Severstal demonstrates strong year-on-year growth for 9M of 2007

 ($ million unless otherwise stated)

 

 

 

 

OAO Severstal (LSE: SVST; RTS: CHMF), today reports results for the nine months to 30 September 2007 which show strong improvement compared with the same period last year. Third quarter production was impacted by one-off events, resulting in lower revenues and profit than in the second quarter.

 

·         A record $11,283 million in revenues for the first nine months, up 23.7% year-on-year

·         EBITDA of $2,986 million, up 38.9% year-on-year

·         Net profit up 60.7% to $1,326 million

·         Operating margin up to 18.0% from 15.4% due to higher prices and cost control measures

·         EPS of $1.32, up 48.3% year-on-year

·         Q3 production impacted by planned blast furnace relining at SNA and disruption to production at Cherepovets and Vorkutaugol

 

 

As a result of operational improvements, a robust and growing Russian economy, and relatively strong prices in other world markets, the Board remains confident of meeting market expectations for the full year.”

 

 

 

EBITDA growth for the first nine months of 2007 increased by 38.9% compared with the same period last year. Prices continue to be strong in Q3 2007 in both Russian and overseas markets. Russian Steel continued to lead our growth, showing a 46.7% increase in EBITDA year-on-year. Strong economic growth in Russia underpins high steel consumption rates and underlines the Russian domestic premium to export prices.

 

Severstal’s mining business also performed strongly in the period compared with the same period last year: EBITDA was up by 18.3%, and prices were up on average by 16.4%, with a 2.4% growth in volumes.

 

In our European business, Lucchini, EBITDA for the first nine months increased by 42.3% when compared with the same period last year. Revenues were up by 14.3%, resulting in an increase in EBITDA margin to 12.9% for the first nine months of the year compared with 10.4% for the same period last year.

 

Izhorsky pipe mill, the producer of large diameter pipes, demonstrated significant growth. EBITDA margin increased from 31.3% in Q2 to 32.5% in Q3.

 

In Q3, however, an industrial accident at our Vorkutaugol mine in late June and railroad bottlenecks in Karelsky Okatysh caused a slowdown in mining production rates in Q3 compared with Q2. As a result of the actions taken by the company to address these problems, we expect to see improvements at the Vorkutaugol mine and in the mining division as a whole in Q4.

 

Market conditions in North America and the planned outage of blast furnace “C” for relining negatively affected SNA’s results during the period with EBITDA down 60.4% year-on-year.

 

Management took a number of actions in the third quarter to improve production. SNA resumed operations at blast furnace “C” in October with capacity expected to exceed previous production capabilities by 30%, with operating costs over 20% lower. Cherepovets has increased production volumes in Q4. Vorkutaugol has restored production levels in line with planned rates.

 

 

Severstal’s consolidated revenuesincreased by 23.7% to $11,283 million in the first nine months of 2007 ($9,123 million in 9M 2006), attributable to three main factors: higher average prices, volume growth and product mix improvements.

 

Costs were $7,955 million in the first nine months of 2007 compared with $6,619 million for the same period of 2006. The primary drivers behind this change were cost inflation in raw materials, energy and labour. Cost of revenues as a percentage of consolidated revenues decreased to 70.5% (72.6% in 9M 2006) reflecting the company’s ability to pass cost increases on to end customers.

 

Gross profitincreased by 32.9% to $3,328 million in first nine months of 2007 compared with $2,504 million for the same period of 2006.

 

Profit from operationsincreased by 44.1% to $2,029 million in the first nine months of 2007. This increase was due to positive steel prices and cost control measures.

Group operating margin went up to 18.0% (15.4% in 9M 2006).

 

Consolidated EBITDA increased by 38.9% to $2,986 million in the first nine months of 2007 ($2,149 million in 9M 2006). This growth is largely attributable to the strong performance of Russian Steel, which exploited growth opportunities in the Russian domestic market. Our Mining business and Lucchini also contributed to the overall growth during the period.

 

Income tax charges were $527 million in the first nine months of 2007 as against $403 million for the same period of 2006. This change reflects an increase in pre-tax profit by 51.4%%, offset by one-off events.

 

 

For the first nine months of 2007, Severstal reported consolidated net profit attributable to shareholders of $1,326 million compared with $825 million in 9M 2006, an increase by 60.7% y-o-y.

 

EPS was $1.32, 48.3% higher than for the comparable period of 2006.

 

Cash surplus, calculated as the difference between debt and cash and cash equivalents plus short-term bank deposits, decreased for the first nine months of 2007 from $158 million as at 31 December 2006 to $149 million. Total indebtedness increased from $3,006 million as at 31 December 2006 to $3,139 million as at 30 September 2007. Cash, cash equivalents and short-term bank deposits increased from $2,848 million as at 31 December 2006 to $3,288 million as at 30 September 2006, mainly attributable to the results of operating activities.

 

Severstal’s strategy for the gold market is based on making relatively small, opportunistic investments to exploit the synergies and expertise in its existing core mining business. Severstal aims to invest in gold mining businesses at attractive valuations and to supplement these with new license grants.

 

During the quarter, Severstal acquired a 29.7% stake in Celtic Resources Holdings PLc. and plans to acquire a controlling stake in Celtic Resources Holdings Plc., which operates gold mines in Kazakhstan. Severstal also acquired other small mining interests in Russia during the period.

 

Severstal's Board of Directors, held on 22-23 November 2007, has recommended a dividend of 2.5 rubles per share and per global depositary receipt ("GDR") for Q3 2007 with the record date of 14 November 2007. Each GDR represents one share in the Company. This recommendation is based on strong financial results in the first nine months of 2007.

 

Approval of the dividend is expected at the EGM which will take place on 20 December 2007.

 

 

 

 

As a result of the operational improvements, described above, a robust and growing Russian economy, and relatively strong prices in other world markets, the Board remains confident of meeting market expectations for the full year.