On July 7, Mechel reported its preliminary financial results for 1Q 2008. The consolidated revenue exceeded USD 2.3 billion, the net profit totaled USD 500 million and the operating profit amounted to USD 630 million. EBITDA surpassed USD 850 million, while the EBITDA margin widened to at least 36.5%, up from 24% in the same period last year.
Table. Mechel: consolidated financial results for 1Q 2008
| Indicator | Unit of measure | 1Q 2008 | 1Q 2007 | 1Q 2008 / 1Q 2007 |
|---|
| Revenue | mn USD | 2300 | 1400 | +64.28% |
| Gross profit | mn USD | 1000 | 545 | +83.48% |
| Gross margin | - | 43.48% | 38.93% | +4.55% |
| Operating profit | mn USD | 630 | 302 | +99.67% |
| Operating margin | - | 27.39% | 24.28% | +3.11% |
| EBITDA | mn USD | 850 | 340 | 150% |
| EBITDA margin | - | 36.95% | 24.28% | +12.67% |
| Net profit | mn USD | 500 | 190 | 163% |
| Net margin | - | 21.74% | 13.57% | +8.17% |
Source: company data, Finam estimates
The company cited the successful integration of its mining assets and favorable price trends on the coal and steel markets as the main reasons for its strong financial performance. Furthermore, the company has made hefty investments into the purchase of modern equipment and production technology, which have enabled it to economize on steel production.
Table. Mechel mining division: 1Q 2008 financial results
| Indicator | Unit of measure | 1Q 2008 | 1Q 2007 | 1Q 2008 / 1Q 2007 |
|---|
| Revenue | mn USD | 850 | 409.3 | +107.67% |
| Gross profit | mn USD | 600 | 280.6 | +113.82% |
| Gross margin | - | 70.59% | 68.55% | +2.04% |
| Operating profit | mn USD | 410 | 176.6 | +132.16% |
| Operating margin | - | 48.23% | 43.15% | +5.08% |
| EBITDA | mn USD | 510 | 198.3 | +157.18% |
| EBITDA margin | - | 60% | 48.45% | +11.55% |
| Net profit | mn USD | 300 | 107 | +180.37% |
| Net margin | - | 35.3% | 26.14% | +9.16% |
Source: company data, Finam estimates
The mining division attributed its record financial results to the consolidation of Yakutugol assets at the end of 2007 and favorable price trends on the coal market. The unit said coal production had expanded 60% y-o-y. A 50% rise in the Posyet port's throughput capacity emerged as an additional factor contributing to the record results.
Table. Mechel steel division: 1Q 2008 financial results
| Indicator | Unit of measure | 1Q 2008 | 1Q 2007 | 1Q 2008 / 1Q 2007 |
|---|
| Revenue | mn USD | 1270 | 990 | +28.28% |
| Gross profit | mn USD | 360 | 267.8 | +34.43% |
| Gross margin | - | 28.35% | 27.05% | +1.3% |
| Operating profit | mn USD | 195 | 131 | +48.85% |
| Operating margin | - | 15.35% | 13.23% | +2.12% |
| EBITDA | mn USD | 320 | 146.3 | +118.73% |
| EBITDA margin | - | 25.19% | 14.77% | +10.42% |
| Net profit | mn USD | 170 | 90 | +88.88% |
| Net margin | - | 13.38% | 9.09% | +4.29% |
Source: company data, Finam estimates
The steel division attributed improvements in its financials mainly to the more intensive use of continuous billet casting, which expanded to 30% of overall steel smelting by the company. As a result, the company could lower its input consumption and expand steel output by 5% y-o-y. The company referred to the conclusion of an agreement with Russian Railways on the construction of a steel rolling mill as one of its main achievements over the quarter. The unit will be installed at the Chelyabinsk Metallurgical Plant and used for the production of 100-meter-long rails. Over time, the new equipment will enable Mechel to become Russia's second largest rail maker, trailing only Evraz, which has so far been the dominant player in the market segment.
We are upbeat on Mechel's prospects and link them primarily with the development of mining assets, first and foremost the Elga coal deposit. The steel division may expand on production of long bars, the market for which is expanding rapidly both within Russia and internationally.
Our target price for the company's shares is now under review.
0.569
0.073
