Russian Miner Is a BRIC Star

10/23/2007 12:00 am EST

Focus:

Nicholas Vardy

Editor, Bull Market Alert, The Alpha Investor Letter, and The Global Guru

Nicholas Vardy, editor of Global Bull Market Alert, says a Russian mining and metals company offers good exposure to a booming market.

For emerging market equities, this summer’s credit crunch was a mere blip in a five-year bull run. The MSCI Emerging Markets index [was] up more than 56% during the past 12 months, and it soared by almost 33% since bottoming on August 16th (before the recent selloff—Editor).

But it's the BRIC markets—Brazil, Russia, India, and China—that have been the stars. The solid economic fundamentals, rising domestic consumption and high commodity prices mean that BRICs are less vulnerable to external shocks than in the past. Even if emerging markets are not as decoupled from Western economies as they'd like to think, the financial strength of companies, governments, and consumers will cushion the impact of the credit turmoil and US economic downturn.

And while the BRICs and emerging markets aren't the bargains they once were, they still are below historic highs in the 1990s and, aside from China, are nowhere near bubble levels.

Mechel Open Joint Stock Company (NYSE: MTL) is one of Russia's largest mining and metals companies, producing steel, processed coal, and metal products used in mining industries. Rising metals prices and industry consolidation have more than quadrupled Mechel's sales from a mere $1 billion in 2001 to $4.4 billion last year.

In announcing its first-half 2007 results, Mechel confirmed that its breathtaking growth still is on track. Both business segments—mining and steel—demonstrated high operational results. Crude steel production was up 4% year on year, with rolled products up 11%. Coal output rose 10%, driven by a 29% rise in steam coal output. Nickel output also rose 22%.

But it was the company's financial results that knocked analysts' socks off. Revenue rose a whopping 55% to $2.99 billion during the first six months of 2007, compared with the same period of 2006. Earnings before interest, taxes, depreciation, and amortization (EBITDA) rose 136%. First-half 2007 net profit rose 169% to a [much] better-than-expected $489.5 million.

And two days after its earnings announcement, Mechel announced that it had successfully won a $2.33-billion auction bid for coal assets in Yakutia, Russia. That acquisition will allow Mechel to create a world-class, modern coal company. More than 60% of the coal produced there will be sold in Russia's domestic market, where prices have soared by more than a third in recent months.

A combination of a favorable market environment, organic growth, and selective acquisitions means that Mechel is growing by leaps and bounds. Yet for all that, the stock trades at a lowly P/E of 11x. So buy Mechel at market (it closed Monday above $74—Editor), and place your stop at $42.50. For potentially even bigger upside, buy the April $80 call options (MTLDP.X).

A word of warning: the stock has roared ahead, and may be due for a technical correction.

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