Press Releases

Mechel announces results for the first quarter of 2005

Moscow, Russia - August 18, 2005 - Mechel OAO (NYSE: MTL), a leading Russian integrated mining and steel group, today announced results for the first quarter ended March 31, 2005.

 -- Revenues increase 60.1% to $1.05 billion --
-- Operating income rises 180.8% to $226.8 million --
-- Net income increases 219.6% to $169.5 million, $1.26 per ADR or $0.42 per diluted share --

US$ thousand 1Q 2005 1Q 2004 Change Y-on-Y
Revenues 1,049,383 655,340 60.1%
Net operating income 226,773 80,763 180.8%
Net operating margin 21.61% 12.32% -
Net income 169,512 53,033 219.6%
EBITDA (1) 279,654 115,256 142.6%
EBITDA margin 26.65% 17.59% -


(1) See Attachment A.

Vladimir Iorich, Mechel’s Chief Executive Officer, commented:

“First quarter 2005 was a very successful period for Mechel, one in which we saw continued strong operational and financial performance, particularly from our mining segment as raw material prices remained at peak levels. The demand for our mining and steel products, as well as average realized prices and selling volumes, remained high throughout most of the first quarter both domestically and internationally, yielding solid results. However, towards the end of the quarter we began to see increasingly difficult market conditions for our products, a situation we expect to experience for the remainder of this year. Although I believe that Mechel is well-positioned for the future given its status as one of the world’s most integrated mining and steel companies, the current slowdown in the market will almost certainly make the first quarter the best quarter of 2005 for us.”

Consolidated Results

Net revenue in the first quarter of 2005 rose 60.1% to $1.05 billion from $655.3 million in the first quarter of 2004. Driven by high product pricing and steps Mechel has taken to reduce operating costs, gross margin rose 103.1% to $449.9 million, or 42.9% of net revenue, compared to $221.5 million, or 33.8% of net revenue for the first quarter of 2004. Operating income was $226.8 million, or 21.6% of net revenue, versus operating income of $80.8 million, or 12.3% of net revenue, in the first quarter of 2004, an increase of 180.8%.

For the first quarter of 2005, Mechel reported consolidated net income of $169.5 million, or $1.26 per ADR ($0.42 per diluted share), a 219.6% increase compared with net income of $53.0 million, or $0.43 per ADR ($0.14 per diluted share), for the first quarter of 2004.

Consolidated EBITDA rose 142.7% to $279.7 million in the first quarter of 2005 from $115.2 million a year ago. Please see the attached tables for a reconciliation of consolidated EBITDA to net income.

Mining Segment Results

S$ thousand 1Q 2005 1Q 2004 Change Y-on-Y
Revenues from external customers 313,636 140,673 123.0%
Operating income 184,157 22,590 715,2%
Net income 146,262 8,314 1,659.2%
EBITDA 185,959 33,320 458.1%
EBITDA margin 59.30% 23.69% -


Mining segment output

Product 1Q 2005, thousand tonnes 1Q 2005 vs 1Q 2004, %
Coal 4,084 + 12.8
Coking coal 2,337 + 12.3
Steam coal 1,747 + 13.4
Iron ore concentrate 1,041 + 14.3
Nickel 2.4 - 16.8


Mining segment revenue for the first quarter of 2005 totaled $313.6 million, or 29.9%, of consolidated net revenue, an increase of 123.0% over segment revenue of $140.6 million, or 21.5%, of consolidated net revenue, in the first quarter of 2004. The increase in revenues reflects growth in output, strong market positions, and an increase in sales of mining products to third parties.

Operating income for the first quarter of 2005 in the mining segment rose 715.2% to $184.2 million, or 58.7%, of total segment revenues, compared to operating income of $22.6 million, or 16.6%, of total segment revenues a year ago. This increase in profitability reflects Mechel’s tight control over costs and overall efficiency of mining operations. EBITDA in the mining segment for the first quarter of 2005 was $186.0 million, 458.1% higher than segment EBITDA of $33.4 million in the first quarter of 2004. The EBITDA margin of the mining segment also increased to 59.3% from 23.7%.

Mr. Iorich commented on the results of the mining segment: “During the first quarter we still saw a good pricing environment for our mining products. With high-quality products and a broad customer base, Mechel was able to leverage market conditions into strong operating performance within this segment, more than doubling the EBITDA margin. In addition, during the first quarter of 2005 and further into the year, we continued to execute our strategy to further expand our mining operations, acquiring a 25%+1 stake in Yakutugol, thus gaining access to a new promising region with substantial coal and iron ore reserves. Our primary area of difficulty in the mining segment, our nickel operations, were an issue of a particular focus for us, as the existing coke-based technology and significant work to upgrade equipment resulted in a decline in profitability and output. We view technological upgrade of this facility and reduction of its dependence on coke so as to lower production costs as the key to its profitable operation.”

Steel Segment Results

US$ thousand 1Q 2005 1Q 2004 Change Y-on-Y
Revenues from external customers 735,747 514,667 43.0%
Operating income 42,616 58,172 -26.7%
Net income 23,250 44,719 -52.0%
EBITDA (1) 93,695 81,936 14.3%
EBITDA margin (1) 12.73% 15.92% -


Steel segment output

Product 1Q 2005, thousand tonnes 1Q 2005 vs 1Q 2004, %
Coke 718 - 1.2
Pig iron 994 + 17.4
Steel 1,615 + 14.0
Rolled products 1,331 + 19.7
Hardware 145.2 + 10.5


Revenue from Mechel’s steel segment increased 43.0% in the first quarter of 2005 from $514.7 million to $735.7 million, or 70.11%, of consolidated net revenue, as compared to the first quarter of 2004. This revenue growth was driven by increasing output and demand.

In the first quarter of 2005, the steel segment generated operating income of $42.6 million, or 5.8%, of total segment revenues, a decrease of 26.7% over operating income of $58.1 million, or 11.3%, of total segment revenues in the first quarter of 2004. EBITDA in the steel segment for the first quarter of 2005 was $93.7 million, an increase over steel segment EBITDA of $81.9 million in the first quarter of 2004. EBITDA margin of the steel segment decreased from 15.9% to 12.7%. This primarily resulted from increasing raw material prices and changing environment for steel products.

Mr. Iorich commented, “In a declining pricing environment we saw a decrease in EBITDA margin and operating income of the segment as increasing raw material costs shifted profitability in the group from the steel to the mining segment. Throughout 2005 we have been concentrating our efforts on efficiency improvement and controlling costs. Recently, for example, we made a test run of the second line of the new sinter plant at Chelyabinsk Metallurgical Plant, which will further improve usage ratios and cost-efficiency. However, we expect that this shift in profitability will continue to be the case through the remainder of this year.”

Recent Highlights

In 2005 Mechel has taken a number of actions to continue the successful execution of its operating strategy and enhance its position in the Russian mining and steel and markets. Some of these actions include:

  • A number of transactions that have significantly expanded the capabilities of Mechel’s coal segment. These include various successes at license auctions to develop coal deposits in the Olzherasskaya Mine plot, Razvedochny plot, Sorokinsky plot, Erunakovskaya-1 Mine and Erunakovskaya-3 Mine plots. These transactions have increased Mechel’s total reserves by 1.15 billion tonnes, according to Russian reserve valuation standards, of which the vast majority is coking coal reserves of high quality.
  • Mechel also won an auction for the sale of ordinary shares in Yakutugol OAO that constitute 25 % + 1 share of the company's charter capital for approximately $411.2 million. Yakutugol’s annual output is approximately 9 million tonnes, of which approximately 5.4 million tonnes is coking coal. The acquisition further expands Mechel’s mining holdings while also increasing its exposure to the Asia-Pacific region.
  • Continued progress on Mechel’s commitment to investing in its operations to reduce operating costs and increase efficiency. In April, Mechel announced the start-up of the first line of a new, four-line sinter plant at its Chelyabinsk Metallurgical Plant subsidiary. The new plant will increase Mechel’s ability to internally source its iron ore requirements from its iron ore mine, Korshunov Mining Plant. Once fully operational, the plant, which will cost approximately $154 million, will generate approximately $70 million in annual cost savings.
  • To diversify the cargo flow of our coal and steel products and to improve our logistics, Mechel acquired 90.36% stake in Kambarka Port OAO - one of Russia’s largest river ports. The facility specializes in the transshipment of bulk cargo, including ore, iron ore concentrate and coal.

Mr. Iorich concluded, “Overall, the first quarter of 2005 was one of our most successful periods ever. We were able to utilize favorable market conditions and diligently execute our operating strategy. However, starting from March, we have been seeing decreasing price trends for our products, and we intend to remain focused on controlling costs and enhancing operational efficiencies across both segments, and believe that our position as an integrated producer, our diversity of products and markets, will allow us to flexibly react to the changing environment, positioning us well for the future.”

Financial Position

First quarter cash expenditure on property, plant and equipment amounted to $133.45 million, of which $92.9 million was invested in the steel segment and $40.6 million in the mining segment.

In 2005 Mechel has spent $463 million on acquisitions, comprised of $411.2 million for 25%+1 of the shares of Yakutugol Holding Company OAO, $3.5 million for 90.3% of the shares of Port Kambarka OAO, $15.7 million for 24.96% of the shares of Izhstal OAO, $32.3 million for 5.62% of the shares of Chelyabinsk Metallurgical Plant OAO and $0.3 million for 4.5% of the shares of Korshunov Mining Plant.

As of March 31, 2005, total debt was at $534.3 million. Cash and cash equivalents amounted to $634.7 million at the end of the first quarter of 2005 and net debt amounted to $(100.4) million (Net debt is defined as total debt outstanding less cash and cash equivalents)

The management of Mechel will host a conference call today at 10 a.m. New York time (3 p.m. London time, 6 p.m. Moscow time) to review Mechel’s financial results and comment on current operations. The call may be accessed via the Internet at:, under the Investor Relations section.

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


Mechel OAO
Irina Ostryakova
Director of Communications
Phone: 7-095-258-18-28
Fax: 7-095-258-18-38


Mechel is one of the leading Russian mining and metals companies. Mechel unites producers of coal, iron ore, nickel, steel, rolled products, and hardware. Mechel products are marketed domestically and internationally.


Some of the information in this press release may contain projections or other forward-looking statements regarding future events or the future financial performance of Mechel, as defined in the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. We wish to caution you that these statements are only predictions and that actual events or results may differ materially. We do not intend to update these statements. We refer you to the documents Mechel files from time to time with the U.S. Securities and Exchange Commission, including our Form 20-F. These documents contain and identify important factors, including those contained in the section captioned "Risk Factors" and "Cautionary Note Regarding Forward-Looking Statements" in our Form 20-F, that could cause the actual results to differ materially from those contained in our projections or forward-looking statements, including, among others, the achievement of anticipated levels of profitability, growth, cost and synergy of our recent acquisitions, the impact of competitive pricing, the ability to obtain necessary regulatory approvals and licenses, the impact of developments in the Russian economic, political and legal environment, volatility in stock markets or in the price of our shares or ADRs, financial risk management and the impact of general business and global economic conditions.

Attachments to the 1Q 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 1Q 2005 1Q 2004
Net income 169,512 53,033
Depreciation, depletion and amortization 40,727 29,895
Interest expense 16,433 14,876
Income taxes 52,982 17,452
Consolidated EBITDA 279,654 115,256


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

US$ thousands 1Q 2005 1Q 2004
Revenue, net 1,049,383 655,340
EBITDA 279,654 115,256
EBITDA margin 26.65% 17.59%


AS OF MARCH 31, 2005 AND DECEMBER 31, 2004

(in thousands of U.S. dollars, except share amounts)   March 31, 2005   December 31, 2004
Cash and cash equivalents $ 634,668 $ 1,024,761
Accounts receivable, net of allowance for doubtful accounts of $19,616 as at 31/03/2005, and $20,850 as at 31/12/2004   217,233   135,597
Due from related parties   11,304   16,458
Inventories   634,248   568,545
Deferred cost of inventory in transit   -   29,554
Current assets of discontinued operations   1,060   1,247
Deferred income taxes   9,757   7,491
Prepayments and other current assets   386,502   349,107
Total current assets   1,894,772   2,103,206
Long-term investments in related parties   428,772   9,270
Other long-term investments   10,852   66,663
Due from related parties   -   -
Non-current assets of discontinued operations   162   165
Intangible assets   5,854   6,379
Property, plant and equipment, net   1,365,384   1,274,722
Mineral reservs, net   164,846   166,483
Deferred income taxes   11,942   11,940
Goodwill   39,441   39,441
Total assets $ 3,922,025 $ 3,678,269
Short-term borrowings and current portion of long-term debt $ 316,410 $ 348,880
Accounts payable and accrued expenses:        
Advances received   148,538   94,964
Accrued expenses and other current liabilities   78,457   70,607
Taxes and social charges payable   189,270   145,527
Trade payable to vendors of goods and services   225,609   186,233
Due to related parties   1,333   2,050
Current liabilities of discontinued operations   127   30
Deferred income taxes   27,602   26,521
Asset retirement obligation   8,104   8,219
Deferred revenue   760   52,915
Pension obligations   6,678   6,261
Total current liabilities   1,002,128   889,292
Restructured taxes and social charges payable, net of current portion   68,491   87,364
Long-term debt, net of current portion   217,881   216,113
Due to related parties   0   0
Defined income taxes   113,379   105,330
Pension obligations   41,267   40,720
Asset retirement obligation   66,559   66,758
Other long-term liabilities   202   239
Commitments and contingencies   -   -
Minority interests   190,903   214,824
Common shares (10 Russian Rubles par value; 497,969,086 shares authorized, 416,270,745 shares issued and 403,118,680 shares outstanding at March 31, 2005 and December 31, 2004)   133,507   133,507
Treasury shares, at cost (13,152,065 and 16,790,271 common shares at December 31, 2004 and December 31, 2003, respectively)   -4,187   -4,187
Additional paid-in capital   304,404   304,404
Other comprehensive income   87,760   93,687
Retained earnings    1,699,731   1,530,218
Total shareholders' equity   2,221,215   2,057,629
Total liabilities and shareholders' equity $ 3,922,025 $ 3,678,269


(in thousands of U.S. dollars) For the three months ended March 31, 2005 For the three months ended March 31, 2004
Cash Flows from Operating Activities        
Net income $ 169,512 $ 53,033
Adjustments to reconcile net income to net cash provided by operating activities:        
Depreciation   37,499   26,011
Depletion and amortization   3,228   3,884
Foreign exchange (gain) loss   5,985   (4,478)
Deferred income taxes   4,293   (2,657)
(Recovery of) provision for doubtful accounts   11,175   1,193
Inventory write-down   516   220
Accretion expense   496   982
Impairment of goodwill     -
Minority interest   2,226   (827)
Effect of change in accounting principle     -
(Income) loss from equity investments   (498)   (1,302)
Non-cash interest on long-term tax and pension liabilities   2,169   1,414
Loss (gain) on sale of property, plant and equipment   (587)   5,301
(Gain) loss on sale of long-term investments   (189)   2,282
Loss from discontinued operations   186   4,424
Gain on forgiveness of fines and penalties   (14,600)   (5,535)
Stock-based compensation expense   1   1,200
Amortization of capitalized costs on bonds issue   381   384
Pension service cost and amortization of prior year service cost   547  
Extraordinary (gain)   -   -
Net change before changes in working capital   222,339   86,329
Changes in working capital items, net of effects from acquisition of new subsidiaries:        
Accounts receivable   (107,600)   (18,504)
Inventories   (64,041)   (11,584)
Trade payable to vendors of goods and services   48,038   13,839
Advances received   53,687   57,623
Accrued taxes and other liabilities   50,736   (34,242)
Settlements with related parties   4,400   5,530
Current assets and liabilities of discontinued operations   97   (5,932)
Deferred revenue and cost of inventory in transit, net   (716)   1,426
Other current assets   (10,180)   (12,224)
Net cash provided by operating activities   217,120   82,261
Cash Flows from Investing Activities        
Acquisition of minority interest in subsidiaries   (31,503)   (4)
Investment in Yakutugol   (411,182)   -
Acquisition of Port Posiet   -   (29,462)
Investments in other non-marketable securities   (1,934)   (1,877)
Proceeds from disposal of non-marketable equity securities   1,141   123
Proceeds from disposals of property, plant and equipment   642   3,244
Purchases of property, plant and equipment   (133,450)   (54,513)
Net cash provided from (used in) investing activities   (576,286)   (82,489)
Cash Flows from Financing Activities        
Proceeds from short-term borrowings   372,507   244,950
Repayment of short-term borrowings   (404,732)   (225,507)
Dividends paid   -   (285)
Proceeds from long-term debt   5,589   2,097
Repayment of long-term debt   (4,217)   (7,089)
Net cash provided by financing activities   (30,853)   14,166
Effect of exchange rate changes on cash and cash equivalents   74   (269)
Net increase (decrease) in cash and cash equivalents   (390,093)   14,207
Cash and cash equivalents at beginning of quarter   1,024,761   19,279
Cash and cash equivalents at end of year $ 634,668 $ 33,486
Supplementary cash flow information:        
Interest paid, net of capitalized $ (9,897) $ (9,204)
Income taxes paid  $ (48,059) $ (29,840)


(in thousands of U.S. dollars, except share amounts)   For three months ended March 31, 2005   For three months ended March 31, 2004
Revenue, net $ 1,049,383 $ 655,340
Cost of goods sold   (599,424)   (433,857)
Gross margin   449,959   221,483
Gross margin, %   42.88%   33.80%
Selling, distribution and operating expenses:        
Selling and distribution expenses   (115,250)   (77,686)
Taxes other than income tax   (33,335)   (15,232)
Goodwill impairment   -   -
Accretion expenses   (496)   (982)
Provision for doubtful accounts   (11,175)   (1,994)
General, administrative and other operating expenses   (62,930)   (44,826)
Total selling, distribution and operating expenses   (223,186)   (140,720)
Operating income   226,773   80,763
Operating income, %   21.61%   12.32%
Other income and (expense):        
Income (loss) from equity investees   498   1,302
Interest income   4,817   870
Interest expense   (16,433)   (14,876)
Other income, net   15,236   1,545
Total other income and (expense)   (1,867)   (6,681)
Income before income tax, minority interest, discontinued operations, extraordinary gain and changes in accounting principles   224,906   74,082
Effective tax rate   -23.56%   -23.56%
Income tax expense   (52,982)   (17,452)
Minority interest in (income) loss of subsidiaries   (2,226)   827
Income from continuing operations   169,698   57,457
Income (loss) from discontinued operations, net of tax   (186)   (4,424)
Extraordinary gain, net of tax   -   -
Change in accounting principle, net of tax    -   -
Net income $ 169,512 $ 53,033
Net income, %   16.15%   8.09%
Other comprehensive income, net of tax        
Currency translation adjustment   49,116   17,466
Adjustment of available for sale securities   (2,219)   683
Comprehensive income $ 216,409 $ 71,182
Basic and diluted earnings per share:        
Earnings per share from continuing operations $