Research Notes

Thanks to its low production costs and vertical integration Severstal ramps up output and exhibits robust profit margins, while global metal product prices have been falling over the past 12 months. The metal major’s new projects offer additional income-raising opportunities and urged us to revise upward our estimate of the metal concern’s fair value.

• Severstal is one of the largest Russian metal makers. The company sees it as a priority to boost production (in particular, there are plans to increase domestic steel output from 10.8 mln tons in 2005 to 12.5 mln tons until 2010) and gain leadership in its segment.

• Cold- and hot-rolled steel accounts for the large portion in Severstal’s revenue mix. The metal major has taken active measures to raise manufacture of value-added products, in particular in the vehicle steel sheet segment.

• We believe that the production of large diameter pipes (LDP) and galvanized steel (by implementing Severgal and SNA projects) could push up the metal producer’s revenues in the future.

• Severstal boosts output and reports strong financial performance despite the recession in the industry. We project Severstal’s 2005 revenue at $6.9 bln and net profit at $1.2 bln.

• As a result of the scheduled assignment of raw material assets to the balance sheet of Severstal, a vertically integrated structure will be formed and the metal giant’s market cap could climb to $11 bln.

• Severstal is marked by a well diversified distribution network, with most of its products marketed in Europe and the United States thanks to the acquisition of Severstal North America (former Rouge Industries). Domestic sales account for around 40% of its total sales.

According to estimates, the fair value of Severstal’s common shares is $14.70. We assign a Buy recommendation to the metal maker’s stocks.

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Nataly Kocheshkova

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