Mechel OAO (MTL), one of the leading Russian mining and metals companies, signed a contract to supply coking coal concentrates and steam coal of various grade to companies in China, Japan and South Korea. Mechel will supply about 2 million tons of coking coal concentrates and about 2.3 million tons of steam coal of various grades to the companies (not disclosed) in 2009.The coking coal and steam coal exports will be performed by Mechel Mining OAO’s subsidiary, Yakutugol OAO. The company has not provided any financial details associated these contracts.

Mechel has established itself as one of the largest producers of coking coal in the world by acquiring 100% interests in the U.S. entities Bluestone Industries, Inc. and Dynamic Energy, Inc. (both West Virginian corporations) and JCJ Coal Group, LLC, a Delaware limited liability company and some of its West Virginia affiliates. These companies are engaged in the mining, processing and sale of premium quality hard coking coal. These acquisitions have helped Mechel integrate backwards. The company is capable of internally sourcing 100% of the coking coal, 92% of the iron ore and 55% of the nickel requirements in its steel business. In addition, the company is the only specialty steel manufacturer in the world capable of internally sourcing most of these raw materials. Mechel controls 23% of the coking coal capacity in Russia.

Mechel is confident about its operations in China inspired by a strong demand for iron ore and coking coal concentrates as well as ferroalloys in the Chinese steel industry. In contrast, Mechel is witnessing declining demand for its products in the domestic markets. Earlier, during a conference call in the beginning of June 2009, the company had stated that Mayr-Melhnof Karton Ag (MMK) and Novolipetsk Steel (NLMK), its key customers in Russia were no longer purchasing its coking coal. This apart, Mechel’s large capital-spending program and high debt leading to a greater interest burden are matters of concern. Although the company received a credit line totaling $1 billion from Gazprombank OAO to manage its short-term liabilities, we remain concerned about Mechel’s high debt, in view of its tight cash position.

Thus, we rate the shares a Hold and set a six-month target price of $9.50.

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