On July 28, 2008, the Severstal steel company released its operating results for 2Q 2008. The statement indicates a rise in operating indices, attributable to new acquisitions and higher prices on its core products. Raw steel production was up 10% quarter-on-quarter to 5.3 million tons, while rolled steel production picked up by 13%. Output of iron-ore ingots declined by 4% y-o-y. Production of iron-ore concentrate and coking coal concentrate expanded by a respective 11% and 1%.
Table. Severstal: operating results
| Indicator | Unit of measure | 1H2007 | 1H2008 | 2H2008 / 1H2008 | 1Q 2008 | 2Q 2008 | 2Q 2008 / 1Q 2008 |
|---|
| Production | | | | | | | |
| Coal | tons | 2 692 655 | 1 537 174 | -43% | 755982 | 781192 | 3% |
| Iron ore | tons | 1 929 431 | 2 571 592 | 33% | 1 534 309 | 1 037 283 | -32% |
| Gold | tons | 0 | 2035 | - | 900 | 1135 | 26% |
| Semi-finished products | tons | 974 401 | 1 055 813 | 8% | 521542 | 534271 | 2% |
| Rolled stock | tons | 6 845 289 | 7 569 229 | 11% | 3 547 463 | 4 021 766 | 13% |
| Products with value added | tons | 964 442 | 986 576 | 2% | 469 816 | 516 760 | 10% |
| Average selling price | | | | | | | |
| Coal | USD/ton | 55 | 104 | 89% | 91% | 118 | 30% |
| Iron ore | USD/ton | 69 | 96 | 39% | 91% | 101 | 11% |
| Gold | USD/kg | 0 | 29196 | - | 29671 | 28422 | -4% |
| Semi-finished products | USD/ton | - | 637 | - | - | 729 | - |
| Rolled stock | USD/ton | 713 | 881 | 24% | 769 | 983 | 28% |
| Products with value added | USD/ton | 1001 | 1344 | 34% | 1148 | 1520 | 32% |
Source: company data, Finam estimates
Production losses from the sale of Kuzbassugol in early April were fully offset by 19% growth in coal output at Vorkutaugol in 2Q 2008. Production grew on the elimination of geological problems which had adversely affected production in 1Q 2008, and conversion to production of higher-quality coal. Iron-ore output remained flat during the second quarter, while net sales of pellets and concentrate, excluding internal operations, dropped by a respective 30% and 44%. Raw steel output from the Russian division slid 3% as the company repaired its converter plant and blast furnace. Marked improvements in the production results of the US division are linked with its takeover of Sparrows Point in 2Q. The division specifically boosted output of hot-rolled steel by 159% and raw steel by 85%.
Prices on steel products increased by an average of 30% in 2Q. Given the available data, we estimate the company's 2Q 2008 revenue to exceed its 1Q sales by at least 15%.
Table. Severstal revenue estimates
| Indicator | Unit of measurement | Revenue, 2Q 2008 |
|---|
| Coal | USD | 92 251 456 |
| Iron ore | USD | 104765583 |
| Gold | USD | 32258970 |
| Semi-finished products | USD | 389 783 |
| Rolled stock | USD | 3 953 395 978 |
| Products with added value | USD | 785 475 200 |
| Total | USD | 4 968 536 970 |
Source: Finam estimates
In our opinion, Severstal has shown strong operating results, which reflect the company's extensive growth strategy and will have a positive impact on its stock valuations. In other words, Severstal focuses on the acquisition of finished product capacities as distinct from Russia's largest steelmakers that seek to acquire highly remunerative companies, such as Evraz or Mechel, or actively invest in expansion of current capacities and improvement of productivity, like MMK.
Each of the selected strategies has its own strengths and weaknesses. The advantages of Severstal's strategy are quick growth and a large market share. The disadvantages include the low profitability of purchased assets and the strong need for investments into the acquired facilities.
We recommend that investors Buy Severstal shares with a target price of USD 23.5 per share.
0.234
30.89
