Annual report and accounts 2012
Alexey Kulichenko Chief Financial Officer

Dear Shareholders,

Despite worsening economic conditions, Severstal delivered a solid set of results in 2012, maintaining the Group’s EBITDA margin at 15.0%, reflecting the resilience of the business. A deteriorating market backdrop and lower selling prices negatively affected our financial results. However, our position as a low-cost steel producer in Russia with full vertical integration allowed us to maintain almost full utilization rates during the year at our steel, iron ore and coking coal operations. In the US we successfully ramped-up the facilities, launched in 2011 and reached good levels of capacity utilization. Our business initiatives continued to yield efficiency and cost advantages.

Despite negative impact coming from the global market, our financial position remained strong during the year. Our EBITDA for 2012 came in at US$2.1 billion with the margin of 15.0%. Our debt metrics stays solid as well, although our net debt/EBITDA ratio increased by the end of the year to 1.9x, which is above the internal target of 1.5x. We will closely monitor our debt level in 2013 to return it to the targeted net debt/EBITDA of 1.5x, meanwhile already reduced our capex year on year. As for the debt we reduced gross debt from US$5,976 million to US$5,710 million over the year, and net debt from US$4,112 million to $3,983 million by the end of the year. Despite that our liquidity position remains strong with US$1,726 million in cash and cash equivalents, exceeding short-term debt of US$1,382 million 1, and committed unused credit lines of US$922 million.

Our strong credit metrics enabled us to improve our debt profile and refinance part of our public debt instruments with more favourable issuances in 2012. 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%. Lower interest rates help us reduce interest payment adding to the company’s financial stability and keeping liquidity inside the company.

As for our debt structure it remains stable dominated by US dollar (83% of total by the end of year) and public debt instruments (81% of total). Debt domination by US dollar is naturally hedged through our export inflows and cash and equivalents’ position, also led by US dollar (72% of total).

Our focus throughout the year was on efficiency and low cost production whilst modernizing our assets at Severstal Russian Steel and Severstal Resources and ramping up the additional capacities at Severstal International. We continued to focus on delivering our long-term strategy to become one of the most efficient verticallyintegrated steelmakers globally.

Our cash Capex for FY2012 amounted to $1,448 million. This was lower than initially planned. Capex was adjusted during the year in the light of slowing market conditions. Our major projects in 2012 included continuing construction of the Balakovo mini-mill, refurbishment of Coke Battery #7 at Cherepovets and a coalmine methane power station at Vorkuta. As previously announced, our 2013 capital expenditure program will be $1.3 billion including completion of the Balakovo mini-mill construction and its launch in mid-2013; development of specialised steel service centres, construction of two inclined shafts and modernization of the Pechorskaya preparation plant at Vorkutaugol, the construction of a steeply inclined conveyor and geological exploration at Olkon.

Following 2012 results, the Board of Directors recommended dividend payment of 1.89 roubles per share (approximately US$0.06) for the 12 months ended 31 December 2012, reflecting the Board’s commitment to shareholder returns and confidence in the medium term outlook and the financial strength of the company. The dividend is to be approved at the AGM on 13 June 2013. If approved, the dividend amount for all the quarters of 2012 will total 10.66 roubles with the payout ratio of 36%.

In 2012 we completed the separation of Nordgold – the gold division inside the company, launched in 2011. That left Severstal’s production portfolio with only steel and steel-related raw materials (iron ore and coking coal), which will be in focus of the corporate development going forward. Nordgold became independent and was listed on London Stock Exchange in January 2012. In July 2012 we cancelled 170 million treasury shares, which were used in the Nordgold separation process.

We held Capital Markets Day in London in September 2012 for the second year in a row, delivering on our promise made in 2011 to run Capital Markets Day on an annual basis. Investors from different investment organizations, both equity and debt, as well as sell-side analysts from the largest investment banks participated in the event. During this event we confirmed our long-term strategy, which was positively taken by the participants.

Despite the challenging year for the industry Severstal managed to improve its credit rating profile by being upgraded to BB+ by Standard & Poor’s and Ba1 by Moody’s.

We continued to develop IT projects across all our divisions, of which the most important is definitely the implementation of SAP. We launched SAP at Severstal Resources in 2009 and almost across the Severstal Russian Steel division. The implementation will be finalized in 2013. The launch of the project allows us to increase the efficiency of our business processes, the processing of administrative information and general management.

The steel market remains volatile on the back of worldwide macroeconomic uncertainties, however we believe, that our efficient business model and focus on costs control will enable us to navigate successfully through the challenges in 2013.


Alexey Kulichenko
Chief Financial Officer


1 Amount of debt as at 31/12/2012, where US$1,282 million represents only pricipal amount of debt.