We are retaining our Neutral recommendation on Russian miner
). The company slipped into a loss in the second quarter of 2012.
It posted a net loss of $823 million in the quarter compared with a
profit of $191.9 million registered a year ago.
Revenues fell at a double-digit clip due to weakness in the core
mining segment. The results were also hurt by weak market
conditions and foreign exchange losses. Lower demand and pricing
affected the performance of the Moscow-based company's mining
segment in the quarter.
Mechel, which competes with
) and others, 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
The company owns and controls essential infrastructure, including
ports, rolling stock and power plants, which provide access to the
export markets. Mechel benefits from backward integration as it is
capable of internally sourcing most of its raw materials.
We are encouraged by the incremental opportunities stemming from
the Elga mine, which is expected to reinforce Mechel's position as
a metallurgical coal producer through capacity expansion.
The company continues the development of the Elga mine. It has also
constructed a seasonal washing plant at the site for accelerating
the production and sales of coking coal concentrate. Mechel
recently announced the commencement of the production of first
volumes of the coking coal concentrate at the Elga mine following
the commissioning of the washing plant at the site.
However, Mechel's high debt level represents a serious concern. The
company could be handicapped because of its high leverage and
interest burden and may not be able to keep up with its huge
capital spending program. In addition, Mechel's cost advantage is
in danger of being wiped out as the company has seen costs rising
at a fast clip over the last three years.
Mechel currently holds a Zacks #4 Rank, which translates into a
short-term (1 to 3 months) Sell rating.
ARCELOR MITTAL (MT): Free Stock Analysis Report
MECHEL OAO ADS (MTL): Free Stock Analysis
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