SVST.L Regulatory News (SVST)

Severstal reports Q4 & FY 2012 financial results

Moscow, Russia - March 5, 2013 - OAO Severstal (MICEX-RTS: CHMF; LSE: SVST), one of the world's leading vertically integrated steel and steel-related mining companies, today announces its Q4 & FY 2012 financial results.

CONSOLIDATED FINANCIAL RESULTS FOR THE YEAR ENDED 31 December 2012

Notes:

1) 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.

2) Attributable to shareholders of OAO Severstal.

3) EPS is calculated based on the following weighted average number of shares outstanding during the period: 839.8 million shares for FY 2012, 810.6 million shares for Q3 and Q4 2012, and for 1,005.2 million shares for FY 2011.

FY 2012 vs FY 2011 ANALYSIS:

§ Resilient performance over a challenging year for the industry;

§ Revenue down by 10.8% to $14,104 million (FY 2011: $15,812 million) as a result of lower prices and slightly weaker sales volumes at Russian Steel;

§ EBITDA contracted 40.9% to $2,119 million (FY 2011: $3,584 million) and EBITDA margin held at 15.0% (FY 2011: 22.7%);

§ FY12 net profit down 62.6% to $762 million (FY 2011: $2,035 million);

§ Business System initiatives starting to deliver cost savings.

Q4 2012 vs. Q3 2012 ANALYSIS:

§ Traditionally weaker quarter reflecting winter period in Russia;

§ Q4 revenue down 13.2% q/q to $3,116 million (Q3 2012: $3,591 million) reflecting lower realized prices and volumes;

§ Q4 EBITDA down 36.4% q/q to $347 million (Q3 2012: $546 million) mainly due to traditionally weaker demand, resulting in a 4.1 ppts decrease in EBITDA margin q/q to 11.1%. Excluding the negative non-cash items of $42m (primarily the allowance for doubtful debts at Severstal Resources and obsolescence provision for inventories at Severstal Russian Steel) Q4 2012 EBITDA would be $389m with EBITDA margin of 12.5%. The FY12 effect of these non-cash items amounted to $128m;

§ Q4 net loss of $150 million (Q3 2012: net profit of $329 million) was negatively affected by the following non-cash items: a goodwill impairment at PBS in the amount of $49 million and an impairment allowance in respect of consideration in other financial assets receivable from the sale of the North America disposal group in the amount of $101 million. Q3 2012 was also positively impacted by FX gains of $152 million. Excluding those non-cash items, Severstal would have been break-even in Q4 2012;

§ Recommended dividend payment of 1.89 roubles per share (approximately $0.06) for the 12 months ended 31 December 2012, reflecting the Board's confidence in the medium term outlook and the financial strength of the company.

FINANCIAL POSITION HIGHLIGHTS:

§ Gross debt reduced from $5,976 million to $5,710 million over the year;

§ Continued focus on costs and efficiency through the Business System of Severstal;

§ Strong liquidity: $1,726 million in cash and cash equivalents, exceeding short-term debt of $1,282 million[1] with committed unused credit lines of $922 million;

§ Net debt reduced from $4,112 million to $3,983 million over the year. Net Debt/EBITDA ratio increased to 1.9x at end of Q4 2012 due to drop in EBITDA for the last twelve months. We will closely monitor our debt level in 2013 to return it to the targeted net debt/EBITDA of 1.5x, meanwhile already reduced our capex y/y;

§ In October, Severstal successfully placed $750 million of 10-year Eurobonds with a coupon rate of 5.9%.

Alexey Mordashov, CEO of Severstal, commented:

"The whole management of Severstal and Vorkutaugol again express their deepest condolences to the families and friends of the nineteen miners who were tragically killed in an accident at the Vorkutinskaya mine on Monday 11th February 2013. The health and safety of employees is a key priority across the Severstal group and, along with the authorities, Severstal is working vigorously to understand the cause of this tragic accident.

As for the financial results, Severstal delivered a solid performance in 2012, keeping our EBITDA margin at 15.0% despite the challenges to the industry over the year. Our Q4 performance was negatively impacted by weaker steel demand, which is traditional for this period, and lower prices for steel, iron ore and coking coal.

Our focus throughout the year was on efficiency and low cost production whilst modernizing our assets at Severstal Russian Steel and Severstal Resources and ramping up the additional capacities at Severstal International. We continued to focus on delivering our long-term strategy to become one of the most efficient vertically-integrated steelmakers globally.

Our FY12 cash capex was $1,448 million with the focus on the development of the Balakovo mini-mill, commissioning of new longwall faces at Vorkutaugol, reconstruction of Coke Battery #7, and the construction of a methane gas power station at Vorkutaugol.

Global economic conditions remain uncertain for the steel industry. However we believe that we could see some improvements over 2013 in steel, iron ore and coking coal demand. We will continue to do our best to maintain a prudent investment profile and maximize cash generation."

CHIEF EXECUTIVE'S REVIEW OF THE TWELVE MONTHS ENDED 31 DECEMBER 2012

Severstal delivered 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. A deteriorating market backdrop and lower selling prices negatively affected our financial results. However, our position as a low-cost steel producer in Russia with full vertical integration allowed us to maintain almost full utilization rates during the year at our steel, iron ore and coking coal operations. In the US we successfully ramped-up the facilities, launched in 2011 and reached good levels of capacity utilization. Our business initiatives continued to yield efficiency and cost advantages.

Our core markets, - Russia and the US continued to demonstrate good end-user demand growth in 2012 (2.4% in Russia and 7.8% in the US) and we expect further growth in 2013.

Our Q4 2012 results were negatively impacted by traditionally lower steel demand in Russia during the winter period, as well as by weak economic conditions globally. This impacted the performance of our Russian Steel and Resources divisions, leading to weaker results, compared with Q3 2012.

The Group's cash capital expenditure in Q4 2012 was $469 million, up 42.1% from Q3, mainly due to the completion of several projects in Q4. Our FY12 capex amounted to $1,448 million. This was lower than initially planned. Capex was adjusted during the year in the light of slowing market conditions. Our major projects in 2012 included continuing construction of the Balakovo mini-mill, refurbishment of Coke Battery #7 at Cherepovets and a coalmine methane power station at Vorkuta. As previously announced, our 2013 capital expenditure program will be $1.3 billion including completion of the Balakovo mini-mill construction and its launch in mid-2013; development of specialized steel service centers, construction of two inclined shafts and modernization of the Pechorskaya preparation plant at Vorkutaugol, the construction of a steeply inclined conveyor and geological exploration at Olkon.

SEVERSTAL RUSSIAN STEEL

Severstal Russian Steel's revenue in FY12 decreased by 18.3% to $8,617 million (FY11: $10,547 million) reflecting weaker pricing environment and lower sales volumes, including a contraction in large-diameter pipe sales. The division's EBITDA2 was $939 million (FY11: $1,784 million), including an additional allowance in respect of inventories of $115 million.

The share of high value-added (HVA) products in the sales portfolio remained the highest among our Russian peers at 44%, while the proportion of domestic sales' in the portfolio was 60%.

Severstal Russian Steel's Q4 revenue was down 14.4% q/q to $1,929 million (Q3 2012: $2,254 million) on weaker realized volumes and prices. This led to a decrease in Q4 EBITDA[2] by 29.6% to $200 million (Q3 2012: $284 million) with EBITDA margin down to 10.4% mainly due to lower sales volumes and prices.

The share of HVA products remained high in Q4 at 46%, while share of domestic sales went up to a record high of 65%, compared to 61% in Q3 2012.

Although high oil prices support the Russian economy, steel consumption growth decelerated from 13% in 2011 to 2% in 2012. On the positive side, we may see growing steel demand in 2013 on the back of construction and infrastructure projects.

SEVERSTAL RESOURCES

Severstal Resources' FY12 revenue decreased by 19.0% y/y to $3,005 million (FY11: $3,711 million) as a result of lower coking coal and iron ore prices during the year, while overall realized volumes remained broadly flat. This negatively impacted EBITDA[3], which contracted 38.6% to $985 million (FY11: $1,604 million).

In FY12, Severstal Resources delivered a strong cost control. Vorkuta cash costs of coking coal concentrate in FY12 were down 2.2% y/y to $90/t, while PBS saw cost reduction by 4.5% to $107/t. Cash costs at Karelskiy Okatysh decreased by 4.8% to $59/t, although Olkon's cash costs were slightly up 4.2% to $50/t. We will continue to focus our efforts on keeping production costs under control.

As for Q4, the division's top line was down 8.4% to $673 million (Q3 2012: $735 million) due to lower sales volumes of iron ore and weaker realized prices of coking coal and iron ore. That, together with higher costs at our iron ore production units, negatively impacted EBITDA3, which decreased by 45.7% to $132 million (Q3 2012: $243 million), and Q4 EBITDA margin declined to 19.6% (Q3 2012: 33.1%).

Unit costs at Severstal Resources in Q4 were reduced at our coal operations and increased at our iron ore mines. Coking coal concentrate cash costs at Vorkuta were $85/t, 2.3% down from Q3 ($87/t), while cash costs at PBS decreased by 5.3% to $107/t. We expect further cost reductions at PBS following the idling of two more mines in December. Costs per tonne at Karelskiy Okatysh were up 12.3% to $64/t due to an allowance for doubtful debts, while the 36.4% cash costs increase at Olkon to $60/t was a result of planned maintenance and traditionally higher energy costs in the winter period. We expect iron ore costs to stabilize going forward.

For 2013 we anticipate average global iron ore prices to remain flat y/y, while coking coal prices could be lower, as compared to 2012.

SEVERSTAL INTERNATIONAL

In FY12, Severstal International's shipments rose by 17.3% to 4.5 mt and revenue rose by 13.3% y/y to $3,878 million (FY11: 3.8 mt and $3,422 million respectively) due to newly commissioned facilities and higher capacity utilization at both Columbus and Dearborn, which helped offset lower realized prices in the US. This sustained the division's profitability at a level similar to FY11 with EBITDA3 of $166 million (FY11: $181 million). FY12 EBITDA margin was down to 4.3% (FY11: 5.3%) due to lower realized prices, which also led to lower EBITDA per tonne of $37 ($48 in FY11).

In Q4, Severstal International posted revenue of $810 million, down 11.0% q/q (Q3 2012: $910 million) on weaker realized prices and selling volumes. The November accident at Dearborn's blast furnace, which caused two weeks idling, resulted in lower production volumes and excessive costs at Dearborn. These factors along with a write-off related to provisions against receivables at the coke-making joint-venture MSC resulted in q/q decrease in Q4 EBITDA3 to $6 million. Q4 EBITDA margin was down to 0.7% (Q3 2012: 1.9%), and EBITDA per tonne fell q/q to $6 compared to $16 in Q3.

Marketwise, construction spending in 2012 was 9% higher than 2011, with residential construction increasing 15% and nonresidential increasing 6%. After 17% growth in 2012, the automotive industry continues its upward trend with 2013 NAFTA auto production projected to increase 3% over 2012 to 15.9 million units. US pipe and tube demand has moderated but there are signs of recovery in 2013 based on increasing drilling activity and new pipeline projects.

DIVIDEND

The Board is recommending a dividend of 1.89 roubles per share (approximately $0.06) for the twelve months ended 31 December 2012, reflecting the Board's commitment to shareholder returns and confidence in the medium term outlook and the financial strength of the company.

Approval of the dividend is expected at the Company's Annual General Meeting which will take place on 13 June 2013. The record date is 26 April 2013.

OUTLOOK

Though the fragile economic environment will keep pressure on steel prices throughout 2013, we are seeing slight signs of recovery. Our efficient business model and focus on costs control encourage us to remain confident about the future resilience and development of Severstal.

For further information, please contact:

Severstal Investor Relations

Vladimir Zaluzhsky

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

vladimir.zaluzhsky@severstal.com

Severstal Public Relations

Elena Kovaleva

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

elena.kovaleva@severstal.com 

Severstal's financial communications agent - Hudson Sandler

Andrew Hayes / Andrew Leach / Maria Ignatova / Alex Brennan

T: +44 (0) 20 7796 4133

A conference call on FY 2012 results for investors and analysts hosted by Alexey Mordashov, Chief Executive Officer and Alexey Kulichenko, Chief Financial Officer, will be held on March 5, 2013 at 14.00 (GMT London)/ 18.00 (Moscow).

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

Participant dial in: +08 00 6940 257 (UK FreeCall Dial-In)

Participant dial in: 8108 002 097 2044 (Russian Free Call)

Conference ID: 13644258

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 00

UK Free Call Dial In: 0800 953 1533

UK Local Dial In: 0844 338 6600

Encore replay access number: 13644258

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

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ОАО Severstal is one of the world's leading vertically integrated steel and steel related mining companies, with assets in Russia, the USA, Ukraine, Latvia, Poland, Italy, Liberia and Brazil. Severstal is listed on RTS and MICEX and the company's GDRs are traded on the LSE. Severstal reported revenue of $14,104 million and EBITDA of $2,119 million in 2012. Severstal's crude steel production in 2012 reached 15.1 million tonnes. www.severstal.com