ALFA BANK Russian Steel Downgrade

8/6/2019 ALFA BANK Russian Steel Downgrade

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Russian SteelChina Slowdown Outweighs JapanReconstruction Opportunity

S u m m a r y

Japanese reconstruction efforts add 22mt, or 1.5%, to globalsteel demand in FY12, according to our preliminary estimate.This unanticipated volume expansion is dwarfed by slowinggrowth in China, where PMI and domestic steel prices are leadindicators, and both have fallen in recent months. We expectglobal steel demand to slow considerably in FY11. Therefore,despite considerable theoretical upside for steel producers onspot steel prices, we believe risk outweighs opportunity and

move U/W the subsector, reducing our rating on MMK to E/W, onNLMK and SVST to U/W, and reiterating our U/W rating on EVR.

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Upside to peak cycle valuation: Investors who believe spot is thebest indicator of future prices should be long the subsector. Weintroduce our peak-cycle valuation methodology, which identifies peakstock price potential under the assumption that current spot prices aresustainable. Evraz offers the most upside of 35%.Reconstruction generates 22mt incremental steel demand: Weestimate reconstruction efforts in Japan add 22mt, or 1.5%, to globaldemand in 2012 relative to pre-earthquake forecasted growth.but we see prices falling on China PMI, domestic discount:China consumes almost 9x the steel that Japan does, so our view ona slowdown in China takes precedence. Chinas PMI has declined inthe past two months, and there is a strong relationship between PMIand steel prices four months later. Furthermore, Chinas domesticsteel price has moved to a discount to Black Sea, a rare developmentthat typically signals declining global steel prices.Subsector to U/W: Slowing demand growth will likely cause steelprices to begin declining in 2Q11 as shortages in raw materials arerelieved. We lower NLMK, SVST and MMK one notch each and leaveEVR at U/W. Taking into account our February 22 downgrade ofFXPO to E/W, we are now U/W Russian ferrous and steel.

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Valuation: We value steel on sum-of-the-parts, utilizing DCF forcurrently or soon-to-be operating assets, risked NPV for long-datedmining assets, and market value for non-controlling stakes.FY12 multiples unattractive: We view the subsector as unattractiveon average FY12 EV/EBITDA and P/E of 5.9x and 10.5x, respectively.Risk to top-down forecast is high: We are aware that this top-downcall 1) conflicts with valuations implied by spot prices; 2) carriesgreater forecast risk than usual due to macroeconomic uncertainties;and 3) may play out only after a rally to peak valuation levels.

Bloomberg ticker EVR LIRating U/WClosing Price* 36.4Target Price 29.6Return to TP -19% Bloomberg ticker MMK LIRating E/WClosing Price* 13.3Target Price 14.2Return to TP 7% Bloomberg ticker NLMK LIRating U/WClosing Price* 44.1Target Price 41.6Return to TP -6% Bloomberg ticker SVST LIRating U/WClosing Price* 18.3Target Price 17.3Return to TP -5%

Relative price performance

80%

90%

100%

110%

120%

130%

140%

150%

Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 M ar-11

EVR M M K NLM K SVST Source: Bloomberg

RESEARCH DEPARTMENT [email protected]

The contents of this document have been prepared by Barry Ehrlich of OJSC Alfa Bank ("Alfa Bank") as Investment Research within the meaning of Article 24 ofCommission Directive 2006/73/EC implementing the Markets in Financial Instruments Directive (2004/39/EC). Please refer to the further important information inrelation to this Document located on the last page. Note that the recommendations contained in this document differ materially from recommendations issued by AlfaBank and distributed by Alfa Capital Markets in the 12 months preceding the publication of this document. www.alfa-bank.com

Barry Ehrlich, CFASenior Analyst, Moscow

(+7 495) 785-9568Maxim Semenovykh

Analyst, Moscow(+7 495) 795-3725

Russian Equity ResearchMetals & Mining

March 15, 2011


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Russian SteelChina Slowdown Outweighs Japan Reconstruction Opportunity

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TABLE OF CONTENTS:

Investment Summary ......................................................................................................3

Valuation, Forecasts, Multiples ...................................................................................... 5

Upside on Peak Cycle .....................................................................................................8

Japan Reconstruction: +1.5% to Global Steel Demand .............................................10 Scrap use reduces raw material inputs.........................................................................10 Steel demand growth slows despite Japan...................................................................10 Lifting our steel price forecast on higher raw material prices........................................11

China Slowdown Key Driver for Steel to Decline........................................................12

Economy and steel demand slowed in 2H10................................................................12 China steel demand declined in 2H10 ..........................................................................14 Tightening measures to continue..................................................................................15 Testing the PMI/global steel price relationship .............................................................18 Possible explanations for break in relationship.............................................................19 Chinese metals premiums shrinking often a leading indicator ...................................21

Stock Specific Issues and Risks ..................................................................................24

Financial Statements.....................................................................................................25


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Investment SummaryWhile we believe that steel volume growth will slow, causing steel prices topeak in 2011 and decline thereafter, we recognize that this is a minority viewand that investors require valuation guidance for other commodity pricescenarios.

Peak-cycle valuation indicates upside on steel spotWe introduce our peak-cycle valuation methodology, which identifies peakstock price potential under the assumption that current spot prices aresustainable. The upside on peak cycle is considerable, with MMK, Evraz andSeverstal poised to gain the most. We therefore believe that investors whobelieve strongly that current steel prices are sustainable or will rise furthershould be Overweight the subsector.

Japan reconstruction to add 22mt demandWe roughly estimate that reconstruction efforts will add 22mt to FY12 demandrelative to pre-earthquake forecasts. This represents a not inconsiderable1.5% increase in demand in FY12 relative to our earlier forecast.

China demand 9x that of Japan, and demand is slowingChina represents 9x the steel demand of Japan, so developments in Chinawill likely dwarf those of Japan.

Many investors probably do not realize that Chinese steel consumptiondeclined in 2H10 on a h/h and y/y basis, showing that policy-tightening

measures have slowed steel demand.China PMI has weakened. There is a strong correlation between Chinese PMIwith a four-month lead and global steel prices.

Steel prices have risen sharply over the past few months, contrary to what thisrelationship would suggest. We attribute this to supply-side shocks in iron oreand coking coal, as well as a restocking cycle. Our view is that steel prices aremost likely to decline in coming quarters as this relationship is reestablished.

Construction to slow in China, remain weak elsewhereConstruction is likely to slow in China as tightening efforts take their desiredeffect. Other than Japan, there are few signs of construction demand growth

in other major economic regions, in particular the US and Europe. Global steeldemand growth is likely to slow to 5% in FY11 from 15% in FY12. This willrelieve pressure on raw materials, allowing the cost of making steel andtherefore steel prices to move down.

China steel discount to Black Sea is a negative indicatorSteel in China typically trades at a premium to Black Sea, but this relationshiphas now moved to a discount. During the steel price spike of April 2010, whichpreceded a substantial move down in steel prices, the same phenomenonoccurred. We view the domestic discount as further evidence that demand inChina has weakened and global steel prices are set to decline.

Peak cycle valuationindicates upside onspot metals prices

Construction remainsweak in key global

economies

China domestic steeldiscount to Black Seais often a leadindicator of decliningprices

China steelconsumption fell in2H10

Chinese PMI isweakening


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Revised forecasts and target pricesWe revise our one-year target prices, moving MMK modestly lower and EVR,

NLMK and SVST modestly higher. We value steel on sum-of-the-parts, utilizingDCF for currently or soon-to-be operating assets, risked NPV for long-datedmining assets, and market value for non-controlling listed holdings.

Our revised target prices indicate downside for most steel names.

Figure 1: Target prices, upsides and recommendationsEvraz MMK NLMK Severstal

Price, $ 36.4 13.3 44.1 18.3New 12-month target price, $ 29.6 14.2 41.6 17.3Previous target price, December 2, $ 28.8 16.1 40.0 15.9 New rating U/W E/W U/W U/WPrevious rating U/W O/W E/W E/WReturn to 12-month TP -19% 7% -6% -5%Source: Alfa Research, Bloomberg

Risks heightened on top-down callThe Alfa metals & mining team strongly prefers stock calls that are bottom-uprather than top-down.

However, in this report, we highlight top-down factors for our Underweightposition in Russian steel. We are aware of the substantial upside to peak-cycle valuation as discussed above and the far higher forecast andrecommendation risk associated with top-down-driven recommendations.However, we believe there is sufficient evidence to support our steel price andsubsector Underweight based on top-down factors.

Top-down calls entailgreater-than-normalrisks


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Valuation, Forecasts, MultiplesOur commodity price forecasts are unchanged except for steel, which we lift to$730/t from $670/t in FY11 and $710 from $680/t in FY12.

Earlier this year, in dedicated iron ore and coking coal studies, we lifted ouriron ore and coking coal forecasts. The increase in our steel forecast in thisreport is mainly driven by the increase in earlier forecasted raw materialscosts, which underpin higher steelmaking costs for non-backward integratedproducers.

Figure 2: Commodity forecasts, $ mln/ton2010E 2011E 2012E

New Old New Old New OldIron ore, FOB Austr. 100 100 155 155 135 135Iron ore Russian domestic 90 90 145 145 125 125

Hard coking coal, FOB Austr. 195 195 255 255 240 240Coking coal Russian domestic blend 140 140 200 200 175 175HRC, FOB Black Sea 606 593 730 670 710 680Ruble/USD 30.4 30.0 30.0 30.0 30.0 30.0Source: Alfa Research

We adjust our company forecasts as follows.

Figure 3: Changes to company forecast, $ mln2010E 2011E 2012E

New Old New Old New OldEvrazDomestic steel finished, mln t 11.7 11.7 12.5 12.5 12.4 12.4International steel finished, mln t 4.1 4.1 4.2 4.2 4.4 4.4

Revenues, $ mln 14,023 14,023 17,515 17,051 17,323 17,600EBITDA, $ mln 2,371 2,371 3,694 3,287 3,354 3,516Net income, $ mln 137 168 1,311 1,062 1,284 1,454match Sep'09 Sep'09MMKFinished steel, mln t 10.2 10.2 11.7 11.7 12.6 12.6International steel finished, mln t 0.2 1.5 0.8 2.3 2.1 2.3Revenues, $ mln 8,099 8,099 10,772 10,889 12,460 12,042EBITDA, $ mln 1,672 1,672 2,272 2,357 2,578 2,783Net income, $ mln 579 579 932 1,019 1,143 1,344match Sep'09 Sep'09NLMKFinished steel, mln t 11.6 11.5 13.0 13.2 16.0 15.5Revenues, $ mln 8,150 8,150 11,003 10,574 12,946 12,483EBITDA, $ mln 2,381 2,381 3,435 3,249 3,882 3,998Net income, $ mln 1,317 1,317 2,091 1,953 2,366 2,452match Sep'09 Sep'09SeverstalDomestic steel finished, mln t 9.8 9.8 10.8 10.8 10.8 10.8International steel finished, mln t 3.7 6.2 4.0 7.2 4.7 7.2Revenues, $ mln 13,573 16,989 17,853 24,445 18,260 25,008EBITDA, $ mln 3,365 2,923 4,333 3,798 4,070 3,958Net income, $ mln -576 171 2,207 1,817 2,031 1,951Source: Alfa Research,*SVST 2010 financial results are actual not expected

On FY11 and FY12 multiples, the subsector does not look attractively valuedon an absolute basis. The sector trades inline with global peers on FY11multiples and at a premium on Alfa below-consensus forecasts on FY12multiples.


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Figure 4: Earnings multiplesEV/EBITDA Evraz MMK NLMK Severstal2008 3.7 4.6 6.1 5.22009 17.6 11.3 19.2 13.82010 9.1 8.2 11.9 6.62011 5.4 6.3 8.2 5.32012 5.5 5.3 7.0 5.2PE2008 4.7 9.5 9.7 6.62009 nm nm 41.8 nm2010 nm 19.7 20.1 12.72011 12.2 12.3 12.6 8.32012 12.4 10.0 11.2 9.0Source: Company data, Alfa Research, Bloomberg

Figure 5: Sector multiplesRussia Country MCap EV/S EV/EBITDA P/E

$ mln 2010E 2011E 2012E 2010E 2011E 2012E 2010E 2011E 2012EEvraz Russia 15 074 1.6 1.2 1.1 9.1 5.4 5.5 nm 12.2 12.4MMK Russia 11 424 1.8 1.4 1.2 8.2 6.3 5.3 19.7 12.3 10.0NLMK Russia 26 670 3.5 2.6 2.1 11.9 8.2 7.0 20.1 12.6 11.2Severstal Russia 18 360 1.7 1.3 1.2 6.6 5.3 5.2 12.7 8.3 9.0Average 2.0 1.5 1.4 9.1 6.3 5.9 nm 11.0 10.5

Emerging markets Country MCap EV/S EV/EBITDA P/E$ mln 2010E 2011E 2012E 2010E 2011E 2012E 2010E 2011E 2012E

POSCO South Korea 34 901 0.8 0.9 0.7 5.2 5.5 4.8 8.9 8.0 6.4Baoshan Steel China 18 830 0.8 0.7 0.6 4.8 4.2 3.5 9.8 8.6 7.3Cia Siderurgica National (CSN) Brazil 23 020 3.1 2.6 2.3 7.2 5.6 4.8 12.2 8.9 7.4Gerdau Brazil 18 167 1.3 1.2 1.0 7.7 6.6 5.1 14.5 12.3 8.7

Steel Authority of India India 14 260 1.3 1.4 1.4 5.4 7.4 6.3 10.0 10.9 9.1Wuhan Iron & Steel China 5 483 0.7 0.6 0.5 6.4 6.2 4.9 20.4 14.5 10.1China Steel Taiwan 15 280 1.5 1.2 1.1 7.9 8.0 7.4 12.5 13.8 10.9Tata Steel India 12 457 1.2 0.9 0.8 15.1 6.5 5.6 neg 8.9 7.6Erdemir Turkey 4 891 1.7 1.3 1.1 8.2 7.3 6.3 10.9 10.5 9.1Hyundai Steel South Korea 9 362 1.5 1.0 0.8 10.7 6.1 4.8 11.2 8.1 7.7Maanshan Iron & Steel China 4 266 0.6 0.6 0.6 5.5 4.8 4.5 21.2 13.0 11.5Average 1.1 1.0 0.9 6.8 5.8 5.0 12.2 9.6 7.9

Developed markets Country Mcap EV/S EV/EBITDA P/E$ mln 2010E 2011E 2012E 2010E 2011E 2012E 2010E 2011E 2012E

ArcelorMittal Netherlands 52 870 0.9 0.8 0.7 8.5 6.6 5.3 14.4 11.9 8.4Nippon Steel Japan 22 918 1.0 0.7 0.7 11.9 6.1 5.5 neg 16.9 12.1ThyssenKrupp Germany 19 978 0.5 0.4 0.4 6.8 5.5 4.2 20.8 14.4 8.9JFE Holding (NKK+Kawasaki) Japan 18 419 1.0 0.9 0.8 8.9 6.4 5.7 57.3 18.8 11.9

Nucor USA 14 238 1.0 0.9 0.8 16.6 7.7 5.7 nm 16.9 11.7USX-U.S. Steel Group USA 7 583 0.6 0.5 0.5 19.7 5.5 4.1 neg 12.1 8.0Voestalpine Austria 7 449 1.2 0.8 0.7 9.8 6.1 5.2 63.2 11.0 8.4Salzgitter AG - Stahl und Technologie Germany 4 495 0.3 0.3 0.3 5.6 5.1 3.6 97.4 20.4 11.0Allegheny Technologies USA 6 027 1.6 1.3 1.2 17.9 8.4 6.6 62.5 17.9 12.6Steel Dynamics USA 3 890 0.9 0.7 0.7 9.7 5.4 4.9 25.0 9.7 7.8AK Steel USA 1 612 0.3 0.3 0.3 19.6 4.9 3.8 neg 16.7 10.0Average 0.8 0.7 0.6 9.5 6.3 5.1 32.1 14.0 9.6Source: Alfa Research, Bloomberg

Our target prices move down slightly for EVR and MMK, and move up slightlyfor NLMK and SVST.

We downgrade MMK to E/W and NLMK and SVST to U/W. We reiterate ourU/W rating on EVR.We downgrade MMK,NLMK and SVST


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Figure 6: Valuation summary, $ mlnEvraz MMK NLMK Severstal

Price 36.4 14.2 44.1 18.3

Share count, mln 438 860 599 1,005Market cap, $ mln 15,943 11,433 26,410 18,365Risk free rate 4.4% 4.4% 4.4% 4.4%Equity risk premium 6.5% 6.5% 6.5% 6.5%Beta 1.5 1.2 1.1 1.5WACC 12.5% 11.2% 10.7% 12.5%Terminal growth 1.5% 1.5% 1.5% 1.5%EOY11 DCF, legacy ($ mln) 15,762 12,200 24,038 15,167Value of long-dated mining assets 600 900 180 700Rasp. (Evr), Fort. (MMK), Au (SVST) 2075 682 0 3,500EOY11 value of assets 18,437 13,782 24,218 19,367EOY11 DCF, equity ($ mln) 11,346 10,906 22,350 15,238DCF $/share 25.9 12.7 37.3 15.2Target price 29.6 14.2 41.6 17.3Return to 12-month t.p. -19% 7% -6% -5%

Rating U/W E/W U/W U/WPrevious rating U/W O/W E/W E/WSource: Alfa Research, Bloomberg

Following the downgrade of FXPO from O/W on 22 February, we have noO/W recommendations in the subsector.


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Upside on Peak CycleThe question that has been posed by many investors is what stock pricewould be achievable under current spot prices. To answer this question, weintroduce our peak cycle valuation approach. The upside is as high as 35%.

Figure 7: Peak valuation summary, $ mlnEVR MMK NLMK SVST

NI at forward metal prices 2,285 1,628 3,090 2,315EBITDA at forward metal prices 4,771 3,173 4,849 5,545Target P/E 8.4 8.4 8.4 8.4Target Mcap based on P/E 19,287 13,741 26,081 19,540Target EV/EBITDA 5.3 5.3 5.3 5.3Target Mcap based on EV/EBITDA 23,929 15,678 25,068 26,952Target Mcap (average) 21,608 14,710 25,575 23,246Current stock price, $/share 36.4 13.3 44.1 18.3

Target stock price, $/share 49.3 17.1 42.7 23.1Upside (downside), % 35% 30% -4% 26%Source: Alfa Research

The peak cycle approach involves two steps:

1) Apply spot prices to estimate FY12 earnings;

2) Apply forward earnings multiples at the peak of the last cycle to estimatethe peak stock price potential, assuming this cycles valuations reach thesame peak level as the last cycles.

We note that the multiple was above the mid-cycle multiple, representing ahigher-than-normal multiple during a period of rising prices and bullishsentiment, similar to the current period.

Peak cycle commodity prices utilized are shown in the left-hand column andfor comparison purposes we show our actual forecasts to the right.

Figure 8: Peak cycle commodity scenario and Alfa forecast, $/tPeak cycle (2Q11E) 2011EAlfa forecast

2012EAlfa forecast

2013EAlfa forecast

Iron ore FOB Australia 170 155 135 125Iron ore domestic 160 145 125 115

Coking coal FOB Australia 300 255 240 230Coking coal domestic 235 200 175 168

HRC FOB Black Sea 800 730 710 700Source: Alfa Research Note: Under the peak scenario, domestic prices are theoretical netbacks not actual/forecasted 2Q11 figures

Peak cycle upside suggests stocks undervalued on spotInvestors that prefer to utilize spot prices and believe these are sustainable orwill rise further should be long the subsector.

Stocks undervaluedon peak-cyclemethodology

Relies on the previouscycles peak forwardearnings multiple

Investors who believespot is sustainableshould O/W thesubsector


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Figure 9: Peak cycle valuation, $ mlnEVR MMK NLMK SVST

2Q08Price, $/ADR 98.9 17.1 49.7 25.4Share count, mln 390.4 859.6 599.3 1007.7MCap, $ mln 38,611 14,699 29,785 25,596Net debt (YE09 consensus), $ mln 3,700 1,000 -1 ,000 2,700Investments, $ mln 1,858 947EV, $ mln 40,452 14,752 28,785 28,296 NI (2009 consensus) 4,000 1,800 3,300 3,7002-yr forward P/E 9.7 8.2 9.0 6.9EBITDA (2009 consensus) 7,000 2,800 5 ,400 5,9002-yr forward EV/EBITDA 5.8 5.3 5.3 4.8 1Q11

Price, $/ADR 35.9 13.2 42.9 18.1Share count, mln 437.9 859.6 599.3 1007.7MCap, $ mln 15,721 11,347 25,710 18,239Net debt (YE2012 consensus), $ mln 3,400 1,800 600 2,400Investments, $ mln 2,075 681EV, $ mln 17,046 12,465 26,310 20,639 NI at forward prices 2,285 1,628 3,090 2,315EBITDA at forward prices 4,771 3,173 4,849 5,545 Target P/E 8.4 8.4 8.4 8.4Target MCap based on P/E 19,287 13,741 26,081 19,540Target EV/EBITDA 5.3 5.3 5.3 5.3Target MCap based on EV/EBITDA 23,929 15,678 25,068 26,952Target MCap (average) 21,608 14,710 25,575 23,246

Current stock price, $/share 36.4 13.3 44.1 18.3Target stock price, $/share 49.3 17.1 42.7 23.1Upside (downside), % 35% 30% -4% 26%Source: Alfa Research


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Japan Reconstruction: +1.5% to

Global Steel DemandWe roughly estimate that the Japanese reconstruction effort will increasecrude steel demand by about 8mt in 2011 and 22mt in 2012 relative to ourpre-earthquake forecast levels. These are preliminary estimates subject to anextremely high margin of error depending on the degree of damage,government response, construction design, scrap collection and other factors.

This estimate was made by assuming a 25% increase in construction activityin 2011 and then a further 30% in 2012, for a total two-year increase of 63%.

Figure 10: Japan crude steel apparent consumption, mmt2009 2010 2011E 2012E

Production 88 110 100 112Net export 33 42 24 22Apparent consumption 55 68 76 90Change yo/ 13 8 14Note construction and distribution 27 29 37 48Source: Japan Iron and Steel Federation, Ministry of Finance, Bloomberg, Alfa Research estimates

We sanity check this estimate by assuming the construction of 1m homesproviding 65m m2 of living area and 100m m2 of total construction area andan equivalent volume of commercial and infrastructure building. Then weassume 0.22mt of crude steel (~200kg steel product) per m2 of totalconstruction area.

This generates a total volume of 40mt, which is not far from the incrementalvolumes anticipated through 2013 of 45mt (8mt, 22mt and 15mt per year in2011 through 2013). It represents about 1.5% incremental global steeldemand in 2012.

Scrap use reduces raw material inputsSome of the higher steel demand will not require iron ore inputs because ofincreased scrap availability as a result of clean-up efforts, we believe. We areguessing that approximately one-third of the additional steel requirement willbe met by available scrap.

This will lead to an incremental requirement for iron ore and coking coal tomeet the remaining 2/3 of steel demand that will be produced by pig ironinstead of scrap input.

Steel demand growth slows despite JapanWe lift our steel and iron ore volume growth forecast by approximately 0.7%per annum in FY11 and FY12, respectively, to reflect the increased demand inJapan.

Steel demand growth in 2011 should slow to 5% in 2011 from a level of 15%in 2010, and remain in the mid-single-digit range in 2012.

We estimate 8mt and22mt increases inJapanese crude steeldemand in 2011 and 12

Total volume ofreconstruction workmay require 40-45mt

Recovered scrap mayreduce raw materialinputs

We lift steel and ironore forecasts by 0.7%p.a.


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Figure 11: Global steel and pig iron production forecast, mmt2006 2007 2008 2009 2010E 2011E 2012E

SteelGlobal production 1 251 1 351 1 350 1 220 1 413 1 480 1 564growth, % 8% 0% -10% 16% 5% 6% Chinese production 423 495 500 568 627 664 714growth, % 17% 1% 14% 10% 6% 8% Global ex-China 828 856 850 652 786 816 849growth, % 3% -1% -23% 21% 4% 4% Global capacity 1470 1546 1626 1686 1736 1804 1872Capacity utilization 85% 87% 83% 72% 81% 82% 84% note: China % of global 34% 37% 37% 47% 44% 45% 46%Pig iron 869 949 933 891 1023 1074 1138Global production/consumption 875 950 930 891 1 023 1 074 1 138growth, % 9% -2% -4% 15% 5% 6% Source: World Steel Association for historical data, Alfa Research forecasts

Lifting our steel price forecast on higher rawmaterial pricesEarlier this year, in dedicated iron ore and coking coal studies, we lifted ouriron ore and coking coal forecasts. The increase in our steel forecast in thisreport is mainly driven by the increase in earlier forecasted raw materialscosts, which underpin higher steelmaking costs for non-backward integratedproducers.

We lift our HRC FOB Black Sea forecast, which serves as a benchmark in oursteel sector models, to $730/t from $670/t in FY11 and $710 from $680/t inFY12.

Figure 12: Commodity forecasts, $ mln/ton2010E 2011E 2012E

New Old New Old New OldIron ore, FOB Austr. 100 100 155 155 135 135Iron ore Russian domestic 90 90 145 145 125 125Hard coking coal, FOB Austr. 195 195 255 255 240 240Coking coal Russian domestic blend 140 140 200 200 175 175HRC, FOB Black Sea 606 593 730 670 710 680Ruble/USD 30.4 30.0 30.0 30.0 30.0 30.0Source: Alfa Research

We increase steelprices to reflect higherraw material pricespreviously forecasted


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Figure 15: China PMI and electricity change, seasonally adjusted

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

J an- 0 5

M a y - 0 5

S e p- 0 5

J an- 0 6

M a y - 0 6

S e p- 0 6

J an- 0 7

M a y - 0 7

S e p- 0 7

J an- 0 8

M a y - 0 8

S e p- 0 8

J an- 0 9

M a y - 0 9

S e p- 0 9

J an-1 0

M a y -1 0

S e p-1 0

J an-1 1

PMI Electricity

Source: China Federal of Logistics and Purchasing, China Economic Information Network, three-month moving average of y/y change in PMI and electricity consumption

Figure 16: China PMI and 3-month MA

40

42

44

46

48

50

52

54

5658

60

J a n - 0

5

M a y - 0

5

S e p - 0

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S e p - 0

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M a y - 0

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S e p - 0

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M a y - 0

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S e p - 0

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J a n - 1

0

M a y - 1

0

S e p - 1

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1

PMI 3mo MA

Source: China Federal of Logistics and Purchasing

The growth rate in Chinese steel apparent demand moved slightly negative inAugust-September, 2010, and has since rebounded, albeit to levels below the2009-1Q10 peak growth rates.

Steel demand was flatin 2H10 y/y, and downh/h


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Figure 17: China steel apparent demand, change y/y and 3-month MA, %

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

J a n - 0 7

M a r - 0 7

M a

y - 0 7

J u l - 0 7

S e

p - 0 7

N o v - 0 7

J a n 0 8

M a r 0 8

M a

y 0 8

J u l 0 8

S e

p 0 8

N o v 0 8

J a n 0 9

M a r 0 9

M a

y 0 9

J u l 0 9

S e

p - 0 9

N o v - 0 9

J a n - 1 0

M a r - 1 0

M a

y - 1 0

J u l - 1 0

S e

p - 1 0

N o v - 1 0

J a n - 1 1

Consumption, yoy 3mo MA

Source: World Steel Association for global and Chinese production, Customs General Administration of China for exports and imports, consumption calculated as production minus net exports

China steel demand declined in 2H10China steel apparent demand declined in 2H10 on a h/h basis and was flat ona y/y basis.


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Figure 18: Movement in Chinese steel demand by half, mln tProduction Net exports Apparent demand

20081H 262 22 2412H 237 23 21420091H 266 1 2652H 300 5 29620101H 323 15 3082H 303 10 294Source: World Steel Association for global and Chinese production, Customs General Administration of China for exports and imports, apparent demand calculated as production minus net exports

Tightening measures to continueWe believe China is in the early stages of tightening to control significantinflationary pressures. Interbank rates have moved back to 2008 levels, whilethe lending policy rate is still well below those levels.

Figure 19: China policy and interbank rate, deposit reserve ratio, %

1

2

3

4

5

6

7

8

9

10

O c t - 0 6

J an- 0 7

A pr - 0 7

J ul - 0 7

O c t - 0 7

J an- 0 8

A pr - 0 8

J ul - 0 8

O c t - 0 8

J an- 0 9

A pr - 0 9

J ul - 0 9

O c t - 0 9

J an-1 0

A pr -1 0

J ul -1 0

O c t -1 0

J an-1 1

Lending Interbank Deposit reserve/2

Source: PBOC, National Interbank Funding Center, Deposit reserve requirement ratio is the announced ratio for major banks, dividend by two for easy display (current level is 19.5%)

Tightening is required after massive loan and monetary aggregates growthover the past two years.


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Figure 20: CNY reported y/y loan growth, %

10%

20%

30%

3 / 3 1 / 0 6

6 / 3 0 / 0 6

9 / 3 0 / 0 6

1 2 / 3 1 / 0 6

3 / 3 1 / 0 7

6 / 3 0 / 0 7

9 / 3 0 / 0 7

1 2 / 3 1 / 0 7

3 / 3 1 / 0 8

6 / 3 0 / 0 8

9 / 3 0 / 0 8

1 2 / 3 1 / 0 8

3 / 3 1 / 0 9

6 / 3 0 / 0 9

9 / 3 0 / 0 9

1 2 / 3 1 / 0 9

3 / 3 1 / 1 0

6 / 3 0 / 1 0

9 / 3 0 / 1 0

1 2 / 3 1 / 1 0

CNY loan growth 3mo MA

Source: China Economic Information Network, February data is taken from press sources, as not yet officially released

The official growth rates understate real growth due to the use of off-balance-sheet and non-bank-lending financing sources.

Based on the estimates provided in a recent PBOC press release, it appearsthat net loans to the system expanded at about $1.6-1.7bn p.a. over the pasttwo years, at a compound annual growth rate of 34%. Chinas loans-to-GDPratio is about 150%.

Loan growth exceedsofficial levels becauseof OBS lending


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Figure 21: $1.6-1.7tn net increase in bank/non-bank lending p.a.CNY loansFOREX loansOBS/non-bank Total loans Total loans ($mln) % of GDP

YE08 30.3 1.9 2.0 34.2 5.0 109%Net increase FY09 9.6 0.7 0.4 10.7 1.6 34%YE09 40.0 2.6 2.4 44.9 6.6 135%Net increase FY10 8.0 0.4 3.0 11.4 1.7 34%YE10 48.0 3.0 5.4 56.3 8.5 150%Source: China Economic Information Network, PBOC press release

We do not display here the inflationary impact on house prices and othergoods and assets in the Chinese market, but the impact has been significant.Chinese headline CPI of an average of 4.9% over the past three months iswidely believed to understate the real level of price inflation in the economy.

Construction growth likely to slowTotal floor space under construction in China slowed down to mid-20%sgrowth in the autumn, but rose again to a near-record growth level in February2011.

Construction represents about half of total steel demand, we believe.Therefore, the earlier discussed slowdown in steel demand in China indicatesthat other segments of the economy that are heavy consumers of steel areslowing considerably.

Given that one of the main policy objectives is to slow housing price growth, itis likely that volume growth will slow down. Neither US nor Europeanconstruction activity will likely prove to be a strong growth engine, as bothwere in negative territory as of December.

Figure 22: Construction indicators in major economies

-20%

-10%

0%

10%

20%

30%

40%

M ar - 0 4

J un- 0 4

S e p- 0 4

D e c - 0 4

M ar - 0 5

J un- 0 5

S e p- 0 5

D e c - 0 5

M ar - 0 6

J un- 0 6

S e p- 0 6

D e c - 0 6

M ar - 0 7

J un- 0 7

S e p- 0 7

D e c - 0 7

M ar - 0 8

J un- 0 8

S e p- 0 8

D e c - 0 8

M ar - 0 9

J un- 0 9

S e p- 0 9

D e c - 0 9

M ar -1 0

J un-1 0

S e p-1 0

D e c -1 0

China US Europe

Source: y/y change of cumulative year to date China residential and commercial floor space under construction (China Economic Information Network), three month moving average of y/y change in US housing starts (US Census Bureau), and European construction volumes (Eurostat).

China floor spaceunder constructionturned negative assteel growth weakened

Other key regions arenot showingconstruction growth


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Testing the PMI/global steel pricerelationshipThere is a strong and growing relationship between Chinese PMI with a leadof approximate four months and global steel prices. Since 2008, thisrelationship has strengthened, which makes sense given the increased weightin global consumption that China represents. Global steel prices moveapproximately 2x the rate of change in the PMI.

Figure 23: Chinese PMI+4 months and Black Sea HRC relationshipCorrelation Slope

Since 2005 0.48 1.45Since Mar 2008 0.66 1.90Source: Three-month moving average of monthly change in Chinese PMI, with a four-month lead, vs. three month moving average of monthly change in Black Sea HRC, China Federation of Logistics and Purchasing,Metal Bulletin. Slope is Black Sea sensitivity to change in Chinese PMI.

The relationship is evident in the scatter plots below.

Figure 24: PMI+4 months vs. Black Sea HRC since 2005, 3-mo MA %

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

-30% -20% -10% 0% 10% 20%

Black Sea

P M I + 4 m o

Source: Three month moving average of monthly change in Chinese PMI, with a four-month lead, vs. three- month moving average of monthly change in Black Sea HRC, China Federation of Logistics and Purchasing,Metal Bulletin

Relationship betweenPMI with four-monthlead and global steel


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Figure 25: PMI+4 months vs. Black Sea HRC since Mar 2008, 3-mo MA %

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

-30% -20% -10% 0% 10% 20%

Black Sea

P M I + 4 m

Source: Three month moving average of monthly change in Chinese PMI, with a four-month lead, vs. three- month moving average of monthly change in Black Sea HRC, China Federation of Logistics and Purchasing,Metal Bulletin

Over the past four months, PMI has moved 2%, 1%, -2% and -2%. HRC rose22% over this period. As a result, the steel price probably overshot its naturallevel.

Possible explanations for break inrelationshipThe relationship between China PMI and steel prices may have been affectedby supply-side shocks in raw materials and the restocking cycle. During 2H10,the iron ore market absorbed the loss of volumes from the state of Karnatakain India, after an export ban was put in place over the summer.

During early 2011, the coking coal market absorbed the loss of volumes fromflooding in Queensland.

Based on measures of steel and iron ore inventory at Chinese ports and USservice centers, it appears that inventory levels have moved up. If we

extrapolate these restocking volumes throughout the value chain, the volumescan be significant enough to have an impact on steel prices.

Raw material supplyshocks supportedsteel prices

Restocking took place


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Figure 26: Measures of steel inventory in China and US, mln t

5

6

7

8

9

10

11

12

13

14

15

M ar -1 0

A pr -1 0

M a y -1 0

J un-1 0

J ul -1 0

A u g-1 0

S e p-1 0

O c t -1 0

N ov -1 0

D e c -1 0

J an-1 1

F e b -1 1

China steel China iron ore US steel

Source: Steelhome, Metals Service Center Institute

While coking coal prices are settling sharply up in 2Q10, iron ore prices havebegun to ease.

Figure 27: First month swap, 62% iron ore fines, CFR China, $/ton

60

80

100

120

140

160

180

200

O c t - 0 9

N o v - 0

9

D e c - 0

9

J a n - 1

0

F e b - 1

0

M a r - 1 0

A p r - 1 0

M a y - 1

0

J u n - 1

0

J u l - 1 0

u g - 1

0

S e p - 1

0

O c t - 1 0

N o v - 1

0

D e c - 1

0

J a n - 1

1

F e b - 1

1

M a r - 1 1

Source: SGX AsiaClear

Iron ore prices areeasing back fromrecord levels


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Chinese metals premiums shrinking often aleading indicatorWe show below that Chinese domestic price premiums on steel, copper andaluminum have all been declining. In February, domestic steel prices movedto a discount to Black Sea

Figure 28: China premium to global benchmarks, %

-20%

-10%

0%

10%

20%

30%

40%

M a y - 0 5

A u g- 0 5

N ov - 0 5

F e b - 0 6

M a y - 0 6

A u g- 0 6

N ov - 0 6

F e b - 0 7

M a y - 0 7

A u g- 0 7

N ov - 0 7

F e b - 0 8

M a y - 0 8

A u g- 0 8

N ov - 0 8

F e b - 0 9

M a y - 0 9

A u g- 0 9

N ov - 0 9

F e b -1 0

M a y -1 0

A u g-1 0

N ov -1 0

F e b -1 1

Steel Cu Al

Source: Four-week moving average of difference between Chinese domestic and global benchmark prices for steel, Cu and Al, Shanghai Futures Exchange, LME, Metal Bulletin for China domestic HRC and Black Sea HRC

The Chinese relative price is important because China is often a lead indicatorfor global pricing. This makes sense because of its substantial weight in globalconsumption.

This chart shows the absolute levels instead of the discount. HRC Black Seahas moved above Chinese rebar (and HRC as shown in the chart above).During the April/May 2010 period, we experienced a similar development andthis preceded a significant drop in global steel prices.

Chinese domesticmetals below globalprices

Chinese prices oftenlead global prices sothis is a negative sign


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Figure 29: Global steel prices, $/mt

300

400

500

600

700

800

900

3 / 2 7 / 0 9

5 / 2 7 / 0 9

7 / 2 7 / 0 9

9 / 2 7 / 0 9

1 1 / 2 7 / 0 9

1 / 2 7 / 1 0

3 / 2 7 / 1 0

5 / 2 7 / 1 0

7 / 2 7 / 1 0

9 / 2 7 / 1 0

1 1 / 2 7 / 1 0

1 / 2 7 / 1 1

China rebar spot LME billet HRC Black Sea

Source: Metal Bulletin, LME

Reiterate our volume slowdown forecastChinese construction and economic activity is likely to slow from elevatedlevels.

We reiterate our view that steel demand growth will slow from around 15% y/y

in FY10 to a level of 5-6% (previously 4-5%) in the FY11-FY12 period.During January 2011, the World Steel Association estimates that globalproduction grew 5.3% y/y and the three months through January at a rate of5.2% y/y.

Figure 30: Global steel and pig iron production forecast, mmt2006 2007 2008 2009 2010E 2011E 2012E

SteelGlobal production 1 251 1 351 1 350 1 220 1 413 1 480 1 564growth, % 8% 0% -10% 16% 5% 6% Chinese production 423 495 500 568 627 664 714growth, % 17% 1% 14% 10% 6% 8% Global ex-China 828 856 850 652 786 816 849growth, % 3% -1% -23% 21% 4% 4% Global capacity 1470 1546 1626 1686 1736 1804 1872Capacity utilization 85% 87% 83% 72% 81% 82% 84% note: China % of global 34% 37% 37% 47% 44% 45% 46%Pig iron 869 949 933 891 1023 1074 1138Global production/consumption 875 950 930 891 1 023 1 074 1 138growth, % 9% -2% -4% 15% 5% 6% Source: World Steel Association for historical data, Alfa Research forecasts

Steel demand will slow

sharply in FY11/FY12


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Decline risk greater than upsideThe decline in 2010 began in April and took $150/t off the price of HRC andnearly $200/t off rebar. Subsector stocks lost 30-50% (EVR 49%, NLMK -36%, FXPO -42%) over this period.

We are not calling for such a large decline, but we do not exclude thispossibility. We recognize that prices could also rise into 2Q11 especially givenpositive sentiment related to Japanese reconstruction efforts.

Our view is that the downside risk over the coming quarters is substantiallygreater than the upside potential.

Figure 31: HRC Black Sea, $/ton - FY10 all over again?

500

550

600

650

700

750

800

S e p- 0 9

O c t - 0 9

N ov - 0 9

D e c - 0 9

J an-1 0

F e b -1 0

M ar -1 0

A pr -1 0

M a y -1 0

J un-1 0

J ul -1 0

A u g-1 0

S e p-1 0

O c t -1 0

N ov -1 0

D e c -1 0

J an-1 1

F e b -1 1

Source: Metal Bulletin

Evidence suggestssteel prices willdecline in 2Q11


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Stock Specific Issues and RisksWe have the following specific expectations that could affect individual stocksover the coming quarters:

1) The domestic steel premium, which shrank to close to zero in 1Q11, willexpand to a level of $30/t in 2-3Q11. This will help MMK to catch up onearnings growth as of 2Q11.

2) The domestic coking coal discount to the global benchmark will widen in2Q11 as the domestic price lags. This will help NLMK continue to deliverstrong earnings growth in 1H11 despite the increase in global coking coalprices. As of 2H11, NLMK will face headwinds from higher domesticcoking coal prices as these slowly catch up to global prices.

3) 1Q11 financials will not be indicative of full-year results due to a lag inachieving higher prices from export prices and the collapse in thedomestic premium as discussed above in point 1.

4) The most important Middle East export market is Iran, accounting forapproximately 60% of regional volumes and 15% of overall Russian steelexports. The most exposed company in our subsector, we believe, isMMK given its traditional volume flow to that market.


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Financial StatementsFigure 32: Evraz income statement, $ mln

2006 2007 2008 2009 2010E 2011E 2012ERevenues 8,292 12,808 20,380 9,772 14,023 17,515 17,323Operating Profit 2,298 3,523 3,632 -1,047 821 2,194 1,904EBITDA 2,601 4,380 6,286 1,237 2,371 3,694 3,354Interest expense -229 -409 -599 -730 -717 -585 -398Other non-operating items -22 -1 0 0 0 0 0EBT 2,087 3,051 3,051 -1,600 233 1,881 1,865Tax -637 -984 -1,192 339 -65 -526 -522Net income 1,450 2,179 1,859 -1,261 168 1,354 1,343Minority interest -73 -76 -62 10 -6 -45 -45Net income to shareholders 1,377 2,103 1,797 -1,251 162 1,309 1,298EPS 3.33 5.08 4.34 -3.02 0.37 2.99 2.96

MarginsOperating 28% 28% 18% -11% 6% 13% 11%Net 17% 17% 9% -13% 1% 8% 8%EBITDA 31% 34% 31% 13% 17% 21% 19%Source: Company data, Alfa Research

Figure 33: Evraz balance sheet, $ mln2006 2007 2008 2009 2010E 2011E 2012E

Cash and cash equivalent 842 327 930 675 319 867 1,555Inventories 864 1,618 2,416 1,886 2,100 2,277 2,252Receivables 556 1,803 1,369 1,001 1,300 1,401 1,386Other current assets 562 766 1,569 691 1,386 1,386 1,386Total current assets 2,824 4,514 6,284 4,253 5,105 5,931 6,578PP&E 5,479 12,489 9,012 14,941 14,341 13,741 13,191Other non-current assets 2,031 4,153 4,152 4,230 4,230 4,230 4,230Total Assets 8,510 18,634 19,448 23,424 23,676 23,902 23,999Total debt 2,596 6,756 9,986 7,923 7,423 6,523 5,623Payables 462 1,241 1,479 1,181 1,200 1,244 1,257Other current liabilities 672 1,966 1,137 553 553 553 553Other long-term liabilities 545 2,318 1,872 3,146 3,146 3,146 3,146Shareholders' equity 4,235 6,353 4,917 10,608 10,776 12,130 13,473Total Liab and Shrhlds' equity 8,510 18,634 19,448 23,424 23,676 23,902 23,999Net debt 4,000 6,000 8,970 7,248 7,104 5,656 4,068Source: Company data, Alfa Research

Figure 34: Evraz cash flow statement, $ mln2006 2007 2008 2009 2010E 2011E 2012E

Net income 1,450 2,217 1,859 -1,261 168 1,354 1,343Depreciation and amort 303 698 1,195 1,632 1,550 1,500 1,450Other/interest 465 583 1,641 730 717 585 398Working capital changes 95 -132 -126 600 -494 -234 54Cash flow from operations 2,084 2,957 4,569 4,569 1,812 2,933 2,886Net additions to PP&E -896 -7,010 -1,103 -441 -950 -900 -900Other investing cf -673 1,374 -2,633 0 0 0 0Cash flow from investing -1,569 -5,636 -3,736 -441 -950 -900 -900Net borrowings 246 4,160 3,230 -2,063 -500 -900 -900Net interest income (expense) -229 -409 -599 -634 -717 -585 -398Dividends Paid - Common -352 -916 -1,276 0 0 0 0Other financing cf -235 -1,109 -1,482 0 0 0 0Cash flow from financing -341 2,135 -127 -2,382 -1,217 -1,485 -1,298Source: Company data, Alfa Research


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Figure 38: NLMK income statement, $ mln2006 2007 2008 2009 2010E 2011E 2012E

Revenues 6,046 7,719 11,699 6,139 8,150 11,003 12,946

Operating Profit 2,243 2,998 4,061 891 1,881 2,885 3,257EBITDA 2,601 3,406 4,538 1,444 2,381 3,435 3,882Interest expense -30 -31 -30 -111 -107 -78 -95Other non-operating items 883 86 0 0 0 0 0EBT 2,624 3,106 2,979 280 1,775 2,807 3,162Tax -707 -837 -703 -182 -458 -716 -795Net income 1,917 2,269 2,276 98 1,317 2,091 2,366Minority interest -26 -24 2 117 0 0 0Net income to shareholders 1,891 2,245 2,278 215 1,317 2,091 2,366EPS 3.16 3.75 3.80 0.36 2.20 3.49 3.95 MarginsOperating 37% 39% 35% 15% 23% 26% 25%Net 32% 29% 19% 2% 16% 19% 18%EBITDA 43% 44% 39% 24% 29% 31% 30%

Source: Company data, Alfa Research

Figure 39: NLMK balance sheet, $ mln2006 2007 2008 2009 2010E 2011E 2012E

Cash and cash equivalent 665 1,155 2,160 1,247 65 117 197Inventories 857 1,236 1,556 1134 1,400 1,650 1,942Receivables 1,150 1,696 1,488 913 1,212 1,430 1,683Other current assets 377 301 93 582 582 582 582Total current assets 3,050 4,388 5,346 3,876 3,260 3,780 4,404PP&E 3,988 6,450 6,826 7,316 8,616 9,766 10,341Other non-current assets 1,679 2,238 1,892 1,309 1 ,309 1 ,309 1,309Total Assets 8,717 13,076 14,064 12,501 13,185 14,855 16,054Total debt 297 1,610 3,037 2,495 1,933 1,933 1,133Payables 664 1,395 1,879 841 1,033 1,135 1,360

Other current liabilities 80 71 21 19 19 19 19Other long-term liabilities 866 1,009 431 536 536 536 536Shareholders' equity 6,809 8,992 8,723 8,718 10,298 12,912 15,870Total Liab and Shrhlds' equity 8,717 13,076 15,573 12,501 13,185 14,855 16,054Net debt 500 892 1,248 1,868 1,816 936Source: Company data, Alfa Research

Figure 40: NLMK cash flow statement, $ mln2006 2007 2008 2009 2010E 2011E 2012E

Net income 2,066 2,247 2,964 98 1,317 2,091 2,366Depreciation and amort 358 408 519 478 500 550 625Other/interest -104 -3 -667 111 107 78 95Working capital changes -735 -128 373 -41 -373 -367 -320Cash flow from operations 1,585 2,524 3,072 1179 1551 2353 2767Net additions to PP&E -1,931 -2,869 -1,435 -1121 -1800 -1700 -1200Other investing cf -112 1,602 -667 0 0 0 0Cash used in investing -2,043 -1,268 -2,102 -1121 -1800 -1700 -1200Net borrowings 244 1,288 -492 -542 -562 0 -800Net interest income (expense) 3 25 1,919 -111 -107 -78 -95Dividends Paid - Common -767 -703 -471 0 -263 -523 -592Other financing cf -413 -1,440 2 -471 0 0 0Cash from financing -933 -830 958 -681 -932 -601 -1487Source: Company data, Alfa Research


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Figure 41: Severstal income statement, $ mln2006 2007 2008 2009 2010 2011E 2012E

Revenues 12,449 15,245 16,065 9,594 13,573 17,853 18,260Operating Profit 2,356 2,970 3,572 925 2,652 3,433 3,120EBITDA 2,960 3,773 4,410 1,623 3,365 4,333 4,070Interest expense -143 -116 -531 -591 -464 -341 -276Other non-operating items -98 -180 192 -200 -292 0 0EBT 2,356 2,970 3,572 925 2,652 3,092 2,845Tax -635 -700 -490 -134 -487 -884 -814Net income 1,479 1,876 2,740 13 1,428 2,207 2,031Minority interest -56 -26 -717 -1,051 -2,004 -40 -40Net income to shareholders 1,423 1,850 2,023 -1,038 -576 2,167 1,991EPS 1.42 1.84 2.01 -1.03 -0.57 1.58 1.46 MarginsOperating 19% 19% 22% 10% 20% 19% 17%Net 12% 12% 17% 0% 11% 12% 11%EBITDA 24% 25% 27% 17% 25% 24% 22%Source: Company data, Alfa Research

Figure 42: Severstal balance sheet, $ mln2006 2007 2008 2009 2010 2011E 2012E

Cash and cash equivalent 2,006 2,007 3,472 2,854 2,013 951 1,219Inventories 2,222 2,537 4,279 2974 2,367 3,047 2,739Receivables 1,324 1,675 2,006 1458 967 1,261 1,096Other current assets 1,927 1,779 935 899 2600 2600 2600Total current assets 7,479 7,998 10,692 8,185 9,567 7,860 7,653PP&E 6,470 7,293 9,827 9,485 9,152 10,252 10,502Other non-current assets 765 1,426 1,961 2,334 1,900 1,900 1,900Total Assets 14,714 16,717 22,480 19,644 19,329 18,722 18,765Total debt 2,948 3,942 8,317 7,126 6,142 5,342 3,871Payables 1,246 1,207 1,527 1378 914 961 851Other current liabilities 774 1,112 1,192 972 4,019 4,019 4,019Other long-term liabilities 1,134 1,160 1,880 1,691 934 934 934Shareholders' equity 8,554 10,211 9,554 8,376 7,320 9,969 12,406Total Liab and Shrhlds' equity 14,714 16,717 22,480 19,644 19,329 18,722 18,765Net debt 1,291 4,671 4,272 4,129 4,391 2,652Source: Company data, Alfa Research

Figure 43: Severstal cash flow statement, $ mln2006 2007 2008 2009 2010 2011E 2012E

Net income 1,421 1,936 2,740 13 1,428 2,207 2,031Depreciation and amort 604 803 838 698 794 900 950Other/interest 0 -663 531 591 1,474 341 276Working capital changes 0 -1,035 -1,753 1,704 -463 -927 364Cash flow from operations 1,729 2,315 3,435 3,193 2,515 2,521 3,621

Net additions to PP&E -1,244 -1,562 -2,152 -946 -1,118 -2,000 -1,200Other investing cf -925 -419 -2,780 -92 -814 0 0Cash used in investing -2,169 -1,980 -4,932 -1,038 -1,932 -2,000 -1,200Net borrowings 1,379 2,794 750 -1,191 -1,036 -800 -1,472Net interest income (expense) -1,495 -2,623 3,106 -591 -464 -341 -276Dividends Paid - Common -269 -736 -1,347 0 -130 -441 -406Other financing cf 1,112 -4 -85 0 157 0 0Cash from financing 726 -569 2,425 -691 -1,630 -1,583 -2,153Source: Company data, Alfa Research


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Contact Information Alfa Bank (Moscow) 12 Akad. Sakharov Prospect, Moscow, Russia 107078

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Research DepartmentTelephone (+7 495) 795-3676Head of Research Peter SzopoOil & Gas Pavel Sorokin, Alexander BespalovMacroeconomics Natalia Orlova, Ph.D., Dmitry DolginBanking Jason Hurwitz, Eldar VagabovTelecommunications, Industrials Iouli Matevossov, CFA, CPAUtilities Alexander Kornilov, CFA, Elina Kulieva, Ph.D., Fedor KornachevMetals & Mining Barry Ehrlich, CFA, Maxim SemenovykhConsumer, Agriculture, Pharmaceuticals Alexandra Melnikova, Irina ProkopyevaChemicals, Logistics, Industrials Georgy Ivanin, Vladimir Dorogov, CFARussian Product Angelika Henkel, Ph.D., Alan KazievEditorial David Spencer, Heather DeanTranslation Elena ElovskayaProduction Aleksei Balashov

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The contents of this document have been prepared by Barry Ehrlich, a Senior Analyst at Open Joint Stock Company Alfa Bank ("Alfa Bank"), as Investment Researchwithin the meaning of Article 24 of Commission Directive 2006/73/EC implementing the Markets in Financial Instruments Directive 2004/39/EC ("MiFID"). Alfa CapitalMarkets ("ACM") is distributing this document to its clients in the EEA and accepts no responsibility towards any other classes of recipient. Alfa Bank and ACM have inplace appropriate conflicts of interest policies and procedures aimed at ensuring the objectivity of the information contained in this document. The information contained inthis document is provided for information purposes only and is not a marketing communication, investment advice or personal recommendation within the meaning ofMiFID. The information must not be used or considered as an offer or solicitation of an offer to sell or to buy or subscribe for any securities or financial instruments. In theUK, this document does not constitute a Financial Promotion within the meaning of section 21 of the Financial Services and Markets Act 2000 (as amended). ACM isregulated by the Financial Services Authority (FSA) with FSA registration number 416251, for the conduct of UK investment business and is the trading name of the UKbranch of Alfa Capital Holdings (Cyprus) Limited (ACC), which is authorized by the Cyprus Securities and Exchange Commission under license number CIF 025/04. Thisdocument is not for distribution to retail clients as defined by MiFID and may not be communicated to such persons. This document is not for distribution or use by anyperson or entity in any jurisdiction where such distribution or use would be contrary to local law or regulation or which would subject Alfa Bank, ACC , ACM or any othergroup entity to authorization, licensing or other registration requirements under applicable laws. The information contained in this document is the exclusive property of AlfaBank. Unauthorized duplication, replication or dissemination of this document, in whole or in part, without the express written consent of Alfa Bank is strictly prohibited.Although the information in this document has been obtained from, and is based on, sources Alfa Bank believes to be reliable, no representation or warranty, express orimplied, is made by Alfa Bank, ACM or the authors. ACM and its officers and employees do not accept any responsibility as to the accurateness or completeness of anyinformation herein or as to whether any material facts have been omitted. All information stated herein is subject to change without notice. ACM makes no warranty orrepresentation that any securities referred to herein are suitable for all recipients and any recipients considering investment decisions should seek appropriate independentadvice. Nothing in this document constitutes tax, legal or accounting advice. Alfa Bank, ACC and their associated companies, officers, directors or employees (excluding

any financial analysts or other personnel involved in the production of research), from time to time, may deal in, hold or act as market makers or advisors, brokers orcommercial and/or investment bankers in relation to the securities, financial instruments and companies mentioned in this email, or may have been, or may be representedon the board of such companies. If such circumstances arise, ACM, Alfa Bank, ACC and their associated companies have in place appropriate conflicts of interest policiesand procedures to ensure that investment research remains independent and objective. A summary of ACC's conflicts of interests policy (which also covers ACM),containing details relevant to investment research is available upon request from ACC or ACM ACC and ACM have arranged for Alfa Bank and other relevant group

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