Research Notes

The global iron&steel industry is currently going through a phase of consolidation as the companies are striving to preserve their competitive edge amid rising operating costs and an ongoing correction in global steel prices. In our opinion, the Russian iron&steel sector could become one of the hubs of M&A activity and Severstal, which appears to be laying the groundwork for new alliances, is one of the companies which will most likely take the lead in that and could add significantly to its value, as a result.

1. A possible merger of Severstal with other steelmakers could produce a positive impact on the company's stock valuations and attract investors looking to take part in the industry consolidation process.

2. Management intends to push through a strategy aimed at gaining leadership positions in the industry through mergers. When merger plans with Arcelor fell through, Severstal focused on the consolidation of mining assets and the acquisition of Italian Lucchini made it possible for Severstal to bolster its value.

3. Severstal's ongoing restructuring program and improved liquidity of its stock as a result of the IPO could mean that the company is gearing up for new M&A deals.

4. Severstal's corporate management still leaves much to be desired, however, judging by management's most recent moves, the metal maker is prepared to improve its transparency and accountability to win over more investors.

According to our estimates, the fair price of Severstal's common shares is $14.30. We assign a Buy recommendation to the company's stock.

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Nataly Kocheshkova

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