The Sum of Mechel's Parts

No industry is more emblematic of growth than steel, so as we look at the economies of fast-emerging BRIC countries  Russia and Brazil, we shouldn't be surprised to find multibaggers forged in steel.

Lately, the world's leading steel companies have dealt with the sharp rise in costs for raw materials, which has squeezed margins despite the robust global demand for steel. Meanwhile, shares of Russia's Mechel (NYSE: MTL  ) have more than quintupled during the past year. The secret to Mechel's success is in the legacy of U.S. Steel (NYSE: X  ) , whose pioneers recognized the importance of sourcing their own iron ore to ensure competitive steel pricing.

Steel companies that didn't adopt this model have struggled more than some others, and now POSCO (NYSE: PKX  ) and ArcelorMittal (NYSE: MT  ) are both making moves to develop mining projects. Brazilian steelmaker Companhia Siderurgica (NYSE: SID  ) impressed me back in March with large surpluses from its iron-ore mining operation that added substantial sales profits beyond the cost savings of the integration. Mechel takes this idea to the next level, with its massive diversified mining segment generating huge profits, in addition to producing everything needed for production, including coal, iron ore, nickel, and limestone.

As an example, let's look at coal, which is the focal point of Mechel's mining segment. Prices for the coking coal used in steel production have risen sharply as experts predict a growing shortfall of global supply. After completing the acquisition of Russia's largest coking coal producer, Yakutugol, Mechel's mining segment is able to supply most of the coking coal needed for its own production, while selling the surplus to a very eager global market. Furthermore, the company's own ports and rail lines help with the trip to market. Fools familiar with the recent gains enjoyed by Arch Coal (NYSE: ACI  ) and Patriot Coal (NYSE: PCX  ) know full well how profitable coal has become.

On the strength of this integration, Mechel managed to increase both net operating margin and its EBITDA margin in fiscal 2007 while increasing revenue 52% to $6.68 billion over fiscal 2006. With 280 million tons of coal and 61 million tons of iron ore in the ground, it appears Mechel makes the steel that's strong enough for BRICs.

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Fool contributor Christopher Barker captains yachts and writes about stocks. He can also be found in the Motley Fool CAPS community under the username TMFSinchiruna. He owns no shares in the companies mentioned. POSCO is an Income Investor pick. The Motley Fool has a disclosure policy.


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