Russia's leading mining company, Mechel OAO,recently released its operational results for the first quarter of 2012. The company's operations exhibited improvement in the quarter, driven by its modernization and cost-cutting programs, which led to an increase in production and sales of its chief products.

 

Mechel's release briefed investors on how its various segments performed in the quarter. The segments and their performance are enumerated below.

 

Mining Segment: Output of run-of-mine coal grew 7% to 6.4 million tons in the first quarter from last year's comparable quarter. Sales of coking coal increased 14% and that of anthracites jumped 26%.

 

The increase in production was achieved despite the temporary shutdown of mining at Southern Kuzbass Coal Company OAO's New-Olzherassk and Sibirginsk mines. The company followed a strategy of boosting production and pushing through sales of high value-adding products, resulting in a 265% jump in PCI sales. However, sales of steam coal fell 19%.

 

As far as the expansion of the mining business is concerned, the company continued to expand the segment's resource base by winning subsoil licenses for Southern Yakutia's Sutamsky and Sivaglinsky iron ore deposits.

 

According to Russian standards, these reserves are estimated at 1.38 billion tons and are strategically located near Yakutugol Holding Company OAO's existing assets and the Elga coal deposit's transport. Mechel expects these licenses to help it generate greater profits due proximity with these two areas, where it is presently building production and social infrastructure.

 

Steel Segment: Stable growth was seen in steel and pig iron production. Sales volume for long and flat rolls grew 12% and 14% respectively, driven by the expanding client base of the company’s service and sales network. However, a drop in share of products produced by third parties led to a decline in billet sales in the quarter.

 

Ferroalloy Segment: Results from this segment displayed improvements on several fronts. Boost in production at Tikhvin Ferroalloy Plant due to improvement in the structural content of iron ore propelled chrome sales 52% higher in the quarter from last year. Production of nickel was stable and ownership transfer periods led to increase in sales volumes.

 

However, modernization and equipment replacement at Bratsk Ferroalloys Plant resulted in a temporary decline in ferrosilicon production. But the plant launched a reconstructed ferroalloy electric furnace in March 2012, and this is expected to result in increased production from the second quarter of 2012.

 

Power Segment: Mechel improved the efficiency of its key power assets by modernizing and implementing advanced management practices for the production process. The company successfully met its internal need for electricity and heat along with growing external demand.

 

Our Take

Mechel is a leading domestic steel and coal producer with a strong position in key businesses, including production of specialty steel and alloys. The company has the largest coal reserve base in Russia and is mainly focusing on growth and cost-cutting measures.

 

The company owns and controls essential infrastructure, including ports, rolling stock and power plants, which provide access to the export markets. However, Mechel's large capital-spending program, high debt and substantial interest burden are matters with which the company contends frequently.

 

We currently have a long-term Underperform recommendation on Mechel. The company, which competes with ArcelorMittal, has a Zacks #5 Rank, indicating a short-term Strong Sell rating.

 

Source: Zacks Equity Research