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MECHEL REPORTS RESULTS FOR THE 2009 FIRST QUARTER Moscow, Russia – July 10, 2009 – Mechel OAO (NYSE: MTL), a leading Russian integrated mining and steel group, today 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.”
* - See Attachment A. Net revenue in the first quarter of 2009 decreased by 13.9% to $1.2 billion compared to $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 $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 $690.7 million, an increase of 39.0% over consolidated net loss of $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 $592 million. Furthermore the results of the fourth quarter of 2008 enclosed positive tax effect of $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 -$474.3 million, compared to $817.3 million in the previous quarter. Depreciation, depletion and amortization in the first quarter of 2009 were $75.4 million, a decrease of 32.5% over $111.6 million in the fourth quarter of 2008. Mining Segment Results
* - See Attachment A. 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 first quarter of 2009 totaled $344.2 million, or 29% of consolidated net revenue, a decrease of 31.7% over net segment revenue from external customers of $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 $50.0 million, or 12.6% of total segment revenue, compared to operating income of $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 $41.8 million over segment EBITDA of $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 $38.1 million, a decrease of 41.8% over $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
* - See Attachment A. Steel Segment Output
Revenue from external customers in Mechel’s steel segment decreased by 3.4% in the first quarter of 2009 to $643.2 million, or 55% of consolidated net revenue, from $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 $85.2 million, an increase of 76.1% over operating loss of $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 $236 million of exchange loss and amounted to -$260.3 million, compared to EBITDA of -$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 $36.1 million in the fourth quarter of 2008 to $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
* - See Attachment A. Ferroalloy Segment Output
Ferroalloy segment revenue form external customers for the first quarter of 2009 increased by 69.3% to $53.9 million, or 5% of consolidated net revenue, compared with segment revenue from external customers of $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 $24.8 million, an increase of 80.5% compared to operating loss of $127.3 million in the previous quarter. EBITDA in the ferroalloy segment for the first quarter of 2009 inclusive of exchange loss was -$307.2 million, 38.3% higher than segment EBITDA of -$498.1 million in the fourth quarter of 2008. For ferroalloy segment depreciation, depletion and amortization in the first quarter of 2009 was $6.4 million, an increase of 18.5% over $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
* - See Attachment A. Power Segment Output
Mechel’s power segment revenue from external customers for the first three months of 2009 totaled $138.2 million, or 12% of consolidated net revenue, a decrease of 17.8% over segment revenue from external customers of $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 $12.1 million, or 5.8% of total segment revenue, an increase of 17.2% compared to operating income of $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 $13.9 million, compared to EBITDA of $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 $4.2 million to $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
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 PositionCapital expenditure on property, plant and equipment and acquisition of mineral licenses for the first quarter of 2009 amounted to $96.1 million, of which $40.6 million was invested in the mining segment, $42.7 million was invested in the steel segment, $12.8 million was invested in the ferroalloy segment and $25 thousand was invested in the power segment. In the first quarter of 2009 Mechel spent $13.6 million on acquisitions, including $4.1 million spent on acquisition of minority interest in other subsidiaries. As of March 31, 2009 total debt was at $5.8 billion. Cash and cash equivalents amounted to $953.3 million at the end of the first quarter of 2009 and net debt amounted to $4.9 billion (net debt is defined as total debt outstanding less cash and cash equivalents). 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. *** Mechel OAOAlexander Tolkach Director, Department of Communications Mechel OAO Phone: 7-495-221-88-88 Fax: 7-495-221-88-00 alexander.tolkach@mechel.com *** 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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