Analysis of Mechel's financial results for 3 neighborhood

Разбор финансовых результатов «Мечела» за 3 квартал

Mechel (MOEX: MTLR) Is a Russian industrial holding, which includes more than 20 enterprises. The company is engaged in the production of coal, become, iron ore, rolled, ferroalloys, heat and power energy.

Financial results

Mechel published operating and financial results for the third quarter of 2021 in mid-November, which showed a drop of 5-10% compared to the second quarter of 2021.

The company's total revenue in the third quarter fell by 5% to 102.913 billion rubles amid weak performance in one of the segments - metallurgy, the results of which were immediately reduced by 8% because of, that after the introduction of export duties in the Russian Federation, the volume of sales of finished products decreased.

EBITDA, as well as revenue, decreased by 5% up to 31.918 billion rubles for the same reason: weak results in the metallurgical segment. After the introduction of export duties, Russian metallurgists tried to reorient themselves to the domestic market, As a result, in the third quarter, this led to a surplus in supply and a decrease in Mechel's sales.

Net profit in the current quarter fell by 11% - up to 21.277 billion rubles in comparison with the results of the second quarter. The main reason is a decrease in the income of the metallurgical segment, which in the current quarter earned 4.707 billion rubles against 11.406 billion rubles in the second quarter of 2021.

The main achievement of Mechel in the third quarter is the reduction of its debt burden. According to data on 30 September 2021, net debt / EBITDA ratio decreased from 4.27 × to 3.18 ×, and the net debt itself, not including fines and interest on arrears, decreased to 299.137 billion rubles.

Mechel Consolidated Results, billion rubles

3к2021 2к2021 3к2020 9м2021 9м2020
total revenues 102,913 108,862 64,424 287,823 196,197
Extractive segment 29,765 29,320 17,190 75,325 52,470
Metallurgical segment 67,184 73,222 41,354 191,704 123,754
Energy segment 5,964 6,320 5,879 20,794 19,972
Total EBITDA 31,918 33,727 9,349 83,887 31,362
Extractive segment 23,552 19,551 6,406 51,429 19,746
Metallurgical segment 10,041 14,980 3,022 34,421 10,120
Energy segment 0,514 −0,162 0,254 1,306 1,542
Intersegment communication −2,189 −0,642 −0,333 −3,269 −0,046
Net profit 21,277 23,909 −25,959 53,082 −15,763
Extractive segment 18,439 16,254 −3,368 38,460 29,212
Metallurgical segment 4,707 11,406 −21,487 20,360 −39,525
Energy segment −0,108 −0,474 0,063 −0,287 −1,341
Intersegment communication −1,761 −3,277 −1,167 −5,451 −4,109
Net debt 299,137 305,244 336,069 299,137 336,069
Net debt / EBITDA 3,18× 4,27× 8,15× 3,18× 8,15×
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Extractive segment - the most profitable line of business for Mechel, which in the third quarter increased EBITDA and net profit by 15-20% due to the increase in prices for almost all products of the segment. The segment's revenue increased by only 2% against the backdrop of a decrease in product sales.

Average selling prices, rubles per ton

3к2020 4к2020 1к2021 2к2021 3к2021
Coke 10 691 12 279 15 979 20 975 25 856
Coking coal 3427 4066 4616 6967 11 083
Anthracite 2895 3144 4304 4379 7624
Steam coal 2189 1829 2091 3129 5216
Iron ore 9438 10 361 13 526 16 352 15 664

Revenue of this segment by types of products in 3 quarter of 2021

Coking coal 29%
Coke 28%
Anthracite 25%
Middlings' second-class coal 10%
Coke products 4%
Steam coal 2%
Iron ore 1%
Other 1%

29%

Segment sales geography in 3 quarter of 2021

China 46,3%
Russia 20,4%
Asia without China 13%
Europe 11%
CIS 9%
Other 0,3%

46,3%

Metallurgical segment - the largest segment of Mechel by revenue, which showed mediocre results in the third quarter: revenue decreased by 8% against the backdrop of a decrease in product sales, and EBITDA fell immediately by 33% due to market instability after the introduction of export duties.

Average selling prices, rubles per ton

3к2020 4к2020 1к2021 2к2021 3к2021
Armature 31 888 36 812 46 681 54 037 58 899
Hardware 44 546 49 234 64 184 71 238 84 583
Flat rolled 44 077 45 647 61 382 79 066 84 800
Structural products 42 998 44 569 56 979 70 220 76 202
Railroad rails 45 024 60 948 58 265 71 269 76 453
Ferrosilicon 70 079 75 580 78 442 99 158 127 767

Revenue of this segment by types of products in 3 quarter of 2021, billion rubles

Armature 27%
Hardware 16%
Long products 15%
Flat rolled 13%
Structural products 10%
Forged and stamped products 5%
Ferrosilicon 3%
Flat stainless steel 2%
Railroad rails 1%
Semi-finished steel products 1%
Other 7%

27%

Segment sales geography in 3 quarter of 2021

Russia 64%
Europe 19%
CIS 14%
Asia 3%
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64%

Energy segment - an insignificant line of business for Mechel, bringing him about 6% income. In the third quarter of 2021, this segment showed neutral results in comparison with similar past indicators. EBITDA increased by 102% due to one-off factors, which led to a reduction in general business, administrative and other operating expenses. Revenue increased by 1% amid rising electricity prices, the company received a loss at the end of the current quarter of 108 million rubles against a profit of 63 million rubles a year earlier.

What did not like in the report

There are two points in the results of the industrial holding for the third quarter of 2021, which cause concern: debt reduction rate and operating results.

Debt load. The current coal situation is a real gift for Mechel shareholders. Thanks to high prices, the company, for the first time in a long time, can significantly reduce its debt burden to acceptable levels.. Since the beginning of the year, the holding has been doing this - net debt has decreased by 26 billion rubles, at the same time, the rate of decline in net debt in the third quarter significantly decreased to 6 billion rubles against 13 billion rubles in the second quarter and 7 billion rubles in the first quarter.

Debt load of Mechel, billion rubles

Net debt Net debt / EBITDA
1к2019 456,585 5,70×
2к2019 457,078 6,40×
3к2019 454,850 7,83×
4к2019 448,721 8,40×
1к2020 476,244 9,20×
2к2020 311,487 6,83×
3к2020 336,069 8,15×
4к2020 325,572 7,93×
1к2021 318,093 6,83×
2к2021 305,244 4,27×
3к2021 299,137 3,18×

Operational results. Mechel reported weak Q3 operating results as in the steel segment, and in the mining.

Sales of coking coal concentrate decreased by 30% due to a decrease in coal production at the Neryungrinsky open pit, and also because, that in the second quarter Mechel sold almost all of its stock. The same facts were reflected in the sales of thermal coal., which fell on 10%.

Iron ore concentrate sales decreased by 12% against the background of repair work at a subsidiary - Korshunovskiy GOK. And sales of coke products decreased by 8% due to sales from the warehouse of accumulated inventory in the second quarter. Pulverized coal sales volumes (PCI) and anthracite have not changed.

In the third quarter, the share of exports from Mechel's metallurgical segment decreased by 10%, this led to a decrease in the sale of finished products:

  • ferrosilicon on 11%;
  • rolled steel on 19%;
  • flat-rolled products on 12%;
  • hardware on 8%.
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The company explains this as follows: after the introduction of export duties, Mechel partially redirected volumes to the domestic market, partly for replenishment of stock, which decreased significantly after the second quarter.

Sales of Mechel's finished products in 3 quarter, thousand tons

3к2021 2к2021 The change
Coking coal concentrate 1 056 1 501 −30%
PCI coals 322 322 0%
Anthracite 345 347 −1%
Thermal coal 643 716 −10%
Iron ore concentrate 367 414 −12%
Coke 690 752 −8%
Ferrosilicon 18 21 −11%
Long products 555 685 −19%
Flat rolled 106 121 −12%
Hardware 130 142 −8%
Forged Products 8 10 −19%
Stamped products 18 17 4%

Dividends

The main idea behind Mechel's preferred shares is dividend payments, which for 2021 can bring investors a double-digit dividend yield. The company annually distributes 20% net profit under IFRS on non-voting securities. Dividend policy for 9 months of 2021, a payment was earned in the amount of 76,5 Р, what at current prices, even excluding the fourth quarter, assumes dividend yield 27%. Looking at such a big dividend, the question immediately arises, are there any risks.

The main risk is paper or other loss, which the company can designate in the fourth quarter of 2021, to leave as much money as possible on your accounts, which would help Mechel reduce its debt burden.

Secondary risk is business deterioration, which will have minimal impact on dividends in 2021, but payments in 2022 can greatly spoil.

Mechel dividend payments on preferred shares

2011 31,28 Р
2012 0,05 Р
2013 0,05 Р
2014 0,05 Р
2015 0,05 Р
2016 10,28 Р
2017 16,66 Р
2018 18,21 Р
2019 3,48 Р
2020 1,17 Р

31,28 Р

Outcome

Even taking into account weak operating indicators, Mechel was able to demonstrate good financial results in the third quarter of 2021: net profit was at the level of the record last quarter, debt burden continues to decrease little by little, and the net debt / EBITDA ratio reached a quite good level of 3.18 ×.

Given the abnormally high net profit, which the company earned for 9 months, investors should expect huge dividend payments, which the industrial holding will distribute at the end of 2021, unless a large loss is recorded in the fourth quarter.

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