Mechel Posts Loss, Breaches $4.2 Billion of Covenants

OAO Mechel (MTL), a Russian steel and coal producer controlled by billionaire Igor Zyuzin, posted a fourth- quarter loss and breached covenants on $4.2 billion of loans after steel prices fell and it lost customers for coking coal.

The net loss was $496.9 million, after net income of $207 million a year earlier, Moscow-based Mechel said in a statement today. Sales fell 33 percent to $1.37 billion.

“Most lenders have been understanding,” Chief Executive Officer Zyuzin said on a conference call today. The company reclassified $1.6 billion of long-term loans as due in the next 12 months because of the breach of covenants, which typically set conditions such as maximum debt levels on lenders. The majority of the debt will be refinanced next month, Zyuzin said.

Prices for products such as steel bars used in housing fell more than 60 percent in the fourth quarter as the global credit crunch cut Russian construction companies’ access to funds and hurt mortgage lending. Mechel (MTLR) lost OAO Magnitogorsk Iron & Steel and OAO Novolipetsk Steel as customers for its coking coal after the two sides failed to agree on prices.

“The fourth quarter marked the beginning of a disaster period for the Russian steel industry, with falling steel demand,” Kirill Chuyko, an analyst at KIT Finance Investment Bank, wrote in a research report published before today’s results. “Mechel is no exception.”

Production Declines

The company said coal production in the quarter fell 15 percent to 5.69 million metric tons from the previous three months, with coking coal declining 31 percent. It will produce 7.4 million tons of coal at its Yakutugol unit and 11.4 million tons at Southern Kuzbass this year, Senior Vice President Vladimir Polin said on today’s conference call.

A 25 percent stake in both units is pledged as collateral on a $1 billion loan with ZAO Gazprombank, he said. Mechel is spending $730 million this year on upgrades and expansion, including $400 million at the Yakutugol unit, Polin added.

A company that breaks a financial covenant normally meets with lenders to discuss the violation and new terms may be negotiated. The covenants are typically assessed each quarter.

Mechel’s net income for 2008 rose 25 percent to a record $1.14 billion, or $2.74 a share, the New-York listed company reported. Full-year sales advanced 49 percent to $9.95 billion.

“Currently we are witnessing a stabilization of prices for coal and iron ore,” Polin said in today’s statement. “Under such conditions we directed our efforts at exploring new markets. Having increased sales of iron ore concentrate to China we started shipping there our coal as well.”

Mechel has begun “small” coal shipments to Ukraine, boosted its own consumption by about 25 percent and started talking to smaller Russian steelmakers to replace Magnitogorsk and Novolipetsk, he said.

To contact the reporter on this story: Ilya Khrennikov in Moscow ikhrennikov@bloomberg.net

To contact the editor responsible for this story: Simon Casey at scasey4@bloomberg.net

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