We are striving to build a resilient company making good money on weak markets and strong money on good markets.
Severstal has firmly set and communicated its development strategy to the market. The company’s core competence is in making steel and in mining steel-related raw materials. Severstal strives to keep its global leadership in low-cost production through efficient vertical integration, presence on structurally attractive markets and customer focus. This helps Severstal to lead globally in return on capital and EBITDA margin. Operating in a cyclical industry we also prioritise having a strong balance sheet. At the end of 2012, Severstal has one of the lowest net debt/EBITDA ratios in the sector.
Severstal is a vertically integrated business, covering the whole production cycle from mining raw materials to making and distributing high value-added (HVA) steel products. This affords us higher resilience in the cyclical steel industry. Early in 2013, Severstal was ranked as the third most competitive global steelmaker in a report by World Steel Dynamics (WSD). Full vertical integration helps us maintain high profitability at group level, as buying most of the raw materials from our own Severstal Resources division means we are economically hedged from commodity price fluctuations. Severstal’s Russian steel operations are almost all self-sufficient in iron ore and coking coal, respectively. As we are increasing volumes at our mining assets, Severstal Resources is becoming a sizable supplier to third parties. In 2012, our shipments to third parties of iron ore pellets and coking coal reached 60% and 35% of total volumes produced, respectively. Although in the tough 2012 year, our EBITDA margin declined to 15%, compared to 23% in 2011, it still remains one of the best in the global steel industry in 2012.
One of our priorities is to be a low-cost producer in every region we are present. Our competitive position relies on vertical integration with a sizeable steel-related mining business, and having a large share of HVA products in the steel portfolio. To retain that low-cost position in a cost inflation environment, we are implementing a set of projects for internal improvement, called Severstal Business System. We expect it to achieve approximately US$1.3 billion of savings contributing to the company EBITDA from 2010 to 2015.
Severstal’s key markets are demonstrating high growth rates for steel demand.
Russia remains Severstal’s most attractive market mostly due to its prospects for high growth in steel consumption. Growing personal incomes, increasing demand from the real estate and automotive industries, and underinvested infrastructure will drive further steel consumption. We expect domestic steel demand to grow at the current pace for the next five years. Our share of HVA products in the portfolio in Russia was 44% (sales volume) at the end of 2012 which is the highest to date among Russian peers. Our investment in the production of HVA products includes construction of two additional service centres in Russia in 2013 for auto and ‘white goods’ producers, and further expansion of the Steel Solutions projects for the maturing real estate market. In line with our strategy of expanding into promising market niches, this year we are completing construction of a 1 mmt/y mini-mill Balakovo in Volga region, to produce rebar and construction sections.
As the US economy continues its recovery from the recessionary effects of the global financial crisis, US steel demand is expected to grow steadily, driven by the oil and gas industry (including non-conventional drilling), automotive and manufacturing industries, emerging growth in the construction sector and long term population growth, in addition to the need to build up previously underinvested infrastructure. In 2011-2012 we completed a modernisation programme, including commissioning of new cold-rolling mill and new HDGL at Severstal Dearborn. This has improved product quality while lowering manufacturing costs.
Severstal’s strategy envisages further efficient mining expansion. While the top priority is low-cost mining, we intend to grow our volumes at our current assets in Russia and the USA, as well as to develop low-cost mining greenfields. For instance, our coking coal concentrate production volumes in Russia are expected to increase by around 45% by 2015, compared to 2012. Key greenfields include Usinskoe and Tyva coking coal deposits in Russia, and the Putu Range iron ore project in Liberia. Severstal Resources achieved an EBITDA margin of 32.8% in 2012.
Severstal’s Board comprises ten members, with a strong independent element. Its current structure represents a balance between Chairman, five Independent Non-Executive Directors including the Chairman (who met the independence criteria on his appointment as required by the UK Corporate Governance Code 2012), one Non-Executive Director and four Executives. Severstal strongly believes that maintaining such a balance on the Board is a prerequisite for continued correct decision-making and governance. Severstal sticks to its dividend policy, with quarterly payments of not less than 25% of net profit, provided the company meets certain financial criteria. In 2012 our dividend pay-out was around 36% 1. Following suggestions from investors, in 2012 we completed the separation of Nordgold – the gold division inside the company, launched in 2011. That left Severstal’s production portfolio with steel and steel-related raw materials only. 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. Most of the remaining treasury shares were used for the convertible bond issue later in 2012.
Severstal pursues a conservative borrowing policy. Our long-term and strong relations with banks, and access to both domestic and international external financing, allow us to have a well-diversified financial structure.
The company’s strategy relies on attracting long-term financing with a convenient payment schedule. In 2012, we raised around US$1.2 billion in convertible and Eurobonds. The convertible bonds brought us an interest rate of 1% per annum, which is payable semi-annually in March and September each year, beginning in March 2013, and a yield-to-maturity of 2% per annum, the lowest in the company’s public history, thus lowering the cost of capital. We used most of the proceeds for refinancing the current debt, as well as general corporate purposes.
Severstal’s credit portfolio is well-balanced by both maturities and currencies. Most of our debt is either mid- or long-term with minimal sizeable consecutive payments. At the end of 2012, 83% of our debt was in USD, and is naturally partially covered due to the currency structure of our revenue. In 2012 our net debt declined by 3.2%. Though 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 monitor our debt level closely in 2013 to return it to the targeted net debt/EBITDA of 1.5x. Meanwhile we have reduced our capex year on year.
Severstal has a reputation as a reliable borrower. Since 2010, international rating agencies have raised our credit rating two times with a stable outlook.
1 Includes recommended dividend payment of 1.89 Roubles per share (approximately US$0.06) for the 12 months ended 31 December 2012. The dividend is to be approved at the AGM on 13 June 2013.