Mechel OAO: Earnings "Na Zdorovje" Style

Oct.19.07 | About: Mechel OAO (MTL)

Mining stocks have been on a tear recently ripping through financial tundra as if deserts were fruit bearing highlands. Mechel (NYSE:MTL) is scooping up the cash as if coal, nickel and steel grew on trees.

On 10/11/2007 MTL reported production as follows:

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These are the production figures for the first nine months of 2007. Now let's compare them with the production figures for the first six months of 2007, together with the financial statements from the first six months and see if we can figure out what the financial statements for the first nine months will look like when they are released.

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We'll translate this for you. First, $1.18 net per diluted share is the equivalent of $3.53 per ADS. As MTL trades in N.Y. as an ADS, the $3.53 is what is quoted by the data providers. Second, on a 9 month / 6 month comparison (vs. 2006), this is what we get;

As you can see, aside from nickel overall production is slightly down in the third quarter. However, a further breakdown shows that higher margin products (long products) were up. Also the addition of Ferrosilicon is for two months (August and September) reflecting the acquisition of Bratsk Ferroalloy. Taking into account pricing and other fluctuations [i.e. Q3 2006], but excluding one time charges, third quarter earnings per ADS should be up (!) at around $1.71 per ADS, primarily due to more favorable pricing. If we're off, we are off by multiples of $0.03! Based on forward estimates, at $71.72 per ADS, MTL is trading at a ttm P/E range of 9.8 to 10.8. Considering the potential growth, this is low compared with peers. On the other hand, investors tend to fixate on MTL being under Putin's thumb and apply a higher risk premium. As an aside, "Taxes other than income tax" is not what you think. These aren't payments to the Russian mafia. These are licensing fees, local levies and royalties. The former, if any, is more likely to be included in "Provision for doubtful accounts"! (;

Disclosure: No conflicts.

Note: Pictured above is strip mining in Indonesia (not Russia). Correction: MTL is trading at a ttm P/E of 9.8 to 10.8 (previously stated forward)