On Jan 2, we issued an updated research report on mining and steel company Mechel OAO (MTL). While the company should gain from incremental opportunities stemming from its Elga coal mine, it is faced with pricing pressure and continues to operate with a high debt level.
Mechel posted wider loss in the third quarter of 2014, reported on Dec 9, hurt by lower iron ore and coal pricing. Revenues fell by double-digits year over year on declines across all segments.
Mechel remains focused on the development strategy approved by its board in May 2012, which includes concentrating on core business segments, divestment of non-core assets and improving performance of its key enterprises.
Mechel has the largest coal reserve base in Russia and benefits from backward integration as it is capable of internally sourcing most of its raw materials. It remains focused on strategically diversifying and expanding its customer base
The Elga deposit, which is among the world’s largest coking coal fields, is expected to reinforce Mechel’s position as a metallurgical coal producer through capacity expansion. Its development will enable Mechel to consolidate its position in the Far East and its reputation as a major coal exporter to Asia Pacific.
Mechel has constructed a seasonal washing plant at the site for accelerating production and sales of coking coal concentrate. The launch of the washing plant has enabled the company to mine and process coking coal at Elga on production scale.
Mechel, in Nov 2014, completed the transfer of Elga's seasonal washing plant to all-year operation mode, enabling the plant to have an annual capacity of 2.7 million tons. Roughly 1.3 million tons of coal are expected to be mined at the Elga deposit in 2014, increasing to 3-3.5 million tons in 2015.
However, Mechel’s high debt level still represents a major concern. High leverage and interest burden may negatively impact the company and it may not be able to keep up with its capital spending program.
Mechel also remains challenged by a significant decline in coal prices. Moreover, prices for iron ore continue to fall globally on supply gut and slowdown in China.
Other Stocks to Consider
Other companies in the steel and related industries worth considering include Synalloy Corporation (SYNL), Mueller Water Products, Inc. (MWA) and Carpenter Technology Corp. (CRS). While Synalloy holds a Zacks Rank #1 (Strong Buy), both Mueller and Carpenter retain a Zacks Rank #2 (Buy).
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