Mechel's FY13 Loss Widens, Shares Down - Analyst Blog

Russian miner Mechel OAO MTL posted a consolidated net loss (as reported) of $2.9 billion for 2013, much higher than a net loss of $1.7 billion registered in 2012. The higher loss was mainly due to over $2 billion of write-offs associated with discontinued operations.

Adjusted net loss was $734 million for the year, in stark contrast to a profit of $305 million registered in 2012.

For the fourth quarter, Mechel posted a net loss of $681 million, higher than a loss of $127 million recorded in third-quarter 2013, but lower than a loss of $1.1 billion logged a year-ago. Adjusted loss increased to $251 million in the reported quarter from around $161 million registered in the year-ago quarter and $85 million in the previous quarter.

The company's shares went down nearly 4% during the trading hours following the release. The stock is down around 17% so far this year.
Revenues for 2013 came in at roughly $8.6 billion, down 19% from $10.6 billion in the year-ago period. The decline was attributable to the company's disposal of unprofitable assets (Romanian facilities) and interruption of supplies from third parties due to the end of its partnership with Estar plants.

For the fourth quarter, revenues fell around 25% year over year and 10% sequentially to roughly $1.9 billion.

The company registered an operating loss of $529 million for 2013 compared with an operating loss of $423 million for 2012. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) declined 50.4% year over year to $730 million in 2013. The decrease in consolidated adjusted EBITDA was mainly due lower prices for the mining division's key products.

Segment Performance

Mining: The segment's revenues from external customers were $2,784 million in 2013, down 17.7% from $3,384 million in the year-ago period. The adjusted EBITDA of the mining segment declined 52% year over year to $482 million in 2013. The weakness in coking coal markets significantly affected the division's operations and results throughout 2013.

In 2014, Mechel is making considerable progress in cooperating with its Chinese partners by entering into long-term contracts in order to receive higher volumes of supply than last year. The company has also gained access to new metallurgical coal markets by expanding its client base to include steelmakers in Western Europe.

Mechel continued the development of the Elga Coal Complex's construction. It expects that products from the Elga deposit will make their first major contribution to the division's operational results in 2014.

Steel Mining: Revenues from the Steel Mining segment decreased 22.8% year over year to $4,956 million in 2013. The decline resulted from the  disposal of unprofitable assets (Romanian facilities) and interruption of supplies from third parties due to the end of the company's partnership with Estar plants. The adjusted EBITDA of the Steel Mining segment declined 44.4% year over year to $210 million in 2013.

Ferroalloy: The segment's revenues from external customers were $82 million in 2013, up 21% from $68 million in 2012 due to an increase in ferrosilicon sales.  The adjusted EBITDA of the segment increased 60% year over year to $8 million in 2013 due to cuts in operational and administrative costs, as well as decrease in expenses in creating a reserve on unrecoverable debt.

Power: The Power segment generated $755 million of revenues from external customers in 2013, almost at par with 2012 results. The segment's adjusted EBITDA was down 20% year over year to $33 million.

Financial Position

Capital expenditure for full-year 2013 amounted to $558.1 million, of which $336.8 million was spent in the Mining segment, $211.5 million in the Steel Mining segment, $4.6 million in the Ferroalloy segment and $5.2 million in the Power segment. As of Dec 31, 2013, net debt was at $8.7 billion (down 4% year over year) while cash and cash equivalents amounted to $269 million (down 8.5% year over year).

Mechel is a leading domestic steel and coal producer with a strong position in key businesses, including production of specialty steel and alloys. The company carries a Zacks #4 Rank (Sell).

Other companies in the steel and related industries with favorable Zacks Rank include NN Inc. NNBR, ThyssenKrupp AG (TYEKF) and Timken Co. TKR. While NN sports a Zacks Rank #1 (Strong Buy), ThyssenKrupp and Timken carry a Zacks Rank #2 (Buy).