Wednesday, July 23, 2008

Bookkeeping: Closing Mechel (MTL)

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There is a lot of drama going on at Mechel (MTL) right now, and I don't like drama. On top of my findings from this weekend [Mechel Profits Appear to Be Coming Under Scrutiny] was yesterday's news that (without an analyst report to read over) in my eyes looked like Mechel succumbing to the government pressure and "concluding long term contracts" with Russian steelmakers. In my eyes that means - lower profits and forced to stay in the domestic market as opposed to selling their coal in the global marketplace. I could be wrong but without access to an analyst who follows the company week in and week out that is how I read it.
  • Mechel OAO (NYSE: MTL - News), one of the leading Russian mining and metals companies, announces that it has concluded long term contracts to supply coking coal to a number of Russian customers and expects to secure additional contracts in the future.
  • Mechel has concluded agreements on supplying coking coal to major Russian steel plants for a fixed price for the third quarter of this year. Signing such agreements increases the transparency and predictability of the market, and has benefits for both coking coal producers and consumers. Currently, Mechel is considering the possibility of concluding even longer term contracts on the domestic market.
Even worse is that last sentence. Not only are they beholden for the next quarter they are "considering" even longer term contracts on the domestic market. Again, this has the hands of the government all over it and hurts profitability in my eyes. I don't know the terms of said contracts but I can only conclude they are lower than the open market prices. With the stock now breaking below the 200 day moving average of $38, we appear to have a broken stock if there is not a quick rebound back above this key support level.

Mechel is among my favorites but that assumed they would be able to maximize profits as a freely run company. These recent news items, in my opinion, appears to be a structural change. That does not mean in the long run this company won't prosper or in fact this is a small bump in the road - I could be misreading it. But with the chart breaking down and with what appears to be a material change in my outlook, I am going to stand to the side for now until the smoke clears. Again, for all I know I might be selling at the bottom but I don't want to hemorrhage money and better safe than sorry - I always would rather give up potential gains than kiss away capital. Even with my "favorites" - no room for emotions in the stock market. Perhaps *I* am marking the bottom with my sell, being one of the biggest bulls in this name, or "all the bad news" is now priced in. Even if they drop from 60% growth to 30% growth, this is still a sub 10 PE stock. We can always buy back at a higher price once things clear up. For all I know that could be tomorrow if the chart improves.

We've owned Mechel since Nov 5, 2007 and despite the recent demolishing of the stock price walk away with a $18,000 profit. We're selling at the ridiculous price of $37.50s.

No position


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