Mechel Mining, which consolidates Mechel Group’s mining assets, has reported 9M net profit to Russian Accounting Standards (RAS), down 7% year-on-year. It warned that the crisis indications that began to appear in the global economy in the middle of Q3 2011, could lead to reduced demand for company products on the foreign and domestic sales markets. Nevertheless, the group said it intends to invest about $5.5 billion in its core mining assets in 2012-2015.

Earnings

Mechel reduced its net profits to RAS 7% year-on-year in January-September 2011 to 13.3 billion roubles, the company reported.

Revenue increased 41% to $8.8 billion due to an increase in dividends from Yakutugol in the third quarter of 2011, compared to the third quarter of 2010.

Crisis indications began to appear in the global economy in the middle of the third quarter of 2011, which, if the situation worsens, could have a negative impact on the Russian economy and lead to reduced demand for the company’s production on the foreign and domestic sales markets, the report says.

The guarantee amount on Southern Kuzbass and Yakutugol credit obligations to a syndicate of banks was increased by nearly $4 billion in the third quarter of 2011, compared to the second quarter.

Mechel Mining, established in April 2008, has consolidated coal producers Southern Kuzbass and Yakutugol, iron ore producer Korshunov GOK, and coke producer Mechel-Koks.

Investment

The Mechel group plans to invest about $5.5 billion in its core mining assets in 2012-2015, the company said on its website.

Mechel said it could invest as much as $412 million in iron ore mining unit Korshunov GOK, $285 million in Bluestone, a coal miner in the United States, as well as $1.5 billion and $3.3 billion in Russian coal mining divisions Yuzhny Kuzbass and Yakutugol (including the Elga deposit) respectively.

Korshunov GOK currently mines around 12 million tons or crude iron ore and sells just over 4 million tons of concentrate a year. It is expected that annual ore output of 12.5 million tons will be sustained until 2015.

According to Mechel Bluestone’s mining plans raw coal production is expected to reach some 6 million tons per year by 2015. At the same time, cash costs in this period are not expected to deviate substantially from the current levels.

Southern Kuzbass’s strategic goals include increasing production volumes, expanding its resource base, constructing new facilities and equipment upgrading. An extensive reconstruction and modernization program is currently under way at the company’s enterprises, implementing the most advanced technologies.

Southern Kuzbass’ mining plans provide for increasing raw coal production up to 21.7 million tons per year by 2015.

The Elga will mine and wash high-volatile, highly fluid coking coal with low sulphur, nitrogen, and phosphorus content and high calorific value, as well as oxidized coals with high calorific value, which will be marketed as thermal coals. Elga will also produce middlings as a byproduct of coking coal washing process which will be sold as thermal coal. According to the mining plans, Elga open pit is expected to reach the capacity of 9 million tons per year by 2015.

Output

Mechel reduced production of run-of-mine coal by 4% to 19.814 million tons in the first nine months of 2011, the company said in a press release.

Sales of coking coal concentrate rose 14% to 9.13 million tons, though shipments within the group were down 4% to 2.138 million tons.

“Over these nine months, the company demonstrated good results, significantly increasing its sales on several key points, as compared to the same period last year. For example, favorable pricing in the foreign markets allowed us to increase coking coal concentrate sales by 14% and anthracite sales by 31%. Our iron ore business also proved itself well, with iron ore concentrate sales’ going up by 16%. A sharp increase in PCI sales – by 341%, as compared to the same period last

year – is a result of the company’s strategy of increasing production and sales of metallurgical coals,” said Mechel’s Chief Executive Officer Yevgeny Mikhel.

In the power division, heat generation was stable over these nine months, as compared to the same period last year. The decline in electricity generation was due to the repairs campaign aimed at preparing for the fall-winter season of 2011-2012, as well as lower electricity prices on the wholesale market. In the 4th quarter, we expect an improvement in the division’s operating and financial performance.”

The Mechel Group has consolidated controlling stakes in coal, steel, and iron ore companies and a number of ports. General Director Igor Zyuzin is Mechel’s chief beneficiary. The ADR free float is around 30%.