Press Releases / 04.12.2012

Press Release as of 04.12.2012

Mechel OAO

AK&M Rating Agency confirmed the ‘A’ rating (stable outlook) assigned to OJSC Mechel as per the national scale

The ‘A’ rating indicates that OJSC Mechel (tax number: 7736520280) is qualified as a highly reliable borrower. Risk of a delay in meeting liabilities is relatively low, restructuring risk for a loan / part of a loan is minimal.

The rating score of OJSC Mechel is essentially supported by the achieved and consistently growing revenue, the increasing output of the company’s main products and the successful development of the Elga deposit abounding in coking coals, the recent downward trend in the amount of debt, the new corporate development strategy and the current loan restructuring efforts.

One of the pillars under Mechel’s rating score is the currently achieved and consistently growing revenue of the company. For the 1st quarter 2012, revenue of OJSC Mechel increased by 0.7% against the 4th quarter 2011 and reached $2.95 billion. At the end of the 2nd quarter, it already rose by 5.4% against the reference point, reaching almost $3.09 billion.

In January-September 2011, OJSC Mechel increased its core production output compared to the same period in 2011. In particular, the company’s cast-iron production increased by 16%, steel production by 16%, coal mining by 5%. As a whole, the physical output achieved is favorable for the rating score.

Another positive signal for the rating of OJSC Mechel is that the main part of the Elga project (development of the Elginskoye deposit abounding in coking coals) is successfully completed. The company started operation of the recently constructed railway line 321 kilometers long connecting the Elginskoye deposit with the Ulak station on the Baikal-Amur Mainline, and launched the Elginskaya coal preparation plant.

One of the most powerful arguments for the company’s credit rating is the reduction in Mechel’s total debt liabilities and total loan debt in 2012 (by almost 4% and almost 6%, respectively, in the first half of the year 2012).

In the short term, the company’s rating is also supported by the persistently high share of long-term debt in the loan debt structure (almost 70% at the present moment).

We also appreciate the new development strategy aiming at intensification and higher operating efficiency, adopted and currently pursued by OJSC Mechel’s management team. The company intends to dispose of a number of assets recognized as non-strategic, to essentially cut down current expenditures, to mobilize additional funds and eventually to improve the company’s financial position considerably, which contributes to the high credit rating.

Besides, OJSC Mechel’s successful efforts to restructure the current debt are favorable for its rating score. Conducting intense negotiations with its senior lenders, the company seeks maturity postponement on several principal payments, so as to defer principal repayment on a number of loans and credits beyond this year.

At the same time, we take note of OJSC Mechel’s significant loan debt, its operation below the break-even point as of the last reporting date, reduction of its equity capital and considerable dependence on the global market environment.

As of July 1, 2012, debt to revenue ratio was 1.1, debt to equity ratio was 2.96, interest coverage ratio being a mere 0.71. While we appreciate the company’s successful efforts to reduce its total liabilities, the loan debt of OJSC Mechel is still too significant to be simply disregarded for the company’s rating.

This year, OJSC Mechel is operating in the red, which is also resisting a higher rating score. At the end of the first half year 2012, the company’s operating loss amounted to USD 156.5 million, net loss to USD 605.0 million (including the loss from the non-cash write-offs of impaired long-lived assets, goodwill and provision for amounts due from related parties, amounting to USD 646.0 million, and forex loss reaching US 120.8 million).

This year, OJSC Mechel is also underperforming in the way of equity capital. Among other reasons, the above-mentioned write-offs and the dividend payout caused a reduction in the company’s equity capital by 15% for six months 2012.

The company’s dependence on the global market environment and, in particular, related exposure to price, marketing and currency risks sends another negative signal for its rating. OJSC Mechel exports a large part of its goods and its financial soundness in many respects depends on the general economic trends influencing the demand and pricing in the coal and steel markets, as well as the US dollar stability.

OJSC Mechel founded in 2003 is one of the largest mining and metallurgical companies in Russia and worldwide. The company is on the list of the backbone enterprises of Russia. OJSC Mechel is a vertically integrated holding comprising four business segments (mining, metallurgical, ferroalloy industry and power engineering) with production assets in Russia and abroad. The company’s mining enterprises produce and sell coal, iron-ore concentrate and coke. Mechel’s metallurgical companies are engaged in the production and sale of steel, rolled metal products, cast iron, and metal goods. The ferroalloy unit specializes in the production of ferrosilicon, ferrochrome and nickel. The group also owns commercial ports, as well as marketing, transport and power companies. At the beginning of the second half year 2012, OJSC Mechel’s assets as per US GAAP amounted to USD 17.9 billion.

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This press release is based on the statement of assigning a credit rating to OJSC Mechel.

The credit rating, along with any information and conclusions provided in this press release, only conveys our opinion on the Company's credit standing and shall not be considered as advice on the purchase and sale of securities or the provision of loan facilities.

CJSC AK&M Rating Agency will not incur any responsibility for any interpretations, inferences and consequences related to the application of results of the rating estimation procedure by any third parties.

CJSC AK&M Rating Agency is a leading independent national rating agency engaged in rating activities since 1993. CJSC AK&M Rating Agency is accredited by the Ministry of Finance of the Russian Federation (order no. 452 as of September 17, 2010).

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CJSC AK&M Rating Agency
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