One of Severstal’s main strategic priorities is to maintain resilience to the industrial cycle through high margins and conservative financial ratios.

• We target at least 20% EBITDA margin over the cycle as one of the key performance indicators.
• We also target a net debt/normalized EBITDA* ratio of not more than 1.5.

We are happy to report that we successfully achieved both targets in 2010. Thanks to a strong performance of our core assets in Russia, and ongoing restructuring of our facilities in the developed markets, our EBITDA margin increased from 16.6% in 2009 to 24.0% in 2010. By the end of 2010, we reduced 2010 net debt/EBITDA to 1.3, bringing us to a targeted level of financial leverage.

We will continue our focus on high-margin, resilient and growing regional and product markets in steel and mining, to ensure that we sustain our meeting of these targets, despite inherent industry volatility.

_{*Normalized EBITDA – average EBITDA from 2004 and till current year.}

Severstal growth drivers

Severstal is a vertically-integrated steel company focused on high-growth emerging markets.

There are a number of crucial industrial growth drivers which we believe are key to our success, and which will ultimately help us achieve our financial objectives.

Cost competitiveness We believe that cost competitiveness in every region where we produce steel is a vital element of our success, and a key to industry-leading margins and returns on investments. Our flagship facility, Cherepovets Steel Mill, is one of the world’s largest standalone integrated steelworks by capacity. It has also consistently been ranked as one of the ten lowest-cost steel producing plants in the world. After asset restructuring in the US, and upon the completion of the long-term investment programme in 2011, Severstal Dearborn and Severstal Columbus will be the most efficient and modernised facilities in the US. We will also continue our relentless focus on managing costs in our mining facilities, to counter the global trend of rising mining costs.

Vertical integration Vertical integration is an integral part of our business model. We are one of the few international steel companies with a strong position in both iron ore and coking coal. We are fully self-sufficient in primary steel-related raw materials in Russia, and in the US our local coking coal capacities are more than sufficient to provide full economic integration for our steel plants in North America. We target at least 80% global economic self-sufficiency in both iron ore and coking coal, to secure cost competitiveness, improve total margins, and smooth our performance over the cycle. We build and develop steel assets only in those regions where it’s possible to get access to competitive raw materials at a price below global benchmarks. We will continue to prioritise investments in raw materials to achieve this selfsufficiency goal, so that our steel production is fully balanced by own iron ore and coking coal.

Presence in consolidated and growing markets The high level of market consolidation secures better production discipline, while our presence in growing markets allows us to increase our revenues and earnings together with our customers, and target emerging high-potential niche segments. Our main regional markets demonstrated excellent growth rates in 2010 on the back of recovery from the global economic crisis: steel demand in Russia grew by approximately 35%, and in the US, by approximately 30% year-onyear, according to the World Steel Association. We have a positive mid-to-long term outlook for all our target regional markets. We expect at least 8% growth in demand for steel in Russia in 2011, and continuing sound growth thereafter, on the back of rising personal incomes and growing demand for modern housing, cars and much-needed infrastructure. After the economic recovery is complete, US steel demand will rise in line with the long-term trend, determined by population growth and the need to build up previously underinvested infrastructure. Our new focus – India – will be one of the highest growth areas in the next decade, with the annual increase in demand for steel in excess of 7-8% a year for the next decade.

Executing our strategy in 2010: steps towards a new Severstal

Sustaining positive momentum in Russia

In 2010, Severstal's Russian steel and mining assets performed strongly, aided by the general recovery in demand for steel and the booming raw materials markets. Russian steel assets were nearly fully utilised through the year, with total EBITDA growth of 27.1%. We maintained our strategic focus on the domestic market with the launch of several valuable downstream organic growth initiatives:

• TPZ Sheksna with 250,000 tonnes of welded tubes and profiles for construction
• A renovated HDG line in Cherepovets adding 400,000 tonnes of new galvanizing capacity
• A joint venture stamping facility with Gestamp and joint venture steel service centre with Gonvarri – both in Kaluga region, several hundred km from Moscow

We also increased our share of the domestic market in the total sales of Severstal Russian Steel from 55.6% to 61.0%. Cost control and recovery in demand allowed us to increase the per-tonne profitability of our steel operations despite rapid inflation in raw materials costs.

Bringing the asset structure in line with our strategic targets

In 2010, we made continuous steps to bring our international asset structure in line with our financial and strategic targets. In Europe, the Group reduced its stake in Lucchini S.p. A. to 49.2%. In North America, the Group sold Northern Steel Group, the processor and distributor of steel products, and also the steelmaking facilities of Warren, OH, Wheeling, WV, and Sparrows Point, MD.

The restructuring of our US assets allowed us to focus on the development of the most profitable and resilient parts of our US business – Dearborn and Columbus. These facilities were profitable in 2010, by EBITDA, despite economic difficulties and rising raw materials prices. We expect a much stronger performance from these US assets from 2011 and beyond, with the completion of their investment programmes expected by the end of 2011.

Entering new frontiers for our vertically-integrated business model

We have taken the first steps in our development of a new regional market – India. In December 2010 Severstal and NMDC, the leading iron ore producer in India and one of the major global suppliers of iron ore, signed a Memorandum of Understanding to establish a joint venture company to build an integrated steel plant, with a capacity between 2 and 5 million tonnes (to be determined at feasibility stage). The plant will be located in the state of Karnataka, close to the industrial heartland of southern and western India and close to multiple iron ore mines. In line with our strategic priorities for cost leadership and vertical integration, the joint venture intends to have its captive coking coal mining subsidiary in Russia and its iron ore mining subsidiary in India, to ensure long-term supply of all primary raw materials to the proposed steel plant. Strategically, the rapidly expanding Indian market will become one of our main priorities.

Developing our global raw materials base

We continued to develop a portfolio of growth options in steelrelated mining by investing in acquisitions and developing early-stage mining projects internationally. In the Putu iron ore project in Liberia, where Severstal is the majority stakeholder with a 61.5% interest, an independent mineral resource report confirmed estimated natural resources of 2.4 billion tonnes, with approximately 34% iron concentration, twice the initially estimated reserves base.

In May 2010, the Group acquired a 16.5% stake in Core Mining which controls exploration licences for the Avima iron ore deposit in the Republic of Congo (Brazzaville) and the Kango iron ore deposit in the Republic of Gabon. Both projects are at an early exploration stage with a significant resources potential of high-grade iron ore with Fe content over 50%.

Finally, the Group acquired an exploration and development licence for the Tsentralnyi field in Tyva republic, South Siberia, with a resource potential of 640 million tonnes of high-quality hard coking coal. These developments will offer us a wide range of options to develop our raw materials base in the long term, through a diversified and balanced portfolio of low-cost, high quality deposits.

To ensure the self-sufficiency of our projected steel mini-mill operations, in the third quarter of 2010, we completed the acquisition of a 25.6 % stake in Iron Mineral Beneficiation Services (Proprietary) Limited (IMBS), a research and development company based in Johannesburg, South Africa. IMBS has developed a coal-based Finesmelt technology capable of processing unusable iron ore fines and thermal coal into valuable metallic products similar to DRI/HBI. Currently, IMBS is developing its first commercial project in Phalaborwa, South Africa. As a part of the transaction, we acquired a 51.0 % stake in International Iron Beneficiation Group Limited (IIBG), a newly formed company that has an exclusive license to commercialise the technology worldwide (outside of South Africa and neighbouring countries).

Priorities for 2011

One of our key priorities is to strengthen our asset portfolio and to increase profitability in North America, as the local market recovers from the steel demand recession, and we complete the modernisation and expansion of production volumes.

Upon the completion of ongoing investments, the total production capacity of Severstal North America will reach around 5.5 million tonnes, almost evenly split between integrated and mini-mill production routes. Severstal Dearborn will launch a new cold-rolling mill, pickling and galvanizing lines, which will make it the region’s most modern and technically advanced producer of automotive steel, well positioned to benefit from the ongoing strong recovery of US flat steel market and automotive demand. Severstal Columbus, which demonstrated consistently high utilisation rates and positive annual profitability, even at the bottom of the market, will launch its second phase in Q3-Q4 2011, bringing its total hot-rolled band capacity to 3.1 million tonnes and doubling its galvanized products capacity to 1 million tonnes.

We will continue to develop our core Russian steel and raw materials assets. In Russia, we will be engaged in selective growth in highvalue- added products, adding another colour-coating line with 200,000 tonnes of capacity in Cherepovets. We will also maintain our focus on cost control in both steel and mining through a continuous improvement programme, and targeted investments in increasing efficiency and modernisation.

We will continue to develop our business platform in India through the partnership with NMDC, and our global portfolio of mining projects in iron ore and coking coal.

Our strategy is supported by one more key element, the Business System of Severstal, which we developed in 2010, and which we expect will help us to take leading positions in the industry for financial performance, internal procedures, corporate culture, safety and client relations.

Creating Platform for Growth

Entering new frontiers for our vertically-integrated business model

Maxim Tevs
NMDC Project Leader

"In 2010, we took the first step in developing our presence in India, a new fast-growing emerging market for Severstal. In December 2010 Severstal and NMDC Ltd, the leading iron ore producer in India, signed a Memorandum of Understanding to establish a 50:50% joint venture company with the objective of building an integrated steel plant in India.

The plant will be located in the state of Karnataka and has annual crude steel capacity between 2 and 5 million tonnes, probably constructed in phases. The selected site for the plant is close to the industrial heartland of southern and western India, close to many potential customers and the operating iron ore mines of NMDC.

In line with our strategic priorities for cost leadership and vertical integration, the joint venture company proposes to have its captive iron ore mining subsidiary in India as well as having a coking coal mining subsidiary (most probably in Russia). The proposed steel project has a target to become one of the world’s lowest-cost steelmaking plants and would be the only steel greenfield project in India fully-integrated in both iron ore and coking coal raw materials.

Severstal and NMDC will conduct the technical and economic feasibility study jointly during 2011, to decide on project’s final investment specifications and product portfolio. Both companies have agreed to contribute investment proportional to their equity stakes. We believe in strong partnership with NMDC, one of the most reputable enterprises in India. It has an excellent track record of developing mining business in the county and will be responsible for local institutional support and ensuring iron ore supply. Severstal will provide technical assistance and will be responsible for operational control at the steel plant.

Strategically, India is an attractive market for Severstal with strong macroeconomic and industrial fundamentals. Long-term growth in domestic consumption, demographic suitability and a young growing population, progressive urbanisation and rising living standards, all provide the basis for sustainable high economic growth in the country. Being a net steel importer, India has significant potential for growth in demand for steel, particularly due to the need to develop infrastructure. Given favourable market prospects and the structural low-cost advantage of access to abundant high-quality iron ore, the Indian steel sector enjoys high profitability and may provide attractive investment opportunities."

Getting access to one of Russia’s major coking coal deposits

Dmitry Sakhno
Tyva Project Leader

"In September 2010, Severstal obtained a licence for further exploration and coal extraction at the Tsentralniy coalfield in the western part of the Ulug-Khemskiy coal basin in the Tyva region, South Siberia. The coalfield is located in Tandinskiy kozhuun (district), 32 km from the capital of the region, Kyzyl city, and has an area of 96 sq. km.

Preliminary exploration of the western part of the basin was carried out in 1986-1988 and resources of the Tsentralniy field were estimated at 640 million tonnes of coking coal. The field has ten coal seams, but 70% of resources are contained in one seam called Ulug, with average thickness of 3.5 metre. The depth of the Ulug seam varies from 250 metre to 500 metre. The coal will be extracted by the underground method.

According to the licence agreement, we plan to carry out additional exploration of the coalfield in 2011–2013 and to start construction of the mine and surface infrastructure in 2015. The annual coal production is expected to reach almost 10 million tonnes by 2019.

As a part of the project, Severstal, together with other investors involved in coalfield development in Tyva, and the Russian government, will finance the construction of 400 km of railway connecting the Tyva region with the existing Russian railway network. The Russian government has already allocated US$1.7 billion from its Investment Fund to the project. The railway will be mostly used for transporting coal."

Further development of the Putu Range iron ore project in Liberia

Alexander Soloviev
Putu Range Project Leader

"In 2008, Severstal acquired a 61.5 % stake in African Iron ore Group Ltd, located only 130 km inland from the deepwater shoreline of eastern Liberia. We are advancing the project in a joint venture with African Aura Mining Inc, which has a 38.5% interest in the project.

The project has estimated resources of 2.37 billion tonnes of hematite/magnetite iron ore within the planned pit, with an estimated grade of 34% Fe based on a report issued by SRK Consulting Ltd in February 2011, prepared under the Guidelines of National Instrument 43-101. SRK Consulting also identified the potential for a further 1 billion tonnes to 2.5 billion tonnes of iron ore below the project’s existing pit shell. To date, about 41,000 metres have been drilled and further extensive drilling is underway as part of the Bankable Feasibility Study, scheduled for completion in 2014, with interim Pre-Feasibility study being completed by 2012.

In 2010, a Mineral Development Agreement for Putu Iron Ore Project was granted and ratified by the Government of Liberia. The MDA sets the fiscal regime for the development and mining of the Putu iron ore project for a period of twenty-five years and is extendable in line with the life of the mine.

We expect to start production at the end of 2017, with potential output of at least 20 million tonnes of concentrate. This project will allow us to become a significant player in the iron ore seaborne market."

Diversification into a new prospective market of metallic iron

Artem Simonov-Beschinskiy
IMBS/IIBG Project Leader

"In 2010, Severstal acquired a 25.6% stake in Iron Mineral Beneficiation Services (Proprietary) Limited (IMBS), a research and development company based in Johannesburg, South Africa. IMBS has developed a low-cost Finesmelt technology capable of processing iron ore fines and thermal coal into valuable metallic products similar to DRI/HBI.

The primary product of the Finesmelt process is a highly metallised metallic iron briquette, which is produced at lower than melting temperatures. The technology is a low-cost electric thermo-chemical technology process that converts 62+% superfine iron-bearing material, such as magnetite and hematite, into high quality metallic iron without agglomeration. The Finesmelt plant design is modular and scalable with limited infrastructure requirements. This makes it possible to achieve comparatively low capital and operating costs. The process is also an environmentally sustainable and has a capacity to use iron ore waste dumps and tailings. The end product represents a highquality substitute for scrap metal in steel production, primarily for consumption by Electric Arc Furnaces.

IMBS has formed a joint venture to implement its first commercial project at Phalaborwa, South Africa, at the site of Rio Tinto’s Palabora Mining Company. Construction is planned to start in April 2011 and commissioning is planned for early 2012. The initial capacity of the Palamin project is 50,000 tonnes a year of metallised product, and will be further expanded up to at least 500,000 tonnes a year. IMBS aims to produce up to 3.0 million tonnes of the product a year in South Africa by 2017.

Industrial Development Corporation (IDC), the state owned investment agency of South Africa, has committed to providing necessary political, economical, and financial support and joined the Palamin project as an equity partner.

As part of the transaction with IMBS, Severstal also acquired a 51.0% stake in International Iron Beneficiation Group Limited (IIBG), a newly formed company that has an exclusive licence to commercialise the Finesmelt technology worldwide (outside of South Africa and neighbouring countries)."