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Mechel Halts Otel Rseu Production

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Mechel OAO announced that it has temporarily halted the smelting production at Otelu Rosu, Romania due to a contingency situation. Operation at one of the electric furnaces of the plant was stopped due to technical reasons.

Due to some malfunction in the process, the furnace and auxiliary communications got damaged resulting in stoppage of work. The company’s experts are looking into the matter to find out some solution for diminishing the effects of malfunction.

Last month, the company halted production at Targoviste and Ductil Steel Otelu Rosu plants due to severe weather conditions. During the period, transport in Romania was a problem due to severely cold weather and the plants used their winter stores of scrap, which had been depleting at that time.

Mechel is a leading 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.

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

In December 2011, Mechel recorded a net income of $25.7 million in the third quarter of 2011, down 86.6% from the previous quarter’s consolidated net income of $191.9 million. Revenues in the third quarter decreased 7.6% sequentially to $3.2 billion.

Currently Mechel maintains a Zacks #3 Rank, which translates into short-term (1 to 3 months) Hold rating. However, we reiterate our Underperform recommendation on the stock for the long-term (more than 6 months).  Mechel has a major capital-spending program, which could pose a risk given the slow growth in global economies.

Mechel’s debt-to-capital ratio hovered around 50% in the last couple of quarters. Higher debt results in a greater interest charge for the period. Moreover, a high leverage restricts the company’s ability to raise new debt for further financing. The company faces stiff competition from Arcelor Mittal (MT - Free Report) and Norilsk Nickel Mining and Metallurgical Co.

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