Mechel 1Q 2007 results

• Mechel 1Q 2007 results press-release (PDF, 78 Kb)
• Mechel overview slide presentation (PDF, 223 Kb)
• A link to audio webcast of Mechel 1Q 2007 results conference call to be held in Moscow on July 11, 2007
  

MECHEL REPORTS 2007 FIRST QUARTER FINANCIAL AND PRODUCTION RESULTS

— Revenues increased of $1.4 billion —
— Operating income increased of $327.7 million —
— Net income of $205 million, $1.47 per ADR or $0.49 per diluted share —

Moscow, Russia – July 11, 2007– Mechel OAO (NYSE: MTL), a leading Russian integrated mining and steel group, today announced financial and production results for the first quarter ended March 31, 2007.  

US$ thousand 1Q 2007 1Q 2006 Change Y-on-Y Revenues 1,416,166 853,518 65.9% Net operating income 327,655 58,996 455.4% Net operating margin 23.1% 6.9% - Net income 205,014 62,881 226.0% EBITDA (1) 355,450 134,411 164.5% EBITDA margin 25.1% 15.7% -

 (1)    See Attachment A.

Igor Zyuzin, Mechel’s Chief Executive Officer, commented: "The first quarter of 2007 was a successful one for Mechel that continued the strong performance we have seen recently.  Coupled with a market environment that continues to be favorable, we increased our production volumes and improved operational performance, which drove significant growth in all aspects of our business when compared to a year ago."

Consolidated Results

Net revenue in the first quarter of 2007 increased 65.9% to $1.4 billion from $853.5 million in the first quarter of 2006, reflecting strong selling prices across the Company’s main product categories.  Operating income was $327.7 million, or 23.1% of net revenue, an increase of 455.4% over operating income of $59.0 million, or 6.9% of net revenue, in the first quarter of 2006. For the first quarter of 2007, Mechel reported consolidated net income of $205.0 million, or $1.47 per ADR ($0.49 per diluted share), compared to consolidated net income of $62.9 million, or $0.48 per ADR ($0.16 per diluted share) in the first quarter of 2006. Consolidated EBITDA was $355.5 million in the first quarter of 2007, compared to $134.4 million a year ago, an increase of 164.5%.  The increase in EBITDA was primarily the result of the higher sales volumes in the Company’s main product categories, as well as positive pricing dynamics and the impact of steps the Company has taken to improve production efficiency and lower operating costs. Selling  expenses decreased to 8.4% of sales for the first quarter or 2007 compared with 12.0% for the same quarter in the prior year as a result of positive changes to the sales structure.  General and administrative expense were reduced to 5.4% of sales for the quarter, compared with 7.2% in the first quarter of 2006, due to tighter cost controls.  Please see the attached tables for a reconciliation of consolidated EBITDA to net income.

Mining Segment Results

US $ thousand 1Q 2007 1Q 2006 Change Y-on-Y Revenues from external customers 421,420 289,459 45.6% Intersegment sales 168,354 75,871 121.9% Operating income 181,700 29,289 520.4% Net income 103,810 27,467 277.9% EBITDA 196,229 58,000 238.3% EBITDA margin (1) 33.3% 15.9% -

(1) EBITDA margin calculation is based on the total revenues of the segment including intersegment sales.

Mining Segment Output

Product 1Q 2007, thousand tonnes 1Q 2007 vs. 1Q 2006 Coal 4,543 13% Coking coal 2,223 0% Steam coal 2,320 30% Iron ore concentrate 1,095 (3)% Nickel 4.1 22%

Mining segment revenue from external customers for the first quarter of 2007 totaled $421.4 million, or 29.8% of consolidated net revenue, an increase of 45.6% over segment revenue from external customers of $289.5 million, or 33.9% of consolidated net revenue, in the first quarter of 2006. Operating income in the first quarter of 2007 in the mining segment was $181.7 million, or 30.8% of total segment revenues, an increase of 520.4% compared to operating income of $29.3 million, or 8.0% of total segment revenues, a year ago.  EBITDA in the mining segment for the 2007 first quarter was $196.2  million, an increase of 238.3% compared to EBITDA of $58.0 million a year ago, with an EBITDA margin increase to 33.3% from 15.9% in the 2006 first quarter.  Results in the Company’s mining segment for the first quarter of 2006 include a one-time extraction tax accrual of $20 million, as previously announced. Igor Zyuzin commented on the results of the mining segment, "Market conditions remained strong in the mining segment, and Mechel continued to implement its strategy aimed at further growing its mining operations. Investments in construction of new mining facilities and modernization of mining equipment allowed us to achieve significant increase in coal output in the first quarter of 2007 as compared to the same period a year ago.  We leveraged the strong market conditions  and doubled EBITDA margin for the segment to 33.3%.  We also increased our nickel output by 22% due to the further optimization of our production processes. Taking into consideration current favorable market conditions, we remain optimistic with regard to the overall outlook for the segment for the remainder of this year."

Steel Segment Results

US $ thousand 1Q 2007 1Q 2006 Change Y-on-Y Revenues from external customers 994,746 564,059 76.4% Intersegment sales 14,636 5,173 182.9% Operating income 145,955 29,707 391.3% Net income 101,204 35,414 185.8% EBITDA 159,222 76,411 108.4% EBITDA margin (1) 15.8% 13.4% -

(1) EBITDA margin calculation is based on the total revenues of the segment including intersegment sales.

Steel Segment Output

Product 1Q 2007, thousand tonnes 1Q 2007 vs. 1Q 2006 Coke 930 82% Pig iron 930 13% Steel 1,488 9% Rolled products 1,274 19% Hardware 158 18%

Revenues from external customers in Mechel’s steel segment increased 76.4% to $994.7 million, or 70.2% of consolidated net revenue, in the first quarter of 2007 as compared to $564.1 million, or  66.1%, in the first quarter of 2006. For the first quarter of 2007, the steel segment generated operating income of $146.0 million, or 14,5% of total segment revenues, an increase of 391.3% compared to operating income of $29.7 million, or 5.2% of total segment revenues, during the first quarter of 2006.  EBITDA in the steel segment for the 2007 first quarter was $159.2 million, an increase of 108.4% when compared to EBITDA of $76.4 million in the 2006 first quarter.  The EBITDA margin in the first quarter of 2007 was 15.8%, compared to 13.4% a year ago. Igor Zyuzin commented, "In the steel segment, we continue to focus our efforts on enhancing profitability through modernization of production and control over costs as well as further shifting our sales mix to an increased proportion of value-added, higher margin products.  The capital expenditure program which we continue to implement in the steel segment has enabled us to decrease raw material consumption ratios, resulting in reduced production costs and increased production output.  We also continued to steadily increase the share of continuously cast stee. At the end of last year we commissioned a new continuous casting machine at Chelyabinsk Metallurgical Plant, and another one was commissioned at our Romanian subsidiary, Mechel Targoviste, in the first quarter of this year."

Recent developments

• In July, Mechel OAO announced the appointment of Stanislav Ploschenko as its Acting Chief Financial Officer. In this position Stanislav Ploschenko replaced Anton Vishanenko.
• In July, Mechel OAO provided additional information regarding its capital expenditure program for 2007-2011.  Mechel plans to invest about $1.5 billion in its steel segment and about $1.2 billion in its coal segment during five years.

Financial Position

Capital expenditure in the first quarter of 2007 amounted to $81.8 million, of which $29.4 million was invested in the mining segment and $52.3 million in the steel segment. In the first quarter of 2007, Mechel spent $4.2 million on acquisitions, and another $6.1 million was spent on acquisition of minority interest in other subsidiaries.  As of March 31, 2007, total debt ¹ was at $408.8 million.  Cash and cash equivalents amounted to $209.1 million at the end of the period and net debt amounted to $199.7 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 6 p.m. Moscow time (10 a.m. New York time, 3 p.m. London 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.

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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.

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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 2007 First Quarter 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:

US $ thousands 1Q 2007 1Q 2006 Net income 205,014 62,881 Add: Depreciation, depletion and amortization Interest expense Income taxes   52,856 7,945 89,635   41,515 11,349 18,666 Consolidated EBITDA 355,450 134,411

EBITDA margin can be reconciled as a percentage to our Revenues as follows:

US $ thousands 1Q 2007 1Q 2006 Revenue, net 1,416,166 853,518 EBITDA 355,450 134,411 EBITDA margin 25.1% 15.7%

¹ Total debt is comprised of short-term borrowings and long-term debt

Consolidated Balance Sheets

(in thousands of U.S. dollars, except share amounts) March 31, 2007 December 31, 2006 Assets         Cash and cash equivalents $ 209,050 $ 172,614 Trading securities   258,453   270,964 Accounts receivable, net of allowance for doubtful accounts of $21,844 as of 31/03/2007 and $19,592 as of 31/12/2006   274,162   191,172 Due from related parties   743   545 Inventories   659,576   653,079 Deferred cost of inventory in transit   12,391   14,125 Current assets of discontinued operations   9   9 Deferred income taxes   4,436   7,922 Prepayments and other current assets   417,679   324,600 Total current assets   1,836,499   1,635,030           Long-term investments in related parties   436,283   429,206 Other long-term investments   56,466   44,392 Non-current assets of discontinued operations   109   108 Intangible assets, net   5,418   4,746 Property, plant and equipment, net   2,082,613   2,012,828 Mineral licenses, net   258,750   269,851 Deferred income taxes   14,675   6,983 Goodwill   48,133   45,914 Total assets $ 4,738,946 $ 4,449,058           Liabilities and Shareholders' Equity         Short-term borrowings and current portion of long-term debt $ 80,393 $ 166,517 Accounts payable and accrued expenses:         Advances received   150,109   88,278 Accrued expenses and other current liabilities   100,692   84,632 Taxes and social charges payable   253,852   143,037 Trade payable to vendors of goods and services   168,909   183,485 Due to related parties   3,603   2,353 Current liabilities of discontinued operations   511   508 Asset retirement obligation, current portion   3,616   3,444 Deferred income taxes   34,959   58,820 Deferred revenue   21,945   7,183 Pension obligations, current portion   13,803   11,044 Finance lease liabilities, current portion   6,234   6,066 Total current liabilities   838,626   755,367           Long-term debt, net of current portion   328,454   322,604 Restructured taxes and social charges payable, net of current portion   1,654   7,782 Asset retirement obligations, net of current portion   90,081   88,914 Pension obligations, net of current portion   58,504   59,170 Deferred income taxes   162,845   136,154 Finance lease liabilities, net of current portion   62,436   51,068 Minority interests   185,152   163,036           Shareholders' Equity         Common shares (10 Russian rubles par value 497,969,086 shares authorized, 416,270,745 shares issued and 416,270,745 and 416,270,745 shares outstanding as of March 31, 2007 and December 31, 2006)   133,507   133,507 Treasury shares, at cost   –   – Additional paid-in capital   426,767   412,327 Accumulated other comprehensive income   213,650   188,218 Retained earnings   2,237,270   2,130,911 Total shareholders' equity   3,011,194   2,864,963 Total liabilities and shareholders' equity $ 4,738,946 $ 4,449,058

Consolidated Income Statements

(in thousands of U.S. dollars, except share and per share amount) 3 months ended March 31, 2007 2006 2005 Revenue, net 1,416,166 $ 853,518 $ 1,039,456 Cost of goods sold (875,724) (591,729) (589,497) Gross profit 540,442 261,789 449,959 Selling, distribution and operating expenses: Selling and distribution expenses (119,288) (102,693) (115,250) Taxes other than income tax (13,614) (35,623) (33,335) Accretion expense (1,039) (834) (496) Loss on write-off of property, plant and equipment – – – (Provision for) recovery of doubtful accounts (2,043) (1,899) (11,175) General, administrative and other operating expenses (76,803) (61,744) (62,930) Total selling, distribution and operating expenses (212,787) (202,793) (223,186) Operating income 327,655 58,996 226,773 Other income and (expense): Income from equity investments 3,417 2,596 498 Interest income 1,076 1,555 4,817 Interest expense (7,945) (11,349) (16,433) Loss on revaluation of trading securities (15,667) – – Other income, net 4,448 7,374 15,237 Foreign exchange gain (loss) 9,278 20,066 (5,985) Total other income and (expense), net (5,393) 20,242 (1,866) Income before income tax, minority interest, discontinued operations and extraordinary gain 322,262 79,238 224,907 Income tax expense (89,635) (18,666) (52,982) Minority interest in (loss) income of subsidiaries (27,658) 1,627 (2,226) Income from continuing operations 204,969 62,199 169,699 Income (loss) from discontinued operations, net of tax 45 681 (186) Extraordinary gain, net of tax – – – Net income 205,014 $ 62,880 $ 169,513 Currency translation adjustment 20,259 66,443 (6,058) Adjustment of available-for-sale securities 5,201 30 131 Additional minimum pension liability – – – Comprehensive income 230,474 $ 129,353 $ 163,586 Basic and diluted earnings per share: Earnings per share from continuing operations 0.49 $ 0.16 $ 0.42 Loss per share effect of discontinued operations (0.00) (0.00) (0.00) Earnings per share effect of extraordinary gain 0.00 0.00 0.00 Net income per share 0.49 $ 0.16 $ 0.42 Weighted average number of shares outstanding 416,270,745 $ 403,274,537 $ 403,118,680

(in thousands of U.S. dollars) 3 months ended March 31,  2007 2006 Cash Flows from Operating Activities         Net income $ 205,014 $ 62,880 Adjustments to reconcile net income to net cash provided by operating activities:         (in thousands of U.S. dollars   48,520   37,584 Depletion and amortization   4,336   3,931 Foreign exchange (gain) loss   (9,278)   (20,066) Deferred income taxes   (6,672)   (4,978) Provision for (recovery of) doubtful accounts   2,043   1,899 Inventory write-down   1,506   (392) Accretion expense   1,039   834 Loss on write-off of property, plant and equipment   –    – Minority interest   27,658   (1,627) Gain on revaluation of trading securities   15,666   – Change in undistributed earnings of equity investments   3,417   (2,596) Non-cash interest on long-term tax and pension liabilities   1,245   1,376 Loss on sale of property, plant and equipment   26   984 Loss (gain) on sale of long-term investments   –   (624) Gain on discharged asset retirement obligations   –   – (Income) loss from discontinued operations   (45)   (681) Gain on accounts payable with expired legal term   (4,773)   (987) Gain on forgiveness of fines and penalties   (6,346)   (5,038) Amortization of capitalized costs on bonds issue   –   390 Pension service cost and amortization of prior year service cost   1,027   (665) Effect of FIN No48 implementation on current income tax   3,707   – Net change before changes in working capital   288,090   72,224 Changes in working capital items, net of effects from acquisition of new subsidiaries:         Accounts receivable   (50,541)   (2,100) Inventories   (45,486)   (57,689) Trade payable to vendors of goods and services   (31,680)   (43,763) Advances received   60,753   89,557 Accrued taxes and other liabilities   63,599   3,233 Settlements with related parties   1,036   5,844 Current assets and liabilities of discontinued operations   (24)   441 Deferred revenue and cost of inventory in transit, net   16,496   (9,006) Other current assets   (104,871)   68,506 Dividends received   –   3,479 Net cash provided by operating activities   197,372   130,726           Cash Flows from Investing Activities         Acquisition of subsidiaries, less cash acquired   –   (2,153) Acquisition of minority interest in subsidiaries   (6,074)   (1,696) Acquisition of Prommet   (4,181)   – Investments in other non-marketable securities   –   – Proceeds from disposal of non-marketable equity securities   –   1,333 2007 2006 Proceeds from disposals of property, plant and equipment   1,100   620 Purchases of mineral licenses   (1,061)   – Purchases of property, plant and equipment   (80,696)   (118,658) Net cash (used in) provided by investing activities   (90,912)   (120,554)         Cash Flows from Financing Activities         Proceeds from short-term borrowings   85,473   200,799 Repayment of short-term borrowings   (171,605)   (193,802) Dividends paid   –   – Proceeds from issuance of common stock   –   – Purchase of treasury stock   –   – Proceeds from disposal of treasury stock   –   – Proceeds from long-term debt   18,474   5,566 Repayment of long-term debt   –   (363) Repayment of obligations under finance lease   (2,416)   (1,213) Net cash (used in) provided by activities   (70,074)   10,987           Effect of exchange rate changes on cash and cash equivalents   50   (1,179)           Net (decrease) increase in cash and cash equivalents   36,436   19,980           Cash and cash equivalents at beginning of year   172,614   311,775 Cash and cash equivalents at end of year $ 209,050 $ 331,755