Soon after its first quarter 2009 earnings release, Mechel OAO (MTL), one of the leading Russian mining and metals companies, entered into an agreement with a syndicate of bankers to refinance its short-term credit facilities. The company had raised a total of $2.6 billion to acquire Yakutugol Holding Company OAO and Elgaugol OAO in October 2007 and Oriel Resources Ltd. (Great Britain) in April 2008.

For acquiring Yakutia coal mines, Mechel took loans of $2 billion, which has been refinanced for $1.6 billion at LIBOR plus 6%. Earlier, the company had paid off $400 million of the loan from internal funds. Mechel will pay off the loan in equal monthly installments beginning September 2009 through December 2012.

The company has also refinanced the $1.5 billion credit obtained for acquiring the U.K.-based chrome and nickel mining and processing company, Oriel Resources Ltd. for $1 billion at LIBOR rate + 7%. Mechel has repaid $500 million of the loan from the proceeds of the three-year loan of $1 billion received from Gazprombank in February 2009. The company will pay off the loan in equal monthly installments starting from July 2010 to December 2012.

Mechel and its subsidiaries have been implementing a $5.2 billion investment program in the period 2008 to 2012 to boost its coal and iron ore reserves. Acquisitions of the Yakutugol and the Elgaugol as well as Oriel Resources are a part of the investment program.

We believe the company might have to resort to additional debt in the near term. For 2008, Mechel had spent $2.1 billion on acquisitions and its net debt amounted to $5.1 billion. Higher debt resulted in greater interest charges for the year.

Although Mechel received a credit line totaling $1 billion from Gazprombank OAO to manage its short-term liabilities, we stay concerned about the company’s high debt and its tight cash position.

Read the full analyst report on “MTL”
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