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Mechel Reports the 2010 Financial Results

/ Source: GlobeNewswire

Revenue Amounted to $9.7 Billion
Consolidated Adjusted EBITDA Amounted to $2.0 Billion
Net Income Attributable to Shareholders of Mechel OAO Amounted to $657 Million

MOSCOW, April 11, 2011 (GLOBE NEWSWIRE) -- Mechel OAO (NYSE:MTL), a leading Russian mining and steel group, today announced financial results for the full year 2010.

Yevgeny Mikhel, Mechel's Chief Executive Officer, commented on the full year results: "It would not be an exaggeration to say that last year has become one of the most successful in history of the company in terms of production and financial performance. Our drive to increase production, develop new products and new markets, amid continuing efforts to implement strategic investment projects, has in no small measure contributed to it. The impressive growth in our operating profit, which is more than six times higher than 2009's figures, created a good basis for further growth and a corresponding increase in shareholder value."

The net revenue in 2010 increased by 69.4% and amounted to $9.7 billion compared to $5.8 billion in 2009. The operating income rose by 523.7% and amounted to $1.5 billion or 15.72% of the net revenue, compared to the operating income of $245.6 million or 4.27% of the net revenue in 2009.

In 2010 Mechel's consolidated net income attributable to shareholders of Mechel OAO increased by 791.2% to $657.2 million compared to the consolidated net income attributable to shareholders of Mechel OAO of $73.7 million in 2009.

The consolidated adjusted EBITDA in 2010 increased by 193.6% to $2.0 billion, compared to $686.6 million in 2009. Depreciation, depletion and amortization in 2010 for the Company were $474.6 million, an increase of 16.7% compared to $406.7 million in 2009.

Mining segment's revenue from external customers in 2010 totaled $3.1 billion, or 31.3% of the consolidated net revenue, an increase of 78.1% over net segment's revenue from external customers of $1.7 billion, or 29.8% of the consolidated net revenue in 2009.

The operating income in the mining segment in 2010 increased by 478.0% to $1.2 billion, or 30.75% of total segment's revenue, compared to the operating income of $205.2 million, or 9.72% of total segment revenue for the year 2009. The adjusted EBITDA in the mining segment in 2010 went up by 224.8% and amounted to $1.5 billion compared to segment's adjusted EBITDA of $452.0 million in 2009. The adjusted EBITDA margin for the mining segment in 2010 was 38.07% compared to 21.40% in 2009. Depreciation, depletion and amortization in the mining segment amounted to $281.4 million which is 21.5% higher than $231.6 million in 2009.

Chief Executive Officer of Mechel Mining Management Company Boris Nikishichev commented on the mining segment operating results: "Last year was very eventful for the segment. We have restored production volumes after the crisis to an unprecedented high level. We made significant progress in implementing major investment projects, such as the construction of the Elga coal complex and the related rail branch line. In 2010 the segment as a whole confidently demonstrated good production and financial performance dynamics.

"We had to face certain difficulties, when several thickeners at the Nerungrinsk washing plant collapsed in the end of the 2010. We took prompt measures to affect the plant's urgent restoration in operational mode. As a result, coking coal concentrate production at the plant resumed in the first half of February this year. In addition, we used the plant's halt to complete the entire set of scheduled equipment maintenance which will enable us not to halt the plant later in the year.

"Favorable market conditions for our products helped the consistent implementation of our projects. Because of Australian floods, we see a rising demand for and growing prices of coking coal and its products as well as for iron ore. Given the persistent supply shortage of coking coal on the world market, we are positive about the prospects for the Group's mining segment in 2011."

Mechel's steel segment's revenue from external customers in 2010 amounted to $5.6 billion, or 57.3% of the consolidated net revenue, an increase of 77.7% over the net segment's revenue from external customers of $3.1 billion, or 54.6% of consolidated net revenue, in the year 2009. Among other factors significant growth in revenue was achieved through increased operations with related metallurgical plants, which amounted to $1051.2 million.

In 2010 the steel segment's operating income increased by 1,708.7% and totaled $297.6 million, or 5.10% of total segment's revenue, versus the operating loss of $18.5 million, or -0.60% of total segment's revenue, a year ago. The adjusted EBITDA in the steel segment in 2010 increased by 312.9% and amounted to $413.6 million, compared to the adjusted EBITDA of $100.2 million in 2009. The adjusted EBITDA margin of the steel segment was 7.09% for the year 2010, versus the adjusted EBITDA margin of 3.03% in 2009. Depreciation and amortization in steel segment rose by 0.5% from $110.3 million in 2009 to $110.9 million in 2010.

Commenting on the results of the steel segment, Andrey Deineko, Chief Executive Officer of Mechel-Steel Management Company, noted: "By the end of 2010 the steel segment showed confident growth in its operating and financial performance. We managed to achieve the highest production volumes on high-margin types of products, such as forgings, stampings, hardware, flat rolled products.

"It should be noted that in the second half of the year, production growth was accompanied by a decrease in cost prices for our core businesses. This became possible due to our ongoing program for developing our plants. Last year we upgraded a number of units and production lines. This work still continues, and in 2012 the division's enterprises will be working on qualitatively new technological level. As a result, we expect to increase our range of products, and production volumes, as well as to continue with spending cuts and further improvement in the division's economics.

"I should also note the success of our sales division, Mechel Service Global, which increased sales to third parties to 3 million tonnes of finished product by the end of 2010, which was the logical result of its efforts to expand the network of warehouses and service centers and expand to new European markets throughout last year. Given Mechel Service Global's long-term plans, we expect that by the end of 2011 it will be able to stand on a par with major European players in the steel distribution market by sales volumes."

Ferroalloys segment's revenue from external customers in the year 2010 amounted to $455.2 million, or 4.7% of the consolidated net revenue, an increase of 25.2% compared with the segment's revenue from external customers of $363.6 million or 6.3% of the consolidated net revenue, in 2009.

In 2010, the operating income in the ferroalloys segment increased by 183.2% and totaled $23.0 million, or 3.65% of total segment's revenue, versus operating loss of $27.6 million, or -6.40% of total segment's revenue, in 2009. The adjusted EBITDA in the ferroalloys segment in 2010 increased by 170.3% and amounted $94.4 million, compared to segment's adjusted EBITDA of $34.9 million in 2009. The adjusted EBITDA margin of the ferroalloys segment comprised 15.01% in 2010 compared to the adjusted EBITDA margin of 8.11% in 2009. Ferroalloys segment's depreciation, depletion and amortization in 2010 were $67.3 million, an increase of 38.2% over $48.7 million in 2009.

Gennadiy Ovchinnikov, Chief Executive Officer of Mechel Ferroalloys Management Company, noted: "The ferroalloys segment completed its last year's performance with improvement in its operational and financial results as compared to 2009. We increased production of almost all types of products, despite the difficulties in chrome ore production which we faced at the beginning of the year. We came out with operating profit and almost tripled adjusted EBITDA. In addition to our enterprises' continuous efforts to optimize costs and increase production efficiency, improved market conditions for the division's products following growth of demand for various types of steel significantly helped our results.

"Our large-scale program for modernization of our production facilities will help maintain positive dynamics in the division's performance. Modernization works have already begun at the Bratsk Ferroalloy Plant, where two of the four furnaces will be upgraded this year, and two more next year. Preparation works to transfer Bratsk Ferroalloy Plant to its own raw materials base at the Uvatsk quartzite deposit is being successfully held. Once the transfer is completed, all of the segment's facilities will be using only their own raw materials. In May 2011 we are due to launch a new constant current furnace at Southern Urals Nickel Plant. These projects will result in significant cost reduction, increase of production volumes, improvement of compliance with environmental standards, which will inevitably affect the segment's financial results for the better."

Mechel's power segment's revenue from external customers in 2010 comprised $653.7 million, or 6.7% of consolidated net revenue, an increase of 22.4% compared with the segment's revenue from external customers of $534.0 million or 9.3% of consolidated net revenue in 2009.

The operating income in the power segment in 2010 amounted to $46.7 million, or 4.40% of the total segment's revenue in the same period, an increase of 14.8% compared to the operating income of $40.7 million, or 4.65% of the total segment's revenue, in 2009. The adjusted EBITDA in the power segment in 2010 went up by 12.5% totaling $60.4 million, compared to the adjusted EBITDA of $53.7 million in 2009. The adjusted EBITDA margin for the power segment amounted to 5.69% compared to 6.16% in 2009. Depreciation and amortization in power segment in 2010 decreased by 6.78% comparing with the year 2009 from $16.07 million to $14.98 million.

Sergey Zorin, Chief Executive Officer of Mechel Energo, noted: "Mechel's power segment keeps growing and developing. In the end of 2010 we acquired 51% of Toplofikatsia Rousse, a power plant located in the Republic of Bulgaria which consumes coal from our assets, thus increasing our stake in its authorized capital stock up to 100%. Last year we took major efforts to optimize production costs, and managed to decrease costs for electric power generation in our main generating facilities in every quarter of the year. It allowed Mechel Energo to complete its performance in 2010 with a substantial increase of operational and financial results as compared to year 2009. In 2011 we plan a series of measures which will help to increase the power division's efficiency which, considering the liberalization of the Russian power market, will enable us to expect further improvement of our performance in the future."

Recent Highlights

  • In December 2010, Mechel announced the launch of a new production line for steel electrode copper-coated wire at its Beloretsk Metallurgical Plant (BMP) subsidiary. The new production line can produce annually 7.9 thousand tonnes.
  • In December 2010, Mechel announced the collapse of three thickeners out of 30 at the Nerungrinsk washing plant, a brunch of Yakutugol OAO, the subsidiary of Mechel Mining OAO. There were no casualties or injuries. A special commission was set up to determine the reasons for and consequences of the accident. Operation at the coking coal wash shop at the Nerungrinsk plant was halted. However, the technological line which processes steam coal kept operating as scheduled.
  • In December 2010, Mechel announced opening of its official representative offices in the Southern Federal District's city of Rostov-on-Don and the Amur Region's city of Blagoveshchensk. The functions of both representative offices will include establishment and maintenance of contacts with government authorities and business community of the Southern Federal District and the Amur Region respectively, representation of Mechel group's interests, strengthening cooperation with Mechel's partners and establishing new relations to ensure expansion of the group's activities.
  • In January 2011, Mechel announced that it has paid a dividend (including taxes) of RUR 910,223,721.05 (approximately US$29.9 million as of December 31, 2010), based on the Company's results for the 2009 fiscal year. This includes RUR 456,510,250.35 paid to holders of preferred shares or RUR 3.29 per one preferred share, and RUR 453,735,112.05 paid to holders of common shares or RUR 1.09 per one common share. The amount of funds allocated to pay the annual dividend is approximately 40% of the company's net profit for 2009 according to US GAAP.
  • In February 2011, Mechel announced the execution a loan agreement to finance the construction of the second line at the Sibirginsk underground mine (owned by Mechel Mining OAO's subsidiary Southern Kuzbass Coal Company OAO). According to the terms of the agreement, Transcreditbank OAO has extended to Southern Kuzbass Coal Company OAO a loan of 6.189 billion rubles (approximately 210.4 million US dollars). The loan will finance acquisition of equipment, construction of the surface complex's buildings and excavation for the second line of Sibirginsk underground mine, which will increase the capacity of the facility up to 2.4 million tonnes of coal per year.
  • In February 2011, Mechel announced the re-launch of the Nerungrinsk washing plant at Yakutugol OAO, following the accident on December 26 which saw the collapse of three thickeners in the washing shop. Operations were resumed at the washing shop's second and third sections, which are fully loaded and will allow the plant to maintain pre-accident levels of concentrate production. Repairs are ongoing at the shop's first section.
  • In February 2011, Mechel announced two placements of interest-bearing bonds of the 15 and 16 series with a centralized custody at MICEX Stock Exchange ZAO. Placement was performed through collection of offers for fixed-price purchase of commercial papers and coupon rate for the first coupon period and before the date of the offer. The bonds' maturity is 10 years, with the offer in three years. The total number of bonds issued made 10,000,000 (100% of the issues volume), the nominal value of the bonds is 1,000 rubles each and the total nominal value of the placed bonds is 10,000,000,000 rubles (nearly 343 million US dollars). The coupon rate of the bonds for the period until the offer date is 8.25% per year which corresponds to 41.14 rubles. Coalmetbank OAO, AKB Svyaz Bank OAO, Alfa-Bank OAO, Bank VTB OAO and Sberbank OAO were managers of the placement. The bonds are included in the MICEX's quotation list A1.
  • In March 2011, Mechel reported start of test melting at the Bratsk Ferroalloy Plant of an industrial probe of quartzite mined from the plant's own resource base, the Uvatsk deposit.The intermediate results of melting of the industrial probe of quartzite, the main raw material used in ferrosilicon production, showed that the Uvatsk deposit's resources are suitable for production of ferrosilicon with 65% silicon content, which is most in demand. The test melting, which is conducted in one of the plant's furnaces, will continue until May 2011.
  • In March 2011, Mechel announced the launch of the reconstructed coking battery #6 at Mechel Mining OAO's subsidiary, Mechel-Coke OOO. The launch will enable the company to step up production of coke and chemical products and ensure production demands are met as well as to provide an independent supply for Mechel's Chelyabinsk Metallurgical Plant OAO and Southern Urals Nickel Plant OAO. Due to the reconstruction, the battery nearly tripled its capacity to 470,000 tonnes of coke annually. The project cost 1.369 billion rubles (48.5 million US dollars*). Launch of the coking battery #6 allows Mechel-Coke to begin reconstruction of the coking battery #5 while increasing production volumes by 5% in 2011 compared to the same period last year.

Yevgeny Mikhel concluded: "On the whole, throughout last year, we kept developing the company by increasing the coal production volumes, modernizing production facilities, perfecting the marketing structure, developing new high value-added products and implementing strategic investment projects, which not only strengthens our market positions, but lay the foundation for Mechel's consistent development for many years ahead."

Financial Position

Capital expenditure on property, plant and equipment and acquisition of mineral licenses for the year 2010 amounted to $990.1 million, of which $621.9 million was invested in the mining segment, $315.2 million was invested in the steel segment, $41.7 million was invested in the ferroalloy segment and $11.2 million was invested in the power segment.

In 2010, Mechel spent $107.0 million on acquisitions, including $70.2 million spent on acquisition of 51% of Toplofikatsia Rousse power plant and $17.5 million spent on acquisition of minority interest in our subsidiaries.

As of December 31, 2010 total debt was at $7.3 billion. Cash and cash equivalents amounted to $340.8 million and net debt amounted to $7.0 billion (net debt is defined as total debt outstanding less cash and cash equivalents) at end of 2010.

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 Full Year 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 US 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 US GAAP.

Adjusted EBITDA represents earnings before Depreciation, depletion and amortization, Foreign exchange gain/(loss), Gain/(loss) from remeasurement of contingent liabilities at fair value, Interest expense, Interest income, Net result on the disposal of non-current assets, Amount attributable to non-controlling interests and Income taxes. Adjusted EBITDA margin is defined as adjusted EBITDA as a percentage of our net revenues. Our adjusted EBITDA may not be similar to EBITDA measures of other companies. Adjusted EBITDA; 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 our adjusted 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 of Investor Relations Mechel OAO Phone: 7-495-221-88-88 Fax: 7-495-221-88-00 vladislav.zlenko@mechel.com