Mechel (NYSE:MTL, NYSE:MTL.P) continues to seek a way to deal with its severe debt burden (8.4 LTM Net Debt/EBITDA). The company has no financial resources to continue developing its most promising investment project - the Elga deposit - and considers selling it. As for the stock, I wouldn't recommend jumping on the bandwagon as there are no fundamental reasons for that.
Losing A Dream
The debt burden is Mechel's biggest problem. Between 2004 and 2012, the management pursued a very aggressive policy of building a vertically integrated holding company. As a result, the company has its own resource base, transportation capacities, a wide range of end products and its own sales network. The downside of this was the growth of the company's debt, as the acquisitions were made on borrowed funds. Eventually, the debt became too huge and the company was no longer able to service it.
Mechel was on the verge of bankruptcy in 2014-2016 when VTB, Gazprombank, and Sberbank demanded to convert $9.16 billion of the company's debt into shares. All this took place against the backdrop of a dramatic collapse in coal prices and a drop in the capitalization of Mechel itself. Subsequently, the company managed to avoid bankruptcy after signing a debt restructuring agreement in 2016.
In the summer of 2016, Gazprombank purchased 49% of the Elga project from Mechel for 34.4 billion rubles. For reference, Elga is one of Russia's largest coking coal deposits with reserves of 2.2 billion tonnes and Mechel's key investment project. Most of these funds were spent to reduce Mechel's debt to Sberbank. On January 20, the offer period expired, under which Mechel had a right to buy 34% of the Elga project from Gazprombank. After Mechel's failed purchase of Gazprombank's stake, Igor Zyuzin, according to RBC agency sources, is now ready to sell Mechel's stake in Elga.
