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Why Mechel (MTL) Shares Are Falling

NEW YORK (TheStreet) -- Russian miner Mechel (MTL) dropped 19.5% to $2.31 in trading Wednesday, a knock-on effect of the stock's 41% dive on the Moscow Exchange overnight. Investors remain concerned over the company's management of $9 billion in debt.

Year to date, shares have plummeted 66.7%, after sluggish Chinese growth and financial turmoil in Europe weakened demand for Mechel's core coking coal production.

In an emailed statement, Mechel said discussions with its creditors were progressing smoothly and that the share price slump was due to rumors run rife.

"Discussions with banks over covenant holidays and debt restructuring are going well," the company said in a statement obtained by Reuters. "There are no negative events at the company."

The miner expects debt discussions to be finalized by the end of November.

At the time of publishing, a Mechel spokesperson had not responded to requests for comment on its debt discussions.

TheStreet Ratings team rates Mechel OAO as a Sell with a ratings score of D. The team has this to say about its recommendation:

"We rate Mechel OAO (MTL) a SELL. This is driven by a few notable weaknesses, which we believe should have a greater impact than any strengths, and could make it more difficult for investors to achieve positive results compared to most of the stocks we cover. The company's weaknesses can be seen in multiple areas, such as its deteriorating net income, generally high debt management risk, disappointing return on equity, poor profit margins and weak operating cash flow."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Metals & Mining industry. The net income has significantly decreased by 247.1% when compared to the same quarter one year ago, falling from $218.02 million to -$320.65 million.
  • The debt-to-equity ratio is very high at 3.37 and currently higher than the industry average, implying increased risk associated with the management of debt levels within the company. Along with this, the company manages to maintain a quick ratio of 0.21, which clearly demonstrates the inability to cover short-term cash needs.
  • Return on equity has greatly decreased when compared to its ROE from the same quarter one year prior. This is a signal of major weakness within the corporation. Compared to other companies in the Metals & Mining industry and the overall market, Mechel OAO's return on equity significantly trails that of both the industry average and the S&P 500.
  • The gross profit margin for Mechel OAO is currently lower than what is desirable, coming in at 34.80%. It has decreased from the same quarter the previous year. Along with this, the net profit margin of -12.92% is significantly below that of the industry average.
  • Net operating cash flow has significantly decreased to $69.37 million or 79.91% when compared to the same quarter last year. In addition, when comparing to the industry average, the firm's growth rate is much lower.

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