OREANDA-NEWS.  Resilient performance achieved despite continued challenging market conditions driven by relentless focus on internal efficiencies, cost control, enhancing the product mix and higher customer satisfaction;
Four consecutive quarters of q/q EBITDA growth delivered in 2013;
Efficiency initiatives delivered impressive cost reductions and operational enhancements including:
— 4.1% decrease in Group cost of sales, achieved despite higher steel products sales volumes;
— 14.7% decrease in Group G&A expenses to USD 639 million (FY12: USD 749 million);
— 10.3% decrease in Group distribution costs, and;
— Second consecutive year of unit cost reductions at Russian mining operations;
Business System initiatives embedded across the Group and delivering competitive advantage through creation of a continuous improvement culture;
Group revenue decreased 5.6% y/y to USD 13,312 million (FY12: USD 14,104 million) due to weaker selling prices although Severstal International delivered stable revenue y/y despite price softening;
Group EBITDA 4.4% lower y/y to USD 2,063 million (FY12: USD 2,158 million); a relatively resilient performance supported by strong earnings improvement by Severstal International and increased EBITDA at Severstal Russian Steel;
FY13 Free Cash Flow strong at USD 488 million, up 13.2% on the FY12 number;
Net profit of USD 83 million (FY12: USD 762 million), mainly negatively impacted by FX losses of USD 350 million and a total amount of asset impairment of USD 356 million. Excluding those non-cash items, Severstal would have had a net profit of USD 789 million in FY13;
Capex 18.6% lower y/y at USD 1,178 million (FY12: USD 1,448 million).
Q4 2013 vs. Q3 2013 ANALYSIS:

Group revenue increased 6.0% q/q to USD 3,384 million (Q3 2013: USD 3,192 million), primarily due to higher realized prices at both Severstal Resources and Severstal International, and increased sales volumes at Severstal Russian Steel;
Group EBITDA up 12.5% q/q to USD 611 million (Q3 2013: USD 543 million) driven by improved earnings at Severstal Resources and Severstal International. Group EBITDA margin strengthened to 18.1% from 17.0% in Q3;
Free Cash Flow improvement with USD 347 million delivered in Q4 2013 (Q3 2013: USD 8 million);
Net loss of USD 74 million (Q3 2013: net profit of USD 157 million), mainly as a result of the FX loss of USD 83 million and a total amount of asset impairment of USD 349 million. Excluding those non-cash items, Severstal would have had a net profit of USD 358 million in Q4 2013;
Capex of USD 334 million expectedly up q/q (Q3 2013: USD 282 million);
Recommended dividend payment of 3.83 roubles per share (approximately USD 0.11) for the 12 months ended 31 December 2013.
FINANCIAL POSITION HIGHLIGHTS:

Over FY13 we kept on decreasing our gross debt finishing the year with USD 4,754 million of gross debt, which is 4.5% lower than in the end of Q3 or 16.7% down as compared to EOY2012. In other words, we lowered our gross debt over the last year by almost USD 1 billion;
The net debt dynamics followed the one of the gross debt: as of EOY2013 the net debt was USD 3,718 million which is 6.2% lower than in the end of Q3 and 6.7% lower as compared to EOY2012. During FY13 our net debt/EBITDA ratio went up to 2.2x from 1.8x as of EOY12. However our operational improvements and cost cutting initiatives enabled us to return to 1.8x by EOY13 and we are now well on track to achieve our internal target of 1.5x;
Solid liquidity position with USD 1,036 million in cash and cash equivalents and committed unused credit lines of USD 1,518 million in excess covering short-term debt of USD 1,085 million .
Alexey Mordashov, CEO of Severstal, commented:

“Severstal delivered another resilient performance in 2013 despite the ongoing challenging conditions in global steel and steel-related commodities markets. We have made a number of structural and organizational changes to further reduce costs and enhance efficiency, which are already delivering results. These changes, in combination with the continuous improvement across the Group as a result of our embedded Business System projects, enabled Severstal to consistently improve its earnings performance throughout the course of the year.

Whilst market conditions in 2014 will continue to be challenging, we are focused on delivering further earnings improvements through maintaining our focus on efficiency and cost control, underpinned by highly efficient assets and vertically integrated model.”

CHIEF EXECUTIVE’S REVIEW OF THE TWELVE MONTHS ENDED 31 DECEMBER 2013

In 2013, our steel divisions – Severstal Russian Steel and Severstal International – delivered increased earnings and profitability despite weaker realized prices. In 2013, we continued to focus on lowering production costs at our mining operations and, encouragingly, our Russian coking coal operations at Vorkuta increased sales volumes despite a competitive and challenging market.

Q4 represented the Group’s fourth consecutive quarter of earnings improvement with EBITDA up 12.5% q/q by to USD 611 million, primarily driven by the Severstal Resources and Severstal International. Q4 EBITDA margin increased to 18.1% — the highest level since Q4 2011.

Our FY13 capex was USD 1,178 million, 18.6% down y/y. We have launched the new Coke Battery #7, completed the first stage of modernization and expansion of the Pechorskaya Preparation Plant in Vorkuta. We have almost completed construction of the Balakovo mini-mill and of an inclined shaft at the Vorgashorskaya mine also in Vorkuta and are expanding production capacities at the newly launched specialized service center near St. Petersburg to supply the auto, white goods and small machinery markets.

We maintain a prudent and flexible approach to capex which is focused on operational efficiency, health and safety improvements, further improving our product mix and enhancing customer care initiatives. Our FY2014 capex target of USD 976 million is approximately 17% lower y/y and will include maintenance investment of approximately USD 570 million. Major ongoing development projects in 2014 include: the launch of the Balakovo mini-mill; revamping our cold rolling mill at Cherepovets; the completion of a specialized service center near St. Petersburg, and; continuing reconstruction and modernization at the Orel Steel Plant, part of Severstal Steel Solutions. At Severstal Resources, the largest initiatives in 2014 include the operational consolidation of the Vorkuta Zapolyarnaya and Vorkutinskaya mines; the construction of an inclined shaft at Zapolyarnaya, and; the construction of a new water rotation unit and enhancing stripping works at Karelsky Okatysh.

SEVERSTAL RUSSIAN STEEL

In FY13, Severstal Russian Steel delivered a 3.4% increase in steel shipments to 10.6 mt, despite weaker end markets. Within the sales mix the division increased volumes of high value-added (“HVA”) products, such as colour coated sheet sales (up 21.8% y/y), to 48% (FY12: 46%), and decreased shipments of semi-finished slabs (down 42.8% y/y) in line with our strategy. This improvement to the sales mix partly offset steel price softening during the year with average selling prices for 2013 decreasing by 10.1% to USD 675/t y/y. As a result, the division’s revenue decreased 6.8% y/y to USD 8,033 million (FY12: USD 8,617 million).

Despite lower revenue, the division delivered a 5.3% increase in EBITDA for FY13 to USD 1,008 million (FY12: USD 957 million) driven by lower input prices in conjunction with production and G&A cost reductions. The division’s EBITDA margin was also up, by 1.4 ppts y/y to 12.5%. Sales to the domestic market increased to 63% compared to 60% in FY12.
In Q4, the division revenue rose by 5.4% q/q to USD 2,006 million (Q3 2013: USD 1,904 million) driven by higher sales volumes, which compensated for lower q/q realized prices. Q4 EBITDA of USD 289 million was down 3.0% against Q3 with EBITDA margin 1.3 ppts lower q/q at 14.4% due to higher iron ore prices and lower steel prices.

The share of domestic sales decreased from the year’s peak level of 69% in Q3 to 62% in Q4, as export prices started improving, while the share of HVA products remained strong at 49% in Q4.

SEVERSTAL RESOURCES

The pricing environment for steel-related commodities in 2013 was challenging, especially for coking coal with realized prices down c.20% y/y. Iron ore prices were more resilient following the global benchmark and retreated between 2 and 5%. As a result, iron ore shipments remained broadly flat y/y at 15.1 mt, while overall coking coal sales volumes decreased by 4.7% y/y to 7.2 mt. This decrease was primarily driven by significantly lower volumes at PBS Coals (down 31% y/y), although Vorkuta increased its coking coal concentrate shipments by 6.5% y/y to 5.6 mt. As a result, the division’s revenue in 2013 was 11% lower y/y at USD 2,665 million (FY12: USD 3,005 million) and EBITDA was USD 813 million (FY12: USD 985 million).

Throughout 2013 we continued to combat inflation at our mining units through our focus on efficiency and cost control. Vorkuta’s total cash costs (TCC) were down 3.3% y/y to USD 87/t; Karelskiy Okatysh decreased TCC by 6.8% y/y to USD 55/t and Olkon’s TCC decreased by 10.0% y/y to USD 45/t. PBS was the only unit where TCC rose, up by 3.7% y/y to USD 111/t owing to the lower sales volumes.

In Q4, the division delivered revenue of USD 670 million (Q3 2013: USD 605 million), a 10.7% q/q increase q/q driven by stronger iron ore prices and higher iron ore pellets sales volumes. EBITDA in Q4 was up 22.2% q/q to USD 226 million (Q3 2013: USD 185 million) as a result of higher revenues and our continuing focus on cost control and efficiency.
SEVERSTAL INTERNATIONAL

Severstal International delivered a stronger performance in 2013, reporting its highest EBITDA for 3 years despite falling steel prices. FY13 revenue for the division was flat y/y at USD 3,878 million (FY12: USD 3,878 million) which represented a resilient performance as weaker realized prices were offset by a 4.2% y/y increase in shipments of steel products, driven by stronger sales of galvanized and CRC products. The division’s ongoing focus on operational and sales improvements led to a significant increase in EBITDA of USD 244 million, up 31.9% y/y (FY12: USD 185 million). FY13 EBITDA margin increased to 6.3% (FY12: 4.8%) and EBITDA per tonne also rose to USD 52 from USD 41 in FY12.

Q4 2013 recorded the strongest quarter of earnings for Severstal International in three years with EBITDA up 58.6% q/q to USD 92 million (Q3 2013: USD 58 million). At the revenue line, higher realized prices were offset by seasonally lower sales volumes, leading to revenue of USD 1,002 million (Q3 2013: USD 993 million). The significant q/q EBITDA improvement was driven by an increase in the sales of HVA products in the portfolio coupled with management’s focus on operational improvements. EBITDA margin also improved, to 9.2% (Q3 2013: 5.8%), and EBITDA per tonne increased significantly to USD 78 from USD 48 in Q3 2013.

The division’s utilization rate remained close to 100% in Q4, which was significantly higher than the US steel industry average of 76%.

“While we are encouraged and pleased with our Q4 results, I believe we are just getting started and have a long way to go,” said Saikat Dey, CEO of Severstal North America.
DIVIDEND

The Board is recommending a dividend payment of 3.83 roubles per share (approximately USD 0.11) for the 12 months ended 31 December 2013.

Approval of the dividend is expected at the Company’s AGM which will take place on 11 June 2014. The record date for participation in the AGM is 24 April 2014.

The recommended record date for the dividend payment is 23 June 2014. The approval of the record date for the dividend payment is expected at the Company’s AGM which will take place on 11 June 2014.

OUTLOOK

We believe that global steel demand will continue to grow in 2014 driven by an anticipated bottoming-out of the European demand and further improvements in the US economy, which together might result in higher utilization rates for the global steel industry. However, we forecast continuing supply growth for both iron ore and coking coal, which may result in slightly lower y/y bulks prices in FY14.

In Russia, we expect steel consumption to grow by 3% y/y in 2014, driven primarily by the construction and the oil and gas sectors, which will also drive increased demand for large diameter pipes for new projects.

Management’s efforts in 2014 will be focused on delivering further improvements to earnings through the execution of our stated strategy focused on efficiency and low-cost production, optimising capital investment and delivering value through enhanced customer satisfaction, service and product mix.