Mechel Plans to Spend $1.2 Billion on Coal, Nickel

OAO Mechel (MTLR) earmarked $1.2 billion for spending on coal and nickel operations to buoy sales as it slips outside the ranks of Russia's top five steelmakers.

The money will be spent through 2011 to upgrade equipment and expand production, the Moscow-based company said in a statement today. Mechel plans to boost annual coal output by 45 percent to 25 million tons and nickel by 67 percent to 24,000 tons in five years. Spending on steel will be $1.5 billion.

``Our new investment program will support the next phase of the company's growth,'' Alexey Ivanushkin, chief operating officer of Mechel, said in the statement. It will help Mechel ``increase profitability and enter new markets.''

Mechel (MTLR) is increasing its focus on coal and nickel after prices for the raw materials rose to records and as steel production stalls. The company's steel output rose 1 percent to 5.95 million tons last year, the slowest rate of growth among Russia's top seven steelmakers.

The company's coal projects include opening new mines in the mineral-rich South Kuzbass region and bidding for the biggest coal field in Russia's Far East, the Elga deposit. Mechel also wants to upgrade its Southern Urals Nickel Plant to process its 1 million tons of nickel ore stock.

Production Costs

``We think that the production costs will be the same as elsewhere in the world, about $9,000, $10,000 a ton,'' Igor Zyuzin, owner and chief executive officer, said today in a conference call. Nickel traded at $37,600 a ton in London today.

In steel, Mechel has fewer plans. The company will add 2.2 million tons of rolled-steel and so-called long-steel products by the end of the decade, Zyuzin said. The company doesn't plan to increase crude-steel production, he said.

Expanding coal production will help Mechel build up its power-generation business. The company bought a Siberian power plant for $265 million in March and also has bid for wholesale generator OAO OGK-3. The company is likely to participate in other auctions for electricity producers, Zyuzin said.

Mechel's output of thermal coal, used in power plants, surpassed production of coking coal, used in steelmaking, for the first time during the first quarter of this year.

The Russian government wants to encourage increased coal- fired power generation, freeing the country's natural-gas reserves for the more lucrative export market.

To contact the reporter on this story: Yuriy Humber in Moscow at yhumber@bloomberg.net

To contact the editor responsible for this story: Justin Carrigan at jcarrigan@bloomberg.net

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