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Mechel: Waiting Til the Smoke Clears

by: Trader Mark July 23, 2008 | about stocks: MTL    
Trader Mark

Trader Mark

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There is a lot of drama going on at Mechel (MTL) right now, and I don't like drama. On top of my findings from this weekend [Mechel Profits Appear to Be Coming Under Scrutiny] was yesterday's news that (without an analyst report to read over) in my eyes looked like Mechel succumbing to government pressure and "concluding long term contracts" with Russian steelmakers. In my eyes that means - lower profits and forced to stay in the domestic market as opposed to selling their coal in the global marketplace. I could be wrong, but without access to an analyst who follows the company week in and week out, that is how I read it.

  • Mechel OAO, one of the leading Russian mining and metals companies, announces that it has concluded long term contracts to supply coking coal to a number of Russian customers and expects to secure additional contracts in the future.
  • Mechel has concluded agreements on supplying coking coal to major Russian steel plants for a fixed price for the third quarter of this year. Signing such agreements increases the transparency and predictability of the market, and has benefits for both coking coal producers and consumers. Currently, Mechel is considering the possibility of concluding even longer term contracts on the domestic market.

Even worse is that last sentence. Not only are they beholden for the next quarter, they are "considering" even longer term contracts on their domestic market. Again, this has the hands of the Russian government all over it and hurts profitability in my eyes. I don't know the terms of said contracts but I can only conclude they are lower than the open market prices. With the stock now breaking below the 200 day moving average of $38, we appear to have a broken stock if there is not a quick rebound back above this key support level.



Mechel

is among my favorites but that assumed they would be able to maximize profits as a freely run company. These recent news items, in my opinion, appears to be a structural change. That does not mean in the long run this company won't prosper or even that this is a small bump in the road - I could be misreading it. But with the chart breaking down and with what appears to be a material change in my outlook, I am going to stand to the side for now until the smoke clears. Again, for all I know I might be selling at the bottom but I don't want to

hemorrhage

money and better safe than sorry - I always would rather give up potential gains than kiss away capital. Even with my "favorites" - no room for emotions in the stock market. Perhaps *I* am marking the bottom with my sell, being one of the biggest bulls in this name, or "all the bad news" is now priced in. Even if they drop from 60% growth to 30% growth, this is still a sub 10 PE stock. We can always buy back at a higher price once things clear up. For all I know that could be tomorrow if the chart improves.



We've owned

Mechel

since Nov 5, 2007 and despite the recent demolishing of the stock price walk away with a $18,000 profit. We're selling at the ridiculous price of $37.50s.



Disclosure: Currently no position

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This article has 10 comments:

  •  
    Jul 23 12:18 PM
    People like you short naked sellers. You are trying convince investors that something bad does on with MTL and force them sell stocks.
    I've just read its website in Russian. It says that company will benefit from those contracts.
    You also did not mention anything about another fixed contract with Russian Railway company . MTL will be the solely producer of 400000 tonn of rail road sections in length equal 100m. Russia covers one sifth of earth and this contratc alone will provide MTL with enough profit for many many years.
    So, do not try hite your shark activities by misleading information
    Reply
  •  
    Jul 23 07:00 PM
    TraderMark is solid, he provides reliable information. If you want to see how scary Russia is right now, read the New York Times piece July 24 about William Browder and Heritage Capital. Putin/Medvedev very scary. MTL is wise to play ball.
    Long MTL
    Reply
  •  
    Jul 23 08:59 PM
    Trader Mark,
    Well done!
    We have a saying...'never regret a profit'. Agree with your logic as we will have to see if MTL breaks 30 over the next couple of weeks.

    Long term, MTL is still a double even at 37.50 though this may take a lot longer than 12 months.
    See seekingalpha.com/artic...
    As mentioned in article, we will have to wait until steel prices move up, then it will be time to re-enter MTL again as they will be able to raise prices closer to market for local customers.

    Just food for thought.
    CrossProfit

    P.S. See our latest comment on CLF here:
    seekingalpha.com/artic...
    Also take a look at the CrossProfit BTU 2008 chart and how we seem to agree on this one as well.
    Reply
  •  
    Jul 23 11:31 PM
    why have the steel prices been dropping?
    Reply
  •  
    Jul 24 12:06 PM
    I am russian, and I don't find Putin/ Medvedev scary, not at all. Putin is the best thing that happened to Russia in the last 200 years. He wants to restore Russia to prosperity, but he is not intrested in building a ne empire, and so are russians, they just want a good life.
    Said that, he takes a similar approach to Chinese, where he expects successful companies to contribute (read sponsor) Russia's growth. That will limit profit margins in the short term, but everybody will benefit from Russia's prosperity in the long run.
    Putin is somewhat heavy handed in dealing with defiance. MTL was smart to comply immideatly. It is not exactly democratic way to govern, but compared to other Russia's rules, Putin is a considerable improvement.
    Reply
  •  
    Jul 24 12:24 PM
    itm: Putin's approach, like other semi-dictatorships, have never contributed to robust, long-term economies over the last 200 years. I'll put my money on history and on the fact that for Russia to thrive, Putin will have to go with more open and free markets, and less centralized gov't interference (not to mention anti-West policies).

    T.M. One HELL of a good call. MTL down 30% and dropping... I'm almost tempted to buy at this unbelievalbe price of $25.50 right now. But still a lot of smoke in the air.... I put my stop-loss at $37.00 and am very happy about it. Cheers to the stop-loss and putting one on every holding!
    Reply
  •  
    Jul 24 01:18 PM
    Trader Mark,
    It didn't take a couple of weeks to break 30! Wow, now that is cutting it close, but glad you got out at 37.50 in the nick of time.

    Putin is playing politics and currently he has to protect the steel makers'. That's all there is to it. He's done this before. If you don't play ball he will destroy you. Last time he used a bogus back-tax claim against the company (oil company).

    We call this "Putinitis".

    If the market makes the connection, COP may take a hit because the "Russian Risk Factor Premium" (RRFP) tends to increase in times like this. COP is heavily dependent on Lukoil. Already advised to steer clear of COP like stocks until the dust settles.

    CrossProfit
    Disclosure: Associates may still be long a number of related stocks.
    Reply
  •  
    Jul 24 05:32 PM
    Thanks, Mark. Very timely acticile.
    Reply
  •  
    Jul 24 06:11 PM
    Had some dumb luck and being conservative. Sometimes it works.
    Reply
  •  
    Jul 25 02:27 AM
    According to the news services Putin's complaint related to the practice of charging international buyers something like half the prices charged to their domestic market.

    That does not make him sound like a threat to anyone.
    Reply
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