Why Mechel PAO Shares Jumped 13% in April

By Reuben Gregg BrewerMarketsFool.com

What happened?

Continue Reading Below

Mechel PAO (NYSE: MTL), a Russian metals and mining conglomerate, saw its shares advance 13% last month. However, virtually all of that gain came in one big leap after the company reported 2016 earnings on April 26. In fact, the stock was down around 2% prior to the earnings release.

So what?

Clearly, 2016 earnings pleased investors, but perhaps not for the reasons you might expect. Certainly news that improving steel and coal markets helped push revenues higher by 9%, and EBITDA (earnings before interest, taxes, depreciation, and amortization) up by a massive 45%, were welcome bits of information. The bigger update, however, was tied to the balance sheet.

More From Fool.com

Image source: Mechel PAO.

The company recapped its successful efforts at restructuring its debts with Russian state banks. These were key moves since these banks hold roughly 70% of Mechel's debt. And CEO Oleg Korzhov made a point of highlighting that the company faces no material debt maturities until 2020 at this point -- another piece of good news.

The more exciting update, however, was that cash flow in 2016 was sufficient to fund operations and service the company's debt. During the depths of the commodity downturn, that wasn't the case. In fact, Korzhov hinted that, if current market conditions remain in place, Mechel may be able to start paying down its hefty debt load. For reference, shareholder equity is negative, so long-term debt makes up over 100% of the capital structure. That's not exactly an ideal situation in a highly cyclical industry.

Now what?

Mechel PAO's business appears to be turning a corner. That's good news, but it's still a very risky investment option in the metals and mining space. Despite the progress, it's still saddled with a heavy debt load, and you can't forget the political uncertainty of operating in Russia. Only the most aggressive investors should even consider it.

10 stocks we like better than Mechel OAOWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Mechel OAO wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of May 1, 2017

Reuben Brewer has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.