Mechel Reports the 9M 2011 Financial Results

Revenue amounted to $9.6 billion
Consolidated adjusted EBITDA amounted to $1.9 billion
Net income attributable to shareholders of Mechel OAO amounted to $527 million

MOSCOW, Dec. 15, 2011 (GLOBE NEWSWIRE) -- Mechel OAO (NYSE:MTL), a leading Russian mining and steel group, today announced financial results for the 9M 2011.

Yevgeny Mikhel, Mechel's Chief Executive Officer, commented on the 3Q 2011 results: "Overall third quarter results for the Group can be characterized as positive. We maintained production volumes at targeted levels, continued our cost control efforts and the modernization of our production assets. Despite a marginal quarter-on-quarter decrease in revenue, the Company showed an increase in operating income and EBITDA, which reflects stronger operating efficiency."

Consolidated Results For The 9M 2011

Consolidated Results For The 3Q 2011

The net revenue in 3Q 2011 decreased by 7.6% and amounted to $3.2 billion compared to $3.5 billion in 2Q 2011. The operating income rose by 11.2% and amounted to $529.5 million or 16.49% of the net revenue, compared to the operating income of $476.3 million or 13.72% of the net revenue in 2Q 2011.

In 3Q 2011, Mechel's consolidated net income attributable to shareholders of Mechel OAO decreased by 86.6% to $25.7 million compared to the consolidated net income attributable to shareholders of Mechel OAO of $191.9 million in 2Q 2011.

The consolidated adjusted EBITDA in 3Q 2011 increased by 10.7% to $677.6 million, compared to $612.3 million in 2Q 2011. Depreciation, depletion and amortization in 3Q 2011 for the Company were $142.8 million, an increase of 3.0% compared to $138.6 million in 2Q 2011.

Mining Segment Results For The 9M 2011

Mining Segment Results For The 3Q 2011

Mining Segment Output and Sales For The 9M 2011

Mining segment's revenue from external customers in 3Q 2011 totaled $1.15 billion, or 35.7% of the consolidated net revenue, an increase of 3.9% over net segment's revenue from external customers of $1.10 billion, or 31.8% of the consolidated net revenue in 2Q 2011.

The operating income in the mining segment in 3Q 2011 decreased by 9.9% to $427.5 million, or 30.6% of total segment's revenue, compared to the operating income of $474.5 million, or 34.4% of total segment revenue for the 2Q 2011. The adjusted EBITDA in the mining segment in 3Q 2011 went down by 8.3% and amounted to $511.8 million compared to segment's adjusted EBITDA of $558.0 million in 2Q 2011. The adjusted EBITDA margin for the mining segment in 3Q 2011 was 36.6% compared to 40.4% in 2Q 2011. Depreciation, depletion and amortization in the mining segment amounted to $82.3 million which is 3.9% more than $79.2 million in 2Q 2011.

Chief Executive Officer of Mechel Mining Management Company Boris Nikishichev commented on the mining segment operating results: "In spite of a deteriorating pricing environment in the third quarter, the mining segment managed to show a revenue increase as compared to the second quarter results. This was possible due to capacity restoration and development work in previous periods that enabled production and sales growth of almost all products in the third quarter. Production growth and cost control measures positively resulted in a decrease of production cash costs at all Russian coal mining subsidiaries.

"In the third quarter we continued to develop our production assets and key strategic projects at all mining subsidiaries. Our largest achievement was the launch of the first stage of Elga open pit, the significance of which is hard to overestimate. With Elga reaching full capacity, Mechel will substantially reinforce its positions among leading world metallurgical coal produces. Elga has already produced some 200 thousand tonnes of coal. Oxidized coal is dispatched to end customers. Recently, coking coal production has started as well. We've already received the first industrial washing results that confirmed the high quality of Elga's coking coal. We are going to further develop their mining segment's resource base, creating a solid platform for increased production of high-value coal."

Steel Segment Results For The 9M 2011

Steel Segment Results For The 3Q 2011

Steel Segment Output and Sales For The 9M 2011

Mechel's steel segment's revenue from external customers in 3Q 2011 amounted to $1.8 billion, or 55.9% of the consolidated net revenue, a decrease of 12.8% over the net segment's revenue from external customers of $2.1 billion, or 59.3% of consolidated net revenue, in the 2Q 2011.

In 3Q 2011, the steel segment's operating income increased by 214.2% and totaled $115.6 million, or 6.2% of total segment's revenue, versus the operating income of $36.8 million, or 1.7% of total segment's revenue, in 2Q 2011. The adjusted EBITDA in the steel segment in 3Q 2011 increased by 134.6% and amounted to $153.5 million, compared to the adjusted EBITDA of $65.4 million in 2Q 2011. The adjusted EBITDA margin of the steel segment was 8.22% for the 3Q 2011, versus the adjusted EBITDA margin of 3.06% in 2Q 2011. Depreciation and amortization in steel segment rose by 2.8% from $32.4 million in 2Q 2011 to $33.3 million in 3Q 2011.

Commenting on the results of the steel segment Andrey Deineko, Chief Executive Officer of Mechel-Steel Management Company, noted: "The segment's results in the third quarter noticeably outperformed those of the previous quarter. Despite a decline in revenue, which was attributable to a temporary reduction in sales to third parties, we demonstrated an increase in production volumes of the majority of our product types and stronger financial results. Improved production results were achieved due to re-starting Blast furnace No. 5 after its recent repair and replacement of Converter No. 2 at the Chelyabinsk Metallurgical Plant, as well as modernization of rolling mills at Izhstal.

"Implementation of investment programs at our steel plants and ongoing cost optimization on the back of lower prices of raw materials allowed us to reduce production costs for major product types. Given the favorable market environment, it resulted in substantial improvement of our financials. Mechel Service Global's sales facilities allowed us to enhance the positive effect through reallocation of sales towards the regions with more favorable market conditions." 

Ferroalloys Segment Results For The 9M 2011

Ferroalloys Segment Results For The 3Q 2011

Ferroalloys Segment Output and Sales For The 9M 2011

Ferroalloys segment's revenue from external customers in the 3Q 2011 amounted to $103.7 million, or 3.2% of the consolidated net revenue, a decrease of 21.1% compared with the segment's revenue from external customers of $131.5 million or 3.8% of the consolidated net revenue, in 2Q 2011.

In 3Q 2011, the operating loss in the ferroalloys segment totaled $19.8 million, or -12.1% of total segment's revenue, increasing by 1,720.9% versus operating loss of $1.1 million, or -0.5% of total segment's revenue, in 2Q 2011. The adjusted EBITDA in the ferroalloys segment in 3Q 2011 decreased by 85.5% and amounted $2.8 million, compared to segment's adjusted EBITDA of $19.2 million in 2Q 2011. The adjusted EBITDA margin of the ferroalloys segment comprised 1.7% in 3Q 2011 compared to the adjusted EBITDA margin of 9.5% in 2Q 2011. Ferroalloys segment's depreciation, depletion and amortization in 3Q 2011 were $22.4 million, an increase of 3.2% over $21.7 million in 2Q 2011.

Gennadiy Ovchinnikov, Chief Executive Officer of Mechel Ferroalloys Management Company, noted: "In relation to the operational performance of the ferroalloys division keeps showing good results. Nickel production volumes were maintained at a stable level. Some decrease in ferrosilicon production was anticipated and is caused by reconstruction of furnace #4 that is being prepared for launch into operation in the first quarter of next year. Ferrochrome production is continuously increasing from one quarter to another. Further increases will be supported by the chrome bales workshop.

"In the third quarter we managed to reduce nickel and ferrochrome production cash costs. But at the same time the rate of decrease of realized products prices outpaced the rate of cash costs contraction that resulted in financial result decrease compared to the previous quarter."

Power Segment Results for The 9M 2011

Power Segment Results for The 3Q 2011

Power Segment Output and Sales For The 9M 2011

Mechel's power segment's revenue from external customers in 3Q 2011 comprised $164.1 million, or 5.1% of consolidated net revenue, a decrease of 7.2% compared with the segment's revenue from external customers of $176.8 million or 5.1% of consolidated net revenue in 2Q 2011.

The operating loss in the power segment in 3Q 2011 amounted to $10.3 million, or -3.7% of the total segment's revenue in the same period, an increase of 5,745.5% compared to the operating loss of $0.2 million, or -0.06% of the total segment's revenue, in 2Q 2011. The adjusted negative EBITDA in the power segment in 3Q 2011 went down by 237.5% totaling -$7.0 million, compared to the adjusted EBITDA of $5.1 million in 2Q 2011. The adjusted EBITDA margin for the power segment in 2Q 2011 amounted to -2.5% compared to 1.7% in 2Q 2011. Depreciation and amortization in power segment in 3Q 2011 decreased by 9.08% comparing with the 2Q 2011 from $5.29 million to $4.81 million.

Anatoly Merzlyakov, Chief Executive Officer of Mechel Energo, noted: "The power segment results in the third quarter were lower compared to the previous quarter on the back of seasonal demand fluctuation for heat and electricity. In the third quarter substantial efforts were directed toward preparation works ahead of the new heating season. In particular, we carried out a substantial amount of repair and maintenance works and secured fuel stocks. The decrease in power generation in the third quarter influenced the cost side of the segment. However, we expect that with the start of the heating season and corresponding increase in production volumes the situation will stabilize, improving financial results of the segment."

Recent Highlights

• In October 2011, Mechel announced that ING Bank N.V., UniCredit Bank AG, Barclays Capital Inc. and ZAO UnicreditBank have provided a syndicated loan to Mechel Trading AG totaling 180 million US dollars. The facility may be increased to 350 million US dollars by other banks as well. It carries a three-year tenor with an 18-month grace period. The facility will be used to re-finance a portion of Mechel Group's short-term loans.
• In October 2011, Mechel announced that Southern Urals Nickel Plant OAO launched an experimental industrial complex to produce ferronickel. The complex's launch is part of the reconstruction of the plant's smelting facilities, aimed at increasing production efficiency, lowering production costs and dramatically reducing the volume of waste released into the atmosphere. The 12-MW complex was designed by Bateman Engineering B.V. of South Africa and has annual production capacity is some 4,500 tonnes of ferronickel, with an average 20% nickel content. The experimental industrial 12-MW complex's total cost amounted to 1.3 billion rubles (some 41 million dollars*).
• In October 2011, Mechel announced the launch of a biochemical cleaning facility to treat phenolic waste water from Mechel-Coke OOO's coke and chemicals production process which is part of Chelyabinsk Metallurgical Plant's long-term environment protection program. It enables the company to deeply cleanse all of the waste water produced by Mechel-Coke, which is used for slaking coke, and decrease waste emissions by half. Investment in constructing the biochemical facility totaled some 900 million rubles (27.5 million US dollars).
• In November 2011, Mechel announced the signing of a long-term framework agreement with Sberbank of Russia on providing Mechel Trading AG with a framework credit line totaling 130 million US dollars for a period of three years and within its framework, separate credit lines carrying a 1-year tenor. Mechel OAO and Chelyabinsk Metallurgical Plant OAO act as guarantors of the facility. These funds will be used to finance Mechel Trading AG's current operations, including pre-export financing.
• In November 2011, Mechel announced that Mechel-Service OOO won the contest for "Russia's Best Sales Network 2011" in the Best Sales Network of Federal Level category. The contest was held by Metal Supply & Sales information and publishing group in association with the Russian Union of Metal and Steel Suppliers and the International Industrial Exposition "Metall-Expo'2011".
• In November 2011, Mechel announced that coal mining at New-Olzherassk Underground mine has been resumed. By the year's end, New-Olzherassk's section # 21-1-7 is planned to yield some 352,000 tonnes of coal. The long wall face's industrial reserves are estimated at some 3 million tonnes.
• In November 2011, Mechel announced the signing of a long-term partnership agreement with BelAZ OAO during the session of the Supreme State Council of the Union State of Russia and Belarus held on the level of heads of state. Mechel Group's mining division plans to acquire mining dump trucks mainly for use at the Elga coal deposit.
• In December 2011, Mechel reported that work was suspended at several facilities at two of Southern Kuzbass Coal Company's mines. Following a check conducted at Lenin Underground and New-Olzherassk mines by the Mezhdurechensk territorial branch of the Southern Siberian department of the Federal Agency for Ecological, Technological and Nuclear Monitoring, work at some of the two mines' facilities was suspended by order of the Mezhdurechensk city court. Mining at all facilities of Lenin Underground and New-Olzherassk mines is planned to be resumed within a few days.
• In December 2011, Mechel reported that work at several facilities at two of Southern Kuzbass Coal Company's mines, which enables the company to produce at full capacity, was resumed fully after a temporary suspension. Administrative suspension of work at several facilities of Lenin Underground and New-Olzherassk mines was lifted ahead of schedule by order of the Mezhdurechensk city court as all grounds for the suspension have been eliminated. As of now, production at Lenin Underground and New-Olzherassk has resumed as normal.
• In December 2011, Mechel announced winning the prestigious Cbonds Awards contest Based upon the Cbonds news agency's analysis, Mechel won the top place in the Best Primary Placement for Domestic Bonds nomination for the placement of the 17-19 series debentures with a maturity of 10 years and a put option in five years.
• In December 2011, Mechel announced that Southern Kuzbass Coal Company's washing plant produced first coking coal concentrate out of the Elga deposit's coal. A sample lot of some 4,000 tonnes of Elga's coking coal was washed at Southern Kuzbass Coal Company OAO's Sibir plant. The concentrate obtained by industrial washing has qualities which rate the Elga deposit's coals with high-value grades of caking coals. The concentrate produced at Sibir was sent to Mechel-Coke OOO for test industrial coking. Using coal of this quality allows production of coke with high structural durability, which in its turn helps improve technological and economic results of blast furnace production.

Financial Position

Capital expenditure on property, plant and equipment and acquisition of mineral licenses for the 9M 2011 amounted to $1,393.3 million, of which $929.8 million was invested in the mining segment, $404.4 million was invested in the steel segment, $46.0 million was invested in the ferroalloy segment and $13.1 million was invested in the power segment.

As of September 30, 2011, total debt was at $9.5 billion. Cash and cash equivalents amounted to $518.1 million and net debt amounted to $9.0 billion (net debt is defined as total debt outstanding less cash and cash equivalents) at end of 3Q 2011.

The management of Mechel will host a conference call today at 10:00 a.m. New York time (2:00 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 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.

The Mechel OAO logo is available at http://www.globenewswire.com/newsroom/prs/?pkgid=8181

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 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:

Mining Segment

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

Steel Segment

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

Ferroalloys Segment

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

Power Segment

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