OREANDA-NEWS. August 11, 2011. Mechel reported its 2Q11 operating results today (10 Aug). All three of the company’s main businesses demonstrated positive progression YoY. However, the numbers were mixed in terms of quarterly advancement, with weaker QoQ output of coal products, offset by stronger sales in its iron ore and steel businesses.

Mechel 2Q11 operating results – main product line output (‘000 tonnes)

 

2Q11

1Q11

QoQ

2Q10

YoY

Coking coal concentrate

1379

3091

-55%

1130

22%

Other types of metallurgical coal

1249

497

151%

743

68%

Steam coal

1134

2194

-48%

1038

9%

Coke

760

932

-18%

860

-12%

Iron ore concentrate

1325

917

45%

944

40%

Pig iron

825

1013

-19%

1004

-18%

Crude steel

1421

1588

-10%

1534

-7%

Rolled products (ex. resale of 3rd party goods), of which

1821

1591

14%

1329

37%

   Flat products

197

132

49%

78

153%

   Long products

1016

913

11%

810

25%

   Billets

608

545

11%

441

38%

Hardware

200

246

-19%

184

9%

Forgings & stampings

54

46

17%

49

10%

Source: Company data, Aton estimates

Disappointingly, Mechel’s coal product output was down substantially from 1Q11. It appears that operational and safety stoppages at the company’s coal mines in Russia have had a much larger impact than we had previously anticipated. As a result, coking coal output was down 55% QoQ, at 1.4mnt. Steam coal output was down 48% QoQ, although a large part of that reduction was due to the increased output of PCI coal (part of the “other types of metallurgical coal” line), which showed an increase of around 2.5x vs 1Q11.

On the positive side, iron ore output was substantially higher, both on a YoY and QoQ basis, with an increase of 45% vs 1Q11. The steel business also recorded a healthy improvement in performance. Despite lower crude steel output, sales of the majority of steel products were up, both YoY and QoQ. Rolled product sales rose 14% QoQ, at 1.8mnt, with the biggest absolute increase coming from long product sales (up 11% or 103kt vs 1Q11). This is in line with the performance of the majority of its Russian peers, which were able to increase their output of construction steel during the quarter on the back of stronger demand and prices.

Bottom line

Mechel’s mining division is the main attraction of the stock, given the much lower profitability of its steel and ferroalloy businesses. We are therefore discouraged by the results of Mechel’s mining division due to sharply lower sales of coking coal concentrate, although higher PCI coal and iron ore sales should offset some of the revenue lost in coal. Higher steel product sales should also give a positive boost to Mechel’s financials for the quarter. The company has increased sales of own raw materials to the steel business, which, combined with lower pig iron and steel output may have led to cost savings in the division and therefore improved profitability.

Mechel does not disclose realised prices for its products, which makes forecasting 2Q11 financial performance quite challenging at this stage. However, we believe that improvements in the steel division and higher iron ore output are unlikely to be sufficient to fully offset weaker coal production results. This may lead to deterioration in the company’s 2Q11 financial performance vs the first quarter.