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Rating Action:

Moody's assigns B1 corporate family rating to Mechel with a stable outlook

Global Credit Research - 24 May 2010

Moscow, May 24, 2010 -- Moody's Investors Service has today assigned a B1 corporate family rating to Mechel ("the company") and a B1 Probability of Default Rating. Concurrently, Moody's Interfax Rating Agency has assigned an A2.ru national scale rating to the company. Moscow-based Moody's Interfax is majority-owned by Moody's, a leading global rating agency. The outlook on the ratings is stable. This is the first time that Moody's rates the company.

The CFR of Mechel's reflects: 1) the company's role as a leading domestic steel and coal producer with strong positions in key businesses including production of specialty steel and alloys; 2) the company's largest coal reserve base in Russia; 3) favourable business profile results from high degree of vertical integration which ensures the stable production and to some extent preserves operating margins; the company has internal captive demand for coking coal and iron ore in steel production and for steam coal -- in power generation; 4) strategic location of its key assets close to the major steel consuming markets as well as the ownership and control of essential infrastructure including ports, rolling stock and power plants which provide guaranteed access to export markets; 5) combination of underground and open pit mining operations with no significant concentration on any single mine mitigates the risks of interruption in coal production; 6) good disclosure and adequate corporate governance supported by NYSE listing.

The rating also reflects the facts that Mechel's operating performance during 2008-2009 financial crisis was materially affected with modest results in the last financial year though largely in line with other similarly rated Russian peers. The falling prices and volumes were partly mitigated by relatively low cost base and ability to re-direct sales of coal from domestic to the export markets. On the positive side, Moody's also notes that the stretched liquidity position that prevailed during part of 2009 was eventually improved thanks to extension of Yakutugol and Oriel loans as well as a new Gazprombank facilities and RUR bond.

The company has large capital expenditures planned for the next few years, which would strengthen the business profile of the company though could weigh on the financial position if not carefully implemented. Moody's believes that strategic acquisitions are largely completed and the projects' related capex is to some extent discretional as it mostly relates to capacity expansion and mine development. In the medium term successful development of coal mining assets would improve the company's positions as the largest metallurgical coal producer in Russia.

On the other hand, the CFR of Mechel also reflects: 1) aggressive capital structure with high leverage and modest CF metrics which will take some time before it improves; 2) the company's exposure to the cyclicality of the steel and mining industry which was recently evidenced by the worst downturn in decades; 3) on-going refinancing risk with sizable repayments in 2010 and 2011 and a liquidity profile depending on renewing or extending funding to the extent that the expansion capex plans are carried out; 4) the fact that future green field developments of Elga deposit would require significant resources and provide technical and operating challenges; 5) expectations of substantial capital expenditures related to the current activity of steel assets which would further negatively affect FCF generation; 6) possible negative administrative/regulatory consequences for the Russian mining sector following the recent incidents at the mining sector; 7) the company's ownership concentration adding uncertainty and less predictability to its financial strategy and dividend policy.

The stable outlook indicates Moody's expectations that the 2010 performance of the company should support the current rating and would demonstrate positive trends in financial metrics especially reduction in leverage and improved cash flow generation. For an upgrade Moody's would like to see the debt/EBITDA ratio moving toward 2.5x and FCF/Debt becoming positive over the next 2 years. If the company's leverage not converging towards 3x and (CFO -- Dividends)/Debt not moving towards 20 % in the next 18 months that might trigger the downward pressure on the rating.

The principal methodology used in rating Mechel was Global Mining Industry, May 2009 (116843), which can be found at www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating Mechel can also be found in the Rating Methodologies sub-directory on Moody's website.

The Company is a vertically integrated mining and metals company. Its business includes four segments: mining, steel, ferroalloy and power. The Company produces coal, iron ore concentrate, nickel, steel, ferrochrome, ferrosilicon, rolled products, hardware, heat and electric power. Mechel products are sold domestically and internationally. The Group's subsidiaries are located in 12 regions of Russia, Kazakhstan, USA, Romania, Bulgaria and Lithuania. Mechel owns three trade ports and a transport operator.

In 2009, the company reported revenue of USD 5.8 billion (42% decline Y-o-Y) and EBITDA of USD 1 billion (51% decrease Y-o-Y).

The company is majority owned by CEO Mr. Zyuzin who controls 66.76% of voting shares. After the IPO the company has 33.24% of free float.

Paris
Eric de Bodard
Managing Director
Corporate Finance Group
Moody's France S.A.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moscow
Larissa Loznova
Vice President - Senior Analyst
Corporate Finance Group
Moody's Eastern Europe LLC
Telephone: +7 495 228 6060
Facsimile: +7 495 228 6091

Moody's assigns B1 corporate family rating to Mechel with a stable outlook
No Related Data.
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