Mechel Closes Donetsk Acquisition - Analyst Blog

Russian Company Mechel OAO(MTL ) announced that it has completed the acquisition of 100% of Donetsk Electrometallurgical Plant (DEMZ AO) worth $537 million.

Payment for Donetsk Electrometallurgical's shares will be made in installments of over 7 years. At the time of Mechel's annual shareholders' meeting, payment was expected to be made in installments of over 4 years. However, over the course of completion of the acquisition, the term was extended by 3 years without increasing the total consideration.

According to Mechel, with an annual production capacity of about 1 million tonnes per year, the plant focuses on the production of continuously-cast billets as well as rolls of thermally treated specialty steels. Further, the plant is located close to a developed railway network and major seaports of Mariupol and Odessa

The plant's electric furnace smelting facilities are currently working at their full capacity, producing up to 90,000 tonnes of steel per month. In 2011, steel production is expected to total over 1 million tonnes.

DEMZ's quality management system is compliant with the international ISO 9001:2008 standard as certified by Lloyd's Register Quality Assurance, while the ecological management system is compliant with the ISO 14001:2004 standard as certified by TUV NORD CERT.

The above acquisition is especially important for Mechel Group's steel division, which aims at increasing the Group's total production volume and the share of high margin products in the group's product portfolio.

Recently, Mechel released its third-quarter 2011 earnings. The company recorded a net income of $25.7 million in the third quarter of 2011, down 86.6% from the previous quarter's consolidated net income of $191.9 million.

Revenues in the third quarter decreased 7.6% sequentially to $3.2 billion.

Operating income in the reported quarter climbed 11.2% sequentially to $529.5 million. Operating margin was 16.49% in the third quarter of 2011 versus 13.72% in the second quarter of 2011.

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 mainly focuses 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 of concern.

Currently, Mechel has a short-term (1 to 3 months) Zacks #4 Rank (Sell rating) and a long-term (6 months) Neutral recommendation.

Mechel faces stiff competition from Arcelor Mittal ( MT ) and Norilsk Nickel Mining and Metallurgical Co.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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