Mechel OAO's chief executive officer Oleg Korzhov commented on the 1H2014 financial results: "We are currently going through a large-scale debt restructuring process. Having foreseen that the slump in metallurgical coal prices will decrease our company's financial results and affect our ability to service debt, early this year we have begun negotiations on changing our credit conditions to ensure both debt servicing and the stability of the company's operations. At the same time, while continuing to service our debt, we have had a significant decrease in our working capital, which began to have its negative impact on our operations.
 
“By the end of the first half of the year, we have not yet reached agreements with our creditors, which led to re-classification of our long-term debt into short-term in our accounting. Currently we have offered our creditors a restructuring option that would enable the company even now to service our obligations, ensuring debt repayment in the future. We continue to actively negotiate it with banks and count on promptly reaching agreements."
 
Consolidated Results For The 1H 2014

US$ million	1H'14	1H'13	Change Y-on-Y	2Q'14	1Q'14	Change Q-on-Q
Revenue	3,444	4,623	-26%	1,744	1,700	3%
from external customers
Adjusted operating income/(loss)	17	143	-88%	41	(25)	--
EBITDA (a)	250	406	-38%	171	79	116%
EBITDA (a), margin	7.27%	8.77%		9.82%	4.66%
Net loss	(648)	(2,120)	-69%	(63)	(585)	-89%
attributable to shareholders of Mechel OAO
Adjusted net income	(511)	(391)	31%	(37)	(474)	-92%
Net debt	8,650	9,120	-5%	8,650	8,440	2%
(excluding finance lease liabilities)
Trade working capital	40	941	-96%	40	260	-85%

• Compared with the first half of 2013, consolidated revenue went down by 26%, which was due to a decrease in the steel division's revenue after the group disposed of its Romanian enterprises, as well as a cutdown in sales of third-party products. It must be noted that sales of products manufactured by the Group's remaining key steel facilities have demonstrated a decrease of no more than 10% as compared to the same period of the last year.
• A decrease in EBITDA(a) is largely due to a slump in prices for the mining division's key products — coal and iron ore, as well as a decrease in sales of iron ore concentrate to third parties.
• The Group's gross profit margin went up from 30% in 1H2013 to 34% in the reporting period.
• With negative changes in the global coal and steel markets, the adjusted operating income in 1H2014 was US$17 million, which is 88% less than in the same period last year. At the same time, in 2Q2014 we got US$41 million of adjusted operating income.
• On 30 June 2014, our net debt, excluding financial lease obligations, was US$8.65 billion. During the reporting period, we paid off nearly US$300 million of our obligations.
• In 1H2014 our capital expenditure amounted to US$276 million, with the mining division accounting for US$244 million, the steel division for US$30 million and the power division for US$2 million.
• Long-term debts, including leasing debt, were re-classified as short-term as per accounting standards, as the company is in the global debt restructuring process.
• Over 1H2014, our trade working capital went down by 96% to US$40 million.
• Due to the halting of Southern Urals Nickel Plant and disposal of chrome assets, the ferroalloys segment was excluded from the company's accounts. The division's management company was liquidated, and Bratsk Ferroalloy Plant transferred into the steel division.

 
Mining Segment
Financial Results For The 1H 2014
Mechel Mining Management Company OOO's chief executive officer Pavel Shtark commented on the mining segment's results: "The weakening of metallurgical coal and iron ore markets had a major impact on the division's activities. For example, contract prices for hard coking coal in the first half of the year went down from US$ 152 on the basis of FOB Australia, which were set in 4Q2013, to US$ 120 on the basis of FOB Australia in the 2Q2014.
 
Speaking of the situation in the division, it is necessary to note the successful progress made in implementing our key investment project on developing the Elga deposit. During the 9 months, Elga mined about 740,000 metric tons of coal, its washing plant produced over 250,000 metric tons of concentrate, and nearly 500,000 metric tons of product were shipped off to customers. Currently works on upgrading the seasonal washing plant to an all-year mode still continue, as well as preparatory works on constructing the first stage of permanent washing plant. This became possible due to agreements signed with Vnesheconombank which provided us with project financing."
 

USUS$ million	1H'14	1H'13	Change Y-on-Y	2Q'14	1Q'14	Change Q-on-Q
Revenue	1,122	1,463	-23%	551	571	-4%
from external customers
EBITDA(a)	152	251	-39%	89	63	41%
EBITDA (a), margin	10.70%	14.52%		12.68%	8.77%

• A slump in the prices for the division's products in the reporting period, as well as a decrease in iron ore concentrate sales to third parties led to a decrease in revenue from sales to third parties by 23% and EBITDA(a) by 39%.
• Halting of mining at US-based Mechel Bluestone had a negative impact on the sales volumes of the Group's coking and steam coal.
• As iron ore prices in the export markets weakened, we decided to re-orient a major part of our iron ore concentrate from Korshunov Mining Plant to Chelyabinsk Metallurgical Plant for intra-group consumption. This enabled us to increase the profit margin of our steel facilities, but became one of the reasons for the decrease in the mining division's revenue from sales to third parties.
• Capital expenditure over the 1H2014 amounted to US$244 million, most of which were used to develop the Elga project.

 
Steel Segment
Financial Results For The 1H 2014
Mechel-Steel Management Company OOO's chief executive officer Vladimir Tytsky commented on the steel segment's results: "In the first half of 2014, we paid a lot of attention to optimizing our product portfolio and our sales structure. For example, the division almost entirely gave up selling billets. Currently almost all billets are processed within the Group into higher-margin products, including rails and other types of rolls at Chelyabinsk Metallurgical Plant (CMP)'s universal rolling mill. Billet sales account for less than 3% of the division's revenue. Meanwhile, our facilities continued to expand our product portfolio. Over these 6 months, they mastered production of 5 new grades of steel, as well as some 50 types of long, flat and structured rolled products. As a result, in the second quarter the segment's profitability by EBITDA went up to 7%.
 
“Over the first half of this year, CMP's universal rolling mill not only mastered and streamlined production of 18 types of structural shapes, but also shipped off over 50,000 metric tons of products new to the plant. It also produced and handed over to Russian Railways a batch of rails for bench and field testing as part of the certification procedure."
 

USUS$ million	1H'14	1H'13	Change Y-on-Y	2Q'14	1Q'14	Change Q-on-Q
Revenue	1,956	2,764	-29%	1,027	929	11%
from external customers
EBITDA(a)	74	125	-41%	77	(3)	--
EBITDA(a), margin	3.56%	4.32%		7.14%	-0.32%

• Revenue from sales of key products in 1H2014 went down by 29% as compared to the same period last year due to a cutdown in sales volumes, largely due to the group disposing of its Romanian enterprises, as well as a cutdown in sales of third-party products starting from the last year end that resulted in more than 15% of revenue decrease. Since the beginning of this year, the volume of stocks kept by Mechel Service Global service and sales network in Europe went down by more than 30%.
• In 1Q2014, prices for many kinds of the steel division's products went through a seasonal decline, which, together with the ruble's devaluation, had a negative impact on financial results. However, in the second quarter the decrease in prices for raw materials for steelmaking and a stronger market led to an improvement in the 1H2014 results.
• The decrease in the EBITDA(a) in 1H2014 was due to a decrease in sales revenue.
• Capital expenditure in 1H2014 amounted to US$30 million. Most of that amount went to pay our contractors for construction of CMP's universal rolling mill.

 
Power Segment       
Financial Results for The 1H 2014
Mechel Energo OOO's chief executive officer Pyotr Pashnin noted: "In this reporting period, the division once again demonstrated stable work. We confidently show operational profit, efficiently control our expenditures and keep our EBITDA at an acceptable level. The division cut down its net loss by 7 times as compared to 1H2013, largely due to the Group disposing of Toplofikatsia Rousse and Tikhvin Ferroalloy Plant. In the future, an increase in tariffs for the electricity produced by Kuzbass Power Sales Company OAO by 4% starting in 2H2014 will have its positive impact on the division's results."
 

USUS$ million	1H'14	1H'13	Change Y-on-Y	2Q'14	1Q'14	Change Q-on-Q
Revenue	366	396	-8%	166	200	-17%
from external customers
EBITDA(a)	21	26	-19%	3	18	-83%
EBITDA(a), margin	3.78%	4.25%		1.17%	5.97%

• Revenue from sales to external customers went down by 8% compared to 1H2013 in US dollars, while the ruble revenue went up by 4%.
• EBITDA(a) went down by 19% compared to 1H2013 mostly due to the creation of additional reserves on doubtful debt.

 

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Mechel is one of the leading Russian companies. Its business includes three segments: mining, steel and power. Mechel unites producers of coal, iron ore concentrate, steel, rolled products, ferroalloys, hardware, heat and electric power. Mechel products are marketed domestically and internationally.