Mechel is finalizing its talks with a group of foreign banks to refinance its USD 2.1 billion loan that underwent restructuring in 2009.

The Russian coal and steel giant Mechel decided to lower its outlays for capital projects to under USD 1.4 billion, according to the company’s Senior Vice President for Finances Stanislav Ploschenko.

In the first quarter of the year, the company’s capital expenditures totaled USD 200 million. The yearly capex total will be below what the company projected initially. Funding for a number of projects has been put on hold this year. Nevertheless, company officials are confident that the delays will not affect the dates for the completion of any planned projects.  

At present, Mechel is finalizing its talks with a group of foreign banks to refinance its USD 2.1 billion loan that underwent restructuring in 2009. While the company is not in need of extra funding, it would like to receive more favorable terms for the debt instruments that it already has on hands. Mechel’s management seeks to push back maturity dates and remove some of the restrictions contained in the financing documents. The company plans to complete its negotiations by September 2010. 

Mechel executives believe that the company would be able to finish the year with the debt-to-EBITDA ratio of 3. In quarter 1, 2010, the ratio was still at 4.5. In the first quarter, the company was able to postpone the due dates on loans totaling over USD 480 million. The payment on these obligations was originally due this year. In July, the company had access to credit lines with the combined available credit of USD 490 million.    

In May of 2010, Mechel was reported to have searched for international banks willing to refinance its USD 2 billion syndicated loans that the company originally took out for the purpose of purchasing assets in Yakutsk. According to reports, the company was negotiating with Royal Bank of Scotland and ING to raise the funds in two stages with repayment periods of 3 and 5 years.   

In July of 2009, Mechel restructured a USD 2.6 billion syndicated loan, the proceeds of which were used to acquire coal assets in Yakutsk in October 2007, as well as to buy the U.K.-based Oriel Resources in 2008. The company is yet to close its bridge loan for the purchase of Oriel Resources. Mechel’s agreement with the bank syndicate provided for pushing back loan due dates for 3.5 years.  

The total amount refinanced from the loan for the acquisition of assets in Yakutsk was USD 1.6 billion. The company borrowed a total of USD 2 billion for the transaction, with interest set a LIBOR + 6 percent. The loan was syndicated through ABN Amro, BNP Paribas, Calyon, Commerzbank, Natixis, SMBC, and Societe Generale. The loan was issued in two tranches, one with interest at LIBOR + 1.5 percent and the second at LIBOR + 2.25 percent. The restructuring of the loan increased financing expenditures.

Among other capex projects in the current year is the development of the Elga coal deposit in the Sakha republic. Most of the funding will be directed to constructing a railroad connection.

In June Mechel succeeded at amending its license for the Elga field. In accordance with the new terms of the license, the company will have until December 2011 to construct the railroad to the deposit site. The rail spur was originally supposed to have been completed in September 2010. 

As the Russian Deputy Prime Minister Igor Sechin indicated at the beginning of July, the Elga deposit will enter production in November 2010 despite the delay in railroad construction. According to Igor Zyuzin, chairman of Mechel’s board of directors, the company selected a new strategy for developing the deposit. Mechel is simultaneously pursuing rail spur construction and the excavation of the open pit mine to minimize the negative consequences of stopping project development in 2009. The deposit will be instrumental to achieving rare coal type supply substitution. Elga contains high quality thermal and coking coal types that are considered rare. The company’s main goal is to reach 27 to 30 million tons of coal production a year at the deposit.

The cost of coal that Mechel supplied for export under FOB contracts in the second quarter of the year was USD 210 to USD 225 per metric ton. Starting in 2010, the price of coking coal is set every quarter through negotiations of biggest mining companies and consumers. The coal price on the spot market can be either lower or higher than the base price. The spot market in Russia has seen a reduction in activity in the recent years. Mechel’s subsidiary Yakutugol charged USD 220 to USD 225 for its supplies in the second quarter.

In regards to domestic orders, the company is increasingly turning to using one-month contracts amidst uncertainty on the Russian coking coal market. 

Mechel’s production of concentrated coking coal in the first quarter of 2010 stood at 2.358 million tons. The sale of coking coal netted nearly 50 percent of the company’s revenues in the first quarter. Total proceeds from the sale of mined commodities for that period were USD 461 million. Mechel groups’ companies located within Russia boosted their export results by 54 percent in relation to the last quarter of 2009. Prices on the Russian market increased 14 percent.

Mechel is a holding company that owns majority stakes in large metallurgy and coal production companies. The company’s assets include Yakutugol, Yuzhny Kuzbass, and Mechel Bluestone of the United States. Mechel also operates several marine ports.