OREANDA-NEWS. August 26, 2011.   Severstal reports H1 and Q2 2011 financial results
Severstal (LSE: SVST), one of the world’s leading vertically integrated steel and mining companies, today announces its H1 and Q2 2011 financial results. 

EBITDA up 18.7% to USD 1,109 million (Q1 2011: USD 934 million) and EBITDA margin up to 25.3% (Q1 2011: 25.1%) due to strong Steel Resources performance and continuing improvement at North American operations resulting in significantly higher selling prices;


 Revenue up 17.6% to USD 4,383 million (Q1 2011: USD 3,727 million);


 Further increase in net profit: by 15.8% to USD602 million (Q1 2011: USD520 million), with net profit margin of 13.7%;


 Recommended dividend payment of 4.37 rubles per share (approximately USD0.15).

H1 2011 vs. H1 2010 ANALYSIS:

 Significant profit and revenue growth due to robust price environment and increasing demand for steel and bulks products;


 EBITDA up 34.5% to USD2,043 million (H1 2010: USD1,519 million) and EBITDA margin up to 25.2% (H1 2010: 23.8%);


 Revenue up by 27.1% to USD8,110 million (H1 2010: USD6,382 million);

Significant improvement on the bottom line: H1 2011 net profit of USD1,122 million (H1 2010: net loss of USD593 million).
FINANCIAL POSITION HIGHLIGHTS:

• Strong liquidity position with USD1,714 million in cash & equivalents and equivalents covering short-term debt of USD1,556 million;

• Further decrease in Net Debt/EBITDA to 1.1x at end of Q2 2011, below target level of 1.5x;

• Improvement in debt maturity calendar and reduction in the cost of capital: in July 26, 2011, Severstal issued USD500 million in 6.25% Eurobonds due in 2016.

OUTLOOK:

• In H1 2011, Severstal demonstrated that through its vertically integrated model and focus on high value-added and high-growth markets it is well placed to deliver strong performance throughout the cycle;
• In Q3 2011, we expect steel prices to stabilize. In Russia, Q3 is traditionally strong due to high levels of activity in the construction sector and the recovery of fixed capital investments. In addition, the delayed start of the “construction season” in Russia is expected to be fully realized in Q3 2011. In the US, demand remains strong in the automotive and export-oriented machinery sectors, which, coupled with low inventories, create upside potential for prices. As for the export markets, we anticipate seasonal demand revival in the Middle East and East Asia after the removal of seasonal factors incl. the end of Ramadan and the monsoon season, and further decay of political turmoils, as well as the end of the holiday season in the US and Europe;

• High coking coal and iron ore price levels remain resilient, benefiting vertically integrated producers;

• Gold prices continue to beat historical highs on the back of economic uncertainties in the developed world.

Alexey Mordashov, CEO of Severstal, commented: “Our strong performance in the 2nd quarter and the whole 1st half of the year 2011 again demonstrated the benefits of our vertically-integrated model, low-cost operations and focus on high growth and high margin segments. Increases in the prices of major raw materials, coupled with strong price environments in the global steel and gold markets, led to significant EBITDA growth on the back of EBITDA margin at over 25%. We remain on track to fulfill our planned 2011 capital expenditure programme, with some projects running ahead of schedule. Our Net Debt/EBITDA level continued to improve to 1.1x, below the targeted 1.5x, and we will look to maintain our reasonable level of debt and solid liquidity position going forward. That said, we understand potential risks associated with the current challenging economic environment, but strongly believe that our major advantages – raw materials self-sufficiency, low-cost operations, balanced product-mix and flexible sales structure – leave us in a better position for the second half of the year compared to the competition”.

CHIEF EXECUTIVE’S REVIEW OF THE SIX MONTHS ENDED 30 JUNE 2011


Over the first half of 2011, Severstal delivered a strong performance reflecting the strength of the company’s vertically-integrated business model, low-cost operations and focus on high-growth and high-margin segments.

The elimination of Q1 seasonal factors at Russian Steel and Steel Resources and the overall improved pricing environment globally led to sales volumes recovery and boosted consolidated revenues to USD4,383 million (Q1 2011: USD3,727 million) and EBITDA Q2 2011: USD1,109 million and Q1 2011: USD934 million, respectively.
In Q2 2011 we saw continuing improvement at our North American operations, despite the negative tornado impact which caused several days stoppages at Columbus in May. EBITDA at Severstal North America increased by 68.9% to USD76 million (Q1 2011: USD45 million), with EBITDA margin and EBITDA per tonne increasing to 9.4% and USD92, respectively.

Another q/q increase in coking coal and iron ore prices led to a very strong performance of the Steel Resources segment. Our full vertical integration in Russia allowed us to capitalise on the growing input prices and improve consolidated earnings and profitability.

Our cash capital expenditure in Q2 2011 was USD446 million, up 23.5% on the seasonally lower previous quarter. We maintain our USD2 billion CAPEX target for FY2011, with increased investment planned in H2 2011. Our projects (Columbus Phase II, modernisation of Dearborn, Balakovo mini-mill greenfield, 2nd colour coating line in Cherepovets, a new coalmine at PBS Coals, a thermoelectric power station burning coalmine methane in Vorkuta, etc.) are progressing well with some of them, such as the modernisation of Dearborn, running ahead of schedule.

RUSSIAN STEEL

High diversification of sales by destination and between consuming industries supported the financial performance of the Russian Steel segment. Overall sales volumes recovered by 5.9% q/q after a weaker Q1 2011, while average selling price increased 9.2% q/q to USD915 per tonne. Revenue went up 16.5% to USD2,807 million (Q1 2011: USD2,409 million), while EBITDA remained largely flat at USD436 million (Q1 2011: USD434 million). Segmental EBITDA margin was down 2.5 ppts to 15.5% (Q1 2011: 18.0%) reflecting higher raw materials prices.

The Russian steel market remained strong in Q2 2011; however domestic prices gradually softened after peaking in March. Demand from key consuming industries, such as auto and pipe production, remained solid, however the construction industry remained somewhat below expectations. We expect the delayed start of the “construction season” in Russia to be fully realised in Q3 2011.
Mirroring slightly lower than anticipated domestic demand, the share of our shipments to the domestic market decreased in Q2 to 61.1% (Q1 2011: 67.7%). This still, however, represents a high proportion of total sales, and export sales helped to maintain full capacity utilisation at our Russian operations. We expect our Russian shipments to increase in Q3 2011.

The share of high value-added (HVA) products in the portfolio in Q2 was down 3 ppts q/q as a result of the higher export sales, but remained high at 43% and is likely to increase in Q3 2011. Our Izhora Pipe Plant continues to operate close to full capacity.

Sales volumes are expected to increase in Q3 2011 due to seasonal pick up in demand and the current low inventory levels.
 
STEEL RESOURCES

The financial performance of Steel Resources was boosted by the continuing price increases of iron ore and coking coal. Q2 2011 revenue surged by 31.4% to USD1,004 million (Q1 2011: USD764 million) and EBITDA soared by 47.1% to USD475 million (Q1 2011: USD323 million). EBITDA margin went up 5.0 ppts to 47.3% (Q1 2011: 42.3%).

Iron ore sales recovered 20% q/q in Q2 2011 after a decrease in Q1 2011, while coking coal concentrate shipments decreased by 16% from Vorkuta and by 7% from PBS Coals q/q. Lower concentrate volumes at Vorkuta were a result of the planned decommissioning of one of the coal faces, and at PBS due to lower raw coal output at open-pit mines resulting from higher stripping works.
In Q3 2011, we plan to maintain production of coking coal and iron ore at current levels, which together with strong bulks prices should support on-going progress.
The construction of the methane gas power station at Vorkuta which is designed to substantially increase our energy self-sufficiency and hence minimize costs is on track to be completed by the year end.

SEVERSTAL NORTH AMERICA

In Q2 2011 steel demand in the U.S. continued to be strong but prices began to decline from the peak in April. Sales volume was impacted by the tornado at Columbus and a need to replenish inventories at Dearborn caused by oxygen supply interruption in Q1 2011.

Higher average selling prices helped improve the segment’s financials. Despite a 6.7% drop in sales volumes from the previous quarter, revenue increased 7.1% to USD811 million. Meanwhile, cost of sales remained almost flat, leading to a 68.9% improvement in EBITDA to USD76 million (Q1 2011: USD45 million). EBITDA in Q2 increased to USD92 per tonne from USD51 per tonne in the previous quarter.

Manufacturing demand in most markets continues at a moderate, but consistent pace. Demand is strong in the automotive, pipe and tube segments. Appliance, construction products, HVAC & water heater are projected at a steady pace through year end, and agriculture and machinery continue to improve.

A second EAF complex at Columbus was commissioned ahead of schedule in June, and the start-up of a second Push Pull Pickle Line in September and second Hot Dipped Galvanizing Line in October are proceeding on schedule. In Dearborn, the launch of a new Continuous Pickle Line and Tandem Cold Mill (PLTCM) in August was ahead of schedule; Hot Dip Galvanizing line (HDGL) to be commissioned in December continues as planned. In July, Severstal received a conditional commitment for a USD730.9 million loan from the U.S. Department of Energy. The proceeds from the loan will be used for the construction and completion of Dearborn’s finishing operations to produce the next generation of advanced high strength steels (AHSS) for automotive applications. Upon completion of the modernisation projects, Dearborn’s facilities will include a 1.9 mtpa coupled pickle line tandem cold rolling mill, a 0.5 mtpa hot dip galvanizing line, and a hi-end 0.5 mtpa continuous annealing line, all with 72-inch width capability.

GOLD

Nordgold, the gold segment within Severstal, continued to improve its operational and financial performance. The gold price continued to rise in Q2 2011, achieving new historical highs. Revenue in H1 2011 increased by 80.4% to USD543 million (H1 2010: USD301 million).

In Q2 2011 gold production went up 13.8% q/q due to the elimination of seasonal factors affecting Q1. Successful process optimisation initiatives resulted in a production increase versus Q1 2011 at Celtic and Berezitovy by 86% and 33%, respectively. The elimination of Q1 seasonal factors resulted in q/q increases in production at Aprelkovo and at Neryungri by 142% and 46%, respectively. In H1 2011, Nordgold produced 372 koz, a y/y increase of 43.1% driven by growing contributions from Berezitovy and Taparko, as well as by the consolidation of Crew Gold.

H1 2011 EBITDA increased by 71.2% to USD267 million (H1 2010: USD156 million). EBITDA margin remained robust at 49.2% (H1 2010: 51.8%).

High growth in revenue was partially offset by higher production costs, resulting from increased fuel and electricity prices, complex geological conditions at some of the mines, and salary indexation at Buryatzoloto and Crew.

Q2 2011 CAPEX was USD67.7 million, including USD25.4 million on exploration activity, q/q increases of 97% and 47%, respectively.

DIVIDEND

The Board is recommending a dividend of 4.37 rubles per share (approximately USD0.15) for the six months ended 30 June 2011.

Approval of the dividend is expected at the Company’s EGM which will take place on 30 September 2011. The record date is 24 August 2011.

OUTLOOK

Although macroeconomics remains challenging, in Q3 we anticipate global steel prices to stabilize as a result of low steel margins, thin inventories and an improving demand-supply balance. Overall demand is expected to revive due to:

Seasonal demand revival in the Middle East and East Asia after the end of Ramadan and the monsoon season, as well as the end of the holiday season in the US and Europe;

Pick-up in automotive production due to removal of supply-chain disruptions after Japan’s earthquake;

Solid construction activity in China on the back of government infrastructure and affordable housing programmes.

Price levels for coking coal and iron ore are expected to remain resilient, benefiting vertically integrated producers.

Steel supply is set to grow in the US, and decrease in other regions due to seasonal maintenance works and iron ore production ban in India.

In Russia, real steel demand in Q3 is expected to remain firm across all steel consuming sectors due to a recovery in fixed capital investments and seasonally increased construction activity. The Middle East and South East Asia, both major Russian export markets, are also expected to grow due to increased construction activity.

In the US, the government agreed to raise the debt ceiling to avert a default, which could weaken the US dollar in the longer run. That should positively impact steel exports and export-oriented manufacturing. Demand fundamentals in the US remain positive in the automotive and export-oriented machinery; while construction does not show signs of recovery. The current low steel inventories create opportunities for price growth with signs of improvement in real demand.
We strongly believe that Severstal’s vertically-integrated model, low-cost operations, good product-mix and focus on high growth and high margin segments leave us well positioned for Q3 and beyond.