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TheStreet Open House

Mechel Reports The 9M 2012 Financial Results

Adjusted net income / (loss) represents net income / (loss) before Impairment of long-lived assets and goodwill and Provision for the amounts due from related parties, including the effect on income tax and amounts attributable to noncontrolling interests. Our adjusted net income / (loss) may not be similar to adjusted net income / (loss) measures of other companies. Adjusted net income / (loss) is not a measurement under accounting principles generally accepted in the United States and should be considered in addition to, but not as a substitute for, the information contained in our consolidated statement of operations. We believe that our adjusted net income / (loss) provides useful information to investors because it is an indicator of the strength and performance of our ongoing business operations. While impairment of long-lived assets and goodwill and provision for the amounts due from related parties are considered operating costs under generally accepted accounting principles, these expenses represent the non-cash current period allocation of costs associated with assets acquired or constructed in prior periods. Our adjusted net income / (loss) calculation is used as one of the bases for investors, analysts and credit rating agencies to evaluate and compare the periodic and future operating performance and value of companies within the metals and mining industry.

Adjusted EBITDA can be reconciled to our consolidated statements of operations as follows:

Consolidated results

US$ thousand 9M 2012 9M 2011
Net (loss) / income (550,094) 526,730
 Add:    
Depreciation, depletion and amortization 453,819 421,578
Forex loss / (gain) (5,828) 131,518
Loss from remeasurement of contingent liabilities at fair value 1,413 1,303
Interest expense 484,717 448,127
Interest income (52,453) (10,097)
Net result on the disposal of non-current assets, impairment of long-lived assets and goodwill and provision for the loan given to related parties 748,568 (6,175)
Amount attributable to noncontrolling interests 7,059 53,046
Income taxes 136,496 290,733
Adjusted EBITDA 1,223,696 1,856,763
     
US$ thousand 3Q 2012 2Q 2012
Net (loss) / income 54,910 (823,023)
 Add:    
Depreciation, depletion and amortization 140,756 157,205
Forex loss / (gain) (126,629) 291,716
Loss from remeasurement of contingent liabilities at fair value 484 469
Interest expense 159,595 164,060
Interest income (15,883) (17,798)
Net result on the disposal of non-current assets, impairment of long-lived assets and goodwill and provision for the loan given to related parties 74,520 674,567
Amount attributable to noncontrolling interests 17,730 (25,688)
Income taxes 69,363 (36,059)
Adjusted EBITDA 374,848 385,446

Adjusted Net income / (loss) can be reconciled as follows:

US$ thousand 9M 2012 9M 2011
Net (loss) / income (550,094) 526,730
Net result on the disposal of non-current assets, impairment of long-lived assets and goodwill and provision for amounts due from related parties 771,028 --
Amount attributable to noncontrolling interests (27,778) --
Income taxes (20,043) --
Adjusted net income  173,113 526,730
     
US$ thousand 3Q 2012 2Q 2012
Net income / (loss) 54,908 (823,023)
Net result on the disposal of non-current assets, impairment of long-lived assets and goodwill and provision for amounts due from related parties 77,222 693,806
Amount attributable to noncontrolling interests -- (27,778)
Income taxes -- (20,042)
Adjusted net (loss) / income 132,130 (177,037)

Adjusted EBITDA margin can be reconciled as a percentage to our Revenues as follows:

US$ thousand 9M 2012 9M 2011
Revenue, net 8,750,831 9,617,126
Adjusted EBITDA 1,223,696 1,856,763
Adjusted EBITDA, margin 13.98% 19.31%
     
US$ thousand 3Q 2012 2Q 2012
Revenue, net 2,714,876 3,085,908
Adjusted EBITDA 374,848 385,446
Adjusted EBITDA, margin 13.81% 12.49%

Mining Segment

US$ thousand 9M 2012 9M 2011
Net income 428,245 630,826
 Add:    
Depreciation, depletion and amortization 243,010 244,444
Forex loss / (gain) 1,840 99,315
Loss from remeasurement of contingent liabilities at fair value 1,413 1,303
Interest expense 205,429 259,151
Interest income (84,016) (117,972)
Net result on the disposal of non-current assets (805) (282)
Amount attributable to noncontrolling interests 38,574 57,067
Income taxes 131,488 257,151
Adjusted EBITDA 965,178 1,431,003
     
US$ thousand 3Q 2012 2Q 2012
Net income 216,765 (30,024)
 Add:    
Depreciation, depletion and amortization 76,515 84,875
Forex loss / (gain) (93,695) 197,945
Loss from remeasurement of contingent liabilities at fair value 484 469
Interest expense 64,605 72,291
Interest income (29,389) (31,053)
Net result on the disposal of non-current assets (2,388) 1,166
Amount attributable to noncontrolling interests 10,394 10,264
Income taxes 61,866 (4,026)
Adjusted EBITDA 305,157 301,906

Adjusted Net income/loss can be reconciled as follows:

US$ thousand 9M 2012 9M 2011
Net income 428,245 630,826
Provision for amounts due from related parties 22,680 --
Adjusted net income 450,925 630,826
     
US$ thousand 3Q 2012 2Q 2012
Net (loss) / income 216,765 (30,024)
Provision for amounts due from related parties 1,974 20,706
Adjusted net (loss) / income 218,739 (9,318)

Adjusted EBITDA margin can be reconciled as a percentage to our Revenues as follows:

US$ thousand 9M 2012 9M 2011
Revenue (including intersegment sales) 3,195,773 3,866,849
Adjusted EBITDA 965,178 1,431,003
Adjusted EBITDA, margin 30.20% 37.01%
     
US$ thousand 3Q 2012 2Q 2012
Revenue (including intersegment sales) 949,168 1,088,265
Adjusted EBITDA 305,157 301,906
Adjusted EBITDA, margin 32.15% 27.74%

Steel Segment

US$ thousand 9M 2012 9M 2011
Net loss (751,830) (38,217)
 Add:    
Depreciation, depletion and amortization 124,657 94,839
Forex loss (23,098) 59,148
Interest expense 278,155 245,545
Interest income (5,730) (10,808)
Net result on the disposal of non-current assets, impairment of long-lived assets and goodwill and provision for the loan given to related parties 595,705 (1,192)
Amount attributable to noncontrolling interests (14,222) (9,148)
Income taxes 10,950 28,514
Adjusted EBITDA 214,587 368,681
     
US$ thousand 3Q 2012 2Q 2012
Net loss (110,989) (625,277)
 Add:    
Depreciation, depletion and amortization 39,762 41,244
Forex loss / (gain) (48,171) 116,228
Interest expense 96,128 95,163
Interest income 155 (2,861)
Net result on the disposal of non-current assets, impairment of long-lived assets and goodwill and provision for the loan given to related parties 76,725 518,523
Amount attributable to noncontrolling interests 8,470 (19,295)
Income taxes 12,666 (32,474)
Adjusted EBITDA 74,746 91,251

Adjusted Net income / (loss) can be reconciled as follows:

US$ thousand 9M 2012 9M 2011
Net loss (751,830) (38,217)
Impairment of long-lived assets and goodwill and provision for amounts due from related parties 593,755 --
Amount attributable to noncontrolling interests (15,320) --
Income taxes (14,797) --
Adjusted net loss (188,192) (38,217)
     
US$ thousand 3Q 2012 2Q 2012
Net loss  (110,989) (625,277)
Impairment of long-lived assets and goodwill and provision for amounts due from related parties 75,249 518,506
Amount attributable to noncontrolling interests -- (15,320)
Income taxes -- (14,797)
Adjusted net loss (35,740) (136,888)

Adjusted EBITDA margin can be reconciled as a percentage to our Revenues as follows:

US$ thousand 9M 2012 9M 2011
Revenue (including intersegment sales) 5,441,514 5,847,457
Adjusted EBITDA 214,587 368,681
Adjusted EBITDA, margin 3.94% 6.30%
     
US$ thousand 3Q 2012 2Q 2012
Revenue (including intersegment sales) 1,749,193 1,964,199
Adjusted EBITDA 74,746 91,251
Adjusted EBITDA, margin 4.27% 4.65%

Ferroalloys Segment

US$ thousand 9M 2012 9M 2011
Net loss (204,782) (32,437)
 Add:    
Depreciation, depletion and amortization 74,775 66,489
Forex loss / (gain) 15,442 (26,796)
Interest expense 22,182 49,700
Interest income (56) (1,742)
Net result on the disposal of non-current assets, impairment of long-lived assets and goodwill 101,192 210
Amount attributable to noncontrolling interests (19,159) 1,294
Income taxes (7,614) 384
Adjusted EBITDA (18,022) 57,102
     
US$ thousand 3Q 2012 2Q 2012
Net loss (41,688) (107,055)
 Add:    
Depreciation, depletion and amortization 20,856 27,439
Forex (gain) / loss 15,236 (22,457)
Interest expense 6,729 7,360
Interest income 253 (97)
Net result on the disposal of non-current assets, impairment of long-lived assets and goodwill 142 100,947
Amount attributable to noncontrolling interests (1,032) (16,698)
Income taxes (3,640) 3,180
Adjusted EBITDA (3,144) (7,381)

Adjusted Net income / (loss) can be reconciled as follows:

US$ thousand 9M 2012 9M 2011
Net loss (204,782) (32,437)
Impairment of long-lived assets and goodwill 100,702 --
Amount attributable to noncontrolling interests (12,458) --
Income taxes (5,246) --
Adjusted net loss (121,784) (32,437)
     
US$ thousand 3Q 2012 2Q 2012
Net loss (41,688) (107,055)
Impairment of long-lived assets and goodwill  -- 100,702
Amount attributable to noncontrolling interests -- (12,458)
Income taxes -- (5,246)
Adjusted net loss (41,688) (24,057)

Adjusted EBITDA margin can be reconciled as a percentage to our Revenues as follows:

US$ thousand 9M 2012 9M 2011
Revenue (including intersegment sales) 421,094 542,560
Adjusted EBITDA (18,022) 57,102
Adjusted EBITDA, margin -4.28% 10.52%
     
US$ thousand 3Q 2012 2Q 2012
Revenue (including intersegment sales) 114,032 154,517
Adjusted EBITDA (3,144) (7,381)
Adjusted EBITDA, margin -2.76% -4.78%

Power Segment

US$ thousand 9M 2012 9M 2011
Net (loss) / income (62,496) 99
 Add:    
Depreciation, depletion and amortization 11,377 15,805
Forex (gain) / loss (12) (149)
Interest expense 16,316 14,365
Interest income (15) (209)
Net result on the disposal of non-current assets, impairment of goodwill 52,476 (4,910)
Amount attributable to noncontrolling interests 1,866 3,834
Income taxes 1,672 4,685
Adjusted EBITDA 21,184 33,520
     
US$ thousand 3Q 2012 2Q 2012
Net (loss) / income (13,877) (60,053)
 Add:    
Depreciation, depletion and amortization 3,623 3,646
Forex loss / (gain) 1 1
Interest expense 5,232 5,460
Interest income -- --
Net result on the disposal of non-current assets, impairment of goodwill 39 53,932
Amount attributable to noncontrolling interests (102) 40
Income taxes (1,528) (2,739)
Adjusted EBITDA (6,610) 287

Adjusted Net income/loss can be reconciled as follows:

US$ thousand 9M 2012 9M 2011
Net (loss) / income (62,496) 99
Impairment of goodwill 53,893 --
Income taxes -- --
Adjusted net income  (8,603) 99
     
US$ thousand 3Q 2012 2Q 2012
Net (loss) / income (13,877) (60,054)
Impairment of goodwill -- 53,893
Income taxes -- --
Adjusted net (loss) / income (13,877) (6,160)

Adjusted EBITDA margin can be reconciled as a percentage to our Revenues as follows:

US$ thousand 9M 2012 9M 2011
Revenue (including intersegment sales) 923,554 946,589
Adjusted EBITDA 21,184 33,520
Adjusted EBITDA, margin 2.29% 3.54%
     
US$ thousand 3Q 2012 2Q 2012
Revenue (including intersegment sales) 256,160 287,790
Adjusted EBITDA (6,610) 287
Adjusted EBITDA, margin -2.58% 0.10%
     
Consolidated Balance Sheets    
(in thousands of U.S. dollars)    
  September 30, 2012 December 31, 2011
  (unaudited)  
ASSETS    
Cash and cash equivalents   $ 582,198 643,379
Accounts receivable, net of allowance for doubtful accounts of $66,254 as of September 30, 2012 and $50,966 as of December 31, 2011 758,831 824,560
Due from related parties 1,160,409 1,315,288
Inventories 2,214,113 2,599,097
Deferred income taxes 48,164 36,056
Prepayments and other current assets 537,933 654,285
Total current assets 5,301,648 6,072,665
     
Long-term investments in related parties 8,693 8,150
Other long-term investments 15,036 13,997
Property, plant and equipment, net 7,551,030 7,076,303
Mineral licenses, net 4,663,565 4,733,676
Other non-current assets 190,841 222,442
Deferred income taxes 50,702 27,817
Goodwill 1,094,252 1,151,187
Total assets  $ 18,875,768  $ 19,306,237
     
LIABILITIES AND EQUITY    
Short-term borrowings and current portion of long-term debt   $ 2,404,279 2,651,357
Accounts payable and accrued expenses:    
Trade payable to vendors of goods and services 945,600 976,187
Advances received 180,106 206,156
Accrued expenses and other current liabilities 316,487 281,762
Taxes and social charges payable 274,377 277,284
Unrecognized income tax benefits 2,305 2,190
Due to related parties 159,105 179,672
Asset retirement obligation, current portion 6,160 3,703
Deferred income taxes 41,517 41,822
Pension obligations, current portion 23,140 22,172
Dividends payable 112 4
Finance lease liabilities, current portion 118,424 96,907
Total current liabilities 4,471,612  $ 4,739,216
     
Long-term debt, net of current portion 7,283,159 6,745,524
Asset retirement obligations, net of current portion 40,098 40,214
Pension obligations, net of current portion  159,323 144,182
Deferred income taxes 1,483,886 1,514,014
Finance lease liabilities, net of current portion 349,713 375,249
Other long-term liabilities  370,945 382,512
     
EQUITY    
Common shares (10 Russian rubles par value; 497,969,086 shares authorized, 416,270,745 shares issued and outstanding as of September 30, 2012 and December 31, 2011) 133,507 133,507
Preferred shares (10 Russian rubles par value; 138,756,915 shares authorized, 83,254,149 shares issued and outstanding as of September 30, 2012 and December 31, 2011) 25,314 25,314
Additional paid-in capital 846,191 845,994
Accumulated other comprehensive loss (283,098) (356,580)
Retained earnings 3,614,751 4,345,754
Equity attributable to shareholders of Mechel OAO 4,336,665 4,993,989
Noncontrolling interests 380,368 371,337
Total equity 4,717,033 5,365,326
Total liabilities and equity   $ 18,875,768  $ 19,306,237
     
Consolidated Statements of Operations and Comprehensive Income (Loss)    
(in thousands of U.S. dollars) Nine months ended September 30,
  2012 2011
  (unaudited) (unaudited)
Revenue, net (including related party amounts of $558,812 and $789,199 during nine months 2012 and 2011, respectively)   $ 8,750,831  $ 9,617,126
Cost of goods sold (including related party amounts of $696,781 and $1,422,929 during nine months 2012 and 2011, respectively) (6,156,816) (6,255,629)
Gross profit 2,594,015 3,361,497
     
Selling, distribution and operating expenses:    
Selling and distribution expenses  (1,320,845) (1,339,263)
Taxes other than income tax  (78,062) (94,687)
Accretion expense (3,816) (5,054)
Loss on write-off of property, plant and equipment  (3,846) (2,425)
Impairment of goodwill and long-lived assets (470,967)  -- 
Provision for amounts due from related parties (300,062)  -- 
Provision for doubtful accounts  (10,876) (8,367)
General, administrative and other operating expenses, net (435,409) (457,532)
Total selling, distribution and operating expenses  (2,623,883) (1,907,328)
Operating (loss) income  (29,868) 1,454,169
     
Other income and (expense):    
Income from equity investments  405 351
Interest income  52,453 10,097
Interest expense  (484,717) (448,127)
Other income (expenses), net 49,359 (14,463)
Foreign exchange gain (loss) 5,828 (131,518)
Total other income and (expense), net  (376,672) (583,660)
(Loss) income before income tax  (406,540) 870,509
     
Income tax expense  (136,496) (290,733)
Net (loss) income  (543,036) 579,776
Less: Net income attributable to noncontrolling interests  (7,059) (53,046)
Net (loss) income attributable to shareholders of Mechel OAO   $ (550,095)  $ 526,730
Less: Dividends on preferred shares  (79,056) (78,281)
Net (loss) income attributable to common shareholders of Mechel OAO  (629,151) 448,449
     
Net (loss) income  (543,036) 579,776
Currency translation adjustment  84,565 (182,982)
Change in pension benefit obligation  (776) (1,199)
Adjustment of available-for-sale securities  (75) (1,327)
Comprehensive (loss) income  $ (459,322)  $ 394,268
Comprehensive income attributable to noncontrolling interests  (17,291) (33,029)
Comprehensive (loss) income attributable to shareholders of Mechel OAO  (476,613) 361,239
     
Consolidated Statements of Cash Flows    
(in thousands of U.S. dollars) Nine months ended September 30,
  2012 2011
   (unaudited)   (unaudited) 
Cash Flows from Operating Activities    
Net (loss) income attributable to shareholders of Mechel OAO  (550,094) 526,730
Net income attributable to noncontrolling interests 7,059 53,046
Net (loss) income  $ (543,035)  $ 579,776
Adjustments to reconcile net (loss) income to net cash provided by operating activities:    
Depreciation  333,023 285,714
Depletion and amortization  120,795 135,864
Foreign exchange (gain) loss (5,828) 131,518
Deferred income taxes  (77,336) 23,147
Provision for doubtful accounts 10,876 8,367
Change in inventory reserves 23,937 504
Accretion expense 3,816 5,054
Revision in asset retirement obligations (2,867) (5,076)
Loss on write-off of property, plant and equipment 3,846 2,425
Impairment of goodwill and long-lived assets 470,967  -- 
Provision for amounts due from related parties 300,062  -- 
Income from equity investments  (405) (351)
Non-cash interest on pension liabilities  9,002 10,264
Loss (gain) on sale of property, plant and equipment  4,091 (2,439)
Gain on accounts payable with expired legal term  (2,445) (3,665)
Gain on forgiveness of accounts payable (17,401)  -- 
Amortization of loan origination fee 36,002 45,330
Loss resulting from accretion and remeasurement of contingent liability 1,413 1,303
Pension service cost, amortisation of prior service cost and actuarial (gain) loss, other expenses 3,010 6,033
Changes in working capital items, net of effects from acquisition of new subsidiaries:    
Accounts receivable  30,941 (206,152)
Inventories  485,060 (608,748)
Trade payable to vendors of goods and services  (18,331) 43,592
Advances received  (29,543) (74,255)
Accrued taxes and other liabilities  61,793 (290)
Settlements with related parties  (230,267) (288,552)
Other current assets  135,732 (135,410)
Unrecognized income tax loss (benefits) 115 (2,378)
Net cash provided by (used in) operating activities  1,107,023 (48,425)
     
Cash Flows from Investing Activities    
Acquisition of DEMP, less cash acquired (24,652)  -- 
Acquisition of Cognor, less cash acquired (24,172)  -- 
Short-term loans issued and other investments (1,485) (386,328)
Proceeds from short-term loans issued 71,766 345,979
Proceeds from disposals of property, plant and equipment  23,461 13,364
Purchases of mineral licenses  (1,320) (23,266)
Purchases of property, plant and equipment  (846,018) (1,370,073)
Net cash used in investing activities  (802,420) (1,420,324)
     
Cash Flows from Financing Activities    
Proceeds from borrowings  3,482,050 4,711,690
Repayment of borrowings  (3,296,138) (2,735,546)
Dividends paid  (186,443) (209,696)
Dividends paid to noncontrolling interest (8,475)  -- 
Acquisition of noncontrolling interest in subsidiaries (32) (188)
Repayment of obligations under finance lease  (92,937) (76,066)
Sale leaseback proceeds  --  25,473
Net cash (used in) provided by financing activities  (101,975) 1,715,667
     
Effect of exchange rate changes on cash and cash equivalents (263,809) (69,596)
     
Net (decrease) increase in cash and cash equivalents  (61,181) 177,322
     
Cash and cash equivalents at beginning of period  643,379 340,800
Cash and cash equivalents at end of period  $ 582,198 $ 518,122
CONTACT: Mechel OAO
         Vladislav Zlenko
         Director of Investor Relations
         Mechel OAO
         Phone: 7-495-221-88-88
         Fax: 7-495-221-88-00
         vladislav.zlenko@mechel.com

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