Wednesday, December 12, 2007

Mechel (MTL) Reports Earnings, Considers Mining IPO

Mechel (MTL) the Russin iron ore, coal, and steel company had an earnings report today and the good news continues. The company is reporting its first 9 months together in the report issued today.
  • Net revenue for the first nine months of 2007 amounted to $4.6 billion, as compared to $3.1 billion in the first nine months of 2006. Operating income was $1.1 billion, or 22.6% of net revenue, compared to operating income of $483.0 million, or 15.4% of net revenue, in the prior year period. The main contributing factors were strong market demand and related increases in selling prices for all of Mechel's major product groups, increase in production of high value-added products as well as a decrease in cost per tonne on some of the Company's core product groups.
  • For the first nine months of 2007, Mechel's consolidated net income nearly doubled to $706.0 million, or $5.09 per ADR ($1.70 per diluted share), compared to consolidated net income of $372.1 million, or $2.76 per ADR ($0.92 per diluted share) for the year-ago period.
The companies business is essentially mining and steel. Below are results from mining (mostly coal, iron ore, and a bit of nickel)
  • Mining segment revenue from external customers for the first nine months of 2007 totaled $1.3 billion, or 27% of consolidated net revenue, an increase of 33% over segment revenue from external customers of $952.3 million, or 30% of consolidated net revenue, for the first nine months of 2006.
  • Operating income in the mining segment for the first nine months of 2007 more than tripled to $604.1 million, or 34.1% of segment revenues, compared to total operating income of $185.5 million, or 15.5% of segment revenues, a year ago.
  • Igor Zyuzin commented on the results of the mining segment: "Growing demand and positive pricing trends in the global coal and iron ore markets continued into the third quarter. As a result of our efforts aimed at expanding the mining segment and optimizing technical processes at our mining facilities, we increased coal production by 8% and nickel by 22%, as compared with the same period of last year. The increase in production output and the strong pricing environment enabled Mechel's mining segment to record operating profit three times higher than operating income for the same period of last year. Today we are witnessing further price increases for coal products on the back of rising demand in Asian markets and infrastructural challenges faced by major coal exporting counties
Results from steel
  • Revenue from external customers in Mechel's steel segment for the first nine months of 2007 increased by 45.2% to $3.1 billion, or 67.3% of consolidated net revenue, from $2.2 billion, or 68.6% of consolidated net revenue, for the first nine months of 2006.
  • In the first nine months of 2007, the steel segment's operating income increased by 67.6% and reached $485.1 million, or 15.2% of total segment revenues, compared to operating income of $289.4 million, or 13.3% of total segment revenues a year ago.
  • Igor Zyuzin commented: "On the whole, we are pleased with the overall performance of Mechel's steel segment during the first nine months of 2007. Favorable pricing environment allowed for a significant increase in net income compared to the same period of last year. In line with our strategy of increasing the share of high value added products, we reduced the output of billets and scaled up the production of hardware.
And they have expanded to start a small(ish) energy portion of the business
  • Igor Zyuzin commented: "This is the first time when we have separately disclosed financial and operating information for the Mechel Energy segment. Since the beginning of 2007, the Company has acquired a number of energy assets, extending its presence in the energy business. As a result, we established an integrated energy division with its own raw material base, power generating facilities and extensive client base. We consider this business to be very promising, given rising energy consumption in Russia and the upcoming deregulation of the electricity market.
Reuters is reporting, Mechel is considering spinning off the its mining division into its own IPO
  • Russian steel maker Mechel is considering an initial public offering of its mining business as it prepares for a second consecutive year of record profits, the company's chief executive said on Tuesday.
  • New York-listed Mechel (MTL), Russia's sixth-largest steel maker, reported net profit of $706 million for the first nine months of 2007, up 89.7 percent year-on-year, as it produced more coal, steel and nickel and sold it at higher prices.
  • "We are considering the option of listing our mining sector on exchanges and are now engaged in this process," Mechel Chief Executive Igor Zyuzin told a conference call. "We don't rule out carrying this out in the near future."
  • Mechel plans to invest $2.7 billion by 2011 -- $1.5 billion in steel and $1.2 billion in mining -- to boost production.
While I find it difficult to invest in Russia due to political risk (entire companies have been converted to state owned businesses in a blink of an eye), Mechel is just too appealing to stay away from. It covers a lot of areas I like from coal to iron ore (pricing power), and Russia is a neighbor to China, much like Australia is so you get that side benefit from any commodity business. I still think this is a major undiscovered gem.

You can read my original basis for investing in Mechel back in early November here. The company held up very well in the November correction, despite a huge run up earlier in the year, and although I have pared back my position in this big rally, I wish to buy more on any decent pullbacks. The chart is a thing of beauty, and combined with fundamentals like this...

Long Mechel in fund, no personal position

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