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MECHEL REPORTS THE 1Q 2011 FINANCIAL RESULTS
— Revenue amounted to $2.9 billion Moscow, Russia – June 29, 2011 – Mechel OAO (NYSE: MTL), a leading Russian mining and steel group, today announced financial results for the 1Q 2011. Yevgeny Mikhel, Mechel’s Chief Executive Officer, commented on the 1Q 2011 results: “Q1 2011 was not easy for the Company, with both positive and negative moments. Nevertheless, we have demonstrated stable operational and financial performance, kept implementing investment projects at the same high rate, and continued to optimize the debt portfolio. Having consolidated the results achieved last year, we established a secure basis for using favorable market price conditions in Q2 and Q3 at our key markets to maximum efficiency and for further active development.” Consolidated Results For The 1Q 2011
(1) In the second quarter of 2010, the Group’s management made a decision to transfer the Group’s coke producing facilities Moscow Coke and Gas Plant and Mechel-Coke to the mining segment. In prior periods, they were included in the Steel segment. The comparative data for the 1Q 2010, ended March 31, 2010, was restated accordingly to account for the coke producing facilities in the mining segment. (2) See Attachment A. (3) Starting from 2010, Mechel changed the method of EBITDA calculation. Here we give the adjusted EBITDA, which is EBITDA adjusted for effects of remeasurement of contingent liabilities at fair value, forex gain/(loss), net result on the disposal of non-current assets, amounts attributable to non-controlling interests and interest income. The net revenue in 1Q 2011 increased by 54.4% and amounted to $2.9 billion compared to $1.9 billion in 1Q 2010. The operating income rose by 203.7% and amounted to $448.4 million or 15.28% of the net revenue, compared to the operating income of $147.6 million or 7.77% of the net revenue in 1Q 2010. In 1Q 2011, Mechel’s consolidated net income attributable to shareholders of Mechel OAO increased by 274.3% to $309.1 million compared to the consolidated net income attributable to shareholders of Mechel OAO of $82.6 million in 1Q 2010. The consolidated adjusted EBITDA in 1Q 2011 increased by 123.1% to $ 566.9 million, compared to $254.0 million in 1Q 2010. Depreciation, depletion and amortization in 1Q 2011 for the Company were $140.2 million, an increase of 16.2% compared to $120.6 million in 1Q 2010. Mining Segment Results For The 1Q 2011
(1)In the second quarter of 2010, the Group’s management made a decision to transfer the Group’s coke producing facilities Moscow Coke and Gas Plant and Mechel-Coke to the mining segment. In prior periods, they were included in the Steel segment. The comparative data for the 1Q 2010, ended March 31, 2010, was restated accordingly to account for the coke producing facilities in the mining segment. (2)See Attachment A. (3)Starting from 2010, Mechel changed the method of EBITDA calculation. Here we give the adjusted EBITDA, which is EBITDA adjusted for effects of remeasurement of contingent liabilities at fair value, forex gain/(loss), net result on the disposal of non-current assets, amounts attributable to non-controlling interests and interest income. (4)Adjusted EBITDA margin is calculated as a percentage of consolidated revenues of the segment, including intersegment sales. Mining Segment Output For The 1Q 2011
(1)Data includes output volumes of various types of anthracite and PCI. (2)Some of the steam coal mined is counted as PCI and is included into the “Various types of coal for steel production” line. (3)Starting from the second quarter of 2010 we include coke production data in the mining segment operational results because coke production facilities were transferred from the steel segment to the mining segment. Mining segment’s revenue from external customers in 1Q 2011 totaled $828.1 million, or 28.2% of the consolidated net revenue, an increase of 57.2% over net segment’s revenue from external customers of $526.8 million, or 27.7% of the consolidated net revenue in 1Q 2010. The operating income in the mining segment in 1Q 2011 increased by 191.0% to $292.1 million, or 26.83% of total segment’s revenue, compared to the operating income of $100.4 million, or 14.76% of total segment revenue for the 1Q 2010. The adjusted EBITDA in the mining segment in 1Q 2011 went up by 109.8% and amounted to $361.2 million compared to segment’s adjusted EBITDA of $172.2 million in 1Q 2010. The adjusted EBITDA margin for the mining segment in 1Q 2011 was 33.19% compared to 25.33% in 1Q 2010. Depreciation, depletion and amortization in the mining segment amounted to $83.0 million which is 19.9% higher than $69.2 million in 1Q 2010. Chief Executive Officer of Mechel Mining Management Company Boris Nikishichev commented on the mining segment operating results: “In Q1 2011, the mining segment has done well. In spite of the temporary halt of Neryunrginskaya washing plant and accordingly the decrease in end product output at Yakutugol, the Group’s mining segment managed to avoid a significant decrease in the Q1 2011 operational results by taking a set of prompt measures, and to minimize the halt’s impact on the segment’s financial performance as well. By mid-February, we had already re-launched two of the washing plant’s three sections, gradually increasing its load. We also used the plant’s halt for making all of the overhaul repairs that had been scheduled for 2011. In May, the washing plant’s third section was re-launched in limited operation. The washing plant is currently working at full load. Lately, demand from traditional importers of coal – China, South Korea and Japan — remained at a fairly high level. All this allows us to expect that the mining segment will show good financial results in 2011”. Steel Segment Results For The 1Q 2011
(1)In the second quarter of 2010, the Group’s management made a decision to transfer the Group’s coke producing facilities Moscow Coke and Gas Plant and Mechel-Coke to the mining segment. In prior periods, they were included in the steel segment. The comparative data for the 1Q 2010, ended March 31, 2010, was restated accordingly to account for the coke producing facilities in the mining segment. (2)See Attachment A. (3)Starting from 2010, Mechel changed the method of EBITDA calculation. Here we give the adjusted EBITDA, which is EBITDA adjusted for effects of remeasurement of contingent liabilities at fair value, forex gain/(loss), net result on the disposal of non-current assets, amounts attributable to non-controlling interests and interest income. (4)Adjusted EBITDA margin is calculated as a percentage of consolidated revenues of the segment, including intersegment sales. Steel Segment Output For The 1Q 2011
Mechel’s steel segment’s revenue from external customers in 1Q 2011 amounted to $1.8 billion, or 59.9% of the consolidated net revenue, an increase of 60.7% over the net segment’s revenue from external customers of $1.1 billion, or 57.5% of consolidated net revenue, in the 1Q 2010. In 1Q 2011, the steel segment’s operating income increased by 433.3% and totaled $125.6 million, or 6.80% of total segment’s revenue, versus the operating income of $23.5 million, or 2.06% of total segment’s revenue, in 1Q 2010. The adjusted EBITDA in the steel segment in 1Q 2011 increased by 258.9% and amounted to $149.8 million, compared to the adjusted EBITDA of $41.7 million in 1Q 2010. The adjusted EBITDA margin of the steel segment was 8.11% for the 1Q 2011, versus the adjusted EBITDA margin of 3.64% in 1Q 2010. Depreciation and amortization in steel segment rose by 0.6% from $28.9 million in 1Q 2010 to $29.1 million in 1Q 2011. Commenting on the results of the steel segment Andrey Deineko, Chief Executive Officer of Mechel-Steel Management Company, noted: “The steel division’s operations in Q1 2011 can be characterized as stable. We maintain a high level of workload for our facilities while continuing to increase production for several products, as well as develop new high value-added products. At the same time, the volume of steel products sales is increasing at priority rates due to the expansion of our Mechel Service Global sales network. As part of our strategy aimed at increasing the share of high value-added products and a more effective cost control, the segment continues with implementing an extensive investment program. In June, a modernized steelmaking complex was launched at Otelu Rosu plant in Romania, which includes a new electric arc furnace with the COSS system, an upgraded continuous billets caster, and a modern scrap metal preparation section. The rolling mill #250 at Izhstal is being prepared for commissioning, and construction of the universal rolling mill at Chelyabinsk Metallurgical Plant continues. In Q1 2011, we saw a certain decrease in demand for the steel segment’s products due to instability in North Africa. Despite that, the segment‘s revenue and adjusted EBITDA grew by more than 10%.” Ferroalloys Segment Results For The1Q 2011
(1)See Attachment A. (2)Starting from 2010, Mechel changed the method of EBITDA calculation. Here we give the adjusted EBITDA, which is EBITDA adjusted for effects of remeasurement of contingent liabilities at fair value, forex gain/(loss), net result on the disposal of non-current assets, amounts attributable to non-controlling interests and interest income. (3)Adjusted EBITDA margin is calculated as a percentage of consolidated revenues of the segment, including intersegment sales. Ferroalloys Segment Output For The 1Q 2011
Ferroalloys segment’s revenue from external customers in the 1Q 2011 amounted to $124.1 million, or 4.2% of the consolidated net revenue, an increase of 30.7% compared with the segment’s revenue from external customers of $95.0 million or 5.0% of the consolidated net revenue, in 1Q 2010. In 1Q 2011, the operating income in the ferroalloys segment increased by 276.7% and totaled $11.9 million, or 6.71% of total segment’s revenue, versus operating loss of $6.7 million, or -5.59% of total segment’s revenue, in 1Q 2010. The adjusted EBITDA in the ferroalloys segment in 1Q 2011 increased by 287.7% and amounted $35.1 million, compared to segment’s adjusted EBITDA of $9.1 million in 1Q 2010. The adjusted EBITDA margin of the ferroalloys segment comprised 19.86% in 1Q 2011 compared to the adjusted EBITDA margin of 7.55% in 1Q 2010. Ferroalloys segment’s depreciation, depletion and amortization in 1Q 2011 were $22.4 million, an increase of 24.0% over $18.1 million in 1Q 2010. Gennadiy Ovchinnikov, Chief Executive Officer of Mechel Ferroalloys Management Company, noted: “The ferroalloys segment’s Q1 2011 results demonstrated a stable operational and financial performance. Nickel and ferrosilicon production remained at the level of Q4 2010. At the same time we managed to increase ferrochrome production in Q1 2011 by 20% as compared to Q4 2010. In spite of the cash cost increase’s negative impact on the segment’s financial results due to increased electricity and coke prices, favorable price conditions and growing volumes of production and sales ferrochrome enabled the segment to maintain its revenue and adjusted EBITDA at the level close to 4Q 2010 results.” Power Segment Results for The 1Q 2011
(2)Starting from 2010, Mechel changed the method of EBITDA calculation. Here we give the adjusted EBITDA, which is EBITDA adjusted for effects of remeasurement of contingent liabilities at fair value, forex gain/(loss), net result on the disposal of non-current assets, amounts attributable to non-controlling interests and interest income. (3)Adjusted EBITDA margin is calculated as a percentage of consolidated revenues of the segment, including intersegment sales. Power Segment Output For The 1Q 2011
Mechel’s power segment’s revenue from external customers in 1Q 2011 comprised $225.1 million, or 7.7% of consolidated net revenue, an increase of 21.4% compared with the segment’s revenue from external customers of $185.4 million or 9.8% of consolidated net revenue in 1Q 2010. The operating income in the power segment in 1Q 2011 amounted to $33.5 million, or 9.10% of the total segment’s revenue in the same period, an increase of 59.8% compared to the operating income of $21.0 million, or 7.05% of the total segment’s revenue, in 1Q 2010. The adjusted EBITDA in the power segment in 1Q 2011 went up by 63.8% totaling $35.4 million, compared to the adjusted EBITDA of $21.6 million in 1Q 2010. The adjusted EBITDA margin for the power segment amounted to 9.61% compared to 7.26% in 1Q 2010. Depreciation and amortization in power segment in 1Q 2011 increased by 28.70% comparing with the 1Q 2010 from $4.43 million to $5.70 million. Sergey Zorin, Chief Executive Officer of Mechel Energo, noted: “In Q1 2011 the power segment noticeably improved its financial performance as compared to the previous quarter. Revenue increased more than by 25%, adjusted EBITDA – by 65%, while net income more than doubled. This growth is largely due to the increase in average electricity tariffs and consolidation in the Company’s performance the results of Toplofikatsia Rousse, as Mechel increased its stake in the power station’s charter capital up to 100%. Expansion of the power segment’s operation as well as implementing measures aimed at optimizing costs, allow us to expect that the positive dynamics of segment’s performance will be maintained.” Recent Highlights
Yevgeny Mikhel concluded: “I believe that the Company worked well in Q1 2011. We maintained the production levels achieved last year, promptly eradicated the consequences of the washing plant’s halt at Yakutugol, increased sales of steel products, and, as a result, demonstrated good financial results. Our consistent efforts to modernize production facilities, increase production due to implementation of new promising projects, and scheduled commissioning of Elga coal deposit allow us to expect further improvement for of the Company’s performance.” Financial Position Capital expenditure on property, plant and equipment and acquisition of mineral licenses for the 1Q 2011 amounted to $335.2 million, of which $179.3 million was invested in the mining segment, $141.1 million was invested in the steel segment, $7.5 million was invested in the ferroalloy segment and $7.3 million was invested in the power segment. As of March 31, 2011 total debt was at $8.2 billion. Cash and cash equivalents amounted to $212.9 million and net debt amounted to $7.9 billion (net debt is defined as total debt outstanding less cash and cash equivalents) at end of 1Q 2011. The management of Mechel will host a conference call today at 10:00 a.m. New York time (3:00 p.m. London time, 6:00 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 companies. Its business includes four segments: mining, steel, ferroalloy and power. Mechel unites producers of coal, iron ore concentrate, steel, rolled products, ferroalloys, hardware, heat and electric power. 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 2011 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. Adjusted EBITDA represents earnings before Depreciation, depletion and amortization, Foreign exchange gain/(loss), Gain/(loss) from remeasurement of contingent liabilities at fair value, Interest expense, Interest income, Net result on the disposal of non-current assets, Amount attributable to non-controlling interests and Income taxes. Adjusted EBITDA margin is defined as adjusted EBITDA as a percentage of our net revenues. Our adjusted EBITDA may not be similar to EBITDA measures of other companies. Adjusted EBITDA; 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 our adjusted 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 adjusted 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. Adjusted EBITDA can be reconciled to our consolidated statements of operations as follows:
Adjusted EBITDA margin can be reconciled as a percentage to our Revenues as follows:
Condensed Consolidated Balance Sheets
Consolidated Statements of Income and Comprehensive Income (Loss)
Condensed Consolidated Statements of Cash Flows Adjustments to reconcile net income to net cash used by operating activities:
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