Research Notes

Severstal has set the bookbuilding range for its upcoming IPO of $11-13.50 per share and GDR. As noted earlier, the steelmaker could float up to 15% of its stock on the London Stock Exchange (LSE) and will close its IPO order book on November 6, 2006.

Frontdeal Limited, Severstal's shareholder and whose beneficiary is Chairman of the BoD Alexei Mordashov, will be selling the metals producer's stock to the general public.

It is expected that Mordashov will share part of the IPO proceeds with Severstal. An additional issue of 85 mln shares worth 9.1% of the company's charter capital will be launched following the IPO. The additional issue will be split among Severstal's shareholders and in proportion to their current stakes. Asssuming Frontdeal Limited manages to sell the shares at the IPO placement price, and, in our opinion, it is very unlikely that investors will buy the stock at over $12.90 (current market price), Severstal could gain some $700-800 mln from Mordashov. The company plans to use the IPO proceeds to upgrade its production facilities and acquire new assets.

Based on Severstal's stock market multiples, the company is currently trading at fair price. With an anticipated slump in global steel prices, steelmakers could see their net income eroded. Severstal's multiples (Ð/Å, EV/EBITDA etc.) have been pushed up this year beyond the industry average due to consolidation of the company's mining subsidiaries, which have so far been showing weak financial performance, on the steelmaker's balance sheet.

In our opinion, it does not make much sense to take part in Severstal's IPO if the placement price exceeds current stock valuations. Furthermore, an increased free float is likely to put downward pressure on Severstal's stock valuations in the long run.

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Nataly Kocheshkova

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