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Mechel

July 21, 2006

Mechel announces results for the first quarter of 2006

Moscow, Russia – July 21, 2006 – Mechel OAO (NYSE: MTL), a leading Russian integrated mining and steel group, today announced results for the first quarter ended March 31, 2006.

US$ thousand

1Q 2006

1Q 2005

Change Y-on-Y

Revenues

853,518

1,039,456

- 17.9%

Net operating income

58,996

226,773

- 74.0%

Net operating margin

6.9% 

21.8%

-

Net income

62,881

169,512

- 62.9%

EBITDA (1)

134,411

279,654

- 51.9%

EBITDA margin

15.7%

26.9%

 

 

Alexey Ivanushkin, Mechel’s Chief Operating Officer, commented: “The first quarter of 2006 witnessed a decline in prices for coking and steam coal, the main products of our mining segment, which was also impacted by a one-time additional tax on extraction of mineral resources at our iron ore facility. The first quarter was also a period of severe weather conditions with unusually low temperatures during the winter months, which significantly complicated open-pit extraction in our mining segment and power supply for the steel facilities. Though the global situation remains difficult, I am encouraged by the signs of recovery in our steel segment from the negative trends we faced last year.”

Mr. Ivanushkin continued, “Going forward, we will continue to execute on our strategy of expanding our mining segment and increasing sales to third parties, while also focusing on improving the profitability of our steel operations over the long-term. We believe that this approach will allow us to better deal with the short-term impact of the challenging environment, and position us well for the future.”

Consolidated Results

Net revenue in the first quarter of 2006 decreased by 17.9%, to $853.52 million, as compared to $1.04 billion in the first quarter of 2005. Operating income was $59.00 million, or 6.9% of net revenue, versus operating income of $226.77 million, or 21.8% of net revenue, in the first quarter of 2005.

For the first quarter of 2006, Mechel reported consolidated net income of $62.88 million, or $0.47 per ADR ($0.16 per diluted share), compared to consolidated net income of $169.51 million, or $1.26 per ADR in the first quarter of 2005.

Consolidated EBITDA was $134.41 million in the 2006 first quarter, compared to $279.66 million a year ago, reflecting the negative impact of softer market conditions on average realized prices for the main categories of our products in the beginning of 2006. Please see the attached tables for a reconciliation of consolidated EBITDA to net income.

Mining Segment Results

US$ thousand

1Q 2006

1Q 2005

Change Y-on-Y

Revenues from external customers

289,459

313,636

- 7,7%

Intersegment sales

75,871

102,587

-26.0%

Operating income

29,289

184,157

- 84.1%

Net income

27,467

146,262

- 81.2%

EBITDA

58,000

959

- 68.8%

EBITDA margin (1)

15.9%

44.68%

 

 

1) EBITDA margin for the first quarter 2005 was corrected for comparison with other companies. EBITDA margin is now calculated out of consolidated revenues of the segment, including intersegment sales.

Mining segment output

Product

1Q 2006, thousand tonnes

1Q 2006 vs 1Q 2005, %

Coal

4,011

- 2.0

Coking coal

2,225

- 5.0

Steam coal

1,786

+ 2.0

Iron ore concentrate

1,127

+ 8.0

Nickel

3.4

+ 42.0

 

Mining segment revenue from external customers for the first quarter of 2006 totaled $289.46 million, or 33.9% of consolidated net revenue, a decrease of 7.7% over segment revenue from external customers of $313.64 million, or 30.2%, of consolidated net revenue, in the first quarter of 2005.

Operating income in the mining segment in the first quarter of 2006 totaled $29.29 million, or 8.0% of segment revenues, compared to total operating income of $184.16 million, or 44.2% of total segment revenues a year ago. EBITDA in the mining segment in the first quarter of 2006 was $58.00 million. The EBITDA margin of the mining segment was 15.9%.

Mr. Ivanushkin commented on the results of the mining segment: “As previously noted, the profitability of our mining segment was impacted by a considerable decline in prices for coking coal in the first quarter. The average price decreased from $114 to $77 per tonne (on a FOB/DAF basis), compared to the results of the segment for 1Q 2005, when these prices reached historic highs. The segment was also impacted by a one-time extraction tax accrual at our Korshunov Mining Plant, which amounted to approximately $20 million and was caused by different interpretation of tax code by us and tax authorities. Iron ore production in first quarter of 2006 continued to grow, partially compensating for the decline in the output of coal and allowing us to increase sales to third parties. Mining continues to be our core business, and we are on track to further expand in this segment.”

Steel Segment Results

US$ thousand

1Q 2006

1Q 2005

Change Y-on-Y

Revenues from external customers

564,059

725,820

- 22.3%

Intersegment sales

5,173

15,171

-65.9%

Operating income

29,707

42,616

- 30.3%

Net income

35,414

23,250

52.3%

EBITDA

76,411

93,695

- 18.4%

EBITDA margin (1)

13.4%

12.6%

 

 

(1) EBITDA margin for the first quarter 2005 was corrected for correct comparison with other companies. EBITDA margin is now calculated out of consolidated revenues of the segment, including intersegment sales.

Steel segment output

Product

1Q 2006, thousand tonnes

1Q 2006 vs 1Q 2005, %

Coke

526

- 27.0

Pig iron

820

- 18.0

Steel

1,367

- 15.0

Rolled products

1,067

- 20.0

Hardware

134

-8.0

 

Revenue from external customers in Mechel’s steel segment in the first quarter of 2006 decreased by 22.3% as compared to the 2005 first quarter, from $725.8 million to $564.06 million, or 66.1% of consolidated net revenue.

In the 2006 first quarter, the steel segment’s operating income totaled $29.70 million, or 5.2% of total segment revenues, compared to operating income of $42.62 million, or 5.8% of total segment revenues a year ago. EBITDA in the steel segment in the first quarter of 2006 was $76.41 million. The EBITDA margin of the steel segment was 13.4%.

Mr. Ivanushkin commented: “Though global steel market conditions continue to affect our steel business, we were encouraged by some growth in demand for our steel segment products during the first quarter and improvement in pricing conditions from the levels we saw at the end of 2005. Our focus on improving in this segment demonstrated further progress, as profit margins remained relatively stable despite the decrease in segment revenue. We will continue to closely control our costs, and improve usage ratios to capitalize on the continuing market recovery.”

Recent Highlights

  • Mechel’s core shareholders have reached an agreement pursuant to which Mr. Zyuzin, Chairman of the Board, will purchase a 42.2% stake from Mechel’s CEO, Vladimir Iorich, over the course of 2006. Mr. Zyuzin increased his stake in Mechel to 65.8%, while company’s free float is over 23%.
  • In March, Mechel announced the establishment of a 100%-owned subsidiary, Mechel Hardware OOO. The new company will sell products manufactured by Mechel’s hardware plants. The action is in line with Mechel’s overall strategy to develop its mining segment and improve the efficiency of its steel business.
  • In April, Mechel announced the acquisition of a 100% stake in Metals Recycling OOO, a Chelyabinsk-based metal scrap processing company through its subsidiary, Mechel Service OOO for approximately $6.0 million. The transaction is a part of Mechel’s policy to ensure its steel segment’s self-sufficiency in raw materials. Metals Recycling OOO is a full-scale metal scrap collector and processor, and is comprised of eight operating facilities. It produced 178,000 tonnes of metal scrap in 2005. Metals Recycling OOO has a modernization program underway aimed at increasing this output.
  • In June, Mechel announced the placement of the second bond issue at the Moscow Interbank Currency Exchange (MICEX). The rate of the first coupon of the first issue is 8.4%. The Board of Directors decided to place a third bond issue with a value of 1,000 rubles. The value of the second and third bond issues total 5 billion rubles each.

Mr. Ivanushkin commented: “Though the first quarter of 2006 was one of the toughest for Mechel, there were a number of one-time events in the period that affected our performance. While we are concerned with the significant decline in prices for coking coal, industry data shows growing demand both for mining and steel products. We also continue to tightly control costs to minimize the short-term impact of unfavorable market conditions. The second quarter suggests progress, as we managed to maintain cost levels while the prices for our products improved. We intend to increase our coal exports, thus expanding mining segment sales to third parties, and further reduce operating costs and diversify our product range with value-added products in the steel segment. We are confident that our position as an integrated producer will allow us to flexibly react to the changing environment and yield benefits for our business and shareholders in the future.”

Financial Position

In the first quarter of 2006, CAPEX totaled $118.7 million, out of which $72.5 million was invested in the mining segment and $46.1 million in the steel segment.

Mechel spent $3.8 million on acquisitions in the first quarter of 2006, including $2.1 million for the 100% stake in Metals Recycling OOO, and $1.7 million on the purchase of minority stakes in other subsidiaries of Mechel.

As of March 31, 2006, total debt was $460.8 million. Cash and cash equivalents amounted to $331.8 million at the end of the period, and net debt amounted to $129.0 million (net debt is defined as total debt outstanding less cash and cash equivalents).

* One American Depositary Share is equivalent to three diluted shares.

1Total debt is comprised of short-term borrowings and long-term debt

 

 

 

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