OREANDA-NEWS. MECHEL reports 2007 first Quarter Financial and production results.

- Revenues increased of $1.4 billion
- Operating income increased of $327.7 million
- Net income of $205 million, $1.47 per ADR or $0.49 per diluted share

Moscow, Russia - July 11, 2007- Mechel OAO (NYSE: MTL), a leading Russian integrated mining and steel group, today announced financial and production results for the first quarter ended March 31, 2007. 

Consolidated Results

Net revenue in the first quarter of 2007 increased 65.9% to $1.4 billion from $853.5 million in the first quarter of 2006, reflecting strong selling prices across the Company’s main product categories.  Operating income was $327.7 million, or 23.1% of net revenue, an increase of 455.4% over operating income of $59.0 million, or 6.9% of net revenue, in the first quarter of 2006. For the first quarter of 2007, Mechel reported consolidated net income of $205.0 million, or $1.47 per ADR ($0.49 per diluted share), compared to consolidated net income of $62.9 million, or $0.48 per ADR ($0.16 per diluted share) in the first quarter of 2006. Consolidated EBITDA was $355.5 million in the first quarter of 2007, compared to $134.4 million a year ago, an increase of 164.5%.  The increase in EBITDA was primarily the result of the higher sales volumes in the Company’s main product categories, as well as positive pricing dynamics and the impact of steps the Company has taken to improve production efficiency and lower operating costs. Selling  expenses decreased to 8.4% of sales for the first quarter or 2007 compared with 12.0% for the same quarter in the prior year as a result of positive changes to the sales structure.  General and administrative expense were reduced to 5.4% of sales for the quarter, compared with 7.2% in the first quarter of 2006, due to tighter cost controls.  Please see the attached tables for a reconciliation of consolidated EBITDA to net income.

Mining segment revenue from external customers for the first quarter of 2007 totaled $421.4 million, or 29.8% of consolidated net revenue, an increase of 45.6% over segment revenue from external customers of $289.5 million, or 33.9% of consolidated net revenue, in the first quarter of 2006. Operating income in the first quarter of 2007 in the mining segment was $181.7 million, or 30.8% of total segment revenues, an increase of 520.4% compared to operating income of $29.3 million, or 8.0% of total segment revenues, a year ago.  EBITDA in the mining segment for the 2007 first quarter was $196.2  million, an increase of 238.3% compared to EBITDA of $58.0 million a year ago, with an EBITDA margin increase to 33.3% from 15.9% in the 2006 first quarter.  Results in the Company’s mining segment for the first quarter of 2006 include a one-time extraction tax accrual of $20 million, as previously announced. Igor Zyuzin commented on the results of the mining segment, "Market conditions remained strong in the mining segment, and Mechel continued to implement its strategy aimed at further growing its mining operations. Investments in construction of new mining facilities and modernization of mining equipment allowed us to achieve significant increase in coal output in the first quarter of 2007 as compared to the same period a year ago.  We leveraged the strong market conditions  and doubled EBITDA margin for the segment to 33.3%.  We also increased our nickel output by 22% due to the further optimization of our production processes. Taking into consideration current favorable market conditions, we remain optimistic with regard to the overall outlook for the segment for the remainder of this year."

Revenues from external customers in Mechel’s steel segment increased 76.4% to $994.7 million, or 70.2% of consolidated net revenue, in the first quarter of 2007 as compared to $564.1 million, or  66.1%, in the first quarter of 2006. For the first quarter of 2007, the steel segment generated operating income of $146.0 million, or 14,5% of total segment revenues, an increase of 391.3% compared to operating income of $29.7 million, or 5.2% of total segment revenues, during the first quarter of 2006.  EBITDA in the steel segment for the 2007 first quarter was $159.2 million, an increase of 108.4% when compared to EBITDA of $76.4 million in the 2006 first quarter.  The EBITDA margin in the first quarter of 2007 was 15.8%, compared to 13.4% a year ago. Igor Zyuzin commented, "In the steel segment, we continue to focus our efforts on enhancing profitability through modernization of production and control over costs as well as further shifting our sales mix to an increased proportion of value-added, higher margin products.  The capital expenditure program which we continue to implement in the steel segment has enabled us to decrease raw material consumption ratios, resulting in reduced production costs and increased production output.  We also continued to steadily increase the share of continuously cast stee. At the end of last year we commissioned a new continuous casting machine at Chelyabinsk Metallurgical Plant, and another one was commissioned at our Romanian subsidiary, Mechel Targoviste, in the first quarter of this year."

Recent developments
In July, Mechel OAO announced the appointment of Stanislav Ploschenko as its Acting Chief Financial Officer. In this position Stanislav Ploschenko replaced Anton Vishanenko.
In July, Mechel OAO provided additional information regarding its capital expenditure program for 2007-2011.  Mechel plans to invest about $1.5 billion in its steel segment and about $1.2 billion in its coal segment during five years. Igor Zyuzin concluded, "Overall, we achieved significant progress in the first quarter of 2007, compared to the first quarter of 2006.  We continue to steadily implement our strategy, focusing on modernizing production, increasing output and controlling costs while also capitalizing on the favorable conditions currently seen in our markets.  As we carry out our recently announced capital expenditure program, we intend to further focus on increasing operational performance in both segments.  Our position as an integrated producer with a diversified product portfolio and broad market base will allow us to flexibly react to the changing market environment, positioning us well for the future."

Financial Position

Capital expenditure in the first quarter of 2007 amounted to $81.8 million, of which $29.4 million was invested in the mining segment and $52.3 million in the steel segment. In the first quarter of 2007, Mechel spent $4.2 million on acquisitions, and another $6.1 million was spent on acquisition of minority interest in other subsidiaries.  As of March 31, 2007, total debt 1 was at $408.8 million.  Cash and cash equivalents amounted to $209.1 million at the end of the period and net debt amounted to $199.7 million (net debt is defined as total debt outstanding less cash and cash equivalents). * One American Depositary Share is equivalent to three diluted shares. The management of Mechel will host a conference call today at 6 p.m. Moscow time (10 a.m. New York time, 3 p.m. London time) to review Mechel’s financial results and comment on current operations.  The call may be accessed via the Internet at http://www.mechel.com, under the Investor Relations section. For more detailed information look on http://www.mechel.com/news/article.wbp?article-id=C4A2AFCB-3CD7-4BF5-9D53-A4EDABF3BFC8