We have retained our Neutral recommendation on Russian miner
). While we are encouraged by the incremental opportunities
stemming from its Elga mine, we remain on the sidelines
considering weak demand from Europe and high debt.
KOBE STEEL-ADR (KBSTY): Get Free Report
MECHEL OAO ADS (MTL): Free Stock Analysis
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Mechel tuned to a loss in the fourth quarter of 2012, reported on
April 15, hurt by weak demand. Revenues fell at a double-digit
clip due to sustained weakness in the core mining segment. The
company saw weak pricing for mining products in the quarter due
to challenging economic conditions.
Mechel, which currently retains a Zacks Rank #3 (Hold), 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.
Mechel benefits from backward integration as it is capable of
internally sourcing most of its raw materials. It remains focused
on expanding its customer base, reflected by the recent coking
coal supply contracts with Baosteel 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
the 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
opportunity for significant expansion of production and
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 capital
Mechel is also faced with weak demand from Europe and its
Ferroalloy division remains affected by lower nickel pricing.
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 are
Shiloh Industries Inc.
Kobe Steel Ltd.
). Both hold a Zacks Rank #1 (Strong Buy).