Revenue drivers

In 2010, crude steel production increased by 16.6% compared to 2009, and reached 14.7 million tonnes.

In 2010, revenue was US$13,573 million, up 41.5% on 2009.

Severstal’s Revenue

	US$ million
2009	9,594
2010	13,573

Notable drivers of revenue growth in 2010 were sales of steel products to the Russian market, sales of mining products to third parties, and accelerating quarter-toquarter gold sales globally on the back of the rapid expansion of our gold business.

Segments' contribution to Group revenue growth in 2010, US$ million

In 2010, Severstal Russian Steel contributed 63.9% of Group revenue, after inter-segment transactions, and remained the most important division by share of revenue.

Severstal Resources’ share of Group revenue, after inter-segment transactions, increased to 14.7% in 2010 compared to 12.0% a year earlier. This increase was due to favorable market conditions and a growing contribution from the gold segment. Revenue rose 86.2% to US$3,484 million (FY 2009: US$1,871 million) and EBITDA was up 294.7% to US$1,551 million (FY 2009: US$393 million).

Severstal North America’s contribution to Group revenue, after intersegment transactions, fell from 24.1% in 2009 to 21.5% in 2010 due to a challenging market.

Severstal’s revenue by segment*, 2010

_{* Including intersegment transactions at the amount of US$1,637 mln for 2010 and US$769 mln for 2009}

Share of segment sales in total sales (without intersegment sales)	12 m 2010	12 m 2009
Severstal Russian Steel division	63.9%	63.9%
Severstal North America division	21.4%	24.1%
Severstal Resources division	14.7%	12.0%

EBITDA drivers

EBITDA was US$3,263 million, up 105.3% on the previous year.

Severstal’s EBITDA

	US$ million
2009	1,589
2010	3,263

2010 EBITDA was strongly driven by Severstal Resources. For the first time in the Company’s history the contribution of Severstal Resources and Severstal Russian Steel at the EBITDA level were almost equal for the year. Severstal Russian Steel EBITDA totaled US$1,677 million versus US$1,551 million generated by Severstal Resources. In Q4 2010, Severstal Resources’ EBITDA exceeded that of Severstal Russian Steel: US$510 million versus US$406 million, respectively. This reflected a much improved mining environment supported by the growing contribution of our gold segment. The Group EBITDA margin increased from 16.6% to 24.0%.

Segments' input to Group EBITDA growth in 2010, US$ million

Cash flow drivers

Operating cash flow remained high with US$1,259 million generated in 2010. We had a strong cash position with US$2,025 million in cash and short-term deposits as at December 31, 2010.

Cash flow in 2010, US$ million

_{* Net cash from operating, investing and financing activities includes negative US$598 million of net cash flow from discontinued operations related to Lucchini and North America disposal groups:
December 2009 cash includes US$96 million of short-term deposits;
December 2010 cash includes US$13 million of short-term deposits;
December 2009 cash includes Lucchini and North America disposal groups.}

Capital investments

Our cash capital expenditures in 2010 totaled US$1,251 million (capital expenditures including discontinued operations totaled US$1,366 million) and were in line with our target for the year, as we continued to invest selectively across our operations in order to expand mining and steel production volumes, increase output of high-value-added steel products, improve our operational efficiency and reduce costs.

Severstal’s capital investments (US$ million)

Segment	2010	2009	Change year-on-year %
Severstal North America*	342	238	43.7
Severstal Russian Steel	576	369	56.1
Severstal Resources	434	242	79.3
Lucchini (discontinued operations)	15	133	(88.7)
Intersegment adjustment	(1)	(4)	n/a
Total capex	1,366	978	39.7

*Including discontinued operations.

Severstal’s capex by segment, 2010 (%)

Major investments:

In line with our plans, the following expansion projects were completed or advanced in 2010:

In June 2010, we completed construction and launched the Sheksna Pipe Plant (TPZ-Sheksna) close to our main Russian steelmaking facilities in Cherepovets. The plant is capable of producing 250,000 tonnes of electric welded pipes and other profiles for the construction industry per year. We invested US$22.5 million in this project in 2010 out of the total investment of US$146.9 million.

In July 2010, the Gestamp-Severstal-Kaluga Stamping Facility was commissioned in the Kaluga Region, one of the biggest Russian centers of high-quality automotive steel demand. The plant produces body components for the Volkswagen plant located in the same area. Target annual output is 13 million stamped parts. Total investment into this joint-venture with Gestamp, an international producer of metal components for the automotive industry was about €89 million.

Total investment into this joint-venture with Gonvarri, part of Gestamp was about €40 million.

In December 2010, we commissioned a new hot dip galvanizing line at the Cherepovets Steel Mill with annual production capacity of 400,000 tonnes of galvanized products. We invested US$41.3 million in this project in 2010, out of a total target investment of US$86.7 million.

At Cherepovets Steel Mill, we spent US$43.2 million on the construction of the second colour-coating line, adding 200,000 tonnes of value-added capacity upon completion in 2011.

We are continuing the construction of the Balakovo Long Product Mini-Mill in central Russia. This has an expected capacity, upon completion in 2013, of one million tonnes per year of long products for the construction and infrastructure industries. We invested US$162.2 million in this project in 2010, out of a total planned investment of US$693.0 million.

At Vorkutaugol, we invested US$11.1 million to develop our own electric power generation and washing plants processes (US$7 million and US$4.1 million, respectively). Once completed in 2011, the captive electric power station will reduce our electricity purchase costs substantially.

Also at Vorkutaugol, we invested US$26.4 million in the Usinskoe deposit, a major coking coal reserve, which we will develop.

Also at Vorkutaugol, we invested US$ 21.8 million in longwall mines and washing plants (US$17 million and US$4.8 million, respectively). Capital expenditure on longwall coking coal mines was US$3.9 million in Komsomolskaya deep mine, US$2.5 million in Severnaya deep mine, US$0.4 million in Vorkutinskaya deep mine, US$5.1 million in Zapoliarnaya deep mine, US$4.5 million in Vorgashorskaya and US$0.6 million to explore Yunyaginskiy open pit. Capital expenditure on washing plants amounted to US$2.9 million at Pechorskaya washing plant, US$1.4 million at Severnaya washing plant and US$0.5 million at Vorkutinskaya washing plant.

In our gold business, we installed additional processing capacity and made operational improvements at the Berezitovy and Suzdal assets. We spent US$11.9 million at Berezitovy and US$4.5 million on other small projects.

We invested US$63.8 million in developing our iron ore open pits: US$48.2 million at Karelsky Okatysh and US$15.6 million at Olkon. Additionally, we invested US$8.0 million to improve railway transport infrastructure, mainly at Karelsky Okatysh. We spent about US$14.5 million on equipment for beneficiating plants at Karelsky Okatysh (US$6.9 million) and Olkon (US$7.6 million). We also invested US$3.3 million in the pellet plant at Karelsky Okatysh, and US$2.3 million in iron mines at Olkon, and US$7.9 million in other workshops.

In our North American division, we spent US$125.0 million on an ongoing pickle line project and tandem cold rolling mill, and US$44.0 million on an ongoing hot-dip coating line in Dearborn. Both of these will help to produce value-added products. We also spent US$68.0 million on Phase II in Columbus, a mill capable of producing 1.5 million tonnes of crude steel.

Consolidating our gold business was the main focus of our cash flow investment in 2010. We spent US$460.5 million on taking a 93.4% stake in Crew Gold Corporation and US$152.1 million on acquiring a 21.1% stake in High River Gold Mines Ltd, raising our total shareholding in this company to 72.6% at the year end.

Other notable 2010 investments included the acquisition of a licence for a coking coal deposit in the Tyva republic in Russia for US$19.7 million. We also purchased, for a total consideration of US$7.5 million, a 25.6% stake in Iron Mineral Beneficiation Services (Proprietary) Limited (IMBS), a research and development company based in Johannesburg, South Africa.

2011 target CAPEX

Our capital expenditure will continue in 2011 to start operations of our ongoing projects, improve operating efficiency, and ensure that we maintain industry-leading standards of health and safety. Our target investment programme for 2011 is US$2 billion, which is approximately 43% higher than our target level in 2010, and twice the target level in 2009. A major part of this year’s expenditure will be invested in Severstal Russian Steel, with the remainder in Severstal Resources and Severstal International (North America).

Liquidity and debt position

Severstal adheres to a conservative treasury approach on managing our debt portfolio. Positive relationships with the banking community and proven access to domestic and international debt capital markets allow us to form a well diversified financing structure not reliant on a single market or source of financing.

Debt structure as of 31 December 2010, %

The Company’s development strategy is backed by long-term financing with a comfortable maturity profile. In 2010, the Company conducted several successful public deals which allowed it to extend the maturity:

• High yield bonds

In February 2010, despite the relatively high market volatility in the US and Europe Severstal Columbus successfully placed US$525.0 million of senior secured notes at an original issue discount of 2% and an annual coupon rate of 10.25% maturing in 2018. The order book was two times oversubscribed. The proceeds were used to refinance outstanding debt obligations originally incurred to finance construction at Severstal Columbus.

• Ruble bonds

In February 2010, we issued a US$498.0 million ruble-denominated bonds, maturing in 2013 at a coupon rate of 9.75%. The offering was 3.7 times oversubscribed, allowing a coupon rate to be fixed below the initial price guidance. We used the proceeds to refinance short-term debt.

• Liability Management & new issue

In October 2010, we took advantage of favourable market conditions and successfully completed the liability management and new issue transaction.

The new 7-year Eurobond issue of US$1,000 million was placed under a US$3,000 million Participation Note Programme on October 25, 2010. With significant market demand, the book was 5.4 times oversubscribed and the transaction was priced below the initial price guidance at a historically low coupon rate for the company of 6.7%.

The majority of the borrowed funds were used to refinance existing debt, including the partial repurchase of the US$1,250 million Loan Participation Notes due in 2013. This was structured as a Modified Dutch Auction to optimise the premium, with the target amount increasing from an original US$450 million to US$706 million.

The combination of the above transactions allowed us to extend the maturity profile of our debt, and reduce interest expense in the coming years.

Debt maturity schedule*, US$ million

_{* Excluding accrued interest and unamortised balance of transactional costs}

Due to our solid financial performance, there was a rapid improvement in leverage metrics, and we are meeting our long-term target of net debt to EBITDA at below 1.5 times.

Gross and net debt as of 31 December 2010, US$ million

_{Note: Figures as of 31 December 2009 and 31 December 2010 exclude Lucchini and North America disposal groups.}

In 2010, we maintained significant cash balances. During the whole year, the average amount of cash and short-term deposits on hand was above US$2 billion, and the average availability of committed credit lines was about US$400 million. Traditionally, we keep our cash balances and availability of committed credit lines above our short-term obligation (debt maturities for 2011 are US$1,331 million, excluding accrued interest and unamortised balance of transactional costs). A strong liquidity position helps us retain operating and financial flexibility, and support stable development.

Liquidity position as of 31 December 2010*, US$ millions

_{* Excluding accrued interest and unamortised balance of transactional costs
** US$492 million in Q3 2011 represent RUB bond put option; maturity can be extended by an additional year}

In 2010, we also tightened our policy for managing liquidity risk to minimise the potential negative impact of counterparty default.