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By John Helmer in Moscow

Mechel, the coking coal and specialty steel group controlled by Igor Zyuzin, has released its production report for the second quarter ended June 30. By the simple device of comparing the latest output figures for the six months ending June 30, 2010, with those of the first half of 2009, the Mechel release is a model of how to mislead the unwary shareholder and encourage meretricious brokerage analysts promoting share sales.

Mechel’s website presentation of the new results makeы something of a secret of what has been happening to Mechel since January 1. For example, the company reports do not disclose the most recent production results for the first and second quarters of this year. Nor did the company release this information in its required US stock market disclosure, the Form 6-K filing to the US Securities and Exchange Commission, which supervises the company’s New York Stock Exchange listing.

By ignoring this year’s trends, and concentrating instead on making a comparison with the recession months of 2009, Mechel’s newly appointed chief executive Yevgeny Mikhel, was able to announce: “Our major markets have demonstrated steady growth during the first six months of 2010. We have done our best to satisfy the existing demand…Arrangements aimed at production development are in full swing at our mining and steel divisions.”

You don’t have to be an expert in the Russian steel business to spot this as gilding the lily. Renaissance Capital tries another well-known horticultural trick – ‘a rose by any other name would smell as sweet’. According to the Rencap steel analyst Boris Krasnojenov, the Mechel share should be bought for its coal-mining value rather than for its steel or other results: “Mechel’s 2Q10 operating results reflect positive dynamics in the coking coal sector….Mechel remains our preferred play in the Russian coking coal segment.”

It remains for the parsimonious or skeptical investor to do a little simple arithmetic of his own, starting with Mechel’s release of its first-quarter 2010 results on April 27 and comparing them to yesterday’s publication. Subtracting the latest production totals for the first half from the totals for the first quarter gives the second quarter results. These can then be compared with those of the first quarter. Voila! Here are the numbers which demonstrate whether Mechel’s business is doing better or worse.

Note that from the first quarter to the second quarter, pig-iron volume fell 4% to 1 million tonnes; crude steel rose 7% to 1.5 mt; rolled steel production declined 6% to 1.4 mt; with long products leading the declines to 741,000t, down 22% on the first quarter volume; flat production totaled 108,000t, a quarter on quarter gain of 6%. To find markets abroad for low-value steel products, Mechel reveals that it has upped semi-finished billet output by 24% to 594,000t. Higher-value production, such as hardware and forgings, were up 21% on the quarter to 219,000t.

A report by Alfa Bank steel analyst Barry Ehrlich warned clients today that although coking coal concentrate volume rose 29% to 3 mt, this was below his projections. “The company now appears likely to miss our FY10 coking coal concentrate forecast of 13.0 mln t. To reach that level, Mechel will need to produce 3.8 mln t in each of the two remaining quarters, while we expect production to expand by 0.5 mln t to only 3.5 mln t in Q3.” Ehrlich told his clients: “the results are NEGATIVE for the stock due to the weaker than expected performance in the mining and ferroalloys segments and suggest Mechel will struggle to reach our Q2 EBITDA forecast of $500 mln and full year forecast of $1,821 mln.”

The performance at Mechel’s iron-ore and chrome divisions was also weak. According to Ehrlich, “iron ore volumes were flat q-o-q at 1 mln t, which was worse than anticipated, as we expected output to rise because the harsh winter did not affect Q2.”

As the tabulation also shows, the company is grudgingly reporting that ferrochrome output amounted to 18,900t, and ferrosilicon, 22,500t; these figures were down 19% and 0%, respectively, compared to the first quarter. “Ferrochrome was the poorest performing segment,” the Alfa report says. “We knew the company had geological issues at its Voskhod mine in Kazakhstan, but we did not anticipate a 50% q-o-q drop in concentrate production. Problems with ore availability apparently led to a decrease in FeCr smelting volumes, which fell 19% q-o-q. It remains unclear how quickly Mechel will be able to resolve the problem.”

And who in the market has been fooled? Just follow the moving line since April, and it has been rollercoaster downhill all the way. If Mechel thought it should pull the wool, it has only managed to reveal how cynically management persuades itself.

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