Annual report and accounts 2012
Christopher Clark Non-Executive Chairman of the Board of Directors

Dear Shareholders,

2012 was a year of global economic uncertainty that led to more challenging trading conditions across the markets we address. Nevertheless, Severstal’s performance was resilient, producing a solid set of results. We were able to maintain good operating margins, pay down debt, and reward our shareholders through dividends.

Health and safety is management’s top priority across all our operations and is overseen by the Board. In 2012, this included investing over US $304.3 million on initiatives designed to eliminate all fatal accidents by 2015. Against this background, we were devastated by the tragic accident at our Vorkutinskaya mine on 11 February this year, which resulted in nineteen fatalities. We extend our deepest condolences to the families and friends of those who died, and are working vigorously, along with the authorities, to understand the causes of this tragic accident.

Our capital investment programme was cautious, and lower than originally predicted at the start of the year. Major projects included the construction of the Balakovo mini-mill, refurbishment of the coke battery #7 at Cherepovets Steel Mill and a coalmine methane power station at Vorkuta. We enter 2013 with well invested assets that are positioned to further enhance our focus on high valueadded products, and achieve additional efficiency and cost advantages. We do not currently plan to add capacity after the commissioning of these projects.

This prudent approach enabled us to maintain strong liquidity, with US$1,726 million in cash and cash equivalents at the year end with committed unused credit lines of US$922 million. In September 2012 Severstal successfully placed US$475 million senior unsecured convertible bonds maturing in 2017 and in October 2012 we successfully placed US$750 million 10-year Eurobonds with an interest rate of 5.9%. We will maintain a strong balance sheet and target to be around net debt/EBITDA multiple of under 1.5x through the cycle.

Full vertical integration in both iron ore and coking coal production in Russia remains a key competitive advantage. To ensure this delivers the maximum benefit, Severstal Resources has consistently achieved its cost management targets to reinforce our strong position on the cost curve. In March 2012 we completed the separation of Nordgold, so our mining operations are now totally concentrated on steel related mining.

Launched in 2010, our Business System of Severstal projects are increasingly embedded in all elements of our activities and are leading to measurable enhancements to EBITDA. These companywide initiatives range from cost reduction and quality improvement initiatives to customer care and product development projects.

Our sustainable development programmes are focused on environmental protection and energy efficiency. We made significant investments in both areas in 2012, to ensure we continue to make progress. As a result we reduced emissions and water consumption, and the amount of gas and electricity we use to produce a tonne of steel. Transparency is an important feature of our approach, with regular reporting based on best practice Global Reporting Initiative guidelines.

We are committed to the highest standards of corporate governance, including regular external evaluation of how the Board is functioning. As the Independent Chairman, I lead a Board that is well balanced between executive and non-executive Directors and scrutinises management’s performance against agreed goals. I would like to thank my Board colleagues for all their help and wise counsel over another important year of development for the company.

Communications with all our stakeholders remain a priority. In 2012 this included hosting another Capital Markets Day for buy and sell side audiences in London, at which we brought together our senior management team. This year, the management team set out our strengths to meet the challenges in the steel and commodities markets including the progress we are making in the execution of our stated strategy.

We are cautious about the outlook in our markets for the current year. Whilst we see some improvement in pricing and volumes in the first quarter of 2013, continued economic uncertainty and the commissioning of additional industry capacity will ensure the trading environment remains competitive.

However, the long term fundamentals of the markets in which we operate remain attractive. According to some analyst reports, in Russia, the economy is expected to grow from US$2 trillion in 2011 to more than US$3.2 trillion in 2017. Market experts say that in the United States, new vehicle registrations are set to rise by over 6% in 2013 and forecasts for economic growth into the medium term have recently risen. Severstal has well invested operations that are strongly placed on the cost curve, combined with high exposure to more attractive high value-added product sectors. So the Board is confident of the outlook for the business.

 

Christopher Clark
Non-Executive Chairman of the Board of Directors