Mechel Reports the 2010 Nine Months Financial Results

/ Source: GlobeNewswire

Revenue amounted to $7.0 billion
Consolidated adjusted EBITDA amounted to $1.4 billion
Net income attributable to shareholders of Mechel OAO amounted to $462 million

MOSCOW, Dec. 14, 2010 (GLOBE NEWSWIRE) -- Mechel OAO (NYSE:MTL), a leading Russian mining and steel group, today announced financial results for the 2010 nine months.

Mechel's CEO Yevgeny Mikhel commented on the third quarter of 2010 results: "The achieved results are a legitimate reflection of the effort we have invested during this period to strengthen the Group's position and expand the scale of its business. All this time we have been working hard at increasing production figures, cutting expenses, optimizing the debt portfolio and perfecting the marketing structure. This allowed us to make good use of favorable market environment and significantly improve financial performance as compared with the same period last year."

Consolidated Results For the Nine Months of 2010

The net revenue in the nine months of 2010 increased by 72.9% and amounted to $7.0 billion compared to $4.0 billion in the nine months of 2009. The operating income rose by 807.0% and amounted to $1.0 billion or 14.86% of the net revenue, compared to the operating income of $114.3 million or 2.83% of the net revenue in the nine months of 2009.

For the nine months of 2010, Mechel's consolidated net income attributable to shareholders of Mechel OAO increased by 236.0% to $462.3 million compared to the consolidated net loss attributable to shareholders of Mechel OAO of $339.8 million in the nine months of 2009.

The consolidated adjusted EBITDA in the nine months of 2010 increased by 233.0% to $1.4 billion, compared to $416.8 million in the nine months of 2009. Depreciation, depletion and amortization in the nine months of 2010 for the Company were $362.1 million, an increase of 29.3% compared to $280.0 million in the nine months of 2009.

Mining Segment Results For The Nine Months of 2010

Mining Segment Output For The Nine Months of 2010 (1)

Mining segment's revenue from external customers for the nine months of 2010 totaled $2.2 billion, or 30.9% of the consolidated net revenue, an increase of 78.7% over net segment's revenue from external customers of $1.2 billion, or 29.9% of the consolidated net revenue in the nine months of 2009.

The operating income in the mining segment in the nine months of 2010 increased by 496.6% to $839.1 million, or 30.49% of total segment's revenue, compared to the operating income of $140.6 million, or 9.6% of total segment revenue for the nine months of 2009. The adjusted EBITDA in the mining segment in the nine months of 2010 went up by 271.9% and amounted to $1.0 billion compared to segment's adjusted EBITDA of $275.7 million in the nine months of 2009. The adjusted EBITDA margin for the mining segment in the nine months of 2010 was 37.26% compared to 18.87% in the nine months of 2009. Depreciation, depletion and amortization in the mining segment amounted to $220.5 million that is 51.5% higher than $145.5 million in the nine months of 2009.

Chief Executive Officer of Mechel Mining Management Company Boris Nikishichev commented on the mining segment's results: "Positive dynamics of the financial indicators in the mining segment continued in the third quarter. Having returned to the pre-crisis mining volumes and normalized cash cost in the second quarter, we maintained our production at the achieved levels in the third quarter, as sales volumes increased almost in all categories. Most of the sales growth was attributed to coking coal concentrate which is the most valuable product in our mining segment.

"In order to ensure uninterrupted production of the segment's operations during the winter period, we have intensified repairs and stripping, which has led to a slight increase in cash costs. In the third quarter, we witnessed some correction in prices for coking coal concentrate which was contrasted by growth of steam coal prices. Overall, due to the growth in the sales volumes, third quarter demonstrated a far better financial result.

"We continue to implement a large-scale investment program. The works on construction of railroad to Elga coal deposit are proceeding in accordance with the previously announced plans. At Elga deposit, we have already stripped the coal seams and prepared coal for extraction.

"Currently we see improving environment for coking coal prices in the global market on the back of floods in Australia and high demand for coal from traditional importers in China and Japan. In these circumstances, we feel that we are well positioned to take advantage of the current favorable trends by increasing sales volumes, controlling cash costs and optimizing logistics." 

Steel Segment Results For The Nine Months of 2010

Steel Segment Output For The Nine Months of 2010

Mechel's steel segment revenue from external customers in the nine months of 2010 amounted to $4.0 billion, or 57.6% of the consolidated net revenue, an increase of 82.1% over the net segment's revenue from external customers of $2.2 billion, or 54.7% of consolidated net revenue, in the nine months of 2009.

In the nine months of 2010, the steel segment's operating income increased by 338.7% and totaled $190.5 million, or 4.55% of total segment's revenue, versus the operating loss of $79.8 million, or -3.44% of total segment's revenue, in the nine months of 2009. The adjusted EBITDA in the steel segment in the nine months of 2010 increased by 801.2% and amounted to $293.3 million, compared to the adjusted EBITDA of $32.5 million in the nine months of 2009. The adjusted EBITDA margin of the steel segment was 7.00% for the nine months of 2010, versus the adjusted EBITDA margin of 1.40% for the nine months of 2009. Depreciation and amortization in steel segment rose by 1.3% from $81.3 million in the nine months of 2009 to $82.4 million in the similar period of 2010.

Commenting on the results of the steel segment, Andrey Deineko, Chief Executive Officer of Mechel-Steel Management Company, noted: "The results of the reporting period demonstrate superior performance of the division on all fronts. We have consistently been increasing the volumes of production and sales, successfully optimizing production costs, and improving our subsidiaries' efficiency.

"I would like to particularly note the work of our distribution company Mechel-Service Global. Having expanded its influence from the local Russian market to markets in Western and Eastern Europe, Mechel-Service Global won a distinctive place among Europe's largest distributors of metal products and service companies. We are constantly expanding our presence, and in the 3rd quarter alone, through acquisition of new warehouse facilities and expansion of old ones, our storage capacity for metal products increased by over 162,000 tonnes, while sales rose up to 890 thousand tonnes, an increase of 20%, compared to the previous quarter.

"However, we see that a further increase in the segment's efficiency will not be only due to its strengthening market position. Growth of the share of high value-added products in our sales, cost-cutting and quality improvement are integral elements of our development strategy. In order to achieve these goals, we continue to implement our comprehensive investment program. This year has seen the completion of the first stage of Izhstal's modernization, launch of a series of equipment and processing lines at other Group's subsidiaries. This work will continue. The modernized rolling facilities at Izhstal and the Universal Rolling Mill at Chelyabinsk Metallurgical Plant are principal, but not the only projects to be realized next year.

"All these factors along with the improvement of market environment for our metal production allow us to look into the future with optimism and expect a further improvement in our metallurgical division's financial performance."

Ferroalloys Segment Results For The Nine Months of 2010

Ferroalloys Segment Output For The Nine Months of 2010

Ferroalloy segment's revenue from external customers in the nine months of 2010 amounted to $330.7 million, or 4.7% of the consolidated net revenue, an increase of 32.2% compared with segment revenue from external customers of $250.1 million or 6.2% of the consolidated net revenue in the nine months of 2009.

In the nine months of 2010, the operating income in the ferroalloy segment increased by 104.7% and totaled $907 thousand, or 0.2% of total segment's revenue, versus operating loss of $19.2 million, or -6.6% of total segment's revenue in the nine months of 2009. The adjusted EBITDA in the ferroalloy segment in the nine months of 2010 increased by 95.6% and amounted to $52.4 million, compared to segment's adjusted EBITDA of $26.8 million in the nine months of 2009. The adjusted EBITDA margin of the ferroalloy segment comprised 11.51% in the nine months of 2010 compared to the adjusted EBITDA margin of 9.22% in the nine months of 2009. Ferroalloy segment's depreciation, depletion and amortization in the nine months of 2010 was $47.9 million, an increase of 16.8% over $41.0 million in the nine months of 2009.

Gennadiy Ovchinnikov, Chief Executive Officer of Mechel Ferroalloys Management Company, said: "The ferroalloys segment's financial results substantially improved compared with the same period a year ago. Moreover, during the reported period, the segment performed well from the operational point of view. From quarter to quarter, we have been increasing the volumes of ferronickel production, maintaining the levels of ferrosilicon production. We also managed to overcome geological difficulties at Voskhod chromites mine. At the moment, we are moving towards recovery in chrome ore production to the planned levels and hence increase of ferrochrome output. Growth in chrome ore production volumes have already contributed to the decrease in the cash cost of the product.

"The capital expenditure program, which we are implementing, will lead to the further growth of the segment's performance. We are planning to launch a number of new and modernized units at our facilities next year. In particular, in 2011, we are planning to modernize two out of four existing arc furnaces at Bratsk Ferroalloy Plant. We are preparing to launch a new experimental smelting complex designed on the basis of the most modern technologies at Southern Urals Nickel Plant. Should the equipment tests be successful we may take a decision to revamp the whole processing chain of the plant. Modernization of the segment's production facilities will allow us to decrease costs, enhance production volumes and improve financial performance of the segment."

Power Segment Results for The Nine Months of 2010

Power Segment Output For The Nine Months of 2010

Mechel's power segment revenue from external customers in the nine months of 2010 comprised $467.9 million, or 6.7% of consolidated net revenue, an increase of 26.7% compared with the segment's revenue from external customers of $369.1 million or 9.2% of consolidated net revenue in the nine months of 2009.

The operating income in the power segment in the nine months of 2010 amounted to $26.4 million, or 3.42% of the total segment's revenue in the same period, an increase of 58.2% compared to the operating income of $16.7 million, or 2.76% of the total segment's revenue in the nine months of 2009. The adjusted EBITDA in the power segment in the nine months of 2010 went up by 44.6% totaling $37.4 million, compared to the adjusted EBITDA of $25.8 million in the nine months of 2009. The adjusted EBITDA margin for the power segment amounted to 4.84% compared to 4.27% in the nine months of 2009. Depreciation and amortization in the power segment in the nine months of 2010 decreased by 7.08% compared with the same period in 2009 from $12.15 million to $11.29 million.

Viktor Gvozdev, Chief Executive Officer of Mechel Energo, noted: "The company's power division continues to consistently increase its efficiency. As compared to the same period last year, we see a positive growth of both production and financial performance. During the 3rd quarter, despite low season, we achieved positive results in operating profit and net profit, significantly increasing the adjusted EBITDA. This was due in part to the measures we took to cut expenses and upgrade equipment. We are prepared for the new heating season and positively assess the division's perspectives, considering the forthcoming liberalization of the power market."

Recent Highlights

  • In October 2010, Mechel OAO reported that Sberbank has opened a credit line for Chelyabinsk Metallurgical Plant OAO (CMP). The credit facilities provided will have a 5-year maturity and a 3-year grace period and will be used to refinance the short-term debt.
  • In October 2010, Mechel OAO announced that Bratsk Ferroalloy Plant OOO, which is a part of Mechel group, and Siberian Plant of Electrothermal Equipment have signed contracts to supply four ferroalloy electric furnaces with the capacity of 33 MVA each to replace the existing furnaces. In addition, Sibelectrotherm undertakes to supervise installation and commissioning works. The reconstruction will take place during 2011-2012. The contracts' total value exceeds 1.9 billion roubles.
  • In November 2010, Mechel OAO announced that it has signed an Agreement of Intent with a South Korean company Posco within the framework of the official visit of the President of the Russian Federation Dmitry Medvedev to the Republic of Korea. The Agreement was signed in order to establish mutually beneficial strategic partnership between the companies. In the document, the companies express their intention to examine and possibly implement projects in steel, mining and logistics in Russia, the Republic of Korea and third countries.
  • In November 2010, Mechel OAO announced establishing its official representative office in Kiev, Ukraine. The representative office of the company will contribute to the development of Mechel's business in Ukraine, including supports of its export activities and contacts with state authorities, conducting market research, arranging meetings with business community and searching new business partners.
  • In November 2010, Mechel OAO announced acquisition of 51% stake in the charter capital of Toplofikatsia Rousse AD (TPP "Rousse"), located in the Republic of Bulgaria. As a result, Mechel has increased its stake in the charter capital of the power station up to 100% from the previously owned stake of 49%. Consolidation of 100% stake in Toplofikatsia Rousse AD is implemented in line with Mechel's power segment development strategy.
  • In December 2010, Mechel announced launch of construction of a grinding-mixing complex for Portland blast-furnace slag cement production with 1.6 mln tonnes per annum capacity by its subsidiary, Mechel Materials OOO. The construction is held on the premises of Chelyabinsk Metallurgical Plant OAO. The amount to be invested is estimated at 110 mln euros. The commissioning of a complex is planned for the 2nd quarter of 2012.
  • In December 2010, Mechel announced the launch of its U.S.-based subsidiary Mechel Bluestone's newest coal processing plant for washing coal mined at the Keystone Operations near Keystone, West Virginia. The K2 plant, worth 12 million dollars in investments, can process annually up to 3 million tonnes of run-of-mine coal. Annual production volume at the first stage is expected to exceed 1 million tonnes. The launch will allow Mechel Bluestone to double its production of low-volatile coking coal.

Yevgeny Mikhel concluded: "The current trends of the Group's operational and financial results, which we have witnessed this year, indicate that we've managed to recover after the crisis, restored operations and brought them to profitable levels. The expected strengthening of demand and improvement in the pricing environment for our main products will also help the company to continue large-scale financing of our strategic investment projects, optimization of the debt portfolio and entering new distribution markets, thus increasing the company's shareholder value."

Financial Position

Capital expenditure on property, plant and equipment and acquisition of mineral licenses for the nine months of 2010 amounted to $669.4 million, of which $392.5 million was invested in the mining segment, $236.7 million was invested in the steel segment, $33.1 million was invested in the ferroalloy segment and $7.1 million was invested in the power segment.

In the nine months of 2010, Mechel spent $22.5 million on acquisitions, including $18.3 million spent on acquisition of minority interest in our subsidiaries.

As of September 30, 2010, total debt was at $6.9 billion. Cash and cash equivalents amounted to $282.4 million at the end of the nine months of 2010 period and net debt amounted to $6.6 billion (net debt is defined as total debt outstanding less cash and cash equivalents).

The management of Mechel will host a conference call today at 10:00 a.m. New York time (3:00 p.m. London time, 6:00 p.m. Moscow time) to review Mechel's financial results and comment on current operations. The call may be accessed via the Internet at , under the Investor Relations section.

Mechel is one of the leading Russian companies. Its business includes four segments: mining, steel, ferroalloy and power. Mechel unites producers of coal, iron ore concentrate, steel, rolled products, ferroalloys, hardware, heat and electric power. Mechel products are marketed domestically and internationally.

The Mechel OAO logo is available at http://www.globenewswire.com/newsroom/prs/?pkgid=8181

Some of the information in this press release may contain projections or other forward-looking statements regarding future events or the future financial performance of Mechel, as defined in the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. We wish to caution you that these statements are only predictions and that actual events or results may differ materially. We do not intend to update these statements. We refer you to the documents Mechel files from time to time with the U.S. Securities and Exchange Commission, including our Form 20-F. These documents contain and identify important factors, including those contained in the section captioned "Risk Factors" and "Cautionary Note Regarding Forward-Looking Statements" in our Form 20-F, that could cause the actual results to differ materially from those contained in our projections or forward-looking statements, including, among others, the achievement of anticipated levels of profitability, growth, cost and synergy of our recent acquisitions, the impact of competitive pricing, the ability to obtain necessary regulatory approvals and licenses, the impact of developments in the Russian economic, political and legal environment, volatility in stock markets or in the price of our shares or ADRs, financial risk management and the impact of general business and global economic conditions.

Attachments to the Nine Months of 2010 Earnings Press Release

Attachment A

Non-GAAP financial measures. This press release includes financial information prepared in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP, as well as other financial measures referred to as non-GAAP. The non-GAAP financial measures should be considered in addition to, but not as a substitute for, the information prepared in accordance with U.S. GAAP.

Earnings Before Interest, Depreciation and Amortization (EBITDA) and EBITDA margin. EBITDA represents earnings before interest, depreciation and amortization. EBITDA margin is defined as EBITDA as a percentage of our net revenues. Our adjusted EBITDA may not be similar to EBITDA measures of other companies; is not a measurement under accounting principles generally accepted in the United States and should be considered in addition to, but not as a substitute for, the information contained in our consolidated statement of operations. We believe that EBITDA provides useful information to investors because it is an indicator of the strength and performance of our ongoing business operations, including our ability to fund discretionary spending such as capital expenditures, acquisitions and other investments and our ability to incur and service debt. While interest, depreciation and amortization are considered operating costs under generally accepted accounting principles, these expenses primarily represent the non-cash current period allocation of costs associated with long-lived assets acquired or constructed in prior periods. Our adjusted EBITDA calculation is commonly used as one of the bases for investors, analysts and credit rating agencies to evaluate and compare the periodic and future operating performance and value of companies within the metals and mining industry. Adjusted EBITDA can be reconciled to our consolidated statements of operations as follows:

Adjusted EBITDA margin can be reconciled as a percentage to our Revenues as follows:

CONTACT: Mechel OAO Vladislav Zlenko, Director, Department of Communications 7-495-221-88-88 Fax: 7-495-221-88-00 vladislav.zlenko@mechel.com