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Mechel Inks Deal with Baosteel

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Russian miner Mechel OAO has signed a memorandum of understanding with Baosteel Resources Int. Co. wherein Mechel’s subsidiary – Mechel Carbon Singapore – will supply the latter with up to 960,000 tons of coking coal annually.

The memorandum also entails implementation of joint projects in mining resources on the territory of the Russian Federation, People's Republic of China and countries.

Last month, Mechel Carbon (Singapore) signed a deal with Baosteel Group Corporation's wholly-owned subsidiary – Baosteel Resources – to supply coking coal. Mechel stated that the one-year contract may be extended and the price will be adjusted on a monthly basis. Both Mechel and Baosteel have agreed upon semi-annual visits (including senior executives) where they will discuss mutual interests and market trends.

With this deal in place, both Mechel and Baosteel plan to extend their relationship in areas of raw materials and other related areas, based on principles of joint coordination, close alliance and common development. The deal also signifies a strategic way of increasing their long-term relationship.

Recently, Mechel released its fourth-quarter 2012 results. It posted consolidated net loss (attributable to shareholders) of roughly $1.11 billion for the quarter compared with 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.

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

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 - Free Report) , is facing weak demand in Europe.

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

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

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