Russian steel manufacturer Mechel OAO (MTL) swung to a first quarter 2010 net income of $82.6 million from a net loss of $690 million in the year-ago period. Revenues in the first quarter leaped 61.1% year-over-year to $1.9 billion on higher sales volume, particularly coking coal. Sales were previously impacted by weak demand for steel and coking coal as well as foreign exchange losses. Higher revenues translated into higher operating income of $147.6 million, which also grew in triple digits.
Segment performance
Mining Segment: Mechel’s first quarter profitability was primarily driven by strong performance in the Mining segment, which deals with coking coal and iron ore concentrates. For the first quarter, operating income increased 66.6% to $83.3 million. Quarterly sales for the segment jumped 34% year-over-year to $461.2 million and formed 24.3% of the total revenue. The company produced 2.36 million tons of coking coal, up 230% from the prior year level. Mechel has been pumping its coking coal production at its Elga coal deposit under its Yakutugol subsidiary in eastern Siberia.
Steel mining segment: Revenues from the Steel mining segment made up 61% of the total revenue, soaring 80.2% year-over-year to $1.2 million despite a weak demand in the Russian markets. Higher demand in the foreign markets especially in South-East Asia and Middle East offsets the subdued performance in the domestic markets. The segment reported operating income of $42.7 million versus operating loss of $85.2 million in the first quarter of 2009. Coke and Pig iron production increased 76% and 53%, respectively in the first quarter while production of the primary metal increased 30% to 1.4 million tons.
Ferroalloy segment: Ferroalloy segment sales amounted to $95.0 million, up 76.3% from the year-ago level. The segment constituted 5% of consolidated revenue. Despite good growth in revenues, the segment reported operating losses in the quarter. Operating loss of $6.7 million was however a 73% improvement from the year-ago loss of $24 million. Mechel saw improving demand for stainless steel particularly in the car and equipment manufacturing and household equipment market. This drove demand for nickel and chrome as well. Chromite ore concentrate and nickel output increased 114% and 37% respectively during the quarter.
Power segment: The Power segment produced 9.8% of revenues, which totaled $15.4 million, up 34.2% year over year. Operating income for the segment in the first quarter increased 73% to $21.0 million. Electric power generation improved 13% while heat power generation was up by 8%.
Financial Position
Mechel has a large capital-spending program. The company reported capital expenditure of $193.8 million in the first quarter of 2010. Total debt was about $6.3 billion compared with cash and cash equivalent of $335.6 million as of Mar 31, 2010.
Outlook
Encouraged by the strong performance in the first quarter, Mechel predicts solid growth in the rest of 2010. Refinancing of debt helped Mechel reduce its debt service costs, which improved its financial performance during the quarter. Higher debt resulting in a substantial interest burden had acted as a drag on the company’s profitability.
Besides, Mechel has further strengthened its position in the steel market by acquiring the Laminorul Braila plant in Romania. Mechel already owns five metallurgical plants in Romania. Mechel expects the mining segment’s coking coal to further drive the 2010 earnings.
Currently, we have a Neutral recommendation on Mechel.
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