Global economic recovery in 2010 brought more visibility and optimism to our business, and we emerged from the economic downturn stronger and with an improved financial performance. The major strengths of our vertically-integrated model, cash generative business and investment programmes, continue to give us a powerful competitive position.

Revenue for the year increased by 41.5% to US$13,573 million as a result of increased sales growth in each of our segments, while profits from continuing operations were US$1,427 million. Central to our revenue growth during the year were sales of steel products to the Russian market, sales of mining products to third parties, and the rapid expansion of our gold business.

We produced a strong operating cash flow with US$1,259 million and net debt/EBITDA was 1.3x at the end of the year, below our 1.5x target threshold.

During the year we capitalised on improving market conditions by increasing production and sales volumes, maintaining high margins, using the benefits of vertical integration, and further expanding our presence in markets with higher growth potential. Our performance reflects the hard work and excellence of all our employees. Our people are the heart of Severstal and are critical to our achievements. They have shown great patience and determination during the economic crisis and we will continue to develop their skills further, in an environment focused on industry leading standards of health and safety. Our ‘Mission, Vision and Values’ initiative promotes excellence in everything we do and ensures we operate to shared goals, values and standards. In 2010, we made another step towards internal efficiency. In line with the international best practice and based on our accumulated experience, we launched the Business System of Severstal, a programme covering the whole company and designed to involve employees in the improvement process as much as possible. We are confident the programme, which focuses on safety, continuous improvements, client orientation and business-process efficiency, will help us raise competitiveness and reach top industry positions.

Strategy

Our key financial objective is to become one of the leaders by EBITDA in the global steel industry, while retaining one of the leading positions by margins and returns on investment. Our vertical integration is the key to these returns, with high self-sufficiency in iron ore and coking coal. The Cherepovets Steel Mill, our Russian asset, is one of the world’s lowest-cost producers, while in the US, we are one of the most modern steel producers. Pricing pressure in the world markets underlines the strength of our vertically-integrated model.

We will continue to focus our investment activities on areas where we see the greatest potential for growth, and therefore we will be investing in steel-related mining as well as expanding our Russian steel operations. In our restructured North American assets we aim to invest in creating a wider product offer to higher growth market segments such as automotive.

Our wholly-owned indirect subsidiary Nordgold, which runs our gold operations, has grown rapidly into an established producer focused on emerging markets and is a growing contributor to our financial results.

We continually review our asset portfolio and strategic development priorities to ensure we generate the highest returns for shareholders from the allocation of capital to development opportunities open to us as an international steel and mining company.

We will also target new frontiers to further expand our presence in areas with high growth potential such as India.

Investment

Cash capital expenditure in 2010, excluding discontinued activities, totalled US$1,251 million and was in line with our target for the year. We continued to invest selectively across our operations, to expand mining and steel production volumes, increase output of high value-added steel products, improve our operational efficiency and reduce costs.

This year we will focus capital expenditure on ongoing projects, on improving operating efficiency, and on ensuring we maintain industry-leading standards of health and safety. Our target investment programme for 2011 is more than US$2 billion – approximately twice the level of 2009. We will invest a significant proportion of this in Severstal Russian Steel, with the remainder in Severstal Resources and the North American operations of Severstal International.

Severstal Russian Steel

Severstal Russian Steel is a world-class, low-cost steel producer which performed strongly throughout the year, helped by higher steel demand, mainly from the domestic market. Revenue rose 42.7% to US$8,815 million due to both volume and price, while EBITDA grew 27.1% to US$1,677 million and EBITDA margin was 19.0%. The domestic market accounted for 61% of the division’s total revenue in 2010 and we aim to increase that percentage this year as Russian steel consumption currently remains below pre-slump levels. Export sales increased by 25.3% and our diversified product mix means we are able to adjust our production and sales to cater for regional and industry trends, and produce higher sales and margins.

In line with our plans we completed several major projects during the year including the construction and launch of the Sheksna Pipe Plant, close to our main Russian steelmaking facilities in Cherepovets.

Severstal Resources

Financially, 2010 was one of the strongest years ever for our Resource division. Revenue increased to US$3,484 million due to both volume and prices, and EBITDA totalled US$1,551 million, while the full year EBITDA margin was 44.5%. The results reflected a combination of favourable market conditions, the flexibility of our production and sales team and the effect of the previous year's initiatives to increase the efficiency of our operations.

Mining activities will continue to provide a strong source of growth and we intend to expand iron ore and coal production as well as other mining operations. Our gold business Nordgold has grown rapidly into an established producer with assets in emerging markets and, following our decision to postpone its initial public offering, we will continue to develop the business.

Severstal International

In North America our priority is to ensure our assets provide a more flexible and efficient cost base and following the disposal of assets after the year end, we are focusing on our Dearborn and Columbus facilities.

Though still challenging, the US steel market gradually recovered in 2010 and, driven by both volumes and prices, revenue from continuing operations was up 26.0% at US$2,912 million and EBITDA was US$86 million.

We expect the cost position of Columbus and Dearborn to improve further as a result of a recovering steel market environment and additional investment in their operational efficiency. In 2011 capital investment at Severstal North America will be approximately US$465 million, helping us to unlock value in the US and to optimise our footprint.

Our European operations represent Lucchini segment which classified as held for sale as of December 31, 2010. In February 2011, Severstal signed an amendment to Lucchini’s share purchase agreement cancelling the buy-back option and the entitlement, for the benefit of the Group, to any gain on a subsequent sale of this stake to a third party. From this date Severstal accounts Lucchini under equity method.

Outlook

The steel market is likely to remain strong in the first half of 2011 and an improvement in margins is likely to stimulate increased output globally. As a result, we expect steel and raw material prices to moderate in the second half of the year while production volumes remain high as average capacity utilisation stays below 80%, against a background of solid demand growth. We expect gold prices to remain firm.

In Russia and the CIS steel demand is expected to increase by approximately 8% year-on-year in 2011 while in the US the automotive industry will continue to be the best steel-consuming segment in a growing market.

Accelerating economic growth in our key markets in 2011 should produce another strong year for Severstal as demand for steel improves and raw material prices rise.

Alexey Mordashov
Chief Executive Officer