OREANDA-NEWS. November 16, 2010. Dividend payment restored, Severstal is confident in future –  Moscow, Russia – November 16, 2010 –Severstal (LSE: SVST), one of the world’s leading integrated steel and mining companies, today announces its financial results for the third quarter and the nine months of 2010.

Q3 2010 HIGHLIGHTS:

Dividend payment restored.

Profitable quarter: net profit1 of USD 368 million.

Benefits of integrated strategy.

Further expansion of gold business.

Solid foundation is laid for future growth in mining.

Divisional comments:

Severstal Russian Steel: Despite seasonal decline, prices remained broadly flat and slightly increased on some product categories, as compared to Q2 2010, reflecting the advantage of exposure to flat steel products. While revenue went down 6.3% to USD 2,264 million (Q2 2010: USD 2,415 million). EBITDA reduced by 35.8% to USD 339 million (Q2 2010: USD 528 million) due to increased raw materials costs. EBITDA was also impacted by a USD 77 million one-off in Q3 2010.


Severstal Resources: Revenue went up 5.1% to USD 914 million (Q2 2010: USD 870 million), EBITDA increased by 5.2% to USD 442 million (Q2 2010: USD 420 million). Q3 2010 EBITDA gained as well from one-off of USD 42 million. Increased raw material production to meet growing steel demand and higher average selling prices. Further progress in gold business.


Severstal International (North America): Revenue went down 19.8% to USD 1,161 million (Q2 2010: USD 1,447 million) with negative EBITDA of USD 59 million, compared to Q2 2010 EBITDA of USD 59 million, reflecting a challenging US steel market and rising raw materials costs. On the positive side some of the assets operate at full capacity.


OUTLOOK

Steel and raw materials prices are expected to slightly weaken or remain stable for the balance of FY2010 and strengthening into 2011.

9M 2010 HIGHLIGHTS:

Revenue increased by 43% to USD 11,322 million (9M 2009: USD 7,915 million).

EBITDA increased by 416% to USD 2,198 million (9M 2009: USD 426 million).
EBITDA margin of 19.4% (9M 2009: 5.4%).

Significant reduction of net loss2 from USD 875 million in 9M 2009 to USD 225 million in 9M 2010.

Severstal International (North America) reduced negative EBITDA to USD 83 million, compared to 9M 2009 negative of USD 557 million.

Divisional comments:

Severstal Russian Steel: Revenue went up 50.1% to USD 6,342 million (9M 2009: USD 4,225 million) and EBITDA up 66.1% to USD 1,271 million (9M 2009: USD 765 million).


Severstal Resources: Revenue went up 90.2% to USD 2,378 million (9M 2009: USD 1,250 million) and EBITDA up 368.9% to USD 1,041 million (9M 2009: USD 222 million).


Severstal International (North America): Revenue went up 27.4% to USD 3,777 million (9M 2009: USD 2,965 million) and negative EBITDA reduced to USD 83 million, compared to 9M 2009 negative of USD 557 million.

FINANCIAL POSITION HIGHLIGHTS:

Solid liquidity position: cash and short-term deposits of USD 2,127 million; borrowing availability of USD 394 million of unused committed credit lines.


While net debt increased to USD 4.3 billion as at September 30, 2010 from USD 3.6 billion as at December 31, 2009, net debt to trailing 12-month EBITDA decreased from 3.4x at the end of the 2009 to 1.5x by the end of Q3 2010 which was in line with the Company’s financial policy goal of 1.5x.


Debt maturities extended and debt repayment volumes decreased by the October 25, 2010 issue of USD 1 billion 6.7% Eurobonds due in October 2017 which was mostly used for a partial buyback of the USD 1.25 billion 9.75% notes due in 2013 and prepayment of a number of existing credit lines in the amount of USD 38 million and USD 110 million maturing in 2010 and 2011, correspondingly. This cut the amount of debt maturing in 2010-2013 by USD 854 million and will save more than USD 20 million in annual interest.


Low refinancing risks in the medium term: 2010 – 2011 debt maturities are fully covered by cash and committed but unused credit lines.

Alexey Mordashov, CEO of Severstal, commented: “We are pleased to be restoring the dividend. The third quarter was a good result in market conditions which continue to be challenging. The result vindicates our strategy of pursuing an integrated model with an increasing upstream exposure both to support our core steel-making activities and in metals and minerals outside that market.”

CHIEF EXECUTIVE’S REVIEW OF THE NINE MONTHS ENDED 30 SEPTEMBER 2010

In line with our estimates indicated in the H1 and Q2 2010 reports, Q3 2010 turned out to be a period of seasonal steel demand softening against a rise in raw materials prices. In these conditions, Severstal benefited from its upstream integration in Russia and continued raw materials diversification. Our gold business contributed 11.4% of the total Company EBITDA for the 9 months of 2010.

Our financials reflect a much improved steel and mining environment, compared to the same nine months in 2009. In 9M 2010 volumes and prices showed close to double digit increases across all key product lines: Severstal Resources: coal sales increased by 36% year-on-year, iron ore pellets by 19%; Russian Steel: rolled products sales increased by 17%, downstream by 16%; Severstal International (North America): rolled products sales increased by 18%, downstream being an exception declining by 20% reflecting a consumption change.

Severstal has adapted to the changing environment by adjusting the geographic and product mix of its sales and this is also reflected in our 2010 capital expenditure programme of USD 1.4 billion which will aid further expansion into the high value-added automotive and construction segments, as well as mining operations. Severstal Resources had an excellent nine months with sales and financial performance improving each quarter.

SEVERSTAL RUSSIAN STEEL
 
The Division’s strong performance throughout 2010 reflects stronger domestic demand. Russia accounted for 63.7% of the total sales of Severstal Russian Steel in Q3 2010.

9M 2010 revenue reached USD 6,342 million (9M 2009: USD 4,225 million); EBITDA totalled USD 1,271 million (9M 2009: USD 765 million). 9M 2010 EBITDA margin reached 20% (9M 2009: 18.1%).
The Division’s performance in Q3 2010 was characterised by seasonal growth in long products and colour coated sheet demand, a longer sales period for products in export markets due to a shift in export geographies (from Europe to Africa and South-East Asia), and an increase in the cost of sales.

In Q3 2010, revenue totalled USD 2,264 million (Q2 2010: USD 2,415 million); EBITDA was USD 339 million (Q2 2010 USD 528 million) with EBITDA adjusted from a negative one-off of USD 77 million totalling USD 416 million. EBITDA margin declined to 15% from 21.9% due to increases in raw materials prices. EBITDA margin adjusted from a negative one-off of USD 77 million was 18.4%. Average sales in prices slightly increased to Q2 2010 due to exposure to flat steel products.

We expect our Izhora Pipe Mill, a major producer of large-diameter pipes, to continue to benefit from an increase in oil and gas construction projects.

SEVERSTAL RESOURCES

Severstal Resources’ revenue in Q3 rose 5.1% to USD 914 million (Q2 2010: USD 870 million) and EBITDA increased 5.2% to USD 442 million (Q2 2010: USD 420 million). We increased production and sales volumes to meet the growing demand. The division had a positive one-off of USD 42 million.

In Q3 2010, Severstal obtained an exploration and mining license for the Tyva coking coal deposit in Siberia for USD 19.5 million. Reserves are estimated at 639 million tonnes of high quality grade “Zh” coking coal and the project development is on track. At the end of October, we signed a memorandum of understanding to set up a consortium with OPK and Evraz to develop the railroad infrastructure by 2014.

In the quarter, Severstal advanced its Putu Range iron ore greenfield project in Liberia, Western Africa, after the Mineral Development Agreement was signed and approved by the President of Liberia and ratified by the Liberian Legislature. A pre-feasibility study of the project is under way and is scheduled to be completed by approximately the end of September 2012. The resource has a preliminary 1.1 billion tonnes of iron mineralization at an average grade of 37.6% with a potential increase to more than 2 billion tonnes. Potential production is more than 20 million tonnes of iron ore concentrate per annum.

In the quarter we made an investment in non-steel making resource assets as part of our diversification away from steelmaking. We acquired a 21.7% stake in Intex Resources, which is a potentially large nickel greenfield project in the Philippines. Due diligence is under way to estimate the asset’s long-term attractiveness.

We strengthened our gold segment by increasing our shareholding in its main assets: in 9M 2010, in High River Gold our stake increased to 70.4% and in Crew Gold it increased to 93.4%. Severstal’s gold business continued to successfully develop while delivering high margins in 9M 2010. Q3 2010 EBITDA margin was 51.6% on revenue of USD 184 million (Q2 2010: 53.6% on revenue of USD 166 million). As indicated in H1 and Q2 reporting, in order to increase the transparency of the gold business, Severstal released selected operational data including gold resources and reserves on the Severstal website. We are still considering IPO of our gold segment as one of the options.

SEVERSTAL INTERNATIONAL

In Q3 2010, revenue of Severstal North America declined by 19.8% to USD 1,161 million (Q2 2010: USD 1,447 million) with a negative EBITDA of USD 59 million, compared to Q2 2010 of USD 59 million, reflecting the challenging US steel market environment and growing raw materials costs. The results were also impacted by the idling of the blast furnace at Sparrows Point in July, as we reported previously. On the positive side, the Columbus, Dearborn and Warren facilities operate at full capacity utilisation.
In Europe, Severstal has a 49.2% stake in Lucchini. In 9M 2010, Lucchini posted revenue of USD 1,785 million (9M 2009: USD 1,224 million). EBITDA was USD 16 million (9M 2009: negative USD 212 million). In Q3 2010, Lucchini reported negative EBITDA of USD 36 million (Q2 2010: EBITDA of USD 53 million). Q3 2010 is only partially comparable to Q2 2010 due to seasonal decline (summer holidays, planned maintenance idling, including increasing maintenance costs).

DIVIDEND

The Board of Severstal is recommending a dividend of 4.29 rubles (which is approximately USD 0.14) per share for the nine months of 2010. This represents a pay-out ratio of 25% for the second and third quarters of 2010.

The dividend payment is within Severstal’s policy of paying out at least 25% of our net profits. It reflects the Board’s desire to share with shareholders the successful quarters’ trading outcome.

Approval of the dividend is expected at the Extraordinary General Meeting of shareholders which will take place on 20 December 2010.

OUTLOOK

Severstal is well placed to weather any weakening of steel prices in Q4 (due to seasonal decline in demand, lower contract raw materials and spot scrap prices) and stands to benefit from an expected rebound in prices in Q1 2011. The apparent reduction in steel inventories should prevent any sharp declines in steel prices while a favourable outlook for gold will benefit Severstal’s gold business.

In Russia and CIS, steel use is estimated to increase by approximately 8% year-on-year in 2011 – helped by potential government infrastructure spending. Since Severstal is moving to the high-end of the local steel manufacturing, Severstal Russian Steel’s priority is to further expand the Continuous Improvement Programme and intensify CRM (Customer Relationship Management) projects targeting local customers.

In the US, we expect the pace of recovery to be gradual. On the positive side, flat steel consumption is relatively robust compared to long steel producers, benefiting Severstal North America which is a flat steel producer. Expectations for Q1 2011 prices recovery are backed by the low stock levels likely to work out by the end of the year and a rise in raw materials contract prices. In North America we expect to continue asset restructuring and optimisation.

Our upstream integration in Russia and partially in the USA, and our portfolio diversification into gold, which hedges steel and mining risks, mean our overall margins continue to be supported at a healthy level.

Overall Severstal is well placed to continue its development given its sales geography, product mix and integrated model.