Annual report and accounts 2012
Alexey Mordashov Chief Executive Officer

Dear Shareholders, Colleagues, Partners,

In 2012, Severstal demonstrated its fundamental strengths, performing resiliently in what were very challenging global economic conditions. Despite deteriorating markets and lower selling prices affecting the world steel industry, our focused strategy and integrated model, coupled with a continued contribution from our Business System of Severstal initiatives, enabled us to achieve a solid set of financial results.

Our focus throughout the year was on efficiency and low cost production, while modernising our assets at Severstal Russian Steel and Severstal Resources, and ramping up additional capacities at Severstal International. Our long-term goal remains to become one of the world’s most efficient steel and steel-related mining companies.

Revenue for the year was affected by overall lower realised selling prices and slightly lower sales at our Severstal Russian Steel division, and was 10.8% below the previous year. EBITDA in 2012 was US$2,119 million and our continued focus on efficiency and cost control enabled us to achieve an EBITDA margin of 15.0%. Severstal’s balance sheet continues to be one of our major strengths, and we ended the year with US$1,726 million in cash and cash equivalents, and a lower net debt position.

This resilient performance would not have been possible without the continued hard work and commitment of our outstanding people, whose dedication and skills are fundamental to Severstal achieving its long term goals. I thank them for their efforts.

On behalf of all management at Severstal, I would like to express my deepest condolences to the families, friends and colleagues of the miners who tragically died in an accident at the Vorkutinskaya mine on 11 February 2013. The health and safety of all employees across the group will always be our key priority.

Strategy

Our long term financial targets include becoming one of the top steelmakers globally by EBITDA, and one of the top steelmakers globally by return on capital employed. In effect, Severstal is driven to deliver profitability and not to pursue volume growth. Key to achieving these goals is a robust business model focused on low costs through vertical integration, with steel-related mining assets providing full self-sufficiency in iron ore and coking coal. Where we have investment programmes, they are designed to improve efficiency and enhance our margins, and I will address this in more detail below. Our strategic focus is on steel production, and particularly in developing our product portfolio. This is not only to meet the evolving demands of our customers, but to increase the ratio of our product mix in favour of high value-added products and added-value services. This, combined with our presence in fast-growing emerging markets as well as established markets with attractive growth dynamics, means we are well positioned to provide market-leading returns for our shareholders.

Investment and Efficiency

We continue to invest selectively across all our operations, to support our strategy by expanding production volumes in steel and mining, increasing output of high value-added products and improving our operational efficiency and reducing costs.

The Group has a flexible investment programme which we are able to adjust to market conditions, lowering our cash capex during the year, finally investing US$1,448 million in 2012 across the whole company. In 2013, we plan to invest even less: US$1,336 million, while at the same time continuing and completing major projects to support our growth and long-term competitive strategy, with major focus on Severstal Russian Steel and Severstal Resources. Since we completed large-scale modernisation and expansion at our North American assets in 2012, 2013’s capex in this division will be relatively small, of US$107 million only.

As well as investing for the future, we constantly strive to improve the efficiency and cost-effectiveness of our operations, and our Business System of Severstal programme, implemented in 2010, continues to make excellent progress. It remains on track to make a cumulative contribution of approximately US$1,300 million to our EBITDA from 2010 to 2015.

Severstal Russian Steel

Severstal Russian Steel is a world-class, low-cost steel producer, but it inevitably felt the slower market conditions with its performance reflecting a weaker pricing environment and lower sales volumes, including a contraction in large-diameter pipe sales. Revenue for the year decreased by 18.3% to US$8,617 million and EBITDA was US$939 1 million. In line with our strategy, the share of high value-added products in the sales portfolio remained the highest among our Russian peers at 44% and domestic sales increased their proportion of the total selling volumes to 60%.

Major investment projects during the year included the continuing construction of the Balakovo mini-mill, supporting our diversification into long products, and the refurbishment of Coke Battery #7 at Cherepovets reinforcing our complete self-sufficiency in coke. In 2013 we will complete construction of the mini-mill and other projects will include development of specialised steel service centres offering solutions to the construction, automotive and machinery sectors.

Severstal Resources

While overall realised volumes remained broadly flat, lower coking coal and iron ore prices during the year had an impact on revenue, down 19% to US$3,005 million, and EBITDA, 38.6% lower at US$985 2 million. However, Severstal Resources achieved strong reductions in cost during the year, and we will continue to keep production costs under control.

Investments during the year included the construction of two inclined shafts and modernisation of the Pechorskaya preparation plant at Vorkutaugol and the construction of a steeply inclined shaft at Olkon. These operational improvements all contribute to steady reduction of costs. In 2013 we will invest US$525 million in Severstal Resources, to realise similar development projects, including construction of inclined shafts at the Zapolyarnaya and Vorgashoskaya mines. Developing the Usinskoye deposit and expanding our iron ore mining operations both strengthen our self-sufficiency advantage.

Severstal International

In North America we have invested to create some of the most modern and efficient plants in the region. In 2012 Severstal International’s revenue rose by 13.3% to US$3,878 million, due to newly commissioned facilities at Columbus, which helped offset lower realised prices in the USA. It also helped underpin EBITDA performance, which was broadly similar to 2011, with EBITDA of US$166 3 million in 2012, compared to US$181 4 million in the previous year.

In line with our strategy, sales of high value-added products made up 44% of the portfolio last year, and this proportion is growing due to demand from our automotive customers. Following a high level of investment in our Severstal International operations in previous years, leading to growing production and sales, the bulk of this year’s programme will be invested in maintenance and to improve operational efficiency.

Outlook

Global economic conditions remain uncertain for the steel industry, but I am confident Severstal has the right strategy to address our marketplace in 2013, which we believe could see some improvement in steel, iron ore and coking coal demand. Severstal’s well invested operations, and the continued hard work and flexibility of our people, give me great confidence in the mediumterm outlook for the business.

 

Alexey Mordashov
Chief Executive Officer

 

1,2,3,4 Excluding intercompany dividend income.