Severstal Annual Report 2015 Home > Business Overview > Severstal Resources Division

Severstal Resources Division

Severstal Resources comprises Severstal’s mining assets, forming the basis of Severstal’s vertically integrated business model. It satisfies almost all of the iron ore and hard coking coal requirements of Severstal Russian Steel division, while also selling volumes to third parties. Severstal Resources mines all of its iron ore and coking coal in Russia.

In 2015 the average headcount at Severstal Resources was 13,024 persons.

Key assets

1. Karelsky Okatysh

Located in Karelia, north-western Russia, Karelsky Okatysh is one of the country’s leading and most modern iron ore mining complexes. It mines magnetite quartzite ores and produces high-quality iron ore pellets with an iron concentration of 66 per cent. The two major deposits, Kostomuksha and Korpanga, have an estimated life of 30 years.

2. Olcon

Located in the Murmansk region, Olcon is Russia’s most northerly iron ore complex. Olcon mines magnetite-hematite quartzite ores from five open pits, and produces high-quality iron ore concentrate, crushed stones and ferrite strontium powder. Olcon’s deposits have an estimated life of around 10 years.

3. Vorkutaugol

Located in the Komi Republic (near Vorkuta), north-east European Russia. Vorkutaugol mines coking and steam coal, and is one of Russia’s largest producers of hard coking coal. Coking coal produces coke which is used for steel production. Steam coal is used in the energy and chemical industries. The two deposits we operate, Vorkutskoye and Vorgashorskoye coal deposits, have an estimated life of 28 and 7 years respectively. The business consists of five longwall mines, an open-pit mine and three washing plants.*

* Coking coal output at one of the longwall mines at Vorkutaugol, Severnaya mine, was impacted on the back of the tragic incident in February 2016. While mining operations at Severnaya remain suspended, all of Vorkutaugol’s other four mines and one open pit are operating as usual. In 2015, the Severnaya mine produced approximately 1.5 million tonnes of coal concentrate.

Performance overview

The market environment for steel-related commodities in 2015 remained challenging, both for coking coal and iron ore products.

Iron ore pellets (Karelsky Okatysh)

  • Average selling price declined 40% year-on-year
  • Flat sales volume dynamics reflect robust demand for high quality products in the domestic and export markets
  • Sales volumes are expected to grow by 250,000 tonnes in 2016

Iron ore concentrate (Olcon)

  • Average selling price declined 42% year-on-year
  • 7% sales volume decline year-on-year reflects the closure of a high cost open pit
  • Sales volumes are expected to stay flat in 2016

Coking coal concentrate (Vorkutaugol)

  • Average selling price declined 18% year-on-year
  • 19% sales volume growth year-on-year reflects improved geological and operational conditions as well as a further upgrade of the Pechorskaya beneficiation plant
  • Sales volumes in 2016 will be negatively impacted on the back of the incident at the Severnaya mine

The abovementioned factors led to 33% year-on-year lower revenue (US$ million) and changes to its structure:

Dynamics of revenue by products

Although most of our sales are intercompany, Severstal is a well-established commodity supplier both in Russia and beyond. Our principal third party sales products are pellets and coking coal concentrate.

Russia is the principal market for our mining businesses, as our steelmaking assets are mostly located there. We also have a number of third party clients in Russia for our mining products including major domestic steelmakers.

Sales and cost of sales figures in the charts below are presented in USD as a per cent of the total sales or cost of sales of the Severstal Resources division.

Geographical diversification of sales

Revenue breakdown by consumers

At Severstal Resources labour cost is one of the main contributors to the total cost of production. In 2015, labour costs accounted for 29% of the total cost base whilst materials and energy costs respectively accounted for 33% and 23% of the cost base.

Cost reduction and efficiency improvements coupled with high safety standards are among the key priorities for our mining business. In 2015 management’s ongoing focus remained on reducing production costs across all mining assets, which was supported by rouble devaluation. These factors enabled the Company to partially offset the negative market trends with EBITDA declining 24% year-on-year.

 

Cost of sales structure

EBITDA drivers in 2015 (US$ million)

Key developments in 2015:

Karelsky Okatysh:

  • The production and stripping ratios are stable and in accordance with the mine plan
  • Higher Fe content (+2.3%) fluxed pellets accounts for 50% of total pellets production in 2015
  • Production of new olivine pellets launched (1.2 million tonnes).

Olcon:

  • The mine plan was reviewed. At current price levels the production life of the mine is around 10 years
  • Two large projects completed: high-angle conveyer and a new dryer.

Vorkuta:

  • The second section upgrade of the Pechorskaya Beneficiation Plant was accomplished
  • Five new coalfaces were commissioned across all the mines, fully in line with the mine plan
  • Projected Komsomolskaya mine life was extended until 2022
  • Record production volumes were achieved (run-of-mine (ROM) coal output increased 16% to 13.2 million tonnes).

Strategic priorities for 2016

Severstal Resources plans to focus on increasing the efficiency of its operations and production volumes, reducing costs and further improving safety and quality standards. Planned investment across the Severstal Resources division in 2016 is approximately 17 billion roubles.

  • Olcon operations will be focused on steady cost improvement as the stripping ratio is going down.
  • Karelsky Okatysh will increase olivine pellets output. The main improvements this year will be focused on the beneficiation plant works optimisation, as well as the tailings thickening project, both of which will result in lower production cash costs.
  • Key developments at Vorkutaugol will be focused on air shaft construction which will not only increase coal output but also improve safety standards.

For more detailed information on Severstal Resources division please refer to page Appendix.

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