SVST.L Regulatory News (SVST)

Severstal reports Q2 and H1 2016 financial results

- Continuing progress -

Moscow, Russia - 21 July, 2016 - PAO Severstal (MICEX-RTS: CHMF; LSE: SVST), one of the world's leading steel and steel-related mining companies, today announces its Q2 and H1 2016 financial results for the period ended 30 June 2016.

CONSOLIDATED FINANCIAL RESULTS FOR THE QUARTER ENDED 30 JUNE 2016

Notes:

1) EBITDA represents profit from operations plus depreciation and amortisation of productive assets (including the Group's share in depreciation and amortisation of associates and joint ventures) adjusted for gain/(loss) on disposals of PPE and intangible assets and its share in associates' and joint ventures' non-operating income/(expenses).

2) Free cash flow excludes discontinued operation.

3) Net profit from continuing operations after FX fluctuations.

4) Basic EPS from continuing operations is calculated on the following basis: net profit from continuing operations divided by the weighted average number of shares outstanding during the period: 810.6 million shares for Q2 2016, Q1 2016, H1 2016 and H1 2015.

Q2 2016 vs. Q1 2016 ANALYSIS:

§ Group revenue increased 44.0% q/q to $1,580 million (Q1 2016: $1,097 million). This reflects a sharp rise in average selling prices for both steel and raw materials, as well as higher sales volumes primarily in the Russian Steel Division due to seasonally higher demand in the domestic market;

§ Group EBITDA increased 92.7% to $526 million (Q1 2016: $273 million) as the increased sales were only partially mitigated by an increase in the cost base following RUB appreciation and higher raw material costs. The Group EBITDA margin increased 8.4 ppts q/q to 33.3% (Q1 2016: 24.9%) and remains one of the highest in the industry;

§ Net profit of $608 million (Q1 2016: net profit of $270 million) includes a FX gain of $181 million. Adjusting for this non-cash item, Severstal would have posted an underlying net profit of $427 million (Q1 2016: net profit of $99 million excluding FX gain and impairment of non-current assets);

§ The positive adjustment of global steel prices resulting in higher earnings alongside with a decrease in net working capital on the back of seasonal sell-off of inventories, meant that free cash flow turned positive at $342 million (Q1 2016: negative $32 million). Free cash flow remains one of the key strategic priorities of the Company;

§ Cash capex of $117 million decreased 1.7% q/q (Q1 2016: $119 million). Severstal's FY 2016 capex target is RUB 43 billion, subject to FX fluctuations;

§ Recommended dividend payment of 19.66 RUB per share for the three months ended 30 June 2016.

H1 2016 vs. H1 2015 ANALYSIS:

§ Group revenue decreased 19.8% y/y to $2,677 million (H1 2015: $3,337 million) primarily reflecting a substantial decline in average selling prices at both Russian Steel and Resources, as a result of the net decline in global prices;

§ Group EBITDA decreased 31.8% y/y to $799 million (H1 2015: $1,171 million) as the top line compression was only partially mitigated by a decline in input costs;

§ Capex of $236 million was 10.3% higher y/y (H1 2015: $214 million).

FINANCIAL POSITION HIGHLIGHTS:

§ As at the end of Q2 2016, cash and cash equivalents were at $2,066 million (Q1 2016: $1,547 million) which primarily reflects strong free cash flow generation alongside with the Convertible Eurobond placement in April 2016;

§ Severstal's gross debt in USD-terms increased a marginal 5.9% as at the end of Q2 2016 to $2,577 million (Q1 2016: $2,434 million) mainly influenced by the Convertible Eurobond placement. In the meantime, during Q2 2016 the Company purchased back from the open market and cancelled part of its Convertible Eurobonds due in 2017;

§ Net debt declined significantly by 42.4% to $511 million at the end of Q2 2016 (Q1 2016: $887 million) as a result of considerable cash flow generation which offsets the marginal increase in the Company's gross debt. The Net Debt/EBITDA ratio decreased to 0.3x at the end of Q2 2016 (Q1 2016: 0.5x) primarily affected by net debt balance decline q/q. Severstal's Net Debt/EBITDA indicator at 0.3x remains one of the lowest ratios amongst steel companies globally;

§ The liquidity position remains strong with $2,066 million in cash and cash equivalents and unused committed credit lines of $625 million, more than covering short-term principal debt of $555 million.

Vadim Larin, CEO of Severstal Management, commented:

"Before moving on to review our results for the quarter, I would like to provide an update on the Severnaya mine, following the tragic incident that took place in February 2016. As the State investigation continues we are working with the authorities to fully identify the causes of the accident. Preliminary analysis has shown it was related to geological issues. The Company has completed compensation payments to all those impacted. I would like to again stress that safety remains our top priority, as well as our commitment to eliminate all fatalities across the business.

Operations at the mine remain suspended. All the other four mines and one open pit of Vorkutaugol are operating as usual. The Company will provide further updates on the Severnaya mine as soon as information becomes available.

As we review the quarter, global steel price increases during February-April 2016 coupled with Severstal's highly competitive cost position has boosted our earnings, with the Group EBITDA almost doubling q/q and free cash flow generation returning back to robust levels.

Overcapacity issues and growing protectionism remain challenges for the steel industry, distorting global free trade principles and impacting customers. In this context we plan to mitigate these issues with further initiatives to reduce costs, raise quality and service, export more value added products and to reach out to new markets. These initiatives, combined with a strong financial position, enables the Company to continue to deliver long-term shareholder value."

REVIEW OF THE SECOND QUARTER ENDED 30 JUNE 2016

In Q2 Severstal once again delivered a sustained performance driven by the strength of our operations and management's ongoing focus on enhancing efficiency. Given the sharp spike in global steel prices, Russian steel producers were able to start increasing domestic RUB-denominated steel prices in order to catch up with export parity. A seasonal uptick in demand both domestically and in export markets led to a decent 14% q/q increase in consolidated steel product sales, to 2.8 mnt. In particular, the Company increased sales on the domestic market, which typically offers higher sales margins. However, Severstal's proximity to both main export and domestic consumers allows to shift flexibly between export and domestic deliveries each quarter depending on the market environment.

The abovementioned factors supported a sharp recovery in the Company's earnings vs. Q1 2016 with group revenue increasing 44.0% q/q and EBITDA raising 92.7% q/q. Moreover, Severstal's EBITDA margin remained one of the highest amongst global steel producers expanding 8.4 ppts q/q to 33.3%.

Subsequently, reflecting a release of a substantial amount of working capital coupled with increased earnings, the Company improved free cash flow generation during the quarter.

Despite the fact that Severstal's gross debt reduction remains largely maturity-driven, with around 88% of the Company's gross debt being public, Severstal managed to purchase back and cancel a portion of its Convertible Eurobonds due in 2017 from the open market. Moreover, the Company has successfully placed a $200 million Convertible Eurobond due 2021 in April 2016 with a coupon rate of only 0.5%, which is the lowest level ever achieved by a Russian corporate borrower.

Given the strong financial position of the Company with the net debt/EBITDA ratio declining further to 0.3x as at the end of Q2 2016, Severstal continues to search for an equilibrium between maintaining a low indebtedness level and returning value to its shareholders. This enabled the Board of Directors to recommend a dividend of 19.66 roubles per share for Q2 2016.

SEVERSTAL RUSSIAN STEEL (RSD)

RSD steel product sales increased 14% q/q to 2.80 mln tonnes due to a robust increase in both domestic final steel demand and improved traders' activity.

Taking into account improved demand in the domestic market as well as the completion of the four-stand cold rolling mill upgrade, the share of HVA products within the sales mix improved to 43% (Q1 2016: 42%).

The proximity of key assets to the border also facilitated shifting to domestic deliveries with the share of export sales, within the sales-mix decreasing to 36% in Q2 2016 (Q1 2016: 40%).

Reflecting all of the abovementioned factors in combination with sharp improvement of global steel prices, revenue increased 45.2% q/q to $1,449 million (Q1 2016: $998 million). The positive impact of higher selling prices and volumes was impacted somewhat by higher production costs on the back of RUB appreciation. As a result, EBITDA increased significantly 103.3% q/q to $435 million (Q1 2016: $214 million) and the EBITDA margin expanded 8.6 ppts to 30.0% (Q1 2016: 21.4%).

The total non-integrated cash cost of slab production at the Cherepovets Steel Mill in Q2 increased $44/t q/q to $221/t (Q1 2016: $177/t) as a result of RUB appreciation combined with higher raw material input price. The integrated cash cost of slab in Q2 increased $26/t q/q to $179/t, as a result of stronger performance from Resources.

SEVERSTAL RESOURCES

Due to the tragic incident at Vorkutaugol's Severnaya mine in February 2016, coking coal concentrate sales at Vorkutaugol decreased 21% q/q to 1.08 mln tonnes (Q1 2016: 1.36 mln tonnes).

The improved economics of the iron ore business led to a decision to restart iron ore concentrate external shipments at Olkon, which combined with the seasonal sharp improvement in demand in export markets resulted in an 18% q/q increase in iron ore pellets sales to 2.85 mln tonnes (Q1 2016: 2.41 mln tonnes).

Accordingly together with the recent uptick in global raw materials benchmarks, revenue increased 29.3% q/q to $296 million (Q1 2016: $229 million). EBITDA rose 62.9% q/q to $101 million (Q1 2016: $62 million) and EBITDA margin expanded 7.0 ppts to 34.1% (Q1 2016: 27.1%).

Due to the production volumes decrease, total cash costs (TCC) at Vorkutaugol increased to $58/t (Q1 2016: $40/t) reflecting RUB appreciation as the majority of costs at Severstal Resources are RUB-denominated. Moreover, given the fixed cost nature of the mining business lower processing volumes at Vorkutaugol dragged TCC higher. At the same time, TCC at Karelsky Okatysh decreased to $21/t (Q1 2016: $22/t), while TCC at Olkon remained unchanged at $24/t (Q1 2016: $24/t) reflecting ongoing operational efficiency improvements.

DIVIDEND

The Board is recommending a dividend payment of 19.66 roubles per share for the three months ended30 June 2016.

Approval of the dividend is expected at the Company's EGM which will take place on 2 September 2016. The record date for participation in the EGM is 8 August 2016.

The recommended record date for the dividend payment is 16 September 2016. The approval of the record date for the dividend payment is expected at the Company's EGM which will take place on 2 September 2016.

OUTLOOK

In Q1 2016 the global steel market saw a sharp increase in steel prices on the back of low inventory levels, a seasonal boost in demand and speculative trading activities. Since global utilisation rate in production remains low, at around 70%, this price improvement triggered a restart of previously idled production by most players and increased product offerings to the market, putting pressure on pricing.

In 2016 Russia's steel demand is now forecast to fall by less than 5%, rather than by 10% assumed at the start of the year, with this anticipated improvement due to stabilisation of the Russian economy.

The EU continues with its HRC anti-dumping investigation against several countries including Russia. The process can take up to 15 months. Though Severstal will be cooperating with the regulators to protect its interests, the Company intends to mitigate these new risks through its broad product mix and a global market reach having low production costs and established relations with customers.

The Board is confident, however, that as a result of the Company's vertically integrated business model, high quality and cost competitive operations, low debt level, and a sizeable share of high-value added products in the portfolio, Severstal remains well positioned relative to both local and global peers.

For further information, please contact:

Severstal Investor Relations

Vladimir Zaluzhsky

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

vladimir.zaluzhsky@severstal.com

Severstal Public Relations

Anastasia Mishanina

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

anastasia.mishanina@severstal.com 

Severstal's financial communications agent - Hudson Sandler

Andrew Hayes / Elena Garside / Alex Brennan

T: +44 (0) 20 7796 4133

A conference call on Q2 2016 results for investors and analysts hosted by Alexey Kulichenko, Chief Financial Officer, will be held on 21 July 2016 at 13.00 (London)/ 15.00 (Moscow).

International Dial in: +44 (0) 20 31394830

Russian Toll-Free Dial in: 810 800 2136 5011

UK Toll-Free Dial in: +44 (0) 808 237 0030

Pin code: 94824064#

The call will be recorded and there will be a replay facility available for 30 days as follows:

International: +44 (0) 203 426 2807

UK Toll Free: 0808 237 0026

Reference: 674509#

Full financial statements are available at http://www.severstal.com/eng/ir/results_and_reports/financial_results/index.phtml

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PАО Severstal is one of the world's leading vertically integrated steel and steel related mining companies, with assets in Russia, Ukraine, Latvia, Poland and Italy. Severstal is listed on RTS and MICEX and the company's GDRs are traded on the LSE. Severstal reported revenue of $6,396 million and EBITDA of $2,096 million in 2015. Severstal's crude steel production in 2015 reached 11.5 million tonnes. www.severstal.com