Once I saw how profitable Korean steelmaker POSCO (NYSE:PKX) was this past quarter, I became excited about upcoming results from other global competitors that enjoy the cost-saving advantage of significant vertical integration. Like many ADRs, whose earnings reports are often delayed, Russia's Mechel (NYSE:MTL) just released numbers from its first quarter, which ended March 31. Nonetheless, these results are solid enough to keep this Fool's interest stoked like a blast furnace.

Mechel delivered truly phenomenal news, featuring dramatic earnings growth, impressive operational efficiencies, and vastly improved margins. Compared with the first quarter of 2007, revenues grew 64.1% to $2.3 billion, operating income rose 112.3% to $642 million, and net income catapulted 162.2% to $500 million ($1.20 per share).

All three of Mechel's business segments performed exceptionally well, as the following table illustrates:

Business Segment

Increase in Net Income

Increase in Revenue from External Customers

Increase in Inter-Segment Sales

EBITDA Margin Q1 2007

EBITDA Margin Q1 2008



















Note: All increases relative to year-ago quarter.

Most of the numbers speak -- if not shout -- for themselves. Income growth in the mining segment derived largely from a 94% increase in production of coking coal, to 4.3 million metric tons. Mechel was able to continue selling product to its own steel unit while doubling its sales of mining products to outside customers. Intersegment sales indicate operational efficiency, showing that each segment is helping another to outcompete less fortunate rivals.

Mechel's substantial expansion of EBITDA margins, even while many other global competitors struggled with higher production costs, further emphasizes the strength of its business model.

Fools who follow my coverage of this sector know that I consider Mechel more than just the sum of its parts. True, POSCO posted those positive results last week, and both it and ArcelorMittal (NYSE:MT) have made recent inroads into vertical integration. All the same, I continue to favor producers who were vertically integrated already, like Mechel and Brazil's Companhia Siderurgica Nacional (NYSE:SID).

Despite a recently acquired affinity for recycled metal specialists like Nucor (NYSE:NUE) and Schnitzer Steel (NASDAQ:SCHN), Mechel's combination of cheap energy and surplus coal makes it hard to beat. However, I would advise Fools to think carefully before investing in Mechel, since Russia boldly restricted foreign ownership of certain key industries last week.

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