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Mechel Forms Joint Venture

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A subsidiary of Russian metals and mining company Mechel OAO () has created a joint venture with India’s Somani Group to sell metallurgical coal to consumers in India.

Per the parent company, Mechel OAO, Mechel Somani Carbon Private Ltd India consists of Mechel Carbon AG, a Switzerland-based subsidiary of Mechel Mining, and Somani’s Northern Exim Private Ltd. Mechel Carbon AG will be the major partner with a 51% stake.

According to a company statement, the project's distribution area will be located on India's east coast, 20 kilometers from the major Indian port of Vizag, which caters to an industrially developed region.

Mechel considers India to be a promising and strategically important market. The joint venture will serve a large number of Indian customers who desire to acquire small shipments of its products.

In June 2011, the company reported its results for first quarter 2011. The company recorded a net income of $309.1 million in first quarter 2011 comprehensively beating last year’s consolidated net income of $82.6 million, a jump of 274.3% year over year.

Revenues in the first quarter 2011 soared 54.4% year over year to $2.9 billion based on the company’s relentless efforts to increase production.

Throughout the quarter the company made concerted efforts to enhance the coal production volumes by modernizing production facilities, perfecting the marketing structure, developing new high value-added products and lastly, by implementing strategic investment projects, which have strengthened its market position.

Operating profits in the reported quarter climbed more than three times the first quarter profit in 2010 and amounted to $448.4 million, compared with the operating income of $147.6 million in the first quarter of 2010. Operating margin was 15.28% in the first quarter of 2011 versus 7.77% in the first quarter of 2010.

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. It is focusing on growth and cost-cutting measures.

Mechel has also entered into various agreements to supply its rail products to large Russian metal mining companies. We are positive on the company’s favorable business profile with a high degree of backward integration and low-cost structure. Mechel’s key assets are located close to the major steel consuming markets.

In addition, the company owns and controls essential infrastructure, including ports, rolling stock and power plants, which provide access to export markets. However, Mechel’s large capital-spending program, high debt and substantial interest burden are matters of concern.

Currently, Mechel has a short-term (1 to 3 months) Zacks #3 Hold rating and a long-term (6 months) Neutral recommendation.

Mechel faces stiff competition from Arcelor Mittal ((MT - Free Report) ) and Norilsk Nickel Mining and Metallurgical Co.

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