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MECHEL REPORTS FIRST QUARTER 2005 RESULTS Moscow, Russia - August 18, 2005 - Mechel OAO (NYSE: MTL), a leading Russian integrated mining and steel group, today announced results for the first quarter ended March 31, 2005.
(1) See Attachment A. Vladimir Iorich, Mechel’s Chief Executive Officer, commented: “First quarter 2005 was a very successful period for Mechel, one in which we saw continued strong operational and financial performance, particularly from our mining segment as raw material prices remained at peak levels. The demand for our mining and steel products, as well as average realized prices and selling volumes, remained high throughout most of the first quarter both domestically and internationally, yielding solid results. However, towards the end of the quarter we began to see increasingly difficult market conditions for our products, a situation we expect to experience for the remainder of this year. Although I believe that Mechel is well-positioned for the future given its status as one of the world’s most integrated mining and steel companies, the current slowdown in the market will almost certainly make the first quarter the best quarter of 2005 for us.” Consolidated Results Net revenue in the first quarter of 2005 rose 60.1% to $1.05 billion from $655.3 million in the first quarter of 2004. Driven by high product pricing and steps Mechel has taken to reduce operating costs, gross margin rose 103.1% to $449.9 million, or 42.9% of net revenue, compared to $221.5 million, or 33.8% of net revenue for the first quarter of 2004. Operating income was $226.8 million, or 21.6% of net revenue, versus operating income of $80.8 million, or 12.3% of net revenue, in the first quarter of 2004, an increase of 180.8%. For the first quarter of 2005, Mechel reported consolidated net income of $169.5 million, or $1.26 per ADR ($0.42 per diluted share), a 219.6% increase compared with net income of $53.0 million, or $0.43 per ADR ($0.14 per diluted share), for the first quarter of 2004. Consolidated EBITDA rose 142.7% to $279.7 million in the first quarter of 2005 from $115.2 million a year ago. Please see the attached tables for a reconciliation of consolidated EBITDA to net income. Mining Segment Results
Mining segment output
Mining segment revenue for the first quarter of 2005 totaled $313.6 million, or 29.9%, of consolidated net revenue, an increase of 123.0% over segment revenue of $140.6 million, or 21.5%, of consolidated net revenue, in the first quarter of 2004. The increase in revenues reflects growth in output, strong market positions, and an increase in sales of mining products to third parties. Operating income for the first quarter of 2005 in the mining segment rose 715.2% to $184.2 million, or 58.7%, of total segment revenues, compared to operating income of $22.6 million, or 16.6%, of total segment revenues a year ago. This increase in profitability reflects Mechel’s tight control over costs and overall efficiency of mining operations. EBITDA in the mining segment for the first quarter of 2005 was $186.0 million, 458.1% higher than segment EBITDA of $33.4 million in the first quarter of 2004. The EBITDA margin of the mining segment also increased to 59.3% from 23.7%. Mr. Iorich commented on the results of the mining segment: “During the first quarter we still saw a good pricing environment for our mining products. With high-quality products and a broad customer base, Mechel was able to leverage market conditions into strong operating performance within this segment, more than doubling the EBITDA margin. In addition, during the first quarter of 2005 and further into the year, we continued to execute our strategy to further expand our mining operations, acquiring a 25%+1 stake in Yakutugol, thus gaining access to a new promising region with substantial coal and iron ore reserves. Our primary area of difficulty in the mining segment, our nickel operations, were an issue of a particular focus for us, as the existing coke-based technology and significant work to upgrade equipment resulted in a decline in profitability and output. We view technological upgrade of this facility and reduction of its dependence on coke so as to lower production costs as the key to its profitable operation.” Steel Segment Results
Steel segment output
Revenue from Mechel’s steel segment increased 43.0% in the first quarter of 2005 from $514.7 million to $735.7 million, or 70.11%, of consolidated net revenue, as compared to the first quarter of 2004. This revenue growth was driven by increasing output and demand. In the first quarter of 2005, the steel segment generated operating income of $42.6 million, or 5.8%, of total segment revenues, a decrease of 26.7% over operating income of $58.1 million, or 11.3%, of total segment revenues in the first quarter of 2004. EBITDA in the steel segment for the first quarter of 2005 was $93.7 million, an increase over steel segment EBITDA of $81.9 million in the first quarter of 2004. EBITDA margin of the steel segment decreased from 15.9% to 12.7%. This primarily resulted from increasing raw material prices and changing 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 increasing raw material costs shifted profitability in the group from the steel to the mining segment. Throughout 2005 we have been concentrating our efforts on efficiency improvement and controlling costs. Recently, for example, we made a test run of 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.” 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:
Mr. Iorich concluded, “Overall, the first quarter of 2005 was one of our most successful periods ever. We were able to utilize favorable market conditions and diligently execute our operating strategy. However, starting from March, we have been seeing decreasing price trends for our products, and 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 environment, positioning us well for the future.” Financial Position First quarter cash expenditure on property, plant and equipment amounted to $133.45 million, of which $92.9 million was invested in the steel segment and $40.6 million in the mining segment. In 2005 Mechel has spent $463 million on acquisitions, comprised of $411.2 million for 25%+1 of the shares of Yakutugol Holding Company OAO, $3.5 million for 90.3% of the shares of Port Kambarka OAO, $15.7 million for 24.96% of the shares of Izhstal OAO, $32.3 million for 5.62% of the shares of Chelyabinsk Metallurgical Plant OAO and $0.3 million for 4.5% of the shares of Korshunov Mining Plant. As of March 31, 2005, total debt was at $534.3 million. Cash and cash equivalents amounted to $634.7 million at the end of the first quarter of 2005 and net debt amounted to $(100.4) 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 *** 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 1Q 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:
EBITDA margin can be reconciled as a percentage to our Revenues as follows:
MECHEL OAO
MECHEL OAO
MECHEL OAO
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