Russian mining company Mechel OAO (MTL) recorded a net income of $191.9 million in the second quarter of 2011, down 37.9% from the previous quarter’s consolidated net income of $309.1 million.
Revenues in the second quarter soared 18.3% sequentially to $3.5 billion based on the company’s relentless efforts restoring production volumes in its mining segment while preserving high capacity utilization rates in steel and other segments.
Operating income in the reported quarter climbed by 6.2% to $476.3 million versus the first quarter of 2011. Operating margin was 13.72% in the second quarter of 2011 versus 15.28% in the first quarter of 2011.
Segment Performance
Mining Segment: The segment’s revenue from external customers in the quarter totaled $1.1 billion, an increase of 33.3% over $828.1 million in the sequential quarter. The segment’s operating margin was 34.4% versus 26.8% in the previous quarter. The adjusted EBITDA in the mining segment in 2Q 2011 went up by 54.5% and amounted to $558.0 million compared to the segment's adjusted EBITDA of $361.2 million in 1Q 2011.
In the reported quarter, the company restored its mining and coal processing volumes on Yakutugol, and also there was planned production growth at the other facilities. Mechel increased volumes of coal mining and concentrate production and sales of the segment while cutting down on mining costs in most of its assets.
Also the company implemented strategic investment projects and began mining at the open pit at the Coal Complex and its railway link and shipped its first coal to customers in August 2011.
Steel Mining Segment: Revenues from the Steel Mining segment made up 59.3% of total revenue, soaring 17.3% sequentially to $2.1 billion. The segment reported an operating income of $36.8 million versus its prior quarter operating income of $125.6 million.
The company continued developing high value added products as well as maintaining a high workload for its facilities and also increased the sales of many of its products. Due to the expansion of its Mechel Service Global sales network, the volume of steel products sales increased.
In order to upgrade its production facilities, the company invests in various projects and investment project on Izhstal's modernization overhaul is almost complete and construction of the universal rolling mill at Chelyabinsk Metallurgical Plant is also going along actively.
Ferroalloy Segment: Ferroalloy segment sales totaled $131.5 million, up 5.9% from first quarter of 2011. The segment constituted 3.8% of consolidated revenue. The segment recorded an operating loss of $1.1 million in the second quarter of 2011 against an operating income of $11.9 million in the first quarter of 2011.
In the second quarter ferrochrome production grew by 10%, while sales went up by 30%.
In order to cut costs and increase production volumes, the company has instituted a modernization program for the segment's facilities. The company is 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. Should it be successful, it will enable it to increase nickel production while cutting costs.
Tikhvin Ferroalloys Plant is also due to launch a workshop producing chrome bales. This technology will also allow Mechel to increase production of chrome and make the plant ecologically safer. Bratsk Ferroalloys Plant, which produces ferrosilicon, is due to re-launch furnace #4 after reconstruction.
Power Segment: The Power segment generated about 5.1% of revenues, which totaled $176.8 million, down 21.4% versus the first quarter of 2011. Operating loss for the segment in the reported quarter decreased drastically by 100.5% sequentially to $0.2 million due to the seasonal decrease of generating and selling heat and electricity, which had its effect on financial results. The adjusted EBITDA in the power segment in the reported quarter went down by 85.6% totaling $5.1 million, compared to the adjusted EBITDA of $35.4 million in the first quarter of 2011.
Financial Position
Mechel has a large capital-spending program. Capital expenditure for the first half of 2011 amounted to $769.5 million, of which $562.4 million was invested in the mining segment, $174.6 million in the steel segment, $18.7 million in the ferroalloy segment and $13.8 million in the power segment. Total debt was about $8.9 billion, while cash and cash equivalents stood at $356.2 million as of June 30, 2011.
Our Take
Mechel is a leading domestic steel and coal producer with a strong position in key businesses, including production of specialty steel and alloys. The company has the largest coal reserve base in Russia. It is focusing on growth and cost-cutting measures.
The company owns and controls essential infrastructure, including ports, rolling stock and power plants, which provide access to the export markets. However, Mechel’s large capital-spending program, high debt and substantial interest burden are matters of concern.
Zacks Recommendation
Currently, Mechel has a short-term (1 to 3 months) Zacks #3 Hold rating and a long-term (6 months) Neutral recommendation.
Competitors
Mechel faces stiff competition from Arcelor Mittal (MT) and Norilsk Nickel Mining and Metallurgical Co.
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