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Mechel Recognized for Elga Project

Zacks Equity Research

Mechel Mining OAO, a unit of Russian miner Mechel OAO (MTL), has clinched the Minex-2012 Mining Excellence Award’s “Investor of the Year” award for the development of its Elga coal project. This is the second straight win for the Moscow-based company. Last year, the company’s Elga project received the award for "Successful Development of a Mining Industry Project".

The independent experts of the award committee assessed the volume of work done by the company over the last year in an open poll and recognized its contribution in the development of the mining industry in Russia.

Mechel continues the development of the Elga mine which has one of the largest coking coal deposits globally. The company invested roughly $1.44 billion in the Elga coal complex in 2011 and expects to spend around $1.42 billion more over the 2012-2014 timeframe.

Mechel, in early 2012, announced the completion of the construction of a 321-kilometer railroad that connects the Elga coal deposit to Baikal-Amur mainline. It has also built a seasonal washing plant at the site for accelerating the production and sales of coking coal concentrate. The plant, in which all the processing systems are controlled in a real-time mode, has an annual processing capacity of up to 3 million tons.

The company recently announced the commencement of the production of first volumes of the coking coal concentrate at the Elga mine following the commissioning of the seasonal washing plant at the site. The launch of the washing plant now enables Mechel to mine and process coking coal at Elga on production scale.

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 alloys. The company has the largest coal reserve base in Russia and is mainly focusing on growth and cost-cutting measures.

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

However, Mechel’s high debt level represents a serious concern. The company could be handicapped because of its high leverage and interest burden and may not be able to keep up with its huge capital spending program.

Mechel currently holds a Zacks #4 Rank, which translates into a short-term (1 to 3 months) Sell rating. We have a long-term Neutral recommendation on the stock.

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