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Mechel

November 28, 2006

Mechel announces results for the nine months of 2006

Mechel reports nine months 2006 results
— Revenue of $3,142 million —
— Operating income of $483 million —
— Net income of $372 million, $2.76 per ADR or $0.92 per diluted share —

Moscow, Russia – November 28, 2006 – Mechel OAO (NYSE: MTL), a leading Russian integrated mining and steel group, today announced results for the nine months ended September 30, 2006.

Highlights for the period ended September 30, 2006:

  • Achieved record financial results for the third quarter
  • Net profit for the nine months of 2006 almost equaled to net profit for full year 2005
  • Improved performance of its Romanian steel operations

 

US$ thousand

3Q 2006

2Q 2006

1Q 2006

3Q06
vs.
2Q06

3Q 2005

3Q06
vs.
3Q05
(% change)

Revenue

1,215,137

1,072,998

853,518

142,139

831,175

46.2%

 

Net operating income

273,499

150,480

58,996

123,019

89,631

205.1%

 

Net operating margin

22.5%

14.0%

6.9%

8.5%

10.8%

 

 

Net income

190,453

118,784

62,881

71,669

71,093

167.9%

 

EBITDA

323,799

210,331

134,411

113,468

146,275

121.4%

 

EBITDA margin

26.6%

19.6%

15.7%

 

17.6%

 

 

 

 

US$ thousand

9M 2006

9M 2005

9M 2006 vs. 9M 2005
(% change)

Revenue

3,141,653

2,910,394

7.9%

 

Net operating income

482,975

452,027

6.8%

 

Net operating margin

15.4%

15.5%

 

 

Net income

372,116

314,717

18.2%

 

EBITDA (1)

668,539

569,016

17.5%

 

EBITDA margin

21.3%

19.6%

 

 

(1)See Attachment A.

Alexey Ivanushkin, Mechel’s Chief Operating Officer, commented: “The third quarter of 2006 was the best quarter in Mechel’s history, as we achieved outstanding financial and operating results. For the second consecutive quarter, we reported significantly improved performance, demonstrating our ability to execute on our strategy of improving the overall efficiency of our operations. We also benefited from the ongoing recovery we’ve seen in our markets, increasing production volumes to meet growing market demand. Moreover, we are now confident that our performance over the full year will show substantial improvement over last year’s levels, as consolidated net profit for the nine months is already close to the result of the whole last year.”

Consolidated Results

Net revenue for the nine months of 2006 amounted to $3.1 billion, as compared to $2.9 billion in the nine months of 2005. Operating income was $483 million, or 15.4% of net revenue, compared to operating income of $452 million, or 15.5% of net revenue, in the nine months of 2005. The main contributing factors were market movement and consequent selling prices growth for all major product groups, as well as decreasing cast per tonne on some of our core product groups.

For the nine months of 2006, Mechel reported consolidated net income of $372 million, or $2.76 per ADR ($0.92 per diluted share), compared to consolidated net income of $315 million, or $2.34 per ADR ($0.78 per diluted share) for the nine months of 2005.

Consolidated EBITDA was $668.5 million for the period, compared to $569 million a year ago, reflecting the favorable pricing environment and disciplined approach to costs. Please see the attached tables for a reconciliation of consolidated EBITDA to net income.

 

Mining Segment Results

 

 

US$ thousand

3Q 2006

2Q 2006

1Q 2006

3Q 2006
vs.
2Q 2006
(% change)

Revenues from external customers

361,904

324,018

289,459

11.7%

 

Intersegment sales

94,645

75,756

75,871

24.9%

 

Operating income

94,095

67,127

29,289

40.2%

 

Net income

61,118

50,514

27,467

21.0%

 

EBITDA

114,813

88,977

58,000

29.0%

 

EBITDA margin (2)

25.2%

22.3%

15.9%

 

 

 

 

US$ thousand

9M 2006

9M 2005

9M 2006 vs. 9M 2005
(% change)

Revenues from external
customers

975,381

823,548

18.4%

 

Intersegment sales

246,272

252,857

(2.6%)

 

Operating income

190,511

341,282

(44.2%)

 

Net income

139,099

266,582

(47.8%)

 

EBITDA

261,791

379,409

(31.0%)

 

EBITDA margin (2)

21.4%

35.3%

 

 

 

(2) EBITDA margin is calculated out of consolidated revenues of the segment, including intersegment sales.

 

Mining Segment Output

 

Product

3Q 2006
(thous. tonnes)

2Q 2006
(thous. tonnes)

1Q 2006
(thous. tonnes)

3Q 2006
vs.
2Q 2006
(% change)

Coal

4,284

4,083

4,011

4.9%

 

Coking coal

2,441

2,272

2,225

7.4%

 

Steam coal

1,843

1,811

1,786

1.8%

 

Iron ore concentrate

1,357

1,264

1,127

7.4%

 

Nickel

3.6

3.6

3.4

--

 

 

 

Product

9M 2006
(thous. tonnes)

9M 2005
(thous. tonnes)

9M 2006 vs. 9M 2005
(% change)

Coal

12,378

11,670

6.1%

 

Coking coal

6,938

6,472

7.2%

 

Steam coal

5,440

5,198

4.7%

 

Iron ore concentrate

3,748

3,374

11.1%

 

Nickel

10.53

9

17%

 

 

Mining segment revenue from external customers for the nine months of 2006 totaled $975.4 million, or 31% of consolidated net revenue, an increase of 18% over segment revenue from external customers of $823.5 million, or 28%, of consolidated net revenue, for the nine months of 2005.

Operating income in the mining segment for the nine months of 2006 totaled $190.5 million, or 15.6% of segment revenues, compared to total operating income of $341 million, or 31.7% of segment revenues a year ago.

EBITDA in the mining segment in the nine months of 2006 was $261.8 million compared to $379.4 million for the same period in the prior year. The EBITDA margin of the mining segment during the nine months of 2006 was 21.4% compared to 35.3% for the comparable nine month period in 2005. The key driver of the change in the EBITDA margin of the segment was a decline in average prices for almost all products.

Average realized prices in the third quarter of 2006 rose by 27% for iron ore concentrate, 29% for nickel, 3% for coking and 1% for steam coal, from levels of the second quarter 2006, and changed 33.4%, 82.7%, (1.1)% and (17.8)%, respectively from the levels of the third quarter 2005 (all prices are quoted on an FCA basis).

Mr. Ivanushkin commented on the results of the mining segment: “During the third quarter we saw increasing price levels and strong demand for our mining products. This supported the healthy growth in the output of the segment. Our iron ore production is on track to reach record production levels of 5 million tonnes this year, a goal we had not expected to achieve until 2007. In addition, we capitalized on unusually high nickel prices, increasing production in response to growing demand. Moving forward we will be revising our nickel operations to further enhance their efficiency and increase output. In 2007, we expect a stable environment for our main products, and we remain committed to our strategy of increasing sales volumes, controlling costs, and tapping new markets to enhance the mining segment’s performance in the future.”

 

Steel Segment Results

 

 

US$ thousand

3Q 2006

2Q 2006

3Q 2006
 vs.
2Q 2006
(% change)

Revenues from external customers 

853,235

748,978

13.9%

 

Intersegment sales 

5,112

4,543

12.5%

 

Operating income 

179,406

83,351

115.2%

 

Net income 

129,337

68,265

89.5%

 

EBITDA 

208,990

121,348

72.2%

 

EBITDA margin (2)

24.3%

16.1%

 

 

 

 

US$ thousand

9M 2006

9M 2005

9M 06 vs. 9M 05
(% change)

Revenues from external customers

2,166,273

2,086,846

3.8%

 

Intersegment sales 

14,829

44,214

(66.5%)

 

Operating income 

292,464

110,745

164.1%

 

Net income

233,016

48,135

384.1%

 

EBITDA

406,748

189,607

114.5%

 

EBITDA margin

18.6%

8.9%

9.7%

 

 

(2) EBITDA margin is calculated out of consolidated revenues of the segment, including intersegment sales.

 

Steel Segment Output

 

 

Product

3Q 2006
(thous. tonnes)

2Q 2006
(thous. tonnes)

3Q 2006
 vs.
2Q 2006
(% change)

Coke

585

552

6.0%

 

Pig iron

952

908

4.8%

 

Steel

1,560

1,498

4.1%

 

Rolled products

1,247

1,209

3.1%

 

Hardware

163

154

5.8%

 

 

 

Product

9M 2006
(thous. tonnes)

9M 2005
(thous. tonnes)

9M 2006 vs. 9M 2005
(% change)

Coke

1,663

1,963

(15.3%)

 

Pig iron

2,680

2,475

8.3%

 

Steel

4,425

4,420

0.1%

 

Rolled products

3,523

3,450

2.1%

 

Hardware

451

441

2.3%

 

 

Romanian assets demonstrated recovery trends as compared to previous periods, gaining net income of $2 million, while net loss for 2005 amounted to $57.8 million.

Revenue from external customers in Mechel’s steel segment for the nine months of 2006 increased by 3.8% to $2.2 billion from $2.0 billion in the first nine months of 2005, and represented 69% of consolidated net revenue.

In the nine months of 2006, the steel segment’s operating income was $292.5 million, or 13.4% of total segment revenues, compared to operating income of $110.7 million, or 5.2% of total segment revenues a year ago. EBITDA in the steel segment in the nine months of 2006 was $406.7 million. The EBITDA margin of the steel segment was 18.6%, significantly improving from 8.9% from a year ago levels, and levels of 2005 of 9.4%.

Average realized prices for rebar for domestic sales grew by 17.1% and semi-finished products for export sales grew by 9.0% in the 2006 third quarter compared to the second quarter of this year and 22.0% and 26.1%, compared to the first quarter, respectively.

Mechel continued its cost savings program in the steel segment during the quarter. The new sinter plant in Chelyabinsk was fully commissioned during the period. The savings from sinter plant were $26.7 million for the nine months of 2006, expected savings for the full-year 2006 are $50.7 million.

Mr. Ivanushkin commented: “We continued to capitalize on the improving steel market conditions in the third quarter, while working to optimize the segment’s costs and capacity utilization. Answering to growing demand, we also increased sales volumes on a number of steel products, and grew sales within the strong premium domestic market to 59% in the third quarter from 50% in the second quarter of 2006. We have also recently commissioned a new coke battery at our Chelyabinsk facility, and will shortly commission a new concasting machine. We expect additional savings from these projects to be reflected in operations next year. Looking into 2007, we believe that we are well positioned to sell into the continuously growing Russian steel market, and we anticipate that our efforts to increase profitability and lower costs will further help raise the segment’s margins”

Recent Highlights

  • In November, Mechel put into operation a new coke battery at Chelyabinsk. Annual coke output at CMP is expected to increase by approximately 500 thousand tonnes once the new coke battery’s full capacity is achieved. Mechel invested $40 million in the coke battery’s construction.
  • In September, Mechel announced the commissioning of the Olzherasskaya Mine, a part of the Southern Kuzbass coal company. Commissioning of the Olzherasskaya Mine will allow Southern Kuzbass OAO to increase its coal output by 1.8 million tonnes in 2007. Production in 2006 is expected to be 0.6 million tonnes. The new mine’s annual capacity is 3.0 million tonnes and production is expected to reach this level in 2010. Mechel invested $100 million in the mine’s construction.
  • In October, Mechel announced the acquisition of a controlling stake in Moscow Coke and Gas Plant OAO (Moskoks). The acquisition is in line with Mechel’s strategy of further developing its mining segment, expanding the company’s presence in coal and coke-chemical markets and strengthening operational synergies. Moscow Coke and Gas Plant OAO, located in the Moscow region, has economically advantageous geographical position and stable sales markets. Products are sold domestically and shipped abroad, in particular to Ukraine and European Union countries.

Mr. Ivanushkin commented: “This year demonstrated our ability to adapt to different market conditions, and while the beginning of the year was challenging for us, we managed to carry on with the cost saving programs to improve performance of both segments, during the second and third quarters we made most of the rise on our main markets, achieving record financial results. We remain positive on the outlook for 2007, and while we recognize that the markets may not be as strong as during the last three quarters of 2006, with our attention directed at further cost-efficiency, and targeted investments we will be ready to flexibly react to the changing conditions.”

Financial Position

For the nine months of 2006, CAPEX totaled $344 million, out of which $207 million was invested in the mining segment and $137 million in the steel segment.

Mechel spent $194.5 million on acquisitions in the nine months of 2006, including $175 million on acquisition of OAO Moskoks and $14.9 million on minority shares acquisitions in different subsidiaries.

As of September 30, 2006, total debt3 was $626 million. Cash and cash equivalents amounted to $184 million at the end of the period, and net debt amounted to $442 million (net debt is defined as total debt outstanding less cash and cash equivalents).

* One American Depositary Share is equivalent to three diluted shares.

(3) Total debt is comprised of short-term borrowings and long-term debt

The management of Mechel will host a conference call today at 10 a.m. New York time (3 p.m. London time, 6 p.m. Moscow time) to review Mechel’s financial results and comment on current operations. The call may be accessed via the Internet at https://www.mechel.com/investors/fresults/index.wbp.

 

 

 

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