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Mechel OAO (NYSE:MTL)

Q3 2007 Earnings Call

December 11, 2007 10:00 am ET

Executives

Alexander Tolkach - Head ofInternational Relations and IR

Igor Zyuzin - CEO

Vladimir Polin - CEO of Mechel ManagementCompany OOO

Stanislav Ploschenko - Acting CFO

Analysts

Yuri Vlasov - Renaissance Capital

Sergey Donskoy - Troika Dialog

Andrei Navikov - Goldman Sachs

Dmitry Kolomytsyn - UniCredit

Dmitry Smolin - URALSIB Capital

Asgani Gregoriatte - BCS AssetManagement

Jack Dzierwa - US Global Investor

Martin Zaninovic - Alfa-Bank

Operator

Good day, ladies and gentlemenand welcome to the Mechel nine months results conference call. For yourinformation, this conference is being recorded.

At this time I would like to turn the call over to your hosttoday Mr. Alexander Tolkach. Please goahead, sir.

Alexander Tolkach

Thank you and good day and good evening everyone. I would like to welcome you to Mechel'sconference call to discuss our nine months 2007 results, which were reportedtoday. With us from the management todayare Mr. Igor Zyuzin, CEO; Mr. Vladimir Polin, CEO of Mechel Management CompanyOOO; and Mr. Stanislav Ploschenko, our Acting CFO. After management has made their formalremarks, we will take your questions to the presentation team.

Please note that during this call management will makeforward-looking statements some of which may have been made in the pressrelease. Some of the information on thisconference call may contain projections or other forward-looking statements regardingfuture events or the future financial performance of Mechel as defined in theSafe Harbor Provisions of the USPrivate Securities Litigation Reform Act of 1995. We wish to caution you that these statementsare only predictions that actual events or results may differ materially. We do not intend to update thesestatements. We refer you to thedocuments Mechel files from time-to-time with the US Securities and Exchange Commission,which contain and identify important factors that could cause the actualresults to differ materially from those contained in our projections orforward-looking statements.

In addition we will be using non-GAAP financial measuresincluding EBITDA in our discussion today. Reconciliation of non-GAAP financial measures to the most directlycomparable US GAAP financial measures are contained in the earnings pressrelease, which is available on our website at www.mechel.com.

At this point, I'd like to turnthe call over to Mr. Igor Zyuzin. Mr.Zyuzin, please go ahead.

Igor Zyuzin

[Translated]. Good day and good morning, ladies andgentlemen. We are pleased to welcome youto our conference call reporting our financial results for the first ninemonths of 2007. I will start today'spresentation with a general overview of our performance and then pass themicrophone to the CEO of Mechel Management OOO, Mr. Vladimir Polin who willprovide more insight on our achievements and plans of the company. After that our CFO Mr. Stanislav Ploschenkowill review the financial results.

First of all for the first nine months of 2007 it is clearthat Mechel has achieved impressive financial results which have alreadysurpassed the record results reported for the full year 2006 that came as ourbusiness continues to expand. During thethird quarter we announced acquisitions of Bratsk Ferroalloy Plant and seaportTemryuk-Sotra on the Sea of Azov and thoseacquisitions we had discussed in detail during our last earnings call. But only two days after our last call, wehave made another major acquisition. That will comprise Yakutugol Mining Company, and one of the world'slargest untapped coking coal field, Elgaugol.

By acquiring Yakutugol, Mechel became the first Russianproducer of hard coking coal, and the third coking coal exporter engineer in Russia.And after we develop the Elgaugol deposits, we expect to become the producer ofthe most expensive and most deficit grade of coking coal. These will makeMechel a leading producer of coke production raw materials in Russia, and one of the majorplayers in international market, especially in the Asia-Pacific region.

Apart from acquisitions, we have executed a number ofprojects to modernize and improve our production across most of our assets. Wehave started implementing our new CapEx program, which will extend our reach tonew markets and grow opportunities and strengthen our existing position. And asa result, the first nine months of 2007 yielded strong financial andoperational results.

The net revenue amounted to morethan $4.6 billion, consolidated EBITDA more than $1.2 billion, and net incomemore than $706 million. And looking at the qualitative side of Mechel'sbusiness, we maintained a high operational margin of 22.6%. And we willcontinue to move forward with our brands for enhancing Mechel's effectiveness,increase its scale and continue to grow our shareholder value.

And now, I'll give over to Mr. Vladimir Polin, CEO of MechelManagement Company, who is in charge of our operational management, and he willprovide more details on our operation. Thank you for your attention. Mr. Polin,please go ahead.

Vladimir Polin

[Translated]. Good day, and goodevening, ladies and gentlemen. We are pleased that our company has performedvery well in the first nine months of this year. We continue to implementimportant projects, improve the abilities of our company, and drive expansion,in existing and new markets.

Here is the highlighted performance of the production. Inthe first nine months of 2007, we're continuing to increase and maintain thepace which we have demonstrated in the beginning of the year. Compared to thefirst nine months of 2006, we increased the coal production by 8%, nickelproduction by 22%, steel production by 3%, rolled products production by 10%,and hardware production by 14%.

And with the acquisition of the Moscow Coke and Gas Plant,and commissioning of the new coke battery in CMP, the coke production rose by77%, if compared to nine months of the last year. And since we actually startedto produce more coal and mining products, we continue to improve the logisticoperations within both domestic and international sales.

Facing a significant shortage in the Russian railroadsrolling stock, due to seasonal factors, we had to lower shipments of our steamcoal. However, in order to reduce dependence on the neighboring countries portsand seasonality factors, in August of this year, we have acquired the seaportTemryuk-Sotra on the Sea of Azov, and presently, we are redirecting part of ourtraffic to this port. We're also working on some other projects oforganizational and technical nature that will improve our logistics.

And I would also like to talk, briefly, about the energysegment of our operations. Our segments of Southern Kuzbass Power Plant, withinstalled capacity of 554 megawatts, as well as Kuzbass Power Sales Company, weapproached the level when generation and sales of electricity constituteseparate business of Mechel, since total power generating capacity of the groupsubsidiaries is now over 800 megawatts.

And we decided to officially report our energy operations asa new segment. And today is the first time when we have disclosed this segmentseparately. Of course, this segment is still very new and young, and has to gothrough development, modernization, and deep integration into the company'soverall business. We are currentlyestablishing the base for developing an efficient and sizable energy businessin the company. It is worth noting that even today, Mechel's Energy segmentdemonstrates profitability. If we exclude interest payments on intersegmentloans which were granted to Mechel Energo, the subsidiary of Mechel, for therecent acquisitions by the holding company. And if we eliminate those paymentsfor the first nine months of 2007, the segment contributed almost $12 millionthrough consolidated EBITDA.

And after becoming part of Mechel Energy segment, theSouthern Kuzbass Power Plant has increased its power generation volumes andoutperformed its initial production plan by more than 1.5 times. Havingacquired Kuzbass Power Sales Company, we have managed to increase electricitysales and get a better feeling of Siberia'shuge energy market. In other words, we see both sides of our energy businesssteadily developing, generation and sale of electricity.

And as expected, at this stage, in the segment development,current profitability in the energy segment is by far lagging behind thestability of our other two segments. However, we continue to develop the energysegment of Mechel's business by increasing the capacity and efficiency of theexisting generating facilities. In addition, we are also planning to developthe segment from new acquisitions of energy assets that will be integrated intothe group's business using the existing synergy potential in production andlogistics. Investments in energy are very promising ones, and given the factthat consumption and shortage of electricity have been on the rise.

And now, I would like to say a few words on the operationalresults of few segments. The third quarter was somewhat more challenging forus, compared with the first half of the year, given the fact that therestructuring of our two subsystems. As I mentioned before, we changed ourstrategy from selling steel rolled products to wholesale traders, and to investinto development of our own service, retail structure called Mechel Service,specialized in reaching the final customers.

But to conduct this change in our cargo flows, we needed toundergo a period of lower rolled product sales, at the same time filling thegap with a temporary increase in billets sales. This resulted in a temporarydecrease in the segment's margin. Overall, although we increased the total salevolumes, but we didn't improve the segment's margin, if compared to theprevious year.

Of course, the margin was also affected by the generaldecline in the constructional steel market in Russia. But we are already seeing astabilization of the situation and we are already able to gradually increaseour sales prices for the rolled products. Besides during this quarter, MechelService managed to commission new warehouses and sales force continuing tocement our position on the retail market.

And now, I would like to turn the call over to StanislavPloschenko, who will discuss in more detail our financial results, and marketoverview. Thank you for your attention.

Stanislav Ploschenko

Good morning, and good afternoon, ladies and gentlemen. Onceagain, I am pleased to report another successful financial period which by farbeats the similar nine months results of the year 2006reasserting theadvantages of the growth strategy we chose. During the reported periods, ourconsolidated revenue grew by 48%, versus the same period of 2006, to a record$4.65 billion.

Our recent acquisitions in the energy sector contributed$217 million there. At the same time, the market situation undoubtedly played asignificant role in the revenue growth, bringing $1.17 billion, while theincrease in sales volume fetched another $115 million. The price factor was, byfar, dominating in the mining segment, pushing the revenue up 33%, to $1.266billion. The significant negative impact from the reduction in volumes was dueto the increase of intersegmental sales, in particular intra-group. Sales ofcoking coal went up by 59%, and iron ore concentrate up by 27%. The steelsegment demonstrated even better dynamics, with revenue up 45%. The pricefactor contributed $769 million, while $205 million came from the growth insales volume.

Now, we'll look into the segment performance in greaterdetail on the following slides. In steel segment, we continue to concentrate onthe more promising Russian markets, whose share in our sales increased from55%, a year-ago, to 60%. Overall, we witnessed a certain slowdown in the marketdynamics in the third quarter of the year, and after that unprecedented growthin the first half, especially coming from the construction sector. Our strategyof gradual cost reduction, and shift towards higher-margin products, allowed usto demonstrate significant growth in the main financial indicators in the firstnine months. EBITDA is up 47%, to $594 million, and net income up 55%, to $360million.

The share of high margin products consistently grew.Stainless sheets, from 4%-5% of the segment revenue, stampings and forgingsfrom 8% 9%. Although the share of hardware decreased insignificantly inabsolute numbers, the volume of sales increased by 19% year-on-year, due to thelaunch of modern equipment in our main hardware plants this year.

As Mr. Polin already mentioned, in 2007 we undertookrestructuring of our sales policy in the steel segment, walking away fromwholesales or the large traders, and concentrating on deliveries to the finalconsumers of our products through our retail subsidiary, Mechel Service, whichworks on the open market, not only with our plants, but also with thirdparties.

Today, we can already say that after certain transitionalperiod this policy is beginning to pay back, and we strongly expect that innear future, it will translate into tangible financial results.

Our mining segment demonstrated even more convincingresults. EBITDA grew more than 2.5 times, and amounted to $654 million. Netincome increased by three times, and it reached nearly $400 million.

Despite the fact that nickel prices came down significantlyin the third quarter from the historical highs reached in the second one, wemanaged to take advantage of our mining business diversification and maintainthe high profitability reached in the first half of the year on growing coaland iron ore prices.

Our flexible sales strategy added to the success throughincrease of sales to Europe, particularly sales of steam coal, as well as theincrease of sales to CIS markets in Ukraine in the first quarter of2007. We also began to ship low quality steam coal to the recently acquiredSouth Kuzbass Power Plant, which helped us to increase sales profitability ofour coal operations, through usage of logistical advantages.

Besides following low spot pricesin the Northern China, we decided to enterthis strategic market, as well, and began shipping concentrate there. Atpresent, our monthly sales to Chinamake up 150,000-200,000 tonnes. Thus, we can say today, that our strategy basedmarket approach in sales- both towards internal consumers and third partiesproved to be efficient, and contributed to our success.

We are also convinced of the fact that our recentacquisitions, namely Yakutugol, which is Russia's largest producer and exporterof hard coking coal; and Elgaugol, with the world's largest reserves of highquality caking coking coal, will provide our mining segments with uniqueopportunities, not only on the Russian markets, but also on the global ones,which will, fundamentally, change our company's market position.

On the cost side, we have managed to keep our cost of salesstructure in both mining and steel segments virtually unaltered, despitechanging conditions in 2007 in all the input markets. We also made furtherprogress on the path to self sufficiency, having acquired Bratsk FerroalloyPlant, which fully covers our need for ferrosilicon in the steel segment.

Taking into account the fact that4 to 6 kilogram of ferrosilicon is consumed in production of one tonne ofsteel, this acquisition not only increased our independence, but also made usone of the major suppliers of ferrosilicon to the entire metallurgicalindustry.

Comparing the results of our two main segments, I would liketo draw your attention once again to the benefits of our growing businessmodel. We succeeded to take full advantage of growth in coking coal and ironore prices increasing the profitability of our mining segment with operatingmargins doubling to exceed to 34%, and EBITDA margin growing to almost 37%. Atthe same time, despite growing raw material costs and certain price correctionin the steel markets in the third quarter, we managed to maintain theprofitability of our steel segment consistently following our strategydiscussed earlier.

As for the new energy segment, we believe it's just tooearly to judge from the results since it was only formed during the last sixmonths, and it will take some time to fully integrate this asset into ourbusiness, and make the most of all expected synergies.

We view this segment as an important investment into thefuture in the light of the pending electricity price liberalization andever-growing energy deficit, both in Russiaand Europe. At present, we are reviewing themodernization program of power generation assets, as well as power capacityincrease to maximize the benefits of the two mentioned factors.

Moving from the segments results to the consolidated ones, Iwould like to reemphasize that the fact that the nine months results of 2007exceeded the full 2006 year results in all financials terms, both absolute andrelative ones, reaching the maximum level for the last three years.Consolidated gross margin grew to 39%. Operating profit exceeds $1 billion forthe first time, and represented 25% of the revenue. EBITDA grew to over $1.2billion, or 26% of revenue, and the net income doubled, to post $706 million.

As far as the balance sheet ofthe group is concerned, we would like to point out the operating cash flow of$843 million for the reporting period, set the new historical maximum for ourgroup. Despite the growing investment activity in 2007, our business hasgenerated sufficient cash inflow for financing our acquisitions. As a result ofinsignificant growth of debt item on our balance sheet, which was used tofinance some of our first quarter acquisitions, the cash and cash equivalentbalances as of the reporting date exceeded $400 million, and it also wasimportant in the light of preparation for the auction for Yakutian andElgaugol.

Despite the increase in debt balances on the end of thethird quarter of 2007, the debt burden continued to be insignificant with thenet debt to EBITDA ratio of just 0.64. Thus we were well prepared for theauction to acquire the Yakutian assets. Largely, that was a result of ourcontinuous efforts to optimize our debt portfolio by increasing the share oflong-term debt and decreasing the share of secured debts, which reached therecord low of 13%. The success of this strategy became even more obvious afterour victory at the auction, which took place at not the best of times for theglobal financial markets, as you know.

To sum it up, we're satisfied with the first nine months ofthe year, which beats again the historical financial results of the company.Such stable positive results measured against different trends in globalmarkets testify to the validity of our strategy aimed at asset modernizationand expansion in key markets.

Taking into account our recent acquisitions, which willallow us not only to enter new markets, but also to solidify our position onthe existing ones, we remain convinced that there is still lot of potential forfurther growth and improvement in our company's performance.

Thank you for your attention, ladies and gentlemen. And nowwe will be pleased to answer your questions.

Alexander Tolkach

Thank you. And wewill now take the questions. We wouldask that participants please state their name and company before asking theirquestion, and allow us sometime after the question for translation. All questions will be answered in Russianwith simultaneous translation into English. So, if you wish you may ask the question in Russian also and we willtranslate for you. Thank you.

Question-and-AnswerSession

Operator

(Operator Instructions). Ourfirst question comes from Yuri Vlasov with Renaissance Capital. Please goahead.

Yuri Vlasov -Renaissance Capital

[Translated]. So I'll translate for our English speakingaudiences. First question was on theYakutugol and its volumes and trends of mining for nearly three years and howmuch of it will be sold in the Russian markets? Second question was about internal consumption of our miningproducts? And third question, ofpossible trends of IPO in the mining segments? Thank you. We will answer thequestions in the row. Mr. Zyuzin will answer this question

Igor Zyuzin

Okay, I'll translate. So The Yakutugol trends for mining, we aretrying to increase the mining output of Yakutugol operations from current,slightly more than 10 million tonnes of coal per year to a maximum of 15million tonnes of coal per year. And next year, 2008, we will increaseproduction by 1 million or 1.5 million tonnes of coal per year and these levelsof production of up to 15 million tonnes per year will be maintained till thedepletion of the reserves there.

So as far as the markets areconcerned for the equity in coal, current portfolio of about 50% export, 50%domestic sales plus/minus 10% we see as an optimal one at present. But, ofcourse, we may shift it somewhat if we see higher prices for coking coaldomestically available, sell more coking coal domestically. And we currentlysee higher prices for the steam coal, so if we could do well on the exportmarkets then, of course, we will export them. So we'll continue to maintainthis operational level. And now the second question of internal consumption ofour mining products. Mr. Polin will answer that.

Vladimir Polin

So, as for internal consumptionof our mining products, during the first nine months of 2007 we shipped about2.7 million tonnes of coking coal to our coal production facilities at Chelyabinsk at Moscow Cokeand Gas Plant. We shipped roughly the same amount, 2.7 million tonnes of ironore concentrate to our Chelyabinsk Metallurgical Plant and as for steam coal,taken into account the acquisitions of Southern Kuzbass Power Plant, total innine months we have shipped about 400,000 tonnes of steam coal to ourgenerating facilities. And now to the third question about miningsegments. Zyuzin will answer the thirdquestion.

Igor Zyuzin

So we are currently studying the possibilitiesof doing a separate IPO of our mining segment, but we are not excluding suchpossibility, but no final decision has been made. So we are just having the --what, how can we do that.

Thank you. And next questionplease.

Operator

The next question comes fromSergey Donskoy with Troika Dialog. Please go ahead.

Sergey Donskoy -Troika Dialog

So, first question was if we candivide our gross margin and amortization into different segments? Secondquestion, in our quarter reporting it seems that our productional costs andcommercial costs have increased, so the question is it true? Third question is[Technical Difficulty]? And the fourth question was on our debt situation atpresent time. Thank you.

Vladimir Polin

Gross profit for the mining segments made up $920 millionto-date in the first nine months of this year, the steel segment $846 millionand the energy segment $89 million. Depreciation, depletion and amortizationitem was respectively, $83 million for the mining segment, $90 million for thesteel segment, and $11 million for the energy segment.

And answering to the second question, the increase incommercial expenses, most of the increase came on the accounts of energysegments and was related to the distribution of electricity to the consumersthrough the network of (inaudible).

Stanislav Ploschenko

Let me answer the fourth question before the third one. Thequestion was about the amount of debt on our books as of today, taking intoaccount the acquisition of Yakut and Elgaugol. The amount of debt as of todayis approximately $3 billion.

Sergey Donskoy -Troika Dialog

[Foreign Language].

Igor Zyuzin

[Foreign Language].

Alexander Tolkach

[Translated] Let me translate, the increase of the cost ofsales interest came in the accounts of the energy segments mostly. And now onthe third question, considering the coal shipments on the Southern KuzbassPower Plant, Mr. Polin will answer.

Vladimir Polin

[Translated]. So, we have been shipping our steam coal fromthe Southern Kuzbass Power Plant since July 2007, and of course, we can't giveyou exact numbers at the moment, but these shipments increase graduallymonth-over-month considering, the fact that we also have to make some surplusfor the winter months. Thank you. What I hear is somebody's heavy breathing inthe line. I guess, our call is very important today.

Sergey Donskoy -Troika Dialog

[Translated]. So, the question was considering the possibledepletion of Yakutugol coal reserves, and considering our plans to increaseproduction up to 15 million tonnes per year, so when will we foresee thedepletion? Thank you. Mr. Zyuzin will answer that question.

Igor Zyuzin

So, we plan to finish production at the Yakutugol operationin the term of 15 to 20 years. Thankyou. Next question, please.

And also additional – I am sorry – and during these 15-20years, as we finish operation at Yakutugol, we will transfer our operations,equipment, manpower, et cetera to Elga operations, which we will bedeveloping. Thank you. Next questionplease.

Operator

We will now move to [Andrei Navikov] with Goldman Sachs.Please go ahead, sir.

Andrei Navikov -Goldman Sachs

Yeah. Hi. I have a few questions regarding your coal assets.What kind of spot prices you currently see for the coking coal in Russiafor J, K and KS grades? And to what extent these prices can exceed that youthink will translate into contracts in ‘08 in Russia?

Second question, what amount of the coking coal is currentlysold in Ukraine,and at what prices? And what do you think these both numbers will be in ‘08?And the third question, what salary inflation, do you have for the cokesubsidiary and steel subsidiary, right now, and what is expectations for ‘08?Thank you.

Alexander Tolkach

Sir, could you repeat the grades of coal you asked in thefirst question?

Andrei Navikov -Goldman Sachs

I am talking about grade J, K and KS?

Alexander Tolkach

All right. Thank you. The first question will be answered byMr. Zyuzin.

Igor Zyuzin

[Translated]. So, for the coking coal prices, they arecurrently both for Russiaand Ukrainewithin spot prices for them, within the level of 140 to $150 on FCA basis, andin 2008, of course, we foresee them to increase. And Mr. Polin will answer the third question.

Vladimir Polin

[Translated]. So, as far as salary inflation is concerned,we offset the salary inflation by increasing the productivity of the manpowerand optimizing the total amount of people working in our subsidiaries. So, currently our salary inflation is higherthan overall inflation in Russia,but we are dropping off some obsolete and inefficient production, and thus wedecreased the manpower level, and we maintain the most professional peopleworking both in steel and mining segment. Thank you. The next question, please.

Operator

The next question comes from Jack Dzierwa with US GlobalInvestors. Please go ahead. Hello, Mr. Dzierwa, your line is now open. Seemsthe line of Mr. Dzierwa is muted. So, I will take now a question from DmitryKolomytsyn from UniCredit. Please go ahead.

Dmitry Kolomytsyn -UniCredit

[Translated]. The first question was on our further steamcoal shipments to the Southern Kuzbass Power Plant, and its capacity, and alsoour plans for generating volumes there. The second question was today it was announcedthe possible increase of taxes for mining companies, and if it can affect ouroperations.

The third question on the general prices in fourth quartercompared to the third quarter, and how we see our financial results goingforward? And the fourth question aboutwe announced very recently our sales of iron ore concentrate to Northern China, so the other question was how itproceeds? Thank you. We will answer them one-by-one. The first question will be answered by Mr.Zyuzin.

Igor Zyuzin

So, we plan to ship about 1.5 to 2 million ton of our coalto the Southern Kuzbass Power Plant. And in 2008, we planned generation outthere at 2.3 million kilowatt hours. Thank you. Now the nextquestion. No, we will answer the nextquestion.

So, on the second question, unfortunately we cannot commentnow since the news was published recently, but we will study that issue, and wewill return back with an answer. Now for the third question, which we willanswer.

So, to answer for that fourth question about our iron oreconcentrate deliveries to China,our current FCA prices reached US$100 per ton on the FCA basis for the dryconcentrate, and it's now on the general prices question.

So, in the fourth quarter, we witnessed declines -- somedeclines for the steel products and nickel, and increase in prices for coalsand iron ore concentrate. Thank you andnext question, please.

Dmitry Kolomytsyn -UniCredit

[Translated]. So the question was on our possible IPO ofmining segment, if this new entity will comprise only coal mining assets orother mining assets?

Igor Zyuzin

So, we are not excluding the possibility of uniting all ofour mining assets that we should currently have in the company, and actuallynow we are studying different possibilities to come to the best possiblesolution. Thank you. Now, next question please?

Operator

We will now take a question from [Dmitry Smolin] withURALSIB Capital. Please go ahead.

Dmitry Smolin -URALSIB Capital

[Translated]. The question was on our new energy segments,so what were the financial results purely for the third quarter? Thank you. We'll answer that.

Igor Zyuzin

Translating, for the energy segment in the third quarter ofthis year, the revenue made up to $112 million; gross profits, $83 million;operating profits, $340,000; EBITDA, $5.4 million; and net loss of around $6.8million mostly on the accounts of the interest payments on inter-companyloans. Thank you.

Dmitry Smolin -URALSIB Capital

[Translated] So the question is on our coking coal prices.As we at our operation, if we can save the significant increase already in thefourth quarter or on the beginning of 2008 after Yakutugol company changes itssales to the new long-term contracts? Thank you. We'll answer thequestions.

Igor Zyuzin

So, we hope that even in the fourth quarter, we have alreadywitnessed it has a increase in sales prices for Yakutugol's operations, forwhich we have their both spot and long-term contracts, and while we'll have tofinish the long-term contracts as of the end of the year, we will be able toincrease prices on the spot basis. Thankyou, and next question please.

Operator

We'll now move to [AsganiGregoriatte] with BCS Asset Management . Please go ahead.

Asgani Gregoriatte - BCS Asset Management

[Translated] The first questionwas long-term contracts in our mining segments, on that base in the totalportfolio in prices, and when they expire? And the second question was on the possible mining volumes of our newmining assets, including Elga? Thank you. We'll answer those.

Igor Zyuzin

So, approximately the totalportfolio of long-term contracts in our overall coal sales are less than 60%and they expire, although the latest of them expire by April 1, 2008. Thank you.

Asgani Gregoriatte - BCS Asset Management

[Foreign Language]?

Igor Zyuzin

So, this year, we should see aproduction of coking coals on existing operations in Southern Kuzbass and Yakutugol up to 16 million tonnes, and next year, wesee a possibility to mine about 18 million tons of coking coals in all ourdifferent assets. Thank you. Now, next question please.

Operator

We will now take a question from Jack Dzierwa with US GlobalInvestor. Please go ahead.

Jack Dzierwa - US Global Investor

Hey. Yes. Goodevening, gentleman. I joined theconference call late, so I apologize, if it has been already discussed, but inyour steel segment only can you comment about EBITDA margin outlook for thenext couple of years, as well as your plans in terms of return on investedcapital? Thank you.

Alexander Tolkach

Thank you.

Stanislav Ploschenko

[Translated]. We do not givefinancial forecasts, therefore, we would like to draw your attention to thecurrent figures and draw your own conclusions.

Alexander Tolkach

And just a second we will finishanswering the question.

Stanislav Ploschenko

[Translated]. As far as thereturn on capital is concerned, so we also can give you only the currentfigure. We will report it in a few minutes, if you don't mind.

Jack Dzierwa - US Global Investor

[Translated]. Thank you.

Alexander Tolkach

Thank you. Now while we are calculatingthat can we move to the next question please?

Operator

(Operator Instructions). We willnow move to Sergey Donskoy with Troika Dialog. Please go ahead.

Sergey Donskoy - Troika Dialog

[Translated]. So a question again about possible IPO of themining assets, and the question is, if we will maintain the control over ourmining assets even after IPO or we will separate those two businessescompletely? Thank you. Mr. Zyuzin will answer.

Igor Zyuzin

We do not look into possibilityof dividing our segments into two businesses completely. In case we do an IPO of our mining segment,this will be only the IPO of minority stake, and we will make sure our – wewill maintain the control over it. Thankyou.

Alexander Tolkach

And now Stanislav Ploschenko isready to answer the previous question on return on investments.

Stanislav Ploschenko

[Translated]. We can give you an answer on the return ofassets at the moment for the steel segment, which is around 12% for the ninemonths.

Sergey Donskoy -Troika Dialog

Thank you.

Alexander Tolkach

Thank you and next question please.

Operator

We will now move to Dmitry Kolomytsyn with UniCredit. Please go ahead.

Dmitry Kolomytsyn -UniCredit

[Translated] The first question is when we state that wewill increase Yakutugol's production up 15 million tons a quarter year, if wewill maintain the same portfolio as currently above 50% of coking coal and 40%of steam coal? And the second questionis regarding the cost in the third quarter. So, while we don't give financial forecast the question is if the energysegment will continue to increase our production costs, and the same questiongoes for the cost of goods sold for commercial goods? Thank you.

Igor Zyuzin

So, the first question, now wehave two big mining companies; first is Southern Kuzbass coal mining company,which now produce about 40% of coking coal of the total output; and Yakutugolcoal mining company, which currently produces about 70 to 80% of coking coalused alone. But on Yakutugol, we will increase the proportion of coking coalsmined, so there we have reached the level of 15 million tons per year. We will produce mostly only coking coal atYakutugol assets.

Alexander Tolkach

Thank you,now, we move to the second question on the third quarter.

Stanislav Ploschenko

[Translated]. Talking about theincrease of cost of sales, we see this natural circumstances when the companyis growing extensively through acquisitions, and this is the message, which youcan take as the basis for the calculations. And coming back to the question onthe return of assets, we give a small direction, it will be in the 12 to 16% asof the nine months of this year. Thankyou.

Alexander Tolkach

Thank you. Now the next question please.

Operator

Our final question comes from [MartinZaninovic] with Alfa-Bank. Please go ahead.

Martin Zaninovic - Alfa-Bank

[Translated] The question was on the prices for steelproducts given in today's presentation. Stanislav Ploschenko will answer it.

Stanislav Ploschenko

[Translated]. Unfortunately, inthis presentation, which is now being made available on the website, itcontains incorrect figures of the average price for the steel segment productsin the nine months. The correct figures are already contained in thepresentation in PDF format, which is already on the website, I hope, and willbe available for your usage. For your [express] purposes I can say that therebar price, average rebar price on FCA basis for the nine months was $645 [wirerods],$555 for stainless flat, [$5,223] and the rest of the figures you can see fromthe presentation which is on the website.

Alexander Tolkach

All right. Thank you. Now the next question, please.

Operator

As we have taken our final question, I would like turn backthe call over to you for any additional or closing remarks.

Alexander Tolkach

Thank you for all yourquestions. Ladies and gentlemen, thankyou for taking time to join Mechel's nine months 2007 financial resultsconference call today. And the replay of the call will be available for thenext 30 days, and you can find it on our website, and if you have any furtherquestions, please always feel free to contact our Investor Relationsoffice. Thank you again from all theteam here, and bye.

Operator

Ladies and gentlemen, that would conclude today's conferencecall. You may now disconnect.

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Source: Mechel Q3 2007 Earnings Call Transcript
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