Mechel Reports 1Q 2012 Financial Results

OREANDA-NEWS. June 27, 2012. Mechel JSC  (NYSE: MTL), a leading Russian mining and steel group, today announced financial results for the 1Q 2012.

Mechel JSC ’s Chief Executive Officer Yevgeny Mikhel commented on the 1Q 2012 financial results:

“In this year’s first quarter, the company focused its efforts on implementing measures launched in the end of last year, aimed at optimizing operational planning and management of working capital, as well as improving our debt portfolio’s structure.

“As a result of the accounting period, despite the volatile market situation due to remaining difficulties in economic development of certain countries and regions that are customers of the Group’s products, we managed to make good on key issues — we optimized the debt, retained high levels of revenue and freed significant amount of funds by reducing stock, thus significantly improving the Group’s operational cash flow.”

Consolidated Results For The 1Q 2012

USD  thousand 1Q 2012 1Q 2011 Change Q-on-Q Revenue from external customers 2,950,047 2,934,491 0.5% Intersegment sales 468,563 545,338 -14.1% Operating income 314,027 448,354 -30.0% Operating margin 10.64% 15.28% - Net income attributable to shareholders of Mechel JSC 218,019 309,116 -29.5% Adjusted EBITDA (1) (2) 463,402 566,852 -18.2% Adjusted EBITDA, margin (1) 15.71% 19.32% -

(1)       See Attachment A.

(2)        Adjusted EBITDA is EBITDA adjusted for effects of remeasurement of contingent liabilities at fair value, forex gain/(loss), net result on the disposal of non-current assets, amounts attributable to non-controlling interests and interest income.

USD  thousand 1Q 2012 4Q 2011 Change Q-on-Q Revenue from external customers 2,950,047 2,929,159 0.7% Intersegment sales 468,563 482,166 -2.8% Operating income 314,027 377,494 -16.8% Operating margin 10.64% 12.89% - Net income attributable to shareholders of Mechel JSC 218,019 201,155 8.4% Adjusted EBITDA (1) (2) 463,402 536,342 -13.6% Adjusted EBITDA, margin (1) 15.71% 18.31% -

(1)       See Attachment A.

(2)       Adjusted EBITDA is EBITDA adjusted for effects of remeasurement of contingent liabilities at fair value, forex gain/(loss), net result on the disposal of non-current assets, amounts attributable to non-controlling interests and interest income.

The net revenue in 1Q 2012 increased by 0.5% and amounted to USD 3.0 billion compared to USD 2.9 billion in 1Q 2011. The operating income decreased by 30.0% and amounted to USD 314 million or 10.64% of the net revenue, compared to the operating income of USD 448 million or 15.28% of the net revenue in 1Q 2011.

In 1Q 2012, Mechel’s consolidated net income attributable to shareholders of Mechel JSC  decreased by 29.5% to USD 218.1 million compared to the consolidated net income attributable to shareholders of Mechel JSC  of USD 309.1 million in 1Q 2011.

The consolidated adjusted EBITDA in 1Q 2012 decreased by 18.2% to USD 463.4 million, compared to USD 566.9 million in 1Q 2011. Depreciation, depletion and amortization in 1Q 2012 for the Company were USD 155.9 million, an increase of 11.2% compared to USD 140.2 million in 1Q 2011.

Mining Segment Results For The 1Q 2012

USD  thousand 1Q 2012 1Q 2011 Change Q-on-Q Revenue from external customers 932,741 828,124 12.6% Intersegment sales 225,599 260,260 -13.3% Operating income 275,568 292,056 -5.6% Net income attributable to shareholders of Mechel JSC 241,504 290,675 -16.9% Adjusted EBITDA(1) (2) 358,116 361,193 -0.9% Adjusted EBITDA, margin (3) 30.92% 33.19% -

(1)       See Attachment A.

(2)        Adjusted EBITDA is EBITDA adjusted for effects of remeasurement of contingent liabilities at fair value, forex gain/(loss), net result on the disposal of non-current assets, amounts attributable to non-controlling interests and interest income.

(3)       Adjusted EBITDA margin is calculated as a percentage of consolidated revenues of the segment, including intersegment sales.

USD  thousand 1Q 2012 4Q 2011 Change Q-on-Q Revenue from external customers 932,741 1,061,435 -12.1% Intersegment sales 225,599 263,744 -14.5% Operating income 275,568 497,417 -44.6% Net income attributable to shareholders of Mechel JSC 241,504 439,066 -45.0% Adjusted EBITDA(1) (2) 358,116 592,825 -39.6% Adjusted EBITDA, margin (3) 30.92% 44.74% -

(1)       See Attachment A.

(2)        Adjusted EBITDA is EBITDA adjusted for effects of remeasurement of contingent liabilities at fair value, forex gain/(loss), net result on the disposal of non-current assets, amounts attributable to non-controlling interests and interest income.

(3)       Adjusted EBITDA margin is calculated as a percentage of consolidated revenues of the segment, including intersegment sales

Mining Segment Output and Sales For The 1Q 2012

Production:

Product name 1Q 2012, thousand tonnes 1Q 2011, thousand tonnes 1Q 2012 vs. 1Q 2011, % Coal (run-of-mine) 6,413 5,985 7%

Product Sales:

Product name 1Q 2012, thousand tonnes 1Q 2011, thousand tonnes 1Q 2012 vs. 1Q 2011, % Coking coal concentrate 3,181 2,803 14% Including coking coal concentrate supplied to Mechel enterprises 628 825 -24% PCI 503 138 265% Anthracites 614 488 26% Including anthracites supplied to Mechel enterprises 58 84 -31% Steam coal 1,504 1,855 -19% Including steam coal supplied to Mechel enterprises 355 459 -23% Iron ore concentrate 1,118 1,068 5% Including iron ore concentrate supplied to Mechel enterprises 150 462 -68% Coke 889 899 -1% Including coke supplied to Mechel enterprises 669 576 16%

 

Mining segment’s revenue from external customers in 1Q 2012 totaled USD 932.7 million or 32% of the consolidated net revenue, an increase of 12.6% over net segment’s revenue from external customers of USD 828.1 million, or 28% of the consolidated net revenue in 1Q 2011.

The operating income in the mining segment in 1Q 2012 decreased by 5.6% to USD 275.6 million, or 23.8% of total segment’s revenue, compared to the operating income of USD 292.1 million, or 26.8% of total segment revenue for the 1Q 2011. The adjusted EBITDA in the mining segment in 1Q 2012 decreased by 0.9% and amounted to USD 358.1 million compared to segment’s adjusted EBITDA of USD 361.2 million in 1Q 2011. The adjusted EBITDA margin for the mining segment in 1Q 2012 was 30.9% compared to 33.2% in 1Q 2011. Depreciation, depletion and amortization in the mining segment amounted to USD 81.6 million which is 1.7% lower than USD 83.0 million in 1Q 2011.

Mechel Mining Management Company LLC ’s Chief Executive Officer Boris Nikishichev commented on the mining segment’s results: “Throughout the first quarter of 2012, the segment had to work in difficult conditions. Despite the continuing decrease in demand and correction of prices for raw materials, as well as temporary idling of several mines in Southern Kuzbass, we managed to retain high volume of coal product sales and increase the sales of iron ore concentrate, which ultimately ensured positive financial results of the entire division’s work.

“At Elga, now that rail tracks are laid along the entire way to the deposit, chief resources are focused on constructing a seasonal washing plant, in order to begin production and sales of coking coal concentrate as soon as possible. Once the construction of the plant is completed this summer we will ship off the first load of coking coal concentrate, starting to get returns on the large-scale investment into the project.

“Besides that, at Southern Kuzbass mining was resumed at the Sibirginskaya Underground mine in May, and construction of the mine’s second line, which will boost its annual capacity up to 2.4 million tonnes of coking coal, is fully under way.

“Recently we saw prices stabilize and Asian customers’ demand go up, creating a basis for improvement of the segment’s operational results in the second half of the year.”

Steel Segment Results For The 1Q 2012

USD  thousand 1Q 2012 1Q 2011 Change Q-on-Q Revenue from external customers 1,649,133 1,757,122 -6,1% Intersegment sales 78,989 88,951 -11,2% Operating income 10,666 125,592 -91,5% Net (loss) / income attributable to shareholders of Mechel JSC (15,564) 15,181 -202,5% Adjusted EBITDA (1) (2) 48,589 149,803 -67,6% Adjusted EBITDA, margin (3) 2.81% 8.11% -

(1)       See Attachment A.

(2)        Adjusted EBITDA is EBITDA adjusted for effects of forex gain/(loss), net result on the disposal of non-current assets, amounts attributable to non-controlling interests and interest income.

(3)       Adjusted EBITDA margin is calculated as a percentage of consolidated revenues of the segment, including intersegment sales.

USD  thousand 1Q 2012 4Q 2011 Change Q-on-Q Revenue from external customers 1,649,133 1,541,256 7.0% Intersegment sales 78,989 76,120 3.8% Operating income / (loss) 10,666 (86,173) 112.4% Net loss attributable to shareholders of Mechel JSC (15,564) (194,389) 92.0% Adjusted EBITDA (1) (2) 48,589 (49,806) 197.6% Adjusted EBITDA, margin (3) 2.81% -3.08% -

(1)       See Attachment A.

(2)        Adjusted EBITDA is EBITDA adjusted for effects of forex gain/(loss), net result on the disposal of non-current assets, amounts attributable to non-controlling interests and interest income.

(3)       Adjusted EBITDA margin is calculated as a percentage of consolidated revenues of the segment, including intersegment sales.

Steel Segment Output and Sales For The 1Q 2012

Production:

Product name 1Q 2012, thousand tonnes 1Q 2011, thousand tonnes 1Q 2012 vs. 1Q 2011, % Pig iron 1,023 1,013 1% Steel 1,655 1,588 4%

Product Sales:

Product name 1Q 2012, thousand tonnes 1Q 2011, thousand tonnes 1Q 2012 vs. 1Q 2011, % Flat products 214 189 14% Including those produced by third parties 141 125 13% Long products 937 837 12% Including those produced by third parties 196 168 16% Billets 540 681 -21% Including those produced by third parties 268 480 -44% Hardware and welded mesh 213 207 3% Including those produced by third parties 11 9 15% Forgings 18 15 21% Stampings 28 27 5%

Mechel’s steel segment’s revenue from external customers in 1Q 2012 amounted to USD 1.6 billion, or 56% of the consolidated net revenue, a decrease of 6.1% over the net segment’s revenue from external customers of USD 1.8 billion, or 60% of consolidated net revenue, in 1Q 2011.

In 1Q 2012, the steel segment’s operating income decreased by 91.5% and totaled USD 10.7 million, or 0.6% of total segment’s revenue, versus the operating income of USD 125.6 million, or 6.7% of total segment’s revenue, in 1Q 2011. The adjusted EBITDA in the steel segment in 1Q 2012 decreased by 67.6% and amounted to USD 48.6 million, compared to the adjusted EBITDA of USD 149.8 million in 1Q 2011. The adjusted EBITDA margin of the steel segment was 2.81% in 1Q 2012, versus the adjusted EBITDA margin of 8.11% in 1Q 2011. Depreciation and amortization in steel segment rose by 50.2% from USD 29.1 million in 1Q 2011 to USD 43.7 million in 1Q 2012.

Mechel-Steel Management Company LLC ’s Chief Executive Officer Andrey Deineko commented on the steel segment’s results: “In the first quarter of 2012, the division showed a marked improvement of its results compared to the previous reporting period. Despite a seasonal low in demand for steel products, we managed to increase sales, significantly reducing stock at our Mechel Service Global sales network. In the first quarter, alone stock went down by over 200,000 tonnes, yielding additional funds to the working capital. At the same time, due to some decrease in prices on incoming raw materials, we retained control over the cost of the products manufactured by our key production assets, in some cases managing to decrease them by approximately10%. As a result we not only increased revenue, but achieved operating income and a positive EBITDA.

“Moreover, we must note improvements in the structure of the segment’s sales, compared to last year’s first quarter. The finished products’ share showed a marked growth as sales of semi-finished products shrank, which is due to the launch of processing facilities and increase of their load. Commissioning of the universal rolling mill at Chelyabinsk Metallurgical Plant, whose construction will be completed this year, will give additional support to the division’s results.”

Ferroalloys Segment Results For The 1Q 2012

USD  thousand 1Q 2012 1Q 2011 Change Q-on-Q Revenue from external customers 124,730 124,134 0.5% Intersegment sales 27,814 52,665 -47.2% Operating (loss) / income (33,770) 11,859 -384.8% Net loss attributable to shareholders of Mechel JSC (56,040) (2,247) -2,394.0% Adjusted EBITDA (1) (2) (7,498) 35,106 -121.4% Adjusted EBITDA, margin (3) -4.92% 19.86% -

(1)       See Attachment A.

(2)       Adjusted EBITDA is EBITDA adjusted for effects of forex gain/(loss), net result on the disposal of non-current assets, amounts attributable to non-controlling interests and interest income.

(3)       Adjusted EBITDA margin is calculated as a percentage of consolidated revenues of the segment, including intersegment sales.

USD  thousand 1Q 2012 4Q 2011 Change Q-on-Q Revenue from external customers 124,730 115,888 7.6% Intersegment sales 27,814 15,997 73.9% Operating loss (33,770) (35,929) 6.0% Net loss attributable to shareholders of Mechel JSC (56,040) (39,141) -43.2% Adjusted EBITDA (1) (2) (7,498) (11,223) 33.2% Adjusted EBITDA, margin (3) -4.92% -8.51% -

(1)       See Attachment A.

(2)        Adjusted EBITDA is EBITDA adjusted for effects of forex gain/(loss), net result on the disposal of non-current assets, amounts attributable to non-controlling interests and interest income.

(3)       Adjusted EBITDA margin is calculated as a percentage of consolidated revenues of the segment, including intersegment sales.

Product Sales:

Product name 1Q 2012, thousand tonnes 1Q 2011, thousand tonnes 1Q 2012 vs. 1Q 2011, % Nickel 4.2 3.6 19% Including nickel supplied to Mechel enterprises 0.6 1.2 -49% Ferrosilicon 18 23.9 -25% Including ferrosilicon supplied to Mechel enterprises 7.2 6.9 5% Chrome 17.2 11.3 52% Including chrome supplied to Mechel enterprises 2.5 3.3 -26%

Ferroalloys segment’s revenue from external customers in 1Q2012 amounted to USD 124.7 million, or 4% of the consolidated net revenue, an increase of 0.5% compared with the segment’s revenue from external customers of USD 124.1 million or 4% of the consolidated net revenue, in 1Q2011.

In 1Q2012, the operating loss in the ferroalloys segment totaled USD 33.8 million, or -22.1% of total segment’s revenue, as compared to operating income of USD 11.9 million, or 6.7% of total segment’s revenue, in 1Q2011. The adjusted EBITDA in the ferroalloys segment in 1Q2012 decreased by 121.4% and amounted to negative USD 7.5 million, compared to segment’s adjusted EBITDA of USD 35.1 million in 1Q2011. The adjusted EBITDA margin of the ferroalloys segment comprised -4.9% in 1Q2012 compared to the adjusted EBITDA margin of 19.9% in 1Q2011. Ferroalloys segment’s depreciation, depletion and amortization in 1Q2012 were USD 26.5 million, an increase of 18.3% over USD 22.4 million in 1Q2011.

Mechel-Energo LLC ’s Chief Executive Officer Yuriy Yampolskiy noted: “In the first quarter of 2012 compared to the 4th quarter of 2011, the division continued its trend toward improvement of financial results. During the period of traditionally high capacity load and significant sales, the division increased its revenue and, having demonstrated a significant increase in operation income and EBITDA, showed net profit. Priority rates in the growth of electricity prices, decrease in fuel expense, and a lower share of semi-fixed costs per product unit together with growing production volumes had a positive impact on the division’s results.”

Power Segment Results for The 1Q 2012

USD  thousand 1Q 2012 1Q 2011 Change Q-on-Q Revenue from external customers 243,442 225,110 8.1% Intersegment sales 136,162 143,462 -5.1% Operating income 24,879 33,535 -25.8% Net income attributable to shareholders of Mechel JSC 11,435 20,194 -43.4% Adjusted EBITDA (1) (2) 27,510 35,437 -22.4% Adjusted EBITDA, margin(3) 7.25% 9.61% -

(1)       See Attachment A.

(2)        Adjusted EBITDA is EBITDA adjusted for effects of forex gain/(loss), net result on the disposal of non-current assets, amounts attributable to non-controlling interests and interest income.

(3)       Adjusted EBITDA margin is calculated as a percentage of consolidated revenues of the segment, including intersegment sales.

USD  thousand 1Q 2012 4Q 2011 Change Q-on-Q Revenue from external customers 243,442 210,579 15.6% Intersegment sales 136,162 126,305 7.8% Operating income 24,879 688 3,516.1% Net income / (loss) attributable to shareholders of Mechel JSC 11,435 (5,907) 293.6% Adjusted EBITDA (1) (2) 27,510 3,019 811.2% Adjusted EBITDA, margin(3) 7.25% 0.90% -

(1)       See Attachment A.

(2)        Adjusted EBITDA is EBITDA adjusted for effects of forex gain/(loss), net result on the disposal of non-current assets, amounts attributable to non-controlling interests and interest income.

(3)       Adjusted EBITDA margin is calculated as a percentage of consolidated revenues of the segment, including intersegment sales.

Power Segment Output and Sales For The 1Q 2012

Product name 1Q 2012 1Q 2011 1Q 2012 vs. 1Q 2011, % Electric power generation (ths. kWh) 1,213,029 1,150,318 5% Heat power generation (Gcal) 3,140,876 2,704,464 16%

Mechel’s power segment’s revenue from external customers in 1Q 2012 comprised USD 243.4 million, or 8% of consolidated net revenue, an increase of 8.1% compared with the segment’s revenue from external customers of USD 225.1 million or 8% of consolidated net revenue in 1Q2011.

The operating income in the power segment in 1Q2012 amounted to USD 24.9 million, or 6.6% of the total segment’s revenue in the same period, a decrease of 25.8% compared to the operating income of USD 33.5 million, or 9.1% of the total segment’s revenue, in 1Q2011. The adjusted EBITDA in the power segment in 1Q2012 went down by 22.4% totaling USD 27.5 million, compared to the adjusted EBITDA of USD 35.4 million in 1Q2011. The adjusted EBITDA margin for the power segment in 1Q2012 amounted to 7.3% compared to 9.6% in 1Q2011. Depreciation and amortization in power segment in 1Q2012 decreased by 28.1% comparing with the 1Q2011 from USD 5.7 million to USD 4.1 million.

Mechel-Energo LLC ’s Chief Executive Officer Yuri Yampolsky noted: “The division’s results improved in the fourth quarter as expected, which was due to the heating season and an increase in capacity utilization. The segment had positive results in operational profit and EBITDA. Nevertheless, growing commercial costs, mostly due to rising electricity traffic tariffs, had a marked effect on the end result. In order to improve the situation, we have worked out and are implementing a series of steps aimed at cutting production costs as well as optimizing the capital expense program.”