By now, you know that I am still long a piece of MTL, taking most of it off for a daytrade on Friday. So, you might say I am talking my book.
But in a blog post from yesterday, “Mo-Mentum” lays out a compelling case on many levels.
Even if you disagree with the thesis, the comment is too well thought-out not to repost.
Mo-Mentum
If it weren’t for their debt MECHEL would be valued north of $16 Billion. The debt is the huge overhang along with the debt servicing costs.
Based on my DCF Model, I plug in a 6.24% compounded growth rate for 5 years (conservative but still valid) and come up with somewhere around $20-25.
Now if I strip out the debt completely, along with current TTM Income Statement and Balance Sheet, I get a figure north of $35.
Things that need work –
1.) Reduction of Debt Principal
2.) Reduction of Debt Interest Expense
3.) Increase of cash and cash investments
4.) Perception of Russia and Emerging Markets in general
5.) Increase in Demand in Coal/Steel (MTL Still clocked $11 B in revenue TTM)
Once they take care of their debt, the Interest Expense will decrease, increasing the Net Income and Free Cash Flow.
If I was the CEO, I would be actively shopping assets in order to pay off their short term debt. Further, they have large credit facilities from bank, in which they can draw upon at any time. They pay a short term commitment fee for this, but the banks have not pulled their credit facilities even though they passed their debt covenants.
Free Advice – Hold on for the long run. It is very volatile and has a high beta. But if you pull up a chart this has bounce about 4 times from 2.90 – 3.25 and only Friday did it pass 3.30 on heavy volume.
Short run – this should be trading between 7-10 easily.
