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Mechel

December 16, 2005

Mechel announces results for the nine months of 2005

MECHEL REPORTS 9-MONTH 2005 RESULTS
 — Revenues increased 17.6% to $2.91 billion —
— Operating income of $452.03 million —
— Net income $314.72 million, $2.34 per ADR or $0.78 per diluted share —
— Corrects its 6-month and 3-month 2005 results to reflect the netting off of certain trading operations —

 

Moscow, Russia – December 16, 2005 – Mechel OAO (NYSE: MTL), a leading Russian integrated mining and steel group, today announced results for the nine months ended September 30, 2005. 


US$ thousand 9M 2005 9M 2004 Change Y-on-Y
Revenues 2,910,394 2,474,854 17.6%
Net operating income 452,027 509,364 - 11.3%
Net operating margin 15.5% 20.6% -
Net income 314,717 420,815 - 25.2%
EBITDA (1) 569,016 618,709 - 8.0%
EBITDA margin 19.6% 25.0% -

(1) See Attachment A.

Vladimir Iorich, Mechel’s Chief Executive Officer, commented: “In the third quarter 2005 we saw a slight improvement in market conditions, as compared to the second quarter, which enabled us to restore production in both segments to planned levels. Our programs targeted at efficiency growth in the steel segment started yielding positive results as well.  This, along with the continuing performance of our mining segment, confirms the strength of our strategy aimed at increasing overall value across both segments.”

Consolidated Results

Net revenue in the first nine months of 2005 rose 17.6% to $2.91 billion from $2.47 billion in the first nine months of 2004. Operating income was $452.03 million, or 15.5% of net revenue, versus operating income of $509.36 million, or 20.6% of net revenue, in 2004, a decrease of 11.3%.

For the first nine months of 2005, Mechel reported consolidated net income of $314.72 million, or $2.34 per ADR ($0.78 per diluted share) 

Consolidated EBITDA decreased 8.0% to $569.02 million in the first nine months of 2005 from $618.71 million a year ago, reflecting the negative impact of unstable market conditions on average realized prices for the main categories of our products. Please see the attached tables for a reconciliation of consolidated EBITDA to net income.

Mining Segment Results


US$ thousand 9M 2005 9M 2004 Change Y-on-Y
Revenues from external customers 823,548 556,880 47.9%
Operating income 341,282 250,044 36.5%
Net income 266,581 240,676 10.8%
EBITDA 379,408 309,507 22.6%
EBITDA margin 46.1% 55.6% -

Mining segment output


Product 9M 2005, thousand tonnes 9M 2005 vs 9M 2004, %
Coal 11,670 + 2.0
Coking coal 6,472 - 5.0
Steam coal 5,198 + 11.0
Iron ore concentrate 3,374 + 20.0
Nickel 9 - 8.0

Mining segment revenue for the first nine months of 2005 totaled $823.55 million, or 28.3%, of consolidated net revenue, an increase of 47.9% over segment revenue of $556.88 million, or 22.5%, of consolidated net revenue, in the first nine months of 2004. The increase in revenues reflects solid output, strong market positions, and an increase in sales of mining products to third parties.

Operating income for the first nine months of 2005 in the mining segment rose 36.5% to $341.28 million, or 41.4%, of total segment revenues, compared to operating income of $250.04 million, or 44.9%, of total segment revenues a year ago. This increase in profitability reflects Mechel’s control over costs and the overall efficiency of our mining operations. EBITDA in the mining segment for the first nine months of 2005 was $379.41 million, 22.6% higher than segment EBITDA of $309.51 million in the first nine months of 2004. The EBITDA margin of the mining segment was 46.1%.

Mr. Iorich commented on the results of the mining segment: “The negative trends we witnessed in major mining markets in the second quarter continued to affect our nine-month production. The slowdown in the coking coal market, caused by a decrease in production by a number of Russian steel companies, prompted our shift to increasing steam coal production.  Declining iron ore prices also influenced the segment’s margin negatively. Nevertheless, with its strong profitability, mining continues to be of primary interest for Mechel.”

Steel Segment Results


US$ thousand 9M 2005 9M 2004 Change Y-on-Y
Revenues from external customers 2,086,846 1,917,974 8.8%
Operating income 110,745 259,321 - 57.3%
Net income 48,135 180,139 - 73.3%
EBITDA 189,608 309,202 - 38.7%
EBITDA margin 9.1% 16.1% -

Steel segment output


Product 9M 2005, thousand tonnes 9M 2005 vs 9M 2004, %
Coke 1,963 - 11.0
Pig iron 2,475 - 10.0
Steel 4,420 - 3.0
Rolled products 3,450 + 3.0
Hardware 441 + 4.0

Revenue from Mechel’s steel segment increased 8.8% in the first nine months of 2005 from $1.92 billion to $2.09 billion, or 71.7%, of consolidated net revenue, as compared to the first nine months of 2004.

In the first nine months of 2005, the steel segment generated operating income of $110.75 million, or 5.3%, of total segment revenues, a decrease of 57.3% over operating income of $259.32 million, or 46.6%, of total segment revenues in the first nine months of 2004. EBITDA in the steel segment for the first nine months of 2005 was $189.61 million. The EBITDA margin of the steel segment increased from 6.9% in first half of 2005 to 9.1% in the first nine months of 2005.

Mr. Iorich commented, “The steel segment demonstrated an increase in EBITDA margin and net income over the previously reported period, reflecting the effect of a number of our ongoing improvement programs, including the commissioning of our new sinter plant at Chelyabinsk. We maintained our rolled product output by optimizing usage ratios, while reducing raw steel, pig iron, and coke output. We will continue to further improve usage ratios by putting our new continuous casting facilities into operation. At the same time, we see positive market trends, as steel products output has begun to pick up, and expect to fully restore production levels in the segment in response to growing demand.”

Recent Highlights

After a local water pump station failed on October 23, interrupting the supply of water to Chelyabinsk Metallurgical Plant, production at CMP was temporarily stopped. The plant’s personnel implemented all necessary emergency protocols to limit any negative consequences for the plant’s equipment and managed to fully restart production within two days, minimizing potential losses, which are not expected to exceed $1.5 million.

Mr. Iorich concluded, “The third quarter of 2005 remained a challenging time for us; however, we demonstrated that we are able to address the negative trends we saw this year by increasing sales volumes and the share of value-added products sales, as well as by raising the efficiency of the steel segment. Our overall profitability remains our focus, and we are confident that we will continue to see the positive impact of our ongoing modernization and efficiency-improvement programs in the coming year. We will concentrate on further lowering costs and improving usage ratios. We will also strive to increase our export of coal, thus increasing third-party sales of mining products, and at diversifying our product portfolio towards value-added products in the steel segment. Our extensive vertical integration, combined with management’s efforts and the continuation of our strategy, positions us well for the future.”

Financial Position

Cash expenditure on property, plant and equipment for the first nine months of 2005 amounted to $394.82 million, of which $199.77 million was invested in the mining segment and $195.05 million in the steel segment.

In the first nine months of 2005, Mechel spent $484 million on acquisitions, comprised of $411.2 million for 25%+1 share of Yakutugol Holding Company OAO, $3.5 million for 90.3% of the shares of Port Kambarka OAO, $15.7 million for 25.4% of the shares of Izhstal OAO, $50.2 million for 6.4% of the shares of Chelyabinsk Metallurgical Plant OAO, and $1.5 million for 10.3% of the shares of Korshunov Mining Plant and $1.9 million was spent on acquisition of minority interest in other subsidiaries. 

As of  September 30, 2005, total debt1 was at $386.9 million. Cash and cash equivalents amounted to $312.2 million at the end of the 9 months 2005 and net debt amounted to $(74.7) million (net debt is defined as total debt outstanding less cash and cash equivalents).

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

Correction of 6-Month and 3-Month 2005 Results

Mechel also announced today the correction of its 6-month and 3-month 2005 results. In connection with the preparation for its 9-month 2005 closing, Mechel identified, through its internal processes, an error in not netting off certain trading transactions within the steel segment. These transactions related to a series of trades in which Mechel bought back from one of its customers steel product which was then re-sold to third parties at the same price at which the product had been purchased by Mechel, resulting in no-margin trades. Previously, Mechel had included these resales as revenue, and the amount paid to the initial customer was included in cost of goods sold. As the total amount of such resales and purchases was the same in both periods, this correction has no effect on gross or net operating income, and affects only revenue, cost of goods sold, and margin percentages deriving from such for the consolidated, as well as steel segment, results. There is no effect on any other item in the financial statements, while affected lines should be corrected as follows:

Corrected Numbers for Six Months ended June 30, 2005



As previously reported Corrected by As corrected
Revenue 2,143,349 (64,130) 2,079,219
Cost of goods sold (1,342,932) 64,130 (1,278,802)
Gross margin % - as it was 37.3% (1.2%) 38.5%
Net operating margin 16.9% (0.5%) 17.4%
Consolidated EBITDA margin 19.7% (0.6%) 20.3%
Steel segment
Revenues from external customers 1,549,260 (64,130) 1,485,130
EBITDA margin 6.6% (0.3%) 6.9%

Corrected Numbers for Three Months ended March 31, 2005



As previously reported Corrected by As corrected
Revenue 1,049,383 (9,927) 1,039,456
Cost of goods sold (599,424) 9,927 (589,497)
Gross margin % - as it was 42.9% (0.4%) 43.3%
Net operating margin 21.6% (0.2%) 21.8%
Consolidated EBITDA margin 26.7% (0.2%) 26.9%
Steel segment
Revenues from external customers 735,747 (9,927) 725,820
EBITDA margin 12.7% (0.2%) 12.9%

The management of Mechel will host a conference call today at 11 a.m. New York time (4 p.m. London time, 7 p.m. Moscow time) to review Mechel’s financial results and comment on current operations.  The call may be accessed via the Internet at https://www.mechel.com, under the Investor Relations section.

***

Attachments to the 9M 2005 Earnings Press Release

Attachment A

Non-GAAP financial measures. This press release includes financial information prepared in accordance with accounting principles generally accepted in the United States of America, or US GAAP, as well as other financial measures referred to as non-GAAP. The non-GAAP financial measures should be considered in addition to, but not as a substitute for, the information prepared in accordance with US GAAP.

Earnings Before Interest, Depreciation and Amortization (EBITDA) and EBITDA margin. EBITDA represents earnings before interest, depreciation and amortization. EBITDA margin is defined as EBITDA as a percentage of our net revenues. Our EBITDA may not be similar to EBITDA measures of other companies; is not a measurement under accounting principles generally accepted in the United States and should be considered in addition to, but not as a substitute for, the information contained in our consolidated statement of operations. We believe that EBITDA provides useful information to investors because it is an indicator of the strength and performance of our ongoing business operations, including our ability to fund discretionary spending such as capital expenditures, acquisitions and other investments and our ability to incur and service debt. While interest, depreciation and amortization are considered operating costs under generally accepted accounting principles, these expenses primarily represent the non-cash current period allocation of costs associated with long-lived assets acquired or constructed in prior periods. Our EBITDA calculation is commonly used as one of the bases for investors, analysts and credit rating agencies to evaluate and compare the periodic and future operating performance and value of companies within the metals and mining industry. EBITDA can be reconciled to our consolidated statements of operations as follows:


US$ thousands 9M 2005 9M 2004
Net income 314,717 420,815
Add:

Depreciation, depletion and amortization 115,375 99,709
Interest expense 43,669 42,007
Income taxes 95,255 56,178
Consolidated EBITDA 569,016 618,709

EBITDA margin can be reconciled as a percentage to our Revenues as follows:


US$ thousands 9M 2005 9M 2004
Revenue, net 2,910,394 2,474,854
EBITDA 569,016 618,709
EBITDA margin 19.6% 25.0%

 

MECHEL OAO
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2005 AND DECEMBER 31, 2004


(in thousands of U.S. dollars, except share amounts) September 30,
2005
December 31,
2004
ASSETS



Cash and cash equivalents $ 312 239 $ 1 024 761
Accounts receivable, net of allowance for doubtful accounts
161 012
135 597
Due from related parties
234
16 458
Inventories
449 091
568 545
Deferred cost of inventory in transit
91 904
0
Current assets of discontinued operations
997
1 247
Deferred income taxes
7 531
7 491
Prepayments and other current assets
382 131
349 106
Total current assets
1 405 139
2 103 205





Long-term investments in related parties
411 975
9 270
Other long-term investments
21 498
66 663
Non-current assets of discontinued operations
100
165
Intangible assets
5 445
6 379
Property, plant and equipment, net
1 432 580
1 274 722
Mineral reserves, net
248 553
166 483
Deferred income taxes
20 097
11 940
Goodwill
39 441
39 441
Total assets $ 3 584 828 $ 3 678 268





LIABILITIES AND SHAREHOLDERS' EQUITY



Short-term borrowings and current maturities of long-term debt $ 170 508 $ 348 880
Accounts payable and accrued expenses:



Advances received
75 617
94 964
Accrued expenses and other current liabilities
70 193
69 847
Taxes and social charges payable
164 929
145 527
Trade payable to vendors of goods and services
209 744
186 233
Due to related parties
2 145
2 048
Current liabilities of discontinued operations
11
30
Deferred income taxes
25 415
26 521
Asset retirement obligation
6 109
8 219
Deferred revenue
91 300
760
Pension obligations
6 796
6 261
Dividends payable
87
-
Total current liabilities
822 854
889 290





Restructured taxes and social charges payable, net of current portion
56 261
87 364
Long-term debt, net of current portion
216 390
216 113
Deferred income taxes
103 651
105 330
Pension obligations
42 080
40 720
Asset retirement obligation
65 173
66 758
Other long-term liabilities
87
240





Commitments and contingencies
-
-





Minority interests
139 952
214 824





SHAREHOLDERS' EQUITY



Common shares
133 507
133 507
Treasury shares, at cost
( 4 187)
( 4 187)
Additional paid-in capital
304 404
304 404
Other comprehensive income
53 875
93 687
Retained earnings
1 650 781
1 530 218
Total shareholders' equity
2 138 380
2 057 629
Total liabilities and shareholders' equity $ 3 584 828 $ 3 678 268

 

MECHEL OAO
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIODS ENDED SEPTEMBER 30, 2005 AND 2004


(in thousands of U.S. dollars) 9 months ended September 30,


2005
2004
Cash Flows from Operating Activities



Net income
314 717
420 815
Adjustments to reconcile net income to net cash provided by operating activities:



Depreciation
106 368
78 104
Depletion and amortization
9 007
19 488
Foreign exchange (gain) loss
35 231
(1 095)
Deferred income taxes
(9 193)
(8 803)
(Recovery of) provision for doubtful accounts
7 580
1 986
Inventory write-down
1 943
488
Accretion expense
1 806
2 946
Minority interest
3 779
16 858
(Income) loss from equity investments
(9 979)
(3 831)
Non-cash interest on long-term tax and pension liabilities
8 176
14 160
Loss (gain) on sale of property, plant and equipment
957
(1 953)
(Gain) loss on sale of long-term investments
(1 669)
2 394
Loss from discontinued operations
403
9 893
Gain on accounts payable with expired legal term
(2 755)
-
Gain on forgiveness of fines and penalties
(15 863)
(17 958)
Stock-based compensation expense
-
1 400
Amortization of capitalized costs on bonds issue
1 171
1 140
Pension service cost and amortization of prior year service cost
818
423
Net change before changes in working capital
452 497
536 455
Changes in working capital items, net of effects from acquisition of new subsidiaries:



Accounts receivable
17 712
(34 267)
Inventories
111 745
(135 505)
Trade payable to vendors of goods and services
5 910
21 998
Advances received
(13 016)
69 971
Accrued taxes and other liabilities
24 123
(47 601)
Settlements with related parties
13 936
3 138
Current assets and liabilities of discontinued operations
(259)
(8 169)
Deferred revenue and cost of inventory in transit, net
(1 354)
(20 849)
Other current assets
(57 787)
(97 455)
Net cash provided by operating activities
553 507
287 715





Cash Flows from Investing Activities



Acquisition of subsidiaries, less cash acquired
(3 497)
(53 142)
Acquisition of minority interest in subsidiaries
(69 198)
(16 282)
Investment in Yakutugol
(411 182)
-
Investments in other non-marketable securities
(7 039)
(1 665)
Proceeds from disposal of non-marketable equity securities
1 389
1 667
Proceeds from disposals of property, plant and equipment
1 838
1 663
Purchases of property, plant and equipment
(303 804)
(192 698)
Purchase of mineral licenses
(91 012)

-
Net cash used in investing activities
(882 505)
(260 457)





Cash Flows from Financing Activities



Proceeds from short-term borrowings
763 040
874 621
Repayment of short-term borrowings
(938 222)
(823 724)
Dividends paid
(194 154)
(5 573)
Proceeds from long-term debt
3 124
3 059
Repayment of long-term debt
(12 536)
(29 454)
Net cash provided by (used in) financing activities
(378 748)
18 929





Effect of exchange rate changes on cash and cash equivalents
(4 776)
186





Net increase (decrease) in cash and cash equivalents
(712 522)
46 373





Cash and cash equivalents at beginning of year
1 024 761
19 303
Cash and cash equivalents at end of period
312 239
65 676

 

MECHEL OAO
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004


(in thousands of U.S. dollars, except share amounts) 9 months ended September 30,
    2005   2004
Revenue, net
2 910 394
2 474 854
Cost of goods sold
-1 852 054
-1 506 660
Gross margin
1 058 340
968 194
Selling, distribution and operating expenses:



Selling and distribution expenses
-341 689
-254 963
Taxes other than income tax
-70 427
-35 993
Accretion expenses
-1 806
-2 945
Provision for doubtful accounts
-7 580
-1 986
General, administrative and other operating expenses
-184 811
-162 943
Total selling, distribution and operating expenses
-606 313
-458 830
Operating income
452 027
509 364
Other income and (expense):



Income from equity investees
9 979
3 831
Interest income
9 327
7 920
Interest expense
-43 669
-42 007
Foreign exchange gain (loss)
-35 231
1 095
Other income, net
21 721
23 542
Total other income and (expense)
-37 873
-5 619
Income before income tax, minority interest, discontinued operations, extraordinary gain and change in accounting principle
414 154
503 745





Income tax expense
-95 255
-56 178
Minority interest in (income) loss of subsidiaries
-3 779
-16 858
Income from continuing operations
315 120
430 709
Income (loss) from discontinued operations, net of tax
-403
-9 894
Net income
314 717
420 815

 

 

 

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