013 from same period last year. The year-over-year decline in the first half was due to the revision of production plans for Mechel North America as prices for the company’s key markets decreased.

Sale of PCI coal declined about 23% sequentially in the second quarter while it increased roughly 34% in the first half of 2013 to 1.44 million tons. Anthracites sales increased 9% sequentially in the second quarter but declined 16% year over year in the first half of the year. Mechel remains on track to establish its presence in newer markets for these coals as they have strong demand by international steelmakers due to global expense reductions.

Sales of iron ore decreased 9% sequentially in the second quarter and 4% year over year in the first half of 2013 as Chinese customers became less active in their business. Coke sales fell 4% sequentially in the second quarter and 16% year over year in the first half. The year over year fall in sales was due to stoppage of supplies to Southern Urals Nickel Plant.

Ferrosilicon sales volumes went up 10% sequentially in the second quarter and were up 35% year over year to 48,000 tons in the first half of 2013. The increase was driven by the launch of ore smelting furnace #4 at Bratsk Ferroalloy Plant.

According to Mechel, the launch of 1.1 million-ton universal rolling mill at Chelyabinsk Metallurgical Plant will impact the results positively in 2013 as the first bar supplies began in the end of the second quarter. The company expects to get high value-added products from the mill due to processing low-margin square billets into high-quality structural shapes and rails for high-speed railways.

Mechel’s power division witnessed a seasonal slump in sales of electricity and heat. The decline in the quarter and the first half was also due to disposal of Toplofikatsia Rousse EAD in late 2012.

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 jeopardized because of its high debt and interest burden, and might not be able to keep up with its huge capital spending program.

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

Other companies in the steel industry with favorable Zacks Rank are Nippon Steel & Sumitomo Metal Corp. , Ternium S.A. (TX - Free Report) and Kobe Steel Ltd. (KBSTY - Free Report) . While Nippon Steel and Ternium maintain a Zacks Rank #1 (Strong Buy), Kobe Steel maintains a Zacks Rank #2 (Buy).

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