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UPDATE 2-Russia's Mechel slashes capex after Q4 loss
April 15, 2013 / 8:41 AM / 5 years ago

UPDATE 2-Russia's Mechel slashes capex after Q4 loss

* Q4 2012 net loss of $161 mln, below forecasts

* Cuts capex $100 mln to $400 mln

* Shares down 6.3 pct (Recasts with capex, adds quotes from CEO, analysts)

By Alessandra Prentice

MOSCOW, April 15 (Reuters) - Heavily indebted Russian miner Mechel said it would slash capital expenditure this year by up to a third after it reported a wider than expected fourth-quarter loss due to weak demand.

Mechel has cut investments and put non-core assets up for sale to service the $9.1 billion of net debt it amassed to fund an expansion before the 2008 financial crisis sent steel and coal prices tumbling.

The firm won some breathing space from lenders earlier in April when it renegotiated the terms of a $1 billion loan and secured a new $1.28 billion credit agreement with Russian bank VTB.

“We don’t see it (Mechel’s debt profile) deteriorating. We have come to an agreement with our lenders on the covenant levels and we’re not currently planning to review them,” said chief executive Evgeny Mikhel on a conference call.

Mechel is one of Russia’s top producers of coking coal used in steelmaking, an industry struggling to cope with flagging prices as a slowdown in Chinese economic growth and Europe’s debt crisis hit demand.

“If there are no improvements in prices or demand they will need to think about restructuring (their debt),” said Societe General analyst Sergey Donskoy, who calculated that Mechel’s cash flow in the fourth quarter was near zero once working capital was discounted.

“Assuming that the company’s profitability doesn’t improve, they can either pay interest on loans and bonds and taxes or they can spend money on capex, but not both,” Donskoy said.

Mechel said it would cut 2013 capital expenditure to $400 million from $500-$600 million, having already cut its annual investment plans from $1.2 billion last year.


The firm undershot analysts’ forecasts by 53 percent for the fourth quarter result, posting a net loss of $161 million, which compared with a profit of $201 million in the same quarter last year.

“In order to return to a healthy business model, coking coal prices need to rebound by 30-40 percent. Mechel’s current debt levels are not sustainable,” said BCS analyst Kirill Chuyko.

Mechel’s debt to EBITDA ratio, a key gauge of its ability to service its debts, stood at 6.7 as of the end of 2012, according to BCS. It must stay below a ratio of 7.5 debt-EBITDA for the first half of 2013 according to its latest covenants.

Shares in New York-listed Mechel, which have lost over 85 percent of their value since their peak in late 2010, were trading down 6.3 percent at an all-time low at 1650 GMT.

Fourth quarter revenue fell 7 percent from the previous quarter to $2.5 billion, while earnings before interest, taxation, depreciation and amortisation (EBITDA) were down 73 percent at $100.4 million, also below expectations. (Editing by Megan Davies and David Cowell)

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