On Jun 20, we retained our Neutral recommendation on Russian
). Though we are encouraged by the incremental opportunities
stemming from its Elga mine, we prefer to tread with caution
factoring in weak demand from Europe and high debt.
Mechel suffered a loss in the first quarter of 2013, reported
on Jun 18, hurt by the sale of its Romanian steelmaking assets.
Declines across the board led to a double-digit slump in
revenues. Sustained weakness was seen in the core mining segment.
However, Mechel's decision to buy back $100 million of ADRs
(representing its common shares) reflected its confidence that
the fundamental value of its share is higher and meets the
interests of its shareholders.
Mechel, which currently retains a Zacks Rank #3 (Hold), is a
leading domestic steel and coal producer with 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.
Mechel benefits from backward integration as it is capable of
internally sourcing most of its raw materials. It remains focused
on strategically diversifying and expanding its customer base,
reflected by the recent long-term contracts for coking coal
supplies with China's Baosteel Resources and Shasteel Group and
The Elga deposit, which is among the world's largest coking
coal fields, is expected to reinforce Mechel's position as a
metallurgical coal producer through capacity expansion.
Mechel continues the development of the Elga mine. It has
constructed a seasonal washing plant at the site for accelerating
production and sales of coking coal concentrate. The launch of
the washing plant enabled the company to mine and process coking
coal at Elga on production scale. The plant currently has an
annual processing capacity of 3 million tons and there is ample
opportunity for expansion of production and processing
However, Mechel's high debt level represents a serious
concern. High leverage and interest burden may negatively impact
the company and Mechel may not be able to keep up with its
capital spending program.
Mechel is also challenged by weak demand from Europe and lower
nickel pricing is impacting its Ferroalloy division. Moreover,
the company is contending with lower coking coal sale prices,
partly due to low demand.
Other Stocks to Consider
Other steel producers having a favorable Zacks Rank include
Shiloh Industries Inc.
Kobe Steel Ltd.
). Both hold a Zacks Rank #1 (Strong Buy).
KOBE STEEL-ADR (KBSTY): Get Free Report
MECHEL OAO ADS (MTL): Free Stock Analysis
POSCO-ADR (PKX): Free Stock Analysis Report
SHILOH INDS INC (SHLO): Get Free Report
To read this article on Zacks.com click here.