Mechel Reports 1H 2011 Financial Results

OREANDA-NEWS. October 12, 2011. Mechel OAO (NYSE: MTL), a leading Russian mining and steel group, today announced financial results for the 1H 2011.

Yevgeny Mikhel, Mechel’s Chief Executive Officer, commented on the 2Q 2011 results: “The company was quite successful in this period. Despite a few difficulties we had to contend with early in the year, we concentrated on restoring production volumes in our mining segment while preserving high capacity utilization rates in steel and other segments. Our efforts were also directed to the implementation of the company’s ambitious investment program.

“As a result, in the second quarter we demonstrated a growth in mining volumes and sales of nearly all our products, which, when combined with fairly favorable market conditions, enabled us to improve the financial results of the previous period.”

Consolidated Results For The 1H 2011

USD  thousand 1H 2011 1H 2010 Change Y-on-Y Revenue from external customers 6,406,944 4,331,284 47.9% Intersegment sales 1,092,366 781,271 39.8% Operating income 924,685 555,146 66.6% Operating margin 14.43% 12.82% - Net income attributable to shareholders of Mechel OAO 501,022 120,820 314.7% Adjusted EBITDA (1) (2) 1,179,174 786,142 50.0% Adjusted EBITDA, margin (1) 18.40% 18.15% -

(1) See Attachment A.

(2) Adjusted EBITDA is EBITDA adjusted for effects of remeasurement of contingent liabilities at fair value, forex gain/(loss), net result on the disposal of non-current assets, amounts attributable to non-controlling interests and interest income.

Consolidated Results For The 2Q 2011

USD  thousand 2Q 2011 1Q 2011 Change Q-on-Q Revenue from external customers 3,472,453 2,934,491 18.3% Intersegment sales 547,028 545,338 0.3% Operating income 476,331 448,354 6.2% Operating margin 13.72% 15.28% - Net income attributable to shareholders of Mechel OAO 191,906 309,116 -37.9% Adjusted EBITDA (1) (2) 612,324 566,852 8.0% Adjusted EBITDA, margin (1) 17.63% 19.32%

(1) See Attachment A.

(2) Adjusted EBITDA is EBITDA adjusted for effects of remeasurement of contingent liabilities at fair value, forex gain/(loss), net result on the disposal of non-current assets, amounts attributable to non-controlling interests and interest income.

The net revenue in 2Q 2011 increased by 18.3% and amounted to USD 3.5 billion compared to USD 2.9 billion in 1Q 2011. The operating income rose by 6.2% and amounted to USD 476.3 million or 13.72% of the net revenue, compared to the operating income of USD 448.4 million or 15.28% of the net revenue in 1Q 2011.

In 2Q 2011, Mechel’s consolidated net income attributable to shareholders of Mechel OAO decreased by 37.9% to USD 191.9 million compared to the consolidated net income attributable to shareholders of Mechel OAO of USD 309.1 million in 1Q 2011.

The consolidated adjusted EBITDA in 2Q 2011 increased by 8.0% to USD 612.3 million, compared to USD 566.9 million in 1Q 2011. Depreciation, depletion and amortization in 2Q 2011 for the Company were USD 138.6 million, a decrease of 1.2% compared to USD 140.2 million in 1Q 2011.

Mining Segment Results For The 1H 2011

USD  thousand 1H 2011 1H 2010 Change Y-on-Y Revenue from external customers 1,931,936 1,286,668 50.2% Intersegment sales 537,452 386,642 39.0% Operating income 766,511 468,673 63.5% Net income attributable to shareholders of Mechel OAO 616,620 240,539 156.3% Adjusted EBITDA(1) (2) 919,155 600,075 53.2% Adjusted EBITDA, margin (3) 37.22% 35.86% -

(1) See Attachment A.

(2) Adjusted EBITDA is EBITDA adjusted for effects of remeasurement of contingent liabilities at fair value, forex gain/(loss), net result on the disposal of non-current assets, amounts attributable to non-controlling interests and interest income.

(3) Adjusted EBITDA margin is calculated as a percentage of consolidated revenues of the segment, including intersegment sales.

Mining Segment Results For The 2Q 2011

USD  thousand 2Q 2011 1Q 2011 Change Q-on-Q Revenue from external customers 1,103,812 828,124 33.3% Intersegment sales 277,192 260,260 6.5% Operating income 474,455 292,056 62.5% Net income attributable to shareholders of Mechel OAO 325,945 290,675 12.1% Adjusted EBITDA(1) (2) 557,962 361,193 54.5% Adjusted EBITDA, margin (3) 40.40% 33.19% -

(1) See Attachment A.

(2) Adjusted EBITDA is EBITDA adjusted for effects of remeasurement of contingent liabilities at fair value, forex gain/(loss), net result on the disposal of non-current assets, amounts attributable to non-controlling interests and interest income.

(3) Adjusted EBITDA margin is calculated as a percentage of consolidated revenues of the segment, including intersegment sales

Mining Segment Output and Sales For The 2Q 2011

Production:

Product name 2Q 2011, thousand tonnes 1Q 2011, thousand tonnes 2Q 2011 vs. 1Q 2011, % Coal (run-of-mine) 6,547.6 5,985.1 9%

Product Sales:

Product name 2Q 2011, thousand tonnes 1Q 2011, thousand tonnes 2Q 2011 vs. 1Q 2011, % Coking coal concentrate 2,506.9 1,963.3 28% PCI 595.6 135.5 340% Anthracites 538.1 476.3 13% Steam coal 1,554.7 1,773.0 -12% Iron ore concentrate 1,193.8 1,048.2 14% Including iron ore concentrate supplied to Mechel enterprises 463.0 459.0 1% Coke 811.9 879.6 -8% Including coke supplied to Mechel enterprises 543.3 573.1 -5%

Mining segment’s revenue from external customers in 2Q 2011 totaled USD 1.1 billion, or 31.8% of the consolidated net revenue, an increase of 33.3% over net segment’s revenue from external customers of USD 828.1 million, or 28.2% of the consolidated net revenue in 1Q 2011.

The operating income in the mining segment in 2Q 2011 increased by 62.5% to USD 474.5 million, or 34.4% of total segment’s revenue, compared to the operating income of USD 292.1 million, or 26.8% of total segment revenue for the 1Q 2011. The adjusted EBITDA in the mining segment in 2Q 2011 went up by 54.5% and amounted to USD 558.0 million compared to segment’s adjusted EBITDA of USD 361.2 million in 1Q 2011. The adjusted EBITDA margin for the mining segment in 2Q 2011 was 40.4% compared to 33.2% in 1Q 2011. Depreciation, depletion and amortization in the mining segment amounted to USD 79.2 million which is 4.6% less than USD 83.0 million in 1Q 2011.

Chief Executive Officer of Mechel Mining Management Company Boris Nikishichev commented on the mining segment operating results: “The segment’s second-quarter results noticeably improved on the first quarter’s results on all points. We increased volumes of coal mining and concentrate production, while cutting down on mining costs in most of our assets, increased sales. This reflected in the improvement of our financial results. For example, EBITDA in the 2 nd quarter grew by over 50% compared to the 1st quarter.

“The chief factors that had a positive impact on our work’s results in this quarter were restoring our mining and coal processing volumes on Yakutugol, planned production growth on the other facilities, and improving conditions on the coal and iron ore market.

“Our success in implementing strategic investment projects must also be noted. Active work on constructing Elga Coal Complex and its railway link allowed us to begin mining at the open pit and ship first coal to our customers as early as in August.”

Steel Segment Results For The 1H 2011

USD  thousand 1H 2011 1H 2010 Change Y-on-Y Revenue from external customers 3,817,400 2,483,858 53.7% Intersegment sales 163,797 108,464 51.0% Operating income 162,371 101,758 59.6% Net income / (loss) attributable to shareholders of Mechel OAO (56,254) 3,821 -1,572.2% Adjusted EBITDA (1) (2) 215,215 154,312 39.5% Adjusted EBITDA, margin (3) 5.41% 5.95% -

(1) See Attachment A.

(2) Adjusted EBITDA is EBITDA adjusted for effects of remeasurement of contingent liabilities at fair value, forex gain/(loss), net result on the disposal of non-current assets, amounts attributable to non-controlling interests and interest income.

(3) Adjusted EBITDA margin is calculated as a percentage of consolidated revenues of the segment, including intersegment sales.

Steel Segment Results For The 2Q 2011

USD  thousand 2Q 2011 1Q 2011 Change Q-on-Q Revenue from external customers 2,060,278 1,757,122 17.3% Intersegment sales 74,846 88,951 -15.9% Operating income 36,779 125,592 -70.7% Net income / (loss) attributable to shareholders of Mechel OAO (71,435) 15,181 -570.6% Adjusted EBITDA (1) (2) 65,412 149,803 -56.3% Adjusted EBITDA, margin (3) 3.06% 8.11% -

(1) See Attachment A.

(2) Adjusted EBITDA is EBITDA adjusted for effects of remeasurement of contingent liabilities at fair value, forex gain/(loss), net result on the disposal of non-current assets, amounts attributable to non-controlling interests and interest income.

(3) Adjusted EBITDA margin is calculated as a percentage of consolidated revenues of the segment, including intersegment sales.

Steel Segment Output and Sales For The 2Q 2011

Production:

Product name 2Q 2011, thousand tonnes 1Q 2011, thousand tonnes 2Q 2011 vs. 1Q 2011, % Pig iron 824.2 1,013.2 -19% Steel 1,420.8 1,588.4 -11%

Product Sales:

Product name 2Q 2011, thousand tonnes 1Q 2011, thousand tonnes 2Q 2011 vs. 1Q 2011, % Flat products 167.5 205.5 -18% Including those produced by third parties 19.4 24.1 -20% Long products 1,158.1 897.1 29% Including those produced by third parties 63.8 62.3 2% Billets 730.0 682.2 7% Including those produced by third parties 146.3 112.6 30% Hardware and welded mesh 247.5 209.7 18% Including those produced by third parties 6.6 4.7 40% Forgings 20.9 20.7 1% Stampings 31.9 27.0 18%

Mechel’s steel segment’s revenue from external customers in 2Q 2011 amounted to USD 2.1 billion, or 59.3% of the consolidated net revenue, an increase of 17.3% over the net segment’s revenue from external customers of USD 1.8 billion, or 59.9% of consolidated net revenue, in the 1Q 2011.

In 2Q 2011, the steel segment’s operating income decreased by 70.7% and totaled USD 36.8 million, or 1.7% of total segment’s revenue, versus the operating income of USD 125.6 million, or 6.8% of total segment’s revenue, in 1Q 2011. The adjusted EBITDA in the steel segment in 1H 2011 decreased by 56.3% and amounted to USD 65.4 million, compared to the adjusted EBITDA of USD 149.8 million in 1Q 2011. The adjusted EBITDA margin of the steel segment was 3.06% for the 2Q 2011, versus the adjusted EBITDA margin of 8.11% in 1Q 2011. Depreciation and amortization in steel segment rose by 11.3% from USD 29.1 million in 1Q 2011 to USD 32.4 million in 2Q 2011.

Commenting on the results of the steel segment Andrey Deineko, Chief Executive Officer of Mechel-Steel Management Company, noted: “In the second quarter we managed to retain a high workload and used the period of rising prices for construction products to increase sales of our key products — rebar and hardware, by 46% and 12% respectively. We made full use of our expansive Mechel Service Global sales network, which allowed us to stock our warehouses to the maximum in the first quarter for efficient sales in the second quarter, which is a traditional high season for steel products.

“Nevertheless, I must note that the situation in the steel market was not so favorable in the second quarter. We had to deal with growing prices for raw materials, which were not compensated by the growth of steel prices. Scheduled repairs of the furnace #5 at our largest asset, Chelyabinsk Metallurgical Plant, provided additional pressure on production costs and the division’s final financial results in the second quarter.

“We continue to consistently implement our investment program aimed at upgrading our production facilities and making the steel segment more efficient. For example, the investment project on Izhstal’s modernization overhaul is nearly complete. After launching a new electric arc furnace, an out-of-furnace steel processing complex and a concaster, in August we made the warm launch of the mill and are currently holding tests. Construction of the universal rolling mill at Chelyabinsk Metallurgical Plant is also going along actively.”

Ferroalloys Segment Results For The 1H 2011

USD  thousand 1H 2011 1H 2010 Change Y-on-Y Revenue from external customers 255,653 227,539 12.4% Intersegment sales 123,365 77,125 60.0% Operating income 10,774 4,719 128.3% Net loss attributable to shareholders of Mechel OAO (22,746) (91,842) 75.2% Adjusted EBITDA (1) (2) 54,323 41,563 30.7% Adjusted EBITDA, margin (3) 14.33% 13.64% -

(1) See Attachment A.

(2) Adjusted EBITDA is EBITDA adjusted for effects of remeasurement of contingent liabilities at fair value, forex gain/(loss), net result on the disposal of non-current assets, amounts attributable to non-controlling interests and interest income.

(3) Adjusted EBITDA margin is calculated as a percentage of consolidated revenues of the segment, including intersegment sales.

Ferroalloys Segment Results For The 2Q 2011

USD  thousand 2Q 2011 1Q 2011 Change Q-on-Q Revenue from external customers 131,519 124,134 5.9% Intersegment sales 70,700 52,665 34.2% Operating income / (loss) (1,085) 11,859 -109.1% Net loss attributable to shareholders of Mechel OAO (20,499) (2,247) -812.3% Adjusted EBITDA (1) (2) 19,217 35,106 -45.3% Adjusted EBITDA, margin (3) 9.50% 19.86% -

(1) See Attachment A.

(2) Adjusted EBITDA is EBITDA adjusted for effects of remeasurement of contingent liabilities at fair value, forex gain/(loss), net result on the disposal of non-current assets, amounts attributable to non-controlling interests and interest income.

(3) Adjusted EBITDA margin is calculated as a percentage of consolidated revenues of the segment, including intersegment sales.

Ferroalloys Segment Output and Sales For The 2Q 2011

Product Sales:

Product name 2Q 2011, thousand tonnes 1Q 2011, thousand tonnes 2Q 2011 vs. 1Q 2011, % Nickel 4.6 3.8 21% Including nickel supplied to Mechel enterprises 1.8 1.2 50% Ferrosilicon 22.1 24.1 -8% Including ferrosilicon supplied to Mechel enterprises 7.4 7.0 6% Chrome 14.8 11.3 31% Including chrome supplied to Mechel enterprises 4.6 3.3 39%

Ferroalloys segment’s revenue from external customers in the 2Q 2011 amounted to USD 131.5 million, or 3.8% of the consolidated net revenue, an increase of 5.9% compared with the segment’s revenue from external customers of USD 124.1 million or 4.2% of the consolidated net revenue, in 1Q 2011.

In 2Q 2011, the operating loss in the ferroalloys segment totaled USD 1.1 million, or -0.5% of total segment’s revenue, decreasing by 109.1% versus operating income of USD 11.9 million, or 6.7% of total segment’s revenue, in 1Q 2011. The adjusted EBITDA in the ferroalloys segment in 2Q 2011 decreased by 45.3% and amounted USD 19.2 million, compared to segment’s adjusted EBITDA of USD 35.1 million in 1Q 2011. The adjusted EBITDA margin of the ferroalloys segment comprised 9.5% in 2Q 2011 compared to the adjusted EBITDA margin of 19.9% in 1Q 2011. Ferroalloys segment’s depreciation, depletion and amortization in 2Q 2011 were USD 21.7 million, a decrease of 3.1% over USD 22.4 million in 1Q 2011.

Gennadiy Ovchinnikov, Chief Executive Officer of Mechel Ferroalloys Management Company, noted: “Every quarter the ferroalloys division demonstrates stable production results for nickel and ferrosilicon while increasing production of ferrochrome. In this year’s second quarter ferrochrome production grew by 10%, while sales went up by 30%.

“We continue to implement the modernization program for the segment’s facilities. We are about to launch an experimental constant current furnace on Southern Urals Nickel Plant, as part of mastering the technology of electric smelting of nickel ore. If the experimental furnace yields successful tests, the new technology will enable us to increase nickel production while cutting costs. Tikhvin Ferroalloys Plant is shortly due to launch a workshop producing chrome bales. This technology will also allow us to increase production of chrome and make the plant ecologically safer. Bratsk Ferroalloys Plant, which produces ferrosilicon, is due to re-launch the furnace #4 after reconstruction.

Implementation of all these projects will allow us to cut costs and increase production volumes.”

Power Segment Results for The 1H 2011

USD  thousand 1H 2011 1H 2010 Change Y-on-Y Revenue from external customers 401,955 333,219 20.6% Intersegment sales 267,752 209,040 28.1% Operating income 33,359 16,912 97.3% Net income attributable to shareholders of Mechel OAO 13,473 5,218 158.2% Adjusted EBITDA (1) (2) 40,552 27,107 49.6% Adjusted EBITDA, margin(3) 6.06% 5.00% -

(1) See Attachment A.

(2) Adjusted EBITDA is EBITDA adjusted for effects of remeasurement of contingent liabilities at fair value, forex gain/(loss), net result on the disposal of non-current assets, amounts attributable to non-controlling interests and interest income.

(3) Adjusted EBITDA margin is calculated as a percentage of consolidated revenues of the segment, including intersegment sales.

Power Segment Results for The 2Q 2011

USD  thousand 2Q 2011 1Q 2011 Change Q-on-Q Revenue from external customers 176,845 225,110 -21.4% Intersegment sales 124,290 143,462 -13.4% Operating income (176) 33,535 -100.5% Net income attributable to shareholders of Mechel OAO (6,721) 20,194 -133.3% Adjusted EBITDA (1) (2) 5,115 35,437 -85.6% Adjusted EBITDA, margin(3) 1.70% 9,61% -

(1) See Attachment A.

(2) Adjusted EBITDA is EBITDA adjusted for effects of remeasurement of contingent liabilities at fair value, forex gain/(loss), net result on the disposal of non-current assets, amounts attributable to non-controlling interests and interest income.

(3) Adjusted EBITDA margin is calculated as a percentage of consolidated revenues of the segment, including intersegment sales.

Power Segment Output and Sales For The 2Q 2011

Product name 2Q 2011, thousand tonnes 1Q 2011, thousand tonnes 2Q 2011 vs. 1Q 2011, % Electric power generation (ths. kWh) 967,107.4 1,150,317.6 -16% Heat power generation (Gcal) 1,236,383.7 2,704,464.3 -54%

Mechel’s power segment’s revenue from external customers in 2Q 2011 comprised USD 176.8 million, or 5.1% of consolidated net revenue, a decrease of 21.4% compared with the segment’s revenue from external customers of USD 225.1 million or 7.7% of consolidated net revenue in 1Q 2011.

The operating loss in the power segment in 2Q 2011 amounted to USD 0.2 million, or -0.1% of the total segment’s revenue in the same period, a decrease of 100.5% compared to the operating income of USD 33.5 million, or 9.10% of the total segment’s revenue, in 1Q 2011. The adjusted EBITDA in the power segment in 2Q 2011 went down by 85.6% totaling USD 5.1 million, compared to the adjusted EBITDA of USD 35.4 million in 1Q 2011. The adjusted EBITDA margin for the power segment in 2Q 2011 amounted to 1.7% compared to 9.6% in 1QH 2011. Depreciation and amortization in power segment in 2Q 2011 decreased by 7.20% comparing with the 1Q 2011 from USD 5.70 million to USD 5.29 million.

Anatoly Merzlyakov, Chief Executive Officer of Mechel Energo, noted: “In the power segment, the second quarter was marked with a seasonal decrease of generating and selling heat and electricity, which had its effect on the financial results.

“At the same time, we traditionally used this year’s warm period to the maximum to make scheduled repairs, upgrade equipment and prepare our generating facilities for the fall-winter full load, when the division’s production and financial results are expected to improve notably.”

Recent Highlights

In August 2011, Mechel announced the signing of a three-party contract between Mecheltrans Vostok OOO, Sinara-Transport Machines OAO, and VTB Leasing OAO for development, production and delivery of TEM-8 type locomotives. The contract stipulates that in 2012-2014 Lyudinovsky Diesel-Locomotive Building Works (part of Sinara-Transport Machines OAO) will deliver 18 single-sectional eight-axle TEM-8 locomotives to Mecheltrans Vostok OOO.

In August 2011, Mechel announced a JORC summary of its ore reserves and mineral resources. Based on the review prepared by IMC Group Consulting Ltd., the total JORC Equivalent Coal Ore Reserves and Resources as of May 1, 2011 were 3,271 million tonnes and 4,373 million tonnes, respectively, while total JORC Equivalent Iron Ore Reserves and Resources as of May 1, 2011 were 267 million tonnes and 427 million tonnes, respectively.

In August 2011, Mechel announced the launch of the new converter # 2 in Chelyabinsk Metallurgical Plant’s oxygen-converter shop. Replacement of the converter #2 is the first stage in the complex reconstruction program for Chelyabinsk Metallurgical Plant’s oxygen converter shop.

In August 2011, Mechel announced achieving highest monthly production results at the Nerungrinskaya processing plant of Yakutugol Holding Company OAO and that Sakha Republic’s Agency for Use of Mineral Resources gave permission to launch the first stage of the open pit development at the Elga deposit. Separately, construction of the Ulak-Elga railway link was completed up to the 209 km point ahead of schedule.

In September 2011, Mechel announced the creation of Mechel Somani Carbon Private Limited, India, set up jointly with India’s Somani Group. The joint venture will handle distribution of metallurgical coals on the Indian market. The project’s distribution area will be located on India’s east coast, 20 kilometers from India’s major port of Vizag, in an industrially developed region.

In September 2011, Mechel announced the first results of mining in Yakutugol Holding Company OAO’s Elga Coal Complex. In accordance with plans announced earlier, mining at the Elga deposit started in August. The Elginsky open pit yielded some 21,000 tonnes of coal in less than a month. The start of the mining process was timed to the commissioning of the Ulak-Elga railway from point 1 to the 209-kilometer point, with the railway planned to be fully completed in December 2011.

In September 2011, Mechel announced record coal transshipment results achieved by Trade Port Posiet OAO in August. In August, Trade Port Posiet OAO loaded 26 cargo ships with a total of 509,000 tonnes of coal products, which is the best monthly result in the port’s history. The record was achieved due to improvements in the port’s technical support made within the framework of the large-scale modernization program scheduled to be completed by the end of 2012.

In September 2011, Mechel announced the signing of a strategic partnership memorandum with SAP AG, the world’s leading supplier of business management software solutions. The document provides for the gradual implementation of SAP software solutions, based on specialized industry packages in Mechel’s mining, steel and sales divisions. The two sides also decided to jointly implement the Enterprise Resource Planning (ERP) project in all of Mechel’s sales network business units.

In October 2011, Mechel announced establishing its official representative office in Minsk, the Republic of Belarus. Mechel OAO’s representative office will provide support to the company’s business interests in Belarus, maintain contact with governmental authorities, arrange meetings with representatives of the local business community, search for new partners and ensure informational support for the company’s activities in Belarus.

Financial Position

Capital expenditure on property, plant and equipment and acquisition of mineral licenses for the 1H 2011 amounted to USD 769.5 million, of which USD 562.4 million was invested in the mining segment, USD 174.6 million was invested in the steel segment, USD 18.7 million was invested in the ferroalloy segment and USD 13.8 million was invested in the power segment.

As of June 30, 2011 total debt was at USD 8.9 billion. Cash and cash equivalents amounted to USD 356.2 million and net debt amounted to USD 8.6 billion (net debt is defined as total debt outstanding less cash and cash equivalents) at end of 2Q 2011.

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 http://www.mechel.com, under the Investor Relations section.