Mechel OAO, a leading Russian mining and steel group, announced financial results for the the first half of 2012.

Mechel OAO’s Chief Executive Officer Yevgeny Mikhel commented on the 1H 2012 financial results, "The first half of 2012 witnessed a series of milestone events for the Group -- we completed a large-scale debt restructuring process and set off to execute on the company’s new strategy of divesting non-strategic assets, improving operating cash flow and reducing debt.

"The key markets for the products exported by Mechel’s mining and steel divisions gradually deteriorated in the first half of 2012. Even though the Group’s divisions operated quite stably in terms of production and distribution, the Group’s financial results were strongly affected, inter alia, by non-recurrent accounting write-offs, resulting from declining market environment, as well as foreign exchange loss. However, the company took measures to improve its operational and financial performance by way of cutting production costs and accessing new sales markets, thus achieving positive cash flow in the reporting period."

Consolidated Results
The net revenue in 2Q 2012 increased by 4.6% and amounted to $3.1 billion compared to $3.0 billion in 1Q 2012. The operating loss amounted to $471 million or -15.25% of the net revenue, compared to the operating income of $314 million or 10.64% of the net revenue in 1Q 2012.

In 2Q 2012, Mechel’s consolidated financial result attributable to shareholders of Mechel OAO, decreased by 477.5% to net loss of $823.0 million compared to the net income of $218.0 million in 1Q 2012. If to eliminate the effects of impairment of long-lived assets and goodwill and provision for amounts due from related parties (including income tax and amounts attributable to noncontrolling interests effects) the adjusted net loss amounts to $177.0 million in 2Q 2012.

The consolidated adjusted EBITDA in 2Q 2012 decreased by 16.8% to $385.4 million, compared to $463.4 million in 1Q 2012. Depreciation, depletion and amortization in 2Q 2012 for the Company were $157.2 million, an increase of 0.9% compared to $155.8 million in 1Q 2012.

Mining Segment Results
Mining segment’s revenue from external customers in 2Q 2012 totaled $881.2 million or 29% of the consolidated net revenue, a decrease of 5.5% over net segment’s revenue from external customers of $932.7 million, or 32% of the consolidated net revenue in 1Q 2012.

The operating income in the mining segment in 2Q 2012 decreased by 30.1% to $192.6 million, or 17.7% of total segment’s revenue, compared to the operating income of $275.6 million, or 23.8% of total segment revenue for the 1Q 2012. The adjusted EBITDA in the mining segment in 2Q 2012 decreased by 15.7% and amounted to $301.9 million compared to segment’s adjusted EBITDA of $358.1 million in 1Q 2012. The adjusted EBITDA margin for the mining segment in 2Q 2012 was 27.7% compared to 30.9% in 1Q 2012. Depreciation, depletion and amortization in the mining segment amounted to $84.9 million which is 4.0% higher than $81.6 million in 1Q 2012.

Mechel Mining Management Company OOO’s Chief Executive Officer Boris Nikishichev commented on the mining segment’s results: "On the back of substantially reduced demand and lower prices for all of our products, we have taken strong action to restore production capabilities, increase export sales and diversify our client base in order to prevent a rapid decline in revenue in the mining division. Increased exports of coking coal, PCI and anthracite to Asia coupled with redirection of iron ore concentrate shipments from Russia to China, allowed us to substantially mitigate the reduced pricing effect, thus justifying the company’s long-term strategy with a strong focus on met coals and more deliveries made to the Asia-Pacific region. In spite of the volatile environment, we continued to allocate appropriate resources to develop our Elga project. A three-million tonne p.a. seasonal coal washing plant was recently launched with commercial scale coal production and processing scheduled to commence at Elga next year. Certain progress was made to restore and expand our mining capabilities at Southern Kuzbass: Sibirginsk mine resumed its operation in April, the works on vertical shaft sinking were finished at Sibirginsk mine in May as part of stage 2 expansion, Olzherasskaya-New mine resumed its operations in early September. The second longwall is expected to be operational at Lenin mine in late October. Taking into account the profitability of coal production even at current lower prices, the development of our existing and prospective mining assets will help us to mitigate the negative impact of the economic recession and maximize a positive effect once the market environment improves."

Steel Segment Results
Mechel’s steel segment’s revenue from external customers in 2Q 2012 amounted to $1.9 billion, or 61% of the consolidated net revenue, an increase of 15.1% over the net segment’s revenue from external customers of $1.6 billion, or 56% of consolidated net revenue, in 1Q 2012.

In 2Q 2012, the steel segment’s operating loss totaled $471.0 million, or -24.0% of total segment’s revenue, versus the operating income of $10.7 million, or 0.6% of total segment’s revenue, in 1Q 2012. The adjusted EBITDA in the steel segment in 2Q 2012 increased by 87.8% and amounted to $91.2 million, compared to the adjusted EBITDA of $48.6 million in 1Q 2012. The adjusted EBITDA margin of the steel segment was 4.65% in 2Q 2012, versus the adjusted EBITDA margin of 2.81% in 1Q 2012. Depreciation and amortization in steel segment reduced by 5.7% from $43.7 million in 1Q 2012 to $41.2 million in 2Q 2012.

Mechel-Steel Management Company OOO’s Chief Executive Officer Vladimir Tytsky commented on the steel segment’s results: "In spite of the global economy still remaining weak, we managed to further improve our performance in the second quarter. Sales measured by volume increased by nearly 18% quarter-on-quarter contributing to a 15% growth in the segment’s revenue. Sales grew as driven by both increased saleable volumes and a 130-thousand tonne reduction in inventory at Mechel Service Global. Given the positive effect from a circa 10% reduction in production costs for the key products on the back of relatively flat market prices, adjusted EBITDA increased virtually twofold quarter-on-quarter. Net of the negative accounting write-offs, including the foreign exchange loss, the Q2 net income is also well above the same result of Q1."

Product Sales
Ferroalloys segment’s revenue from external customers in 2Q2012 amounted to $132.4 million, or 4% of the consolidated net revenue, an increase of 6.1% compared with the segment’s revenue from external customers of $124.7 million or 4% of the consolidated net revenue, in 1Q2012.

In 2Q 2012, the operating loss in the ferroalloys segment rose by 300.6% and totaled $135.3 million, or -87.6% of total segment’s revenue, as compared to operating loss of $33.8 million, or -22.1% of total segment’s revenue, in 1Q2012. The adjusted EBITDA in the ferroalloys segment in 2Q2012 increased by 1.6% and amounted to negative $7.4 million, compared to segment’s adjusted negative EBITDA of $7.5 million in 1Q2012. The adjusted EBITDA margin of the ferroalloys segment comprised -4.8% in 2Q2012 compared to the adjusted EBITDA margin of -4.9% in 1Q2012. Ferroalloys segment’s depreciation, depletion and amortization in 2Q2012 were $27.4 million, an increase of 3.4% over $26.5 million in 1Q2012.

Mechel-Ferroalloys Management OOO’s Chief Executive Officer Sergei Zhilyakov noted: "The segment demonstrated rather stable performance in the reporting period. In spite of the weaker market for nickel and ferrosilicon, we managed to keep our revenue flat quarter-on-quarter, primarily due to higher sales volumes of chrome ore concentrate and ferrochrome. EBITDA remained flat. At the same time net loss, net of non-recurrent accounting write-offs, decreased more than twofold quarter-on-quarter. Once the upgraded furnace is fully operational at the Bratsk Ferroalloy Plant, additional positive effect is further expected from higher ferrosilicon production and sales volumes."

Power Segment Results
Mechel’s power segment’s revenue from external customers in 2Q 2012 comprised $174.7 million, or 6% of consolidated net revenue, a decrease of 28.2% compared with the segment’s revenue from external customers of $243.4 million or 8% of consolidated net revenue in 1Q2012.

The operating loss in the power segment in 2Q2012 amounted to $56.2 million, or -19.5% of the total segment’s revenue in the same period compared to the operating income of $24.9 million, or 6.6% of the total segment’s revenue, in 1Q2012. The adjusted EBITDA in the power segment in 2Q2012 decreased by 99.0% totaling $0.3 million, compared to the adjusted EBITDA of $27.5 million in 1Q2012. The adjusted EBITDA margin for the power segment in 2Q2012 amounted to 0.1% compared to 7.3% in 1Q2012. Depreciation and amortization in power segment in 2Q2012 decreased by 12.2% comparing with the 1Q2012 from $4.1 million to $3.6 million.

Mechel-Energo OOO’s Chief Executive Officer Yuri Yampolsky noted: "Quite expectedly, the 2Q 2012 results appeared to be slightly weaker quarter-on-quarter due to the seasonal decline in demand. What is worth mentioning, however, is that in spite of the low demand, the segment’s operational performance is currently better than the relevant targets. Also, periods of low capacity utilization are traditionally used to complete repair and maintenance arrangements and get ready for the heating season in autumn and winter."

Recent Highlights

• In August 2012, Mechel announced a dividend payment (including taxes) of 7,694,945,433.30 rubles (approximately US $241.2 million), based on the Company’s results for the 2011 fiscal year.
• In September 2012, Mechel announced the signing of a cooperation agreement for supplying OJSC "RAO Energy Systems of East" with coal from Elga Coal Complex. The agreement sets forth the key principles of the two sides’ long-term cooperation regarding the use of coal from the Elga deposit. Once probes of Elga’s coals are delivered to OJSC "RAO Energy Systems of East" subsidiary JSC "DTE" and in case test burning yields positive results, Mechel Mining may gradually increase supplies of the Elga deposit’s coals up to a total of 60 million tonnes over 15 years.
• In September 2012, Mechel announced that coal mining at Southern Kuzbass Coal Company OAO’s New-Olzherassk Underground has been resumed.
• In September 2012, Mechel reported decisions made by the Board of Directors. Based on the results of an analysis of Mechel OAO’s assets presented by the management, the Board of Directors unanimously approved divestment of the following assets as not consistent with the new development strategy: enterprises that make up Mechel’s Eastern European Steel Division S.R.L., Donetsk Electrometallurgical Plant PJSC (Ukraine), Invicta Merchant Bar Ltd. (UK), UAB "Mechel Nemunas" (Lithuania), Mechel Service Global B.V. (except Mechel Service OOO (Russia)), Voskhod-Chrome LLP (Kazakhstan), Voskhod-Oriel LLP (Kazakhstan), Tikhvin Ferroalloy Plant OOO (Russia), Southern Urals Nickel Plant OAO (Russia), Kuzbass Power Sales Company OAO (Russia), Toplofikatsia Rousse EAD (Bulgaria). In order to speed up implementation of the mining division’s priority project -- development of the Elga coal deposit -- the Board of Directors also recommended evaluating the possibility of a potential divestment of a minority stake in Mechel Mining OAO to a strategic partner (but such stake not to exceed 25%).
• In October 2012, Mechel announced the commissioning of a seasonal washing plant and production of the first volumes of concentrate of coking coal mined at the Elga deposit.