June 20, 2012 / 11:12 AM / 7 years ago

UPDATE 2-Russia's Mechel profit hit by mining weakness

* Net profit $218 mln vs $309 mln a year ago

* Debt slightly lower, but still main concern-analyst

* Debt reduction due to forex fluctuations-executive

* Ukraine, Japan and South Korea coking coal sale prices fall in Q2

By Alexei Anishchuk

MOSCOW, June 20 (Reuters) - Profits of Russian coking coal and steel producer Mechel fell 29 percent in the first quarter as its mining operations were hit by weaker demand and lower prices.

Net profit fell to $218 million from a year-earlier $309 million, but this was more than analysts’ forecasts of $127 million. Revenue rose to $3 billion from $2.93 billion.

“The (mining) segment had to work in difficult conditions,” Mechel Mining Management Company CEO Boris Nikishichev said in a statement on Wednesday.

“Despite the continuing decrease in demand and correction of prices for raw materials, as well as temporary idling of several mines in Southern Kuzbass, we managed to retain high volume of coal product sales and increase the sales of iron ore concentrate”.

The mining operations’ net income attributable to shareholders dropped 16.9 percent to $241.5 million from $290.7 million a year ago.

The company’s coking coal export revenues were hit by an almost $30 drop in the sale price to Ukraine to around $170 per tonne in the second quarter.

Coking coal was shipped to South Korea and Japan at $215-220 per tonne in the first three months of 2012, while it fell to $185-190 in the second quarter, Oleg Korzhov, the company’s vice president, told a conference call.

The sale price to China was flat quarter-on-quarter at $185-190 per tonne, he said.

CEO Yevgeny Mikhel said that Mechel managed to make progress in some areas despite challenges in certain countries importing its products.

“We optimized the debt, retained high levels of revenue and freed significant amount of funds by reducing stock, thus significantly improving the Group’s operational cash flow,” Mikhel said in a statement.

Adjusted earnings before interest, taxes, depreciation and amortisation (EBITDA) dropped to $463 million from $567 million a year ago.

The company expressed satisfaction with the operations of its steel segment, which posted a 6.1 percent fall in revenue to $1.65 billion but saw higher sales volumes.

“Despite a seasonal low in demand for steel products, we managed to increase sales, significantly reducing stock,” Mechel-Steel Management Company CEO Andrey Deineko said.

Mechel cut steel inventories in the second quarter by almost 10 percent to roughly 1 million tonnes, Mikhel said.

The company’s shares closed up 2.06 percent, outperforming the broader MICEX index, which closed up 0.02 percent. Its U.S.-listed shares were up 2.14 percent at $6.68 at 1653 GMT.

DEBT CONCERNS

“The results were mainly in line with the negative market trend,” Pavel Yemelyantsev of Investcafe said in a research note.

“The main concern is the company’s debt load, albeit Mechel managed to negotiate its net debt/EBITDA ratio to 5.5 times (with its creditors), which temporarily reduces the acuteness of the problem.”

Mechel’s total debt, which stood at $9.9 billion at the end of last year, decreased to $9.6 billion as of March 31.

But a senior company executive told a conference call on Wednesday that the decrease was largely due to foreign exchange fluctuations.

“Most of reduction of net debt ... came as result of the reverse dynamics of the rouble and dollar exchange rate,” said Stanislav Ploschenko, the company’s CFO. “But we continue to repay (the debt) out of operating cash as well.”

In April, Mechel said that it had reached an agreement with lenders to renegotiate debt covenants on its loans, but did not provide the details.

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