Mechel Installs New Furnace


Russian mining company Mechel OAO (MTL) announced that it has installed a ferroalloy electric furnace and conducted the first smelting of ferrosilicon in order to renovate its ferroalloys division’s Bratsk Ferroalloy Plant. The electric furnace will supply four furnaces, each having a capacity of 33 mega volt-amperes (:MVA) while replacing the existing furnaces with a capacity of 25 MVA each.

The reconstruction of the plant was started in late 2010 and is scheduled to be completed by 2013. The plant’s production capacity is expected to increase by 30% while power consumption is anticipated to reduce by 10%-13% due to the installation of new furnaces.

The company has invested 1.9 billion rubles ($65 million) for the reconstruction of the plant. The reconstruction does not hinder the company’s current infrastructure and allows the plant to significantly cut costs and save time in implementing the project.

As per Mechel, the technology adopted by the company to install the furnace is appropriate and will increase the efficiency of the plant. Ferrosilicon production will ensure reconstruction of the raw materials dosage system and also expand the storage space for finished products.

Mechel is a leading steel and coal producer with a strong position in key businesses, including production of specialty steel and alloys. The company has the largest coal reserve base in Russia.

Mechel recorded net income of $25.7 million in the third quarter of 2011, down 86.6% from the previous quarter’s net income of $191.9 million. Revenues in the quarter decreased 7.6% sequentially to $3.2 billion.

Mechel’s debt-to-capital ratio hovered around 50% in the last couple of quarters. Higher debt results in a greater interest charge. Moreover, a high leverage restricts the company’s ability to raise new debt for further financing. The company faces stiff competition from Arcelor Mittal (MT) and Norilsk Nickel Mining and Metallurgical Co.

Currently, Mechel maintains a Zacks #3 Rank, which translates into short-term (1 to 3 months) Hold rating. However, we reiterate our Underperform recommendation on the stock for the long-term (more than 6 months).

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