Severstal Resources plans to focus on increasing the efficiency of its
operations and production volumes, reducing costs and maintaining high safety
and quality standards.
Cost management continues to be one of Severstal Resources’ key priorities.
In the recent years the company has been quite successful in keeping the cash
costs under control amid overall inflation in the mining industry globally.
Our management initiatives range from volume growth and reduction of the
administrative cost, to increasing self-sufficiency in key resources. For
instance, in H1 2013, Vorkutaugol is launching a methane gas power plant at its
Severnaya mine to secure 80% self-sufficiency in electricity. This is a pioneer
project for the Russian coal industry. The company will consider construction
of a power plant in 2015.
Vorkutaugol has an extensive development programme designed to raise
efficiencies and ensure further production growth. For instance, the ongoing
modernisation of the main washing plant (currently considered as a bottleneck
in the production cycle) not only brings its technology up to date, but is also
expected to increase its capacity by 50%. The number of pieces of equipment at
the plant will decrease by half, which will make maintenance much easier, hence
Another large scale project is the incline shaft from Zapolarnaya mine to
the main washing plant. The project will allow us to bypass the currently
inefficient skip-hoisting shaft and deliver all coal from the Zapolarnaya and
Vorkutinskaya mines when the two are combined.
Usinskoe coal deposit
In December 2011, Severstal was granted the exploration and extraction
rights for the N1 coal field at the Usinskoe coal deposit in the Komi region,
Russia. The coal field has estimated resources of 620 million tonnes of coking
coal, most of which is high-rank (Russian classification – 2Zh) and is similar
in quality to the resources of the Vorkuta deposit, which is also being
developed by Vorkutaugol. The resources of the field include KZh and 1Zh grades
coal (Russian classification).
The N1 coal field is located in the centre of the Usinskoe deposit in
Russia’s Komi region, and is close to key transport and infrastructure links.
The Kotlas-Vorkuta railway line is 5 km from the southern boundary of the coal
field, and the rail station at Khanovei is 30km from it. The development of the
Usinskoe will be financed mostly by Vorkutaugol and hence the project is
treated as a brownfield expansion rather than a greenfield one.
Severstal and Vorkutaugol have decades of experience in developing coal
mines at the Vorkuta coal basin, and an experienced and professional team of
mining engineers and miners. This will help us develop the Usinskoye deposit
successfully. The construction of the mine, preparation and infrastructure
units will create 2,800 additional jobs in the region.
According to the license agreement, construction must start no later than
January 2017. Commissioning is scheduled for 2020, with operating capacity to
be achieved by 2023. The coal field will be developed as an underground mining
project, and will involve the construction of an underground mine and a
coal-preparation plant. The planned production volume is over 4 million tonnes
of coal a year.
New mining licenses
We retain our commitment to vertical integration as the most effective
business model for the company’s long-term development, despite occasional
price weakness on commodity markets.
Severstal Resources has a portfolio of licenses for promising mining
greenfield projects in Russia and beyond, with launch dates closer to 2020. In
2013, Severstal’s spending on these mining greenfields will be approximately
That said, we may update our current project portfolio in the mining
business based on macroeconomic factors and, more importantly, their impact on
the company’s performance. Further investments in these projects will depend on
how they meet our financial criteria: debt load below 1.5 x net debt/EBITDA,
EBITDA profitability above 20%, IRR and ROCE also above 20%. Finally, our
approach to investing in, and developing, such projects, remains flexible and
depending on market conditions, may involve options such as establishing
Severstal’s key licenses for mining greenfield projects:
Putu Range iron ore project
In 2008, we signed a mineral development agreement with the Government of
Liberia for a 61.5% interest in the Putu Range project, a 13km long iron rich
ridge, 130km inland from the deep-water shoreline of eastern Liberia. Putu has
estimated resources of 4.4 billion tonnes of iron ore in the existing pit, with
an average estimated 34% iron content as well as a high grade DSO resource of
approximately 100 million tonnes. The development agreement is valid for 25
years from 9 September 2010, and can be further extended. In 2012, we
consolidated our stake in the project by acquiring an additional 38.5% interest
from Afferro Mining, thus obtaining full control in the project. The
feasibility study is currently underway and is to be completed in 2014. We
expect production to start in 2017-2018, with potential output of 20 million
tonnes of concentrate.
Tyva coking coal deposit
In September 2010, we obtained a licence for further exploration and coal
extraction at the Tsentralniy coalfield in the Tyva Republic, Russia. The Tyva
project resources are estimated at 639 million tonnes of high-quality hard
coking coal (C1+C2). Development of the coalfield depends on the construction
of a 400km railway connecting Tyva with the existing rail network. We will not
invest significantly in the project until the responsibilities of other
industry players developing coal deposits in Tyva are clarified, nor those of
Russian Railways regarding the construction of the rail access.
New market segments
In the first half of 2013, we are launching a project designed to provide
access to the rapidly-growing global metallic iron products market. Severstal
has a 33% stake in International Mineral Beneficiation Services (IMBS), a
research and development company with headquarters in Johannesburg, South
Africa. The company has developed the trade-marked Finesmelt technology,
capable of transforming low-value fine and ultrafine iron ores, with the help
of thermal coal, into a valuable metallic iron product. According to expert
estimates, the global steel industry is annually consuming approximately 700
million tonnes of metallic iron products.
Together with IMBS, Severstal is currently working on the construction of
the first commercial full-size 50 ktpa iron ore reduction unit, and planning to
launch it early in 2013. The site for the plant is at the Palabora copper
deposit in the Republic of South African. The copper ore contains Fe as a
by-product, which has been put to tailings for over 50 years. The Fe content of
the tailings is quite high, at 58%. If successful, IMBS and Severstal will add
another nine units to reach the capacity of 0.5 mtpa.
In recent years, Severstal Resources has replaced all its major equipment
for both its underground operations and open pit mines. In 2012, its cash
capital expenditure was US$555 million.
Our 2013 capital expenditure target has been adjusted to the challenging
market environment, to preserve positive free cash flow, while still ensuring
we are progressing with company’s key development and optimisation
In 2013, total investments at Severstal Resources are planned at
approximately US$525 million. Major initiatives will include: first stage
modernisation of the Pechorskaya preparation plant at Vorkutaugol; further
progress with the construction of two inclined shafts at the Zapolyarnaya and
Vorgashorskaya mines; technical modernisation at Karelsky Okatysh and Olkon.
Our greenfields are not requiring much capex at this stage – in 2013 our
investments there will be approximately US$46 million.
production flow diagram (PNG, 0.1 MB)