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MECHEL REPORTS RECORD RESULTS FOR 2007 FULL YEAR PERIOD Moscow, Russia – May 29, 2008 – Mechel OAO (NYSE: MTL), a leading Russian integrated mining and steel group, today announced financial results for the full year ended December 31, 2007.
* See Attachment A.
Igor Zyuzin, Mechel’s Chief Executive Officer, commented on the full year results: “We achieved record financial results for the second consecutive year and benefited from our balanced business model, combining mining and steel assets. Based on our strategy of developing our base of raw materials and increasing market share of high value added products, we ramped up production volumes and improved our financial performance, nearly doubling operating income for the year. Mechel’s strong performance was also due to synergistic acquisitions that supported our production capability and created a foundation for future growth.” Net revenue in 2007 rose by 52.0% to $6.7 billion from $4.4 billion in 2006. Operating income rose 92.6% to $1.4 billion, or 20.9% of net revenue in 2007, compared to operating income of $725.7 million, or 16.5% of net revenue in 2006. For 2007, Mechel reported consolidated net income of $913.1 million, or $2.19 per ADR / diluted share, an increase of 51.4% over consolidated net income of $603.2 million, or $1.48 per ADR / diluted share, in 2006. Consolidated EBITDA rose 55.3% to $1.7 billion in 2007, compared to $1.1 billion in the year ago period, reflecting the positive impact of favorable market conditions, new assets acquisitions, entering into more effective market segments and a structured expense management approach. Mining Segment Results1
2 - EBITDA margin is calculated as a percentage of consolidated revenues of the segment, including intersegment sales. Mining Segment Output
Mining segment revenue for 2007 totaled $1.8 billion, or 28% of consolidated net revenue, an increase of 41.3% over segment revenue of $1.3 billion, or 30% of consolidated net revenue in the 2006. The increase in revenue reflects production growth at our principal coal producer Southern Kuzbass, production growth at Yakutugol, and the acquisition of the remaining assets of Yakutugol, the largest Russian coking coal producer. These factors resulted in strengthened market position and increased sales of mining products to third parties for the year. Operating income in the mining segment in 2007 increased by 177.9% to $886.7 million, or 34.7% of total segment sales , compared to operating income of $319.0 million, or 19.0% of total segment sales a year ago. EBITDA in the mining segment in 2007 increased by 146.0% to $995.7 million compared to EBITDA of $404.7 million in 2006. The EBITDA margin of the mining segment was 38.9% for the 2007 full year period, versus 24.1% in 2006. Igor Zyuzin commented on the mining segment operating results: “Mechel’s mining segment experienced a breakthrough year in 2007. As demand and the pricing environment continued to improve significantly, Mechel increased production, successfully raising coal production by 25% and nickel production by 19%. With the acquisition of strategic assets, such as Yakutugol and Elgaugol, we have strengthened Mechel as global company with significant growth potential. As a result of favorable pricing and increased production, net income for 2007 increased 3 times compared to 2006. Profitability in the mining segment was also positively affected by cost control efforts and successful execution of the technical upgrade program for segment’s mining plants technical upgrade program. As a part of the program, new highly productive extractive equipment is being commissioned at our facilities on a regular basis. Looking forward, favorable pricing at the end of last year has continued to improve in 2008. We intend to capitalize on the current market environment by increasing sales, controlling expenses and operating in the most attractive and promising markets.” Steel Segment Results3
3 - Results of 2006 are recalculated to reflect separate reporting for the power segment. 4 - EBITDA margin is calculated as a percentage of consolidated revenues of the segment, including intersegment sales. Steel Segment Output
Revenue from Mechel’s steel segment increased by 42.5% in 2007 to $4.3 billion, or 65% of consolidated net revenue, from $3.0 billion, or 69% of consolidated net revenue, in 2006. Operating income in the steel segment increased by 37.3% to $558.2 million, or 12.6% of total segment sales, compared to operating income of $406.5 million, or 13.2% of total segment sales , in the 2006 full year period. EBITDA in the steel segment for 2007 increased by 10.6% to $733.5 million over segment EBITDA of $663.2 million in 2006. The EBITDA margin of the steel segment was 16.5% in 2007 compared to 21.5% in 2006. Commenting on operating results in the steel segment, Igor Zyuzin said: “Although we successfully executed our plans to increase production capacity, the pricing environment for metallurgical products especially in the second half of the year remained challenging. With higher transportation costs and steadily growing prices for raw materials, scrap, electric power and gas, our steel products prices were flat to down. Record high nickel prices also affected profitability in Mechel’s steels segment, which is Russia’s largest stainless flat products producer. In addition, rebar market overstocking led to decreased pricing in the latter half of 2007, which put pressure on our profitability as we have a significant market share for long steel products. As a primary objective for the steel segment, we are continuing to concentrate on increasing output of high value-added products and achieving earnings growth through modernizing production facilities and controlling costs. Despite the ongoing high materials costs, we continue to see an improving economic environment for our products, which makes us optimistic regarding improved financial performance in the steel segment.” Power Segment Results5
5 - Results 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 in Mechel’s power segment from sales to 3rd parties totaled $503.3 million, or 8% of consolidated net revenue, an increase of 917.6% over revenue from sales to the third parties of $49.5 million or 1% of consolidated net revenue in the 2006. Operating income in the power segment in 2007, was $12.6 million, or 2.1% of total segment revenues, an increase of 46% compared to operating income of $8.6 million, or 7.0% of total segment revenues a year ago. EBITDA in the power segment in 2007 increased 191.2% totaling $26.8 million, compared to EBITDA of $9.2 million in 2006. EBITDA margin of the segment was 4.5% in 2007, compared to 7.5% in 2006. Net loss of the power segment was $13.0 million and was primarily the result of interest payments on an intersegment loan that was given to Mechel’s subsidiary called OOO Mechel Energo by other Mechel subsidiaries. Commenting on the results of the power segment Igor Zyuzin said: “Mechel began to develop its power business in 2007 and the acquisition of the coal-fired Southern Kuzbass Power Plant and Kuzbass Power Sales Company made Mechel one of the main players in the energy market in the Kemerovo region, Russia’s principal coal mining area. In 2007, Mechel also developed its power segment abroad by acquiring a 49% share of Toplofikatsia Rousse JSC, located in Bulgaria to extend its presence into new steam coal markets. Our power assets will require significant efforts to modernize the production facilities and integrate them into the Group’s production chain. The segment’s profitability in 2007 was primarily affected by interest payments of “in-group” loans obtained to make the strategic acquisitions during the year. Looking forward, we are very optimistic about the prospects for power generating facilities in Russia, where many regions lack energy. We expect that the forthcoming deregulation of the electricity market will drive the development of the Russian power industry and benefit Mechel. Based on these factors, we plan to continue developing Mechel’s power segment, which will increase the Group’s stability, decrease costs due to the generation of our own electric energy and build value for the shareholders of the company.” Recent Highlights
Igor Zyuzin concluded: “Our results for 2007 demonstrate the advantages of Mechel’s business-model, which utilizes balancing of mining and steel assets. We plan to continue our strategy to grow our business through both organic growth and acquisitions, increasing shareholder’s value. To support the growth of our coal production, we plan to actively develop our logistic capacities such as we have done through the acquisition of Port Temryuk, allowing us to be more flexible in our sales and reach more attractive customers. We will also continue to strengthen our position in the ferroalloy market, building upon the acquisition of Bratsk Ferroalloy Plant in 2007, producing ferrosilicon, with the pending acquisition of Oriel Resources, producing ferrochrome. The ferroalloy market is a significant opportunity for Mechel, especially given that Mechel is currently the largest producer of specialty steel, utilizing ferrochrome and ferronickel. On acquiring the rights to utilize the subsoil plot on the Uvatsk deposit of quartzite, currently, each of Mechel’s ferroalloy subsidiaries has their own raw material bases. This enables Mechel to decrease its dependence on market fluctuations, provides Mechel with additional competitive advantages, and strengthens its market positions as a whole. In summary, our efforts to modernize existing capacities as well as increasing output, supported by current market trends, allow us to have a positive outlook for the future of our company.” Financial Position Capital expenditure on property, plant and equipment and acquisition of mineral licenses for the 2007 full year amounted to $834. million, of which $516 million was invested in the mining segment, $310 million in the steel segment and $7 million in the power segment. For the 2007 full year, Mechel spent $2,565 million on acquisitions, including281 million (excluding monetary resources acquired) on Southern Kuzbass Power Plant OAO acquisition; $78 million (excluding monetary resources acquired) on Kuzbass Power Sales Company OAO acquisition; $187 million on Bratsk Ferroalloy Plant OOO acquisition; $6 million on Temryuk-Sotra seaport acquisition; $1.9 billion on acquisition of 75% less one share of Yakutugol OJSHC and 68.86% of the shares of Elgaugol OAO; $$73.5 million on acquisition of 49% of the shares of Toplofikatsia Rousse JSC as well as $2.4 million spent on acquisition of minority interest in other subsidiaries. As of December 31, 2007 total debt was at $3.5 billion. Cash and cash equivalents amounted to $236.7 million at the end of the year 2007 and net debt amounted to $3.2. billion (net debt is defined as total debt outstanding less cash and cash equivalents). The management of Mechel will host a conference call today at 9:00 a.m. New York time (2:00 p.m. London time, 5:00 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 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 FY 2007 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:
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