Russian steel and coking coal producer Mechel OAO (MTL) recently announced that its $1 billion credit facility with Gazprombank has been doubled to six years with a reduced interest rate. Mechel will begin repayment of the facility, which was used to finance operations and pay down short-term debt, in three years. Gazprombank is part of energy giant Gazprom’s business empire.
In February 2009, Gazprombank had opened credit lines totaling $1 billion for Mechel Mining’s subsidiaries. The credit facilities provided were used to finance the group’s current operations, which allowed it to repay a part of its short-term debt.
Mechel Steel, a leading mining and steel company in Russia, is focusing on growth and cost-cutting measures. The company has entered into various agreements to supply its rail products to large Russian metal mining companies. It has established itself as one of the largest producers of coking coal in the world by fully acquiring the U.S. entities Bluestone Industries Inc., Dynamic Energy Inc. and JCJ Coal Group LLC in West Virginia. Mechel expects to own coal reserves up to 725 million tons in the U.S.
Mechel has recently fully acquired Yakutugol, a coal company in Russia, and also bought a controlling 68.86% stake in another Russian coal company, Elgaugol. The companies were the largest standalone coal producers in Russia prior to their stake purchases by Mechel. Yakutugol produces 10 million tons of coal per year, most of which is sold to customers in Japan and Korea. The company plans to increase this output to 15 million tons and redirect it to the domestic market.
However, Mechel is witnessing weak prices and fragile demand across all its segments following the slowdown in the global economy. Its large capital-spending program, high debt and substantial interest burden are concerns. We remain uneasy about its already high debt, considering its tight cash position. We maintain our Neutral recommendation on the stock.
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