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MECHEL REPORTS 9-MONTH 2005 RESULTS Moscow, Russia – December 16, 2005 – Mechel OAO (NYSE: MTL), a leading Russian integrated mining and steel group, today announced results for the nine months ended September 30, 2005.
(1) See Attachment A. Vladimir Iorich, Mechel’s Chief Executive Officer, commented: “In the third quarter 2005 we saw a slight improvement in market conditions, as compared to the second quarter, which enabled us to restore production in both segments to planned levels. Our programs targeted at efficiency growth in the steel segment started yielding positive results as well. This, along with the continuing performance of our mining segment, confirms the strength of our strategy aimed at increasing overall value across both segments.” Consolidated Results Net revenue in the first nine months of 2005 rose 17.6% to $2.91 billion from $2.47 billion in the first nine months of 2004. Operating income was $452.03 million, or 15.5% of net revenue, versus operating income of $509.36 million, or 20.6% of net revenue, in 2004, a decrease of 11.3%. For the first nine months of 2005, Mechel reported consolidated net income of $314.72 million, or $2.34 per ADR ($0.78 per diluted share) Consolidated EBITDA decreased 8.0% to $569.02 million in the first nine months of 2005 from $618.71 million a year ago, reflecting the negative impact of unstable market conditions on average realized prices for the main categories of our products. 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 nine months of 2005 totaled $823.55 million, or 28.3%, of consolidated net revenue, an increase of 47.9% over segment revenue of $556.88 million, or 22.5%, of consolidated net revenue, in the first nine months 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 nine months of 2005 in the mining segment rose 36.5% to $341.28 million, or 41.4%, of total segment revenues, compared to operating income of $250.04 million, or 44.9%, 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 nine months of 2005 was $379.41 million, 22.6% higher than segment EBITDA of $309.51 million in the first nine months of 2004. The EBITDA margin of the mining segment was 46.1%. Mr. Iorich commented on the results of the mining segment: “The negative trends we witnessed in major mining markets in the second quarter continued to affect our nine-month production. The slowdown in the coking coal market, caused by a decrease in production by a number of Russian steel companies, prompted our shift to increasing steam coal production. Declining iron ore prices also influenced the segment’s margin negatively. Nevertheless, with its strong profitability, mining continues to be of primary interest for Mechel.” Steel Segment Results
Steel segment output
Revenue from Mechel’s steel segment increased 8.8% in the first nine months of 2005 from $1.92 billion to $2.09 billion, or 71.7%, of consolidated net revenue, as compared to the first nine months of 2004. In the first nine months of 2005, the steel segment generated operating income of $110.75 million, or 5.3%, of total segment revenues, a decrease of 57.3% over operating income of $259.32 million, or 46.6%, of total segment revenues in the first nine months of 2004. EBITDA in the steel segment for the first nine months of 2005 was $189.61 million. The EBITDA margin of the steel segment increased from 6.9% in first half of 2005 to 9.1% in the first nine months of 2005. Mr. Iorich commented, “The steel segment demonstrated an increase in EBITDA margin and net income over the previously reported period, reflecting the effect of a number of our ongoing improvement programs, including the commissioning of our new sinter plant at Chelyabinsk. We maintained our rolled product output by optimizing usage ratios, while reducing raw steel, pig iron, and coke output. We will continue to further improve usage ratios by putting our new continuous casting facilities into operation. At the same time, we see positive market trends, as steel products output has begun to pick up, and expect to fully restore production levels in the segment in response to growing demand.” Recent Highlights After a local water pump station failed on October 23, interrupting the supply of water to Chelyabinsk Metallurgical Plant, production at CMP was temporarily stopped. The plant’s personnel implemented all necessary emergency protocols to limit any negative consequences for the plant’s equipment and managed to fully restart production within two days, minimizing potential losses, which are not expected to exceed $1.5 million. Mr. Iorich concluded, “The third quarter of 2005 remained a challenging time for us; however, we demonstrated that we are able to address the negative trends we saw this year by increasing sales volumes and the share of value-added products sales, as well as by raising the efficiency of the steel segment. Our overall profitability remains our focus, and we are confident that we will continue to see the positive impact of our ongoing modernization and efficiency-improvement programs in the coming year. We will concentrate on further lowering costs and improving usage ratios. We will also strive to increase our export of coal, thus increasing third-party sales of mining products, and at diversifying our product portfolio towards value-added products in the steel segment. Our extensive vertical integration, combined with management’s efforts and the continuation of our strategy, positions us well for the future.” Financial Position Cash expenditure on property, plant and equipment for the first nine months of 2005 amounted to $394.82 million, of which $199.77 million was invested in the mining segment and $195.05 million in the steel segment. In the first nine months of 2005, Mechel spent $484 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 25.4% of the shares of Izhstal OAO, $50.2 million for 6.4% of the shares of Chelyabinsk Metallurgical Plant OAO, and $1.5 million for 10.3% of the shares of Korshunov Mining Plant and $1.9 million was spent on acquisition of minority interest in other subsidiaries. As of September 30, 2005, total debt1 was at $386.9 million. Cash and cash equivalents amounted to $312.2 million at the end of the 9 months 2005 and net debt amounted to $(74.7) million (net debt is defined as total debt outstanding less cash and cash equivalents). 1Total debt is comprised of short-term borrowings and long-term debt Correction of 6-Month and 3-Month 2005 Results Mechel also announced today the correction of its 6-month and 3-month 2005 results. In connection with the preparation for its 9-month 2005 closing, Mechel identified, through its internal processes, an error in not netting off certain trading transactions within the steel segment. These transactions related to a series of trades in which Mechel bought back from one of its customers steel product which was then re-sold to third parties at the same price at which the product had been purchased by Mechel, resulting in no-margin trades. Previously, Mechel had included these resales as revenue, and the amount paid to the initial customer was included in cost of goods sold. As the total amount of such resales and purchases was the same in both periods, this correction has no effect on gross or net operating income, and affects only revenue, cost of goods sold, and margin percentages deriving from such for the consolidated, as well as steel segment, results. There is no effect on any other item in the financial statements, while affected lines should be corrected as follows: Corrected Numbers for Six Months ended June 30, 2005
Corrected Numbers for Three Months ended March 31, 2005
The management of Mechel will host a conference call today at 11 a.m. New York time (4 p.m. London time, 7 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 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 9M 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
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