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MECHEL REPORTS 2008 FIRST HALF FINANCIAL RESULTS Moscow, Russia – November 9, 2009 – Mechel OAO (NYSE: MTL), a leading Russian integrated mining and steel group, today announced financial results for the first half ended June 30, 2009. Igor Zyuzin, Mechel’s Chief Executive Officer, commented on the first half results: “The second quarter, most difficult period of the world’s financial crisis, proved that Mechel has chosen right way to overcome the difficult situation. Though our pre-crisis priced contracts mostly expired already in the first quarter, we managed to sustain stable cash flows, restructure most of our debt portfolio with international banks syndicate, restore pre-crisis capacity utilization in steel segment, continue implementing a number of key investment projects. The vertically integrated structure of Mechel again has proved its reliability even in the times of deep markets decline, allowing us to end the quarter with positive EBITDA.” Consolidated Results for the first half of 2009
(1) See Attachment A. (2) For comparison convenience the EBITDA is also provided without correction of Forex gain/loss
(1) See Attachment A. (2) For comparison convenience the EBITDA is also provided without correction of Forex gain/loss Net revenue in the second quarter of 2009 increased by 8.6% to $1.28 billion compared to $1.18 billion in the first quarter of 2009, reflecting beginning of production volumes recovery. Meanwhile operating loss amounted to $54.7 million versus operating income of $13.8 million in the first quarter of 2009. In the second quarter of 2009, Mechel reported consolidated net income of $219.3 million compared to consolidated net loss of $690.7 million in the first quarter of 2009. Consolidated EBITDA in the second quarter of 2009 amounted to $370.0 million. Depreciation, depletion and amortization in the second quarter of 2009 were $97.0 million, an increase of 28.7% over $75.4 million in the first quarter of 2009. Mining Segment Results
* - See Attachment A. ** - EBITDA margin is calculated as a percentage of consolidated revenues of the segment, including intersegment sales.
* - EBITDA margin is calculated as a percentage of consolidated revenues of the segment, including intersegment sales. Mining Segment Output
* The coal concentrate has been produced from the part of the raw coal output.
Mining segment revenue from external customers for the second quarter of 2009 totaled $330.6 million, or 25.8% of consolidated net revenue, a decrease of 4.0% over net segment revenue from external customers of $344.2 million in the first quarter of 2009. As of June 30, 2009, Mechel's acquisition of Bluestone Coal Group companies was accounted for on a tentative basis subject to the finalization of assets appraisals and consideration paid measurement. Specifically, the Group has not yet determined the appropriate values of the Preferred Shares issued, the CVR and the Drilling program related contingent payments (the components of the consideration paid); and the allocation of the purchase consideration to the assets of the BCG companies acquired and liabilities incurred has not been completed. As of the appropriate acquisition date, the estimated amounts of Bluestone Coal Group companies non-current assets were $175,318, and total assets and liabilities amounted to $277,800 and $205,416, respectively. Assets and liabilities are currently accounted for based on their historic values rather than appraised amounts. Goodwill arising on the acquisition of Bluestone Coal Group companies tentatively amounted to $999,561. Specifically the majority of the existing goodwill is expected to be primarily allocated to mineral licenses based on the ongoing third-party valuation. Operating income in the mining segment in the second quarter of 2009 decreased by 74.7% to $12.6 million, or 3.3% of total segment revenue, compared to operating income of $50.0 million in the first quarter of 2009. EBITDA in the mining segment in the second quarter of 2009 totaled $139.5 million, an increase of 233.3% over segment EBITDA of $41.8 million in the first quarter of 2009. The EBITDA margin for the mining segment increased from 10.6% for the first three month of 2009 to 36.4% in the second quarter of 2009. Depreciation, depletion and amortization in mining segment amounted to $49.1 million, an increase of 28.9% over $38.1 million in the previous quarter. Mechel’s Senior vice-president Vladimir Polin commented on the mining segment operating results: “The mining segment’s results in the second quarter were largely affected by significant decline of export prices, for most of the previous year’s contracts, signed at the pike of the market, already expired in the first quarter. Also after acquiring in may 2009 the Bluestone company in USA, we had to temporary shut down production there in order to reorganize its operations and sales system according to our standards and due to expiration of old contracts. All this also resulted in the decline of the financial performance of the segment in the second quarter. At the same time in the second quarter we got new international price benchmarks for coking coal and managed to sign new long term contracts with Chinese, Japanese and South Korean companies. That allowed us to boost capacity utilization in coking coal concentrate later and start returning them back to the pre-crisis levels, which was demonstrated in our nine-months operational results. At Bluestone we have already surpassed the previous maximum production levels in coking coal concentrate. All this gives us reason to believe, that for our mining segment the worst part of 2009 is over and we will witness only improvement of the segment’s performance later.” Steel Segment Results
* - See Attachment A. ** - EBITDA margin is calculated as a percentage of consolidated revenues of the segment, including intersegment sales.
* - EBITDA margin is calculated as a percentage of consolidated revenues of the segment, including intersegment sales. Steel Segment Output
Revenue from external customers in Mechel’s steel segment increased by 17.3% in the second quarter of 2009 and amounted to $754.7 million, or 59% of consolidated net revenue, from $643.2 million, or 58.9% of consolidated net revenue, in the first quarter of 2009. In the second quarter of 2009 the steel segment operating loss was $73.5 million, versus operating loss of $85.2 million in the first quarter of 2009. EBITDA in the steel segment in the second quarter of 2009 amounted to $79.5 million, compared to EBITDA of -$260.3 million in the first quarter of 2009. The EBITDA margin of the steel segment increased to 10.0% in the second quarter of 2009 compared to -38.0% in the first quarter of 2009. Depreciation, depletion and amortization in steel segment increased by 9.1% from $26.4 million in the first quarter of 2009 to $28.8 million in the second quarter of 2009. Commenting the results of the steel segment Vladimir Polin noted: “We are glad to note that Mechel’s steel segment managed to restore its pre-crisis production levels already during second quarter 2009, and in some products even slightly improved them. Also big work was conducted to further optimize the whole system of steel sales in the group. As a result, we have improved the operational income of the segment and significantly reduced accounts receivable, thus improving operational cash flows for the period. In the crisis times, demanding special focus on the production efficiency, we continue to increase the higher value-added products output, reducing volumes of semi-finished sales. We estimate, that the trader destocking is over and their inventories are at their bottom levels. For example, the rebar inventories in Russia reduced during six months by 26%, and Mechel-Service managed to reduce them by 38%. In the third quarter we witnessed growth in demand for all of our export products in Middle-East and South-East Asia. We will continue to focus tightly on our cost side of the steel business, securing its platform for further improvements in performance.” Ferroalloy Segment Results
* - See Attachment A. ** - EBITDA margin is calculated as a percentage of consolidated revenues of the segment, including intersegment sales.
* - EBITDA margin is calculated as a percentage of consolidated revenues of the segment, including intersegment sales. Ferroalloy Segment Output
Ferroalloy segment revenue from external customers for the second quarter of 2009 amounted to $77.1 million, or 6.0% of consolidated net revenue, an increase of 43.2% compared with segment revenue from external customers of $53.9 million, or 5% of consolidated net revenue, in the first quarter of 2009. Operating loss in the ferroalloy segment in the second quarter of 2009 was $5.5 million, versus operating loss of $24.8 million in the previous quarter. EBITDA in the ferroalloy segment for the second quarter of 2009 was $153.2 million, compared to segment EBITDA of -$307.2 million in the first quarter of 2009. The EBITDA margin of the ferroalloy segment increased amounted to 171.2% in the second quarter of 2009. For ferroalloy segment depreciation, depletion and amortization in the second quarter of 2009 was $15.5 million, an increase of 142.2% over $6.4 million in the first quarter of 2009. Vladimir Polin noted: «In the second quarter of 2009 an environment on Mechel’s ferroalloy segment key distribution markets has improved materially. Given that we concurrently managed to significantly decrease costs and to put our ferroalloy plants to 100% capacity utilization quite promptly, the segment demonstrated an expansive growth of all financial indicators. Currently we go forward with realization of package of measures focused on Mechel's ferroalloy assets efficiency improvement. We already managed to achieve projected output rate at Tikhvin Ferroalloy Plant, that produces ferrochrome, and to significantly increase production of chromite ore concentrate at Voskhod mining and processing plant that in turn will result in further growth of segment results». Power Segment Results
* - See Attachment A. ** - EBITDA margin is calculated as a percentage of consolidated revenues of the segment, including intersegment sales.
* - EBITDA margin is calculated as a percentage of consolidated revenues of the segment, including intersegment sales. Power Segment Output
Mechel’s power segment revenue from external customers for the second quarter of 2009 decreased by 14.3% to $118.4 million, or 9% of consolidated net revenue, compared to $138.2 million of segment revenue from external customers, or 12% of consolidated net revenue, in the first quarter of 2009. Operating income in the power segment in the second quarter of 2009 was $213 thousand, a decrease of 98.2% compared to operating income of $12.1 million in the first quarter of 2009. EBITDA in the power segment in the second quarter of 2009 decreased 63.0% totaling $5.1 million, compared to EBITDA of $13.9 million in the first quarter of 2009. The EBITDA margin for the power segment decreased from 6.6% to 2.7%. Depreciation, depletion and amortization in power segment in the second quarter of 2009 decreased 22.2%, compared to the first quarter of 2009, from $4.5 million to $3.5 million. Vladimir Polin noted: «From the very beginning of global financial and economic crisis we witness a power consumption decline that in the second quarter was further affected by overall seasonal decrease of power and heat energy consumption and generation. We work on costs reduction, fuel factor decrease and reaching of synergy between segments. In virtue of range of measures implemented in this area we managed to keep showing results that exceed average all-Russian figures and the segment still demonstrates operating profit». Recent Highlights
Igor Zyuzin concluded: «Generally the first half of 2009 was the most challenging period for Mechel during the crisis. Significant efforts were required to adopt the company to deteriorated global economy, to protect the production from shutdowns and then to restore it to pre-crisis levels as promptly as possible. Nevertheless, we succeeded not just to save our business but we also found new sources and methods of costs cutting and productivity enhancement, became more active and flexible in sales, approached new geographical markets, optimized logistics. It was illustrated by the fact that Mechel has become the first Russian industrial company which managed to refinance its debt portfolio with international banks syndicate, and thus has secured company's stability and further development capability. And that is why today the company is able to fully benefit from current economy stabilization and to increase its shareholder value». Financial Position Capital expenditure on property, plant and equipment and acquisition of mineral licenses for the first half of 2009 amounted to $223.2 million, of which $86.3 million was invested in the mining segment, $121.5 million was invested in the steel segment, $13.1 million was invested in the ferroalloy segment and $2.2 million was invested in the power segment. In the first half of 2009 Mechel spent $5.1 million on acquisitions, including $4.1 million spent on acquisition of minority interest in other subsidiaries. As of June 30, 2009 total debt was at $5,919.6 million. Cash and cash equivalents amounted to $822.4 million at the end of the first half of 2009 and net debt amounted to $5,097.2 million (net debt is defined as total debt outstanding less cash and cash equivalents). The management of Mechel will host a conference call today at 9:00 a.m. New York time (2:00 p.m. London time, 5:00 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. *** Mechel OAO *** Mechel is one of the leading Russian companies. Its business includes four segments: mining, steel, ferroalloy and power. Mechel unites producers of coal, iron ore concentrate, steel, rolled products, ferroalloys, hardware, heat and electric power. Mechel products are marketed domestically and internationally. *** Some of the information in this press release may contain projections or other forward-looking statements regarding future events or the future financial performance of Mechel, as defined in the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. We wish to caution you that these statements are only predictions and that actual events or results may differ materially. We do not intend to update these statements. We refer you to the documents Mechel files from time to time with the U.S. Securities and Exchange Commission, including our Form 20-F. These documents contain and identify important factors, including those contained in the section captioned “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” in our Form 20-F, that could cause the actual results to differ materially from those contained in our projections or forward-looking statements, including, among others, the achievement of anticipated levels of profitability, growth, cost and synergy of our recent acquisitions, the impact of competitive pricing, the ability to obtain necessary regulatory approvals and licenses, the impact of developments in the Russian economic, political and legal environment, volatility in stock markets or in the price of our shares or ADRs, financial risk management and the impact of general business and global economic conditions. Attachments to the 2009 First Quarter Earnings Press Release Attachment A Non-GAAP financial measures. This press release includes financial information prepared in accordance with accounting principles generally accepted in the United States of America, or US GAAP, as well as other financial measures referred to as non-GAAP. The non-GAAP financial measures should be considered in addition to, but not as a substitute for, the information prepared in accordance with US GAAP. Earnings Before Interest, Depreciation and Amortization (EBITDA) and EBITDA margin. EBITDA represents earnings before interest, depreciation and amortization. EBITDA margin is defined as EBITDA as a percentage of our net revenues. Our EBITDA may not be similar to EBITDA measures of other companies; is not a measurement under accounting principles generally accepted in the United States and should be considered in addition to, but not as a substitute for, the information contained in our consolidated statement of operations. We believe that EBITDA provides useful information to investors because it is an indicator of the strength and performance of our ongoing business operations, including our ability to fund discretionary spending such as capital expenditures, acquisitions and other investments and our ability to incur and service debt. While interest, depreciation and amortization are considered operating costs under generally accepted accounting principles, these expenses primarily represent the non-cash current period allocation of costs associated with long-lived assets acquired or constructed in prior periods. Our EBITDA calculation is commonly used as one of the bases for investors, analysts and credit rating agencies to evaluate and compare the periodic and future operating performance and value of companies within the metals and mining industry. EBITDA can be reconciled to our consolidated statements of operations as follows:
EBITDA margin can be reconciled as a percentage to our Revenues as follows:
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