OREANDA-NEWS. Fitch Ratings has affirmed Russia-based Evraz Group SA's (Evraz Group) and holding company Evraz plc's (Evraz) Long-term Issuer Default Rating (IDR) at 'BB-'. The Outlook on both ratings is Stable. Evraz Group's senior unsecured rating of 'BB-' has also been affirmed.

Evraz Group's FYE13 results showed a moderate growth in volumes, totalling 2% year-on year increase in the output of steel products. The growth in volumes did not, however, translate into higher revenues due to a general reduction in market prices. Profitability margins fell as a result but were partly compensated by the company's on-going cost optimisation plan. Fitch-adjusted EBITDAR margin for FYE13 was 10.9% compared with 13.5% in the previous year.
Despite the challenging market environment Evraz Group was able to increase its free cash flow generation year-on year, mainly as a result of a reduction in capex (down by more than 25% yoy). The company was also able to reduce absolute gross and net leverage levels, which Fitch expect to continue in 2014.

KEY RATING DRIVERS
High Raw Material Self-Sufficiency
Evraz Group benefits from 100% self-sufficiency in iron ore and coking coal, including supplies of coal from its affiliate OAO Raspadskaya (B+/Stable). Consequently, it is better placed to control the cost base of its upstream operations than less integrated Russian and international steel peers. The cash cost of slab production at Evraz's Russian steel mills is about 25% below the global average, which has enabled the company to maintain full plant capacity utilisation.

Healthy Core Market Demand
Russia, where the company mainly focuses on long products, remains the largest market for Evraz (42% of revenue in 2013). Consumption of steel in Russia is increasing and Fitch considers the factors driving demand for steel products in Russia to be quite strong over the medium term.

Cost Efficiency
Evraz has intensified its strategy of streamlining its operations, which consists of divesting non- or less profitable assets, and applying capital to optimise the existing assets. Fitch assesses the impact of the initiative on both leverage and overall profitability as positive. However, the disposal of Highveld steel and vanadium assets in South Africa is still under negotiations.

Positive Free Cash Flow
Evraz's ratings are supported by its ability to remain free cash flow (FCF)-positive throughout the cycle. Fitch expects this to continue over the medium term and that the company will use some of FCF for debt reduction.

Average Corporate Governance
Fitch assesses Evraz's corporate governance practices as being average compared with other Russian corporates and are notched down by two levels to 'BB-'. Included in this notching is the higher-than-average systemic risks associated with the Russian business and jurisdictional environment as well as the company's own corporate governance practices.

RATING SENSITIVITIES
Negative: Future developments that could lead to negative rating action include:
- Funds from operations (FFO)-adjusted gross leverage sustained above 3x by end-2015
- Sustained negative FCF

Positive: Future developments that could lead to positive rating actions include:
-FFO-adjusted gross leverage below 2.5x by end-2015
-Sustained positive FCF.