OREANDA-NEWS. June 29, 2007. Mechel OAO (NYSE: MTL), a leading Russian integrated mining and steel group, today announced results for the full year, ended December 31, 2006.

Alexey Ivanushkin, Mechel’s Chief Operating Officer, commented: "The past year was the best in Mechel’s history, as we continued our steady development of the Company, guided by our strategy of increasing mining segment output and raising profitability of our steel segment operations. The investment projects implemented to date started to bear fruit, as reflected in the Company’s performance.  Backed by predominantly positive trends in key markets and the actions we have taken to improve our operations, Mechel has achieved record financial results.  Also, our results for the year once again demonstrate the advantages of Mechel’s integrated structure and diversified operations that combine mining and steel production assets, which also enabled the Company to capitalize on positive trends in pricing for metals products while offsetting unfavorable pricing dynamics in coal markets during 2006.."

Consolidated Results

Net revenue in 2006 rose by 15.6% to $4.4 billion from $3.8 billion in 2005.  Operating income rose 40.7% to $725.7 million, or 16.5% of net revenue, compared to operating income of $515.7 million, or 13.6% of net revenue in 2005.

For 2006, Mechel reported consolidated net income of $603.2 million, or $4.41 per ADR ($1.47 per diluted share), an increase of 58.3% over consolidated net income of $381.2 million, or $2.85 per ADR ($0.95 per diluted share), in 2005.

Consolidated EBITDA rose 47.1% to $1.1 billion in 2006, compared to $726.3 million a year ago, reflecting the positive impact of favorable market conditions and the Company’s commitment to expense management, along with the return on investments aimed at increasing operational performance of Mechel’s subsidiaries.

Mining segment revenue for 2006 totaled $1.3 billion, or 30.4% of consolidated net revenue, an increase of 22.0% over segment revenue of $1.1 billion, or 28.8% of consolidated net revenue in the 2005.  The increase in revenue reflects production growth, strong market positions in coal, and large-scale sales of mining products to third parties.

Operating income in the mining segment in 2006 decreased by 19.8% to $322.0 million, or 24.1% of total sales to third parties, compared to operating income of $401.3 million, or 36.7% of total sales to third parties a year ago. EBITDA in the mining segment in 2006 was $408.1 million compared to  EBITDA of $465.7 million in 2005. The EBITDA margin of the mining segment was 23.8% for the 2006 full year period, versus 32.5% in 2005.  As previously announced, results for the mining segment in 2006 include a nonrecurring charge related to mineral extraction tax claimed from the Company’s Korshunov Mining Plant for the period of 2002-2005.

Alexey Ivanushkin commented on the results of the mining segment: "Throughout the year we have steadily executed on our strategy targeted at expanding our mining segment and securing Mechel’s position as one of Russia’s leading mining companies.  Market conditions for coal products in 2006 were not quite as favorable versus the previous year, in which we experienced high demand and pricing levels. While pricing levels were lower than those seen a year ago, this was offset in part by the increased production volumes of coal, nickel, and iron ore concentrate we managed to achieve at all of our subsidiaries.  Starting from the second half of 2006, prices for our mining segment products were on the rise, generating an EBITDA margin for the segment of 29.8% in the 4 th quarter.  Based on the current favorable pricing environment and current outlook, we are positive regarding the prospects of our mining subsidiaries and will maximize our profit by further increasing production.

Revenue from Mechel’s steel segment increased 13% in 2006 to $3.1 billion, or 69.6% of consolidated net revenue, from $2.7 billion, or 71.2% of consolidated net revenue, in 2005 .

For the 2006 full year period, operating income of the steel segment increased 252.7% to $403.7 million, or 13.2% of sales to third parties, compared to operating income of $114.5 million, or 4.2% of sales to third parties, in the 2005 full year period.  EBITDA in the steel segment for 2006 was $660.1 million, an increase of 153.4% over segment EBITDA of $260.5 million in 2005. The EBITDA margin of the steel segment was 21.4% in 2006 compared to 9.4% in 2005.

Alexey Ivanushkin commented, "2006 marked record financial results and profitability levels for our steel segment, clearly demonstrating the progress we have made in implementing our strategy of enhancing production efficiency and reducing operating costs, as the investment projects we have implemented to date started to yield results.  The performance of our steel segment also benefited from a favorable pricing environment, especially in growing rebar market. During the year, we leveraged our position as the second largest Russian producer of long products, steadily increasing sales in the domestic market, which carries premium to export prices, as domestic demand continued to strengthen.  Going forward we remain committed to increasing profitability and reducing costs while further developing our steel production capabilities."

Recent Highlights
In December of 2006, Mechel announced the commissioning of a new continuous casting machine at its subsidiary, Chelyabinsk Metallurgical Plant, with the annual capacity of over 1 million tonnes of billets. The new continuous caster will allow Mechel to significantly reduce its production costs and improve the quality of long products.
Through a series of private transactions and public offerings, Mr. Zyuzin increased his stake in Mechel to 68.2% as of December 31, 2006.  These transactions were carried out in full accordance with the agreement between core shareholders regarding Igor Zyuzin's acquisition of Vladimir Iorich's stake in Mechel OAO.
In January of 2007, Mechel announced the earlier closure of the privatization contract for its Romanian steel plant, Mechel Targoviste, having completely met all its investment obligations under this contract.
In March of 2007, Mechel announced the commissioning of a new continuous casting machine at its Romanian steel plant Mechel Targoviste. The investments in the continuous caster reconstruction and infrastructure amounted to approximately $14.0 million. The new unit will allow Mechel Targoviste to significantly reduce production costs and improve the quality of its long products.
In March of 2007, Mechel announced the acquisition of a controlling stake of 93.35% of Southern Kuzbass Power Plant OAO.  The transaction amount totaled approximately US$265.0 million. The acquisition of Southern Kuzbass Power Plant was in line with Mechel's strategy to further develop its mining segment.
In April of 2007, Mechel announced the early completion of its obligations under the privatization contract for its Romanian steel plant, Mechel Campia Turzii, having completely met all its investment obligations under this contract.
In May of 2007, Mechel announced the commissioning of a new berthing wall and warehouse areas at its subsidiary, Trade Port Posiet OAO. The commissioning will enable the port to accept and handle 40K-tonne Handymax class ships as early as this year.
In May of 2007, Mechel announced the acquisition of a 49% stake of Kuzbass Power Sales Company OAO. The transaction amount totaled approximately US$44.0 million. Together with 1.2% of the shares owned by Mechel previously, its stake in Kuzbass Power Sales Company has increased to 50.2%.
In June of 2007 Mechel announced an agreement with Danieli to provide for the modernization of Mechel’s steel operations. The agreement between Mechel and Danieli, will include the re-equipment of CMP’s electric arc furnace No.6 with fundamental modernization of its continuous caster to multiply its productivity by 3.5 - 4 times, to 1.2 million tonnes of slabs annually.

Capital Investment Program

Alexey Ivanushkin added: "Investment activities in recent years have allowed Mechel to boost production volumes and increase the profitability of its operations. Based on our extensive experience, we have conducted a thorough analysis of the Company’s investment capabilities and have decided to expand our investment program for 2007-2011 in both the mining and steel segments.  In both segments the Company will focus on developing projects that will allow Mechel to generate steady operational results, increase value-added product output, and improve its production effectiveness."

Total capital investment in 2007-2011 is expected to be approximately US$2.7 billion.

About $1.2 billion of this will be invested in the mining segment, with the goal of increasing annual coal output to 25.0 million tonnes by 2010. About $700.0 million of this amount will be invested in Southern Kuzbass towards construction of new mines: Erunakovskaya-1, Sibirginskaya (Extension 2), Olzherasskaya-Glubokaya; and implementation of cost cutting measures in mining, transportation, and coal washing.

About $300.0 million will be invested in technical upgrades of the Southern Urals Nickel Plant which will allow it to increase its output to 24 thousand tonnes while reducing production costs.

The remaining $1.5 billion of the capital investment program is planned for development of Mechel’s steel subsidiaries.  About $1.3 billion will be invested in the further modernization of Chelyabinsk Metallurgical Plant.  These investments will allow the plant to double its volumes of continuously cast steel billets, reduce billet sales to third parties, and extend its construction and engineering rolled products mix. The investment plan also provides for reconstruction of existing hot and cold rolling facilities, including the increase of stainless steel flat rolled products output.

Investments in the modernization of Izhstal will total about $140.0 million, and will be channeled to the plant’s technical re-equipment program, comprised of fundamental modernization of its steel melting operations and a reconstruction of its long product rolling facilities.

In order to increase its exports to Asian Pacific countries, Mechel plans a reconstruction of Port Posiet that will require about US$70.0 million.  Following the expansion, Posiet will increase its annual throughput to 5 million tonnes, and will be capable of accepting and handling 60,000-tonne Panamax class ships.

The rest of the capital investments in the steel segment will be made in Korshunov Mining Plant ($90.0 million), Beloretsk Metallurgical Plant ($60.0 million), Mechel Campia Turzii ($30.0 million), Mechel Targoviste ($25.0 million), Mechel Nemunas ($10.0 million), and Urals Stampings Plant ($10.0 million).

Alexey Ivanushkin concluded, "Our new investment program will secure Mechel’s position as one of the leading Russian mining and steel companies, and support the next phase of the Company’s growth. The investments planned for modernization and expansion will enable Mechel to increase profitability of its operations and enter new markets, while providing for additional organic growth opportunities and enhancing profitability and shareholder value.  On the whole, looking back at the year 2006, we are very pleased with our results, which further support the advantages of Mechel’s well-balanced model combining coal mining and steel production. Given the results of our operations and the trends observed in our key markets thus far in 2007, we believe that Mechel’s is well positioned to benefit from the positive demand environment throughout 2007".

Financial Position

Cash expenditure on property, plant and equipment and acquisition of mineral licenses for the 2006 full year amounted to $397.8 million, of which $234.0 million was invested in the mining segment and $154.0 million in the steel segment.

For the 2006 full year, Mechel spent $162.6 million on acquisitions, comprised of $156.5 million spent on acquisition of Moscow Coke and Gas Plant OAO and $4.0 spent on acquisition of minority interest in other subsidiaries.

As of December 31, 2006 total debt was at $489.1 million. Cash and cash equivalents amounted to $172.6 million at the end of the year 2006 and net debt amounted to US$316.5 million (net debt is defined as total debt outstanding less cash and cash equivalents).

The management of Mechel will host a conference call today at 6:00 p.m. Moscow time (10:00 a.m. New York time, 3:00 p.m. London time) to review Mechel’s financial results and comment on current operations.  The call may be accessed via the Internet at http://www.mechel.com, under the Investor Relations section.

More information is provided on the official site - http://www.mechel.com/news/article.wbp?article-id=ACE92CD0-696E-480F-B33B-7A602B7D84FA