SVST.L Regulatory News (SVST)

Severstal reports Q1 2011 financial results

Moscow, Russia - May 17, 2011 - OAO Severstal (LSE: SVST), one of the world's leading vertically integrated steel and mining companies, today announces its financial results for three months ended 31 March 2011.

CONSOLIDATED FINANCIAL RESULTS FOR THE QUARTER ENDED 31 MARCH 2011

Notes:

1) These amounts reflect adjustments made in connection with the presentation of the discontinued operations.

2) EBITDA represents profit/(loss) from operations plus depreciation and amortization of productive assets adjusted for gain / (loss) on disposals of property, plant and equipment and intangible assets.

3) Attributable to shareholders of OAO Severstal.

Q1 2011 vs. Q4 2010 ANALYSIS:

§ Continuing increase in earnings, reflecting the company's vertical integration and strong price momentum;

§ EBITDA up 3.9% to $934 million (Q4 2010: $899 million) and EBITDA margin up to 25.1% due to cost control, better product mix, higher share of domestic revenue at Russian Steel and disposal of the underperforming assets in North America;

§ Revenue of $3,727 million (Q4 2010: $3,726 million);

§ Return to net profit of $531 million (Q4 2010: net loss of $352 million), with net margin at 14.2%;

§ Recommended dividend payment of 3.9 rubles per share (approximately $0.14).

Q1 2011 vs. Q1 2010 ANALYSIS:

§ Solid improvement on the EBITDA and revenue lines on the back of the strong market conditions and disposal of the underperforming assets in North America;

§ EBITDA up 60.2% to $934 million (Q1 2010: $583 million) and EBITDA margin up to 25.1% (Q1 2010: 21.3%);

§ Revenue up by 35.9% to $3,727 million (Q1 2010: $2,742 million);

§ Significant progress on the bottom line: Q1 2011 net profit of $531 million (Q1 2010: net loss of $785 million).

FINANCIAL POSITION HIGHLIGHTS:

§ Solid liquidity position with of $1,791 million in cash & equivalents and short-term deposits;

§ Net Debt/EBITDA continued to decline to 1.2x by the end of Q1 2011, below target level of 1.5x;

§ Over the course of the current year, Severstal intends to sell into the market 2,252,964 GDRs and 246,373 ordinary shares held in treasury with the proceeds to be used to reduce net debt.

OUTLOOK:

§ Q2 2011 steel prices are expected to vary by region: in Russia they may moderate; in North America demand fundamentals remain positive in the automotive, pipe&tube, energy-related and machinery segments, though some price softening is anticipated on the back of increased supply and destocking at service centers;

§ Continuing increase in coking coal and iron ore prices benefiting vertically integrated producers;

§ Ramp-up in volumes in Russia after weaker Q1 2011;

§ Though Columbus operations were temporarily interrupted by severe storms hitting several US states at the end of April, we expect Columbus and Dearborn to maintain operations at close to full capacity in Q2 2011 on the back of strong steel demand in North America;

§ We expect continued strong gold segment performance going forward.

Alexey Mordashov, CEO of Severstal, commented: "In Q1 we focused on increasing profitability by selling more value-added products. Despite the growth of raw materials prices, EBITDA margin increased to 25.1% as a result of our vertical integration and improved steel assets structure. We expect to deliver our planned 2011 capital expenditure programme, with Phase II commissioning at Columbus and modernization at Dearborn running ahead of schedule. Our net debt/EBITDA level continued to decline to 1.2x below the targeted 1.5x and we are committed to maintaining this reasonable level of debt and strong liquidity position. We expect further improvement in our operating and financial performance in Q2 2011 and are confident about our full-year outlook."

CHANGE IN DISCLOSURE OF SEGMENT INFORMATION

§ With the Gold segment now representing a material proportion of the consolidated Group assets, the presentation and disclosure of segment information has been changed by separating the Gold segment from Severstal Resources. The comparative information has been disclosed as if the separation occurred at the beginning of the earliest comparative period presented.

§ As of March 31, 2011 the Group now has four reportable segments: Steel Resources and Gold (the two reportable segments representing together the former Group's Severstal Resource segment), Russian Steel and Severstal North America.

§ Severstal's operational divisional structure remains unchanged with Severstal Resources, Severstal Russian Steel and Severstal International.

CHIEF EXECUTIVE'S REVIEW OF THE FIRST QUARTER ENDED 31 MARCH 2011

Severstal Russian Steel and Severstal Resources were affected by certain weather and technological factors, but consolidated revenues were robust at $3,727 million and further improved our EBITDA to $934 million (Q4 2010: $899 million).

The disposal of the underperforming assets in the US together with the deconsolidation of Lucchini had a big impact on the bottom line, where we reported net profit of $531 million (net margin of 14.2%), against a net loss of $352 million in Q4 2010 and a net loss of $785 million in Q1 2010.

After the disposal of the three underperforming assets, Severstal North America demonstrated a strong performance on the back of higher sales volumes and realised prices.

Severstal's vertically integrated model allowed the Group to benefit from improvements in the steel and bulks markets in Q1 2011.

Our cash capital expenditure in Q1 2011 was $361 million, down 11.7% on a quarterly basis. The decrease was due to the normal reduction in activity during the winter season. We expect planned capital expenditure to remain on track in the quarters to come and we remain committed to the previously announced FY2011 target of $2 billion. Our projects (Columbus Phase II, modernisation of Dearborn, Balakovo mini-mill greenfield, 2nd colour coating line, a new coalmine at PBS Coals, a thermoelectric power station burning coalmine methane in Vorkuta, etc.) are progressing well.

RUSSIAN STEEL

The Russian Steel segment continued to demonstrate strong results. Despite some production decreases and lower q-o-q revenues, down 2.6% to $2,409 million (Q4 2010: $2,473 million), EBITDA improved by 6.9% to $434 million (Q4 2010: $406 million). Segmental EBITDA margin grew by 1.6 ppts to 18.0% from 16.4% in Q4 2010. Average selling price of steel products rose by 13.1% to 838 US$/t (Q4 2010: 741US$/t).

Overall market conditions for steel products in Q1 2011 were favourable: demand from our key customers, including the auto, machinery and construction industries, in both Russia and abroad was robust, while steel prices were strong across the globe as a reaction to growing coking coal and iron ore prices.

Technological issues at Cherepovets and severe weather conditions in Q1 2011 resulted in a 2.7 mmt or 6% fall in crude steel production in Q1 2011. These issues are now resolved and we anticipate higher steel production and revenue volumes in Q2 2011.

We continued to increase revenue to the domestic market which comprised 67.7% of total revenue (Q4 2010: 61.6%). We also increased the share of value-added products in our overall portfolio to 45.4% (Q4 2010: 41.2%). Both of these factors contributed to better earnings and margins.

Russian Steel's export revenue in Q1 decreased due to higher supply to the domestic market. Our revenue to Europe continued to rise on the back of lower shipping to the Middle East and African regions.

Our Izhora Pipe Plant ran at close to full capacity utilisation rate and sold 138.4 thousand tonnes of large-diameter pipes (Q4 2010: 135.9 thousand tonnes). The plant targets a continued high utilisation rate throughout 2011.

We will continue to focus on increasing the share of high value-added products in our portfolio, primarily targeted to the Russian market.

STEEL RESOURCES

Steel Resources' operating and financial results were affected by bad weather, primarily in Russia. Q1 2011 revenue was down 8.7% to $764 million (Q4 2010: $837 million) and EBITDA decreased by 16.5% to $323 million (Q4 2010: $387 million). EBITDA margin remained strong at 42.3% (Q4 2010: 46.2%).

The fall in iron ore and coal output in Russia was due to harsh winter conditions, when ports and railways were severely affected. However the price environment continued to be strong, partially offsetting this negative impact on production. We anticipate production volumes will return to normal levels in Russia in Q2 2011.

We anticipate that supportive price momentum together with improving volumes will be beneficial to our operational and financial results in Q2 2011.

GOLD

Nordgold, the gold segment within Severstal, continued to demonstrate growth and strong results. The gold price reached new record level in Q1 2011. Revenue increased by 80.7% to $244 million (Q1 2010: $135 million).

Nordgold produced 174.2 koz in Q1 2011, a y-o-y increase of 59.5% driven by de-bottlenecking initiatives at Berezitovy and Taparko. There was also a contribution from the consolidation of Crew Gold. Gold output fell by 10% q-o-q due to bad weather factors.

Total cash costs per ounce of gold in Q1 2011 were $603/oz and are expected to remain in the range of$600-$650/oz for the full year 2011.

Q1 2011 EBITDA increased by 101.5% to $135.1 million (Q1 2010: $67.0 million). EBITDA margin reached 55.3%.

Capex in Q1 2011 increased to $38.9 million (Q1 2010: $22.3 million), including $17.4 million spent on exploration.

In January 2011, the Group acquired an additional 6.6% stake in Crew Gold Corporation for a total consideration of US$ 32.9 million, increasing its ownership interest up to 100%.

Nordgold continues to advance organic growth at existing operations while making good progress in exploration, including the two major development projects: Bissa in Burkina Faso and Gross in Russia.

SEVERSTAL NORTH AMERICA

In North America we completed the disposal of underperforming facilities at Warren, OH; Wheeling, WV; and Sparrows Point, MD to the Renco Group, Inc on 31 March 2011. Our focus now is on two efficient assets: Columbus and Dearborn.

Q1 2011 demand for steel in the US was healthy driven by growing consumption from the auto, pipe & tube and service center segments. Our Columbus and Dearborn facilities were operating close to full capacity in Q1 2011 and we expect high utilization level for the rest of the year. These factors contributed to growth in our sales volumes by 8.7% and an increase in average realised prices of 14.5%. That helped to increase Q1 2011 revenues by 24.5% q-o-q to $757 million and boost Q1 2011 EBITDA to $45 million (Q4 2010: $2 million).

Our development plans at Columbus are running ahead of schedule and we are now planning to launch Phase II gradually starting from June 2011, ahead of the September 2011 target. Our modernization at Dearborn is also running ahead of schedule with launches of the new cold-rolling complex and the new automotive hot dip galvanizing line in September and December 2011, respectively.

Lucchini

In February 2011, the Group signed an amendment to the Lucchini's share purchase agreement with the Majority Shareholder which cancelled the buy-back call option and the entitlement, for the benefit of the Group, to any gain on a subsequent sale of this stake to a third party. Effective that date the Group accounts its investment to Lucchini using the equity method. As of the date of the transaction and as of 31 March 2011, the book value of the investment is nil.

DIVIDEND

The Board is recommending a dividend of 3.9 rubles per share (approximately $0.14) per share for the three months ended 31 March 2011.

Approval of the dividend is expected at the Company's AGM which will take place on 27June 2011. The record date is 22 May 2011.

OUTLOOK

In Q2 we expect a moderation of the positive global steel price dynamics experienced in Q1 as a result of some destocking, production ramp-ups, the expectations of lower raw material prices later this year, and the monsoon season in South East Asia. We expect any softening to be temporary given the healthy levels of traders' inventories, strong real demand, and high Q2 2011 contract raw material prices.

In Russia, monthly domestic steel consumption has already exceeded 40 million metric tonnes annualised which is comparable with the pre-crisis levels, driven by auto, machinery and pipes production. The seasonally strong construction market is a potential upside factor. Export prices will be affected by the ongoing political turmoil in the Middle East and Africa, as well as from summer seasonal factors. Domestic high-value-added products are likely to remain stable in terms of both demand and prices.

In the US, demand fundamentals remain positive in the automotive, pipe&tube, energy-related and machinery segments, though some price softening is observed on the back of increased supply and destocking at service centres. Steel inventories have fallen on expectations of lower prices and higher imports as well as due to active buying from final consumers. The current inventories are at a normal level and we expect destocking to end during Q2 2011.

Improving production volumes at Russian Steel and Steel Resources segments, the high utilisation rate of the North American assets based on the strong demand in the region, as well as favorable market conditions are supporting our production and financial results in Q2 2011 and giving us confidence in our full-year outlook.

For further information, please contact:

Severstal

Vladimir Zaluzhsky

T: +7 (495) 926-77-66

vladimir.zaluzhsky@severstal.com

Severstal's financial communications agent - Hudson Sandler

Andrew Hayes / Andrew Leach / Maria Ignatova

T: +44 (0) 20 7796 4133

A conference call for investors and analysts will be held from London on Tuesday, 17th May 2011at 14:00 London time, which is 17:00 Moscow time.

Participant dial in: +44 (0)1452 555 566 (International)

Participant dial in: 0871 700 0345 (UK only)

Conference ID: 66545925

The call will be recorded and there will be a replay facility available for 7 days as follows:International dial in: +44 (0) 1452 55 00 00UK call dial in:0845 245 5205Encore replay access number: 66545925#

Full financial statements are available at http://www.severstal.com/eng/ir/results_reports/financial_reports/ 

Nordgold, the gold segment within Severstal, will hold a separate conference call related to Nordgold's Q1 results. The call for investors and analysts hosted by Nikolai Zelenski, Chief Executive Officer, and Sergey Zinkovich, Chief Financial Officer, will be held on 18 of May 2011 at 9.00 (London) 12.00 (Moscow), with press-release and presentation published on Nordgold's website www.nordgold.com at 7.00 (London) 10.00 (Moscow).

Participant dial in: +7 495 705 9451 (Russia)

Participant dial in: +44 (0) 20 7784 1036 (UK)

Conference ID: 1954969

Enquiries: 

Nordgold

Dmitriy Gudovskiy

T: +31 20 406 4480

Financial Dynamics, Financial Communications for Nordgold

Т: +44 20 7831 3113 Ben Brewerton / Chris Welsh

Т: +7 495 795 0623 Maria Shiryaevskaya

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ОАО Severstal is one of the world's largest vertically integrated steel and mining companies. With assets in Russia and other CIS, USA, Europe and Africa, Severstal reported revenue of $13,573 million and EBITDA of $3,263 million in 2010. Severstal's crude steel production in 2010 reached 14.7 million tonnes. Severstal also produced 589 koz of gold at its gold mining assets in West Africa, Kazakhstan and Russia. The Company is listed on RTS and MICEX, the Company's GDRs are traded on LSE.