Mechel Resumes Coal Mine Operation

Zacks

Russian miner Mechel OAO (MTL) recently resumed coal mining operation at the New-Olzherassk underground mine in Siberia. The company temporality suspended production at the mine, in February 2012, due to coal-self heating. High levels of carbon monoxide were detected at the mine’s long wall face 21-1-7. Production at the mine was halted after an order was passed by the Mezhdurechensk city court.

The New-Olzherassk mine is a part of the company’s subsidiary, Southern Kuzbass Coal Company. The mine's long wall face 21-1-7 has industrial coal reserve of 350,000 tons. The company noted that the mining face has been equipped with the necessary infrastructure to ensure safety.

Earlier, on July 5, 2012, Mechel announced temporary suspension of work at its V.I. Lenina underground mine in Russia. The work was halted after an order was passed by the Mezhdurechensk city court. However, operation was resumed within a few days following the announcement.  

Mechel, which competes with ArcelorMittal (MT) among others, is a leading domestic steel and coal producer with a strong position in key businesses, including production of specialty steel and allloys. The company has the largest coa reserve base in Russia and is mainly focusing on growth and cost-cutting measures.

Mechel’s profit slid 29.5% year over year to $218 million in first-quarter 2012. Revenues rose modestly to $3 billion.

Despite a weak pricing environment, revenues from the mining segment increased year over year in the quarter on the back of higher coal product sales volume and increased iron ore concentrate revenues. However, steel market dynamics were not favorable and Mechel had to deal with lower demand for steel products.

We are encouraged by the incremental opportunities stemming from the Elga mine, which are expected to reinforce Mechel’s position as a metallurgical coal producer through capacity expansion.  

However, the company’s high debt load represents a serious concern. In addition, Mechel’s cost advantage is in danger of being wiped out as the company has seen its costs rising at a fast clip over the last three years.

Mechel currently carries a Zacks #3 Rank, which translates into a short-term (1 to 3 months) Hold rating. We have a long-term Neutral recommendation on the stock.

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