Mechel 1H 2005 results

• Mechel 1H 2005 results press-release (PDF, 89 Kb)
• Mechel overview slide presentation (PDF, 4 Mb)
• A link to audio webcast of Mechel 1H 2005 results conference call held in Moscow on October 17, 2005

MECHEL REPORTS FIRST HALF 2005 RESULTS
 -- Revenues increased 33.2% to $2.14 billion --
-- Operating income of $362.40 million --
-- Net income 243.62 million, $1.76 per ADR or $0.60 per diluted share --

Moscow, Russia – October 17, 2005 – Mechel OAO (NYSE: MTL), a leading Russian integrated mining and steel group, today announced results for the first half ended June 30, 2005.

US$ thousand 1H 2005 1H 2004 Change Y-on-Y Revenues 2,143,349 1,608,984 33.2% Net operating income 362,396 354,844 2.1% Net operating margin 16.9% 22.0% - Net income 243,624 254,456 - 4.3% EBITDA (1) 422,741 420,602 0.5% EBITDA margin 19.7% 26.1% -

(1) See Attachment A.

Vladimir Iorich, Mechel’s Chief Executive Officer, commented:

“In the second quarter 2005 we saw negative pricing trends for both our mining and steel products. Although this was a challenging time for us, we believe that it also confirms that our dual strategy of seeking to continue to increase our mining segment through organic growth and acquisitions, while working to improve the bottom line in our steel segment through a comprehensive efficiency program, is exactly the right focus for us.  We will continue to work hard to achieve these goals, and we believe that our efforts, along with an improving price environment, will yield results.”

Consolidated Results

Net revenue in the first half of 2005 rose 33.2% to $2.14 billion from $1.61 billion in the first half of 2004. Operating income was $362.40 million, or 16.9% of net revenue, versus operating income of $354.84 million, or 22.1% of net revenue, in the first half of 2004, an increase of 2.1%.

For the first half of 2005, Mechel reported consolidated net income of $243.62 million, or $1.76 per ADR ($0.60 per diluted share).

Consolidated EBITDA rose 0.5% to $422.74 million in the first half of 2005 from $420.60 million a year ago. Please see the attached tables for a reconciliation of consolidated EBITDA to net income.

Mining Segment Results

US$ thousand 1H 2005 1H 2004 ChangeY-on-Y Revenues from external customers 594,089 362,309 64.0% Operating income 310,851 185,392 67.7% Net income 234,125 162,915 43.7% EBITDA 319,966 214,079 49.5% EBITDA margin 53.9% 59.1% -

Mining segment output

Product 1H 2005, thousand tonnes 1H 2005 vs 1H 2004, % Coal 7,525 + 3.0 Coking coal 4,134 - 1.5 Steam coal 3,392 + 9.0 Iron ore concentrate 2,224 + 17.0 Nickel 5.6 - 13.0

Mining segment revenue for the first half of 2005 totaled $594.09 million, or 27.7%, of consolidated net revenue, an increase of 64.0% over segment revenue of $362.31 million, or 22.5%, of consolidated net revenue, in the first half of 2004. The increase in revenues reflects solid output, strong market positions, and an increase in sales of mining products to third parties.

Operating income for the first half of 2005 in the mining segment rose 67.7% to $310.85 million, or 52.3%, of total segment revenues, compared to operating income of $185.39 million, or 51.2%, of total segment revenues a year ago. This increase in profitability reflects Mechel’s control over costs and the overall efficiency of our mining operations. EBITDA in the mining segment for the first half of 2005 was $319.97 million, 49.5% higher than segment EBITDA of $214.08 million in the first half of 2004. The EBITDA margin of the mining segment was 53.9%.

Mr. Iorich commented on the results of the mining segment: “During the second quarter we saw a declining pricing environment. However, even in those conditions, our mining segment continued to demonstrate high profitability and returns. For operational reasons, we temporarily decreased our coking coal output during the first half, but have since resumed production at full capacity. Iron ore concentrate production also demonstrated excellent results. Overall output increased, thus increasing our self-sufficiency in iron ore, and we consider it to be an important accomplishment of this period. And, of course, we were very pleased to have continued to execute our expansion strategy in mining, acquiring 1.15 billion of high-quality coal reserves at very attractive prices in the first half of the year.”

Steel Segment Results

US$ thousand 1H 2005 1H 2004 Change Y-on-Y Revenues from external customers 1,549,260 1,246,675 24.3% Operating income 51,545 162,802 -68.3% Net income 9,498 91,542 -89.6% EBITDA (1) 102,775 206,523 -50.2% EBITDA margin (1) 6.6% 16.6% -

Steel segment output

Product 1H 2005, thousand tonnes 1H 2005 vs 1H 2004, % Coke 1,360 - 7.0 Pig iron 1,844 - 1.0 Steel 3,088 + 2.0 Rolled products 2,423 + 2.0 Hardware 296 + 13.0

Revenue from Mechel’s steel segment increased 24.2% in the first half of 2005 from $1.25 billion to $1.55 billion, or 72.3%, of consolidated net revenue, as compared to the first half of 2004. 

In the first half of 2005, the steel segment generated operating income of $51.55 million, or 3.3%, of total segment revenues, a decrease of 68.3% over operating income of $162.80 million, or 1.3%, of total segment revenues in the first half of 2004. EBITDA in the steel segment for the first half of 2005 was $102.77 million. The EBITDA margin of the steel segment decreased from 16.6% to 6.6%. This primarily resulted from increasing raw material prices and the changing market environment for steel products.

Mr. Iorich commented, “In a declining pricing environment, we saw a decrease in EBITDA margin and operating income of the segment as raw material costs continued to shift profitability from our steel segment to our mining segment. This again highlights the advantages we derive from our status as the vertically integrated company. Throughout 2005, we are concentrating our efforts on efficiency improvement and controlling costs. Recently, we commissioned the second line of the new sinter plant at Chelyabinsk Metallurgical Plant, which will further improve usage ratios and cost-efficiency. However, we expect that this shift in profitability will continue to be the case through the remainder of this year. Improvement of the margin in our steel segment operations remains a particular focus of Mechel’s management.”

Recent Highlights

In 2005 Mechel has taken a number of actions to continue the successful execution of its operating strategy and enhance its position in the Russian mining and steel and markets.  Some of these actions include:

• A number of transactions that have significantly expanded the capabilities of Mechel’s coal segment.  These include various successes at license auctions to develop coal deposits in the Olzherasskaya Mine plot, Razvedochny plot, Sorokinsky plot, Erunakovskaya-1 Mine and Erunakovskaya-3 Mine plots. These transactions have increased Mechel’s total reserves by 1.15 billion tonnes, according to Russian reserve valuation standards, of which the vast majority is coking coal reserves of high quality.
• Mechel also won an auction for the sale of ordinary shares in Yakutugol OAO that constitute 25 % + 1 share of the company's charter capital for approximately $411.2 million. Yakutugol’s annual output is approximately 9 million tonnes, of which approximately 5.4 million tonnes is coking coal. The acquisition further expands Mechel’s mining holdings while also increasing its exposure to the Asia-Pacific region.
• Continued progress on Mechel’s commitment to investing in its operations to reduce operating costs and increase efficiency.  In April, Mechel announced the start-up of the first line of a new, four-line sinter plant at its Chelyabinsk Metallurgical Plant subsidiary.  The new plant will increase Mechel’s ability to internally source its iron ore requirements from its iron ore mine, Korshunov Mining Plant.  Once fully operational, the plant, which will cost approximately $154 million, will generate approximately $70 million in annual cost savings.
• To diversify the cargo flow of our coal and steel products and to improve our logistics, Mechel acquired a 90.4% stake in Kambarka Port OAO, one of Russia’s largest river ports. The facility specializes in the transshipment of bulk cargo, including ore, iron ore concentrate and coal.

Mr. Iorich concluded, “The second quarter of 2005 was a challenging time for us.  However, we were able to react flexibly and adjust our production plans to the changing market environment. We intend to remain focused on controlling costs and enhancing operational efficiencies across both segments, and believe that our position as an integrated producer, our diversity of products and markets, will allow us to flexibly react to the changing conditions, positioning us well for the future. On another front, our continued efforts in transparency were appreciated by the financial community, with Mechel being named third in S&P’s scoring of Russian companies’ transparency.”

Financial Position

First half cash expenditure on property, plant and equipment amounted to $310.81 million, of which $203.54 million was invested in the mining segment and $107.27 million in the steel segment.

In 2005, Mechel has spent $463 million on acquisitions, comprised of $411.2 million for 25%+1 share of Yakutugol Holding Company OAO, $3.5 million for 90.3% of the shares of Port Kambarka OAO, $15.7 million for 25.0% of the shares of Izhstal OAO, $32.3 million for 5.6% of the shares of Chelyabinsk Metallurgical Plant OAO, and $0.3 million for 4.5% of the shares of Korshunov Mining Plant. 

As of  June 30, 2005, total debt¹ was at $438.7 million. Cash and cash equivalents amounted to $507.5 million at the end of the first half of 2005 and net debt amounted to $(68.8) 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 10 a.m. New York time (3 p.m. London time, 6 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.

¹Total debt is comprised of short-term borrowings and long-term debt

***

Mechel OAO
Irina Ostryakova
Director of Communications
Phone: 7-095-258-18-28
Fax: 7-095-258-18-38
irina.ostryakova@mechel.com

***

Mechel is one of the leading Russian mining and metals companies. Mechel unites producers of coal, iron ore, nickel, steel, rolled products, and hardware. 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 1H 2005 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:

US$ thousands 1H 2005 1H 2004 Net income 243,624 254,456 Add: Depreciation, depletion and amortization 77,802 62,240 Interest expense 27,706 29,806 Income taxes 73,609 74,100 Consolidated EBITDA 422,741 420,602

EBITDA margin can be reconciled as a percentage to our Revenues as follows:

US$ thousands 1H 2005 1H 2004 Revenue, net 2,143,349 1,608,984 EBITDA 422,741 420,602 EBITDA margin 19.7% 26.1%

MECHEL OAO
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2005 AND DECEMBER 31, 2004

(in thousands of U.S. dollars, except share amounts) June 30, 2005 December 31, 2004 Assets (unaudited) Cash and cash equivalents $ 507,469 $ 1,024,761 Accounts receivable, net of allowance for doubtful accounts of $24,546 as of June 30, 2005, and $20,850 as of December 31, 2004, respectively   204, 613   135,597 Due from related parties   8,763   16,458 Inventories   482,172   568,545 Deferred cost of inventory in transit   59,567   – Current assets of discontinued operations   1,644   1,247 Deferred income taxes   7,284   7,491 Prepayments and other current assets   375,362   349,106 Total current assets   1,646,874   2,103,205 Long-term investments in related parties   405,359   9,270 Other long-term investments   19,914   66,663 Non-current assets of discontinued operations   147   165 Intangible assets   5,916   6,379 Property, plant and equipment, net   1,383,353   1,274,722 Mineral licenses, net   230,449   166,483 Deferred income taxes   13,930   11,940 Goodwill   39,441   39,441 Total assets $ 3,745,383 $ 3,678,268 Liabilities and Shareholders' Equity         Short-term borrowings and current maturities of long-term debt $ 224,886 $ 348,880 Accounts payable and accrued expenses:         Advances received   85,491   94,964 Accrued expenses and other current liabilities   59,505   69,847 Taxes and social charges payable   180,559   145,527 Trade payable to vendors of goods and services   221,366   186,233 Due to related parties   2,644   2,048 Current liabilities of discontinued operations   22   30 Asset retirement obligation   6,182   8,219 Deferred income taxes   24,035   26,521 Deferred revenue   53,626   760 Pension obligations, current portion   6,834   6,261 Dividends payable   198,989   – Total current liabilities   1,064,139   889,290 Long-term debt, net of current portion   213,844   216,113 Restructured taxes and social charges payable, net of current portion   65,245   87,364 Asset retirement obligations, net of current portion   64,780   66,758 Pension obligations, net of current portion   40,981   40,720 Deferred income taxes   101,708   105,330 Other long-term liabilities   94   240 Commitments and contingencies   –   – Minority interests   140,883   214,824 Shareholders' Equity         Common shares (10 Russian rubles par value; 497,969,086 shares authorized, 416,270,745 shares issued and 382,969,086 shares outstanding as of June 30, 2005 and December 31, 2004)   133,507   133,507 Treasury shares, at cost   (4,187)   (4,187) Additional paid-in capital   304,404   304,404 Accumulated other comprehensive income   45,657   93,687 Retained earnings   1,574,328   1,530,218 Total shareholders' equity   2,053,709   2,057,629 Total liabilities and shareholders' equity $ 3,745,383 $ 3,678,268

MECHEL OAO
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIODS ENDED JUNE 30, 2005 AND 2004

(in thousands of U.S. dollars) Six months ended June 30,   2005 (unaudited)   2004 (unaudited) Cash Flows from Operating Activities         Net income. $ 243,624 $ 254,456  Adjustments to reconcile net income to net cash provided by operating activities:         Depreciation   72,004   50,577 Depletion and amortization   5,798   11,663 Foreign exchange loss/(gain)   36,126   (2,858) Deferred income taxes   (4,976)   (2,787) Provision for doubtful accounts   7,174   (20) Inventory write-down   2,340   1,559 Accretion expense   1,178   1,828 Minority interest   2,674   7,920 Income from equity investments   (8,074)   (2,595) Non-cash interest expense on long-term tax and pension liabilities   6,408   7,181 Loss/(gain) on sale of property, plant and equipment   443   (689) (Gain)/loss on sale of long-term investments   (190)   890 Loss from discontinued operations, net   132   5,578 Gain on forgiveness of fines and penalties   (12,383)   (17,835) Stock-based compensation expense   –   1,400 Amortization of capitalized costs on bonds issue   786   767 Pension service cost and amortization of prior year service cost   1,162   – Gain on forgiveness of accounts payable with expired legal term   (201)   – Changes in current assets and liabilities, net of effects from acquisition of new subsidiaries:         Accounts receivable   (82,974)   (13,298) Inventories   75,610   (83,934) Trade payable to vendors of goods and services   31,422   45,673 Advances received   (7,967)   14,837 Accrued taxes and other liabilities   41,633   3,083 Settlements with related parties   8,022   (2,132) Current assets and liabilities of discontinued operations   (570)   (2,646) Deferred revenue and cost of inventory in transit, net   (6,701)   (8,298) Other current assets   6,627   (63,320) Net cash provided by operating activities   419,127   206,699           Cash Flows from Investing Activities         Acquisition of subsidiaries, less cash acquired   (3,497)   (53,142) Acquisition of minority interest in subsidiaries   (65,652)   (1,082) Investment in Yakutugol   (411,182)   – Investments in other non-marketable securities   (1,934)   (13,620) Proceeds from disposal of long-term investments   1,149   246 Proceeds from disposals of property, plant and equipment   1,664   1,353 Purchases of mineral licenses   (70,293)   – Purchases of property, plant and equipment   (240,512)   (141,295) Net cash used in investing activities   (790,257)   (207,540)           Cash Flows from Financing Activities         Proceeds from short-term borrowings   611,724   634,292 Repayment of short-term borrowings   (733,711)   (574,417) Dividends paid to minority interest   –   (285) Proceeds from long-term debt   3,062   2,397 Repayment of long-term debt and long-term portion of restructuredtaxes and social charges payable   (7,971)   (18,144) Net cash (used in)/provided by financing activities.   (126,956)   43,843           Effect of exchange rate changes on cash and cash equivalents   (19,206)   210           Net (decrease)/increase in cash and cash equivalents   (517,292)   43,513           Cash and cash equivalents at beginning of period   1,024,761   19,303 Cash and cash equivalents at end of period $ 507,469 $ 62,816

MECHEL OAO
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004

(in thousands of U.S. dollars, except share and per share amounts) Six months ended June 30,   2005 (unaudited) 2004 (unaudited) Revenue, net (including related party amounts of $53,783 and $33,950 during six months 2005 and 2004, respectively) $ 2,143,349 $ 1,608,984 Cost of goods sold (including related party amounts of $21,874 and $6,279 during six months 2005 and 2004, respectively)   (1,342,932)   (963,380) Gross margin   800,417   645,604           Selling, distribution and operating expenses:         Selling and distribution expenses   (243,680)   (172,838) Taxes other than income tax   (52,380)   (25,372) Accretion expense   (1,178)   (1,828) Provision for doubtful accounts   (7,174)   20 General, administrative and other operating expenses   (133,609)   (90,742) Total selling, distribution and operating expenses   (438,021)   (290,760) Operating income   362,396   354,844           Other income and (expense):         Income from equity investments   8,074   2,595 Interest income   6,975   1,125 Interest expense   (27,706)   (29,806) Other income, net   6,426   10,439 Foreign exchange (loss)/gain   (36,126)   2,858 Total other income and (expense), net   (42,357)   (12,789) Income before income tax, minority interest and discontinued operations   320,039   342,055           Income tax expense   (73,609)   (74,100) Minority interest in income of subsidiaries   (2,674)   (7,920) Income from continuing operations   243,756   260,035 Loss from discontinued operations, net of tax   (132)   (5,579) Net income $ 243,624 $ 254,456 Currency translation adjustment   (48,030)   7,149 Unrealized losses on available-for-sale securities   –   (783) Comprehensive income $ 195,594 $ 260,822           Basic and diluted earnings per share:         Earnings per share from continuing operations $ 0.60 $ 0.71 (Loss) per share effect of discontinued operations   –   (0.02) Net income per share $ 0.60 $ 0.69           Dividends declared per share $ 0.49 $ 0.01           Weighted average number of shares outstanding   403,118,680   367,150,968