Annual Report & Accounts 2010
Severstal Annual Report 2010 Home > Business Review > Performance Review > Severstal Resources

Severstal Resources

Revenue 2010 (US$)
3,484.3 m
An increase of 86.2% on 2009

3,484.3 m


1,870.8 m

EBITDA 2010 (US$)
1,550.9 m
An increase of 294.2% on 2009

1,550.9 m


393.4 m

Severstal Resources has the capacity and product mix to provide almost all the iron ore and hard coking coal requirements for the Russian Steel division’s steel operations.

Iron ore production

Our iron ore business comprises two iron ore extracting complexes: Karelsky Okatysh, which produces iron ore pellets, and Olkon, which produces iron ore concentrate. We also have an iron ore project in Africa: the Putu Range project in south-eastern Liberia, for which we have signed a mineral development agreement with the Government of Liberia. In May 2010, we acquired a 16.5% stake in Core Mining Limited, which controls exploration licences for the Avima iron ore deposit in the Republic of Congo (Brazzaville) and the Kango iron ore deposit in the Republic of Gabon. Both projects are at an early exploration stage with a significant resources potential of high-grade iron ore with an Fe content over 50%.

Karelsky Okatysh is in Kostomuksha, in the Karelia Republic of north-western Russia. It mines magnetite quartzite ores and produces high-quality iron ore pellets with an iron concentration between 63% and 65%. Karelsky Okatysh operates two major deposits with an estimated life of 34 years, based on our estimates of JORC reserves plus expected reserves extension. The average iron concentration of reserves at Karelsky Okatysh is approximately 29%.

Olkon is in the Murmansk region of north-western Russia. It mines magnetite-haematite quartzite ores and produces high-quality iron ore concentrate. Currently, ore mining is carried out in five open pits. In 2010, Olkon acquired two additional mining licenses for deposits totalling around 44 million tonnes of non-JORC reserves – estimated according to the Russian method in A, B, C1 and C2 categories, and suitable for open-pit mining. Olkon’s deposits have an estimated life of 19 years, based on our estimates of JORC reserves plus reserves extension.

Liberia’s Putu Range iron ore project has estimated resources of 2.37 billion tonnes of iron ore in the existing pit at Putu, with an estimated 34% iron concentration based on a report issued by SRK Consulting Ltd in February 2011 prepared under the Guidelines of National Instrument 43-101. SRK Consulting Ltd also identified potential for up to 2.5 billion tonnes more of iron ore below the project’s existing pit shell. Extensive drilling is currently underway as part of the Bankable Feasibility Study, scheduled for completion in 2014. We expect production to start in 2017, with a potential output of at least 20 million tonnes of concentrate. This project will allow us to become a significant player in the iron ore seaborne market.

Coal production

Our coal business comprises Vorktaugol in Russia and PBS Coals in the United States.

The Vorkutaugol mine is near Vorkuta in the Komi Republic in northeast European Russia. It operates the Vorkutskoye and Vorgashorskoye coal deposits, with an estimated life of 45 and 20 years respectively, based on our estimates of JORC reserves plus expected reserves extension. The business comprises five longwall mines, an open pit mine and three washing plants. It extracts coking and steam coal. Premium grade coking coal accounts for a high proportion of the Vorkutaugol reserves. In 2010, Vorkutaugol had run of mine of 12.6 million tonnes and plans to increase this to 13 million tonnes by 2013.

PBS Coals is a coking and steam coal producer in the United States operating several surface and underground mining complexes near Somerset, Pennsylvania. PBS Coals had a total output of 3.4 million tonnes in 2010. According to a report by the John T. Boyd Company dated 30 May 2008, under the Guidelines of National Instrument 43-101, estimated coal reserves and resources are approximately 49 million tonnes and 223 million tonnes respectively. PBS Coals is favourably located in relation to Severstal’s steel producing facilities in North America and export seaborne markets.

In September 2010, we obtained a licence for further exploration and coal extraction at the Tsentralnyi coalfield in the western part of the Ulug-Khemskiy basin in the Tyva Republic, Russia. This licence was granted by Rosnedra, the Federal Agency of Subsoil Use and will give us access to an estimated 639 million tonnes of high quality hard coking coal. It also expands our access to new markets.

Gold production

Our gold business is consolidated under Nordgold, our 100% gold-mining subsidiary. Nordgold is an established pure-play gold producer focused on emerging markets, with eight producing mines, two development projects, five advanced exploration projects and a broad portfolio of early exploration projects and licences – located across West Africa in Guinea and Burkina Faso, Kazakhstan and the Russian Federation. Since starting operations in 2007, Nordgold has grown through acquisition and organically, increasing its production (including gold equivalent ounces of silver) from approximately 21,000 oz to approximately 589,000 oz in 2010. It targets production of over a million ounces from its operating mines and development projects on a fully consolidated basis by 2013. At 1 November 2010, Nordgold’s resource base consisted of 23 million oz of gold resources on a fully consolidated basis and 103 million ounces of silver resources (represented by a 50% interest in the Prognoz silver deposit) classified as measured, indicated and inferred, according to JORC – and 8.9 million oz classified proven and probable gold reserves.

Ferroniobium production

In 2010 we decided to stop Ferroniobium production and sell this kind of our business.

Brief world iron ore market overview

In 2010, the global iron ore market fully recovered from the crisis reaching 1,753 million tonnes and growing by 13% year-on-year, as steel production rebounded in developed countries and demand in China continued to grow.

Global iron ore consumption 2005 – 2010, million tonnes

Source: AME, Severstal analysis

The international iron ore trade volume reached 1,031 million tonnes in 2010, a 9% increase on 2009. China, as the largest player, imported 611 million tonnes of iron ore last year, or 59% of the total international trade volume. The other big importers of iron ore were the EU, Japan and South Korea, with a combined 31% share of the global iron ore imports.

International iron ore trade in 2009-2010, million tonnes (63% Fe)

Source: AME, Severstal analysis

One of the key themes in 2010 was a recovery in demand from developed countries. China’s iron ore imports actually decreased last year by 17 million tonnes, or 2.7%, from 2009. This was the first time in 10 years China’s iron ore imports dropped. Among the developed countries, EU and US imports increased by 47 million tonnes and 10 million tonnes, respectively, and South Korean and Japanese imports (the biggest contributors to Asia ex-China imports) increased by 35 million tonnes.

On the supply side, the biggest players in the international market were Australia, Brazil and India which together exported 808 million tonnes of iron ore in 2010, or 78% of global iron ore.

2010 was pivotal for the global iron ore industry, as it moved away from the 40-year old annual benchmark system. A new quarterly contract system was introduced, which offers more transparency and is based on an average spot price (CFR China) over the last quarter, lagging one month minus average freight for a previous month. Iron ore prices in 2010 exceeded all-time highs, reaching US$115 per tonne for fines and US$152 per tonne for pellets, FOB Brazil. This represented increases of 64% and 76%, respectively, on 2009.

Iron ore price, FOB Brazil, USD/tones

Note: year from Jan 1 to Dec 31 Source: SBB

Russia is the world’s fourth largest iron ore producer, with a significant resource base. In 2010, Russian iron ore output reached 101 million tonnes, 6% more than in 2009. In both years, most output was consumed domestically and about 25% was exported.

Brief world coking coal market overview

In 2010, there was strong demand with insufficient supply in the global coking coal market. The global economy, steel demand and production recovered, and with serious supply issues in Russia, Indonesia and Australia, there was a global coking coal shortage. As with iron ore, there was a change of pricing mechanism for coking coal, with most contracts switching from an annual to quarterly system. As a result, 2010’s JFY contract price gained 68% on 2009 to reach US$217 per tonne FOB Australia for premium hard coking coals.

The international coking coal trade reached 249 million tonnes in 2010, up 12% on 2009. This growth was mainly driven by steel production recovery in Japan and the EU, the two largest coking coal importers. The total increase of coking coal exports to Asia (excluding China) and the EU accounted for 11 million tonnes, or 10% year-on-year.

International coking coal trade in 2009-2010, million tonnes

Source: AME

In supply, the international coking coal market is dominated by Australia, with a 55% market share. The other key exporting countries include the US, Canada, Mongolia and Russia. In 2010, Russia’s coking coal output grew 24% to 56 million tonnes. Of this 30% (17 million tonnes) was exported.

Last year coking coal exports were impeded by a number of catastrophes, including the explosion at Raspadskaya mine, and floods in Indonesia and Australia. Nevertheless, in 2010, total Australian coking coal exports increased by 15 million tonnes or 12% year-on-year. Mongolia exported 14 million tonnes of coking coal in 2010, mostly to China, representing a three-fold increase. It is worth mentioning that the US, a ‘swing-supplier’, also exported 2 million tonnes more coking coal last year.

The expected shortage of globally traded coking coal supply has led to numerous plans for capacity expansions through brownfield and greenfield projects in Australia, Canada, the US, Russia, Mongolia and Mozambique. However, new projects are restricted by road and port infrastructure bottlenecks, and the availability of capital funding.

In terms of pricing environment, the coking coal market is similar to iron ore, and in 2010 the annual benchmark contract system was replaced by the quarterly one. In 2010, premium hard coking coal prices reached US$195 per tonne FOB Australia on average, representing a 13% growth from 2009. In JFY contract terms, 2010 price grew by 68%, reaching US$217 per tonne FOB Australia.

Premium hard coking coal price, FOB Australia, USD/tonne

Note: year from Jan 1 to Dec 31 Source: SBB

Key performance indicators

In 2010, revenue from Severstal Resources increased by 86.2%, to US$3,484.3 million. This was mostly due to higher sales volumes and product prices on the back of improving market conditions.

Revenue drivers in 2010, US$ million

* Other includes revenues from non-core business, like delivery services

EBITDA amounted to US$1,550.9 million, 294.2% higher than in 2009, and the EBITDA margin increased from 21.0% in 2009 to 44.5% in 2010. Our gold business added US$137.2 million to the 2010 EBITDA increment, with an EBITDA margin of gold product at 49.4%. OAO Karelsky Okatysh added US$451 million to the 2010 EBITDA increment, with an EBITDA margin of pellets at 54.2%. OAO Olkon added US$87 million to the 2010 EBITDA increment, with an EBITDA margin of iron ore concentrate at 43.5% in 2010. Vorkutaugol added US$393 million to the 2010 EBITDA increment, with an EBITDA margin of coal product at 44.3%.

EBITDA drivers in 2010, US$ million

The average number of Severstal Resources employees in 2010 was 26,568 – 1,167 less than in 2009.

Key performance indicators


Sales and marketing

According to Rasmin, Severstal Resources’ coal businesses are among Russia’s top five coking coal producers. Our iron ore business is among the leaders in terms of extraction volumes in its respective markets. Specifically, our share of the Russian pellet market, which is a value-added product, increased from 31.9% in 2009 to 32.4% in 2010 (source: Rudprom).


* including gold equivalent ounces of silver

We expect our share of raw materials production for metallurgy (iron ore, coking coal) on the Russian market to increase in 2011. This will be due to our new customer-oriented programmes and changes in the supply chain of our vertically integrated metallurgical holdings. Our share of steam coal on Russian and world markets will also grow.

Sales by products

In 2010, Severstal Resources increased sales across all key products, in Russia and internationally. Year-on-year combined sales in tonnes of coking coal concentrate, iron ore pellets, and gold increased by 42.9%, 11.8% and 15.5%, respectively. Value-added products accounted for the largest part of our sales in 2010. Coking coal concentrate accounted for 29.8% of total sales, pellets for 29.0%, iron ore concentrate for 7.9%, and gold accounted for 21.6%. Coking and steam coal accounted for 1.1% and 4.8% of revenue respectively.

Coking coal sales increased by 219.4% in volume and 977.1% in revenue in 2010, compared to 2009, as a result of maximizing sales. Coal concentrate sales increased by 42.9% in volume and 130.9% in revenue, due to increased production volumes at PBS Coals Ltd (volume) and higher prices (revenue). Pellet sales increased by 11.8% in volume and 149.9% in revenue. Iron ore concentrate sales fell by 21.1% in volume due to increased consumption of iron ore pellets at our own Russian steel mill, and increased by 52.4% in revenue. Gold sales increased by 15.5% in volume and 45.7% in revenue, due to the acquisition of Crew Gold Corporation in 2010 (volume) and growth in prices (revenue).

The weighted average selling prices for our main products also progressed. Iron ore prices increased by 123.9%, coking coal concentrate by 62.5%, and gold by 26.1% compared to 2009. As a result, revenue was driven by both volume and prices.

Principal markets

Severstal Resources sells its products internally as well as to international and domestic markets. We aim to maintain domestic market share and expand our international market share with high-quality pellets and coking coal concentrate.

Russian market

Russia is the principal market for our mining businesses. Our main customer is Severstal’s Russian Steel division.

Our share of sales on the Russian market in 2010 was 60.3% of revenue. The largest part of our revenue on the Russian market resulted from sales of pellets (31.9%), coking coal concentrate (30.2%), gold (18.6%) and iron ore concentrate (13.1%).

Favourable market conditions and higher prices significantly added to Severstal Resources’ financial performance in 2010. For example, prices of coking coal concentrate increased by 67.1% compared to 2009 – pellets by 115.1% and gold by 26.1%.



Exports accounted for 39.7% of our total sales by revenue in 2010. The main reason for this increase was continuous development of our gold business and PBS Coals.

The principal exports were coking coal concentrate (29.2%), gold (26.2%) and pellets (24.7%). The main destinations were Europe, the US and the CIS (mostly to Ukraine and Belarus).

The export market was also favourable, and we’ve seen similar results. For example, prices on coking coal concentrate have increased by 42.1% compared to 2009; pellets by 141.5% and gold by 25.9%.


Capital expenditure

In 2010, investments in Severstal Resources’ ongoing business and new projects totalled US$433.8 million. This is almost twice as much as in 2009. The biggest increase in capital expenditure was in the gold mining division (US$170.8 million compared to US$99 million in 2009) and in the Corporate Centre (US$21.4 compared to US$5 million in 2009). We invested US$102.0 million in our coal production (Vorkutaugol – US$76.2 million and PBS – US$25.8 million). Capital expenditure in iron ore production was US$127.8 million (Severstal Liberia Iron Ore – US$28.2 million, Karelsky Okatysh – US$72.1 million, and Olkon – US$27.5 million).

In 2010, we made the following main investments :

Coal assets:

Vorkutaugol invested US$26.4 million i –– n Usinskoe deposit, identified as one of the major coking coal reserves for further development.

  • Vorkutaugol invested US$ 21.8 million in longwall mines and washing plants (US$17 million and US$4.8 million respectively). Capital expenditure on longwall coking coal mines was US$3.9 million in Komsomolskaya deep mine, US$2.5 million in Severnaya deep mine, US$0.4 million in Vorkutinskaya deep mine, US$5.1 million in Zapoliarnaya deep mine, US$4.5 million in Vorgashorskaya and US$0.6 million to explore Yunyaginskiy open pit. Capital expenditure on washing plants amounted to US$2.9 million at Pechorskaya washing plant, US$1.4 million at Severnaya washing plant and US$0.5 million at Vorkutinskaya washing plant.
  • Vorkutaugol invested US$11.1 million in its own electric power generation and washing plants processes (US$ 7 million and US$ 4.1 million, respectively).
  • Vorkutaugol also invested US$1.6 million in the modernisation and re-equipment of its transportation system.
  • PBS invested US$17.1 million in re-equipping of mines and open pits and US$8.0 million in business and production process development. US$2.6 million was invested in Kimberly Run deep mine production development, and US$0.8 million in process improvement at cleaning plants. Part of the US$0.4 million development budget went towards ongoing SAP implementation. US$0.8 million was invested in licensing currently developed areas, including Schrock Run, Sheep Ridge and others.
  • Corporate Centre invested US$19.7 million into acquiring a licence for a large coking coal deposit in the Tyva republic of Russia.

Iron ore assets:

  • In 2010 we invested US$99.6 million in projects to increase our extraction and refining of iron ore.
  • We invested US$63.8 million in developing open pits: US$48.2 million at Karelsky Okatysh and US$15.6 million at Olkon. We also invested US$ 8.0 million in railway transport infrastructure, mainly at Karelsky Okatysh. We spent around US$14.5 million on equipment for beneficiating plants at Karelsky Okatysh (US$6.9 million) and Olkon (US$7.6 million). We also invested US$3.3 million in the pellet plant at Karelsky Okatysh, and US$2.3 million in iron mines at Olkon, and US$7.7 million in other workshops.

Gold assets:

  • Total investments in the gold segment amounted to US$170.8 million in 2010.
  • We invested US$57.3 million in safety projects and re-equipment: US$14.2 million at Crew Gold, US$12.9 million at Buryatzoloto, US$8.8 million at Berezitovy Rudnik, US$8.5 million at Neryungri- Metallic and Rudnik Aprelkovo, US$7.5 million at Somita, US$4.7 million at Celtic and Semgeo and US$0.7 million at other assets.
  • A major part of the US$48.1 million investments on expansion were US$31.7 million from Celtic capital expenditure (for the expansion of crushing and milling facilities, acquisition of underground machinery and on developing new BIOX assets). Residual amounts consist of US$11.9 million for development of additional processing capacity in the gold extraction facilities at Berezitovy Rudnik, and US$4.5 million for other small projects.
  • Exploration and evaluation investments in the gold segment totalled US$65.4 million in 2010: US$17.4 million in West Africa, US$17.3 million in Yuzhno-Uguyskaya area at Neryungri-Metallic, US$14.9 million in Buryatzoloto, US$6.7 million in SZRK (Uryakhskoye, Vitimkanskaya, Nerchinskaya, Kunikan and Ostantsovy fields), US$4.5 million in Celtic and US$4.6 million in others.

Projects for 2011

In 2011, total investment at Severstal Resources will be approximately US$650 million. Major initiatives will include a project to modernise production equipment across the division’s iron ore mills and coalmines, completion of a thermoelectric power station burning coalmine methane in Vorkuta, exploration of the Putu iron ore deposit in Liberia, continued development of the division’s gold mining assets and a coalmine at PBS Coals.

Major projects:

Coal assets:

  • Capital investment at Vorkutaugol will go mainly towards extraction, development and washing (US$51.3 million for the long-term and US$51.4 million for maintenance). We are also investing in improved industrial safety measures (US$3.0 million) and renovating production facilities (US$3.6 million).
  • Further investment projects at PBS Coals Ltd will require US$58.1 million.
  • We will also spend US$7.6 million on our Tyva project.

Iron ore assets:

  • We plan to spend around US$47.9 million on projects at Olkon. These include the renovation of production facilities (US$12.4 million), investments in long-term development projects and new technology (US$15.7 million), safety measures (US$1.9 million) and maintaining the current level of production (US$17.8 million).
  • Through our investment programme at Karelsky Okatysh, we aim to maintain 2010 production volumes. This includes renovating production facilities (US$16.8 million), maintaining the existing level of extraction (US$57.4 million), investing in long-term development projects and new technology (US$10.5 million), and safety measures (US$1.0 million).
  • We will also spend US$32.0 million on the Severstal Liberia Iron Ore project.

Gold assets:

  • We expect to spend US$289.9 million on gold extraction projects in 2011, including:
  • US$71.2 million on maintenance (safety, facilities balancing and replacing equipment) at Crew Gold (US$37.7 million), Buryatzoloto (US$13.4 million), Neryungri-Metallic and at Rudnik Aprelkovo (US$12.7 million), Celtic (US$3.8 million), Berezitoviy (US$2.8 million) and Somita (US$0.8 million).
  • US$111.7 million capital expenditure on expansion (development) at Burkina Faso entities (US$90.0 million), Celtic (US$7.2 million), Berezitoviy (US$5.8 million), Somita (US$4.1 million), Neryungri-Metallic (US$3.1 million) and Buryatzoloto (US$1.5 million).
  • US$107.0 million on exploration and evaluation at our Western African assets (US$34.2 million), Buryatzoloto (US$23.2 million), Neryungri-Metallic and Rudnik Aprelkovo (US$17.3 million), Crew Gold (US$12.0 million), SZRK (US$9.4 million), Celtic (US$8.6 million), Berezitoviy (US$1.6 million) and Somita (US$0.7 million).

“In 2010, investments in Severstal Resources’ ongoing business and new projects totalled US$433.8 million. This is almost twice as much as in 2009”


In 2010, costs in Severstal Resources increased by US$375.9 million, or 26.7%. This was due to a 58.6% material expenses increase as a result of increased production volumes compared to 2009.


Vadim Larin

Severstal Resources, CEO

Chief Executive’s Review

“Our performance reflects the hard work and excellence of all our employees. Our people are at the core of Severstal and were a critical factor in our achievements”

Read More
© Severstal 2010. Visit
Share |
Select language: Русский