Annual Report & Accounts 2013
Severstal Annual Report 2013 Home > Performance > Severstal Resources > Outlook and strategic priorities for 2014
 

Outlook and strategic priorities for 2014

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 control

Cost management continues to be one of Severstal Resources’ key priorities. In recent years the company has been successful in keeping cash costs under control amid overall inflation in the global mining industry.

Our management initiatives range from volume growth and reduction of administrative cost to increasing self-sufficiency in key resources. For instance, in 2014, Vorkutaugol is launching a methane gas power plant at its Severnaya mine to secure 80 per cent self-sufficiency in electricity. This is a pioneer project for the Russian coal industry.

Brownfield development

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 a bottleneck in the production cycle) not only brings its technology up to date, but is also expected to increase its capacity by 50 per cent. The number of pieces of equipment at the plant will decrease by half, which will make maintenance much easier and increase availability.
 
In early 2014 Vorkutaugol will complete the construction of an inclined shaft at its Vorgashorskaya mine. This new shaft will expand the range of produced coking coal grades with the introduction of grade Zh. The new inclined shaft — which will be used to mine coal, transport employees and supplies to tunnels and raise mined rock — will be approximately 405 meters long; the optimum distance from the surface to the coal seam. Facilities for the new inclined shaft will include a shaft house, electric power substation, coal loading depot, and coal and timber warehouses. A railroad approximately six kilometres long will connect the Vorgashorskaya mine’s main industrial site to the new inclined shaft’s facilities.

Another large scale project is the inclined shaft from Zapolarnaya mine to the main washing plant. This 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. This project is planned for completion by the end of 2014.

The new inclined shafts, which are being constructed using leading-edge technology, equipment and materials, will deliver coal extraction processes, including production efficiency and health and safety, in line with global best practices.

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 weaknesses in commodity markets.

Severstal Resources has a portfolio of licenses for promising mining greenfield projects in Russia and beyond, with launch dates close to 2020. Our approach to investing in and developing such project remains flexible and depending on market conditions, may involve options such as establishing partnerships. In 2014, we intend to spend around US$21 million on all greenfield licenses.

Severstal’s key license is the Putu Range iron ore project in Liberia. In 2008, we signed a mineral development agreement with the Government of Liberia for a 61.5 per cent interest in the Putu Range project, a 13km long iron rich ridge, 130 km inland from the deepwater 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 per cent iron content as well as a high grade DSO resource of approximately 100 million tonnes. The development agreement is valid for 25 years from September 9 2010, and can be further extended. In 2012, we consolidated our stake in the project by acquiring an additional 38.5 per cent interest from Afferro Mining, thus obtaining full control in the project. A feasibility study is currently underway and is to be completed in Q2 2014.

New market segments – access to the rapidly-growing global metallic iron products market

Severstal has a 33.2 per cent 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 close to launching the first commercial full-size 50 ktpa iron ore reduction unit in 2014. The site for the plant is at the Palabora copper deposit in the Republic of South Africa. 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 per cent. If successful, IMBS and Severstal will add another nine units to reach the capacity of 0.5 mtpa.

Capex

In recent years, Severstal Resources has replaced all of its major equipment for both its underground operations and open pit mines. In 2013, its cash capital expenditure was US$510 million.

Our 2014 capital expenditure target has been adjusted in light of the challenging market environment, to preserve positive free cash flow, while still ensuring we are progressing with company’s key development and optimisation projects.

In 2014, total investments at Severstal Resources are planned to be approximately US$404 million. Major initiatives will include the following:

At Vorkutaugol:

  • Further production growth;
  • Completion of the construction of the inclined shaft at the Zapolyarnaya mine in 2014;
  • Completion of the construction of the inclined shaft at the Vorgashorskaya mine in 2014;
  • Evaluation of a further upgrade of the washing plant.

At Karelsky Okatysh:

  • Stripping ratio passed its peak in 2013 and will decline further;
  • Added five mt of higher quality pellets through separate ore processing: fluxed pellets Fe goes up from 63.7 per cent to 66.0 per cent;
  • Continued focus on cost improvements: costs of drilling & blasting, excavation, hauling will fall.

At Olkon:

  • Stripping ratio passed its peak in 2013 and will decline further;
  • A high-angle conveyor and the new dryer will be launched in 2014 for further cost reduction.

CEO statement

Our strategic goal remains the same: we aim to be a leader in value creation. In the current volatile and challenging market environment, this means the ability to generate solid positive free cash flow throughout the market cycle.

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Chairman statement

Since listing we have been committed to the highest standards of corporate Governance and aim for full compliance with the UK Corporate Governance Code.

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Performance review 2012

Severstal achieved a solid set of results in 2012, despite worsening economic conditions, maintaining the Group’s EBITDA margin at 15.0%, reflecting the resilience of the business.

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Performance review 2012 - Severstal Resources

Our strong asset base enables us to capture excellent margins and generate significant free cash flow in strong markets, but it is also resilient enough to provide positive results even in the current weak markets.

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