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MECHEL REPORTS NINE MONTHS 2007 RESULTS Moscow, Russia - December 11, 2007 - Mechel OAO (NYSE: MTL), a leading Russian integrated mining and steel group, today announced results for the nine months ended September 30, 2007.
Igor Zyuzin, Mechel’s Chief Executive Officer, commented: “In the first nine months of 2007, Mechel has demonstrated strong financial results, supported by steadily rising production output and a favorable environment across our customer markets. Today we can say with certainty that 2007 will be the second year in a row when the Company will achieve record financial results. Net income for the first three quarters of this year far exceeded net income for the whole year of 2006, which was the best year for financial performance in Mechel’s history.” Consolidated Results Net revenue for the first nine months of 2007 amounted to $4.6 billion, as compared to $3.1 billion in the first nine months of 2006. Operating income was $1.1 billion, or 22.6% of net revenue, compared to operating income of $483.0 million, or 15.4% of net revenue, in the prior year period. The main contributing factors were strong market demand and related increases in selling prices for all of Mechel’s major product groups, increase in production of high value-added products as well as decreasing cost per tonne on some of the Company’s core product groups. For the first nine months of 2007, Mechel’s consolidated net income nearly doubled to $706.0 million, or $5.09 per ADR ($1.70 per diluted share), compared to consolidated net income of $372.1 million, or $2.76 per ADR ($0.92 per diluted share) for the year-ago period. One American Depositary Share is equivalent to three diluted shares. Consolidated EBITDA also nearly doubled, rising to $1.2 billion for the period, compared to $668.5 million in the first nine months of 2006, reflecting the favorable pricing environment and the Company’s disciplined approach to cost management. Please see the attached tables for a reconciliation of consolidated EBITDA to net income. Mining Segment Results1
1 - Results for the 9 months of 2006 are recalculated to reflect separate reporting for the energy segment. 2 - EBITDA margin is calculated as a percentage of consolidated revenues of the segment, including intersegment sales. Mining segment output
Mining segment revenue from external customers for the first nine months of 2007 totaled $1.3 billion, or 27% of consolidated net revenue, an increase of 33% over segment revenue from external customers of $952.3 million, or 30%, of consolidated net revenue, for the first nine months of 2006. Operating income in the mining segment for the first nine months of 2007 more than tripled to $604.1 million, or 34.1% of segment revenues, compared to total operating income of $185.5 million, or 15.5% of segment revenues, a year ago. EBITDA in the mining segment in the first nine months of 2007 was $654.1, which is 156.6% higher than segment EBITDA of $254.9 million for the same period in the prior year. The EBITDA margin of the mining segment during the first nine months of 2007 also rose to 36.9% compared to 21.3% for the comparable nine months period in 2006. Igor Zyuzin commented on the results of the mining segment: “Growing demand and positive pricing trends in the global coal and iron ore markets continued into the third quarter. As a result of our efforts aimed at expanding the mining segment and optimizing technical processes at our mining facilities, we increased coal production by 8% and nickel by 22%, as compared with the same period of last year. The increase in production output and the strong pricing environment enabled Mechel’s mining segment to record operating profit three times higher than operating income for the same period of last year. Today we are witnessing further price increases for coal products on the back of rising demand in Asian markets and infrastructural challenges faced by major coal exporting counties. We expect to capitalize on the existing favorable market conditions, while further expanding sales volumes, maintaining our focus on controlling the segment’s operating costs and optimizing our logistics operations. Steel Segment Results3
3 -Results for the 9 months of 2006 are recalculated to reflect separate reporting for the energy segment. 4 - EBITDA margin is calculated as a percentage of consolidated revenues of the segment, including intersegment sales. Steel segment output
Revenue from external customers in Mechel’s steel segment for the first nine months of 2007 increased by 45.2% to $3.1 billion, or 67.3% of consolidated net revenue, from $2.2 billion, or 68.6% of consolidated net revenue, for the first nine months of 2006. In the first nine months of 2007, the steel segment’s operating income increased by 67.6% and reached $485.1 million, or 15.2% of total segment revenues, compared to operating income of $289.4 million, or 13.3% of total segment revenues a year ago. EBITDA in the steel segment in the nine months of 2007 was $593.7 million, an increase of 46.7% compared to the same period of last year. The EBITDA margin of the steel segment was 18.6%. Igor Zyuzin commented: “On the whole, we are pleased with the overall performance of Mechel’s steel segment during the first nine months of 2007. Favorable pricing environment allowed for a significant increase in net income compared to the same period of last year. In line with our strategy of increasing the share of high value added products, we reduced the output of billets and scaled up the production of hardware. The continued implementation of our capital expenditure program, announced earlier this year, will allow us to further improve the steel segment’s efficiency and increase the segment’s profitability by raising the share of high value added products and reducing our costs by further modernizing our production facilities and decreasing usage ratios.” Energy Segment Results5
5 -Results in the 9 months of 2006 were previously reported as part of the mining and steel segments. 6 - EBITDA margin is calculated as a percentage of consolidated revenues of the segment, including intersegment sales. Revenue from external customers in Mechel’s energy segment for the first nine months of 2007 increased by 623.2% to $251.5 million, or 5.4% of consolidated net revenue, from $34.8 million or 1.1% of consolidated net revenue in the first nine months of 2006. In the first nine months of 2007, the energy segment’s operating income fell by 82% to $0.9 million, or 0.3% of total segment revenues, compared to operating income of $5 million, or 5.9% of total segment revenues a year ago. EBITDA in the energy segment in the nine months of 2007 was $11.8 million, an increase of 92.4% compared to the same period of last year. The EBITDA margin of the segment was 3.7%. Net loss of the segment was $11.1 million and is the result of interest payments on intersegment loans that were given to Mechel’s subsidiary called OOO Mechel Energo by other Mechel subsidiaries. Igor Zyuzin commented: “This is the first time when we have separately disclosed financial and operating information for the Mechel Energy segment. Since the beginning of 2007, the Company has acquired a number of energy assets, extending its presence in the energy business. As a result, we established an integrated energy division with its own raw material base, power generating facilities and extensive client base. We consider this business to be very promising, given rising energy consumption in Russia and the upcoming deregulation of the electricity market. However, since this is very young and growing segment of Mechel’s business and many assets were acquired fairly recently, it will take some time before we develop a broader energy holding and integrate it into Mechel Group, laying the base for the segment’s financial performance. We are confident about the future of this new business segment, building on our experience of integrating acquired companies and turning them into highly profitable businesses.” Recent Highlights
Igor Zyuzin concluded: “The production and financial results delivered for the first nine months of 2007 and the demand trends in our main markets give us further confidence in our prospects for the full year of 2007. The recent acquisition of Yakutugol not only strengthens our position as a producer of high quality hard coking coal, but allows us to benefit from the current favorable market conditions for coal products. We will continue to develop the Company and enhance our production assets, sales and management. I am confident that after the Company’s record performance in 2007, we will be well positioned to further improve our financial performance.” Financial Position For the nine months of 2007, capital expenditures totaled $319.3 million, out of which $139.6 million was invested in the mining segment, $175.2 million in the steel segment and $4.5 million in the energy segment. Mechel spent $511.5 million on acquisitions in the first nine months of 2007 and $9.6 million to acquire minority shares in different subsidiaries. As of September 30, 2007, total debt6 was $1.04 billion. Cash and cash equivalents amounted to $412.6 million at the end of the period, and net debt amounted to $622.4 million (net debt is defined as total debt outstanding less cash and cash equivalents). 6Total debt is comprised of short-term borrowings and long-term debt 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. Attachments to Announcement of Nine Months 2007 Results 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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