• Revenue up 1.1% to $3,718 million (Q1 2012: $3,679 million);
• Decrease in net profit by 63.7% to $155 million (Q1 2012: $427 million), which is mainly attributable to FX losses of $143 million in Q2, compared to FX gains of $122 million in Q1 and the separation of Nordgold, which contributed to net profit in Q1;
• Recommended dividend payment of 1.52 roubles per share (approximately $0.05) for the 6 months ended 30 June 2012.

H1 2012 vs. H1 2011 Analysis:

• Revenue slightly down by 2.2% to $7,397 million (H1 2011: $7,566 million), being more resilient than the earnings due to ramp-up of new production facilities at Severstal International in H1 2012;
• EBITDA down 31.9% to $1,226 million (H1 2011: $1,799 million) and EBITDA margin down to 16.6% (H1 2011: 23.8%), reflecting lower realized prices at Severstal Russian Steel and Severstal Resources.

Financial Position Highlights:

• Maintained strong liquidity position: $1,943 million in cash and cash equivalents, comfortably covering shortterm debt of $1,479 million1;
• Net Debt/EBITDA increased slightly to 1.2x at the end of Q2 2012 due to decline in EBITDA for the last twelve months, but remains comfortably below target level of 1.5x.

Alexey Mordashov, CEO of Severstal, commented, "Severstal delivered a strong result in Q2, despite the continued challenging economic environment, driven by strong performances at our Russian and International steel divisions. Our EBITDA margin improved q/q and Severstal remains one of the global industry leaders by profitability. Our balance sheet remains in good shape. Further falls in raw materials prices provided cost relief for our steel divisions, but our high quality mining assets continue to deliver good results. The seasonal summer softening in demand put pressure on steel and raw materials prices, but we anticipate improvements in pricing and demand from September. Overall we expect our H2 2012 results to be broadly similar to our H1 2012 numbers".

CEO’s Review of the Three Months Ended 30 June 2012:
Both Severstal’s steel divisions – Severstal Russian Steel and Severstal International – delivered improved results q/q thanks to lower costs and better product mixes. Severstal Resources performance was weaker compared to Q1 due to lower coking coal and iron ore prices and slightly higher costs at Vorkuta, due to planned maintenance work.

Its cash capital expenditure in Q2 was $371 million, up 33% from the seasonally lower levels in Q1. Following the completion of our full-scale expansion and modernization program in the U.S., the company is focusing capex on steel and mining assets in Russia. Its major 2012 capex projects include the Balakovo mini-mill, the reconstruction of coke battery #7 at Cherepovets and a coalmine methane thermoelectric power station at Vorkuta coal operations. Its FY 2012 capex target across all divisions remains $1.7 billion.

Severstal Russian Steel:
Severstal Russian Steel’s Q2 revenue was down 0.8% q/q to $2,209 million (Q1 2012: $2,226 million) driven by lower selling volumes. EBITDA, however, increased 44.6% q/q to $269 million (Q1 2012: $186 million) with EBITDA margin up 3.8 ppts q/q to 12.2% as a result of lower input costs and the $56.7m one-off non-cash inventory provision, taken in Q1.

The share of high-value-added products in the sales portfolio rose slightly to 43% due to higher sales of value-added products to the domestic market. Q2 supplies of color-coated, galvanized and cold-rolled steel coils altogether went up 11% q/q, reflecting strong demand from domestic consumers. The share of sales to the domestic market increased to 58% in Q2 from 53% in Q1 as a result of seasonally strong demand.

Severstal Resources
Lower realized coal prices meant that Severstal Resources’ delivered revenue in Q2 down 3.1% q/q to $786 million (Q1 2012: $811 million). This, coupled with a slight increase in costs put pressure on earnings with EBITDA decreasing 9.0% q/q to $293 million (Q1 2012: $322 million). EBITDA margin was 2.4 ppts lower q/q at 37.3%.

Unit cost dynamics at our coal and iron ore operations in Q2 were mixed. Iron ore costs decreased to $55/t at Karelskiy Okatysh and $47/t at Olkon. Production costs at PBS went up slightly to $107/t, however the company anticipates them to come down in H2 2012 following the idling of five high-cost mines in July. Coking coal concentrate costs at Vorkuta increased to $105/t (Q1 2012: $86/t), as a result of planned maintenance and somewhat lower coking coal output. Severstal expect Vorkuta’s costs to remain broadly flat into Q3.

Severstal International
In the U.S., Q2 saw softening in demand and prices, but a lag in realized prices passed on from a strong Q1 helped soften the impact of declining prices. This coupled with the higher share of value-added galvanized steel in the sales portfolio due to the launch of two modern galvanizing lines in Q1 helped minimize the decrease in average realized price in Q2. Slightly lower realized prices and weaker selling volumes contributed to lower revenue of $1,063 million (Q1 2012: $1,095 million). However lower production costs provided support for earnings growth with EBITDA climbing 16.7% to $77 million (Q1 2012: $66 million). EBITDA margin improved 1.2 ppts q/q to 7.2%, while EBITDA per tonne increased 18.5% q/q to $64.

In its end markets, automotive demand remains strong. Car sales through H1 2012 were 15% higher y/y, while inventories remained below optimum levels. New orders of durable goods increased 7.2% YTD through H1 with machinery and fabricated metals up 6.6% and 1.4%, respectively. Private nonresidential construction spending through H1 has increased 14% YTD, although the data signals weakness in nonresidential construction in 2013. Residential Construction Starts through H1 are 26.5% higher YTD led by multi-unit construction.

Outlook:
In Russia in Q3 Severstal expects demand to be similar to Q2. Domestic apparent steel use remains fairly high allowing continuing high capacity utilization of the Russian mills. Domestic steel consumption is expected to increase driven by high construction activity. On the export front it anticipates decreasing prices. Buying activity is expected to revive in September which should lead to price increases.

In the U.S., producers started to increase prices in August on the back of improving market balance with lower imports, production cuts due to idling several facilities and seasonal maintenance work. Real steel demand remains healthy, and a seasonal pick-up of automotive activity is expected after the summer breaks.

Overall the global economic environment continues to remain challenging with leading indicators endorsing this view. Crude steel production in China is expected to decrease in 2H 2012 which could put pressure on raw materials prices. Measures to promote growth by the Chinese authorities could boost construction activity in H1 2013. Overall the company expects its H2 2012 results to be broadly similar to its H1 2012 numbers.