OREANDA-NEWS. On July 10, 2009 Mechel OAO (NYSE: MTL), a leading Russian integrated mining and steel group, announced financial results for the first quarter ended March 31, 2009.

Igor Zyuzin, Mechel’s Chief Executive Officer, commented on the first quarter results: “First quarter of 2009 was rather challenging for Mechel as well as for the whole mining and steel industry. Nevertheless despite the decline in demand and prices for all of company’s products we succeeded in closing the quarter with positive net operating income. Important factor of company’s sustainability in times of crisis in world economy is its vertically integrated structure. It allowed us to support capacity utilization and to demonstrate flexibility in sales in difficult market environment.”

Net revenue in the first quarter of 2009 decreased by 13.9% to US1.2 billion compared to US 1.4 billion in the fourth quarter of 2008. Operating income increased by 105.5% to \\$13.8 million or 1.2% of net revenue, versus operating loss of US 251.3 million, or -18.3% of net revenue, in the fourth quarter of 2008.

For the first quarter of 2009, Mechel reported consolidated net loss of US 690.7 million, an increase of 39.0% over consolidated net loss of US 496.9 million in the fourth quarter of 2008. The main cause of the negative result is foreign exchange difference due to sagging of Ruble rate to Euro and US Dollar rates that amounted to US 592 million. Furthermore the results of the fourth quarter of 2008 enclosed positive tax effect of US 556 million mainly caused by reduction of profit tax in Russia and Kazakhstan since 2009. Therefore effective figures of the first quarter of 2009 demonstrate positive movement in terms of profit generation.

Consolidated EBITDA for the first three months of 2009 that includes foreign exchange difference result increased by 42.0% to - US 474.3 million, compared to US 817.3 million in the previous quarter. Depreciation, depletion and amortization in the first quarter of 2009 were US 75.4 million, a decrease of 32.5% over US 111.6 million in the fourth quarter of 2008.

Mining segment revenue from external customers for the first quarter of 2009 totaled US 344.2 million, or 29% of consolidated net revenue, a decrease of 31.7% over net segment revenue from external customers of US 504.3 million, or 37% of consolidated net revenue, in the fourth quarter of 2008.

Operating income in the mining segment in the first quarter of 2009 decreased by 79.2% to US 50.0 million, or 12.6% of total segment revenue, compared to operating income of US 240.1 million, or 37.6% of total segment revenue, in the fourth quarter of 2008. EBITDA in the mining segment in the first quarter of 2009 decreased by 80.3% to US 41.8 million over segment EBITDA of US 212.0 million in the fourth quarter of 2008. The EBITDA margin for the mining segment was 10.6% for the first three month of 2009, versus 33.2% in the fourth quarter of 2008. Depreciation, depletion and amortization in mining segment in the first quarter of 2009 amounted to US 38.1 million, a decrease of 41.8% over US 65.5 million in the fourth quarter of 2008.

Mechel’s Senior vice-president Vladimir Polin commented on the mining segment operating results: “The results of mining segment were significantly affected by the sharp decline in demand for coking coal. Decrease in production of coking coal at Yakutugol brought about temporary increase in production costs which in turn caused decline in gross margin. Considering more favorable environment for steam coal we reoriented our production to mining mostly steam coal. In view of decreased demand for coking coal especially in the domestic market we concentrated most of our efforts on finding new customers particularly in Asia. As a result in the second quarter we signed a number of large scale long-term contracts with Chinese, Japanese and South Korean companies, which will allow us to increase utilization of coking coal mining capacity setting the base for its restoration to pre-crisis levels. We intend to maximize our efforts to improve results of our mining segment adhering to tight costs control and active marketing policy.”

Steel Segment Results
Revenue from external customers in Mechel’s steel segment decreased by 3.4% in the first quarter of 2009 to US 643.2 million, or 55% of consolidated net revenue, from US 665.9 million, or 49% of consolidated net revenue, in the fourth quarter of 2008.

In the first quarter of 2009 the steel segment operating loss was US 85.2 million, an increase of 76.1% over operating loss of US 363.3 million in the fourth quarter of 2008. EBITDA in the steel segment in the first quarter of 2009 increased by 48.8% despite US 236 million of exchange loss and amounted to - US 260.3 million, compared to EBITDA of - US 508.4 million in the fourth quarter of 2008. The EBITDA margin of the steel segment was -38.0% in the first quarter of 2008 compared to -68.2% in the fourth quarter of 2008. Depreciation, depletion and amortization in steel segment decreased by 26.9% from US 36.1 million in the fourth quarter of 2008 to US 26.4 million in the first quarter of 2009.

Commenting the results of the steel segment Vladimir Polin noted: “It is pleasant to note that despite continued decline in world steel production Mechel’s steel segment output in the first quarter was maintained almost at the level of the previous quarter. We continued implementation of measures aimed at optimization of cost structure. Considering challenging market environment that sets higher standards in regard to production efficiency we have steadily increased output of high value added products. For some time we are witnessing certain stabilization of prices for steel products.

Among other things this process is supported by a decrease in stock at traders’ warehouses, which has fallen to its minimal level in Russia decreasing by 26% in the past half year. We are also witnessing some positive trends on our export markets. There has been some growth in demand from Middle East as well as from South-East Asia. Considering our efforts aimed at development of sales network and restructuring sales geography we succeeded at providing our production assets with offtake orders and increased capacity utilization almost to 100% level. Going forward we will continue realizing measures aimed at improving usage ratios as well as exercising tight control of costs structure in order to achieve increased efficiency of our steel segment when markets recover.”

Ferroalloy Segment Results
Ferroalloy segment revenue form external customers for the first quarter of 2009 increased by 69.3% to US 53.9 million, or 5% of consolidated net revenue, compared with segment revenue from external customers of US 31.8 million, or 2% of consolidated net revenue, in the first quarter of 2008.

Operating loss in the ferroalloy segment in the first quarter of 2009 was US 24.8 million, an increase of 80.5% compared to operating loss of US 127.3 million in the previous quarter. EBITDA in the ferroalloy segment for the first quarter of 2009 inclusive of exchange loss was - US 307.2 million, 38.3% higher than segment EBITDA of - US 498.1 million in the fourth quarter of 2008. For ferroalloy segment depreciation, depletion and amortization in the first quarter of 2009 was US 6.4 million, an increase of 18.5% over US 5.4 million in the fourth quarter of 2008.

Vladimir Polin noted: “In the first quarter of 2009 market conditions for Mechel’s ferroalloy products  remained rather weak. Nevertheless we managed to cut down production costs and following a pick up in prices in the second quarter we increased capacity utilization of our ferroalloy assets to 100%. We continue implementation of measures in order to increase efficiency of our ferroalloys operations. In the near future at our Tikhvin ferrochrome producing plant we plan to achieve designed capacity of dump slag processing unit, which will allow for 5% increase of chrome extraction from ore. Also in the second half of July we plan to increase production volumes of chrome ore which will further reduce costs of chrome concentrate and ferrochrome production.”

Power Segment Results
Mechel’s power segment revenue from external customers for the first three months of 2009 totaled US 138.2 million, or 12% of consolidated net revenue, a decrease of 17.8% over segment revenue from external customers of US 168.0 million, or 12% of consolidated net revenue, in the fourth quarter of 2008.

Operating income in the power segment in the first quarter of 2009 was US 12.1 million, or 5.8% of total segment revenue, an increase of 17.2% compared to operating income of US 10.3 million, or 4.1% of total segment revenue, in the fourth quarter of 2008. EBITDA in the power segment in the first three months of 2009 increased 5.1% totaling US 13.9 million, compared to EBITDA of US 13.2 million in the fourth quarter of 2008. The EBITDA margin for the power segment increased from 5.3% to 6.6%. Depreciation, depletion and amortization in power segment in the first quarter of 2009 decreased 4.7%, compared to the fourth quarter of 2008, from US 4.2 million to US 4.5 million.

Vladimir Polin noted: “From the beginning of the world financial and economic crisis we witness decline in consumption of electricity. Considering the increased proportion of the liberalized electricity market in Russia, the ‘expensive’ electricity is being most hampered. This situation causes partial or full idling of the generating capacities of less efficient companies. In this light, one of the top priority of the power segment of our business is to increase competitiveness. We work on decreasing costs, lowering the amount of fuel consumption and utilizing synergies of our vertical integration. Due to measures already conducted, we have minimized decline in electricity generation demonstrating better than Russian-average results.”

Recent Highlights
In June 2009 Mechel announced that electric arc furnaces No. 1 and No. 2 at Tikhvin Ferroalloy Smelting Plant (JSC “TFZ”), a subsidiary of Oriel Resources Ltd. (Great Britain), have been commissioned. Today all of the four electric furnaces concurrently operate at Tikhvin Ferroalloy Smelting Plant. Thus, Mechel increases its output of high quality ferrochrome, an alloy required to produce stainless and special steels. From January 2009, steady supplies of high quality chrome ore commenced from the new Voskhod Mining and Processing Plant (Kazakhstan).

In June 2009 Mechel announced that its Mechel Trading AG subsidiary has signed a long-term coking coal supply contract with South Korean Hyundai Steel. Pursuant to the contract, coal will be supplied during the next five years starting from April 1, 2010. The supply volumes will reach 300,000 tonnes p.a. The coal deliveries to South Korea will be performed on FOB basis via Mechel’s Trade Port Posiet subsidiary.

In June 2009 Mechel announced that the official restart of coke oven battery No. 4 was held at its Chelyabinsk Metallurgical Plant’s Mechel-Coke OOO subsidiary. Coke oven battery No. 4’s operations were suspended in January 2008 due to its capital repair. Coke oven battery No. 4 will supply additional coke to CMP’s blast furnace workshop and produce 200 million cubic meters of gas for operation of the plant’s power facilities.

In June 2009 Mechel announced that in May 2009 high level of production capacity utilization was witnessed at its metallurgical plants as compared to the average level of capacity utilization in January – August 2008. Steel-making capacity utilization was more than 94%, metallurgical commodity products capacity utilization was more than 95%, including rolled products reached the level of about 99%, hardware – about 74%, forgings and stampings crossed the level of 58%. Mechel’s plants in Romania steelmaking capacity utilization in May 2009 was about 76%, hardware production capacity load was about 83%.

In June 2009 Mechel announced the restart of a block of coke oven batteries No. 2 at its Moscow Coke and Gas Plant OAO (Moskoks). After the restart, the plant’s average monthly capacity utilization level will become equal to the average rates of the first eight months of 2008 (pre-crisis level). After commissioning of the block #2 Mechel’s coking assets capacity utilization will reach 100%.

In June 2009 Mechel announced starting production for repair of type 2 BC-105 dump cars at its Korshunov Mining Plant OAO subsidiary and obtaining a permit for the repaired dump cars to be used at railways of Russia. All activities to start new production including process technology and specifications-supplied unique equipment development as well as construction and erection works were performed in-house without involvement of design companies and contractors allowing for costs minimization. Inspecting authorities have confirmed full compliance with process technology and safety regulations of Russian Railways JSC. Capacity of new production provides for Korshunov Mining Plant annual needs for type 2 BC dump cars repairs of 180 dump cars per year.

In June 2009 Mechel announced signing of contracts for coking and steam coal supplies to Chinese, Japanese, and South Korean companies for 2009. Currently total volume of supplies for 2009 fiscal year under contracts with Chinese, Japanese, and South Korean companies amounts to approximately 2 million tons of coking coal concentrate produced at Yakutugol and 2.3 million tons of steam coal of various grades produced at Yakutugol and Southern Kuzbass. Starting from 2007, Mechel also performs successful sales of iron ore concentrate produced at its Korshunov Mining Plant to China.

Igor Zyuzin concluded: “The beginning of 2009 was a difficult period for our company. It required significant efforts to adopt Mechel to the drastically falling world economy and keep production from being idled. Nevertheless, we managed not only to maintain our business, but even in this environment we demonstrated positive operational income. We have found new sources and ways to decrease costs and increase efficiency, became more active and flexible in our sales, entered new geographical markets, optimized logistics. Even more, while we witnessed decrease in global demand, we still managed to increase our market share in some of our products. Thus Mechel today is fully capable to utilize the stabilization of the world economy we start to feel today and to increase shareholder value.”

Financial Position
Capital expenditure on property, plant and equipment and acquisition of mineral licenses for the first quarter of 2009 amounted to US 96.1 million, of which US 40.6 million was invested in the mining segment, US 42.7 million was invested in the steel segment, US 12.8 million was invested in the ferroalloy segment and US 25 thousand was invested in the power segment.

In the first quarter of 2009 Mechel spent US 13.6 million on acquisitions, including US 4.1 million spent on acquisition of minority interest in other subsidiaries.

As of March 31, 2009 total debt was at US 5.8 billion. Cash and cash equivalents amounted to US 953.3 million at the end of the first quarter of 2009 and net debt amounted to US 4.9 billion (net debt is defined as total debt outstanding less cash and cash equivalents).