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MECHEL REPORTS FIRST HALF 2006 RESULTS
— Revenue of $1,927 million — Moscow, Russia – October 11, 2006 – Mechel OAO (NYSE:MTL), a leading Russian integrated mining and steel group, today announced results for the first half ended June 30, 2006.
(1) See Attachment A. Alexey Ivanushkin, Mechel’s Chief Operating Officer, commented: “The second quarter of 2006 was very favorable for both mining and steel markets, generating improved financial and production results, thus offsetting the negative impact of the first quarter and allowing us to achieve our financial plans for the first half of 2006. We continued to successfully execute on our strategy of expanding our mining segment, increasing output and enjoying high profitability. We also feel that we’ve overcome a downturn in our steel segment, as the actions we’ve undertaken to improve profitability are yielding results, and the EBITDA margin of the segment improved to 15% from 7% a year ago. At the same time, we continued to take actions focused on further improving the profitability of our steel operations. The positive market trends in both the mining and steel segments have continued into the subsequent periods of 2006, and we remain optimistic that our improved results will continue further into the year.” Consolidated Results Net revenue in the first half of 2006 decreased by 7.3%, to $1.9 billion, as compared to $2.1 billion in the first half of 2005. Operating income was $209 million, or 10.9% of net revenue, versus operating income of $362 million, or 17.43% of net revenue, in the first half of 2005. For the first half of 2006, Mechel reported consolidated net income of $182 million, or $1.35 per ADR ($0.45 per diluted share), compared to consolidated net income of $244 million, or $1.8 per ADR in the first half of 2005. Consolidated EBITDA was $345 million in the 2006 first half, compared to $423 million a year ago, reflecting the negative impact of softer market conditions on average realized prices for the main categories of our products in the beginning of 2006. Please see the attached tables for a reconciliation of consolidated EBITDA to net income. Mining Segment Results
(1) EBITDA margin is calculated out of consolidated revenues of the segment, including intersegment sales.
Mining Segment Output
Mining segment revenue from external customers for the first half of 2006 totaled $613 million, or 31.8% of consolidated net revenue, an increase of 3.2% over segment revenue from external customers of $594 million, or 28.6%, of consolidated net revenue, in the first half of 2005. Operating income in the mining segment in the first half of 2006 totaled $96 million, or 12.6% of segment revenues, compared to total operating income of $311 million, or 41.6% of segment revenues a year ago. EBITDA in the mining segment in the first half of 2006 was $147 million. The EBITDA margin of the mining segment was 19.2%. The key driver of such a significant drop in the EBITDA margin of the segment was a decrease in selling prices of major products of the segment: the decrease in prices of coking coal by 31% was the reason for decrease in EBITDA by $95 million, or 12.3 basis points; the decrease in prices of iron ore by 30% was the reason for decrease in EBITDA by $36 million, or 4.7 basis points; decrease in prices of steam coal by 22% was the reason for decrease in EBITDA by $24 million, or 3.1 basis points. Also, in the first half of 2006 the segment was negatively impacted by a one-time extraction tax accrual at our Korshunov Mining Plant, which amounted to approximately $20 million and was caused by different interpretation of tax code by us and tax authorities. This is the reason for the EBITDA decline by 2.6 basis points. Average realized prices in the second quarter of 2006 rose 10% for iron ore concentrate, 41% for nickel, while prices for coking and steam coal decreased by 18% and 4%, respectively, from levels of the first quarter 2006 (all prices are quoted on an FCA basis). Mr. Ivanushkin commented on the results of the mining segment: “In the second quarter, we saw a rise in prices and sales volumes for our mining products, as compared to the first quarter of this year, though the price increase cannot be compared to those we witnessed in the first half of 2005. The segment also demonstrated considerable output growth in the first half of 2006 compared to the first half of 2005, while we kept the segment’s cost base stable. Mining continues to be a growth driver for our business, and in line with this strategy, we recently commissioned the Olzherasskaya coal mine, which will allow us to increase coal output by 1.8 million tonnes in 2007 and by 3 million tonnes annually starting in 2010. The recent acquisition of Moscow Coke and Gas Plant will further allow us to expand our sales markets, as the plant will use between 1.5 – 2 million tonnes of our coking coal. We believe our iron ore production is on track to reach record production levels this year. In addition, nickel prices were unexpectedly high, and we were able to increase production in response to growing demand. Going into the second half of 2006, we continue to witness a positive market environment for our main products. We intend to further capitalize on this positive trend as we are planning to increase sales volumes, control costs, and improve logistics to enhance the segment’s performance in the future.” Steel Segment Results
Steel Segment Output
Revenue from external customers in Mechel’s steel segment in the first half of 2006 decreased by 11.6% as compared to the 2005 first half, from $1.5 billion to $1.3 billion, and represented 68.2% of consolidated net revenue. In the 2006 first half, the steel segment’s operating income totaled $113 million, or 8.6% of total segment revenues, compared to operating income of $52 million, or 3.5% of total segment revenues a year ago. EBITDA in the steel segment in the first half of 2006 was $198 million. The EBITDA margin of the steel segment was 15.1%. Average realized prices for rebar grew by 4%, for semi-finished products – by 9% in the 2006 second quarter as opposed to the first quarter of this year. The new sinter plant in Chelyabinsk was fully commissioned in the third quarter. The savings from previously commissioned lines of the sinter plant were $10.3 million in first half of 2006, expected savings for the full-year 2006 are $38.5 million Mr. Ivanushkin commented: “We improved our cost controls and usage ratios to capitalize on the market recovery we saw in the second quarter and expect to see further into 2006, while also increasing sales volumes on a number of steel products. Prices in the steel segment improved when compared to the first quarter, contributing to the increase in revenue over first quarter levels. Moreover, we see the continuation of this pricing trend into the second half of 2006, though the price dynamics cannot be compared to the levels we saw in 2005. We expect additional cost-savings from our new concasting machine and coke battery in Chelyabinsk, which will both be put into operation in the fourth quarter. We believe that we are well positioned to sell into the strong Russian steel market, and we anticipate that the efforts we have made to increase profitability and lower costs will further help raise the segment’s margins.” Recent Highlights
Mr. Ivanushkin commented: “The first half of 2006 demonstrated Mechel’s ability to carry on with the cost saving programs to improve performance of both segments as compared to the beginning of the year. Despite the difficult market conditions we faced in the first quarter of the year, we continued to strengthen the mining segment, while improving the performance of the steel segment. We also managed to maintain cost levels, resulting in a significant increase in income and fulfilling our plans and expectations. Our presence as a self-sufficient, integrated producer combined with our geographic diversity, enables us to adapt to changing market conditions. We believe this will result in significant value for our business and shareholders in the future.” Financial Position In the first half of 2006, CAPEX totaled $253.6 million, out of which $156.2 million was invested in the mining segment and $97.4 million in the steel segment. Mechel spent $3.8 million on acquisitions in the first half of 2006, including $2.1 million for the 100% stake in Metals Recycling OOO, and $1.7 million on the purchase of minority stakes in other subsidiaries of Mechel. As of June 30, 2006, total debt(1) was $453.6 million. Cash and cash equivalents amounted to $331.3 million at the end of the period, and net debt amounted to $122.3 million (net debt is defined as total debt outstanding less cash and cash equivalents). * One American Depositary Share is equivalent to three diluted shares. 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/investors/fresults/index.wbp. *** Mechel OAO *** 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. (1)Total debt is comprised of short-term borrowings and long-term debt. Attachments to the 1H 2006 Earnings Press ReleaseAttachment 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:
Mechel OAO Consolidated balance sheets as of June 30, 2006 and December 31, 2005
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