2010 Annual Report severstal

Strength of vertical integration

empowered by peopleAnnual Report and Accounts 2010

Welcome to Severstal Severstal is a global steelmaker with vertical-integration and a focus on emerging markets. With high-value-added products in attractive niche markets, Severstal’s corporate strategy is to become one of the global industry leaders by EBITDA, and sustain a leading position by margins and returns on investment.

Severstal is a full-production-cycle operation which includes iron ore, coal and gold mining enterprises, scrap collection, steel mills and rolled product plants, as well as downstream production and distribution businesses. Our primary production facilities are geographically diverse, with locations in Russia, the United States, and a number of other countries, including Ukraine, Kazakhstan, Burkina Faso and Guinea. Severstal comprises three business divisions: Severstal Resources (including our gold business, Nordgold), Severstal Russian Steel, and Severstal International, comprising our North American operations.

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Overview01 Highlights02 Severstal at a Glance04 Chairman’s Review

Business Review06 Chief Executive’s Review08 Severstal Strategy14 Risk Management26 Performance Review 32 The Business System of Severstal38 Severstal Resources50 Severstal Russian Steel62 Severstal International70 Nordgold78 Corporate Social Responsibility

Governance83 Board of Directors85 Board of Directors’ Report

Financial Statements95 Independent Auditors’ Report96 Consolidated income statements97 Consolidated statements

of comprehensive income98 Consolidated statements

of financial position99 Consolidated statement

of cash flows100 Consolidated statements

of changes in equity101 Notes to the consolidated

financial statements

Further Information172 Shareholder information

and financial calendar174 Contacts

Revenue in 2010 (US$)

13,573m(2009 revenue: 9,594m)

Net debt/EBITDA in 2010 (ratio)

1.3(2009 Net debt/EBITDA: 2.2*)*excludes Lucchini and North America disposal groups

Group’s financials

EBITDA in 2010 (US$)

3,263m(2009 EBITDA: 1,589m)

EBITDA margin in 2010 (US$)

24.0%(2009 EBITDA margin: 16.6%)

Profit from continuing activities in 2010 (US$)

1,427m(2009 profit from continuing activities: 14m)

Net loss attributable to shareholders in 2010 (US$)

577m(2009 net loss: 1,037m)

Dividend per share in 2010 (US$)

0.14(2009 dividend per share: n/a)

Highlights 2010Severstal capitalised on the improving market conditions efficiently, increasing production and sales volumes, raising margins, benefiting from vertical integration, and expanding its presence in markets with high growth and potential. Through making its asset platform more competitive and strengthening its management team, Severstal is well placed to make the most of the promising new year.

Annual Report and Accounts 2010 Severstal02

Severstal ResourcesSeverstal is one of Russia’s largest producers of iron ore and coking coal. The gold business, consolidated within Severstal Resources in the Nordgold company, is a significant player in emerging markets. Severstal Resources has the capacity and product mix to provide almost all of the iron ore and hard coking coal requirements of our steel operations.

Severstal Russian SteelSeverstal Russian Steel is a leading steel producer in Russia with focus on value-added flat steel products for the construction, automotive, machinery, and oil and gas industries. Severstal Russian Steel’s Cherepovets Steel Mill is one of the world’s largest stand-alone integrated steelworks by capacity (annual production capacity is about 11.1 million tonnes).

Severstal InternationalSeverstal International is a solid mid-sized US steelmaker with premium customers in the automotive, energy, and construction, industries. The company’s Dearborn and Columbus facilities are two of the most advanced in North America, with partial upstream integration into coking coal production through the PBS Coals company also being part of Severstal.

Severstal at a Glance

Severstal has three divisions: Severstal Resources, Severstal Russian Steel and Severstal International. Our product portfolio and strategy of focusing on high-value-added products in niche markets enable us to realise greater earnings than many of our peers, and to minimise market and product cyclical risks.

Mining*1 Vorkutaugol| (Vorkuta, Russia) 2 Karelsky Okatysh (Kostomuksha, Russia) 3 Olkon (Olenegorsk, Russia) 4 PBS Coals (Friedens, Pennsylvania, USA)5 Severstal Liberia Iron Ore Ltd (Liberia, Putu

Range Iron Ore deposit, license)6 OOO UlughemUgol (Republic of Tyva, Russia,

Tsentralnyi field coking coal deposit, license)

Gold*7 Neryungri-Metallic (Yakutia, Russia,

subsidiary)8 Mine Aprelkovo (Transbaikal region,

Russia, subsidiary)9 Buryatzoloto (Buryatia, Russia, subsidiary)

10 Suzdal (Eastern Kazakhstan, field)11 Taparko (Burkina Faso, subsidiary)12 Berezitoviy (Amur region, Russia, subsidiary)13 Societe Miniere de Dinguiraye (Guinea,

LEFA gold mine) *Listed only selected major assets.

Steel products*14 Cherepovets Steel Mill (Cherepovets, Russia)15 Izhora Pipe Mill (St. Petersburg, Russia, subsidiary)16 SMZ-Kolpino (St. Petersburg, Russia, subsidiary)17 TPZ Sheksna (Vologda, Russia, subsidiary)18 Gestamp-Severstal-Kaluga (Kaluga, Russia,

joint venture)

Metalware products*19 Severstal – Metiz (Cherepovets, Russia,

subsidiary)20 Severstal – Metiz (Russia, Orel, subsidiary)21 Severstal – Metiz (Russia, Volgograd, subsidiary)

Other companies*22 Redaelli Tecna SpA (Italy, subsidiary)23 Dneprometiz (Dnepropetrovsk, Ukraine, subsidiary)

Scrap processing*24 Vtorchermet (Cherepovets, Russia, subsidiary)25 Murmanskvtormet (Murmansk,

Russia, subsidiary)26 Archangelski vtormet (Archangelsk,

Russia, subsidiary)

*Listed only selected major assets.

Steel products*27 Dearborn (Michigan, USA, subsidiary)28 Columbus (Mississippi, USA, subsidiary)

*Listed only selected major assets.


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Production volumes of steel by Severstal Russian Steel and Severstal International in 2010 (tonnes)

14.7m (2009 steel production: 12.6m)

Sales volumes of coal by Severstal Resources in 2010 (tonnes)

11.7m (2009 coal sales: 9.1m)

Sales volumes of iron ore by Severstal Resources in 2010 (tonnes)

13.8m (2009 iron ore sales: 13.9m)

Sales volumes of gold by Severstal Resources in 2010 (k oz)

603k oz (2009 gold sales: 522k oz)


Our strength as an integrated steel and mining group enabled Severstal to make good progress in 2010 as economic recovery gathered momentum and steel prices returned to higher levels.

10 Year Highlights

2001 – 2003 Consolidation of Russian mining assets

within Severstal creates one of the highest levels of raw materials self-sufficiency in steelmaking among Russian players

2004 Issuing its first Eurobond, Severstal gains

international recognition as a reliable public debt borrower

Severstal enters the US market following the acquisition of Rouge Steel, forming Severstal North America, now called Dearborn, an integrated steelmaking facility based in Michigan

2005 Severstal stock is listed on MICEX

2006 Initial public offering on the London

Stock Exchange

Severstal completes the construction of the Izhora Pipe Mill, a large-diameter pipe producer in Russia

2007 Severcorr Mini-Mill, one of the most

modern steel mini-mills in the US (later renamed Severstal Columbus), begins operation

Severstal commences development of the Balakovo Long Product Mini-Mill in Russia as a move to expand its presence in a promising market and enhance the product mix

Chairman’s Review

Christopher ClarkChairman of the Board of Directors

As a result revenue, margins and profits all grew strongly the Board was pleased to announce a return to the dividend list in the second half of the year. The Board continues to pay close attention to further improving standards of health and safety, with progress also made in this critical area.

Capital expenditure rose as we progressed initiatives across the Group. We focus our investment activities on areas where we see the greatest potential for growth and can operate our integrated model in a competitive way on the regional cost curve.

We made progress on major projects in Russia which will further strengthen our position in the higher growth automotive, construction and infrastructure sectors. These include the construction of a mini-mill at Balakovo in the Saratov region, due to be completed in 2013, with a production capacity of one million tonnes a year.

We took the decision to refocus our North American operations on our Dearborn and Columbus facilities. These are amongst the most efficient in the region and are integrated with our PBS Coals operation, while being well positioned to supply the buoyant automotive sector. After the year end, we announced the sale of our Warren, Wheeling and Sparrows Point facilities. In Europe we also decided that Lucchini does not fit our preferred integrated model and we, therefore, classified it as held for sale.


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We were very saddened to report the untimely death in December of Anatoly Kruchinin, aged only 50. He joined Severstal in 1982 and gave almost thirty years of distinguished service, culminating in his work as CEO of Severstal Russian Steel. Anatoly was a highly respected and popular colleague who we will miss greatly. The Board would like to express its condolences to his family and friends.

We finished 2010 with good momentum, which bodes well for our continued development in 2011. We believe the steel market is likely to remain strong as a result of high raw material pricing and steel product re-stocking. With an increased focus on higher growth market segments, high levels of self sufficiency in coking coal and iron ore, and an expanding emerging market dimension, Severstal is well placed to achieve another year of good progress.

Christopher ClarkChairman of the Board of Directors

We continued to achieve high returns from our mining activities, with higher prices and expanded production over the year. We also laid the foundations for future growth with major new greenfield initiatives, including winning licences for new projects in coking coal in Russia and iron ore in Africa.

The development of Nordgold demonstrates that we can also generate returns by using our mining and regional competences selectively for other high value minerals.

In December we announced a Memorandum of Understanding to establish a joint venture to build an integrated steel plant at Karnataka in India, one of the world’s most attractive growth markets. The joint venture will operate to our integrated model, with self sufficiency in coking coal and locally mined iron ore.

Severstal remains committed to high standards of corporate governance. The Board is well balanced between executive and non-executive Directors and scrutinises management’s performance against agreed goals. We also seek to continuously evolve the senior management team. In September we announced that Alexander Grubman would assume the role of CEO of Severstal Russian Steel and Vadim Larin the role of CEO of Severstal Resources. Both have extensive experience across our operations and are, therefore, well qualified to ensure we continue to drive efficiency and capture the maximum benefit from our vertically integrated model.

2008 Severstal streamlines its corporate

structure, creating three divisions: Severstal Russian Steel, Severstal Resources and Severstal International

Severstal receives first international mining exposure acquiring PBS Coals, a coking coal producer in Pennsylvania

2009 Severstal introduces a new corporate

brand identity reflecting the company’s truly global nature and its status as a leader in the metals and mining industry

Severstal launches an ERP (Enterprise Resource Planning) project implementing SAP software to increase the efficiency of its key business processes

2010 Severstal consolidates its gold assets

within a single structure named Nordgold, a major emerging-markets player

Severstal launches its 250,000 tonne capacity new pipe-section mill Severstal TPZ Sheksna, located in the Sheksna industrial zone of Russia’s Vologda region


Chief Executive’s Review

Alexey MordashovChief Executive Officer

Global economic recovery in 2010 brought more visibility and optimism to our business, and we emerged from the economic downturn stronger and with an improved financial performance. The major strengths of our vertically-integrated model, cash generative business and investment programmes, continue to give us a powerful competitive position.Revenue for the year increased by 41.5% to US$13,573 million as a result of increased sales growth in each of our segments, while profits from continuing operations were US$1,427 million. Central to our revenue growth during the year were sales of steel products to the Russian market, sales of mining products to third parties, and the rapid expansion of our gold business.

We produced a strong operating cash flow with US$1,259 million and net debt/EBITDA was 1.3x at the end of the year, below our 1.5x target threshold.

During the year we capitalised on improving market conditions by increasing production and sales volumes, maintaining high margins, using the benefits of vertical integration, and further expanding our presence in markets with higher growth potential. Our performance

“ Our performance reflects the hard work and excellence of all our employees. Our people are at the core of Severstal and were a critical factor in our achievements”

reflects the hard work and excellence of all our employees. Our people are the heart of Severstal and are critical to our achievements. They have shown great patience and determination during the economic crisis and we will continue to develop their skills further, in an environment focused on industry leading standards of health and safety. Our ’Mission, Vision and Values’ initiative promotes excellence in everything we do and ensures we operate to shared goals, values and standards. In 2010, we made another step towards internal efficiency. In line with the international best practice and based on our accumulated experience, we launched the Business System of Severstal, a programme covering the whole company and designed to involve employees in the improvement process as much as possible. We are confident the programme, which focuses on safety, continuous improvements, client orientation and business-process efficiency, will help us raise competitiveness and reach top industry positions.

StrategyOur key financial objective is to become one of the leaders by EBITDA in the global steel industry, while retaining one of the leading positions by margins and returns on investment. Our vertical integration is the key to these returns, with high self-sufficiency in iron ore and coking coal. The Cherepovets Steel Mill, our Russian asset, is one of the world’s lowest-cost producers, while in the US, we are one of the most modern steel producers. Pricing pressure in the world markets underlines the strength of our vertically-integrated model.

We will continue to focus our investment activities on areas where we see the greatest potential for growth, and therefore we will be investing in steel-related mining as well as expanding our Russian steel operations. In our restructured North American assets we aim to invest in creating a wider product offer to higher growth market segments such as automotive.

Our wholly-owned indirect subsidiary Nordgold, which runs our gold operations, has grown rapidly into an established producer focused on emerging markets and is a growing contributor to our financial results.

We continually review our asset portfolio and strategic development priorities to ensure we generate the highest returns for shareholders from the allocation of capital to development opportunities open to us as an international steel and mining company.

We will also target new frontiers to further expand our presence in areas with high growth potential such as India.

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Severstal InternationalIn North America our priority is to ensure our assets provide a more flexible and efficient cost base and following the disposal of assets after the year end, we are focusing on our Dearborn and Columbus facilities.

Though still challenging, the US steel market gradually recovered in 2010 and, driven by both volumes and prices, revenue from continuing operations was up 26.0% at US$2,912 million and EBITDA was US$86 million.

We expect the cost position of Columbus and Dearborn to improve further as a result of a recovering steel market environment and additional investment in their operational efficiency. In 2011 capital investment at Severstal North America will be approximately US$465 million, helping us to unlock value in the US and to optimise our footprint.

Our European operations represent Lucchini segment which classified as held for sale as of December 31, 2010. In February 2011, Severstal signed an amendment to Lucchini’s share purchase agreement cancelling the buy-back option and the entitlement, for the benefit of the Group, to any gain on a subsequent sale of this stake to a third party. From this date Severstal accounts Lucchini under equity method.

OutlookThe steel market is likely to remain strong in the first half of 2011 and an improvement in margins is likely to stimulate increased output globally. As a result, we expect steel and raw material prices to moderate in the second half of the year while production volumes remain high as average capacity utilisation stays below 80%, against a background of solid demand growth. We expect gold prices to remain firm.

In Russia and the CIS steel demand is expected to increase by approximately 8% year-on-year in 2011 while in the US the automotive industry will continue to be the best steel-consuming segment in a growing market.

Accelerating economic growth in our key markets in 2011 should produce another strong year for Severstal as demand for steel improves and raw material prices rise.

Alexey MordashovChief Executive Officer

InvestmentCash capital expenditure in 2010, excluding discontinued activities, totalled US$1,251 million and was in line with our target for the year. We continued to invest selectively across our operations, to expand mining and steel production volumes, increase output of high value-added steel products, improve our operational efficiency and reduce costs.

This year we will focus capital expenditure on ongoing projects, on improving operating efficiency, and on ensuring we maintain industry-leading standards of health and safety. Our target investment programme for 2011 is more than US$2 billion – approximately twice the level of 2009. We will invest a significant proportion of this in Severstal Russian Steel, with the remainder in Severstal Resources and the North American operations of Severstal International.

Severstal Russian SteelSeverstal Russian Steel is a world-class, low-cost steel producer which performed strongly throughout the year, helped by higher steel demand, mainly from the domestic market. Revenue rose 42.7% to US$8,815 million due to both volume and price, while EBITDA grew 27.1% to US$1,677 million and EBITDA margin was 19.0%. The domestic market accounted for 61% of the division’s total revenue in 2010 and we aim to increase that percentage this year as Russian steel consumption currently remains below pre-slump levels. Export sales increased by 25.3% and our diversified product mix means we are able to adjust our production and sales to cater for regional and industry trends, and produce higher sales and margins.

In line with our plans we completed several major projects during the year including the construction and launch of the Sheksna Pipe Plant, close to our main Russian steelmaking facilities in Cherepovets.

Severstal ResourcesFinancially, 2010 was one of the strongest years ever for our Resource division. Revenue increased to US$3,484 million due to both volume and prices, and EBITDA totalled US$1,551 million, while the full year EBITDA margin was 44.5%. The results reflected a combination of favourable market conditions, the flexibility of our production and sales team and the effect of the previous year’s initiatives to increase the efficiency of our operations.

Mining activities will continue to provide a strong source of growth and we intend to expand iron ore and coal production as well as other mining operations. Our gold business Nordgold has grown rapidly into an established producer with assets in emerging markets and, following our decision to postpone its initial public offering, we will continue to develop the business.


Severstal Strategy

One of Severstal’s main strategic priorities is to maintain resilience to the industrial cycle through high margins and conservative financial ratios.

We target at least 20% EBITDA margin over the cycle as one of the key performance indicators. –

We also target a net debt/normalized EBITDA* ratio of not more than 1.5. –

We are happy to report that we successfully achieved both targets in 2010. Thanks to a strong performance of our core assets in Russia, and ongoing restructuring of our facilities in the developed markets, our EBITDA margin increased from 16.6% in 2009 to 24.0% in 2010. By the end of 2010, we reduced 2010 net debt/EBITDA to 1.3, bringing us to a targeted level of financial leverage.

We will continue our focus on high-margin, resilient and growing regional and product markets in steel and mining, to ensure that we sustain our meeting of these targets, despite inherent industry volatility.

*Normalized EBITDA – average EBITDA from 2004 and till current year.

Our strategy is to become one of the global industry leaders by EBITDA and sustain a leading position by margins and returns on investment.


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We believe that cost competitiveness in every region where we produce steel is a vital element of our success, and a key to industry-leading margins and returns on investments. Our flagship facility, Cherepovets Steel Mill, is one of the world’s largest stand-alone integrated steelworks by capacity. It has also consistently been ranked as one of the ten lowest-cost steel producing plants in the world.

After asset restructuring in the US, and upon the completion of the long-term investment programme in 2011, Severstal Dearborn and Severstal Columbus will be the most efficient and modernised facilities in the US.

We will also continue our relentless focus on managing costs in our mining facilities, to counter the global trend of rising mining costs.

Severstal growth drivers Severstal is a vertically-integrated steel company focused on high-growth emerging markets.

There are a number of crucial industrial growth drivers which we believe are key to our success, and which will ultimately help us achieve our financial objectives.

Vertical integration is an integral part of our business model. We are one of the few international steel companies with a strong position in both iron ore and coking coal.

We are fully self-sufficient in primary steel-related raw materials in Russia, and in the US our local coking coal capacities are more than sufficient to provide full economic integration for our steel plants in North America.

We target at least 80% global economic self-sufficiency in both iron ore and coking coal, to secure cost competitiveness, improve total margins, and smooth our performance over the cycle. We build and develop steel assets only in those regions where it’s possible to get access to competitive raw materials at a price below global benchmarks. We will continue to prioritise investments in raw materials to achieve this self-sufficiency goal, so that our steel production is fully balanced by own iron ore and coking coal.

The high level of market consolidation secures better production discipline, while our presence in growing markets allows us to increase our revenues and earnings together with our customers, and target emerging high-potential niche segments.

Our main regional markets demonstrated excellent growth rates in 2010 on the back of recovery from the global economic crisis: steel demand in Russia grew by approximately 35%, and in the US, by approximately 30% year-on-year, according to the World Steel Association. We have a positive mid-to-long term outlook for all our target regional markets.

We expect at least 8% growth in demand for steel in Russia in 2011, and continuing sound growth thereafter, on the back of rising personal incomes and growing demand for modern housing, cars and much-needed infrastructure.

After the economic recovery is complete, US steel demand will rise in line with the long-term trend, determined by population growth and the need to build up previously underinvested infrastructure.

Our new focus – India – will be one of the highest growth areas in the next decade, with the annual increase in demand for steel in excess of 7-8% a year for the next decade.

Vertical integration

Cost competitiveness

Presence in consolidated and growing markets


Severstal Strategy (continued)

Executing our strategy in 2010: steps towards a new Severstal Sustaining positive momentum in RussiaIn 2010, Severstal’s Russian steel and mining assets performed strongly, aided by the general recovery in demand for steel and the booming raw materials markets. Russian steel assets were nearly fully utilised through the year, with total EBITDA growth of 27.1%. We maintained our strategic focus on the domestic market with the launch of several valuable downstream organic growth initiatives:

TPZ Sheksna with 250,000 tonnes of welded tubes and profiles –for constructionA renovated HDG line in Cherepovets adding 400,000 tonnes –of new galvanizing capacityA joint venture stamping facility with Gestamp and joint venture –steel service centre with Gonvarri – both in Kaluga region, several hundred km from Moscow

We also increased our share of the domestic market in the total sales of Severstal Russian Steel from 55.6% to 61.0%. Cost control and recovery in demand allowed us to increase the per-tonne profitability of our steel operations despite rapid inflation in raw materials costs.

Bringing the asset structure in line with our strategic targetsIn 2010, we made continuous steps to bring our international asset structure in line with our financial and strategic targets. In Europe, the Group reduced its stake in Lucchini S.p. A. to 49.2%. In North America, the Group sold Northern Steel Group, the processor and distributor of steel products, and also the steelmaking facilities of Warren, OH, Wheeling, WV, and Sparrows Point, MD.

The restructuring of our US assets allowed us to focus on the development of the most profitable and resilient parts of our US business – Dearborn and Columbus. These facilities were profitable in 2010, by EBITDA, despite economic difficulties and rising raw materials prices. We expect a much stronger performance from these US assets from 2011 and beyond, with the completion of their investment programmes expected by the end of 2011.

Entering new frontiers for our vertically-integrated business modelWe have taken the first steps in our development of a new regional market – India. In December 2010 Severstal and NMDC, the leading iron ore producer in India and one of the major global suppliers of iron ore, signed a Memorandum of Understanding to establish a joint venture company to build an integrated steel plant, with a capacity between 2 and 5 million tonnes (to be determined at feasibility stage). The plant will be located in the state of Karnataka, close to the industrial heartland of southern and western India and close to multiple iron ore mines. In line with our strategic priorities for cost leadership and vertical integration, the joint venture intends to have its captive coking coal mining subsidiary in Russia and its iron ore mining subsidiary in India, to ensure long-term supply of all primary raw materials to the proposed steel plant. Strategically, the rapidly expanding Indian market will become one of our main priorities.


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Developing our global raw materials baseWe continued to develop a portfolio of growth options in steel-related mining by investing in acquisitions and developing early-stage mining projects internationally. In the Putu iron ore project in Liberia, where Severstal is the majority stakeholder with a 61.5% interest, an independent mineral resource report confirmed estimated natural resources of 2.4 billion tonnes, with approximately 34% iron concentration, twice the initially estimated reserves base.

In May 2010, the Group acquired a 16.5% stake in Core Mining which controls exploration licences for the Avima iron ore deposit in the Republic of Congo (Brazzaville) and the Kango iron ore deposit in the Republic of Gabon. Both projects are at an early exploration stage with a significant resources potential of high-grade iron ore with Fe content over 50%.

Finally, the Group acquired an exploration and development licence for the Tsentralnyi field in Tyva republic, South Siberia, with a resource potential of 640 million tonnes of high-quality hard coking coal. These developments will offer us a wide range of options to develop our raw materials base in the long term, through a diversified and balanced portfolio of low-cost, high quality deposits.

To ensure the self-sufficiency of our projected steel mini-mill operations, in the third quarter of 2010, we completed the acquisition of a 25.6% stake in Iron Mineral Beneficiation Services (Proprietary) Limited (IMBS), a research and development company based in Johannesburg, South Africa. IMBS has developed a coal-based Finesmelt technology capable of processing unusable iron ore fines and thermal coal into valuable metallic products similar to DRI/HBI. Currently, IMBS is developing its first commercial project in Phalaborwa, South Africa. As a part of the transaction, we acquired a 51.0% stake in International Iron Beneficiation Group Limited (IIBG), a newly formed company that has an exclusive license to commercialise the technology worldwide (outside of South Africa and neighbouring countries).

Priorities for 2011One of our key priorities is to strengthen our asset portfolio and to increase profitability in North America, as the local market recovers from the steel demand recession, and we complete the modernisation and expansion of production volumes.

Upon the completion of ongoing investments, the total production capacity of Severstal North America will reach around 5.5 million tonnes, almost evenly split between integrated and mini-mill production routes. Severstal Dearborn will launch a new cold-rolling mill, pickling and galvanizing lines, which will make it the region’s most modern and technically advanced producer of automotive steel, well positioned to benefit from the ongoing strong recovery of US flat steel market and automotive demand. Severstal Columbus, which demonstrated consistently high utilisation rates and positive annual profitability, even at the bottom of the market, will launch its second phase in Q3-Q4 2011, bringing its total hot-rolled band capacity to 3.1 million tonnes and doubling its galvanized products capacity to 1 million tonnes.

We will continue to develop our core Russian steel and raw materials assets. In Russia, we will be engaged in selective growth in high-value-added products, adding another colour-coating line with 200,000 tonnes of capacity in Cherepovets. We will also maintain our focus on cost control in both steel and mining through a continuous improvement programme, and targeted investments in increasing efficiency and modernisation.

We will continue to develop our business platform in India through the partnership with NMDC, and our global portfolio of mining projects in iron ore and coking coal.

Our strategy is supported by one more key element, the Business System of Severstal, which we developed in 2010, and which we expect will help us to take leading positions in the industry for financial performance, internal procedures, corporate culture, safety and client relations.


Creating a Platform for Growth

Entering new frontiers for our vertically-integrated business modelMaxim TevsNMDC Project Leader

"In 2010, we took the first step in developing our presence in India, a new fast-growing emerging market for Severstal. In December 2010 Severstal and NMDC Ltd, the leading iron ore producer in India, signed a Memorandum of Understanding to establish a 50:50% joint venture company with the objective of building an integrated steel plant in India.

The plant will be located in the state of Karnataka and has annual crude steel capacity between 2 and 5 million tonnes, probably constructed in phases. The selected site for the plant is close to the industrial heartland of southern and western India, close to many potential customers and the operating iron ore mines of NMDC.

In line with our strategic priorities for cost leadership and vertical integration, the joint venture company proposes to have its captive iron ore mining subsidiary in India as well as having a coking coal mining subsidiary (most probably in Russia). The proposed steel project has a target to become one of the world’s lowest-cost steelmaking plants and would be the only steel greenfield project in India fully-integrated in both iron ore and coking coal raw materials.

Severstal and NMDC will conduct the technical and economic feasibility study jointly during 2011, to decide on project’s final investment specifications and product portfolio. Both companies have agreed to contribute investment proportional to their equity stakes. We believe in strong partnership with NMDC, one of the most reputable enterprises in India. It has an excellent track record of developing mining business in the county and will be responsible for local institutional support and ensuring iron ore supply. Severstal will provide technical assistance and will be responsible for operational control at the steel plant.

Strategically, India is an attractive market for Severstal with strong macroeconomic and industrial fundamentals. Long-term growth in domestic consumption, demographic suitability and a young growing population, progressive urbanisation and rising living standards, all provide the basis for sustainable high economic growth in the country. Being a net steel importer, India has significant potential for growth in demand for steel, particularly due to the need to develop infrastructure. Given favourable market prospects and the structural low-cost advantage of access to abundant high-quality iron ore, the Indian steel sector enjoys high profitability and may provide attractive investment opportunities."

Getting access to one of Russia’s major coking coal depositsDmitry Sakhno Tyva Project Leader

"In September 2010, Severstal obtained a licence for further exploration and coal extraction at the Tsentralniy coalfield in the western part of the Ulug-Khemskiy coal basin in the Tyva region, South Siberia. The coalfield is located in Tandinskiy kozhuun (district), 32 km from the capital of the region, Kyzyl city, and has an area of 96 sq. km.

Preliminary exploration of the western part of the basin was carried out in 1986–1988 and resources of the Tsentralniy field were estimated at 640 million tonnes of coking coal. The field has ten coal seams, but 70% of resources are contained in one seam called Ulug, with average thickness of 3.5 metres. The depth of the Ulug seam varies from 250 metres to 500 metres. The coal will be extracted by the underground method.

According to the licence agreement, we plan to carry out additional exploration of the coalfield in 2011–2013 and to start construction of the mine and surface infrastructure in 2015. The annual coal production is expected to reach almost 10 million tonnes by 2019.

As a part of the project, Severstal, together with other investors involved in coalfield development in Tyva, and the Russian government, will finance the construction of 400 km of railway connecting the Tyva region with the existing Russian railway network. The Russian government has already allocated US$1.7 billion from its Investment Fund to the project. The railway will be mostly used for transporting coal."


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Further development of the Putu Range iron ore project in LiberiaAlexander SolovievPutu Range Project Leader

"In 2008, Severstal acquired a 61.5% stake in African Iron ore Group Ltd, located only 130 km inland from the deepwater shoreline of eastern Liberia. We are advancing the project in a joint venture with African Aura Mining Inc, which has a 38.5% interest in the project.

The project has estimated resources of 2.37 billion tonnes of hematite/magnetite iron ore within the planned pit, with an estimated grade of 34% Fe based on a report issued by SRK Consulting Ltd in February 2011, prepared under the Guidelines of National Instrument 43-101. SRK Consulting also identified the potential for a further 1 billion tonnes to 2.5 billion tonnes of iron ore below the project’s existing pit shell. To date, about 41,000 metres have been drilled and further extensive drilling is underway as part of the Bankable Feasibility Study, scheduled for completion in 2014, with interim Pre-Feasibility study being completed by 2012.

In 2010, a Mineral Development Agreement for Putu Iron Ore Project was granted and ratified by the Government of Liberia. The MDA sets the fiscal regime for the development and mining of the Putu iron ore project for a period of twenty-five years and is extendable in line with the life of the mine.

We expect to start production at the end of 2017, with potential output of at least 20 million tonnes of concentrate. This project will allow us to become a significant player in the iron ore seaborne market."

Diversification into a new prospective market of metallic ironArtem Simonov-BeschinskiyIMBS/IIBG Project Leader

"In 2010, Severstal acquired a 25.6% stake in Iron Mineral Beneficiation Services (Proprietary) Limited (IMBS), a research and development company based in Johannesburg, South Africa. IMBS has developed a low-cost Finesmelt technology capable of processing iron ore fines and thermal coal into valuable metallic products similar to DRI/HBI.

The primary product of the Finesmelt process is a highly metallised metallic iron briquette, which is produced at lower than melting temperatures. The technology is a low-cost electric thermo-chemical technology process that converts 62+% superfine iron-bearing material, such as magnetite and hematite, into high quality metallic iron without agglomeration. The Finesmelt plant design is modular and scalable with limited infrastructure requirements. This makes it possible to achieve comparatively low capital and operating costs. The process is also an environmentally sustainable and has a capacity to use iron ore waste dumps and tailings. The end product represents a high-quality substitute for scrap metal in steel production, primarily for consumption by Electric Arc Furnaces.

IMBS has formed a joint venture to implement its first commercial project at Phalaborwa, South Africa, at the site of Rio Tinto’s Palabora Mining Company. Construction is planned to start in April 2011 and commissioning is planned for early 2012. The initial capacity of the Palamin project is 50,000 tonnes a year of metallised product, and will be further expanded up to at least 500,000 tonnes a year. IMBS aims to produce up to 3.0 million tonnes of the product a year in South Africa by 2017.

Industrial Development Corporation (IDC), the state owned investment agency of South Africa, has committed to providing necessary political, economical, and financial support and joined the Palamin project as an equity partner.

As part of the transaction with IMBS, Severstal also acquired a 51.0% stake in International Iron Beneficiation Group Limited (IIBG), a newly formed company that has an exclusive licence to commercialise the Finesmelt technology worldwide (outside of South Africa and neighbouring countries)."


Risk Management

“ Severstal top team, managers and employees at each level are responsible for developing and using the risk management system”


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Severstal’s operations are subject to certain risks. Our top team, managers and employees at each level are responsible for developing and using the risk management system, and we have a risk management committee to coordinate its implementation, with key managers as its members. The Board of Directors and top management control the risk management system’s effectiveness. We describe the most important risks below.

Political risksSeverstal performs its main activities in Russia and other CIS states, as well as in North America, Europe, Africa and Asia, and we are registered as a taxpayer in various countries. The overall political climate differs significantly between countries, as do the limitations on business activity, assets expropriation and confiscation rules, monetary systems and their potential negative changes, and the potential for other crisis factors due to government policy. There is a possibility that new trade barriers may be established, which could have a negative impact on our export or import operations. Political risks also include potential conflicts, terrorist acts, social unrest, and the introduction of a state of emergency. All these might influence our activities – and although none of them has directly affected our business so far, they could have an adverse effect on our business, financial condition, and the results of our operations.

MitigationThe majority of our production facilities and business operations are located in regions and countries with a stable political and social system. All our operational and investment decisions imply proper risk assessment and monitoring on a continuing basis. In those countries where the political situation is unstable, we undertake additional risk mitigation measures, such as specialised types of insurance against political risks.

Economic risksRussia is seriously dependent on the level of world commodity prices. Their decline may cause the price of Severstal’s shares to fall, and lead to a decrease in the purchasing ability of our customers which, in turn, will have substantial negative consequences for the company.

In 2010, the world economy demonstrated an overall upward tendency. According to the International Monetary Fund (IMF), global GDP increased by 3.9% during the year, which is 0.8% higher than expected. Russia’s GDP in 2010 climbed by about 4% year-on-year, total fixed assets investments increased by 7.5% and recorded industrial production growth was 7.5%. This robust economic and demand recovery had a very significant impact on both pricing and demand for steel products, iron ore and coking coal. In 2010,

domestic steel demand increased by 37%, which adjusted both capacity utilisation levels and prices. This in turn had a significant positive impact on Severstal’s 2010 financial results. Although raw materials costs rose in 2010, we benefited as a vertically-integrated producer.

The moderate setback of Russia’s economy during the second half of 2010 (3.0% GDP growth compared to 4.0% for the first half of the year) was partially explained by the summer drought, and had a temporary effect.

In 2010, inflation in Russia was 8.8%, almost at the same level as in 2009 (Rosstat). This rate is slightly higher than the forecast level of 7–8%. One of the main reasons for this is the summer drought and the related growth in food prices. Although the current official inflation forecast for 2011 is 6–7%, during the first two months of 2011 it has already amounted to 3.2%, and official government agencies do not rule out that the total figure for 2011 could be in double digits. Certain costs of Severstal’s Russian operations, such as wages, utilities, construction and maintenance costs, are quite sensitive to possible general price increases in Russia. However, due to competitive pressures, we might not be able to transfer fully the increased costs to our customers and to preserve operating margins. But as a value-added producer, we do have a certain customer loyalty as an advantage.

MitigationThe geographic diversification of our sales helps to minimise the negative impact of economic risks. The domestic market is our main focus, but our ability to change quickly the geography of our shipments provides more flexibility in reacting to the different challenges of the external environment, and helps us to insure ourselves against a sudden regional crisis. The majority of experts suppose that the global economic crisis is over. Nevertheless, we are monitoring the most important advance indicators of the possibility of an economic slowdown. We are also developing economic scenarios to prepare our management for possible negative changes in the external environment.


Market risksIndustry cyclicality and demand fluctuationsThe steel and mining industries are cyclical, which may result in adverse fluctuations in the demand for, and prices of, Severstal’s products. Moreover, the industries in which a large proportion of our customers operate – such as the automotive, construction and oil and gas industries – are also cyclical in nature, and this too can result in adverse fluctuations in the demand for, and prices of, steel products. Demand for the raw materials necessary for the production of steel products, such as iron ore and coal, is generally correlated with the demand for steel products. The main overriding theme for global steel markets in 2011 will be the impact of higher input costs and the ability of steel makers to pass these on. Particular economic and market factors may also have a significant effect on certain parts of our operations – for example, an economic downturn in the US could lead to a decrease in production by automotive manufacturers, resulting in a decrease in demand for our automotive flat steel products. Furthermore, the recent global economic downturn resulted in a decline in demand for, and prices of, steel and iron ore products. Although prices have risen significantly in 2010 in response to the global recovery, there is no guarantee that this recovery will continue. Adverse fluctuations in the demand for our products, or the supply of competing products, may result in overproduction or underproduction, increased costs or general uncertainty in the industry, any of which could have a material adverse effect on our business, financial condition, and the results of our operations.

Some of the products of our Russian operations are subject to various trade barriers – such as anti-dumping duties, tariffs and quotas – in our principal export markets, including the EU and the US. These trade barriers affect the demand for our products by effectively increasing their prices compared to domestically available products. An increase in existing trade barriers, or the imposition of new trade barriers, would cause a significant decrease in the demand for our products in our principal export markets. At present, however, we are not seeing any increases in existing trade barriers in our traditional markets.

In 2010, the Russian quotas for delivery to the EU were increased to 3.4 million tonnes (including 0.2 million tonnes of unused quotas for 2009 transferred to 2010), and in 2011 they will be 3.3 million tonnes. Severstal traditionally has a 35% share in these quotas.

MitigationThe main factors influencing our activities are steel demand and price recovery in 2010. The recovery on the different markets occurred at different speeds, with the domestic market demonstrating higher growth rates. For example, the Russian Steel Division changed its sales volume balance between the Russian Federation market and export, so that the proportion was 53.3% and 46.7%, respectively, at the end of 2010. In addition, we benefited from entering international markets, as our comparatively low production costs for most products allowed us to offer competitive pricing internationally. Our management has also initiated an Early Warning System project to increase the speed of our reaction to possible market changes.

Risk Management (continued)Changes in selling pricesOne of the specific features of the steel and mining industries is their liability to cyclical changes in steel prices. Positive price conditions which existed before the fourth quarter of 2008 were followed by a sharp fall in prices. The results of our activity are particularly dependent on changes in the price for rolled steel and steel products, in both domestic and foreign markets.

After the start of economic recovery, world steel demand increased by 13%, according to the World Steel Association. Steel prices are expected to continue to rise in 2011. Bad weather conditions, complicating coal and iron ore mining and delivery, have already caused these raw materials spot prices to soar, and can increase their contract prices. World steel capacity utilisation remains at a low level (about 75%), but Russian steel capacity utilisation is more than 90%, driving up steel prices. The overall average price for Russian exports of hot rolled coils (HRC) in 2010 soared by approximately 38.3% year-on-year, while the price in the domestic market increased by 30.9%.

MitigationWe were able to moderate the negative impact of the adverse economic situation, and to overcome quickly the consequences of the crisis. We made major efforts to manage working capital effectively, increase operational effectiveness, use raw materials and energy effectively, increase labour productivity, control costs closely, focus on customers (the quality of production and service), and increase production of high-value-added goods whose prices are less sensitive to economic fluctuations. We also strengthened our position in most prospective product niches, which have preferable competitive conditions and an attractive balance of supply and demand. Our comparatively low production costs are a mitigating factor for the risk of steel price fluctuations. To reduce the influence of sharp market fluctuations on our revenue, the management has initiated the Foresight project, to improve our understanding of our markets, and the Early Warning System, to predict short-term price fluctuations three months in advance.

Fluctuations in the prices of raw materials, energy and servicesAs expected, global raw material supply will remain tight in 2011 and begin to loosen from 2012 as new capacities in the world are commissioned. But delays in the construction of new mines could keep raw material prices high for a longer period, which is negative for steel mills.

Severstal requires substantial amounts of raw materials in the steel production process, in particular coal and iron ore. Although our Russian Steel Division has a secure supply of iron ore and coal from Severstal Resources – and certain Severstal North America operations have secure iron ore supply through long-term contracts – the availability of coal, iron ore and/or slabs for Severstal North America, and the availability of other necessary raw materials such as scrap, may be negatively affected by a number of factors largely beyond our control. These include interruptions in production by suppliers, supplier allocation to other purchasers, price fluctuations and transport costs. In addition, our operations require substantial amounts of other raw materials, including various types of limestone, alloys, refractories,


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While developing our forecasting system, one of our main goals was to provide a consistency of economic and industry forecasts. It is also important to remember that the global economy is cyclical, and periods of upturn are usually followed by downturns and vice versa. We use a bottom-up approach, starting with our global and regional GDP through steel and raw materials demand-supply balances, and ending up with a set of coherent price forecasts for steel and raw materials.

We also put a lot of effort into controlling our development of accurate forecasts. We systematically compare our views on the market with the opinions of other industry analysts, as well as with our previous forecasts.

Early Warning SystemThe Early Warning System (EWS) aims to keep up with the most current global economic, industry and market developments. We have identified a set of economic and industrial leading indicators, allowing us to predict pivot points on the global steel and raw materials markets three to six months in advance.

As in long-term forecasting, we always consider the opinions of industry analysts as well as those of our company experts. This gives us an understanding of the general industry mood, together with some marginal views, even though our opinion might differ from them both.

Also by working on the EWS we constantly track the convergence of short-term and long-term forecasts, and control forecast accuracy through a 90% confidence interval into which all our forecasts fall. If a forecast is out of the interval, we investigate it individually using a fishbone diagram.

One of the key applications for the EWS is a discussion at monthly senior management meetings, which helps managers keep track of the recent market situation and align their opinions with the near-term market development. The EWS is also available to anyone in the company by downloading it from an online database called Marketing Information System.

Even though professional forecasting is a relatively new function at our company, a lot of positive outcomes are already in place. We now have a centralised forecasting function, allowing our strategy planning to be carried out on a single basis. Also, our forecasts now work out better than a consensus of other analysts – and we can develop cyclical forecasts, always reminding the counterparties of the downside risks.

Severstal’s forecasting systemMarket uncertainty is one of the key elements we should closely track and mitigate in order to provide a sustainable basis for strategic decisions. In 2009 we launched a project aimed at building a comprehensive market forecasting system. As of 2010, this system (the Early Warning System), covering both long- and short-term horizons, was largely completed.

Long-term forecastingWe use long-term forecasting as a basis for developing our strategic business plan. It allows us to have a joint set of consistent assumptions on the future prospects of the global economy, and the mining and steel markets, which we can then use to evaluate all our investment projects.

In order to provide a systematic approach to long-term forecasting, we have developed a regulation that defines responsibilities and key dates in the preparation of forecasts, and sets guidelines for their use across all our business units globally. We review our forecasts fully once a year, and update them quarterly considering the most current market changes.

We recognise that the future is generally unpredictable, and this is why we concentrate on several possible outcomes following a scenario approach. The scenarios are based on the major uncertainty factors that could most drastically affect our markets.

Alexander MalanichevHead of Strategic Marketing


oxygen, fuel and gas, and the price and availability of these are also subject to market conditions. We may not be able to adjust our prices to recover the increased cost of such raw materials, so any change in their prices or supply could have a substantial adverse effect on our business, financial condition, and the results of our operations.Our Russian operations obtain significant amounts of electricity and natural gas from external providers, and the supply of electricity is currently the subject of the state price liberalisation programme.

In 2010, our Russian operations purchased significant volumes of natural gas from subsidiaries of OAO Gazprom (Gazprom), a government controlled entity, and significant amounts of electricity from the Wholesale Electricity Market. In 2010, gas prices soared by 24%, and in 2011 they are expected to increase by 15%. Whereas electricity prices grew by 9% in 2010, yet are also expected to increase by 15% in 2011.

Any interruption in the supply of energy, or a substantial increase in costs, could adversely affect our future profitability if we are unable to pass on higher costs to our customers.

Our Russian operations depend on the Russian railway system, and rely predominantly on the rail freight network operated by OAO Russian Railways (Russian Railways) for the transport of raw materials and deliveries of steel products to our facilities, consignment agents and customers. Russian Railways is the predominant company in the Russian railway sector which, together with its subsidiaries, owns the country’s largest fleet of freight rolling stock. It also plays a monopolistic role as the sole railway infrastructure operator, and it enjoys a near monopoly in the provision of locomotive services. In addition, the Russian Government sets rail tariffs and may further increase these tariffs, as it has done in the past. Such increases have resulted in significant rises in our transportation costs, and where possible we now consider alternative delivery methods, such as river and motor transport.

MitigationWe manage the sector risks regarding the provision of raw materials and services by establishing long-term mutually advantageous contracts with key suppliers, optimising purchasing processes and continuous inventory management. Most of our purchasing contracts for primary raw materials (pellets, iron ore, coking coal, and coke) are concluded for a period of at least a year. In these contracts we are not subject to the influence of short-term changes in price, except for ferroalloys (quarterly) and scrap (monthly). High reliance on our own iron ore, coking coal and scrap supplies helps mitigate price rises for raw materials.

Competition risksThe markets for steel and steel products are highly competitive. Steel producers are also in competition with producers of substitute materials, particularly in the automotive, construction and packaging industries. Severstal’s competitors include major international steel producers, some of which are larger or have greater capital resources than we do – or, in some cases, they have lower raw materials costs than ours. Our competitors may also have competitive advantages in terms of location and access to key suppliers and transport routes, and our competitive position may be further affected by the recent trend towards consolidation in the steel industry. The highly competitive nature of the industry, combined with excess production capacity for some steel products, has exerted – and may in the future continue to exert – downward pressure on the prices of some of our products. There can be no assurance that we will be able to compete effectively in the future.

Reduction or elimination of trade barriersThe Russian Government has enacted various trade barriers, such as import customs duties, specific kinds of duties (including anti-dumping duties) and licensing against imports of foreign steel products. One example is import customs duties on certain steel products imported from outside Russia, excluding countries in the CIS. These customs duties are generally: (i) 5.0% of the customs value of some commodity steel products (for example, rolled steel and steel rod); (ii) 15.0% of the customs value of a variety of value-added products (for example, pipe). These trade barriers provide protection for domestic steel producers in Russia against foreign competition by effectively increasing the prices of imported products compared to domestically available products. However, in the event of Russia’s entry into the WTO, the Government may be required to reduce or eliminate these trade barriers and there can be no assurance that other similar agreements will not be concluded in the future. The reduction or elimination of trade barriers would increase competition in the Russian steel industry, resulting in lower prices for steel products. On the whole, the Russian market is one of the least protected in terms of trade barriers against import, compared to the key markets – the US, the EU and Mexico.

Risk Management (continued)


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“ We manage the sector risks regarding the provision of raw materials and services by establishing long-term mutually advantageous contracts with key suppliers”



Financial risksCredit riskCounterparties’ risks – clientsSeverstal has developed and implemented policies and procedures to manage credit risks, including credit committees’ approvals. A bank guarantee from the approved bank is normally required, or credit insurance if credit terms are granted. Letters of credit may be used as well. After the credit committee’s approval, products may be sold to key customers under deferred payment conditions.

Counterparties’ risks – financial institutionsThe bankruptcy or insolvency of any banks we work with could adversely affect our business. Another banking crisis, or the bankruptcy or insolvency of the banks which hold our funds, could result in a loss of income for several days, or affect our ability to complete banking transactions in Russia – and this could have a material adverse effect on our business, financial condition, the results of our operations and our future prospects. Furthermore, any shortages of funds or other disruptions to banking experienced by our banks from time to time could also have a material adverse effect on our ability to complete our planned developments or to obtain the finance we need for our planned growth. Again, this could have a material adverse effect on our business, financial condition, the results of our operations and our future prospects.

MitigationIn order to minimise the potential risk of counterparties’ defaults, our management diversifies the number of our financial counterparts and holds liquid assets in several banks under flexible conditions within certain limits. These limits are determined and approved quarterly by our CFO under a developed and enforced internal procedure.

The financial conditions and the surrounding environment of financial counterparts are regularly monitored to foresee counterparties’ defaults and minimise the potential negative impact.

Interest rate fluctuationsInterest rates on our debt finance are either fixed or variable, at a fixed spread over LIBOR or Euribor for the duration of each contract. Therefore, in the case of borrowings at a variable rate of interest, we are exposed to the effect of fluctuations in interest rates, and

with borrowings at fixed rates of interest, we are exposed to the effect of the rate at the time of refinancing. There is no assurance that we can pass on the costs associated with interest rate increases in the form of higher prices to our customers. Consequently, such increases may have an adverse effect on our business, financial condition, the results of our operations and our future prospects.

MitigationDiversification of the debt portfolio is the primary tool we use to minimise the potential adverse effects of interest rate fluctuations. We also monitor closely the economic environment and current trends on debt capital markets. At the same time, we make a significant effort to provide maximum flexibility in our debt portfolio for timely adjustments via standalone third-party agreements or embedded derivative structures in loan agreements. We can also use our existing cash cushion to repay debts affected by adverse interest rate changes.

Foreign currency exchange rate fluctuationsSeverstal is exposed to translational and transactional foreign currency exchange rate risks. The translational risks are the result of translating assets and liabilities into currencies other than US dollar amounts for financial reporting purposes. Transactional foreign currency exchange rate risks arise as a result of payments we make or receive that involve foreign currency exchange. Currently, our international operations are balanced with most of our revenues, borrowings and expenses denominated in the same currency. Our Russian operations have revenues denominated in roubles, US dollars and euros, with meaningful fluctuations year on year.

Our expenses are mostly in roubles, and our borrowings are in US dollars and euros. As we report our financial results in US dollars – and must frequently exchange or translate foreign currency into roubles or roubles into foreign currency – fluctuations in foreign currency exchange rates could have a material adverse effect on our business, financial condition, the results of our operations and our future prospects.

MitigationOur existing natural hedge of export sales against financing in US dollars or euros covers much of the existing rouble-dollar exposure of our Russian operations. To manage these opposite cash streams more effectively, we have entered into a number of cross-currency swaps and forward contracts.

Credit agreement provisionsCredit agreements signed by Severstal include provisions triggering default in the case of material adverse changes or covenant violations.

MitigationWe monitor possible credit covenant violations on the basis of our business plan, and request that lenders amend such agreement provisions in advance, to prevent defaults and adverse impacts on our financial statements.


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Operational risksInvestment effectivenessSeverstal will require a significant amount of cash to fund its capital expenditure programme. If we are unable to generate this cash through operations or external sources, this programme may not be completed on schedule, or at all.

Steel production and mining are capital intensive businesses. In particular, we have undertaken a capital expenditure programme focused on the modernisation and development of our existing steel production and mining facilities. Thus far, we have cash capital expenditures (excluding Lucchini and the North America disposal groups) of US$ 1.7 billion in 2008, US$ 809 million in 2009 and US$ 1.25 billion in 2010. We plan to rely on cash generated from our operations, and, to a lesser extent, on external financing, to provide the capital needed for the capital expenditure programme. However, there is no assurance that we will be able to generate adequate cash from operations – or that external financing, if necessary, will be available on reasonable terms.

In addition, our capital expenditure programmes are subject to a variety of potential problems and uncertainties. These include changes in economic conditions, delays in completion or delivery, cost overruns, and defects in design or construction, all of which may create the need for additional cash investment. Furthermore, our capital expenditure programme includes plans to acquire significant amounts of new equipment, including more advanced technologies. While such new production equipment and technologies are aimed at increasing the operational performance of our facilities, there can be no assurance that the equipment will meet its intended production targets on a timely basis, or at all, and this could result in reduced production, delays or additional costs. Moreover, to finance the programme, we may incur a substantial amount of additional debt, and the interest and principal repayments on this may be a significant drain on our cash flow. The failure or delay of our capital expenditure programme – or the significant increases in financing costs that may be incurred to fund the programme – could have a material adverse effect on our business, financial condition, and the results of our operations.

MitigationTo mitigate technical and technological risks, we choose contractors for the construction and installation of equipment carefully. We regularly assess employees and provide necessary training, and have a company-wide development programme in place.

Mergers and acquisitionsSeverstal has grown rapidly, and we intend to pursue opportunities to grow our operations through further acquisitions. However, there can be no assurance that we will be able to integrate successfully such acquired companies, or identify suitable acquisition targets.

In recent years, we have increased our ownership interests in a number of companies, and acquired other companies, businesses and production assets. In particular, Severstal Resources has acquired a number of mining operations, both gold and iron ore, and Severstal International in the US has made several other acquisitions. We may consider future acquisitions of assets or companies that we believe are aligned with our corporate strategy and financial targets and offer significant potential synergies. In particular, we are considering growth opportunities in Africa, specifically in Liberia, Congo, Burkina Faso, Guinea and Gabon, and other emerging markets.

The success of past, current and future acquisitions will depend on our ability to manage the assimilation of the acquired assets or companies into our operations. We need to do this despite the inherent difficulties, such as: existing operational inefficiencies, cultural differences, redundancies of personnel, incompatibility of equipment and information technology, production failures or delays, loss of significant customers, problems with minority shareholders in acquired companies and their material subsidiaries, the potential disruption of our own business, the assumption of liabilities relating to the acquired assets or businesses, the possibility that indemnification agreements with the sellers of such assets may be unenforceable or insufficient to cover potential liabilities, the impairment of relationships with employees and counterparties as a result of difficulties arising out of integration, poor records or internal controls, and difficulties in establishing immediate control over cash flows. Furthermore, there can be no assurance that we will be able to achieve the target synergies in our operations with recent or planned acquisitions.



“ We regularly assess employees and provide necessary training, and have a company-wide development programme in place”


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Additionally, the value of any business we acquire or invest in may be lower than the amount we pay for it – for example, if there is a decline in the position of that business in the market or markets where it operates, or a decline in the market generally. Developed markets, such as Western Europe and the US, may offer lower margins generally, compared to Russia and the CIS. We may not be able to identify suitable acquisition targets, and future acquisitions may not be available to us on terms as favourable as in the past. We may also in the future face significant competition for potential acquisitions. When making acquisitions, it may not be possible for us to conduct a detailed investigation of the nature of the assets we are acquiring – for example, due to time constraints in making the acquisition decision and other factors. We may also become responsible for additional liabilities or obligations we did not foresee at the time of the acquisition, such as any financial liabilities entered into by the previous management before completion.

Any or all of these difficulties, if they occur, could have a material adverse effect on our business, financial condition, and the results of our operations.

A substantial portion of our gold assets were obtained through the acquisition of interests in public companies, and limited due diligence was conducted in connection with such acquisitions.

Social risksSeverstal’s business depends on good relations with its employees. A breakdown in these relations and/or restrictive labour and employment laws could have a material adverse impact on us.

Although we believe our labour relations with our employees are good, there can be no assurance that a work slowdown or stoppage will not occur at any of our operating units or exploration prospects. At most of our business units, there are collective bargaining agreements in place with labour unions. Any future work stoppages, disputes with employee unions or other labour-related developments or disputes, including renegotiation of collective bargaining agreements, could result in a decrease in our production levels. They could also lead to adverse publicity or an increase in costs, which could have a material adverse effect on our business, financial condition, and the results of our operations.

MitigationWe pay special attention to staff support and development programmes. We undertake sociological surveys of employee satisfaction, create the conditions for the development and fulfilment of employees’ working potential, and implement programmes of social assistance. Activities in different parts of our business include employee healthcare, support for maternity and childhood, catering and recreation organisation, social assistance for retired staff and veterans, staff education and development, and social incentives for the best employees.

Health, safety and environmental risksSeverstal operates industrial facilities that contain heavy metals or hazardous substances liable to present significant risks to the health or safety of neighbouring populations and to the environment. In this respect, we have in the past and may in the future incur liability for having caused injury or damages to persons or property, or for polluting the environment.

Although we have made provisions for such potential liability, there can be no assurance that the amounts covered by such provisions will be sufficient in the future, due to the intrinsic uncertainties involved in projecting expenditures and liabilities relating to health, safety and the environment.


Risk Management (continued)Achieving environmental compliance at sites that are currently in operation, or that have been decommissioned, entails a risk that could generate substantial financial costs for us. The competent authorities have made, are making, or may in the future make, specific requests that we carry out environmental improvement works. These include cleaning up and rehabilitating sites, and controlling emissions at sites in Europe where we are currently operating, or where we have operated in the past. We may have to incur significant costs to fulfil these obligations, and these could have a material adverse effect on our business, financial condition, and the results of our operations.

Additional or stricter environmental rules and regulations may significantly increase the cost of compliance. Our steel-making plants and mining operations involve potential environmental problems, including the generation of pollutants and the storage and disposal of wastes and other hazardous materials. As a result, we must comply with stringent regulatory requirements necessitating the commitment of significant financial resources, and we expect that the global trend towards stricter environmental laws and regulations will continue. Any significant increase in the cost of complying with such environmental rules and regulations in the future could have a material adverse effect on our business, financial condition, and the results of our operations.

MitigationWe have a unified health, safety and environmental protection policy. This includes efficient HS&E management systems and standards, setting objectives and targets, and identifying, assessing and managing HS&E hazards and risks. We have also introduced, into all parts of Severstal, responsibilities for senior and line management in implementing the HS&E policy and monitoring its performance. In addition, we have brought in improved practices, technology and equipment to prevent injuries, ill health and adverse environmental impacts. We have also organised employee training programmes. The HS&E management systems at each entity cover risk management, contingency and recovery planning, information and communications, training and other relevant elements.

Legislation and regulatory risksTaxes Severstal’s effective tax rate and financial condition could be affected by the Russian tax status of our non-Russian subsidiaries.

Russian tax laws do not provide detailed rules on the taxation of foreign companies. It is possible that with the evolution of these rules, or changes in the approach of the Russian tax authorities, the non-taxable status in Russia of some or all of our foreign companies may be challenged.

We believe that our interpretation of the relevant tax legislation is and will be sustainable.

Moreover, we believe we have accrued all applicable taxes. However, the interpretations of the relevant authorities could differ, and if they were successful in enforcing their interpretation, the effect could have a negative impact on our financial position.

Property lawThe legal framework relating to the ownership and use of land and other real property in Russia is not yet sufficiently developed to support the private ownership of land and other real estate to the same extent as is common in some of the more developed market economies of North America and Europe. Land use and title systems rely on complex traditional ownership systems. As a result, the title of land that Severstal might invest in may be unclear or in doubt. Moreover, the validity of our right to the title or use of our properties may be successfully challenged or invalidated due to technical violations or defects in title. Such instability creates uncertainties in the operating environment in the emerging market nations, which could hinder our long-term planning efforts and may prevent us from carrying out our business strategy effectively and efficiently. If the real property we own or lease is found not to comply with all applicable approvals, consents, registrations or other regulations, we may lose the use of such real property, and this could have a material adverse effect on our business, financial condition, and the results of our operations.


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Administrative sanctionsWe have expanded our operations through the acquisition of companies that are incorporated and operating in Russia, or by acquiring assets that are located in Russia, such as the mining companies that currently comprise Severstal Resources. Some of these acquisitions are, or were, subject to the prior approval or subsequent notification requirements of the FAS, or its predecessor agencies. Certain portions of these requirements are worded vaguely, and there can be no assurance that we will be able to comply fully or that the FAS will not challenge our past compliance, which could result in administrative sanctions, required divestitures or limitations on our operations. Any such sanctions, divestitures or limitations would have a material adverse effect on our business, financial condition, and the results of our operations.

Licence agreementsOur business depends on the continuing validity of our licences, the issuing of new licences and our compliance with the terms of our licences, including subsoil licences for our mining operations in Russia. Regulatory authorities exercise considerable discretion in the timing of licence issuing and renewal, and in monitoring licensees’ compliance with licence terms. Requirements imposed by these authorities may be costly and time-consuming, and may result in delays in starting or continuing exploration or production operations. Moreover, legislation on subsoil rights remains internally inconsistent and vague, and the acts and instructions of licensing authorities, and the procedures by which licences are issued, are often arguably inconsistent with legislation.

In addition, our business outside of Russia also depends on the continuing validity of licences, the issuing of new licences and compliance with the terms of such licences, which may involve uncertainties and costs for us. Any or all of these factors may affect our ability to obtain, maintain or renew the necessary licences. If we are unable to obtain, maintain or renew the necessary licences – or can obtain or renew them only with newly introduced material restrictions – we may be unable to benefit fully from our reserves, and this could have a material adverse effect on our business, financial condition, and the results of our operations.

MitigationWe base our activities, Russian and international, on strict adherence to all applicable laws and regulations – tax, customs, and currency control. We ensure monitoring and timely, appropriate reaction to changes, and strive to maintain constructive dialogue with regulators on issues of interpreting and implementing laws and regulations.

In particular, we work with Russian federal and local authorities, and participate in the Russian Union of Industrialists and Entrepreneurs and various ad hoc governmental committees. Our international activities are analysed both by in-house lawyers and respectable local or international law firms. We always hold negotiations with government bodies, such as anti-trust, financial and securities market authorities, in good faith and in strict compliance with their regulations, to maintain long-term constructive dialogue.

“ Our comparatively low production costs for most products allowed us to offer competitive pricing internationally”


“ Notable drivers of revenue growth in 2010 were sales of steel products to the Russian market, sales of mining products to third parties, and accelerating quarter-to-quarter gold sales globally on the back of the rapid expansion of our gold business”

Performance Review

EBITDA margin 2010 (US$)

24.0%(2009 EBITDA margin: 16.6%)

EBITDA 2010 (US$)

3,263m(2009 EBITDA: 1,589m)

Revenue 2010 (US$)

13,573m(2009 revenue: 9,594m)


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Our outstanding performance in 2010 reflected our efficient vertically-integrated asset structure and improving market conditions. Revenue was US$13,573 million, up 41.5% on 2009; EBITDA was US$3,263 million, 105.3% higher than the previous year.

Revenue driversIn 2010, crude steel production increased by 16.6% compared to 2009, and reached 14.7 million tonnes.

In 2010, revenue was US$13,573 million, up 41.5% on 2009.

Severstal’s Revenue US$ million

2009 9,594

2010 13,573

Notable drivers of revenue growth in 2010 were sales of steel products to the Russian market, sales of mining products to third parties, and accelerating quarter-to-quarter gold sales globally on the back of the rapid expansion of our gold business.

Segments’ contribution to Group revenue growth in 2010, US$ million

Revenue2009

9,594

2,636600

13,573

1,613(870)

RussianSteel

Division

SeverstalNorth America

Division

SeverstalResourcesDivision

Intersegment Revenue2010

1,0002,0003,0004,0005,0006,0007,0008,0009,00010,00011,00012,00013,00014,000

In 2010, Severstal Russian Steel contributed 63.9% of Group revenue, after inter-segment transactions, and remained the most important division by share of revenue.

Severstal Resources’ share of Group revenue, after inter-segment transactions, increased to 14.7% in 2010 compared to 12.0% a year earlier. This increase was due to favorable market conditions and a growing contribution from the gold segment. Revenue rose 86.2% to US$3,484 million (FY 2009: US$1,871 million) and EBITDA was up 294.7% to US$1,551 million (FY 2009: US$393 million).

Severstal North America’s contribution to Group revenue, after intersegment transactions, fell from 24.1% in 2009 to 21.5% in 2010 due to a challenging market.

Severstal’s revenue by segment*, 2010 * Including interdivision adjustments of a US$1,637.3 million for 2010 and US$769 million for 2009.

Share of segment sales in total sales (without intersegment sales) 12 m 2010 12 m 2009

Severstal Russian Steel division 63.9% 63.9%

Severstal North America division 21.4% 24.1%

Severstal Resources division 14.7% 12.0%

EBITDA driversEBITDA was US$3,263 million, up 105.3% on the previous year.

Severstal’s EBITDA US$ million

2009 1,589

2010 3,263

2010 EBITDA was strongly driven by Severstal Resources. For the first time in the Company’s history the contribution of Severstal Resources and Severstal Russian Steel at the EBITDA level were almost equal for the year. Severstal Russian Steel EBITDA totaled US$1,677 million versus US$1,551 million generated by Severstal Resources. In Q4 2010, Severstal Resources’ EBITDA exceeded that of Severstal Russian Steel: US$510 million versus US$406 million, respectively. This reflected a much improved mining environment supported by the growing contribution of our gold segment. The Group EBITDA margin increased from 16.6% to 24.0%.

Segments’ input to Group EBITDA growth in 2010, US$ million

EBITDA2009

1,589

358200

1,158

(42)3,263

RussianSteel

Division

SeverstalNorth America

Division

SeverstalResourcesDivision

Intersegment EBITDA2010

200

1200

2200

3200


Severstal’s capex by segment, 2010 (%)

-5

0

5

10

15

20

25

30

35

40

45

Intersegmentadjustments

Lucchini(discontinued

operations)

SeverstalResources

SeverstalRussian

Steel

SeverstalNorth

America*

Major investmentsIn line with our plans, the following expansion projects were completed or advanced in 2010:

In June 2010, we completed construction and launched the Sheksna Pipe Plant (TPZ-Sheksna) close to our main Russian steelmaking facilities in Cherepovets. The plant is capable of producing 250,000 tonnes of electric welded pipes and other profiles for the construction industry per year. We invested US$22.5 million in this project in 2010 out of the total investment of US$146.9 million.

In July 2010, the Gestamp-Severstal-Kaluga Stamping Facility was commissioned in the Kaluga Region, one of the biggest Russian centers of high-quality automotive steel demand. The plant produces body components for the Volkswagen plant located in the same area. Target annual output is 13 million stamped parts. Total investment into this joint-venture with Gestamp, an international producer of metal components for the automotive industry was about €89 million. Total investment into this joint-venture with Gonvarri, part of Gestamp was about €40 million.

In December 2010, we commissioned a new hot dip galvanizing line at the Cherepovets Steel Mill with annual production capacity of 400,000 tonnes of galvanized products. We invested US$41.3 million in this project in 2010, out of a total target investment of US$86.7 million.

At Cherepovets Steel Mill, we spent US$43.2 million on the construction of the second colour-coating line, adding 200,000 tonnes of value-added capacity upon completion in 2011.

Performance Review (continued)

Cash flow driversOperating cash flow remained high with US$1,259 million generated in 2010. We had a strong cash position with US$2,025 million in cash and short-term deposits as at December 31, 2010.

Cash flow in 2010*, US$ million

December2009 Cash

& STDeposits

OperatingCF

2,949

1,259 (1,582)

(393)

(208)2,025

InvestingCF

FinancingCF

Cash ofdiscontinued

operation

December2010 Cash

& STDeposits

0

1,000

2,000

3,000

4,000

5,000

* Net cash from operating, investing and financing activities includes negative US$598 million of net cash flow from discontinued operations related to Lucchini and North America disposal groups: December 2009 cash includes US$96 million of short-term deposits; December 2010 cash includes US$13 million of short-term deposits; December 2009 cash includes Lucchini and North America disposal groups.

Capital investments Our cash capital expenditures in 2010 totaled US$1,251 million (capital expenditures including discontinued operations totaled US$1,366 million) and were in line with our target for the year, as we continued to invest selectively across our operations in order to expand mining and steel production volumes, increase output of high-value-added steel products, improve our operational efficiency and reduce costs.

Severstal’s capital investments (US$ million) Change year- Segment 2010 2009 on-year %

Severstal North America* 342 238 43.7

Severstal Russian Steel 576 369 56.1

Severstal Resources 434 242 79.3

Lucchini (discontinued operations) 15 133 (88.7)

Intersegment adjustment (1) (4) n/a

Total capex 1,366 978 39.7

*Including discontinued operations.


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We are continuing the construction of the Balakovo Long Product Mini-Mill in central Russia. This has an expected capacity, upon completion in 2013, of one million tonnes per year of long products for the construction and infrastructure industries. We invested US$162.2 million in this project in 2010, out of a total planned investment of US$693.0 million.

At Vorkutaugol, we invested US$11.1 million to develop our own electric power generation and washing plants processes (US$7 million and US$4.1 million, respectively). Once completed in 2011, the captive electric power station will reduce our electricity purchase costs substantially. Also at Vorkutaugol, we invested US$26.4 million in the Usinskoe deposit, a major coking coal reserve, which we will develop.

Also at Vorkutaugol, we invested US$ 21.8 million in longwall mines and washing plants (US$17 million and US$4.8 million, respectively). Capital expenditure on longwall coking coal mines was US$3.9 million in Komsomolskaya deep mine, US$2.5 million in Severnaya deep mine, US$0.4 million in Vorkutinskaya deep mine, US$5.1 million in Zapoliarnaya deep mine, US$4.5 million in Vorgashorskaya and US$0.6 million to explore Yunyaginskiy open pit. Capital expenditure on washing plants amounted to US$2.9 million at Pechorskaya washing plant, US$1.4 million at Severnaya washing plant and US$0.5 million at Vorkutinskaya washing plant.

In our gold business, we installed additional processing capacity and made operational improvements at the Berezitovy and Suzdal assets. We spent US$11.9 million at Berezitovy and US$4.5 million on other small projects.

We invested US$63.8 million in developing our iron ore open pits: US$48.2 million at Karelsky Okatysh and US$15.6 million at Olkon. Additionally, we invested US$8.0 million to improve railway transport infrastructure, mainly at Karelsky Okatysh. We spent about US$14.5 million on equipment for beneficiating plants at Karelsky Okatysh (US$6.9 million) and Olkon (US$7.6 million). We also invested US$3.3 million in the pellet plant at Karelsky Okatysh, and US$2.3 million in iron mines at Olkon, and US$7.9 million in other workshops.

In our North American division, we spent US$125.0 million on an ongoing pickle line project and tandem cold rolling mill, and US$44.0 million on an ongoing hot-dip coating line in Dearborn. Both of these will help to produce value-added products. We also spent US$68.0 million on Phase II in Columbus, a mill capable of producing 1.5 million tonnes of crude steel.

Consolidating our gold business was the main focus of our cash flow investment in 2010. We spent US$460.5 million on taking a 93.4% stake in Crew Gold Corporation and US$152.1 million on acquiring a 21.1% stake in High River Gold Mines Ltd, raising our total shareholding in this company to 72.6% at the year end.

Other notable 2010 investments included the acquisition of a licence for a coking coal deposit in the Tyva republic in Russia for US$19.7 million. We also purchased, for a total consideration of US$7.5 million, a 25.6% stake in Iron Mineral Beneficiation Services (Proprietary) Limited (IMBS), a research and development company based in Johannesburg, South Africa.

2011 target CAPEXOur capital expenditure will continue in 2011 to start operations of our ongoing projects, improve operating efficiency, and ensure that we maintain industry-leading standards of health and safety. Our target investment programme for 2011 is US$2 billion, which is approximately 43% higher than our target level in 2010, and twice the target level in 2009. A major part of this year’s expenditure will be invested in Severstal Russian Steel, with the remainder in Severstal Resources and Severstal International (North America).


Performance Review (continued)

Liquidity and debt positionSeverstal adheres to a conservative treasury approach on managing our debt portfolio. Positive relationships with the banking community and proven access to domestic and international debt capital markets allow us to form a well diversified financing structure not reliant on a single market or source of financing. Debt structure as of 31 December 2010, %

0

10

20

30

40

50

60

70

Private debtPublic debt

58%

42%

The Company’s development strategy is backed by long-term financing with a comfortable maturity profile. In 2010, the Company conducted several successful public deals which allowed it to extend the maturity:

High yield bonds –

In February 2010, despite the relatively high market volatility in the US and Europe Severstal Columbus successfully placed US$525.0 million of senior secured notes at an original issue discount of 2% and an annual coupon rate of 10.25% maturing in 2018. The order book was two times oversubscribed. The proceeds were used to refinance outstanding debt obligations originally incurred to finance construction at Severstal Columbus.

Ruble bonds –

In February 2010, we issued a US$498.0 million ruble-denominated bonds, maturing in 2013 at a coupon rate of 9.75%. The offering was 3.7 times oversubscribed, allowing a coupon rate to be fixed below the initial price guidance. We used the proceeds to refinance short-term debt.

Liability Management & new issue –

In October 2010, we took advantage of favourable market conditions and successfully completed the liability management and new issue transaction. The new 7-year Eurobond issue of US$1,000 million was placed under a US$3,000 million Participation Note Programme on October 25, 2010. With significant market demand, the book was 5.4 times oversubscribed and the transaction was priced below the initial price guidance at a historically low coupon rate for the company of 6.7%.

The majority of the borrowed funds were used to refinance existing debt, including the partial repurchase of the US$1,250 million Loan Participation Notes due in 2013. This was structured as a Modified Dutch Auction to optimise the premium, with the target amount increasing from an original US$450 million to US$706 million.

The combination of the above transactions allowed us to extend the maturity profile of our debt, and reduce interest expense in the coming years.

Debt maturity schedule*, US$ million

0

500

1,000

1,500

2,000

2,500

2018+201720162015201420132012

537

1,048

5253

650

1,599

706

847

2011

1,331

* Excluding accrued interest and unamortised balance of transactional costs

Due to our solid financial performance, there was a rapid improvement in leverage metrics, and we are meeting our long-term target of net debt to EBITDA at below 1.5 times.


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Gross and net debt as of 31 December 2010, US$ million

1,000

2,000

3,000

4,000

5,000

6,000

7,000

End 2010End 2009

5,831

3,476

6,142

4,116

Gross debtNet debt/EBITDA

Net debt

2.2x

1.3x

0x

1x

2x

3x

4x

5x

6x

Note: Figures as of 31 December 2009 and 31 December 2010 exclude Lucchini and North America disposal groups.

In 2010, we maintained significant cash balances. During the whole year, the average amount of cash and short-term deposits on hand was above US$2 billion, and the average availability of committed credit lines was about US$400 million. Traditionally, we keep our cash balances and availability of committed credit lines above our short-term obligation (debt maturities for 2011 are US$1,331 million, excluding accrued interest and unamortised balance of transactional costs). A strong liquidity position helps us retain operating and financial flexibility, and support stable development.

Liquidity position as of 31 December 2010*, US$ millions

0

500

1,000

1,500

2,000

2,500

Q411Q311Q211Q111

331625**

211164

Liquidity

248

2,025 58%

42%

CashShort-term debt to be repaidUnused committed credit lines

* Excluding accrued interest and unamortised balance of transactional costs** US$492 million in Q3 2011 represent RUB bond put option; maturity can be extended by an additional year

In 2010, we also tightened our policy for managing liquidity risk to minimise the potential negative impact of counterparty default.


The Business System of SeverstalFollowing the development of the Mission, Vision and Values of Severstal in 2009, in 2010, we made another step forward towards internal efficiency. We worked out a set of principles and tools named the Business System of Severstal implanting desired behavior models among the employees and, as a consequence, enable cultural transformation of Severstal, as well as achievement of the company’s strategic goals.

2009 2010 2011 – onwards

Reversal creativity matrix developed

Values, corporate mission –and visionKey business project –

Choosing key patterns for company development:

Labour safety –Customer orientation –Production efficiency –Corporate culture and –personnel developmentDecision-making speed –and business processes

Defining goals and objectives by development lines, creating and implementing initiatives

Communicating and solving various discrepancies in goals across several lines of development

Formulating basic Business System principles

Creating uniform culture for production units

Integrating key elements of the Business System into production and management processes.

Deploying programs to implement initiatives by specific lines of development in the division


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The Business System is a logical follow-up to the previous development phases. Severstal has always focused on production efficiency and implemented several projects in this segment: “Total Optimization of Production” (1998), “Production Consulting” (2000), “Continuous Improvement” (2009).

The Business System is a logical development of previous improvement efforts

– Reducing production costs and waste the most cost-effective way possible

– Involving the most capable production managers in the improvement process

– Further reduction of production costs and waste, improvement in product quality

– Including a wider range of production managers and employees in various segments

– Stabilising all production processes, minimising production variances

– Striving to achieve maximum efficiency of labour, equipment, energy use

– Integration of individual projects into a uniform improvement system

– Improved management structure for business units based on best practices

– Maximum employee involvement in improvement processes

– Cost analysis and classification– Collecting and analysing cost

reduction proposals– Implementing fastest-yielding

proposals– Tracking the effects of the

implemented proposals

– Implementing basic lean production tools

– Systemic performance management

– Using regular audits– Creating a permanent

infrastructure– Creating quality teams

– Implementing a wide range of lean production tools

– Comprehensive standardisation of production processes

– Two-level programme infrastructure controlled by experts in lean production

– Creating improvement initiatives with a view to key lines requirements (development, safety, customer orientation, values)

– Changing labour payment system while setting ambitious goals

– Comprehensive audit of the improvement system

– Wholesale training of officers and senior employees in many segments

Goals

Tools

1998 2000 2009 2010

Total production optimisation

Production consulting

Continuous improvement

Business system


In 2010, Severstal identified five key lines of development within the Business System:1. “Labour Safety”2. “Building a Customer-Oriented Organization”3. “Continuous Improvement”4. “Severstal People”5. “Business Standard”

Pillars of the Severstal Business System

Business System

Severstal People

Labo

ur S

afet

y

Cont

inuo

us Im

prov

emen

t

Build

ing

a Cu

stom

er-

Orie

nted

Org

anis

atio

n

Busi

ness

Sta

ndar

d

In 2011, we will implement the five Business System projects simultaneously in production, making it possible to achieve specific goals for each of the projects and ensuring common changes in employee behaviour and cultural transformation.

We established a Unified Business System development centre to integrate these projects and develop harmonised methods for doing so. These methods look at seven areas: skills tracking, motivation, target-setting, standardisation, communications, skill development, and audits. Our approach to implementation prevents project teams competing for personnel, enables even distribution of assignments among line managers and reduces the number of reports and amount of paperwork. At the same time, the uniform project implementation makes it possible to keep all the unique features.

Project details:The Continuous Improvement project focuses on developing structural competitive advantages for Severstal in the global market. Its foremost objectives include establishing self-sustained continuous improvement systems on site, increased labour and equipment efficiency, reduced production losses, improved product quality, implementing best practices and changing employees’ mentality and behaviour in the workplace.

Lean production tools are particularly important as they help employees eliminate seven classic types of waste, those resulting from overproduction; products transported between processing stages; unnecessary product movements within the same production stage; delays in spare parts and materials arriving; over-processing; excessive inventory; making defective products and re-processing them. Managers and employees are both trained in lean production tools.

The Business System of Severstal (continued)


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The confirmed financial benefits of the project for the Russian Steel division in 2010 were US$52 million. The project’s success is proven by changes in the Cherepovets Steel Mill Flat Rolled Shop No 2. In 2011, production volume at the mill 2000 is expected to increase by 363.1 million tonnes due to reduced downtime as a result of decreased roll changing time and introduction of standard rolling speed and pauses between product units.

The Labour Safety project aims to eliminate death at the workplace by 2015 and achieve a leading position by major injury rate indicators (LTIFT, LTIFR) in Russia, and in the longer term at a global level. The project focuses on deploying an efficient occupational safety management system that should help employees development in safe behaviour skills.

Work on this project includes three units: creating safe labour conditions, involving employees in labour safety work, and engraining safe behaviour skills. We have developed eleven methods to train line management and employees in various lines of activities. For example, safe behaviour audits help to assess risks correctly and avoid unsafe employee actions in the future.

The main goal of the Building a Customer-Oriented Organisation project is to involve all employees in systemic customer orientation events to increase our customer orientation.

This project improves absolute and relative customer satisfaction levels, helps to assess and increase corporate process efficiency, improves understanding of internal clients by employees, and leads to economic benefits by increasing the sale price compared to benchmark pricing trends.

We used annual customer questionnaires to develop about 200 organisational and investment activities to improve product quality, delivery flexibility and performance, achieve speedier resolving of customer requests and awareness of order progress.

Under the project, the motivation and target-setting systems were modified in several business units (production and technical directorate, sales directorate). New targets focus on improving customer satisfaction levels. We reorganised marketing service and assigned a new function to manage customer expectations.

By consolidating the project methods and implementing them together within production, we managed to get the system online enabling communication of customer requests to production units. Our subsidiary marketing companies started implementing the customer orientation principles.

The Severstal People project looks to create a single-minded business team focused on solving common corporate tasks and sharing its values. We implement this project in three ways at once: we create transparent and easy-to-grasp HR management processes, ensure a worthwhile working environment, and promote dialogue (a system of internal communications and feedback) with employees.

Within the first group of objectives, we created processes for recruiting, evaluating and developing employees in accordance with the corporate values model, developed a recruitment and engagement process for managers, and implemented a performance, development and continuity management system.

In 2010, we started a new training programme for managers called ’Achieving More Together’. The Russian Steel Division, in cooperation with McKinsey and Hay Group, started implementing an organisational efficiency and compensation project.


Within the second group of objectives, we established a social and living standard, and approved an action plan to improve working conditions for employees, repaired locker rooms, shower rooms, and premises for shift meetings, improved the quality of employee delivery in their workplaces, provided comfortable working clothes and personal protection equipment, repaired walkways and galleries etc.

To promote dialogue with employees, we adopted a Code of Business Conduct, and are also developing feedback routes, and we perform annual cultural monitoring which we follow up with a corrective action plan.

The Business Standard programme, as one of the crucial elements of the Severstal Business System, focuses on increasing business-process efficiency and improving information transparency when making management decisions, as well as significant cost reduction and cultural transformation. The programme is based on the SAP ERP platform.

In 2010, we implemented several projects designed to improve operational processes, within the scope of the Business Standard Programme:

We opened a Unified Service Centre (USC) in the Russian city of –Yaroslavl to provide accounting and tax accounting services, IFRS transaction accounting, treasury operations, HR accounting, wage and withholdings tracking, and wage calculations for Severstal Resources. This technology enables us to develop business while minimising the costs of supporting geographically dispersed business units. Vorkutaugol launched an ’Equipment Maintenance & Repair’ –programme enabling the management of repair quality, as well as control and analysis of the engineering status of equipment and specific units. For cost-saving, new functionality ensures reliable technical accounting, strategic analysis and planning of M&R expenses. EM&R automated management and control enable tracking mandatory performance of scheduled preventative activities: maintenance and repair of mining equipment. In addition to decreasing the number of forced outage cases and bringing direct economic benefits for the company, the new system will also improve industrial safety levels. Equipment maintenance and repair is a harmonised process for the Mining Division and Russian Steel Division.

Those processes have already provided the impetus for serious organisational and methodological changes:

Merging service companies –Simplifying warehousing structure –Establishing harmonised accounting principles by Russian –Accounting Principles, IFRS, Tax Accounting

By July 2011, the Business Standard Programme is scheduled for launch at the Russian Steel Division.

By 2012, we expect over 9,000 of Severstal employees to be working in the programme.

The Business System of Severstal (continued)


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Severstal’s Information Technology

As for improvements in business continuity, we have reconstructed all major data centres to provide the highest level of durability for all business-critical services and applications. We can confirm the potential for significantly reducing operational costs after the pilot project in IP Telephony. The transfer of internal phone communications, especially between different cities and countries, to within the corporate WAN proved to be the right choice.

Information systemsThe main area of focus in 2010 was improving internal communications services. The goal is to provide a standard company-wide software solution. With the use of the latest software technologies this approach also gave us the opportunity to get rid of several different legacy applications which performed the same task in different business units.

We have implemented new intranet portal services in cooperation with the start of operations of the Shared Service Centre.

To provide better control and improve current business processes, we have developed a new information system for PBS Coals. This experience proved to be very successful, so after solving the task of the integration with ERP, we will consider introducing this solution to other mining business units.

IT governanceThe main result of 2010 in IT governance was the transfer of the IT service provision from outsourcing to in-house at Severstal North America. We have transferred all major services previously supplied by external IT providers, to a team of local and corporate IT staff and implemented new call centres within the Shared Service Centre. This reduced IT operational costs significantly.

Goals for 2011In 2011 Severstal IT will face the following challenges:

SAP ERP implementation; –Start of the Unified Communications implementation; and –Start of implementing the Manufacturing Execution System (MES). –

IT can be considered as one of the most crucial functions for Severstal business processes integration, efficiency and business continuity. 2010 was the year of significant results in terms of infrastructure modernization, application implementation as well as of the corporate governance in IT function.

InfrastructureThe key drivers for infrastructure development in 2010 were:

Business Standard project; –Further improvement in the Business Continuity sphere; and –Operational cost reduction. –

These topics found the reflection in different successful IT projects.

We have built full infrastructure to meet all requirements of the Business Standard project. This resulted in a significant increase in server capacity and telecommunication channels bandwidth and scale.

Evgeny CharkinChief Information Officer


Severstal Resources Severstal Resources forms the basis of Severstal’s balanced and vertically-integrated business model. With a focus on high-value-added products, such as export-quality iron ore pellets and hard coking coal concentrate, Severstal Resources sold 13.8 million tonnes of iron ore and 11.7 million tonnes of coal in 2010.


Revenue 2010 (US$)

3,484.3mAn increase of 86.2% on 2009

EBITDA 2010 (US$)



Severstal Resources (continued)

Severstal Resources forms the basis of Severstal’s balanced and vertically-integrated business model. With a focus on high-value-added products, such as export-quality iron ore pellets and hard coking coal concentrate, Severstal Resources sold 13.8 million tonnes of iron ore and 11.7 million tonnes of coal in 2010.Severstal Resources has the capacity and product mix to provide almost all the iron ore and hard coking coal requirements for the Russian Steel division’s steel operations.

Iron ore productionOur iron ore business comprises two iron ore extracting complexes: Karelsky Okatysh, which produces iron ore pellets, and Olkon, which produces iron ore concentrate. We also have an iron ore project in Africa: the Putu Range project in south-eastern Liberia, for which we have signed a mineral development agreement with the Government of Liberia. In May 2010, we acquired a 16.5% stake in Core Mining Limited, which controls exploration licences for the Avima iron ore deposit in the Republic of Congo (Brazzaville) and the Kango iron ore deposit in the Republic of Gabon. Both projects are at an early exploration stage with a significant resources potential of high-grade iron ore with an Fe content over 50%.

Karelsky Okatysh is in Kostomuksha, in the Karelia Republic of north-western Russia. It mines magnetite quartzite ores and produces high-quality iron ore pellets with an iron concentration between 63% and 65%. Karelsky Okatysh operates two major deposits with an estimated life of 34 years, based on our estimates of JORC reserves plus expected reserves extension. The average iron concentration of reserves at Karelsky Okatysh is approximately 29%.

Olkon is in the Murmansk region of north-western Russia. It mines magnetite-haematite quartzite ores and produces high-quality iron ore concentrate. Currently, ore mining is carried out in five open pits. In 2010, Olkon acquired two additional mining licenses for deposits totalling around 44 million tonnes of non-JORC reserves – estimated according to the Russian method in A, B, C1 and C2 categories, and suitable for open-pit mining. Olkon’s deposits have an estimated life of 19 years, based on our estimates of JORC reserves plus reserves extension.

Liberia’s Putu Range iron ore project has estimated resources of 2.37 billion tonnes of iron ore in the existing pit at Putu, with an estimated 34% iron concentration based on a report issued by SRK Consulting Ltd in February 2011 prepared under the Guidelines of National Instrument 43-101. SRK Consulting Ltd also identified potential for up to 2.5 billion tonnes more of iron ore below the project’s existing pit shell. Extensive drilling is currently underway as part of the Bankable Feasibility Study, scheduled for completion in 2014. We expect production to start in 2017, with a potential output of at least 20 million tonnes of concentrate. This project will allow us to become a significant player in the iron ore seaborne market.


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Coal productionOur coal business comprises Vorktaugol in Russia and PBS Coals in the United States.

The Vorkutaugol mine is near Vorkuta in the Komi Republic in northeast European Russia. It operates the Vorkutskoye and Vorgashorskoye coal deposits, with an estimated life of 45 and 20 years respectively, based on our estimates of JORC reserves plus expected reserves extension. The business comprises five longwall mines, an open pit mine and three washing plants. It extracts coking and steam coal. Premium grade coking coal accounts for a high proportion of the Vorkutaugol reserves. In 2010, Vorkutaugol had run of mine of 12.6 million tonnes and plans to increase this to 13 million tonnes by 2013.

PBS Coals is a coking and steam coal producer in the United States operating several surface and underground mining complexes near Somerset, Pennsylvania. PBS Coals had a total output of 3.4 million tonnes in 2010. According to a report by the John T. Boyd Company dated 30 May 2008, under the Guidelines of National Instrument 43-101, estimated coal reserves and resources are approximately 49 million tonnes and 223 million tonnes respectively. PBS Coals is favourably located in relation to Severstal’s steel producing facilities in North America and export seaborne markets.

In September 2010, we obtained a licence for further exploration and coal extraction at the Tsentralnyi coalfield in the western part of the Ulug-Khemskiy basin in the Tyva Republic, Russia. This licence was granted by Rosnedra, the Federal Agency of Subsoil Use and will give us access to an estimated 639 million tonnes of high quality hard coking coal. It also expands our access to new markets.

Gold productionOur gold business is consolidated under Nordgold, our 100% gold-mining subsidiary. Nordgold is an established pure-play gold producer focused on emerging markets, with eight producing mines, two development projects, five advanced exploration projects and a broad portfolio of early exploration projects and licences – located across West Africa in Guinea and Burkina Faso, Kazakhstan and the Russian Federation. Since starting operations in 2007, Nordgold has grown through acquisition and organically, increasing its production (including gold equivalent ounces of silver) from approximately 21,000 oz to approximately 589,000 oz in 2010. It targets production of over a million ounces from its operating mines and development projects on a fully consolidated basis by 2013. At 1 November 2010, Nordgold’s resource base consisted of 23 million oz of gold resources on a fully consolidated basis and 103 million ounces of silver resources (represented by a 50% interest in the Prognoz silver deposit) classified as measured, indicated and inferred, according to JORC – and 8.9 million oz classified proven and probable gold reserves.

Ferroniobium productionIn 2010 we decided to stop Ferroniobium production and sell this kind of our business.

"2010 was one of the strongest years ever for our mining division, due to a combination of favourable market conditions, the flexibility of our production and sales team, and the effect of last year’s initiatives to increase the efficiency of our operations.Our mining activities will continue to provide a strong source of growth and we intend to expand iron ore and coal production as well as other mining operations. In 2010, we laid a solid foundation for future growth with new mining greenfield projects in Russia and Africa. In 2010, we won a licence for a large coking coal deposit in Russia and made progress obtaining permits for our Putu Range iron ore greenfield project in Liberia, Western Africa. In February 2011, an independent mineral resource report estimated a doubling in resources in Putu’s iron ore deposits to 2.4 billion tonnes. We are now working on a feasibility study at this asset, and intend to build a sizeable iron ore complex.

At the same time, our gold production business has rapidly grown through acquisitions and organic growth over the last three years into an established gold producer with assets in emerging markets. In 2010, it contributed a total of US$372.8 million to the Resources Division’s EBITDA, or 24.0%, and the full-year EBITDA margin was 49.4%. Having announced on 11 February 2011 that we have postponed Nordgold’s initial public offering, we will continue to develop the business. We are confident that given its strong fundamentals, Nordgold will meet our predicted growth targets".

Vadim LarinSeverstal Resources, Chief Executive Officer



Brief world iron ore market overviewIn 2010, the global iron ore market fully recovered from the crisis reaching 1,753 million tonnes and growing by 13% year-on-year, as steel production rebounded in developed countries and demand in China continued to grow.

Global iron ore consumption 2005 – 2010, million tonnes

0200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

201020092008200720062005

China Excluding China

Source: AME, Severstal Analysis

899837

715713616

521

854722

957937912

867

1,753

1,5591,6721,650

1,5281,388

Source: AME, Severstal analysis

The international iron ore trade volume reached 1,031 million tonnes in 2010, a 9% increase on 2009. China, as the largest player, imported 611 million tonnes of iron ore last year, or 59% of the total international trade volume. The other big importers of iron ore were the EU, Japan and South Korea, with a combined 31% share of the global iron ore imports.

International iron ore trade in 2009-2010, million tonnes (63% Fe)

Dem

and i

n 200

9

Supp

ly in

2009

Othe

rsCh

ina EU

Supp

ly = d

eman

d in 2

010

Asia

ex-C

hina

North

Am

erica

Austr

alia

Braz

il

CIS

India

Afric

aNor

th A

mer

icaOt

hers

900

920

940

960

980

1,000

1,020

1,040 DemandSupply

944

12 -17

35

10

47 1,031 69

25

4

-14 -3 -3 9

944

Source: AME, Severstal analysis

One of the key themes in 2010 was a recovery in demand from developed countries. China’s iron ore imports actually decreased last year by 17 million tonnes, or 2.7%, from 2009. This was the first time in 10 years China’s iron ore imports dropped. Among the developed countries, EU and US imports increased by 47 million tonnes and 10 million tonnes, respectively, and South Korean and Japanese imports (the biggest contributors to Asia ex-China imports) increased by 35 million tonnes.

On the supply side, the biggest players in the international market were Australia, Brazil and India which together exported 808 million tonnes of iron ore in 2010, or 78% of global iron ore.

2010 was pivotal for the global iron ore industry, as it moved away from the 40-year old annual benchmark system. A new quarterly contract system was introduced, which offers more transparency and is based on an average spot price (CFR China) over the last quarter, lagging one month minus average freight for a previous month. Iron ore prices in 2010 exceeded all-time highs, reaching US$115 per tonne for fines and US$152 per tonne for pellets, FOB Brazil. This represented increases of 64% and 76%, respectively, on 2009.

Iron ore price, FOB Brazil, USD/tonnes

0

20

40

60

80

100

120

140

160

201020092008200720062005

Note: year from Jan 1 to Dec 31 Source: SBB

Carajas fines, 66% Fe

BF Pellet, 65.7% Fe


Russia is the world’s fourth largest iron ore producer, with a significant resource base. In 2010, Russian iron ore output reached 101 million tonnes, 6% more than in 2009. In both years, most output was consumed domestically and about 25% was exported.


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Brief world coking coal market overviewIn 2010, there was strong demand with insufficient supply in the global coking coal market. The global economy, steel demand and production recovered, and with serious supply issues in Russia, Indonesia and Australia, there was a global coking coal shortage. As with iron ore, there was a change of pricing mechanism for coking coal, with most contracts switching from an annual to quarterly system. As a result, 2010’s JFY contract price gained 68% on 2009 to reach US$217 per tonne FOB Australia for premium hard coking coals.

The international coking coal trade reached 249 million tonnes in 2010, up 12% on 2009. This growth was mainly driven by steel production recovery in Japan and the EU, the two largest coking coal importers. The total increase of coking coal exports to Asia (excluding China) and the EU accounted for 11 million tonnes, or 10% year-on-year. International coking coal trade in 2009-2010, million tonnes

Dem

and i

n 200

9Ot

hers

CIS EU

China

Asia

ex-C

hina

Supp

ly = D

eman

d in 2

010

Austr

alia

Mon

golia

North

Am

erica CI

SOt

hers

Supp

ly in

2009

200

210

220

230

240

250

260 DemandSupply

222

4 -25

10

11 249 15

10

4-0.5 -1.5 222

Source: AME

In supply, the international coking coal market is dominated by Australia, with a 55% market share. The other key exporting countries include the US, Canada, Mongolia and Russia. In 2010, Russia’s coking coal output grew 24% to 56 million tonnes. Of this 30% (17 million tonnes) was exported.

Last year coking coal exports were impeded by a number of catastrophes, including the explosion at Raspadskaya mine, and floods in Indonesia and Australia. Nevertheless, in 2010, total Australian coking coal exports increased by 15 million tonnes or 12% year-on-year. Mongolia exported 14 million tonnes of coking coal in 2010, mostly to China, representing a three-fold increase. It is worth mentioning that the US, a ’swing-supplier’, also exported 2 million tonnes more coking coal last year.

The expected shortage of globally traded coking coal supply has led to numerous plans for capacity expansions through brownfield and greenfield projects in Australia, Canada, the US, Russia, Mongolia and Mozambique. However, new projects are restricted by road and port infrastructure bottlenecks, and the availability of capital funding.In terms of pricing environment, the coking coal market is similar to iron ore, and in 2010 the annual benchmark contract system was replaced by the quarterly one. In 2010, premium hard coking coal prices reached US$195 per tonne FOB Australia on average, representing a 13% growth from 2009. In JFY contract terms, 2010 price grew by 68%, reaching US$217 per tonne FOB Australia.

Premium hard coking coal price, FOB Australia, USD/tonne

0

50

100

150

200

250

300

201020092008200720062005



Key performance indicators Change year-on-year 2010 2009 %

Revenue (US$ million) 3,484.3 1,870.8 86.2

Gross profit (US$ million) 1,702.8 465.2 n/a

Profit from operations (US$ million) 1,247.2 91.1 n/a

Operating margin (%) 35.8 4.9 n/a

EBITDA (US$ million) 1,550.9 393.4 n/a

EBITDA margin (%) 44.5 21.0 n/a

Average product prices (FCA) (US$/tonne)

Coking coal (concentrate) 143 88 62.5

Steam coal 43 40 7.5

Iron ore concentrate 68 35 94.3

Pellets 103 46 123.9

Ferroniobium 25,581 25,000 2.3

Gold (US$/oz) 1,251 992 26.1

EBITDA margin (%)

Coal 39.2 5.8 n/a

Iron ore concentrate 43.5 19.0 n/a

Pellets 54.2 18.6 n/a

Ferroniobium (204.0) 12.6 n/a

Gold 49.4 45.5 n/a

Key performance indicatorsIn 2010, revenue from Severstal Resources increased by 86.2%, to US$3,484.3 million. This was mostly due to higher sales volumes and product prices on the back of improving market conditions.

Revenue drivers in 2010, US$ million

0

700

1,400

2,100

2,800

3,500

172

462 10

692 80157

40 3,484

1,871

Revenue2009

Volumecoal

Pricecoal

Volumeiron ore

Priceiron ore

Volumegold

Pricegold

Other* Revenue2010

* Other includes revenues from non-core business, like delivery services

EBITDA amounted to US$1,550.9 million, 294.2% higher than in 2009, and the EBITDA margin increased from 21.0% in 2009 to 44.5% in 2010. Our gold business added US$137.2 million

to the 2010 EBITDA increment, with an EBITDA margin of gold product at 49.4%. OAO Karelsky Okatysh added US$451 million to the 2010 EBITDA increment, with an EBITDA margin of pellets at 54.2%. OAO Olkon added US$87 million to the 2010 EBITDA increment, with an EBITDA margin of iron ore concentrate at 43.5% in 2010. Vorkutaugol added US$393 million to the 2010 EBITDA increment, with an EBITDA margin of coal product at 44.3%.

EBITDA drivers in 2010, US$ million

0200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

177

1,235 48 -38 -209

-17 -38 1,551

393

EBITDA2009

Salesvolumes

Salesprices

Salesstructures

Productionvolumes

Productionexpenses

G&A Other EBITDA2010

The average number of Severstal Resources employees in 2010 was 26,568 – 1,167 less than in 2009.



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Sales and marketingAccording to Rasmin, Severstal Resources’ coal businesses are among Russia’s top five coking coal producers. Our iron ore business is among the leaders in terms of extraction volumes in its respective markets. Specifically, our share of the Russian pellet market, which is a value-added product, increased from 31.9% in 2009 to 32.4% in 2010 (source: Rudprom).

2010 2009 Change year-on-year %

Thousand US$ Thousand US$ Thousand US$ Sales by products, tonnes million tonnes million tonnes million

Coking coal 575 37.7 180 3.5 219.4 977.1

Coking coal concentrate 7,262 1,037.6 5,083 449.3 42.9 130.9

Steam coal 3,896 165.8 3,885 154.7 0.3 7.2

Pellets 9,797 1,011.4 8,763 404.7 11.8 149.9

Iron ore concentrate 4,027 275.1 5,107 180.5 (21.1) 52.4

Ferroniobium (tonnes) 129 3.3 296 7.4 (56.4) (55.4)

Gold (ounces)* 602,662 754.2 521,599 517.6 15.5 45.7

Total sales by products – 3,285.1 – 1,717.7 n/a 91.2

Other and shipping – 199.2 – 153.1 n/a 30.1

Total sales revenue – 3,484.3 – 1,870.8 n/a 86.2

Inter-segment transactions (14,317) (1,494.5) (13,162) (723.9) n/a n/a * including gold equivalent ounces of silver

We expect our share of raw materials production for metallurgy (iron ore, coking coal) on the Russian market to increase in 2011. This will be due to our new customer-oriented programmes and changes in the supply chain of our vertically integrated metallurgical holdings. Our share of steam coal on Russian and world markets will also grow.

Sales by productsIn 2010, Severstal Resources increased sales across all key products, in Russia and internationally. Year-on-year combined sales in tonnes of coking coal concentrate, iron ore pellets, and gold increased by 42.9%, 11.8% and 15.5%, respectively. Value-added products accounted for the largest part of our sales in 2010. Coking coal concentrate accounted for 29.8% of total sales, pellets for 29.0%, iron ore concentrate for 7.9%, and gold accounted for 21.6%. Coking and steam coal accounted for 1.1% and 4.8% of revenue respectively.

Coking coal sales increased by 219.4% in volume and 977.1% in revenue in 2010, compared to 2009, as a result of maximizing sales. Coal concentrate sales increased by 42.9% in volume and 130.9% in revenue, due to increased production volumes at PBS Coals Ltd (volume) and higher prices (revenue). Pellet sales increased by 11.8% in volume and 149.9% in revenue. Iron ore concentrate sales fell by 21.1% in volume due to increased consumption of iron ore pellets at our own Russian steel mill, and increased by 52.4% in revenue. Gold sales increased by 15.5% in volume and 45.7% in revenue, due to the acquisition of Crew Gold Corporation in 2010 (volume) and growth in prices (revenue).

The weighted average selling prices for our main products also progressed. Iron ore prices increased by 123.9%, coking coal concentrate by 62.5%, and gold by 26.1% compared to 2009. As a result, revenue was driven by both volume and prices.

Principal marketsSeverstal Resources sells its products internally as well as to international and domestic markets. We aim to maintain domestic market share and expand our international market share with high-quality pellets and coking coal concentrate.


Russian marketRussia is the principal market for our mining businesses. Our main customer is Severstal’s Russian Steel division.

Our share of sales on the Russian market in 2010 was 60.3% of revenue. The largest part of our revenue on the Russian market resulted from sales of pellets (31.9%), coking coal concentrate (30.2%), gold (18.6%) and iron ore concentrate (13.1%).

Favourable market conditions and higher prices significantly added to Severstal Resources’ financial performance in 2010. For example, prices of coking coal concentrate increased by 67.1% compared to 2009 – pellets by 115.1% and gold by 26.1%.


Thousand US$ Thousand US$ Thousand US$ Domestic sales by products tonnes million tonnes million tonnes million

Coking coal 4 0.1 37 0.9 (89.2) (88.9)

Coking coal concentrate 4,562 633.7 3,870 321.7 17.9 97.0

Steam coal 2,292 74.4 2,147 60.8 6.8 22.4

Pellets 6,631 670.3 5,734 269.6 15.6 148.6

Iron ore concentrate 4,027 275.1 5,107 180.5 (21.1) 52.4

Ferroniobium (tonnes) 129 3.3 296 7.4 (56.4) (55.4)

Gold (ounces) 314,907 391.6 308,606 304.4 2.0 28.6

Total sales by products – 2,048.5 – 1,145.3 n/a 78.9

Other and shipping – 52.8 – 54.4 n/a (2.9)

Total domestic sales revenue – 2,101.3 – 1,199.7 n/a 75.2

Inter-segment transactions (12,219) (1,221.8) (12,158) (647.5) n/a n/a

ExportExports accounted for 39.7% of our total sales by revenue in 2010. The main reason for this increase was continuous development of our gold business and PBS Coals.

The principal exports were coking coal concentrate (29.2%), gold (26.2%) and pellets (24.7%). The main destinations were Europe, the US and the CIS (mostly to Ukraine and Belarus).

The export market was also favourable, and we’ve seen similar results. For example, prices on coking coal concentrate have increased by 42.1% compared to 2009; pellets by 141.5% and gold by 25.9%.


Thousand US$ Thousand US$ Thousand US$ Export sales by products, FCA based on discounts/price premium tonnes million tonnes million tonnes million

Coking coal 571 37.6 143 2.6 299.3 1,346.2

Coking coal concentrate 2,700 403.9 1,212 127.6 122.8 216.5

Steam coal 1,604 91.4 1,738 93.9 (7,7) (2.7)

Pellets 3,166 341.1 3,029 135.1 4.5 152.5

Gold (ounces) 287,755 362.6 212,993 213.2 35.1 70.1

Total sales by products – 1,236.6 – 572.4 n/a 116.0


Total export sales revenue – 1,383.0 – 671.1 n/a 106.1

Inter-segment transactions (2,098) (272.7) (1,004) (76.4) n/a n/a



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Capital expenditure In 2010, investments in Severstal Resources’ ongoing business and new projects totalled US$433.8 million. This is almost twice as much as in 2009. The biggest increase in capital expenditure was in the gold mining division (US$170.8 million compared to US$99 million in 2009) and in the Corporate Centre (US$21.4 compared to US$5 million in 2009). We invested US$102.0 million in our coal production (Vorkutaugol – US$76.2 million and PBS – US$25.8 million). Capital expenditure in iron ore production was US$127.8 million (Severstal Liberia Iron Ore – US$28.2 million, Karelsky Okatysh – US$72.1 million, and Olkon – US$27.5 million).

In 2010, we made the following main investments:

Coal assets: Vorkutaugol invested US$26.4 million in Usinskoe deposit, –identified as one of the major coking coal reserves for further development.Vorkutaugol invested US$ 21.8 million in longwall mines and –washing plants (US$17 million and US$4.8 million respectively). Capital expenditure on longwall coking coal mines was US$3.9 million in Komsomolskaya deep mine, US$2.5 million in Severnaya deep mine, US$0.4 million in Vorkutinskaya deep mine, US$5.1 million in Zapoliarnaya deep mine, US$4.5 million in Vorgashorskaya and US$0.6 million to explore Yunyaginskiy open pit. Capital expenditure on washing plants amounted to US$2.9 million at Pechorskaya washing plant, US$1.4 million at Severnaya washing plant and US$0.5 million at Vorkutinskaya washing plant.Vorkutaugol invested US$11.1 million in its own electric power –generation and washing plants processes (US$ 7 million and US$ 4.1 million, respectively).Vorkutaugol also invested US$1.6 million in the modernisation and –re-equipment of its transportation system.PBS invested US$17.1 million in re-equipping of mines and open –pits and US$8.0 million in business and production process development. US$2.6 million was invested in Kimberly Run deep mine production development, and US$0.8 million in process improvement at cleaning plants. Part of the US$0.4 million development budget went towards ongoing SAP implementation. US$0.8 million was invested in licensing currently developed areas, including Schrock Run, Sheep Ridge and others.Corporate Centre invested US$19.7 million into acquiring a licence –for a large coking coal deposit in the Tyva republic of Russia.

Iron ore assets:In 2010 we invested US$99.6 million in projects to increase our –extraction and refining of iron ore.We invested US$63.8 million in developing open pits: US$48.2 –million at Karelsky Okatysh and US$15.6 million at Olkon. We also invested US$ 8.0 million in railway transport infrastructure, mainly at Karelsky Okatysh. We spent around US$14.5 million on equipment for beneficiating plants at Karelsky Okatysh (US$6.9 million) and Olkon (US$7.6 million). We also invested US$3.3 million in the pellet plant at Karelsky Okatysh, and US$2.3 million in iron mines at Olkon, and US$7.7 million in other workshops.

Gold assets:Total investments in the gold segment amounted to –US$170.8 million in 2010. We invested US$57.3 million in safety projects and re-equipment: –US$14.2 million at Crew Gold, US$12.9 million at Buryatzoloto, US$8.8 million at Berezitovy Rudnik, US$8.5 million at Neryungri-Metallic and Rudnik Aprelkovo, US$7.5 million at Somita, US$4.7 million at Celtic and Semgeo and US$0.7 million at other assets.A major part of the US$48.1 million investments on expansion –were US$31.7 million from Celtic capital expenditure (for the expansion of crushing and milling facilities, acquisition of underground machinery and on developing new BIOX assets). Residual amounts consist of US$11.9 million for development of additional processing capacity in the gold extraction facilities at Berezitovy Rudnik, and US$4.5 million for other small projects.Exploration and evaluation investments in the gold segment –totalled US$65.4 million in 2010: US$17.4 million in West Africa, US$17.3 million in Yuzhno-Uguyskaya area at Neryungri-Metallic, US$14.9 million in Buryatzoloto, US$6.7 million in SZRK (Uryakhskoye, Vitimkanskaya, Nerchinskaya, Kunikan and Ostantsovy fields), US$4.5 million in Celtic and US$4.6 million in others.

Projects for 2011In 2011, total investment at Severstal Resources will be approximately US$650 million. Major initiatives will include a project to modernise production equipment across the division’s iron ore mills and coalmines, completion of a thermoelectric power station burning coalmine methane in Vorkuta, exploration of the Putu iron ore deposit in Liberia, continued development of the division’s gold mining assets and a coalmine at PBS Coals.



Major projects:Coal assets:

Capital investment at Vorkutaugol will go mainly towards –extraction, development and washing (US$51.3 million for the long-term and US$51.4 million for maintenance). We are also investing in improved industrial safety measures (US$3.0 million) and renovating production facilities (US$3.6 million).Further investment projects at PBS Coals Ltd will require –US$58.1 million.We will also spend US$7.6 million on our Tyva project. –

Iron ore assets:We plan to spend around US$47.9 million on projects at Olkon. –These include the renovation of production facilities (US$12.4 million), investments in long-term development projects and new technology (US$15.7 million), safety measures (US$1.9 million) and maintaining the current level of production (US$17.8 million).Through our investment programme at Karelsky Okatysh, we aim –to maintain 2010 production volumes. This includes renovating production facilities (US$16.8 million), maintaining the existing level of extraction (US$57.4 million), investing in long-term development projects and new technology (US$10.5 million), and safety measures (US$1.0 million).We will also spend US$32.0 million on the Severstal Liberia Iron –Ore project.

Gold assets:We expect to spend US$289.9 million on gold extraction projects –in 2011, including:

US$71.2 million on maintenance (safety, facilities balancing –and replacing equipment) at Crew Gold (US$37.7 million), Buryatzoloto (US$13.4 million), Neryungri-Metallic and at Rudnik Aprelkovo (US$12.7 million), Celtic (US$3.8 million), Berezitoviy (US$2.8 million) and Somita (US$0.8 million). US$111.7 million capital expenditure on expansion –(development) at Burkina Faso entities (US$90.0 million), Celtic (US$7.2 million), Berezitoviy (US$5.8 million), Somita (US$4.1 million), Neryungri-Metallic (US$3.1 million) and Buryatzoloto (US$1.5 million).US$107.0 million on exploration and evaluation at our Western –African assets (US$34.2 million), Buryatzoloto (US$23.2 million), Neryungri-Metallic and Rudnik Aprelkovo (US$17.3 million), Crew Gold (US$12.0 million), SZRK (US$9.4 million), Celtic (US$8.6 million), Berezitoviy (US$1.6 million) and Somita (US$0.7 million).

“ In 2010, investments in Severstal Resources’ ongoing business and new projects totalled US$433.8 million. This is almost twice as much as in 2009”


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Costs In 2010, costs in Severstal Resources increased by US$375.9 million, or 26.7%. This was due to a 58.6% material expenses increase as a result of increased production volumes compared to 2009.

2010 2009

Change year-on-year Cost of sales structure US$ million % of total US$ million % of total %

Materials

Grinding balls and rods 34.2 2.0 28.4 2.0 20.4

Explosives 46.5 2.6 33.7 2.4 38.0

Metal – roll 27.7 1.6 16.5 1.2 67.9

Technological coals 64.0 3.6 27.5 2.0 132.7

Other materials 180.5 10.1 122.8 8.7 47.0

Integral implements and spares 125.5 7.0 72.8 5.2 72.4

Total materials 478.4 26.9 301.7 21.5 58.6

Energy

Electric power 178.2 10.0 132.6 9.4 34.4

Gasoline 74.1 4.2 57.0 4.1 30.0

Other energy resources 86.0 4.8 62.2 4.4 38.3

Total energy 338.3 19.0 251.8 17.9 34.4

Staff costs 467.6 26.2 399.1 28.4 17.2

Depreciation and amortisation 254.9 14.3 267.2 19.0 (4.6)

Services 262.8 14.8 198.8 14.1 32.2

Change in inventories (41.9) (2.4) 14.9 1.1 n/a

Other 21.4 1.2 (27.9) (2.0) n/a

Total 1,781.5 100.0 1,405.6 100.0 26.7


Severstal Russian Steel Our Russian integrated manufacturing facilities are one of the largest in the CIS and offer some of the widest varieties of products.


Revenue 2010 (US$)


EBITDA 2010 (US$)



Severstal Russian Steel (continued)

We are a leading steel producer in Russia with a focus on value-added flat steel products. Located in north-west Russia, our steel operations have convenient rail access not only to our mining supplies, but also to our Russian customers and Baltic Sea ports.The Russian Steel Division is one of the largest production units of Severstal. In 2010, it produced approximately 65% of our total crude steel production, manufactured around 57% of our total rolled products output, and around 94% of our total downstream products output, and accounted for 64% of our total revenues.

2010 was a year of solid growth for the Russian Steel Division, with a production volume of 11.1 million tonnes of crude steel in 2010, compared to 9.5 million in 2009. Revenue increased by 42.7% to US$8,814.8 million (FY 2009: US$6,179.1 million) and EBITDA went up by 27.1% to US$1,677.4 million (FY 2009: US$1,319.4 million).

Brief world steel market overviewIn 2010, world crude steel production reached 1,414 million metric tones. This was a 15% increase on 2009 and a new record for global crude steel production. As before, Russia remained one of the leading steel-producing countries. In 2010, it was ranked as the fourth country, following China, Japan and the US, with a production volume of 67 million metric tonnes of crude steel, a 12% increase on 2009. Global crude steel production by country in 2010, total – 1,414 million tonnes

China 47%EU-27 13%Japan 8%United States 6%Russia 5%India 5%South Korea 4% Ukraine 2%Brazil 2%Turkey 2%Rest of the World 6%

Source: World Steel Association

During 2010, the global crude steel capacity utilisation ratio fluctuated. The average world steel capacity utilisation ratio in 2010 was 77%, compared to 70% in 2009. Annual average HRC prices increased by 26–32% on different markets compared to 2009, on the back of appreciating raw materials.

“2010 was a strong year for the Russian Steel Division. We managed to capitalise fully on the market recovery and flexibly adjust our sales to the fastest growing segments. Growing raw materials prices were partially balanced by our efforts to reduce the cost of production. We integrated some of our operations to improve the efficiencies of their businesses. In line with our plans, we completed several major projects during the year, including the construction and launch of the TPZ-Sheksna pipe plant close to our main Russian steel-making facilities in Cherepovets. This plant is capable of producing 250,000 tonnes per year of electric welded pipes and other products for the construction industry.

In July, the Gestamp-Severstal-Kaluga Stamping Facility was commissioned in the Kaluga Region, one of the biggest Russian centres of high-quality automotive steel demand. It produces body components for the Volkswagen plant located in the same area, with target annual output of 13 million stamped parts.

In December, a hot-dip galvanizing line with annual capacity of 400,000 tonnes was commissioned at the Cherepovets Steel Mill after reconstruction. Construction of the Balakovo Long Product Mini-Mill continues in the Saratov region (central Russia), with an expected capacity, upon completion in 2013, of one million tonnes per year of long products for the construction and infrastructure industries. The aim of this organic investment is to increase Severstal’s growth potential in attractive higher-growth market sectors.

In 2011, our focus is to increase production and sales volumes and further develop our Continuous Improvement, Customer Care, Safety, Severstal People and other projects of the Business System of Severstal”.

Alexander GrubmanSeverstal Russian Steel, Chief Executive Officer


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World hot-rolled coil prices, US$/tonne

Source: CRU, SBB

USA, spot

EU, spot

CIS Black Sea, FOB

4002006 2007 2008 2009 2010

500

600

700

800

900

1,000

Key production facilitiesThe Russian Steel Division’s primary steel production facility is the Cherepovets Steel Mill, located in Cherepovets, in north-west Russia. It also includes the Izhora Pipe Mill, located in Kolpino, the new pipe works, TPZ-Sheksna, located in the Sheksna industrial area of the Vologda region, and the Metalware segment, which operates from multiple sites across Russia, Ukraine and Italy. These locations give the Russian Steel Division strategic proximity to river ports and railways, providing logistically favourable access to raw material sources and customers. Severstal Russian Steel also comprises ferrous scrap recycling businesses, as well as various supporting functions for trading, maintenance and transportation.

Steel productionThe Cherepovets Steel Mill is one of the world’s largest standalone integrated steelworks by capacity (annual production capacity is about 11.1 million tonnes), and is a low-cost steel producer with an excellent geographic location. It produces a wide range of flat and long rolled products, including hot and cold-rolled flat products, galvanized and colour-coated products and long-steel applications. Rolling Mill 5000, located in Kolpino, produces hot-rolled plates and strips.

Automotive grade galvanizing line (Severgal), incorporated as a shop within the Cherepovets Steel Mill, produces high-quality galvanized auto body sheet products, coated with zinc-iron alloy. In commercial operation since December 2005, it has a capacity of 400,000 tonnes per year, and can produce galvanized-steel sheet to a thickness of 0.4 to 2.0 mm and a width of 900 to 1,850 mm. Severgal is strategically located close to several major domestic automotive ’greenfield’ production facilities, including Nissan and Toyota in St. Petersburg, and Volkswagen in Kaluga.

Severstal SMZ-Kolpino is also included in the Severstal Russian Steel division. It is an industrial complex created for heavy plate processing with an annual production capacity of 80,000 tonnes of plate. The plant provides semi-finished products for machinery, and manufactures large fabricated sections for the construction industry.

In July 2010, in order to meet the demands of the automobile and electrical industries, as well as electronics and building industry producers, the Gestamp-Severstal-Kaluga Stamping Facility and the Severstal-Gonvarri-Kaluga Steel Center were commissioned in the industrial cluster of Grabtsevo, in the Kaluga Region. The Severstal-Gonvarri-Kaluga Steel Services Center is designed to produce 170,000 tonnes of rolled metal products per annum. The Gestamp-Severstal-Kaluga Stamping plant is equipped with a number of press lines and creates the entire chain of processing rolled metal products, from coil to car components. With an annual output of 13 million stamped parts, Gestamp-Severstal-Kaluga targets international car manufacturers, including Volkswagen, PSA, and Renault-Avtoframos. The new stamping facility offers additional possibilities for expanding production, enabling us to increase capacity promptly if we need to.

Pipe productionThe Izhora Pipe Mill in Kolpino produces electric longitudinal welded pipes with a designed diameter of 610mm. These can also be produced with diameters from 1,020mm to 1,420mm, and in lengths of 12,000mm to 18,300mm. They have a three-layered anti-corrosion outer coating and a smooth inner coating. The Mill has a unique ability to produce especially long, large-diameter pipes – up to a length of 18.3m – that offer higher reliability, lower costs and fewer welded joints. Construction of the Izhora Pipe Mill was completed in July 2006. It uses strips manufactured by Rolling Mill 5000 at the Cherepovets Steel Mill, and has a production capacity of 480,000 tonnes of pipe per year.

In order to target new market niches, in June 2010 Severstal launched a new pipe works, TPZ-Sheksna in the Sheksna industrial area of the Vologda region. This is designed to produce up to 250,000 tonnes of electric-welded pipes in various diameters, thicknesses and lengths, as well as square and rectangular sections with different cross-sections. It uses semi-finished steel products from the Cherepovets Steel Mill. Investment in the new Sheksna Pipe Plant is entirely consistent with our strategy to concentrate on the production of high-value-added products, and to take advantage of our integrated structure by supplying the plant from our Cherepovets Steel Mill. TPZ-Sheksna is strategically located within reach of both Saint Petersburg and Moscow, where the construction industry is showing significant growth.

“ We managed to fully capitalize on the market recovery and flexibly adjust our sales to the fastest growing segments”


Severstal Russian Steel (continued)Metalware productionSeverstal-Metiz is the metalware producer within the Russian Steel Division. Its factories in Russia focus on manufacturing products such as low-carbon and high-carbon wire rods, nails, cold-drawn steel, steel rope, netting and fastenings. Severstal-Metiz comprises three sites: the Cherepovets site in north-west Russia, the Orel site in central Russia, and the Volgograd site in the Povolzhie region.

Our metalware business has additional sites in Ukraine and Italy, each benefiting from locations in developing markets with high concentrations of industrial and retail customers. Currently, our metalware business produces more than 55,000 types of products, including rod, calibrated steel, steel rope, nails, fibre, fastenings, netting, welding materials and metal cord. It has a total maximum production capacity of more than 1.5 million tonnes per year.

Scrap collection and processingThe Russian Steel Division has its own scrap-processing facilities, allowing it to utilise a wide range of sizes of steel scrap. These facilities are located in several Russian regions, and include special cutting and packaging lines for processing the scrap to make it ready for use in the smelting process.

Trading companiesThe Russian Steel Division makes its domestic sales to regional and other distributors, directly to end-users, or through its trading arm, Trading House Severstal Invest. The regional distribution of its products primarily involves the delivery of steel to the construction and processing industry.

The Division conducts its export sales through export-trading subsidiaries, Severstal Export GmbH, AS Severstallat, LLC Severstal-Ukraine and ZAO SeverstalBel. This system has enabled it to increase the efficiency of its export operations by minimising its reliance on intermediaries in the sales process and, therefore, reducing its distribution costs.

Service companiesThe main purpose of service companies is to maintain the production processes of Cherepovets Steel Mill, by providing timely, high-quality equipment repairing services. In 2010, for more efficiency, our repairing services were reorganised into four types of activities: equipment repairing services, machine building and construction, implementation of other repairing projects, and designing and developing projects.

The Russian Steel Division is the core of the Business System of SeverstalThe Russian Steel Division has established comprehensive quality control systems at each stage of its production cycle. It currently operates a total quality management system at each of its steel production facilities, which involves organising employees in quality teams. Established in the converter shop at the Cherepovets Steel Mill in 2000, these teams are now in place at all of the Russian Steel Division’s shops. The Division employs techniques to benchmark its performance to best practice and statistical process control, which it began in 2001. Since 2005, the Cherepovets Steel Mill has been developing and implementing a system of statistical production management, and since 2009 it has implemented the Continuing Improvement Programme. The main objective of these quality control systems is to improve the quality of steel by improving technological process parameters. In 2010, the Continuing Improvement Programme evolved into the Business System of Severstal, a pan-Severstal programme designed to establish maximum involvement of employees in the improvement processes.

Quality ControlThe quality control measures employed by the Russian Steel Division have enabled it to maintain a range of products that meet the high standards required in the US, Germany, Japan and other markets, in addition to the modernised Russian oil and pipeline industries. A range of its products have been certified by the Marine Register of the Russian Federation, Lloyd’s Register, the American Bureau of Shipping, Norske Veritas, Germanischer Lloyd, Bureau Veritas and the Russian River Register.

In February 2010, Lloyd’s Register performed a re-certification audit of the Russian Steel Division, and extended the term of validity of quality management system approval in terms of its compliance with international standards’ requirements: ISO 9001:2008 until 31 December 2011 and ISO TS 16949-2009 until 29 March 2011.

In 2001, the Russian Steel Division received several certificates attesting to the quality of the production output at Mill 5000. Its steel products are also supplied to various offshore oil and gas development projects. Severstal-Metiz’s three plants in Russia have management quality systems corresponding to the requirements of International Standard ISO 9001. It has a quality standard certification under International Standard ISO/TS 16949:2009 concerning the production of cold-drawn steel and steel shaped profiles. In addition, Severstal-Metiz has a series of certificates attesting to the quality of its products, including welding wire, ropes, railway fasteners, engineering and high-strength fasteners, low-carbon wire for concrete reinforcement, and fibre.


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Key performance indicatorsThe Division’s strong performance throughout 2010 reflects stronger steel demand, mainly from the domestic market. In 2010, Russian Steel’s revenue increased by US$2.6 billion. 2010 revenue was driven by both volume and price factors. There was an increase of 42.7% in revenue, due to a 19.7% growth in sales prices compared to the previous year; the average price for steel products increased by US$119 per tonne.


Revenue2009

6,179

1,039

1,378 8,815

(97)

316

Volume Price Mix Other* Revenue2010

* “Other” includes revenues from non-core business, like delivery services, sales of energy, heat, coking side products, etc

0

2,000

4,000

6,000

8,000

10,000

In terms of sales in tonnes, sales volumes of steel products increased by 18.9% (or 1.8 million tonnes) in comparison with 2009, as production volumes achieved the normal level.


EBITDA2009

Salesvolume

Salesprice

Salesstructure

COSvolume

COSprice

Rates COSstructure

Other FX EBITDA2010

1,319

1,026

981176

(798)

(695)(162)

(155) (36)

21

1,677

0500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

Our 2010 EBITDA increased by 27.1%, and EBITDA per tonne grew by 4.9% to US$154.1. Full year 2010 EBITDA margin declined to 19.0% from 21.4% in 2009 due to increased prices for raw materials acquired mostly from our own mining assets at market prices.

Change year-on-year

Key performance indicators 2010 2009 %


Gross profit (US$ million) 2,811.6 2,097.7 34.0

Profit from operations (US$ million) 1,370.6 1,035.7 32.3


EBITDA (US$ million) 1,677.4 1,319.4 27.1

EBITDA per tonne (US$/tonne)* 154.1 146.9 4.9


Average steel product price (US$/tonne)* 723 604 19.7

Hot-rolled strip and plate (US$/tonne) 599 474 26.4

Large-diameter pipes (US$/tonne) 2,041 1,995 2.3

Cold-rolled flat products (US$/tonne) 670 538 24.5

Galvanized and other metallic coated sheet (US$/tonne) 851 757 12.4

Colour-coated sheet (US$/tonne) 1,181 1,053 12.2

Metalware products (US$/tonne) 1,063 918 15.8

Long products (US$/tonne) 617 456 35.3

Semi-finished products (US$/tonne) 482 342 40.9

Other tubes and pipes, formed shapes (US$/tonne) 711 586 21.3

Average scrap price (US$/tonne) 290 202 43.6

* Excludes scrap.

The average number of Russian Steel employees in 2010 was 50,541 (full-time equivalent), a decrease of 0.6% compared to 2009. The majority of entities in the Russian Steel Division continued the deliberate downsizing policy. At the same time, the average wage of Russian Steel employees was raised by 15.0% as of 1 April 2010, compared to 2009.



Production resultsIn 2010, the Russian Steel Division produced 8.7 million tonnes of hot metal (20.3% more than in 2009), and 11.1 million tonnes of crude steel (16.1% more than in 2009).

Change year-on-year Production volumes, thousand tones 2010 2009 %

Total output

Hot metal 8,689 7,223 20.3

Crude steel

Basic oxygen furnaces 9,340 8,002 16.7

Electric arc furnaces 1,746 1,546 12.9

Total crude steel 11,085 9,548 16.1

Sales by productIn 2010, sales of hot-rolled strip and plate accounted for 40.7% of overall sales volume (31.1% of revenue), cold-rolled flat products accounted for 13.7% of volume (11.7% of revenue), semi-finished products accounted for 12.5% of volume (7.7% of revenue), long products accounted for 6.9% of volume (5.4% of revenue), metalware products accounted for 7.0% of volume (9.5% of revenue), and galvanized and other metallic-coated sheet accounted for 4.8% of volume (5.2% of revenue). Other steel products (tubes, pipes, colour-coated sheet and scrap) accounted for 13.7% of volume and 19.2% of revenue. Other revenues and shipping reached 10.2% of total revenues. 2010 2009 Change year-on-year %

Thousand US$ Thousand US$ Thousand US$ Sales by product tonnes million tonnes million tonnes million

Hot-rolled strip and plate 4,569 2,737.4 3,948 1,872.2 15.7 46.2

Large diameter pipes 471 961.3 390 778.0 20.8 23.6

Cold-rolled flat products 1,541 1,032.6 1,265 680.8 21.8 51.7

Metalware products 786 835.7 683 626.7 15.1 33.3

Galvanized and other metallic-coated sheet 537 457.1 508 384.3 5.7 18.9

Long products 773 477.3 788 359.0 (1.9) 33.0

Semi-finished products 1,403 676.3 839 287.2 67.2 135.5

Other tubes and pipes, formed shapes 490 348.2 436 255.4 12.4 36.3

Colour-coated sheet 244 288.2 234 246.4 4.3 17.0

Scrap 339 98.2 289 58.3 17.3 68.4

Total steel products 11,153 7,912.3 9,380 5,548.3 18.9 42.6 Other and shipping* 82 902.5 –- 630.8 100.0 43.1

Total sales by products 11,235 8,814.8 9,380 6,179.1 19.8 42.7

Inter-segment transactions (202) (142.8) (49) (44.6) n/a n/a

* Includes coking coal

Sales by marketThe Russian Steel Division sells its products in both export and Russian domestic markets. In 2010, the recovery level was high on both the domestic and international markets.

The Russian market The Russian Steel Division continues to regard Russia as its most important market. Our main domestic customers include pipe mills, the automotive and machinery industries, construction due to change in building companies. Our share of the Russian market in revenue terms changed significantly (61.0% in 2010 compared to 55.6% in 2009). We aim to increase that percentage going forward, as Russian steel consumption remains below pre-crisis levels. We estimate demand for steel will rise by 8.0% in 2011, driven by key customers in the construction, automotive, and oil and gas industries.

In 2010, sales to the Russian market increased by 36.1% in volume terms, while revenues increased by 56.5%, as a result of the major price increase (by 14.9%). Hot-rolled strip and plate accounted for 36.5% of sales volume, long products accounted for 11.8%, cold-rolled flat products accounted for 16.0%, and galvanized and other metallic-coated sheet accounted for 6.7% of sales volume.


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The prices for our main products in 2010 grew considerably in comparison with 2009. The prices for hot-rolled strip and plate went up by 18.5%, for long products by 33.6%, and for cold-rolled flat products by 16.4%. The growth in both volume and price are explained mainly by growing demand in all industry sectors in Russia. Additionally, we have increased the share of cold-rolled steel sales, which also had a positive effect on the Division’s average price for steel products in 2010. 2010 2009 Change year-on-year %

Thousand US$ Thousand US$ Thousand US$ Sales by product – domestic market tonnes million tonnes million tonnes million

Hot-rolled strip and plate 2,187 1,425.4 1,420 781.1 54.0 82.5

Large-diameter pipes 469 960.1 297 626.8 57.9 53.2

Cold-rolled flat products 956 630.6 609 345.1 57.0 82.7

Metalware products 529 523.9 425 351.4 24.5 49.1

Galvanized and other metallic-coated sheet 402 342.1 336 273.6 19.6 25.0

Long products 704 432.4 649 298.4 8.5 44.9

Semi-finished products 26 13.2 4 2.5 n/a n/a

Others tubes and pipes, formed shapes 384 267.9 350 201.8 9.7 32.8


Scrap 112 34.5 95 19.4 17.9 77.8

Total steel products 5,989 4,888.7 4,399 3,125.3 36.1 56.4

Other and shipping – 489.7 –- 312.2 – 56.9

Total sales by products 5,989 5,378.4 4,399 3,437.5 36.1 56.5

Inter-segment transactions (15.0) (55.0) (21) (33.8) (28.6) 62.7

Export marketsIn 2010, compared to 2009, export sales of steel products increased by 3.7% in volume terms, while revenues increased significantly (by 24.8%) due to substantial price growth (by 20.4%). Our diversified product mix means we are able to adjust our production and sales to cater for regional and industry trends, and produce higher sales and margins. The main contributors to export sales volumes were hot-rolled strip and plate (45.4%), semi-finished products (26.2%) and cold-rolled flat products (11.2%).

In 2010, prices in the export market rose for almost all product groups. The main exporting products were hot-rolled strip and plate and semi-finished products. Prices for those products in 2010 went up by 27.6% and 41.2% respectively, compared to 2009. 2010 2009 Change year-on-year %

Thousand US$ Thousand US$ Thousand US$ Sales by product –export tonnes million tonnes million tonnes million

Hot-rolled strip and plate 2,382 1,312.0 2,528 1,091.1 (5.8) 20.2

Large diameter pipes 2 1.2 93 151.2 (97.8) (99.2)

Cold-rolled flat products 585 402.0 656 335.7 (10.8) 19.7

Metalware products 257 311.8 258 275.3 (0.4) 13.3

Galvanized and other metallic-coated sheet 135 115.0 172 110.7 (21.5) 3.9

Long products 69 44.9 139 60.6 (50.4) (25.9)

Semi-finished products 1,377 663.1 835 284.7 64.9 132.9

Others tubes and pipes, formed shapes 106 80.3 86 53.6 23.3 49.8


Scrap 227 63.7 194 38.9 17.0 63.8


Other and shipping* 82 412.8 – 318.6 100.0 29.6

Total sales by products 5,246 3,436.4 4,981 2,741.6 5.3 25.3 Inter-segment transactions (186.0) (87.8) (28) (10.8) n/a n/a

* Includes coking coal



Sales by regionStrategically, Russian Steel is building long-term relationships with customers in the CIS and the EU. Deliveries to other regions are carried out primarily on a spot basis, with the exception of sales to tube and pipe makers and automotive producers. Sales to customers in Russia are strategically important for the future sales of Russian Steel.

In 2010, the main export regions were Europe (45.4% of export revenue), Asia excluding the Middle East (23.6% of export revenue) and the Middle East (11.9% of export revenue). Sales to other regions amounted to 19.0% of export sales. In comparison with 2009, the main accent on Europe and the CIS countries was maintained. The sales to Asian markets went down due to the recovery of traditionally more profitable markets.

Revenues by regions, 2010

Russian Federation 61.0%Europe 17.7%The Middle East 4.7%South-East Asia 4.8%China and Central Asia 4.4%Central & South America 4.1%North America 2.1%Africa 1.2%

Revenues by regions, 2009

Russian Federation 55.6%Europe 18.2%The Middle East 6.4%South-East Asia 4.7%China and Central Asia 10.6%Central & South America 1.9%North America 0.3%Africa 2.3%

Sales by industryIn the domestic market, Russian Steel focuses on selling its products to the construction industries and steel service centres, pipe production, oil and gas, automotive producers and machinery builders, among others. In export markets, sales are primarily to the processing and construction industries, including re-rollers of slabs, hot-rolled and cold-rolled coils. In 2010, construction and processing sales revenue accounted for 54.8% of total sales, while sales to the oil and gas sector accounted for 10.8%, machinery building accounted for 7.2%, and pipe production accounted for 9.4%.

Revenues by industry, 2010

Construction and processing 54.8%Oil & Gas 10.8%Machinery building 7.2%Tube- and pipemaking 9.4%Automotive 5.8%Other 12.0%

Revenues by industry, 2009

Construction and processing 50.4%Oil & Gas 11.8%Machinery building 13.8%Tube- and pipemaking 10.1%Automotive 5.1%Other 8.8%

CostsThe cost of sales increased by US$1,921.8 million in 2010 compared to 2009. The main factor in this increase was the growth in sales volume from 9.4 million tonnes to 11.2 million tonnes, resulting in an increase in the cost of sales of US$798 million.

Other factors contributing to the total increase in the cost of sales included: –changes in the structure of used raw materials due to change in production, which caused the cost of sales to increase –by US$162 millionchanges in labour costs, excluding foreign exchange rate fluctuations, which resulted in a cost of sales increase of US$94 million –foreign exchange effect resulted in a cost of sales increase of US$223 million –the increase in the price of materials and energy, which caused an increase in cost of sales of US$695 million. –

In this context, it is worth noting the following positive effects: –a decrease in raw materials consumption rates, which had a positive effect of US$21 million on the cost of sales –other factors, which had a positive effect of US$29 million on the cost of sales. –


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2010 2009

Change US$ US$ year-on-year Cost of sales structure million % of total million % of total %

Materials

Scrap metal 848.2 14.2 561.0 13.7 51.2

Coal 864.7 14.4 502.6 12.3 72.0

Iron ore 662.1 11.0 323.0 7.9 105.0

Ferroalloys and nonferrous metals 476.0 7.9 269.7 6.6 76.5

Pellets 535.4 8.9 206.6 5.1 159.1

Coke 197.5 3.3 46.3 1.1 326.6

Other materials 931.5 15.5 687.3 16.8 35.5

Total materials 4,515.4 75.2 2,596.5 63.6 73.9Energy

Electric power 200.0 3.3 142.4 3.5 40.4

Gas 197.5 3.3 141.3 3.5 39.8

Other energy resources 91.6 1.5 78.5 1.9 16.7

Total energy 489.1 8.1 362.2 8.9 35.0Staff costs 605.8 10.1 485.6 11.9 24.8

Depreciation and amortisation 272.1 4.5 257.2 6.3 5.8

Services 229.2 3.8 140.0 3.4 63.7

Other (108.4) (1.7) 239.9 5.9 (145.2)

Total 6,003.2 100.0 4,081.4 100.0 47.1



Capital investmentsThe Russian Steel Division’s capital expenditure programme is designed to increase productivity and efficiency, effect environmental upgrades, replace and refurbish major equipment, and develop its product mix further to produce higher-quality, value-added products, including galvanized steel and cold-rolled products.

We invested US$575.6 million in our steel business in 2010. Of this, we spent US$184.7 million on new projects and US$390.9 million on repairing and modernising projects, including US$ 35.8million for the SAP ERP implementation project.

Major projects completed in 2010:Pipe welding mill TPZ-SheksnaWe invested US$22.5 million in this project in 2010, out of the total investment of US$146.9 million. Having launched this project in June 2010, we expect to produce up to 250,000 tonnes of pipes per year. The plant will produce pipes of various diameters, thicknesses and lengths, as well as square and rectangular sections with different cross-sections. It will make enable us to increase the share of value-added output at Severstal Russian Steel.

Gestamp-Severstal-Kaluga Stamping facilityTotal investments in this join venture with Gestamp, an international producer of metal components for the automotive industry, were about €89 million. From the start of this project, we expect to produce up to 13 million stamped parts per year. The facility will primarily produce auto-stamping parts for international markets. It will enable us to access a new promising market, increasing value-added output.

Severstal-Gonvarri-Kaluga Steel CenterTotal investments in this joint venture with Gonvarri, a part of Gestamp, were about €40 million. Having launched this project in July 2010, we expect to produce up to 170,000 tonnes per year of rolled metal products for the automotive and electrical industries. This entity will use semi-finished products from Cherepovets Steel Mill.

Hot-dip galvanizing line at the Cherepovets Steel Mill We invested US$41.3 million in this project in 2010, out of a total planned investment of US$86.7 million. Having completed this project in December 2010, we expect to increase our annual production of galvanized products to 400,000 tonnes.

Main ongoing projects:Expansion:Color coating line №2 We invested US$43.3 million in this project in 2010, out of a total planned investment of US$84.7 million. Upon completion, we expect it to increase our annual production of colour-coated products to 429,000 tonnes. This project started in the fourth quarter of 2007, and we expect it to be completed in the fourth quarter of 2011.

Integrated scrap processing in an open site (Phase 2)We invested US$33.5 million in this project in 2010, out of a total planned investment of US$50.3 million. The aim is to ensure we can supply 900,000 tonnes of shredded scrap each year for the Cherepovets Steel Mill. This project started in the fourth quarter of 2007, and we expect it to be completed in the fourth quarter of 2011.

Severstal Balakovo Long Product Mini-Mill (a mini-mill in the Saratov region)We invested US$162.2 million in this project in 2010, out of a total planned investment of US$693.0 million. The mill will produce long products for the construction industry, and will have the capacity to make up to 1 million tonnes of rolled products per year. In 2010, construction works relating to the project entered an active phase: subcontractors for the main types of activities were chosen and mobilised; energy was supplied to the construction site; the main technological equipment was delivered; contracts for the construction of the main step-down substation, and for delivery of the auxiliary equipment required for manufacturing, were concluded.


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Modernization:Revamping of by-products recovery Shop №2 We invested US$14.6 million in this project in 2010, out of a total planned investment of US$104.7 million. Its aim is to maintain fixed assets. It started in the first quarter of 2007 and we expect it to be completed in the second quarter of 2013.

Revamping of coke battery №7 with a dry coke quenching plant We invested US$11.6 million in this project in 2010, out of a total planned investment of US$141.3 million. Its aim is to maintain fixed assets. It started in the first quarter of 2007 and we expect it to be completed in the second quarter of 2013.

Strip slitting line (with inspection area)We invested US$11.3 million in this project in 2010, out of a total planned investment of US$16.3 million. Upon completion, we will be capable of producing heavyweight cold rolled coils (slit coil weight up to 25 tonnes), with an annual line capacity of 200,000 tonnes. The project started in the first quarter of 2007, and we expect it to be completed in the first quarter of 2011.

Revamping of coiler group №2 to coil X-100 grades with a gauge up to 25mmWe invested US$3.6 million in this project in 2010, out of a total planned investment of US$46.0 million. It will enable us to carry out high quality coiling of steel products, up to 250,000 tonnes per year, and to develop new products (100 grade with 16-25mm gauge). The project started in the fourth quarter of 2007, and we expect it to be completed in the third quarter of 2012.

Replacement of turbine generator №4 with 20 atm. steam extraction We invested US$3.4 million in this project in 2010, out of a total planned investment of US$30.0 million. Our aim with this is to increase internal power generation. The project started in the first quarter of 2008, and we expect it to be completed in the fourth quarter of 2011.

Revamp of the main step-down substation №1 at our electric power supply shop We invested US$3.2 million in this project in 2010, out of a total planned investment of US$31.5 million. Its aim is to maintain fixed assets. The project started in the fourth quarter of 2007, and we expect it to be completed in the third quarter of 2011.

Reconstruction of our steam power plant’s main building We invested US$2.9 million in this project in 2010, out of a total planned investment of US$26.0 million. Its aim is to maintain fixed assets. The project started in the first quarter of 2009, and we expect it to be completed in the fourth quarter of 2013.

Revamping of gas cleaning for №9 BoilerWe invested US$2.8 million in this project in 2010, out of a total planned investment of US$4.8 million. Its aim is to maintain fixed assets. The project started in the first quarter of 2007, and we expect it to be completed in the second quarter of 2011.

Metalware production We invested US$35.1 million in this segment in 2010. The project aims to reduce costs by optimising and revamping facilities, improving product quality, expanding services, and developing new products.

“ The Russian Steel Division’s capital expenditure programme is designed to increase productivity and efficiency”

Severstal International2010 was an important year for Severstal International. We made decisive steps to bring our international asset structure in line with our financial and strategic targets, to be well-positioned for long-term growth.



Revenue 2010 (US$)


EBITDA 2010 (US$)

86.4m(2009 EBITDA: -113.8m)


Severstal International (continued)

In 2010, Severstal International made some major changes, including divesting the European operations and streamlining the North American business to evolve into a stronger and more focused organisation. We classified as ’held for sale’ the Lucchini segment and a number of entities within the North America reporting segment (Severstal Sparrows Point LLC, SSP Railroad LLC, Severstal Warren LLC, Severstal Wheeling Inc and Mountain State Carbon LLC), as at 31 December 2010. This followed our decision to sell these entities within 12 months of the reporting date and to represent the Group’s discontinued operations.

In Europe: –In June 2010, the Group sold its 50.8% stake in the loss- –making Lucchini S.p.A. for a total consideration of €1 (US$1.2 at the transaction date exchange rate). In February 2011, the Group signed an amendment to –Lucchini’s share purchase agreement with the majority shareholder. This cancelled the buy-back call option and the entitlement, for the benefit of the Group, to any gain on a subsequent sale of this stake to a third party. This allows us to deconsolidate Lucchini, starting from March 2011 financial reporting.

In North America, where we operate as Severstal North –America (SNA):

To focus on our core steel-making strategy, in May 2010, –the Group sold Northern Steel Group, engaged in the processing and distribution of steel products in North America, for a total consideration of US$124.0 million. As a result of the re-focusing of our North American business, –on 1 March 2011, we entered into a definitive agreement to sell the subsidiary of Severstal North America which owns facilities at Warren, OH, Wheeling, WV, and Sparrows Point, MD. The transaction was completed on March 31, 2011.

The sale of the above North American assets is a key component of our strategic refocusing, which centres on the development of our Dearborn and Columbus facilities. These are two of the most technologically advanced plants in North America, with partial upstream integration into coking coal through PBS Coals (Severstal Resource), also a member of the Severstal Group.

SNA operations at Columbus and Dearborn delivered positive EBITDA in 2010, despite economic difficulties and rising raw materials prices. At these two plants SNA produced 3.64 million of tonnes of steel, and shipped 3.74 million of tonnes of steel products. Sales revenue from continuing operations in 2010 amounted to US$2,912 million, with EBITDA of US$86 million.

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“2010 was an important year for Severstal International. We made decisive steps to bring our international asset structure in line with our financial and strategic targets, and to be well-positioned for long-term growth.

We remain committed to operating in North America, which we view as a significant and attractive market. Though still challenging, the US steel market gradually recovered in 2010. Our full-year 2010 crude steel output in the US increased by 17.8%, compared to 2009, enabling Severstal North America to sell around 3.7 million tonnes of rolled products, up 14.6% on 2009 figures.

Also in 2010, the full-year revenue of Columbus and Dearborn increased by 25.9% to US$2,911.5 million, driven by volumes and prices, with EBITDA totalling $86.4 million, versus negative EBITDA of US$113.8 million in 2009. We expect the cost position of Columbus and Dearborn to improve further as a result of operational improvements, higher production volumes driven by better capacity utilization rates and commissioning of new steelmaking and finishing facilities at both plants.

In 2011, the total amount of capital investment at Severstal North America will be approximately US$465 million. We expect much stronger performance of our US assets from 2011 and beyond, with the completion of their investment programmes expected by the end of 2011.”

Sergei KuznetsovSeverstal North America, Chief Executive Officer


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Our 2011 development of the Dearborn and Columbus plants includes a US$465 million modernisation programme, targeting critically exposed applications for automotive customers and other original equipment manufacturers – as well as capacity expansion project at the Columbus plant.

Brief NAFTA steel market overviewThe North American Free Trade Agreement (NAFTA) light flat rolled steel market, which includes Canada, Mexico, and the US, is one of the largest and most diverse steel markets in the world. The NAFTA light flat roll market, consisting of hot roll, cold roll, coated sheet, and plate in coils, grew by 42% in 2010 and accounted for 66.4% of all NAFTA market steel consumption. Key factors affecting the NAFTA steel market are overall demand, utilisation of capacity, inventories, exports and imports, and competing materials. GDP growth edged higher by 2.9% in 2010 and NAFTA steel shipments regained momentum with total NAFTA light flat rolled steel demand at 58.89 million metric tonnes.

In 2010, the market grew across a wide range of consuming industries. Pipe and tube shipments rose by 29.5% and accounted for 15.7% of the total local steel demand. Driven by the OCTG (Oil Country Tubular Goods) sector, this growth is expected to continue in 2011, and the US rig count should continue to increase. The construction, automotive, agriculture, and energy markets are some of the key drivers of pipe and tube demand. As the nation’s energy infrastructure is further developed, piping and tubing are expected to be a growing source of steel demand.

Automotive shipments rose by 44.6% and accounted for 17.6% of local steel demand. Availability of credit and consumer confidence were key drivers of automotive demand, despite the slow recovery in employment. NAFTA light vehicle production increased from 8.6 million units in 2009 to 11.9 million units in 2010, and is expected to increase to 13.1 million units in 2011. As automotive manufacturers work to build lighter and more fuel-efficient vehicles, high-strength and advanced high-strength steels become increasingly important.

Construction shipments rose by 38.5% and accounted for 20.2% of local steel demand. As construction recovers from very depressed levels in 2009 and 2010, GDP and employment growth will drive an improvement in residential and non-residential construction, which will be key in further infrastructure growth. We are beginning to see positive signs of a recovery in non-residential construction. The Architecture Billings Index (ABI), a leading indicator, has gradually improved and is above its break-even point.

Distributor shipments rose by 57.7% and accounted for 29% of local steel demand. The key driver in the distributor market is end-user market demand. Distributor shipments grew as the economy recovered and inventories were replenished. As both business and consumer confidence improve and support the general recovery, the distributor market will continue to be key in supply chain management, distribution, and the processing of steel for other markets.

Source: CRU, Global Insight product data, CSM.

Key production facilitiesFollowing the changes, our present operations in Severstal North America (SNA) comprise the following assets:

ColumbusSeverstal Columbus is one of the most technologically advanced steel-making facilities in North America. Commissioned in August 2007, it is the newest mini-mill in North America and the only EAF compact strip process (CSP) plant in the world designed to make exposed automotive steels. It focuses on the production of high-quality flat-rolled steel, and currently has an annual production capacity of 1.5 million tonnes. Upon completion of the expansion program in 2011 annual capacity will increase to 3.1 million tonnes. It produces a broad range of high-quality hot-rolled, hot-rolled picked and coiled, cold-rolled and galvanized sheet products for customers primarily in the distributor, construction, automotive, appliance, machinery, and pipe and tube markets. It also has the capability to produce non grain oriented electrical and renitrogenised steels, as well as value-added applications for culverts, shipbuilding and line-pipe.

Severstal Columbus is strategically located in Columbus, Mississippi. From Mississippi’s ’Golden Triangle’, it has unparalleled access to rail, truck and water routes that enable it to deliver product throughout the growing south-eastern US manufacturing region and into Mexico, faster and more economically than other steelmakers. Its site of approximately 1,300 acres has been designed to allow for additional on-site steel processing operations, which are being developed independently and through joint venture opportunities.

NAFTA LRF product distribution, 2010

HR 42%CR 20%Coated 31%PIC 7%

NAFTA LRF market distribution, 2010

Automotive 18%Construction 20%Distributor 29%Pipe & Tube 16%All Other 17%


Severstal International (continued)DearbornDearborn is located in Dearborn, Michigan. This location gives it strategic proximity to major automotive customers, to the Great Lakes waterways and to three large railroads in North America, providing logistically favourable access to raw materials and customers. Current crude steel capacity at Dearborn is 2.3 million tonnes annually.

Dearborn’s product line includes hot-rolled, cold-rolled and galvanized steel. These products, and in particular the value-added products such as high strength, high-carbon and low-alloy steel, are largely targeted at the automotive industry.

Dearborn realises partial upstream integration into coking coal via PBS Coals, a coking and steam coal producer located in the US, which is part of Severstal Resources. It operates several surface and underground mining complexes near Somerset, Pennsylvania.

Joint ventures and associates:SNA holds interests in three joint ventures and one associate, established together with other US companies in order to expand our product line and provide services. The joint ventures produce metallurgical coke and galvanized steel, and provide steel processing services.

Double EagleDearborn owns 50% of the Double Eagle Steel Coating Company, a joint venture with United States Steel Corporation. Double Eagle is the world’s largest electro-galvanizing line, and produces premium quality galvanized sheet steel, primarily for automotive customers. The plant, located in Dearborn, Michigan, has a production capacity of 789,000 tonnes per year, approximately one half of which is dedicated to Dearborn.

Spartan SteelDearborn owns 48% of Spartan Steel Coating LLC, a joint venture with Worthington Steel of Michigan. Spartan Steel produces hot-dip galvanized sheet steel, primarily for automotive and service centre customers. The plant is located in Monroe, Michigan, and has a production capacity of 544,000 tonnes per year, about 80% of which is dedicated to Dearborn. Dearborn supplies nearly 100% of the steel sheet used as substrate for Spartan Steel.

Delaco ProcessingDearborn owns 49% of Delaco Processing LLC, located in Dearborn, Michigan. Delaco Supreme Tool and Gear Co. owns 51% of Delaco Processing LLC. Delaco Processing specialises in slitting steel strip and sheet up to 1,829mm in width.

Mississippi Steel ProcessingColumbus owns 20% of Mississippi Steel Processing LLC (MSP), which is a steel service centre under construction at Columbus’ industrial site. MSP is a joint venture with Merlo Holdings Inc. (40%) and Layhill Ventures LLC (40%). Production is expected to begin in the second quarter of 2011 with anticipated annual production of 156,000 tonnes per year.

Key performance indicators of Severstal North America in 2010 (excluding discontinued operations)Revenue from Dearborn and Columbus went up by 25.9% to US$2,911.5 million (FY2009: US$2,312.5 million) with EBITDA of US$86.4 million, compared to FY 2009 negative of US$113.8 million. Their performance throughout 2010 reflects stronger steel demand. 2010 revenue was driven by both volume and price factors.


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Key performance indicators Change year-on-year 2010 2009 %

Production of crude steel (thousand tonnes) 3,640 3,090 17.8

Sales of steel products (thousand tonnes) 3,742 3,266 14.6


Gross loss (US$ million) (0.1) (179.4) (99.9)

(Loss)/profit from operations (US$ million) (61.4) (257.8) 76.2

Operating margin (%) (2.1) (11.1) n/a

EBITDA (US$ million) 86.4 (113.8) n/a

EBITDA per tonne (US$/tonne) 23.1 (34.8) n/a

EBITDA margin (%) 3.0 (4.9) n/a

Average steel product price (US$/tonne) * 764 689 10.9

Hot-rolled strip and plate (US$/tonne) 669 571 17.2

Cold-rolled sheet (US$/tonne) 780 691 12.9

Galvanized and other metallic-coated sheet (US$/tonne) 899 859 4.7

Colour-coated sheet (US$/tonne) n/a n/a n/a

Metalware products (US$/tonne) n/a n/a n/a

Semifinished products (US$/tonne) 500 600 (16.7)

*Steel products include semifinished, rolled and downstream products.

As a part of labor costs reduction initiatives SNA decreased headcount (employees and contractors) by the end of the year 2010 to 2,103, compared to 2,185 in 2009.


Revenue2009

2,312

327

294 2,912

(13) (8)

Volume Price Mix Other Revenue2010

0

500

1,000

1,500

2,000

2,500

3,000

* “Other” includes revenues from non-core business, like delivery services, sales of energy, heat, coking side products, etc

Our full-year 2010 EBITDA margin increased to 3.0% from the negative of 4.9% in 2009, due to market recovery.

The main factors behind the EBITDA increase were:US$267.6 million – improved sales prices –US$79.3 million – increased sales volume –US$43.7 million – manufacturing efficiencies attributed –to higher production volumesUS$(200.5) million – cost increases due to raw material –price increases.US$10.1 million – other factors. –


EBITDA2009

($113.8)

$79.3 $7.5

$267.6

($200.5)

$43.7 $2.6 $86.4

Salesvolume

Salesmix

Salespricing

Manu-facturingeconomics

Manu-facturingefficiences

Other EBITDA2010

($150)

($100)

($50)

$0

$50

$100

$150

$200

$250

$300


Severstal International (continued)

Sales by products of Severstal North America in 2010 (excluding discontinued operations)In 2010, sales of hot-rolled strip and plate accounted for 43.0% of total rolled products sales, cold-rolled sheet accounted for 19.4%, and galvanized and other metallic-coated sheet accounted for 37.6%.

US domestic sales accounted for 97.8% of total sales, and export sales totalled 2.2% of total sales.


Thousand US$ Thousand US$ Thousand US$ Sales by product –export tonnes million tonnes million tonnes million


Cold-rolled sheet 711 554.5 688 475.3 3.3 16.7

Galvanized and other metallic-coated sheet 1,196 1,075.8 1,054 905.2 13.5 18.8

Color coated sheet – – – – n/a n/a

Total rolled products 3,741 2,858.1 3,265 2,250.0 14.6 27

Metalware products – – – – n/a n/a

Total semi-finished products 1 0.5 1 0.6 0.0 (16.7)


Other and shipping – 52.9 – 61.9 n/a (14.5)

Total 3,742 2,911.5 3,266 2,312.5 14.6 25.9US sales


Cold-rolled sheet 699 544.9 663 455.3 5.4 19.5

Galvanized and other metallic-coated sheet 1,181 1,063.7 997 857.0 18.5 24.1

Total rolled products 3,656 2,798.3 3,103 2,132.0 17.8 31.3

Total semi-finished products 1 0.5 1 0.6 0.0 (16.7)


Other and shipping – 48.2 – 58.9 – (18.2)

Total US sales 3,657 2,847.0 3,104 2,191.5 17.8 29.9Export sales

Hot-rolled strip and plate 58 38.1 80 50.3 (27.5) (24.3)

Cold-rolled sheet 12 9.6 25 19.5 (52.0) (50.8)

Galvanized and other metallic-coated sheet 15 12.1 57 48.2 (73.7) (74.9)

Total rolled products 85 59.8 162 118.0 (47.5) (49.3)

Total semifinished products – – – – n/a n/a

Total steel products 85 59.8 162 118.0 (47.5) (49.3)


Total export sales 85 64.5 162 121.0 (47.5) (46.7)


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Sales and marketingFrom 2009 to 2010, total sales volumes increased by 14.6%. Direct sales to automotive manufacturers in 2010 accounted for 30.9% of total revenue, which is 18% higher than 26.2% in 2009. US automotive manufacturers experienced a recovery from the recession in 2010 that resulted in increased steel demand.

Production results of Severstal North America in 2010 (excluding discontinued operations)In 2010, Columbus and Dearborn produced 3,640,000 tonnes of slabs, and shipped 3,742,000 tonnes of steel products. Change year-on-year Production volumes (thousand tonnes) 2010 2009 %

Hot metal 1,801 1,527 17.9

Crude steel 3,640 3,090 17.8

Capital expenditure (including discontinued operations)Total capital expenditures in 2010 were US$341.6 million, which is 43.2% more than 2009. Major projects at Dearborn and Columbus were resumed in 2010 as the economy improved.

In 2011, the total amount of investment at Severstal North America will be approximately US$465 million. This will include the construction, commissioning and start-up of the second electric arc furnace, continuous caster, tunnel furnace, and pickle line, and the second hot-dip galvanizing line at Severstal Columbus, and the new cold rolling complex and hot-dip galvanizing line at Severstal Dearborn. Upon completion of these capital improvement programmes, combined annual steel-making capacity will reach 5.4 million tonnes, cold rolling capacity at Dearborn and Columbus will increase to 3.6 million tonnes, and galvanizing capacity will reach 2.4 million tonnes.

2011 projects Timeline Expected results

Dearborn(New Pickle Line and Q3 2011 Cold-rolling capacity will increase to 1.9 million tonnesTandem Cold Mill) start Development of high-end automotive products output

Dearborn(New Automotive Exposed Hot Dip Q4 2011 Increase in exposed automotive steel capacity by 450,000 tonnes Galvanizing Line) start focusing on galvanized and galvannealed products

Columbus(Phase II) Q3-Q4 2011 Crude steel capacity will double to 3.1 million tonnes start Galvanizing capacity will double to 1 million tonnes

CostsThe total cost of sales in 2010 was US$2,911.6 million, which is 16.8% more than in 2009. This is due to increased volumes and the higher cost of raw materials.


Nordgold Since it began, in 2007, Nordgold has grown both by acquisition and organically, increasing its production (including gold equivalent ounces of silver) from approximately 21k oz in 2007 to approximately 589k oz in 2010.


Revenue 2010 (US$)

754.2m(An increase of 45.7%on 2009)

EBITDA 2010 (US$)

372.8m(An increase of 58.2%on 2009)


Nordgold

Nordgold is a 100% Severstal subsidiary and consolidates all the company’s gold assets. It operates eight producing mines, two development projects, five advanced exploration projects and a broad portfolio of early exploration projects and licences located across West Africa in Guinea and Burkina Faso, as well as in Kazakhstan and the Russian Federation. Since it began, in 2007, Nordgold has grown both by acquisition and organically, increasing its production (including gold equivalent ounces of silver) from approximately 21k oz in 2007 to approximately 589k oz in 2010.

Nordgold targets production of over 1.0m oz from its operating mines and development projects on a fully consolidated basis by 2013. At 1 November 2010, Nordgold’s resource base consisted of 23.0m oz of gold resources on a fully consolidated basis and 103m oz of silver resources (represented by a 50% interest in the Prognoz silver deposit) classified as measured, indicated and inferred, according to JORC, and 8.9m oz of proven and probable gold reserves.

Brief world gold market overviewDemand for gold – and hence its price – can be significantly affected by macro-economic factors, such as inflation, exchange rates and reserve policies, and by global political and economic events. Gold is often purchased as a store of value in periods of price inflation and weakening currencies. In the last ten years the gold prices were growing on the back of substantial demand.

LME annual average gold price, US$/ounce

02004006008001,0001,2001,4001,600

Source: Bloomberg, 2011.

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Demand for gold continued to be strong during 2010. The gold price reached a new high of US$1,421 per ounce on 9 November and the average price during the year was US$1,224.5 per ounce, compared to US$972.4 in 2009. 2010 was a year of net official sector purchases as central banks of many emerging economies, including China and Russia, sought to diversify their foreign reserves and increase their gold holdings.

In 2010, the global gold mine production grew by 1.8% to 2,626 metric tonnes and total world supply increased by 1.6% to 4,347 metric tonnes.

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"During 2010, we continued to implement our strategy successfully with the acquisition of Crew Gold, which owned the LEFA gold mine in Guinea. This acquisition adds significantly to both our gold production and our resources. We bought an initial 26.6% stake in February and increased our holding in stages during 2010, giving us ownership of 93.4% of Crew Gold at the end of 2010. We have subsequently acquired 100% of Crew Gold’s shares.

The other significant development during 2010 was the increase in our holding in High River Gold, from 50.1% to 72.6%. High River Gold owns the Irokinda, Zun-Holba and Berezitovy mines in Russia and the Taparko mine and Bissa development project in Burkina Faso. It also has an indirect 50% stake in the Prognoz silver deposit. Prognoz is one of the largest high grade undeveloped primary silver deposits in the world, with current resources of 205m oz of silver.

Our spread of mines and countries reduces our risk and increases our security of production. It also allows us to identify more opportunities, create synergies across our sites and transfer technology and people around the business.

With a proven management team, a commitment to transparency and a strong balance sheet, we are well placed for the future."

Nikolai ZelenskiNordgold, Chief Executive Officer


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OperationsWe report our business in geographical regions, spread across West Africa (Guinea and Burkina Faso), Kazakhstan and Russia.

2010 Gold Reserves and sales volumes Resources Geographical breakdown Description (’000 ounces) (million ounces)

West Africa

Somita The Taparko open pit gold mine, in Burkina Faso 127.229 0.9

Crew Gold The LEFA open pit gold mine, in Guinea 73.252 5.6

Development West Africa Mines in development and exploration. The key n/a development project is at Bissa, Burkina Faso

Kazakhstan

Celtic and Semgeo The Suzdal underground gold mine and deposits in the Zherek 87.273 2.2 and Balazhal open pit mines, which are under technological review

Russia

Berezitoviy An open pit gold mine in Amur region 72.965 1.4

Buryatzoloto The Zun-Holba and Irokinda underground gold mines, 143.764 0.5 in the Buryatia Republic

Neryungri-Metallic and Aprelkovo Open pit gold mines in the Republic of Yakutia and the Transbaikal region 98.178 3.1

Development Russia Mines in the exploration and evaluation stage. The primary project is at Gross

* From August to December 2010 only

StrategyWe have a three-pillar strategy:

Operational optimisation. – We look to maximise production and efficiency, and apply best practice. When we acquire assets, we enhance their culture and strategic focus, and increase their operational performance.Organic expansion and development. – We make significant investment in expanding reserves at our current mines and identifying and developing new projects. We use our depth of mining and geological expertise and considerable experience on the ground in our regions.Value-building acquisitions. – Our M&A strategy is to build on our established presence in the gold industry by identifying underperforming mines or late-stage development projects, where we can create value through operational improvements or by providing expertise or capital. We will consider acquisitions in our existing regions of Russia, Kazakhstan and West Africa, as well as South America. We exercise financial discipline in valuing targets and look to utilise our management’s considerable acquisition experience.

While implementing this strategy, we also make sure that we work in the right way. Maintaining the health and safety of our people, protecting the environment and supporting our communities are all fundamental to our business success.

Key performance indicators In 2010, Nordgold revenue increased by 45.7%, to US$754.2 million. This was primarily due to higher sales volumes and gold prices. EBITDA was US$372.8 million, 58.2% higher than in 2009, and the EBITDA margin increased from 45.5% in 2009 to 49.4% in 2010.

The average number of Nordgold employees during 2010 was 8, 672 people, which was 8.3% higher than in 2009. Change year-on-year 2010 2009 %

Revenue (US$ million) 754.2 517.6 45.7

Gross profit (US$ million) 359.7 208.2 72.8

Profit from operations (US$ million) 272.0 147.6 84.3


EBITDA (US$ million) 372.8 235.6 58.2


Average product prices (FCA) (US$/tonne) 1,251 993 26.0


Revenue drivers in 2010 vs 2009, US$million

Revenue2009

517.6

Neryungriand

Aprelkovo

47.2

Celtic andSemgeo

-7.3

Buryat-zoloto

33.9

Berezitoviy

6.0

Somita

58.2

CrewGold

98.6

Revenue2010

754.2

0100200300400500600700800


EBITDA2009

Prices Volumes,sales

Volumes,cashcosts

Cost of

sales

Admin-istrative

costs

Taxes Others Forex EBITDA2010

235.6

127.7 9.3 -8.6 -14.9 -12.7-3.4

39.7 0.1 372.8

050100150200250300350400

Top 8 gold producers, 2010

China 12%Australia 8%South Africa 8%USA 8%Russia 7%Peru 7%Canada 4%Indonesia 4%Other 42%

Source: Gold-Eagle report.

Capital expenditure In 2010, Nordgold investments in ongoing business and new projects totalled US$170.8 million (compared to US$99 million in 2009). We expect our gold production to continue to increase in 2011, due both to the inclusion of a full year of production at LEFA, and to operational improvements and higher productivity at this mine and at Berezitoviy and Suzdal, where we have installed additional processing capacity.

Major projects in 2010:Our total investments in 2010 amounted to US$170.8 million. –We invested US$57.3 million into safety projects and re- –equipment: US$14.2 million at Crew Gold, US$12.9 million at Buryatzoloto, US$8.8 million at Berezitoviy, US$8.5 million at Neryungri-Metallic and Rudnik Aprelkovo, US$7.5 million at Somita and US$4.7 million at Celtic and Semgeo and US$0.7 million at other assets.The major part of the US$48.1 million investment in expansion –was US$31.7 million of Celtic capex (expansion of the crushing and milling facilities, acquisition of underground machinery and on developing new BIOX assets). The residual amount consists of US$11.9 million for developing additional processing capacity in the gold extraction facilities at Berezitoviy and US$4.5 million for other small projects.Exploration and evaluation investments totalled US$65.4 million –in 2010 (US$17.4 million at our Western African assets, US$17.3 million at Yuzhno-Uguyskaya area at Neryungri-Metallic, US$14.9 million at Buryatzoloto, US$6.7 million at SZRK (Uryakhskoye, Vitimkanskaya, Nerchinskaya, Kunikan and Ostantsovy fields), US$4.5 million at Celtic and US$4.6 million – other).

Projects for 2011:We expect to spend US$289.9 million on gold extraction projects –in 2011, including:

US$71.2 million on maintenance (safety, facilities balancing, –replacement of equipment) at Crew Gold (US$37.7 million), at Buryatzoloto (US$13.4 million), at Neryungri-Metallic and at Rudnik Aprelkovo (US$12.7 million), at Celtic (US$3.8 million), at Berezitoviy (US$2.8 million), at Somita (US$0.8 million). US$111,7 million on Capital expenditure on expansion –(development) at Burkina Faso entities (US$90.0 million), at Celtic (US$7.2 million), at Berezitoviy (US$5.8 million), at Somita (US$4.1 million), at Neryungri-Metallic (US$3.1 million) and at Buryatzoloto (US$1.5 million).US$107.0 million on exploration and evaluation at our Western –African assets (US$34.2 million), at Buryatzoloto (US$23.2 million), at Neryungri-Metallic and at Rudnik Aprelkovo (US$17.3 million), at Crew Gold (US$12.0 million), at SZRK (US$9.4 million), at Celtic (US$8.6 million), at Berezitoviy (US$1.6 million) and at Somita (US$0.7 million).

Nordgold (continued)


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2010 progress and 2011 prioritiesProgress in 2010 Priorities for 2011

Operational optimisation

Equipment upgrades at Taparko to improve gold recovery

Installed an additional processing plant at Suzdal, to expand mine and plant throughput

Installed an additional ball mill at Berezitovy, to expand its processing capacity

Increase the mining rate and plant throughput at Taparko to 1.75 million tonnes of ore in 2011, compared to 1.27 million tonnes in 2010.

Increase mine and plant throughput at Suzdal to 500,000 tonnes, compared to 300,000 at acquisition.

Increase processing throughput at Berezitotovy to 1.8 million tonnes, compared to 1.05 million tonnes in 2010.

Increase production at LEFA to 237.9 thousand ounces of gold, compared with 73.3 thousand ounces of refined gold produced for the period from August to December 2010, and reduce cash costs per ounce.

Organic expansion and development

Continued to invest in development projects, notably Bissa and Gross

Begin the engineering and design phase at Bissa.

Invest approximately US$107 million in exploration in 2011, encompassing activity next to existing mines and our licence portfolio in Russia, Guinea and Burkina Faso, in order to expand mine life, increase the overall gold resource base and identify potential new mine development opportunities.

Continue to focus on exploration of new resources and development of new greenfield and brownfield projects.

Value-building acquisitions

Acquired Crew Gold, which owns the LEFA gold mine in Guinea. Added significantly to both our gold production and our resources

Increased our holding in High River Gold, from 50.1% to 72.6%.

Continue to review potential targets.

Nordgold historyIncreasing total production from 21k oz in 2007 to 589k oz in 2010In under four years, Nordgold has evolved into a significant player in the gold market.2007 2008 2009 2010 2011

April Initiate expansion into gold

August Acquire 22% stake in Celtic Resources, which owns the Suzdal and Zherek mines in Kazakhstan

October Acquire Aprelkovo and Neryungri mines in Russia, from Arlan

December Increase stake in Celtic Resources to 86.3%

January Increase stake in Celtic Resources to 100%

August Acquire Semgeo, which owns the Balazhal mine in Kazakhstan

November Acquire 53.8% controlling stake in High River Gold, which owns the Irokinda, Zun-Holba and Berezitovy mines in Russia and the Taparko mine and Bissa project in Burkina Faso

A year of optimising and integrating assets, forming an integrated business model

February Acquire 26.6% stake in Crew Gold, which owns the LEFA mine in Guinea

July Increase stake in Crew Gold to 50.2%

August Increase stake in High River Gold to 70.4%

September Increase stake in Crew Gold to 93.4%. October Increase stake in High River Gold to 72.6%

October Increase stake in High River Gold to 72.6%

January Increase stake in Crew Gold to 100%

February Intention to list Nordgold on the London Stock Exchange

Postpone an initial public offering and premium listing of its ordinary shares on the London Stock Exchange due to unfavourable market conditions

2007 – 2008 Acquire several exploration permits in Russian state auctions


Board of directorsNordgold is committed to corporate governance and transparency. We have a strong board and our directors have a wide range of different industry experiences. Our independent non-executive directors are well-respected and bring a wealth of experience which will benefit Nordgold in the years ahead.

Philip Baum – ChairmanPhilip Baum joined Nordgold as chairman in October 2010. He also chairs the nomination committee and is a member of the safety and sustainable development committee.

Philip had a 31 year career with Anglo American plc, with extensive experience in Africa, Europe, North and South America and Australasia in mining, minerals, heavy industry and financial services. He retired in 2009 as chief executive of the company’s ferrous metals division and a member of its executive committee.

Philip holds a B.Com., an LL.B. and a higher diploma in tax law from the University of the Witwatersrand. He is also a non-executive director of Ruukki Group plc.

Nikolai Zelenski – Chief Executive OfficerNikolai joined OAO Severstal in 2004 and was head of Severstal Resources’ gold division and strategy. Previously, he was an engagement manager in the mining sector at McKinsey & Company.

Nikolai holds a master of technical sciences degree from the Saint-Petersburg State Technical University, a Ph.D. in molecular genetics from the University of Texas, and a master of business administration degree from Vanderbilt University (United States).

Sergey Zinkovich – Chief Financial OfficerSergey joined Severstal in 2005. He was head of the tax department of the Group’s mining division and chief financial officer of its gold division. Previously, Sergey worked at BDO Unicon and held various financial management positions in the manufacturing industry.

He graduated from the Belarusian State University with a degree in jurisprudence, specialising in financial law.

Vadim Larin – Non-Executive DirectorVadim joined Severstal in 2003 and has managed its coal operations at Intaugol and Kuzbassugol. From August 2007 to September 2010 he was chief executive officer of Vorkutaugol. From 1 September 2010, he became acting chief executive officer of Severstal Resources, division of Severstal Group. Prior to joining the Severstal Group, Vadim worked at McKinsey & Company.

Vadim graduated from the Moscow State Institute of Radio Engineering, Electronics and Automation. He also holds an MBA from INSEAD.

Alexey Kulichenko – Non-Executive DirectorAlexey joined Severstal in 2005 as chief financial officer of Severstal Resources and was appointed chief financial officer of Severstal in July 2009. Prior to joining Severstal, he held senior management positions at Sun Interbrew and Unimilk, where he was chief financial officer.

Alexey graduated from the Omsk Institute of World Economy with a degree in economics.

Peter Lester – Independent Non-Executive DirectorPeter joined Nordgold in October 2010 as an independent non-executive director. He is a mining engineer with extensive experience in senior operating, development and corporate roles and is currently executive director responsible for corporate development at Citadel Resource Group. Previously he was the executive general manager for corporate development for Oxiana and then OZ Minerals. His activities have covered Australia, South East and Central Asia, the Middle East and the Americas.

Peter has a Bachelor of Engineering (Mining-Hons) from the University of Melbourne and is a member of the Australian Institute of Company Directors and the Australian Institute of Mining and Metallurgy. He is also a non-executive director of Toro Energy Limited.

David Morgan – Independent Non-Executive DirectorDavid joined the Company in October 2010 as an independent non-executive director and chairman of the audit committee. Previously, he was executive director of corporate development at Johnson Matthey plc.

David is a member of the Institute of Chartered Accountants in England and Wales, and has an MA in mineralogy and petrology from Trinity College, Cambridge. He is chairman of the advisory board of Conduit Ventures Limited and a member of the supervisory board of SFC Energy AG.

Michael Nossal – Independent Non-Executive DirectorMichael joined Nordgold in October 2010 as an independent non-executive director and chairman of the remuneration committee. He is a member of the executive committee of Minerals and Metals Group and previously served as director and deputy chief executive officer for En+ Group Ltd, which manages aluminium and power assets.

Michael holds a bachelor of science degree from Monash University in Australia and a master of business administration degree from the Wharton School of the University of Pennsylvania.

Nordgold (continued)


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Reserves and resourcesDelivering organic growth by developing our reserves and resources is one of the three pillars of our strategy. Between 2008 and December 2010, we invested US$131 million in exploration.

As a result of our investment, we have:increased the reserves and resources at our mines; –identified the Gross deposit, with more than 5.4 million ounces of resources; –more than doubled resources at Bissa to 2.9 million ounces; and –built a portfolio of opportunities with further potential to significantly increase our resource base. –

At 1 November 2010, our proven and probable reserves stood at nearly 9 million ounces of gold.

Proven and probable reserves (’000 ounces)Burkina Faso 2,280

Guinea 3,796

Kazakhstan 684

Russia 2,148

Total 8,908

At 1 November 2010, we had measured and indicated resources of 12.3 million ounces and inferred resources of 10.7 million ounces, giving us total resources of 23 million ounces.

Measured, indicated and inferred resources (’000 ounces) Measured and Indicated Inferred Total

Burkina Faso 3,407 1,177 4,584

Guinea 4,822 1,096 5,918

Kazakhstan 888 1,307 2,195

Russia 3,229 7,090 10,319

Total 12,346 10,670 23,016


Corporate Social Responsibility

Long-term economic and financial success is possible only under conditions of social stability and partnership. Universal and efficient cooperation with business partners, state authorities, work collectives and general public is essential to ensure Severstal’s steady development. In our cooperation with these stakeholders, we aim to find the optimum balance between company-wide priorities, priorities of specific regions, and the interests of various social groups.

We operate to major principles of social responsibility: Industrial safety and environmental protection –Development and social support of people –Promotion of socio-economic growth in the regions –where we operate.

Severstal’s total social and charitable investments in 2010 were US$45.5 million.

Our activities in the sphere of corporate social responsibility were highly commended by experts. We won the Russian Union of Industrialists and Entrepreneurs annual contest: Best Russian Enterprises. Dynamics. Efficiency. Responsibility – nomination Social Investments and Projects.

Based on corporate charity research by the Vedomosti newspaper, in cooperation with PricewaterhouseCoopers and the non-profit partnership Donors Forum, we were nominated by the Russian Ministry of Economic Development and Trade as the best Programme Promoting the Development of Local Communities and Improvement of the Social Climate in Regions where the Company Operates, for our charitable programme The Road Home.

In a contest for evaluating corporate investment in human capital, named People’s Investor 2010, we won a nomination for Innovative Approach to Resolving the Issue Pertaining to the Development of Local Communities.

Based on the results of the First Rating of Business Partners of Russian Higher Educational Institutions, we were commended in nominations for The Best Practice of Vocational Adjustment of Students of Higher Educational Institutions, The Largest Contribution to the Support of Gifted Students and Young Teachers, and The Largest Youth Employer.

Health, safety and environmental (HSE) policyOur HSE policy provides a solid basis for our long-term success and leadership in business.

We aim to prevent environmental pollution, make efficient use of the power and natural resources we consume, reduce greenhouse gas emissions, and employ efficient waste management practices.

There are no circumstances which justify non-compliance with safety requirements, neglect of the health of our employees or damage to the environment. Work safety is a must within Severstal.


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Health and safety program Over the last three years the occurrence rate of industrial injuries at Severstal has reduced more than twofold.

In 2010, we embarked on a large long-term project named Labour Safety, aimed at steadily reducing the occurrence rate of industrial injuries.

The project calls for the implementation of an efficient labour safety system to make it possible to change the culture of industrial safety, from that of management supervision, to personal commitment from all employees.

In 2010, we launched the project at Cherepovets Steel Mill, and by mid-2012 it should be implemented in the whole Russian Steel Division.

The idea of the Labour Safety project is that we change the culture of industrial safety by implementing consecutively three major principles: providing safe labour conditions, getting employees involved in safety policies, and teaching safe behaviour. Each of these includes special tools or detailed procedures, such as:

evaluating the risk of missions –troubleshooting and low cost operations procedure –setting labour safety goals for all management levels, –and motivationa system for identifying and adjusting hazardous conditions –by auditing industrial operations safety, and also through a behavioural safety auditan updated system for investigating accidents and micro trauma –an updated system for training and mentoring programmes –(allowing work to be done independently)a communications programme promoting safe behaviour; –a labour safety roles and responsibilities matrix –an updated system for dealing with those who fail to observe –labour safety rules.

We envisaged that all managers will be trained and individually coached in these procedures, and will use them in their everyday operations.

The project also provides for a number of investment programmes: higher standards of sanitary amenities for employees, purchase of modern and quality personal protective equipment, repairs to, and construction of, pathways in the plant compound, installation of safety signs, etc. These will be implemented everywhere.

Environmental protectionIn 2010, we spent over US$70.0 million on environmental protection measures, continuing the following:

Energy saving and reducing greenhouse gas emissions –Reducing atmospheric emissions of pollutants –Water supply and waste water treatment –Solid waste management. –

Implementing the long-term energy saving programme has made it possible for the Cherepovets Steel Mill to reduce energy consumption in 2010 by 2.9% compared to 2009. At the same time, steel production rose by nearly 16%. This was due to a number of projects, for example, the large phased investment project, Automated System for Energy Resources Control and Management – Interdepartmental Accounting totalling over US$13.5 million. We completed the fourth of five phases in November 2010 and the fifth is scheduled for completion in 2011.

The project’s goal is to exercise control of the energy consumption of our major production units and, consequently, analyse them and take appropriate measures to reduce non-production costs.

The atmospheric air protection programme aims to renovate the gas-cleaning systems for three naphthalene presses (partially completed in December 2010), and also to modernise gas cleaning of the suction systems in the central ferroalloy storage area (work is done in two phases: we completed the first phase, involving the drier drums section, in November 2010, and the second phase covering the crushers section will be completed in the second quarter of 2011).

The construction of a new filtering unit for advanced waste treatment in the Cherepovets Steel Mill long product shop is nearing completion. The unit, once commissioned, will make it possible to meet appropriate cleaning standards for facility No.10.


Social support of people Our activities in the social arena cover employees’ health improvement, protection of mothers and children, organising employees’ rest and meal breaks, social assistance to pensioners and veterans, developing and training people and encouragement of the best employees.

At 31 December 2010, our workforce numbered 84,891, distributed among the divisions as follows:

Severstal Resources 32%Severstal Russian Steel 65%Severstal International (North America) 3%

Improving our employees’ health is a priority social objective in all our businesses.

In 2010, we allocated about $20.0 million to the Severstal’s Health programme, whose main task is to promote the health of metallurgists.

In Cherepovets we have arranged over 34,000 professional medical check-ups under this programme. We have also launched an action plan to improve labour conditions and the treatment-diagnostic process, to reduce the incidence of disease among employees. In 2010, our financing of Severstal Medical Unit programmes exceeded US$16.0 million. In 2010, the Medical Unit’s maternity home won the second national competition, Best Maternity Homes in the Russian Federation.

We allocated over US$5.0 million to improve the health of Cherepovets employees in 2010, which enabled over 9,000 metallurgists and their children to improve their health in resorts and country houses/camps, with 5,000 metallurgists undergoing rehabilitation and health improvement in the Rodnik sanatorium.

About 15,000 Cherepovets employees enjoy daily meals arranged by Organisation of Working Supplies, where quality services go hand in hand with healthy nutrition principles. As a result, the incidence of digestive disease in 2010 decreased 9.1% compared to 2009. One of the priorities of the Severstal’s Health programme is to motivate employees and their families to take up sports, and we allocated over US$800,000 to this. In 2010, over 4,000 metallurgists regularly attended 145 health and fitness groups, which accounts for 18% of the total staff of the Cherepovets Metallurgical Works. We organised more than 300 mass sport events, enjoyed by 15,000 participants.

Last year the Cherepovets Steel Mill completed the construction of residential houses within the Corporate Housing Programme. Housing was provided after payment of an instalment of no less than 15% of the price. Employees pays the balance monthly over 10 years as long as they continue to work for us. Costs for the improvement of living conditions, such as hostel maintenance, and provision of favourable credit facilities for buying housing, were US$5.8 million.

Employee training and developmentWe strive to create an environment conducive to developing our employees and unlocking their professional potential, promoting a corporate culture based on expertise, personal initiative and responsibility.

Working with young professionalsVarious divisions recruit students who suit our requirements, and every year, hundreds of students work as trainees with us. We run business seminars to help selected students learn about Severstal and its values, and get some career guidance.

We determine our need for graduates annually. For example, at the Cherepovets Steel Mill we will need 111 graduates in 2011. We select them based on their internship results, and presentation of their degree thesis.

We then help them build their careers by promoting them, for example as line managers or technical experts.

Our major mining businesses also offer career guidance at local schools, and school students can aim to be selected for special classes where teaching is focused on field-specific disciplines, physics and mathematics. We then encourage them to apply to leading mining universities, and currently we work closely with the Moscow State Mining University.

In addition to cooperating with higher educational institutions, we have created training centres at our major businesses in Vorkutaugol, Karelsky Okatysh and Olkon, where we have obtained licences for educational activities. All our businesses budget for technical and professional training.

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Career development at SeverstalSeverstal employees get ample opportunity for personal and professional growth and development. We encourage their desire to develop and learn, incorporating it into the management culture we promote. We work systemically to identify and satisfy training needs, to help employees acquire the necessary qualifications and competence.

Every year, company professionals and managers participate in industrial and functional seminars and conferences, to improve their qualifications and exchange experience with their colleagues. Engineering refresher programmes are intended primarily for employees developing new types of products. Those employees who have vast knowledge of technology and production of our strategic products, can teach others, acting as tutors during advanced qualification courses for foremen, and adaptation seminars for young professionals.

Our major businesses have their own centres where employees receive training in the most popular professions.

Besides developing their professional skills, employees have an opportunity to improve their management skills and personal performance by participating in relevant programmes organised both by us and by specialist educational institutions.

We place great emphasis on identifying potential successful managers among our employees and on training them intensively. We promote opportunities for employees to develop their careers and realise their potential through a system of HR committees, within specific functions, divisions and at company level.

Corporate training programme for managers – Achieve More TogetherLast year we embarked on a corporate training programme called Achieve More Together, created specifically to improve the quality and efficiency of projects undertaken by Severstal’s Business System. Its five modules help managers acquire the knowledge and practical skills needed to make changes.

It places great importance on inter-modular work (applying acquired skills in the workplace), as well as videoconferences, communication with experts and managers, and support from business unit HR managers.

About 300 managers from the Severstal Resource and Russian Steel divisions took part in the programme’s first module in October 2010. The second module (February 2011) enabled participants to familiarise themselves with the personnel management system and tools we use, and how to use these in their professional activities. The module’s major subjects include organisational structure, personnel selection and adaptation, the cycle of management of business performance and succession, and legal aspects of personnel management.

To support production managers who are taking part in the programme, we also see possibilities for their individual development through coaching and command sessions, with ongoing feedback from the programme’s experts and coaches. By 2013 the programme will have involved over 1,000 managers.


Development of local communitiesWe cooperate regionally in strategic social programmes in areas such as employment and career guidance, youth policy, health service, supporting culture and sports, and assisting vulnerable sections of the population. We work mainly through agreements with regional authorities.

In 2010, we allocated US$600,000 to developing the infrastructure, education, health service, culture and sports in Vorkuta under a social partnership agreement between the Vorkuta Administration and Vorkutaugol. Vorkutaugol backed the 12th Spartakiad of Northern People and the summer health improvement programme for children. In addition, we finance two major social facilities in the city: Universal Sport Center Olymp and the Miners’ Palace of Culture.

Karelsky Okatysh annually finances the upkeep of the cultural and sports centre Friendship, with more than 90,000 people attending various events. It also provided financial support for children’s educational institutions, sport clubs and schools, organisations for disabled people and veterans. In 2010, it supported important musical events in Kostomuksha, such as the international folklore festival Kanteletar, the International Festival of Chamber Art, the Sergey Ozhigov Art Song Festival, and the International Rock Festival Nord Session.

Olkon finances the youth leisure centre Polar Star, one of the most important social facilities in the city. It also supports various festivals, sports and cultural events, which attract a considerable part of the Olenegorsk population.

The non-profit partnership Urban Development Agency, which we set up jointly with the Mayor’s Office in 1999, to encourage small and medium-sized businesses, is performing successfully. Its programmes provide all-round support for beginning and experienced entrepreneurs at all stages, from the conception of a business idea and development of a business plan, to consultancy. The results of its activities in 2010 included 692 new enterprises and 3,372 new jobs; also, 1,144 start-up entrepreneurs were trained and 432 business promotion events held.

We supported the First International Festival of Young European Cinema, VOICES, held in Vologda and Cherepovets, which has become one of the milestones of the Year of France in Russia. The festival introduced spectators to young independent European cinema, contributing to pan-European culture.

In support of historical and cultural heritage, we continue to cooperate with the Russian Museum, the Tretyakov Gallery and the Bolshoi Theatre. Among joint projects with the Russian Museum are the exhibitions A Hymn to Labor, Russian Advertisement Poster, Holy Russian Lands; with the Tretyakov Gallery – A. Deineka. Work, Build and not Whine!, The Whole World is a Theater. Prints from F.M. Larionov’s Collection. We backed the premiere ballet performance of XIX-XX: Petipa/Forsythe/Balanchine in the Bolshoi Theater. A theatrical festival named the Gold Mask was held in Latvia, Riga, for the sixth time, and in 2010 Cherepovets saw for the first time the festival’s best shows.

In 2010, cooperation with Sergey Andriyaka’s Watercolour School gave rise to a regional exhibition project Master and Student, which involved the presentation of paintings by artists-schoolmasters and their students in Balakovo, Olenegorsk and Vorkuta; also, watercolour painting master classes were held.

In 2010, we continued our programme The Road Home, for the comprehensive prevention of child neglect and social orphanhood in Cherepovets. The programme’s 2010 results included 13 child abandonments prevented, threats to the life and health of 910 minors eliminated, 20 orphans placed in foster families, and 4,202 minors receiving social-psychological support.

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Mikhail Noskov Non-Executive Director. Year of birth: 1963A graduate of the Moscow Institute of Finance, Mikhail Noskov worked at the International Moscow Bank from 1989 until 1993, and was Trade Finance Director of Credit Suisse (Moscow) from 1994 until 1997, when he joined Severstal as Head of Corporate Finance. In 1998 he became Finance and Economics Director, and was appointed as Deputy CEO for Finance and Economics of the Severstal Group in June 2002. From 2007 till 2008 he was Deputy CEO for Finance and Economics of Severstal.

Alexey Mordashov CEO, Severstal, Member of the Nomination and Remuneration Committee. Year of birth: 1965

Alexey Mordashov has worked for Severstal since 1988. He started his career as a senior shop economist, becoming Chief Financial Officer in 1992. In December 1996, he was appointed as Severstal’s Chief Executive Officer. In June 2002, Mr. Mordashov was elected Chairman of Severstal’s Board of Directors and served as Chief Executive Officer of Severstal Group. Since December 2006, he has been Chief Executive Officer of Severstal. Alexey serves on the Entrepreneurs Council of the Government of Russian Federation. In addition, Mr. Mordashov is a member of the Russian-German workgroup responsible for strategic economic and finance issues, and he is the head of the Russian Union of Industrialists and Entrepreneurs’ (RSPP) Committee of Trade Policy and WTO. Since March 2006 he is a member of the EU-Russia Business Cooperation Council. Alexey is a member of the Atlantic Council President’s International Advisory Board.

Mr. Mordashov earned his undergraduate degree from the Leningrad Institute of Engineering and Economics. He also holds an MBA degree from Newcastle Business School of Northumbria University (Newcastle UK). Alexey was granted an honorary doctorate from the Saint-Petersburg State University of Engineering and Economics in 2001 and from the University of Northumbria in 2003

Anatoly Kruchinin CEO Severstal Russian Steel, CEO Cherepovets Steel Mill. Year of birth: 1960

Anatoly Kruchinin joined Severstal in 1982 and became Chief Power Engineer in 1993. In March 1999 he was appointed Commercial Director, and in January 2002 became Executive Director of Severstal. By July 2002 he was CEO of the company. Following the company’s new system of corporate management, from December 2006 he was Chief Executive Officer of Cherepovets Steel Mill, and in April 2008 was appointed CEO of Severstal Russian Steel Division.

Anatoly was a graduate of the Ivanovo Power Engineering Institute and held an MBA degree from the National Economic Academy under the Government of Russian Federation.

Anatoly Kruchinin passed away in December 2010.

Sergei KuznetsovCEO Severstal International, CEO Severstal North America. Year of birth: 1971

Sergei Kuznetsov started his career in 1994 as an expert in trade operations for steel and steel products at the State Owned Foreign Trade Association Promsyrioimport (Industrial Materials Import/Export). From 1995 to 2001, he worked as a commercial representative at the Steel Trading Section of the Moscow Representative Office of Cargill Enterprises, Inc. He joined Severstal in 2002 to head the Business Planning Group responsible for acquiring foreign assets and developing international projects. In 2004 he was appointed Chief Financial Officer of Severstal North America, and in 2008 became Chief Financial Officer of OAO Severstal. In July 2009 Sergei became CEO of Severstal International and CEO of Severstal North America.

Sergei graduated from Bauman Moscow State Technical University in 1994, where he majored in Engineering. In 1998 he received his Finance MBA from California State University, Hayward.

Alexey Kulichenko CFO, Severstal. Year of birth: 1974

Alexey Kulichenko graduated from the Omsk Institute of World Economy with a degree in economics. In 1996-2003 he worked in “Sun Interbrew”, starting his career as cash flow economist of Omsk plant “Pocap” and ending as Efficiency Planning and Managing Director of “Sun Interbrew”. From 2003 till 2005 Alexey worked as CFO at “Unimilk” – the second largest milk producer in Russia, which joins 20 plants in Russia and Ukraine. From December 19, 2005 to July 2009 he served as CFO of CJSC “Severstal Resource”. Since May 2006 Alexey is the member of the Board of directors of JSC “Vorkutaugol”. In July 2009 Alexey Kulichenko was appointed CFO of “OAO Severstal”.

Board of Directors


Peter KraljicIndependent Director, Member of the Audit Committee. Year of birth: 1939

Peter Kraljic is a Director Emeritus at McKinsey, where he spent 32 years and held a number of senior positions until his retirement in 2002. Focused mainly on industrial clients in the chemicals, pharmaceuticals, automotive assembly, and steel and aluminium sectors, he was also a member of McKinsey’s Shareholders and Personnel Development Committee and has managed the company’s activities in France as a General Director. Peter has also written a number of scientific and business articles for publications such as the Harvard Business Review and Le Figaro Economic. He has also recently led special projects aimed at economic growth and job creation in Germany and Brazil. Peter graduated from the University of Ljubljana, Slovenia (Faculty of Metallurgy), and holds a PhD degree from Polytechnic University in Hannover, Germany. He also holds a Masters degree in business management from the INSEAD business school, France.

Christopher ClarkChairman of the Board of Directors, Member of the Nomination and Remuneration Committee. Year of birth: 1942

Chris Clark is a leading industrialist and brings extensive business knowledge to the Board. Chris’s career spans 40 years at Johnson Matthey plc, the specialty chemicals and precious metals Group, where he became Chief Executive Officer in 1998. He led the Group into the FTSE 100 in 2002. Since his retirement in 2004, Chris has taken a number of non-executive positions. He currently chairs Urenco Limited, the leading international supplier of enriched uranium to the power generating industry. Chris is a graduate in metallurgy; he studied at Trinity College, Cambridge and Brunel University, London.

Martin AngleIndependent Director, Chairman of the Audit Committee. Year of birth: 1950

Martin Angle holds a number of non-executive directorships in addition to OAO Severstal, including in the UK Pennon Group plc, Savills plc and the Chairmanship of the National Exhibition Centre Group Ltd. He also sits on the board of Shuaa Capital psc in Dubai. During his career, Martin has held senior executive positions in investment banking, industry and more recently private equity, where he was an Operational Managing Director of Terra Firma Capital Partners and held various senior positions in its portfolio companies including the Waste Recycling Group Ltd, where he was Executive Chairman, and Le Meridien Hotel Group, where he was Deputy Chairman. Prior to that, Martin was for a number of years the Group Finance Director of TI Group plc, a specialised engineering company in the UK FTSE 100 with activities in over 50 countries. Before that, he spent 20 years in investment banking, where he held a number of senior positions with SG Warburg & Co Ltd, Morgan Stanley and Dresdner Kleinwort Benson. Martin is a graduate in physics, a Chartered Accountant, a Member of the Chartered Securities Institute and a Fellow of the Royal Society of Arts. He also sits on the Advisory Board of the Warwick Business School.

Rolf StombergSenior Independent Director, Chairman of the Nomination and Remuneration Committee. Year of birth: 1940

Rolf is Chairman of the Supervisory Board of LANXESS AG, Leverkusen, a global chemical company, formed after the reorganisation of Bayer AG. He is Senior Independent Director of medical device producer Smith and Nephew plc, London, and advises a number of German family-owned companies. After nearly 30 years with BP (British Petroleum Co plc) – where he became CEO of BP’s downstream business and Managing Director on the main board of the company – he held a number of directorships in internationally operating companies in Europe such as Reed Elsevier Group, TNT NV, Scania AB, John Mowlem plc and Management Consulting Group plc, as well as on the boards of PE-owned companies.

Rolf is an economics graduate with a doctorate from Hamburg University, where he also served as a lecturer. He was Honorary professor at the business school of Imperial College, London, and the Institut Francais de Petrol, Paris.

Ronald FreemanIndependent Director, Member of the Audit Committee. Year of birth: 1939

Ronald Freeman is a member of the Board of Directors, an Advisory Partner and stockholder of the Moscow-based Troika Dialog investment bank. He is also a non-executive member of the board of directors of Volga Gas and of Polish Telecom; and, a member of the Executive Committee of the Atlantic Council. He is a member of the International Advisory Committee of Columbia Law School, Chairman of the Executive Committee of the Pilgrims Society (UK) and Chairman of the International Advisory Board, Kozminski University (Warsaw). Between 1991 and 1997, Ronald was Head of the Banking Department of the European Bank for Reconstruction and Development (EBRD). He was responsible for debt and equity financing in the private sector in 23 countries of the former Soviet Union, with a total annual funds commitment of Euro 2 billion. Prior to that, Ronald was vice-chairman of Citigroup European investment banking and a general partner of Salomon Brothers. Ronald holds a BA degree from Lehigh University, and an LLB from the Law School of Columbia University. He was admitted to the New York Bar.


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Board of Directors’ Report

Severstal remains committed to best practice in corporate governance. Maintaining and further developing the high level of corporate governance in the company is a priority in the current economic environment and is the Board’s main responsibility.Severstal first published its Corporate Governance Code in October 2006, which was approved by the Board. This Code has been prepared following the recommendations of the Code of Best Practice set out in section 1 of the Financial Reporting Council’s Code on Corporate Governance. Please refer to www.frc.org.uk for more details.

Severstal’s Corporate Governance Code adheres to the following main principles:Seek to ensure efficient and transparent mechanisms for guaranteeing its shareholders’ rights and interests conferred by law, the –company’s Charter and other regulatory documents, and also those recommended by international corporate governance standards. Maintain a policy of equal treatment of all shareholders, irrespective of their nationality, jurisdiction of incorporation, or the size of –their shareholding. Seek to guarantee implementation of shareholders’ rights to participate in company governance by allowing them to take part –in meetings, vote on meeting agendas, and obtain timely information about the company’s operations, its management bodies and supervisory or auditing bodies. Regard increasing the market value of the company’s shares (capitalization) as one of its principal goals. –

As well as the Corporate Governance Code and Charter of the company, the activities of Severstal’s management and supervisory bodies are also governed by other corporate documents, such as the General Shareholders’ Meeting Regulations, Board of Directors Regulations, Board Committees Regulations, Internal Audit Commission Regulations and General Director Regulations. All the principles and rules presented in the company’s documents are largely compliant with the UK Corporate Governance Code 2010. Severstal has a ’standard listing’ of its depositary receipts on the London Stock Exchange.

In the Board’s opinion, the Company meets the disclosure and governance standards requirements of the UK Corporate Governance Code 2010 applicable to such listings. Visit www.severstal.com (About Severstal > Corporate Governance > Company documents) for more information.

Severstal complies with Russian corporate governance law requirements and meets the corporate governance mandatory requirements of MICEX and RTS (Russia) for the Russian listed ’B’ companies, which in turn follow the recommendations of the Russian Corporate Behaviour Code issued by the Russian Federal Securities Commission. The Code is available at www.fkcb.ffms.ru.

Table of compliance status with MICEX and RTS mandatory requirements for inclusion and maintenance of shares in the quotation lists of MICEX and RTS, as of the end of 2010 №

Requirement

Compliant/Non-compliant

Explanatory note (reference to the company’s internal documents)*

1.1 The Board of Directors shall be formed by the company.

Fully compliant 1) Clause 11.1.4, article 11 of the Company’s Charter approved by the Annual General Shareholders Meeting of OAO Severstal dated 15.06.2009 (Minutes № 1 dated 16.06.2009).2) The Company’s Board of Directors has been elected at the Annual General Shareholders Meeting of OAO Severstal dated 11.06.2010 (Minutes № 1 dated 11.06.2010)

1.2 The company’s Board of Directors shall have at least one Board member fitting the requirements mentioned in the clause 1.2 of Annex 4 (4.6) to these Rules.

Fully compliant The Board of Directors consists of 5 Independent directors: Christopher Clark, Rolf Stomberg, Martin Angle, Peter Kraljic, Ronald Freeman.

According to the resolution of the Board of Directors of OAO Severstal dated 11.06.2010 (Minutes № 22-2010 dated 11.06.2010), the abovementioned directors shall be deemed Independent (as this term is defined in the clause 1.2 of the Regulations for the Board of Directors of OAO Severstal approved at the Annual General Shareholders Meeting on June 27, 2008 (Minutes № 1 dated 02.07.2008)


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Explanatory note (reference to the Issuer’s internal documents) *

1.3 The company’s Board of Directors shall form a committee with an exceptional function to assess candidates to the company’s auditors, to evaluate an auditor’s opinion, to assess the effectiveness of internal control procedures and evaluate proposals for improvement of such procedures (Audit Committee) to be headed by a director fitting the requirements mentioned in the clause 1.2 of Annex 4 (4.6) to these Rules.

Fully compliant Regulations for the committees of the Board of Directors have been approved by the Board resolution dated 15-16.05.2008 (Minutes № 22-2008 dated 16.05.2008).

1.4 Audit Committee shall comprise only those Board members, who are not deemed to be a sole executive body and (or) collegial executive body of the company.

Fully compliant According to the resolution of the Board of Directors of OAO Severstal dated 11.06.2010 (Minutes 22-2010 dated 11.06.2010), the Audit Committee has been formed and included the following three Independent directors:Martin Angle, Peter Kraljic, Ronald Freeman. Martin Angle, Independent director, has been elected Chairman of the Audit Committee.

1.5 Evaluation of the auditor’s opinion prepared by the Audit Committee shall be submitted as materials to the Annual General Shareholders Meeting of the Issuer’s.

Fully compliant 1) Clause 2.5 of the Regulations for the committees of the Board of Directors approved by the Board of Directors on 15-16.05.2008 (Minutes № 22-2008 dated 16.05.2008).2) According to the Board resolution (Minutes № 15-2010 dated April 29, 2010), evaluation of the auditor’s opinion has been submitted as materials to the Issuer’s Annual General Shareholders Meeting.

1.6 The company’s internal documents shall cover duties of a) the Board members; b) members of collegial executive management body; c) a person executing functions of the sole executive body including managing organization and its executives; and contain information about the shareholding of the company’s securities, as well as information about any purchase and (or) sale of the Issuer’s securities.

Fully compliant This requirement is provided for by the clause 2.1.4 of the Regulations for the control over interested party transactions approved by the Board resolution of OAO Severstal on July 01, 2005 (Minutes № 35-2005 dated 01.07.2005) and clauses 36-40 of the Code of Practice on Handling Insider Information and on Dealing in Securities of OAO Severstal approved by the Board resolution of OAO Severstal on March 30, 31, 2007 (Minutes № 8-2007 dated 03.04 2007).

1.7 The company’s Board of Directors shall approve a document on handling information about the Issuer’s operations, dealing in securities of the Company and transactions with such securities, which is not publicly available and disclosure of which may significantly affect market value of the company’s securities.

Fully compliant Code of Practice on Handling Insider Information and on Dealing in Securities of OAO Severstal has been approved by the Board resolution of OAO Severstal dated March 30-31, 2007 (Minutes № 8-2007 dated 03.04 2007).

1.8 The company’s Board of Directors shall approve a document to regulate internal control procedures for financial and business operations of the Issuer to be monitored by a separate subdivision of the Issuer. Such a subdivision shall inform the Audit Committee about any breaches revealed.

Fully compliant According to the Board Minutes № 40-2005 dated 10.08.2005, the Internal Audit Department has been formed to ensure the performance of the Board Audit Committee.On September 20, 2005, General Director of OAO Severstal has issued the Order № 595 to establish the Internal Audit Department.Regulations for internal control over financial and business operations have been approved by the Board resolution of OAO Severstal on July 01, 2005 (Minutes № 35-2005).

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Explanatory note (reference to the Issuer’s internal documents) *

1.9 The company’s Charter shall mention that Notices about the Annual General Shareholders Meeting are to be published at least 30 days before the date of the meeting, unless a longer period is stipulated by the applicable Russian law.

Fully compliant 1) Clause 10.5, article 10 of OAO Severstal Charter (new edition) has been approved at the Annual General Shareholder Meeting of OAO Severstal dated 15.06.2009 (Minutes №1 dated 16.06.2009).2) Date of the Annual General Shareholders Meeting for 2009 results – 11.06.2010.Date for disclosing information about the date of the Annual General Shareholders Meeting (date for disclosing resolutions of the Board of directors) – 29.04.2010. Date for publishing Notice about the Annual General Shareholder Meeting for 2010 results – 06.05.2010.3) Date of the Annual General Shareholders Meeting for 2010 results – 27.06.2010.Date for disclosing information about the date of the Annual General Shareholders Meeting for 2010 results (date for disclosing resolutions of the Board of directors) – 02.03.2011.

Description of the composition and operation of the Issuer’s administrative, management and supervisory bodies and their committees (as required under DTR 7.2.7) is reviewed below.

General Shareholders’ Meeting The company’s General Shareholders’ Meeting is the supreme governing body of Severstal.

The General Shareholders’ Meeting has authority over:changes and addenda to the company’s Charter, or approval of a new Charter –reorganisation of the company –liquidation of the company, appointment of the liquidating commission and approval of intermediate and final liquidation balance sheets –the number of members of the company’s Board of directors, election of the Board’s members and the early termination of their authority –the quantity, face value and category of the declared shares – and the rights given by these shares –increases in the share capital of the company by increasing the face value of shares or by placing additional shares – only in cases, when pursuant –to applicable law, the share capital may be increased by placing additional shares. This is also the General Shareholders’ Meeting’s decisionreduction of the company’s share capital by reducing shares’ face value or by acquiring a part of shares with a view to reducing their total quantity, –or through redemption of the shares the company acquires or buysformation of the executive body of the company and early termination of its authority –election of the company’s Internal Audit Commission’s members and the early termination of its powers –approval of the company’s auditor –approval of annual statements, annual accounting and reporting documents, including reports on the company’s profit and loss accounts –distribution of profit, including disbursement of dividends, with the exception of profit distributed as dividends of the results of the first three –quarters of the year, and distribution of the company’s loss at the end of the fiscal yearthe procedure for a General Shareholders’ Meeting –split and consolidation of shares –adopting decisions on approval of transactions in the cases stipulated by applicable law –adopting decisions on approval of major transactions in the cases stipulated by applicable law –the company’s acquisition of the placed shares –decision on participation in financial and industrial groups, associations and other commercial corporations –approval of internal documents regulating activities of the company’s bodies –other matters stipulated by the Federal law ’On Joint Stock Companies’ and the company’s Charter. –

Severstal’s shareholders have the right to:participate in the management of the company –participate in General Shareholders’ Meetings and vote on all questions within its remit and authority –receive dividends from the company’s activities (provided a relevant decision is taken by the shareholders in a General Shareholders’ Meeting) –receive a part of the company’s assets in the event of a liquidation of the company. –


Shareholders owning at least 2% of the company’s ordinary registered shares can propose items for the Annual General Shareholders’ Meeting agenda and nominate candidates for the Board of Directors. Such proposals must be submitted to the company within 60 days of the financial year-end.

Shareholders owning 10% or more of the company’s ordinary registered shares can ask the company’s Board of Directors to hold an Extraordinary Shareholders’ Meeting.

Shareholders exercise their rights relating to the company’s management by voting at General Shareholders’ Meetings.

In 2010, Severstal held one Annual and one Extraordinary General Shareholders’ Meetings. Please visit www.severstal.com (About Severstal > Corporate Governance > Shareholder Rights) for more information.

The BoardAccording to the company’s charter, the Board will comprise ten members. The current structure of the Board represents a balance between a Non-Executive Chairman and five Non-Executive Directors – of which four are Independent Directors – and Executives. Balance on the Board is a prerequisite for good decision-making and governance.

The proportion of Independent Directors on the Board guarantees equal regard for the interests of all shareholders. The Board considers all its Independent Directors to be independent, in line with the UK Corporate Governance Code, 2010.

Severstal’s Board comprises Non-Executive Chairman, Christopher Clark; four Independent Directors – Ronald Freeman, Doctor Peter Kraljic, Martin Angle, and Doctor Rolf Stomberg; one Non-executive Director, Mikhail Noskov; and three Executive Directors – Alexey Mordashov, Sergei Kuznetsov and Alexey Kulichenko.

Board meetings and attendanceAttendance by individual directors at the personal meetings of the Board and its Committees in 2010: Remuneration Audit and Nomination Number of Number of Committee Committee Board Board meetings meetings meetings meetings attended (out attended (out Member of the Board possible2 attended of 4 meetings) of 3 meetings)

Christopher Clark 5 5 41 3

Ronald Freeman 5 5 4 31

Peter Kraljic 5 5 4 31

Martin Angle 5 5 4 31

Rolf Stomberg 5 5 41 3

Alexey Mordashov 5 5 – 3

Mikhail Noskov 5 5 21 –

Anatoly Kruchinin 4 4 – –

Sergei Kuznetsov 5 5 – –

Alexey Kulichenko 5 5 41 –

1 means that the specified Director is not a member of that Committee, although he attended the meetings at the invitation of the Chairman of the Committee;2 one of the meetings was held via conference call.

Board and Committee members have direct and continuous access to Board and Committee materials via a dedicated electronic system, which also serves as an archive of Board and Committee materials – and as a way to vote in Board meetings where members may be participating remotely.



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Role of the Severstal BoardSeverstal’s Board of Directors is responsible for the general management and performance of the company’s operations, including discussion, review and approval of its strategy and business model, and closely monitoring its financial and business operations by segment and as a whole.

The Board’s main objective is to run the company in a way that increases shareholder value in the medium and long term. Short-term financial and operational issues, such as debt levels and costs, also receive close attention.

The Board’s decisions are based on the best interests of all stakeholders. This can mean making difficult decisions in complex situations.

The Board is also responsible for disclosure and dissemination of information about the company’s operations, and for implementing the company’s information policy.

The Board has authority in decisions concerning major aspects of Severstal’s activity, except in matters within the jurisdiction of the General Shareholders’ Meeting.

Key duties:1. Responsibility for the company’s strategic direction.2. Reviewing the consolidated budget and submitting appropriate

recommendations.3. Reviewing the appointment and compensation policy applicable

to the company’s senior executives, and making recommendations regarding such a policy.

4. Dividend policy.5. Approving transactions with interested parties (as this term is

defined in accordance with Russian Law) with the value for each such transaction not to exceed 2% of the book value of Severstal’s assets on the date such a transaction is agreed.

6. Approving transactions of values exceeding 10% of the book value of Severstal assets on the date such a transaction is agreed.

7. Approving transactions to acquire: (i) shares or participation interests, or rights to manage such –shares or participation interests (ii) fixed or intangible assets if the amount of the transaction –specified in sub-clauses (i) or (ii) exceeds the equivalent of US$500 million. A resolution on the matters set out in clauses 2 and 7 requires a 2/3 majority vote of all members of the Board of Directors.

Board effectivenessThe roles of Chairman and Chief Executive Officer are separate and their responsibilities are clearly defined in the company’s statutory documents and regulated by Russian law. The role of the Chairman is to organise, lead and manage the Board and to convene and preside over Board meetings.

Directors new to the Board are given background information on the company when they join. This includes details of its operations and procedures, as well as information on what is required from them in their role according to the company’s statutory documents. This includes Severstal’s Corporate Governance Code, and applicable corporate governance law, best practice to help ensure their early effective contribution to the company.

The Board performed a self evaluation of its performance in 2010 based on the individual contribution of the Board members. Such evaluation helped to identify the areas for development and more close attention as well as the strengths of the Board.

The performance evaluation questioner contained three sets of questions relating to Board composition and structure, Board meetings and core processes and Board engagement with the company’s business issues. The overall results for the evaluation conducted proved to be positive and inspiring. The Board members mentioned several strong characteristics of the Board performance in 2010, those are: appropriate number of the Board members and sufficient individual contribution from the Board members, effective relationship between Chairman and CEO, important contribution by committees to the Board, value of boardroom discussions including those related to financial performance of the company.

There were some areas for improvement underlined i.e. Board succession planning and extension of more close communication of the Board members outside the Board meetings.”

Company SecretaryOleg Tsvetkov (PhD, MBA) became company Secretary of Severstal in 2006 after its listing in London. Oleg was awarded Corporate Governance Director – Corporate Secretary in 2008 and also headed the list of Directors on Corporate Governance 2010 in the steelmaking sector.

The company Secretary’s office is responsible for the Board of Directors’ activities, preparing and holding the General Meetings and meetings of the Board of Directors, disclosure of information, corporate governance advice, communications with shareholders and GDR holders – as well as relations with Russian and foreign stock market regulators. The company Secretary is responsible for ensuring the company, its management and officers comply with applicable corporate law, the company’s charter and internal documents.

Non-executive DirectorsThe Board reviews the independence of all Independent and Non-executive Directors annually and has determined that all such directors are independent and have no cross-directorships or significant links that could materially interfere with them exercising their independent judgment. The Independent and Non-executive Directors play a leading role in corporate accountability and governance through their membership of the Remuneration and Nomination and Audit Committees.


Senior Independent DirectorRolf Stomberg is Severstal’s Senior Independent Director and is also Chairman of the Remuneration and Nomination Committee. His responsibilities include meeting major shareholders and chairing meetings of the Independent and Non-executive Directors when the Chairman is not present.

Terms of appointment Members of the company’s Board of Directors are elected by the shareholders at their General Meeting and remain members until the next Annual General Meeting. If a Board Member elects to terminate his office the whole body of the Board of Directors is re-elected at a General Shareholders Meeting. Those elected to the company’s Board of Directors may be re-elected an unlimited number of times.

Meetings of Non-executive DirectorsThe Independent and Non-executive Directors meet separately during the year. There were four such meetings in 2010.

Company CharterSeverstal’s Charter, and any other internal document regulating the activities of the Company’s bodies, can be amended or adopted in the new edition by the resolution of the General Shareholders’ Meeting only, as required by applicable Russian law and the Charter of the company. Decision on the company Charter amendment or adoption in the new edition is taken by a ¾ qualified majority shareholder vote at the General Shareholders’ Meeting.

Share capitalOAO Severstal share capital comprises ordinary shares with a nominal value of RUR 0.01 each. Authorized share capital of Severstal at December 31, 2010, 2009 and 2008 comprised 1,007,701,355 issued and fully paid shares.

All shares carry equal voting and distribution rights. There are no restrictions or limitations on voting rights for holders of OAO Severstal shares and GDRs.

Equity capital structure as of 31.12.2010 Share, % Shareholders equity capital

Alexey Mordashov* 77.97

Institutional investors and employees 22.03

Total 100

* Through participating in Severstal’s privatization auctions and other purchases, Alexey Mordashov (the “Majority Shareholder”) had purchased shares in Severstal such that as at December 31, 2010 he controlled indirectly 77.97% of Severstal’s share capital and had an option to purchase another 4.96 percent (at December 31, 2009 and 2008 he controlled, directly or indirectly, 82.37% of Severstal’s share capital)

Key CommitteesThe Board’s key committees are consultative and advisory bodies that deal with issues raised by the Board. Committees may not act on behalf of the Board of Directors and are not management bodies of the company. They have no powers in relation to managing the company.

Committee meetings are held as and when necessary, but at least three times a year. Committee decisions are made by a majority vote of all committee members taking part in the meeting. Each member has one vote, and the Committee Chairman has no casting vote in the event of a vote tie.

The Audit CommitteeThe Audit Committee monitors and reviews risk management processes and supervises the company’s financial performance and business operations. The Audit Committee assists the Board of Directors in:

monitoring the timeliness, completeness and reliability –of financial and other reportingthe preparation and submission process –risk management, internal control and corporate –governance systems.

The Audit Committee consists of three Independent Directors, currently Martin Angle, Chairman of the Audit Committee, Ronald Freeman and Dr. Peter Kraljic. In accordance with its terms, the Committee has sufficient recent relevant financial experience, and the overall skills required for financial statements, business risk analysis and financial management skills. No Senior Executive of the company is a member of the Audit Committee. The Audit Committee met four times in 2010. The Chairman of the Audit Committee is continuously in touch with the Chairman, the external audit lead partner, the company CFO and Head of Internal Audit.



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The Audit Committee:evaluates candidates put forward as the company’s external –auditors, developing recommendations for the Board regarding the selection of the external auditorsdevelops recommendations for the Board of Directors regarding –external auditors’ feessupervises the scope and results of the auditors’ work (including –the evaluation of the auditors’ opinion) and its efficiency and objectivity – monitoring the independence of the external auditor, taking into account the applicable requirements of professional and regulatory bodies in Russia and the UKreviews the company’s regular financial statements and analyses –changes in accounting policies and practices, as well as material adjustments based on the audit’s findingsanalyses the company’s annual report and any other published –financial information before submission for approval to the Board of Directors and publicationanalyses official statements relating to the company’s financial –performance and reviews of any opinions concerning significant aspects of financial reportingmonitors the effectiveness and efficiency of risk management, –internal control and corporate governance systemsmonitors and controls the efficiency of the internal audit function –develops and implements an ethical compliance policy for –auditors supplying non-audit services, taking into account relevant ethical restrictions applicable to such activities and risk management, internal control and corporate governance systemsanalyses material changes to existing legislation that affects the –company’s financial statements, and any findings of supervisory authorities and court proceedings.

The Audit Committee also prepares its own evaluation of the auditors’ opinion on financial statements and provides this evaluation to the Board of Directors and the Annual Shareholders’ General Meeting.

To ensure the company’s financial and business operations are monitored efficiently, the company employs external auditors with no interests in the company verify and approve of the accounts. The Audit Committee monitors the auditor’s independence.The KPMG – external auditor lead partner always participates in meetings of the Audit Committee, reviewing the company’s quarterly and annual results. Audit Committee members regularly meet with the external auditor, without management, to discuss matters arising from the audit and review process. There were four of such meetings in 2010.

The company’s books and records are audited in compliance with the requirements of statutory law and International Standards on Auditing, issued by the International Auditing and Assurance Standards Board (IAASB), with respect to financial statements prepared under the International Financial Reporting Standards (IFRS).

Such an audit takes place annually and, as of the first quarter of 2007, the company’s interim condensed financial statements, prepared in accordance with International Financial Reporting Standard IAS 34 Interim Financial Reporting, are also reviewed in accordance with International Standard on Review Engagements 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity.


The Remuneration and Nomination CommitteeThe Remuneration and Nomination Committee’s role is to help the company engage qualified professionals to manage the company, and create the incentives necessary to ensure their successful work for the company. It also reviews the remuneration and compensation for senior managers of the company and Independent Board members.

The Remuneration and Nomination Committee consists of three members. At least two members, including the Chairman of the Committee, are Independent Directors who are not senior executives of the company.

The Remuneration and Nomination Committee:develops general recommendations for the Board of Directors –on selecting nominees to the Board of Directors, proposed by the Board of Directorsconducts preliminary evaluations of potential nominees to the –Board of Directors and provides the Board of Directors with recommendationsinforms the Board of Directors of any potential nominees to the –Board of Directors it is aware of and recommends individual persons for nomination or election to the Board of Directorsissues an opinion as to whether a person nominated to the Board –of Directors qualifies as an Independent Directordevelops the system of remuneration and other payments made by –the company or at the company’s expense (including life and health insurance, and pension plans) for Board members of the company – based on members’ personal contributions to the company’s strategic objectivesprepares and submits the appointment and remuneration policy –for senior executives of the company, including its Chief Executive, as well as providing recommendations on the terms of the contract signed with the Chief Executivereviews Board members’ performance, including the advisability –of nominating respective Board members for another term in officeprovides recommendations to the Board of Directors regarding –material terms of the General Director’s contractreviews information given by Board members –to be disclosed –in accordance with the existing legislation or the Charter – for establishing whether such Board members have an interest in any decisions of the company, as well as information related to the circumstances preventing the aforementioned officers from efficiently discharging their duties as members of the Board – and any circumstances entailing their loss of independence as a member of the Board of Directors.

The Remuneration and Nomination Committee comprises Doctor Rolf Stomberg (Chairman of the Committee), Christopher Clark and Alexey Mordashov.

The Remuneration and Nomination Committee met three times in 2010. The Chairman of the Remuneration and Nomination Committee is in regular contact with the Company CEO and Head of Human Relations.

Remuneration of Severstal’s key managers Remuneration of the key managers of Severstal totalled US$52.8 million in 2010. This includes salaries, bonuses for 2010, as well as the change in accrued provisions under the long-term incentive programmes. These changes are subject to further adjustments, depending on a range of financial indicators of Severstal and its industry peer group. As at 31 December 2010, those accrued provisions amounted to approximately US$20 million. Remuneration of the Severstal’s key managers in 2009 was US$19.6 million, while bonuses were minimal and no reserves were made under the long-term incentive programmes.

Sole Executive Body The authority of the Sole Executive Body of the company is exercised by the Chief Executive Officer, who must be appointed by the General Shareholders’ Meeting of the company for a three-year period and can be re-elected an unlimited number of times. Alexey Mordashov was re-appointed Chief Executive Officer at the Annual General Shareholders’ Meeting of OAO Severstal on June 11, 2010.

Refer to www.severstal.com (About Severstal > Corporate Governance > Shareholder Rights>Voting results report) for more information. The General Shareholders’ Meeting can, at any time, adopt a resolution on early termination of the Chief Executive Officer’s authorities.

Chief Executive Officer, among other things, acts on behalf of the company, represents its interests, commits transactions, approves manning schedules, and issues orders and instructions obligatory for all the company’s employees.

The Chief Executive Officer carries out the day-to-day management of the company and ensures its efficient operation by performing the tasks set by the Board of Directors. The Chief Executive is responsible for the organisation, status and accuracy of accounting practices, timely provision of financial reports to appropriate authorities, and timely provision of information regarding the company’s operations to shareholders, creditors and the media. The Chief Executive also cooperates with trade unions to protect the interests of company employees and communicates with government and municipal authorities.

Internal Control and Risk Management Systems The information required by DTR 7.2.5 regarding the company’s Internal Control and Risk Management Systems in relation to the financial reporting process, is included in OAO Severstal Risk Management section.



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OAO Severstal and SubsidiariesConsolidated financial statements for the years ended December 31, 2010, 2009 and 2008


OAO Severstal and Subsidiaries

Independent Auditors’ Report 95Consolidated income statements 96Consolidated statements 97 of comprehensive income Consolidated statements 98 of financial position Consolidated statements 99 of cash flowsConsolidated statements 100 of changes in equityNotes to the consolidated 101-171 financial statements1. Operations 1012. Basis for preparation of the 102 consolidated financial statements 3. Summary of the principal 106

accounting policies4. Revenue 1155. Staff costs 1166. Net loss from 116 securities operations7. Net other operating 117

(expenses)/income 8. Impairment of non-current assets 1179. Net other non-operating 125

(expenses)/income10. Taxation 126

11. Related party transactions 12812. Related party balances 12913. Cash and cash equivalents 13014. Short-term bank deposits 13015. Short-term financial investments 13016. Trade accounts receivable 13017. Inventories 13018. Other current assets 13119. Long-term financial investments 13120. Investments in associates 132 and joint ventures21. Property, plant and equipment 13322. Intangible assets 13523. Debt finance 13624. Other current liabilities 13825. Retirement benefit liabilities 13826. Other non-current liabilities 14027. Share capital 14228. Discontinued operations 144 and assets held for sale29. Subsidiaries, associates 146 and joint ventures 30. Segment information 15631. Financial instruments 16232. Commitments and 170 contingencies33. Subsequent events 171

Consolidated financial statementsYears ended December 31, 2010, 2009 and 2008

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ZAO KPMG Telephone +7 (495) 937 447710 Presnenskaya Naberezhnaya Fax +7 (495) 937 4400/99Moscow, Russia 123317 Internet www.kpmg.ru

Independent Auditors’ ReportBoard of DirectorsOAO Severstal

We have audited the accompanying consolidated financial statements of OAO Severstal (the ’Company’) and its subsidiaries (the ’Group’),which comprise the consolidated statements of financial position as at 31 December 2010, 2009 and 2008, and the related consolidatedincome statements and consolidated statements of comprehensive income, consolidated statements of changes in equity and cash flowsfor the years then ended, and a summary of significant accounting policies and other explanatory notes.

Management’s Responsibility for the Consolidated Financial StatementsManagement is responsible for the preparation and fair presentation of these consolidated financial statements in accordance withInternational Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining internal controlrelevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatements,whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that arereasonable in the circumstances.

Auditors’ ResponsibilityOur responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits inaccordance with International Standards on Auditing. Those standards require that we comply with relevant ethical requirements and planand perform the audits to obtain reasonable assurance whether the consolidated financial statements are free of material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financialstatements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement ofthe consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal controlrelevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control.An audit also includes evaluating the appropriateness of accounting principles used and the reasonableness of accounting estimates madeby management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

OpinionIn our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of theGroup as at 31 December 2010, 2009 and 2008, and its consolidated financial performance and its consolidated cash flows for the yearsthen ended in accordance with International Financial Reporting Standards.

ZAO KPMG1 March 2011

ZAO KPMG, a company incorporated under the Laws of the Russian Federation, a subsidiary of KPMG Europe LLP, and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.


OAO Severstal and SubsidiariesConsolidated income statementsYears ended December 31, 2010, 2009 and 2008(Amounts expressed in thousands of US dollars)

Year ended December 31,

Note 2010 2009* 2008*

RevenueRevenue – third parties 13,510,930 9,540,775 15,888,278

Revenue – related parties 11 62,335 53,118 177,481

4 13,573,265 9,593,893 16,065,759

Cost of sales (9,110,216) (7,209,763) (10,542,560)

Gross profit 4,463,049 2,384,130 5,523,199

General and administrative expenses (638,403) (516,863) (801,528)

Distribution expenses (990,727) (791,505) (995,732)

Other taxes and contributions (182,351) (150,001) (153,071)

Share of associates’ profit/(loss) 19,401 13,298 (2,687)

Net loss from securities operations 6 (104,694) (12,160) (99,876)

Loss on disposal of property, plant and equipment and intangible assets (46,748) (30,058) (43,511)

Net other operating (expenses)/income 7 (15,288) (37,675) 555,665

Profit from operations 2,504,239 859,166 3,982,459

Impairment of non-current assets 8 (81,123) (88,056) (531,975)

Negative goodwill 29 – – 79,862

Net other non-operating (expenses)/income 9 (44,444) (31,790) 238,945

Profit before financing and taxation 2,378,672 739,320 3,769,291

Interest income 103,396 91,452 128,840

Interest expense (630,775) (478,453) (397,915)

Foreign exchange difference 62,687 (204,371) (262,769)

Profit before income tax 1,913,980 147,948 3,237,447

Income tax expense 10 (487,249) (133,960) (490,448)

Profit from continuing operations 1,426,731 13,988 2,746,999

Loss from discontinued operations 28 (1,941,745) (1,133,083) (685,073)

(Loss)/profit for the year (515,014) (1,119,095) 2,061,926

Attributable to:

shareholders of OAO Severstal (576,994) (1,037,240) 2,028,972

non-controlling interests 61,980 (81,855) 32,954

Weighted average number of shares outstanding during the period (millions of shares) 1,005.2 1,005.2 1,007.2

Basic and diluted (loss)/earnings per share (US dollars) (0.57) (1.03) 2.01

Basic and diluted earnings per share – continuing operations (US dollars) 1.36 0.01 2.72

Basic and diluted loss per share – discontinued operations (US dollars) (1.93) (1.04) (0.71)

* These amounts reflect adjustments made in connection with the presentation of discontinued operations

These consolidated financial statements were approved by the Board of Directors on March 1, 2011.

The accompanying notes form an integral part of these consolidated financial statements.


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2010 2009 2008

(Loss)/profit for the year (515,014) (1,119,095) 2,061,926

Other comprehensive lossForeign exchange difference (242,832) (114,714) (1,097,365)

Changes in fair value of cash flow hedges – (2,860) (13,428)

Deferred tax on changes in fair value of cash flow hedges – 809 3,691

Changes in fair value of available-for-sale investments 50,876 40,466 4,864

Deferred tax on changes in fair value of available-for-sale investments (7,626) (4,398) (2,511)

Fair value adjustment upon acquisition of subsidiary to previously held interest – – 33,020

Other comprehensive loss for the year, net of tax (199,582) (80,697) (1,071,729)

Total comprehensive (loss)/income for the year (714,596) (1,199,792) 990,197

Attributable to:

shareholders of OAO Severstal (788,924) (1,158,706) 996,061

non-controlling interests 74,328 (41,086) (5,864)


Consolidated statements of comprehensive incomeYears ended December 31, 2010, 2009 and 2008(Amounts expressed in thousands of US dollars)



December 31, December 31, December 31, Note 2010 2009 2008

AssetsCurrent assets:Cash and cash equivalents 13 2,012,662 2,853,376 2,652,888Short-term bank deposits 14 12,690 95,533 818,545Short-term financial investments 15 27,463 73,129 112,782Trade accounts receivable 16 967,837 1,457,651 1,941,876Accounts receivable from related parties 12 12,359 26,716 63,831Restricted cash 41,313 – –Inventories 17 2,366,924 2,974,227 4,271,886VAT recoverable 278,594 288,032 361,542Income tax recoverable 39,578 106,019 172,947Other current assets 18 298,070 285,453 279,707Assets held for sale 28 3,509,882 24,415 8,872

Total current assets 9,567,372 8,184,551 10,684,876

Non-current assets:Long-term financial investments 19 205,232 128,616 70,342Investments in associates and joint ventures 20 158,564 143,857 110,907Property, plant and equipment 21 7,351,835 9,485,480 9,827,392Intangible assets 22 1,799,776 1,369,204 1,510,658Restricted cash 61,714 17,541 21,703Deferred tax assets 10 101,406 239,835 246,541Other non-current assets 82,620 74,802 41,507

Total non-current assets 9,761,147 11,459,335 11,829,050

Total assets 19,328,519 19,643,886 22,513,926

Liabilities and shareholders’ equityCurrent liabilities:Trade accounts payable 897,389 1,378,300 1,528,453Accounts payable to related parties 12 16,717 16,656 71,960Short-term debt finance 23 1,422,262 1,478,301 2,038,693Income taxes payable 41,230 34,150 46,131Other taxes and social security payable 156,078 209,084 213,315Dividends payable 17,131 5,704 128,715Other current liabilities 24 531,736 743,230 868,409Liabilities related to assets held for sale 28 3,272,354 11,979 4

Total current liabilities 6,354,897 3,877,404 4,895,680

Non-current liabilities:Long- term debt finance 23 4,719,772 5,748,559 6,227,225Deferred tax liabilities 10 493,280 394,990 496,379Retirement benefit liabilities 25 164,555 738,328 722,065Other non-current liabilities 26 276,244 508,266 619,961

Total non-current liabilities 5,653,851 7,390,143 8,065,630

Equity:Share capital 27 3,311,288 3,311,288 3,311,288Treasury shares (26,303) (26,303) (26,303)Additional capital 1,165,530 1,165,530 1,165,530Foreign exchange differences (297,219) (52,478) 84,987Retained earnings 2,780,190 3,436,270 4,488,396Other reserves 76,411 43,600 27,601

Total equity attributable to shareholders of OAO Severstal 7,009,897 7,877,907 9,051,499Non-controlling interests 309,874 498,432 501,117

Total equity 7,319,771 8,376,339 9,552,616

Total equity and liabilities 19,328,519 19,643,886 22,513,926


Consolidated statements of financial positionDecember 31, 2010, 2009 and 2008(Amounts expressed in thousands of US dollars)


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2010 2009* 2008*

Operating activities:Profit before financing and taxation 2,378,672 739,320 3,769,291Adjustments to reconcile profit to cash generated from operations:Depreciation and amortization (Notes 21 and 22) 713,005 697,794 837,749Impairment of non-current assets (Note 8) 81,123 88,056 531,975Movements in provision for inventories, receivables and other provisions 13,897 (102,844) 222,592Negative goodwill – – (79,862)Loss on disposal of property, plant and equipment and intangible assets 46,748 30,058 43,511Gain on disposal of subsidiaries and associates (Note 29) – – (314,435)Loss on remeasurement and disposal of financial investments 104,694 12,160 99,876Share of associates’ results less dividends from associates (7,701) (13,298) 2,687Changes in operating assets and liabilities:Trade accounts receivable (150,061) 122,916 (277,421)Amounts receivable from related parties 14,505 28,966 (39,695)VAT recoverable (52,279) 65,907 (64,358)Inventories (501,323) 522,259 (558,184)Trade accounts payable 140,134 24,960 156,218 Amounts payable to related parties 197 (37,446) 11,781 Other taxes and social security payables 34,668 13,721 13,865 Other non-current liabilities 11,020 (199,281) (914)Assets held for sale (3,378) (422) 38,609 Net other changes in operating assets and liabilities (122,518) (62,041) 133,152 Cash generated from operations 2,701,403 1,930,785 4,526,437 Interest paid (excluding banking operations) (569,638) (489,996) (273,835)Income tax paid (325,955) (37,324) (1,035,281)Net cash from operating activities – continuing operations 1,805,810 1,403,465 3,217,321 Net cash (used in)/from operating activities – discontinued operations (546,636) 207,726 216,540 Net cash from operating activities 1,259,174 1,611,191 3,433,861 Investing activities:Additions to property, plant and equipment (1,118,968) (754,493) (1,649,968)Additions to intangible assets (132,138) (54,231) (70,296)Net (increase)/decrease in short-term bank deposits (46,661) 668,121 (259,880)Additions to financial investments and associates (1,359,140) (258,389) (878,471)Acquisition of entities under common control – – (41,363)Net cash outflow on acquisitions of subsidiaries (Note 29) (48,485) – (3,068,693)Net cash inflow on disposals of subsidiaries (Note 29) 118,647 5,010 671,717 Proceeds from disposal of property, plant and equipment 7,914 30,070 41,978 Proceeds from disposal of financial investments 1,132,838 218,546 832,743 Interest received (excluding banking operations) 96,889 108,238 129,989 Cash used in investing activities – continuing operations (1,349,104) (37,128) (4,292,244)Cash used in investing activities – discontinued operations (150,162) (193,509) (340,281)Cash used in investing activities (1,499,266) (230,637) (4,632,525)Financing activities:Proceeds from debt finance 3,481,615 2,754,383 6,741,400 Acquisitions of non-controlling interests (455,089) (23,387) (178,225)Disposal of non-controlling interest 5,744 – – Repurchase of issued shares – – (591,834)Repayment of debt finance (3,283,340) (3,422,821) (2,930,687)Repayments under lease obligations (5,089) (7,720) (19,763)Dividends paid (130,068) (116,106) (1,346,535)Contributions of non-controlling interests – 54,320 – Dividend to the Majority shareholder paid by acquired entity under common control – – (34,036)Cash (used in)/from financing activities – continuing operations (386,227) (761,331) 1,640,320 Cash from/(used in) financing activities – discontinued operations 98,346 (420,509) 605,882 Cash (used in)/from financing activities (287,881) (1,181,840) 2,246,202 Effect of exchange rates on cash and cash equivalents (104,719) 1,774 (17,192)Net (decrease)/increase in cash and cash equivalents (632,692) 200,488 1,030,346 Less cash and cash equivalents of discontinued operations and assets held for sale at end of the period (208,022) – – Cash and cash equivalents at beginning of the year 2,853,376 2,652,888 1,622,542Cash and cash equivalents at end of the year 2,012,662 2,853,376 2,652,888

* These amounts reflect adjustments made in connection with the presentation of discontinued operations


Consolidated statements of cash flowsYears ended December 31, 2010, 2009 and 2008(Amounts expressed in thousands of US dollars)


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Consolidated statements of changes in equityYears ended December 31, 2010, 2009 and 2008(Amounts expressed in thousands of US dollars)

Non- controlling Attributable to the shareholders of OAO Severstal interests Total

Foreign Share Treasury Additional exchange Retained Other capital shares capital differences earnings reserves Total

Balances at December 31, 2007 3,311,288 – 1,165,530 1,145,499 3,951,116 – 9,573,433 500,353 10,073,786

Profit for the period – – – – 2,028,972 – 2,028,972 32,954 2,061,926

Foreign exchange difference – – – (1,060,512) – – (1,060,512) (36,853) (1,097,365)

Changes in fair value of cash flow hedges – – – – – (8,864) (8,864) (4,564) (13,428)

Deferred tax on changes in fair value of cash flow hedges – – – – – 1,786 1,786 1,905 3,691

Changes in fair value of available-for-sale investments – – – – – 3,010 3,010 1,854 4,864

Deferred tax on changes in fair value of available-for-sale investments – – – – – (1,351) (1,351) (1,160) (2,511)

Fair value adjustment upon acquisition of subsidiary to previously held interest – – – – – 33,020 33,020 – 33,020

Total comprehensive income for the period – – – (1,060,512) 2,028,972 27,601 996,061 (5,864) 990,197

Dividends – – – – (1,378,510) – (1,378,510) (8,126) (1,386,636)

Dividend to the Majority Shareholder paid by acquired entity under common control – – – – (34,036) – (34,036) – (34,036)

Repurchase of issued shares – (26,303) – – – – (26,303) – (26,303)

Effect of acquisitions and disposals without a change in control – – – – (79,146) – (79,146) (138,067) (217,213)

Effect of acquisitions and disposals with a change in control – – – – – – – 152,821 152,821

Balances at December 31, 2008 3,311,288 (26,303) 1,165,530 84,987 4,488,396 27,601 9,051,499 501,117 9,552,616

Loss for the period – – – – (1,037,240) – (1,037,240) (81,855) (1,119,095)

Foreign exchange difference – – – (137,465) – – (137,465) 22,751 (114,714)

Changes in fair value of cash flow hedges – – – – – (2,283) (2,283) (577) (2,860)

Deferred tax on changes in fair value of cash flow hedges – – – – – 646 646 163 809



Total comprehensive loss for the period – – – (137,465) (1,037,240) 15,999 (1,158,706) (41,086) (1,199,792)

Dividends – – – – – – – (3,501) (3,501)

Effect of acquisitions and disposals without a change in control – – – – (14,886) – (14,886) 41,902 27,016

Balances at December 31, 2009 3,311,288 (26,303) 1,165,530 (52,478) 3,436,270 43,600 7,877,907 498,432 8,376,339

Loss for the period – – – – (576,994) – (576,994) 61,980 (515,014)

Foreign exchange difference – – – (244,741) – – (244,741) 1,909 (242,832)



Total comprehensive loss for the period – – – (244,741) (576,994) 32,811 (788,924) 74,328 (714,596)

Dividends – – – – (140,963) – (140,963) – (140,963)

Effect of acquisitions and disposals without a change in control – – – – 61,877 – 61,877 (512,945) (451,068)

Effect of acquisitions and disposals with a change in control – – – – – – – 250,059 250,059

Balances at December 31, 2010 3,311,288 (26,303) 1,165,530 (297,219) 2,780,190 76,411 7,009,897 309,874 7,319,771



1. OperationsThese consolidated financial statements of OAO Severstal and subsidiaries comprise the parent company, OAO Severstal (’Severstal’ or ’the Parent Company’) and its subsidiaries (collectively ’the Group’) as listed in Note 29.

Severstal began operations on August 24, 1955 and completed the development of an integrated iron and steel mill in Cherepovets during February 1959 when the first steel was rolled. On September 24, 1993, as a part of the Russian privatization program, Severstal was registered as a Joint Stock Company (’OAO’) and privatized. Through participating in Severstal’s privatization auctions and other purchases, Alexey Mordashov (the “Majority Shareholder”) had purchased shares in Severstal such that as at December 31, 2010 he controlled indirectly 77.97% of Severstal’s share capital and had an option to purchase another 4.96 percent (at December 31, 2009 and 2008 he controlled, directly or indirectly, 82.37% of Severstal’s share capital).

Severstal’s global depositary receipts (GDRs) have been quoted on the London Stock Exchange since November 2006. Severstal’s shares are quoted on the Russian Trading System (’RTS’) and on the Moscow Interbank Currency Exchange (’MICEX’). Severstal’s registered office is located at Ul Mira 30, Cherepovets, Russia.

The Group comprises the following segments:

Severstal Resource (formerly the Mining segment) – this segment comprises two iron ore complexes, Karelsky Okatysh and Olkon –in northwest Russia, and two coal mining complexes, Vorkutaugol in northwest Russia and PBS Coals Ltd, located in the USA, as well as gold mining assets in the eastern part of Russia, in Africa and in Kazakhstan.Russian Steel – this segment consists primarily of the Group’s steel production and high-grade automotive galvanizing facilities in –Cherepovets; rolling mill 5000 in Kolpino; a large-diameter pipe mill in Izhora (previously reported within the former IPM segment); all in northwest Russia; metalware plants located in Russia, Ukraine and Italy (previously reported within the former Metalware segment); a ferrous scrap metal recycling business operating in northwest and central Russia, as well as various worldwide supporting functions for trading, maintenance and transportation.Severstal North America – this segment includes an integrated iron and steel mill, Severstal Dearborn, in the Midwest region; a mini-mill, –Severstal Columbus LLC, in the southeast of the USA. The Severstal North America segment also includes three integrated iron and steel mills: Sparrows Point, in the South Atlantic located on the East Coast of the USA, Severstal Wheeling, (formerly the Esmark group of companies) in the Midwest region of the USA, Severstal Warren Inc. (formerly WCI Steel Inc.) in the Midwest region of the USA and a coking coal production facility, Mountain State Carbon LLC, located on the border of the South and Midwest regions of the USA which are classified as held for sale and discontinued operations as at December 31, 2010 (Note 28).Lucchini (discontinued, Note 28) – this segment includes two integrated steel producers in Italy, four electric furnace based steel plants –in France and several processing plants and joint ventures in Italy. All Lucchini segment assets are combined into the Piombino and Ascometal business units based on geographical location (Italy and France respectively). Products of the segment include rails, wire rod, special and high quality bars and commercial slabs. The segment also includes a distribution network serving both business units from locations primarily in Western Europe and an engineering research center located in France.

A segmental analysis of the consolidated statements of financial position and consolidated income statements is given in Note 30.

Economic environmentA large part of the Group is based in the Russian Federation and is consequently exposed to the economic and political effects of the policies adopted by the Russian government. These conditions and future policy changes could affect the operations of the Group and the realization and settlement of its assets and liabilities.

International sales of rolled steel from the Group’s Russian operations have been the subject of several anti-dumping investigations. The Group has taken steps to address the concerns of such investigations and participates actively in their resolution. A brief description of protective measures effective at Severstal’s key export markets is given below:

Exports of hot-rolled coils and thin sheets from Russia to the USA are subject to minimum prices issued quarterly by the US Department –of Commerce and annual quotas.Exports of hot-rolled plates from Russia to the USA are subject to minimum prices established based on the producer’s actual cost and –profit on the domestic market. Severstal is the first and currently only Russian company, for which, since September 2005, the hot-rolled plates market is open.

Notes to the consolidated financial statementsfor the years ended December 31, 2010, 2009 and 2008(Amounts expressed in thousands of US dollars, except as otherwise stated)


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The European Union (’EU’) market is protected by quotas. During the last few years quotas have been raised consistently after –adjusting for the effects of EU enlargements, equaling 3,370 million tons in 2010. Severstal traditionally gets approximately 35% of the total Russian quota and strives to utilize it fully because the EU market is a key market for the Group.

2. Basis for preparation of the consolidated financial statementsStatement of complianceThese consolidated financial statements are prepared in accordance with International Financial Reporting Standards (’IFRS’) as issued by the International Accounting Standards Board.

Basis of measurementThe consolidated financial statements are prepared on the historic cost basis except for financial instruments at fair value through profit and loss and available-for-sale financial assets stated at fair value.

The Group’s statutory financial records are maintained in accordance with the legislative requirements of the countries in which the individual entities are located, which differ in certain respects from IFRS. The accounting policies applied in the preparation of these consolidated financial statements are set out in Note 3.

Critical accounting judgments, estimates and assumptionsPreparation of the consolidated financial statements in accordance with IFRS requires the Group’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. The determination of estimates requires judgments which are based on historical experience, current and expected economic conditions, and other available information. Actual results could differ from those estimates.

The most significant areas requiring the use of management estimates and assumptions relate to:

useful lives of property, plant and equipment; –impairment of assets; –allowances for doubtful debts, obsolete and slow-moving inventories; –decommissioning liability; –retirement benefit liabilities; –litigations; and –deferred income tax assets. –

Useful lives of property, plant and equipmentThe Group assesses the remaining useful lives of items of property, plant and equipment at least at each financial year-end and, if expectations differ from previous estimates, the changes are accounted for as a change in an accounting estimate in accordance with IAS 8 “Accounting Policies, Changes in Accounting Estimates and Errors”. These estimates may have a material impact on the amount of the carrying values of property, plant and equipment and on depreciation expense for the period.

Impairment of assetsThe Group reviews the carrying amount of its tangible and intangible assets to determine whether there is any indication that those assets are impaired. In making the assessments for impairment, assets that do not generate independent cash flows are allocated to an appropriate cash-generating unit. Subsequent changes to the cash generating unit allocation or to the timing of cash flows could impact the carrying value of the respective assets.

Allowance for doubtful debtsThe Group makes allowance for doubtful receivables to account for estimated losses resulting from the inability of customers to make required payments. When evaluating the adequacy of an allowance for doubtful debts, management bases its estimates on the current overall economic conditions, the ageing of accounts receivable balances, historical write-off experience, customer creditworthiness and changes in payment terms. Changes in the economy, industry or specific customer conditions may require adjustments to the allowance for doubtful accounts recorded in the consolidated financial statements.




Allowance for obsolete and slow-moving inventoriesThe Group makes allowance for obsolete and slow-moving raw materials and spare parts. In addition, certain finished goods of the Group are carried at net realizable value. Estimates of net realizable value of finished goods are based on the most reliable evidence available at the time the estimates are made. These estimates take into consideration fluctuations of price or cost directly relating to events occurring subsequent to the end of the reporting period to the extent that such events confirm conditions existing at the end of the period.

Decommissioning liabilityThe Group reviews its decommissioning liability, representing site restoration provisions, at each reporting date and adjusts it to reflect the current best estimate in accordance with IFRIC 1 “Changes in Existing Decommissioning, Restoration and Similar Liabilities”. The amount recognized as a provision is the best estimate of the expenditures required to settle the present obligation at the reporting date based on the requirements of the current legislation of the country where the respective operating assets are located. The risks and uncertainties that inevitably surround many events and circumstances are taken into account in reaching the best estimate of a provision. Considerable judgment is required in forecasting future site restoration costs. Future events that may affect the amount required to settle an obligation are reflected in the amount of a provision when there is sufficient objective evidence that they will occur.

Retirement benefit liabilitiesThe Group uses an actuarial valuation method for measurement of the present value of post-employment benefit obligations and related current service cost. This involves the use of demographic assumptions about the future characteristics of the current and former employees who are eligible for benefits (mortality, both during and after employment, rates of employee turnover, disability and early retirement, etc.) as well as financial assumptions (discount rate, future salary and benefit levels, expected rate of return on plan assets, etc.).

LitigationsThe Group exercises judgment in measuring and recognizing provisions and the exposure to contingent liabilities related to pending litigations or other outstanding claims subject to negotiated settlement, mediation, arbitration or government regulation, as well as other contingent liabilities. Judgment is necessary in assessing the likelihood that a pending claim will succeed, or liability will arise, and to quantify the possible range of the final settlement. Because of the inherent uncertainties in this evaluation process, actual losses may be different from the originally estimated provision. These estimates are subject to change as new information becomes available, primarily with the support of internal specialists or with the support of outside consultants. Revisions to the estimates may significantly affect future operating results.

Deferred income tax assetsDeferred tax assets are reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilized. The estimation of that probability includes judgments based on the expected performance. Various factors are considered to assess the probability of the future utilization of deferred tax assets, including past operating results, operational plans, expiration of tax losses carried forward, and tax planning strategies. If actual results differ from that estimates or if these estimates must be adjusted in future periods, the financial position, results of operations and cash flows may be negatively affected. In the event that the assessment of future utilization of deferred tax assets must be reduced, this reduction will be recognized in the income statement.

Functional and presentation currencyThe presentation currency of these consolidated financial statements is the US dollar.

The functional currency is determined separately for each of the Group’s entities. For most Russian entities the functional currency is the Russian ruble. The functional currency of the Group’s entities located in North America is the US dollar. The functional currency of the majority of the Group’s entities located in Western Europe is the Euro.

The translation into the presentation currency is made as follows:

all assets and liabilities, both monetary and non-monetary, are translated at the closing exchange rates at the dates of each statement –of financial position presented;all income and expenses in each income statement are translated at the average exchange rates for the periods presented; and –all resulting exchange differences are recognized as a separate component in other comprehensive income. –

Notes to the consolidated financial statementsfor the years ended December 31, 2010, 2009 and 2008 (continued)(Amounts expressed in thousands of US dollars, except as otherwise stated)


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Any conversion of amounts into US dollars should not be construed as a representation that such amounts have been, could be, or will be in the future, convertible into US dollars at the exchange rates used, or at any other exchange rate.

Adoption of new and revised IFRSA number of new Standards, amendments to Standards and Interpretations were adopted for the year ended December 31, 2010, and have been applied in these consolidated financial statements.

The adoption of the pronouncements did not have a significant impact on the Group’s consolidated financial statements except for those discussed below.

Change in accounting policy for business combinationsThe Group has adopted revised IFRS 3 Business Combinations and amended IAS 27 Consolidated and Separate Financial Statements, which became effective as at 1 January 2010.

Revised IFRS 3 and amended IAS 27 incorporate the following changes that are relevant to the Group’s operations:

The definition of a business has been broadened, which results in more acquisitions being treated as business combinations. –Transaction costs, other than share and debt issue costs, are expensed as incurred. –Total comprehensive income/loss is attributed to the owners of the parent and to the non-controlling interests even if this results –in the non-controlling interests having a deficit balance.

Revised IFRS 3 and amended IAS 27 have been applied prospectively and therefore there is no impact on prior periods in the Group’s 2010 consolidated financial statements.

Change in presentation of the statement of changes in equityThe Group applied amended IAS 1 Presentation of Financial Statements, which became effective as at 1 January 2010. The amended standard requires presentation in the statement of changes in equity of reconciliation, for each component of equity, between the carrying amount at the beginning and the end of the period, separately disclosing changes resulting from profit or loss, each item of other comprehensive income and transactions with owners. The amendment was applied retrospectively by re-presenting the comparative information.

Change in presentation of the statement of cash flowsThe Group applied amended IAS 7 Statement of Cash Flows, which became effective for annual periods beginning on or after July 1, 2009. The amendments require presentation of the cash outflows on acquisitions of non-controlling interests as financing activities in the statement of cash flows. The amendments were applied retrospectively to all periods presented.




New accounting pronouncementsA number of new Standards, amendments to Standards and Interpretations were not yet effective for the year ended December 31, 2010, and have not been applied in these consolidated financial statements.

Effective for annual periods Standards and Interpretations beginning on or after

IAS 1 (Amended) “Presentation of Financial Statements” January 1, 2011

IAS 12 (Amended) “Income taxes” January 1, 2012

IAS 24 (Revised) “Related party disclosure” January 1, 2011

IAS 27 (Amended) “Consolidated and Separate Financial Statements” July 1, 2010

IAS 32 (Amended) “Financial instruments: Presentation” February 1, 2010

IAS 34 (Amended) “Interim financial reporting” January 1, 2011

IFRS 1 (Revised, amended) “First-time Adoption of International Financial Reporting Standards” July 1, 2010, January 1, 2011 and July 1, 2011

IFRS 3 (Amended) “Business Combinations” July 1, 2010

IFRS 7 (Amended) “Financial instruments: disclosures” January 1, 2011 and July 1, 2011

IFRS 9 “Financial instruments” January 1, 2013

IFRIC 13 (Amended) “Customer Loyalty Programmes” January 1, 2011

IFRIC 14 (Amended) “IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction” January 1, 2011

IFRIC 19 “Extinguishing Financial Liabilities with Equity Instruments” July 1, 2010

The adoption of the pronouncements listed above is not expected to have a significant impact on the Group’s consolidated financial statements in future periods except for those discussed below.

IFRS 9 Financial Instruments will be effective for annual periods beginning on or after 1 January 2013. The new standard is to be issued in several phases and is intended to replace International Financial Reporting Standard IAS 39 Financial Instruments: Recognition and Measurement once the project is completed by the end of 2010.

The first phase of IFRS 9 was finalised in October 2010 and relates to the recognition and measurement of financial assets and liabilities. The Group recognizes that the new standard introduces many changes to the accounting for financial instruments and is likely to have a significant impact on Group’s consolidated financial statements. The impact of these changes will be analysed during the course of the project as further phases of the standard are issued.

Revised IAS 24 Related party disclosure provides a revised definition of a related party which includes new relationships and will likely lead to the increased number of related parties of the Group. Revised IAS 24 becomes mandatory for the Group’s 2011 annual consolidated financial statements and requires retrospective application.

RestatementAs discussed in Note 28, these consolidated financial statements have been adjusted for the effects of the discontinued operations.

In order to conform to the current year’s presentation the following reclassifications to prior years were made for the current portion of retirement benefit liabilities (Note 25).

December 31,

2009 2008

(Decrease) in retirement benefit liabilities (49,386) (57,231)

Increase in other current liabilities 49,386 57,231



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3. Summary of the principal accounting policiesThe following significant accounting policies have been consistently applied in the preparation of these consolidated financial statements throughout the Group.

a. Basis of consolidationSubsidiariesSubsidiaries are those enterprises controlled, directly or indirectly, by the Parent Company. The financial statements of subsidiaries are included in these consolidated financial statements from the date that control effectively commences until the date that control effectively ceases. The non-controlling interests represent the non-controlling shareholders’ proportion of the net identifiable assets of the subsidiaries, including the non-controlling shareholders’ share of fair value adjustments on acquisitions. The non-controlling interests are presented in the statement of financial position within equity, separately from the parent’s shareholders’ equity.

Intra-group balances and transactions, and any unrealized gains arising from intra-group transactions, are eliminated in preparing these consolidated financial statements; unrealized losses are also eliminated unless the transaction provides an evidence of impairment of the asset transferred.

Acquisition of SubsidiariesThe purchase method of accounting was used to account for the acquisition of subsidiaries by the Group.

The initial accounting for a business combination involves identifying and determining the fair values to be assigned to the acquiree’s identifiable assets, liabilities and contingent liabilities and the cost of acquisition. If the initial accounting for a business combination is incomplete by the end of the period in which the combination is effected, the Group accounts for the combination using the provisional values for the items for which the accounting is incomplete. The Group recognizes any adjustments to those provisional values as a result of completing the initial accounting within twelve months from the acquisition date. As a result goodwill or negative goodwill is adjusted accordingly.

Comparative information for the periods before the completion of the initial accounting for the acquisition is presented as if the initial accounting had been completed at the acquisition date.

Accounting for business combinations of entities under common controlIFRS provides no guidance on accounting for business combinations of entities under common control. Management adopted the accounting policy for such transactions based on the relevant guidance of accounting principles generally accepted in the United States (’US GAAP’). Management believes that this approach and the accounting policy disclosed below are in compliance with IFRS.

Acquisitions of controlling interests in companies that were previously under the control of the Majority Shareholder are accounted for as if the acquisition had occurred at the beginning of the earliest comparative period presented or, if later, at the date on which control was obtained by the Majority Shareholder. The assets and liabilities acquired are recognized at their book values. The components of equity of the acquired companies are added to the same components within Group equity except that any share capital of the acquired companies is recorded as a part of additional capital. The cash consideration for such acquisitions is recognized as a liability to or a reduction of receivables from related parties, with a corresponding reduction in equity, from the date the acquired company is included in these consolidated financial statements until the cash consideration is paid. Parent Company shares issued in consideration for the acquired companies are recognized from the moment the acquired companies are included in these financial statements.

No goodwill is recognized where the Group acquires additional interests in the acquired companies from the Majority shareholder. The difference between the share of net assets acquired and the cost of investment is recognized directly in equity.

Business combination achieved in stagesIn a business combination achieved in stages, the Group remeasures its previously held equity interest in the associates or joint ventures at its acquisition date fair value and recognizes the resulting gain or loss, if any, in profit or loss.

Investments in associatesAssociates are those enterprises in which the Group has significant influence, but does not have control over the financial and operating policies.




Investments in associates are accounted for under the equity method and are initially recognized at cost, from the date that significant influence commences until the date that significant influence ceases. Subsequent changes in the carrying value reflect the post-acquisition changes in the Group’s share of net assets of the associate and goodwill impairment charges, if any, after adjustments to align the accounting policies with those of the Group. When the Group’s share of losses exceeds the carrying amount of the associate, the carrying amount is reduced to nil and recognition of further losses is discontinued except to the extent that the Group has incurred obligations in respect of the associate.

Unrealized gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associates; unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred.

Interests in joint venturesA joint venture is a contractual arrangement whereby the Group and other parties undertake an economic activity when the strategic financial and operating policy decisions relating to the activities of the joint venture require the unanimous consent of the parties sharing control.

Where a Group entity undertakes its activities under joint venture arrangements directly, the Group’s share of jointly controlled assets and any liabilities incurred jointly with other venturers are recognized in its financial statements and classified according to their nature. Liabilities and expenses incurred directly in respect of interests in jointly controlled assets are accounted for on the accrual basis. Income from the sale or use of the Group’s share of the output of jointly controlled assets, and its share of joint venture expenses, are recognized when it is probable that the economic benefits associated with the transactions will flow to the Group and their amount can be measured reliably.

Joint venture arrangements that involve the establishment of a separate entity in which each venturer has an interest are referred to as jointly controlled entities. The Group reports its interests in jointly controlled entities using the equity method of accounting whereby an interest in jointly controlled entities is initially recorded at cost and adjusted thereafter for post-acquisition changes in the Group’s share of net assets of the joint venture. The income statement reflects the Group’s share of the results of operations of the joint venture.

Unrealized gains on transactions between the Group and its jointly controlled entities are eliminated to the extent of the Group’s interest in the joint venture; unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred.

GoodwillGoodwill arising on the acquisition of a subsidiary, associate or a jointly controlled entity represents the excess of the cost of acquisition over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of the subsidiary, associate or jointly controlled entity recognized at the date of acquisition. Goodwill is initially recognized as an asset at cost and is subsequently measured at cost less any accumulated impairment losses. Goodwill in respect of subsidiaries is disclosed as an intangible asset and goodwill relating to associates and jointly controlled entities is included within the carrying value of the investments in these entities. No goodwill is recognized where the Group acquires additional interests in the acquired companies (acquisitions of non-controlling interest). The difference between the share of net assets acquired and the cost of investment is recognized directly in equity.

Where goodwill forms a part of a cash generating unit and the part of the operations within that unit is disposed of, the goodwill associated with that operation is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation.

Negative goodwill represents the excess of the Group’s share in the fair value of acquired identifiable assets, liabilities and contingent liabilities over the cost of an acquisition. It is recognized in the income statement at the date of the acquisition.

b. Foreign currency transactionsTransactions in foreign currencies are translated to the functional currency of each entity at the foreign exchange rate ruling on the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated to the functional currency of each entity at the foreign exchange rate ruling at that date. Non-monetary assets and liabilities denominated in foreign currencies are translated to the functional currency of the entity at the foreign exchange rate ruling at the date of the transaction. Foreign exchange gains and losses arising on the translation are recognized in the income statement.



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c. Exploration for and evaluation of mineral resourcesExpenditures associated with search for specific mineral resources are recognized as exploration and evaluation assets. The following expenditure comprises cost of exploration and evaluation assets:

obtaining of the rights to explore and evaluate mineral reserves and resources including costs directly related to this acquisition; –researching and analyzing existing exploration data; –conducting geological studies, exploratory drilling and sampling; –examining and testing extraction and treatment methods; –compiling prefeasibility and feasibility studies; –activities in relation to evaluating the technical feasibility and commercial viability of extracting a mineral recourse. –

Administration and other overhead costs are charged to the cost of exploration and evaluation assets only if directly related to an exploration and evaluation project.

If a project does not prove viable, all irrecoverable exploration and evaluation expenditure associated with the project net of any related impairment allowances is written off to the income statement.

The Group measures its exploration and evaluation assets at cost and classifies as tangible or intangible according to the nature of the assets acquired and applies the classification consistently. Exploration and evaluation assets considered to be tangible are recorded as a component of property, plant and equipment at cost less impairment charges. Otherwise, they are recorded as intangible assets, such as licenses. To the extent that tangible asset is consumed in developing an intangible asset, the amount reflecting that consumption is capitalized as a part of the cost of the intangible asset.

As the asset is not available for use, it is not depreciated. All exploration and evaluation assets are monitored for indications of impairment.

An exploration and evaluation asset is no longer classified as such when the technical feasibility and commercial viability of extracting a mineral resource are demonstrable and the development of the deposit is sanctioned by management. The carrying amount of such exploration and evaluation asset is reclassified into development asset.

d. Development expenditureDevelopment expenditure includes costs directly attributable to the construction of a mine and the related infrastructure and is accumulated separately for each area of interest. Development expenditure is capitalized and is recorded as a component of property, plant and equipment or intangible assets, as appropriate. No depreciation is charged on the development expenditure before the start of commercial production.

To the extent that revenue arises from test production during the development stage, an amount is charged from development expenditure to the cost of sales so as to reflect a zero net gross margin.

e. Property, plant and equipmentProperty, plant and equipment are carried at cost less accumulated depreciation and accumulated impairment losses. Cost includes expenditure that is directly attributable to the acquisition of the asset and, for qualifying assets, borrowing costs capitalized. In the case of assets constructed by the Group, related works and direct project overheads are included in cost. The cost of replacing part of an item of property, plant and equipment is recognized in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Group and its cost can be measured reliably. The carrying amount of the replaced part is derecognized. Repair and maintenance expenses are charged to the income statement as incurred. Gains or losses on disposals of property, plant and equipment are recognized in the income statement.

Depreciation is provided so as to write off property, plant and equipment over its expected useful life. Depreciation is calculated using the straight line basis, except for depreciation on vehicles and certain metal-rolling equipment, which is calculated on the basis of mileage and units of production, respectively. The estimated useful lives of assets are reviewed regularly and revised when necessary.




The principal periods over which assets are depreciated are as follows:

Buildings and constructions 20 – 50 yearsPlant and machinery 10 – 20 yearsOther productive assets 5 – 20 yearsInfrastructure assets 5 – 50 years

f. LeaseLeases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the Group. All other leases are classified as operating leases.

Assets held under finance leases are initially recognized as assets of the Group at their fair value at the inception of the lease or, if lower, at the present value of the minimum lease payments. The corresponding liability to the lessor is included in the statement of financial position as a finance lease obligation.

Lease payments are apportioned between finance charges and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly to the income statement as a part of interest expense.

The depreciation policy for depreciable leased assets is consistent with that for depreciable assets, which are owned. If there is no reasonable certainty that the Group will obtain ownership by the end of the lease term, the asset is fully depreciated over the shorter of the lease term or its useful life.

Operating lease payments are recognized as an expense on a straight-line basis over the lease term, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed.

g. Intangible assets (excluding goodwill)Intangible assets acquired by the Group are measured on initial recognition at cost. Following initial recognition, intangible assets are carried at cost less accumulated amortization and accumulated impairment losses.

Intangible assets are amortized over their estimated useful lives using the straight-line basis and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The estimated useful life and amortization method are reviewed at the end of each annual reporting period, with the effect of any changes in estimate being accounted for on a prospective basis.

The table below presents the useful lives of intangible assets:

Mineral rights 12 – 25 yearsSoftware 3 – 10 yearsOther intangible assets 3 – 50 years

The major components of the other intangible assets include capitalized favorable contracts and land lease rights. Amortization of intangible assets is included in the caption “Cost of sales” in the consolidated income statement.

h. Impairment of assetsThe carrying amount of goodwill is tested for impairment annually. At each reporting date the Group assesses whether there is any indication of impairment of the Group’s other assets. If any such indication exists, the asset’s recoverable amount is estimated. An impairment loss is recognized whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount.

Calculation of recoverable amountFor financial assets carried at amortized cost, the amount of the impairment is the difference between the asset’s carrying amount and its recoverable amount that is the present value of estimated future cash flows, discounted at the financial asset’s original effective interest rate. For other assets the recoverable amount is the greater of the fair value less cost to sale and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of



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the time value of money and the risks specific to the asset. For an asset that does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the cash-generating unit to which the asset belongs.

Reversals of impairmentAn impairment loss in respect of a held-to-maturity investment, loan or receivable is reversed if the subsequent increase in recoverable amount can be related objectively to an event occurring after the impairment loss was recognized. An impairment loss in respect of goodwill is not reversed. In respect of other assets, an impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized.

i. InventoriesInventories are stated at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. The cost of inventories is based on the weighted average principle and includes expenditure incurred in acquiring the inventories and bringing them to their existing location and condition. In the case of manufactured inventories and work in progress, cost includes an appropriate share of production overheads. Allowances are recorded against slow-moving and obsolete inventories.

j. Financial assetsFinancial assets include cash and cash equivalents, investments, and loans and receivables.

Cash and cash equivalents comprise cash balances, cash deposits and highly liquid investments with original maturities of three months or less, that are readily convertible to known amounts of cash and are subject to an insignificant risk of changes in value.

Financial assets are classified into the following specified categories: financial assets ’at fair value through profit or loss’ (FVTPL), ’held-to-maturity’ investments, ’available-for-sale’ (AFS) financial assets and ’loans and receivables’. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition.

Effective interest methodThe effective interest method is a method of calculating the carrying value of a financial asset held at amortized cost and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees on points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the financial asset, or, where appropriate, a shorter period.

Income is recognized on an effective interest basis for debt instruments other than those financial assets designated as at FVTPL.

Financial assets at FVTPLFinancial assets are classified as at FVTPL where the financial asset is either held for trading or it is designated as at FVTPL.

A financial asset is classified as held for trading if:

it has been acquired principally for the purpose of selling in the near future; or –it is a part of an identified portfolio of financial instruments that the Group manages together and has a recent actual pattern –of short-term profit-taking.

A financial asset other than a financial asset held for trading may be designated as at FVTPL upon initial recognition if:

such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; or –the financial asset forms part of a group of financial instruments, which are managed and performance is evaluated on a fair value –basis, in accordance with the Group’s documented risk management or investment strategy, and information about the grouping is provided internally on that basis.




Financial assets at FVTPL are stated at fair value, with any resultant gain or loss recognized in profit or loss. The net gain or loss recognized in the income statement incorporates any dividend or interest earned on the financial asset.

Held-to-maturity investmentsNon-derivative financial assets with fixed or determinable payments and fixed maturity dates that the Group has the positive intent and ability to hold to maturity are classified as held-to-maturity investments. Held-to-maturity investments are recorded at amortized cost using the effective interest method less any impairment.

Loans and receivablesTrade receivables, loans, and other receivables that have fixed or determinable payments that are not quoted in an active market are classified as loans and receivables. Loans and receivables are measured at amortized cost using the effective interest method, less any impairment. Interest income is recognized by applying the effective interest rate, except for short-term receivables when the recognition of interest would be immaterial.

AFS financial assetsAvailable for sale financial assets are those non-derivative financial assets that are not classified as financial assets at FVTPL, held-to-maturity or loans and receivables and are stated at fair value. Listed shares that are traded in an active market are stated at their market value. Investments in unlisted shares that do not have a quoted market price in an active market are measured at management’s estimate of fair value. Gains and losses arising from changes in fair value are recognized in other comprehensive income with the exception of impairment losses, which are recognized directly in the income statement. Where the investment is disposed of or is determined to be impaired, the cumulative gain or loss previously recognized in the equity is included in the income statement for the period.

Dividends on AFS equity instruments are recognized in the income statement when the Group’s right to receive the dividends is established.

Derecognition of financial assetsThe Group derecognizes a financial asset only when the contractual rights to the cash flows from the asset expire; or it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity.

k. Financial liabilitiesFinancial liabilities are classified as either financial liabilities ’at FVTPL’ or ’other financial liabilities’.

Financial liabilities at FVTPLFinancial liabilities are classified as at FVTPL where the financial liability is either held for trading or it is designated as at FVTPL.

A financial liability is classified as held for trading if:

it has been incurred principally for the purpose of repurchasing in the near future; or –it is a part of an identified portfolio of financial instruments that the Group manages together and has a recent actual pattern –of short-term profit-taking.

A financial liability other than a financial liability held for trading may be designated as at FVTPL upon initial recognition if:

such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; or –the financial liability forms a part of a group of financial instruments, which are managed and where performance is evaluated on a fair –value basis, in accordance with the Group’s documented risk management or investment strategy, and information about the grouping is provided internally on that basis.

Financial liabilities at FVTPL are stated at fair value, with any resultant gain or loss recognized in profit or loss. The net gain or loss recognized in profit or loss incorporates any interest paid on the financial liability.



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Other financial liabilitiesOther financial liabilities, including borrowings, are initially measured at fair value, net of transaction costs. Borrowing costs on loans specifically for the purchase or construction of a qualifying asset are capitalized as a part of the cost of the asset they are financing.

Other financial liabilities are subsequently measured at amortized cost using the effective interest method, with interest expense recognized in the income statement.

Derecognition of financial liabilitiesThe Group derecognizes financial liabilities when, and only when, the Group’s obligations are discharged, cancelled or they expire.

l. Hedging instrumentsThe Group holds cash flow hedging instruments in order to hedge the exposure to variability in cash flows that is attributable to a particular risk associated with a recognized asset or liability or a highly probable forecast transaction and which could affect profit or loss.

Changes in the fair value of the derivative hedging instrument designated as a cash flow hedge are recognized in other comprehensive income to the extent that the hedge is effective. To the extent that the hedge is ineffective, changes in fair value are recognized in profit or loss.

If the hedging instrument no longer meets the criteria for hedge accounting, expires or is sold, terminated or exercised, then hedge accounting is discontinued prospectively. The cumulative gain or loss that has been previously recognized in other comprehensive income remains in equity until the forecast transaction occurs. When the hedged item is a non-financial asset, the amount that has been recognized in other comprehensive income is transferred to the carrying amount of the asset when it is recognized. In other cases the amount recognized in other comprehensive income is transferred to profit or loss in the same period that the hedged item affects profit or loss.

m. Dividends payableDividends are recognized as a liability in the period in which they are authorized by the shareholders.

n. Other taxes and contributionsOther taxes and contributions are taxes and mandatory contributions paid to the government, or government controlled agencies, that are calculated on a variety of bases, but exclude taxes calculated on profits, value added taxes calculated on revenues and purchases and social security costs calculated on wages and salaries. Social security costs are included in cost of sales, distribution expenses and general and administrative expenses in accordance with the nature of related wages and salaries expenses.

o. Income taxIncome tax on the profit for the year comprises current and deferred tax. Income tax is recognized in the income statement except to the extent that it relates to items recognized in other comprehensive income, in which case it is recognized in other comprehensive income.

Current tax expense is calculated by each entity on the pre-tax income determined in accordance with the tax law of the country, in which the entity is incorporated, using tax rates enacted at the reporting date, and any adjustment to tax payable in respect of previous years.

Deferred tax is calculated using the balance sheet method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting and taxation purposes. Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously.

Deferred tax assets are recognized only to the extent that it is probable that future taxable profits will be available against which these assets can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized.




Deferred tax is not recognized in respect of the following:

investments in subsidiaries where the Group is able to control the timing of the reversal of the temporary differences and it is probable –that the temporary difference will not reverse in the foreseeable future;if it arises from the initial recognition of an asset or liability that is not a business combination and, at the time of the transaction, –affects neither accounting profit nor taxable profit or loss,initial recognition of goodwill. –

p. ProvisionsEmployee benefitsThe Group pays retirement, healthcare and other long-term benefits to its employees.

The Group has two types of retirement benefits: defined contribution plans and defined benefit plans. Defined contribution plans are post-employment benefit plans under which the Group pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further amounts in respect of those benefits. The Group’s only obligation is to pay contributions as they fall due, including contributions to the Russian Federation State pension fund. Prepaid contributions are recognized as an asset to the extent that a cash refund or a reduction in future payments is available.

Defined benefit plans are post-employment benefits plans other than defined contribution plans. The calculation of the Group’s net obligation in respect of defined retirement benefit plans is performed annually by management using the projected unit credit method. In accordance with this method, the Group’s net obligation is calculated separately for each defined benefit plan by estimating the amount of future benefit that employees have earned in return for their service in the current and prior periods; that benefit is discounted to its present value and the fair value of any plan assets is deducted. The discount rate used is the yield at the reporting date on high quality corporate bonds for a respective country that have maturity dates approximating the terms of the Group’s obligations. Any actuarial gain or loss arising from the calculation of the retirement benefit obligation is fully recognized in the current year’s income statement.

Other long-term employee benefits include various compensations, non-monetary benefits and long-term incentive program.

Decommissioning liabilityThe Group has environmental liabilities related to restoration of soil and other related works, which are due upon the closures of certain of its production sites. Decommissioning liabilities are estimated case-by-case based on available information, taking into account applicable local legal requirements. The estimation is made using existing technology, at current prices, and discounted using a real discount rate. Future decommissioning costs, discounted to net present value, are capitalized and the corresponding decommissioning liability raised as soon as the constructive obligation to incur such costs arises. Future decommissioning costs are capitalized in property, plant and equipment and are depreciated over the life of the related asset. The unwinding of the decommissioning liability is included in the consolidated income statement as interest expense. Ongoing rehabilitation costs are expensed when incurred.

Onerous contractsA provision for onerous contracts is recognized when the expected benefits to be derived by the Group from a contract are lower than the unavoidable cost of meeting its obligations under the contract. The provision is measured at the present value of the lower of the expected cost of terminating the contract and the expected net cost of continuing with the contract. Before a provision is established, the Group recognizes any impairment loss on the assets associated with that contract.

Other provisionsOther provisions are recognized in the statement of financial position when the Group has a legal or constructive obligation as a result of a past event, it is probable that an outflow of economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation.

q. Share capitalOrdinary sharesOrdinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares and share options are recognized as a deduction from equity, net of any tax effects.



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Repurchase of issued sharesWhen share capital recognized as equity is repurchased, the amount of the consideration paid which includes directly attributable costs, is net of any tax effects, and is recognized as a deduction from equity. Repurchased shares are classified as treasury shares and are presented as a deduction from total equity. When treasury shares are sold or reissued subsequently, the amount received is recognized as an increase in equity, and the resulting surplus or deficit on the transaction is transferred to/from retained earnings.

r. Operating income and expensesThe Group presents profit or loss from operations, which includes various types of income and expenses arising in the course of production and sale of the Group’s products, disposal of property, plant and equipment, participation in joint ventures and associates, securities operations and other Group’s regular activities.

Certain items are presented separately from profit or loss from operations by virtue of their size, incidence or nature to enable a full understanding of the Group’s financial performance. Such items, which are included in profit or loss before financing and taxation, primarily include impairment of non-current assets, negative goodwill and other non-operating income and expenses, as, for example, gain or loss from disposal of subsidiaries and associates and charitable donations.

s. Revenue recognitionRevenue is measured at the fair value of the consideration received or receivable. Revenue is reduced for estimated customer returns, rebates and other similar allowances.

When goods are sold or services are rendered in exchange for dissimilar goods or services, the revenue is measured at the fair value of the goods or services received, adjusted by the amount of cash or cash equivalents transferred. When the fair value of the goods or services received cannot be measured reliably, the revenue is measured at the fair value of the goods or services given up, adjusted by the amount of any cash or cash equivalents transferred.

Sale of goodsRevenue from the sale of goods is recognized in the income statement when the significant risks and rewards of ownership have been transferred to the buyer; the Group retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold; the amount of revenue can be measured reliably; it is probable that the economic benefits associated with the transaction will flow to the entity; and the costs incurred or to be incurred in respect of the transaction can be measured reliably.

Rendering of servicesRevenue from a contract to provide services is recognized by reference to the stage of completion of the contract.

t. Interest incomeInterest income is recognized in the income statement on a time basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to that asset’s net carrying amount.

u. Interest expenseInterest expense is recognized in the income statement as it accrues, taking into account the effective yield on the liability.

v. Net income from securities operationsNet income from securities operations comprises dividend income (except for dividends from equity associates), realized and unrealized gains on financial assets at fair value through profit or loss, realized gains and impairment losses on available-for-sale and held-to-maturity investments.

w. Earnings per shareEarnings per share is calculated by dividing the net profit by the weighted average number of shares outstanding during the year, assuming that shares issued in consideration for the companies acquired from the Majority Shareholder were issued from the moment these companies are included in these consolidated financial statements.




x. Discontinued operationsDiscontinued operations are disclosed when a component of the Group’s business that represents a separate major line of business or geographical area of operations either has been disposed of during the reporting period, or is classified as held for sale at the reporting date. This condition is regarded as met only when the disposal is highly probable within one year from the date of classification.

The comparative income statement is represented as if the operation had been discontinued from the beginning of the comparative period.

Assets and liabilities of a disposal group are presented in the statement of financial position separately from other assets and liabilities. Comparative information related to discontinued operations is not amended in the balance sheet.

y. Segment reportingAn operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Group’s other components. An operating segment’s operating results are reviewed regularly by the CEO to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available.

The reportable segments’ amounts in the disclosure are stated before the intersegment elimination and are measured on the same basis as those in the consolidated financial statements, except for non-monetary investments in subsidiaries reported within long-term financial investments, which are translated into the presentation currency at the historic exchange rate.

Inter-segment pricing is determined on an arm’s length basis.

Segment capital expenditure is the total cost incurred during the period to acquire property, plant and equipment, and intangible assets other than goodwill.

z. Government grantsGovernment grants are recognized when there is a reasonable assurance that they will be received and the Group will comply with the conditions associated with the grant. Government grants related to assets are presented as a deduction from the cost of the asset.

4. RevenueRevenue by product was as follows: Year ended December 31,

2010 2009 2008

Hot-rolled strip and plate 3,964,534 2,741,271 5,165,788

Cold-rolled sheet 1,587,051 1,156,140 1,822,668

Galvanized and other metallic coated sheet 1,532,821 1,289,472 1,839,610

Large diameter pipes 961,348 624,227 1,204,695

Metalware products 832,397 777,303 819,727

Gold 748,824 512,335 190,415

Coal and coking coal concentrate 686,179 527,613 664,436

Shipping and handling costs billed to customers 677,955 272,176 257,463

Semi-finished products 635,134 279,958 631,879

Long products 470,015 350,636 1,267,869

Pellets and iron ore 383,727 217,194 453,069

Others tubes and pipes, formed shapes 347,834 255,103 485,467

Colour-coated sheet 288,147 246,442 359,064

Scrap 98,222 58,303 321,317

Others 359,077 285,720 582,292

13,573,265 9,593,893 16,065,759



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Revenue by delivery destination was as follows:


2010 2009 2008

Russian Federation 6,203,214 3,955,877 8,878,900

North America 3,131,834 2,448,497 3,047,336

Europe 2,342,231 1,510,840 2,726,643

China and Central Asia 469,246 673,182 252,940

South-East Asia 454,799 295,007 248,736

The Middle East 437,766 418,542 532,738

Central and South America 422,484 152,643 275,869

Africa 111,691 139,305 102,597

13,573,265 9,593,893 16,065,759

5. Staff costsEmployment costs were as follows:


2010 2009 2008

Wages and salaries (1,354,102) (1,236,493) (1,528,468)

Social security costs (236,408) (205,479) (331,371)

Retirement benefit (costs)/gains (10,661) 6,697 (14,646)

(1,601,171) (1,435,275) (1,874,485)

Actuarial losses recognized (14,886) (343) (7,496)

Staff costs (1,616,057) (1,435,618) (1,881,981)

For the year ended December 31, 2010, key management’s remuneration totalled US$ 52.8 million (2009: US$ 19.6 million; 2008: US$ 42.6 million).

6. Net loss from securities operations Year ended December 31,

2010 2009 2008

Held-for-trading securitiesProfit on disposal 481 742 3,037

Remeasurement to fair value – (8,420) (106,058)

Held-to-maturity securities, deposits and loansLoss on disposal (13,982) – –

Discounting – (3,924) (2,359)

Impairment (Note 31) (133,969) – –

Available-for-sale securitiesNet (loss)/gain on disposal transferred from equity (5,042) (2,701) 1,606

Dividends received 6,190 2,143 3,898

Fair value adjustment of previously held interest upon acquisition of subsidiary 41,628 – –

(104,694) (12,160) (99,876)




7. Net other operating (expenses)/income Year ended December 31,

2010 2009 2008

Insurance proceeds – – 430,000

Gain on termination of a supply contract – – 177,000

Other (15,288) (37,675) (51,335)

(15,288) (37,675) 555,665

In January 2008, an explosion occurred on one of Severstal Dearborn’s furnaces, blast furnace “B”. Following the accident, Severstal Dearborn ceased blast furnace “B” operation. Severstal Dearborn is insured against property damage and business interruption with a combined gross coverage of US$ 500.0 million, subject to customary deductibles. The business interruption insurance covers fixed costs and loss of profits. The entire amount of the insurance coverage of US$ 430.0 million was received in 2008.

In February 2008, a long term electricity supply contract between Severstal Dearborn and Dearborn Industrial Generation (“DIG”) was terminated with a lump sum payment from DIG to compensate Severstal Dearborn for the differential between the contract price and the price Severstal Dearborn will have to pay another electricity supplier for the duration of the original contract. This lump sum payment amounted to US$ 177.0 million.

Insurance proceeds and gain on termination of supply contract relate to Severstal North America segment.

8. Impairment of non-current assets Year ended December 31,

2010 2009 2008

Impairment of property, plant and equipment (54,077) (45,280) (141,675)

Impairment of intangible assets (Note 22) (27,046) (42,776) –

Impairment of goodwill (Note 22) – – (390,300)

(81,123) (88,056) (531,975)

For the purpose of impairment testing, the recoverable amount of each cash-generating unit has been determined based on value in use calculations. The value in use calculation uses cash flow projections based on actual operating results and the business plan approved by management and a corresponding discount rate which reflects the time value of money and risks associated with each individual cash generating unit. Key assumptions management used in their value in use calculations are as follows:

For all cash generating units, apart from the Severstal Resource segment, cash flow projections cover a period of five years. Cash flows –beyond the five-year period have been extrapolated taking into account business cycles. Cash flow projections for cash generating units of the Severstal Resource segment cover a period which corresponds to the contractual time of the respective mining licenses.Cash flow projections were prepared in nominal terms for all cash generating units, apart from Neryungri Metallic and Mine Aprelkovo, –Celtic Resources Holdings Ltd. and Crew Gold Corporation where cash flow projections have been prepared based on real terms.Cash flow projections during the forecast period are based on long-term price trends for both sales prices and material costs specific –for each segment and geographic region and operating cost inflation in line with consumer price inflation for each country. Consumer price inflation expectations (in local currency) during the forecast period are as follows in percentage terms:


2010 2009 2008

Russia 5.4 – 7.0 6.2 – 8.2 12.0

USA 1.3 – 2.8 1.4 – 2.8 1.8 – 2.0

Italy 1.5 – 2.0 0.9 – 1.6 1.9 – 2.0

Kazakhstan 5.4 – 7.0 6.5 – 8.3 12.0

Guinea 5.0 – 12.3 n/a n/a

UK n/a n/a 2.3 – 2.0



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Discount rates for each cash-generating unit were estimated in nominal terms based on the weighted average cost of capital, apart –from Neryungri Metallic and Mine Aprelkovo, Celtic Resources Holdings Ltd. and Crew Gold Corporation where discount rates were estimated in real terms. These rates, presented by segment, are as follows in percentage terms:


2010 2009 2008

Severstal Resource:

Russia* 9.0 16.4 18.5 – 21.4

Kazakhstan* 16.0 17.0 23.6

Guinea* 18.7 n/a n/a

USA 18.0 16.5 16.4

Russian Steel:

Russia* 13.3 15.6 20.1 – 22.5

Italy* 16.9 17.0 10.5

Severstal North America 14.4 – 17.0 18.5 – 23.7 17.7 – 18.9

*US$ rate

Values assigned to key assumptions and estimates used to measure the unit’s recoverable amount are consistent with external sources of information and historic data for each cash-generating unit. Management believes that the values assigned to the key assumptions and estimates represent the most realistic assessment of future trends.

Severstal Resource segmentVorkutaugol2008An impairment loss was recognized in 2008 in the amount of US$ 128.8 million and was allocated to property, plant and equipment.

The following specific assumptions were used in the impairment test:

the forecast extraction volumes grow on average at 5% p.a. during the five year period ending 2013 and remain constant thereafter; –the forecast has the following growth rates for coking coal prices: an average decline of 16% p.a. in 2009 to 2011; an average growth –of 29% p.a. during the next two years and constant at 80% of 2013 prices thereafter;the forecast has the following growth rates for steam coal prices: an average decline of 16% p.a. in 2009 to 2010; an average growth –of 10% p.a. during the next three years and constant at 89% of 2013 prices thereafter;operating costs are forecast to decrease by 27% in 2009 compared to 2008 and then increase on average by 9% p.a. during the next –four years; thereafter costs remain constant at the 2013 level;pre-tax discount rate of 18.5% (in US$ terms). –

The above estimates are particularly sensitive in the following areas:

a 1% increase in discount rate increases the impairment loss by US$ 21.3 million; –a 10% decrease in future planned revenues increases the impairment loss by US$ 341.8 million. –

2009An impairment loss was recognized in 2009 in the amount of US$ 3.7 million in relation to specific items of property, plant and equipment.

PBS Coals limited2008An impairment loss was recognized in 2008 in the amount of US$ 361.1 million and was allocated fully to goodwill.

The carrying amount of goodwill allocated to the cash generating unit before the impairment loss was US$ 477.2 million as of December 31, 2008.





the forecast extraction volumes increase by 22% in 2009, then increase by 10% in 2010 and remain constant at the 2010 –level thereafter;the forecast coking coal prices increase by 1.1% p.a. during the five year forecast period and remain constant thereafter; –the forecast steam coal prices increase on average by 2.5% p.a. during the five year forecast period and remain constant at the 2013 –level thereafter;operating costs are forecast to increase by 9% in 2009 and then increase on average by 1% p.a. during the next four years; thereafter –costs are assumed to be constant at the 2013 level;pre-tax discount rate of 16.4% (in US$ terms). –



2009As a result of value in use calculation no impairment loss was recognized in 2009.

The carrying amount of goodwill allocated to the cash generating unit was US$ 111.0 million as of December 31, 2009.

The following assumptions were used in the impairment test:

the forecast extraction volumes increase by 30% in 2010, decrease on average by 2% p.a. in 2011 to 2012, increase on average by –26% p.a. in 2013 to 2014 and remain constant at the 2014 level thereafter;the forecast coking coal concentrate prices increase on average by 4% p.a. in 2010 to 2014 and remain constant at the 2014 level –thereafter;the forecast steam coal prices increase on average by 2% p.a. during the five year forecast period and remain constant at the 2014 level –thereafter;operating costs are forecast to increase by 23% in 2010, decrease on average by 2% p.a. in 2011 to 2012, increase on average by –22% p.a. in 2013 to 2014; thereafter costs are assumed to be constant at the 2014 level;pre-tax discount rate of 16.5% (in US$ terms). –


a 1% increase in discount rate causes the carrying amount of the cash generating unit to exceed its recoverable amount by –US$ 34.5 million;a 10% decrease in future planned revenues causes the carrying amount of the cash generating unit to exceed its recoverable amount by –US$ 258.7 million.

Specific impairment loss in the amount of US$ 35 million was recognized in 2009 and was allocated to intangible assets.




the forecast extraction volumes increase by 5% in 2011 and remain constant at the 2011 level thereafter; –the coking coal concentrate prices are forecast to remain generally constant; –the forecast steam coal prices increase on average by 4% p.a. during the five year forecast period, increase by 2% in 2016 and remain –constant at the 2016 level thereafter;



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operating costs are forecast to decrease by 3% in 2011 and remain constant at the 2011 level thereafter; –pre-tax discount rate of 18.0% (in US$ terms). –


a 1% increase in discount rate causes the carrying amount of the cash generating unit to exceed its recoverable amount by –US$ 18.5 million;a 10% decrease in future planned revenues causes the carrying amount of the cash generating unit to exceed its recoverable amount –by US$ 210.1 million.

Specific impairment loss in the amount of US$ 5.7 million was recognized in 2010 and was allocated to intangible assets.

Celtic Resources Ltd.2008As a result of value in use calculation no impairment loss was recognized in 2008.



the forecast extraction volumes increase on average by 54% p.a. in 2009 to 2010, decline on average by 10% in 2011 to 2012 and –remain constant thereafter;the forecast has the following growth rates for gold prices: decline of 17% in 2009; average growth of 12% p.a. in 2010 to 2013; –average decline of 5% p.a. during the remaining contractual term of the respective licenses;operating costs are forecast to increase on average by 39% p.a. in 2009 to 2010, further grow on average by 5% p.a. in 2011 to 2012 –and remain constant during the remaining contractual term of the respective licenses;pre-tax discount rate of 23.6% (in US$ terms). –

Management believes that any reasonably possible change in any of these key assumptions would not cause the carrying amount of the cash generating unit to exceed its recoverable amount.




the forecast extraction volumes increase by 21% in 2010, increase on average by 2% p.a. in 2011 to 2014 and remain constant at the –2014 level thereafter;the forecast has the following growth rates for gold prices: remain stable in 2010; average growth of 5% p.a. in 2011 to 2013; average –decline of 4% p.a. in 2014 to 2016 and remain constant during the remaining contractual term of the respective licenses;operating costs are forecast to increase by 44% in 2010, grow on average by 8% p.a. in 2011 to 2014, further increase on average by –4% in 2015 and during the remaining contractual term of the respective licenses;pre-tax discount rate of 17.0% (in US$ terms). –


a 1% increase in discount rate gives an impairment loss of US$ 3.6 million; –a 10% decrease in future planned revenues causes the carrying amount of the cash generating unit to exceed its recoverable amount –by US$ 70.6 million.

An impairment loss was recognized in 2009 in the amount of US$ 8.5 million in relation to specific items of property, plant and equipment.







the forecast extraction volumes increase by 33% in 2011, decrease by 2% in 2012 and remain constant at the 2012 level thereafter; –the forecast has the following growth rates for gold prices: increase by 14% in 2011; decrease on average by 3% p.a. in 2012 to 2016 –and remain constant during the remaining contractual term of the respective licenses;operating costs are forecast to remain generally constant during the contractual term of the respective licenses; –pre-tax discount rate of 16.0% (in US$ terms). –


a 10% decrease in future planned revenues causes the carrying amount of the cash generating unit to exceed its recoverable amount by –US$ 2.4 million.

Neryungri Metallik and Mine Aprelkovo2008As a result of value in use calculation no impairment loss was recognized in 2008.



the forecast extraction volumes grow on average at 22% p.a. during 2009 to 2012 and remain constant thereafter; –the forecast has the following growth rates for gold prices: decline of 16% in 2009; average growth of 12% p.a. in 2010 to 2013; –average decline of 4% p.a. during the remaining contractual term of the respective licenses;operating costs are forecast to increase on average by 9% p.a. in 2009 to 2013 and to grow on average by 1% p.a. during the remaining –contractual term of the respective licenses;pre-tax discount rate of 21% (in US$ terms). –


a 10% decrease in future planned revenues causes the carrying amount of the cash generating unit to exceed its recoverable amount by –US$ 52.2 million.




the forecast extraction volumes grow on average by 43% p.a. during 2010 to 2012, increase by 2% in 2013 and remain –constant thereafter;the forecast has the following growth rates for gold prices: average growth of 2% p.a. in 2010 to 2014; average decline of 5% p.a. –during the remaining contractual term of the respective licenses;operating costs are forecast to increase on average by 29% p.a. in 2010 to 2012, increase on average by 8% p.a.in 2013 to 2014 and –remain constant during the remaining contractual term of the respective licenses;pre-tax discount rates of 16.4% (in US$ terms). –



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a 10% decrease in future planned revenues causes the carrying amount of the cash generating unit to exceed its recoverable amount –by US$ 62.4 million;




the forecast extraction volumes grow on average by 13% p.a. during 2011 to 2021 and remain constant during the remaining –contractual term of the respective licenses;the forecast has the following growth rates for gold prices: increase by 14% in 2011; decrease on average by 3% p.a. in 2012 to 2016 –and remain constant during the remaining contractual term of the respective licenses;operating costs are forecast to increase on average by 3% p.a. during the remaining contractual term of the respective licenses; –pre-tax discount rates of 9.0% (in US$ terms). –


a 10% decrease in future planned revenues causes the carrying amount of the cash generating unit to exceed its recoverable amount –by US$ 38.1 million;

Crew Gold Corporation2010As a result of value in use calculation no impairment loss was recognized in 2010.



the forecast extraction volumes increase by 19% in 2011, increase by 25% in 2012, increase by 7% in 2013 and remain constant at the –2013 level thereafter;the forecast has the following growth rates for gold prices: increase by 14% in 2011; decrease on average by 3% p.a. in 2012 to 2016 –and remain constant during the remaining contractual term of the respective licenses;operating costs are forecast to decrease on average by 5% p.a. during the remaining contractual term of the respective licenses; –pre-tax discount rate of 18.7% (in US$ terms). –


a 10% decrease in future planned revenues causes the carrying amount of the cash generating unit to exceed its recoverable amount –by US$ 23.6 million.

Other units2009The impairment loss was recognized in 2009 in the amount of US$ 1.2 million in relation to specific items of property, plant and equipment.

2010The impairment loss was recognized in 2010 in the amount of US$ 10.1 million in relation to specific items of property, plant and equipment and intangible assets.




Russian Steel segmentNeva-Metall2008An impairment loss was recognized in 2008 in the amount of US$ 29.0 million and was allocated fully to goodwill.

The carrying amount of goodwill allocated to the cash generating unit before the impairment loss was US$ 40.0 million as of December 31, 2008.


cash flow projections are based on financial forecasts approved by management covering a four year period; –volumes are assumed to be constant during the forecast period and thereafter; –the forecast sales prices increase by 1% in 2009, increase by 7% p.a. in 2010 to 2012 and remain constant at the 2012 level thereafter; –operating costs are forecast to increase on average by 11% p.a. in 2009 to 2012 and remain constant at the 2012 level thereafter; –pre-tax discount rate of 22.1% (in US$ terms). –





The carrying amount of goodwill allocated to cash generating unit was US$ 10.6 million as of December 31, 2010.


cash flow projections are based on financial forecasts approved by management covering a five year period; –volumes are assumed to increase on average by 10% p.a. during the forecast period and remain constant at the 2015 level thereafter; –the forecast sales prices increase by 8% in 2011, increase on average by 5% p.a. in 2012 to 2015 and increase on average by –1.8% p.a. thereafter;operating costs are forecast to increase by 19% in 2011, increase on average by 5% in 2012 to 2015 and increase on average by –1.8% p.a. thereafter;pre-tax discount rate of 13.3% (in US$ terms). –

Redaeli Techna S.p.A.2008As a result of value in use calculation no impairment loss was recognized in 2008.

The carrying amount of goodwill allocated to the cash generating unit was US$ 36.6 million.


sales volumes are assumed to be stable during the forecast period and thereafter, except for 2010 where an increase of 3% is assumed; –forecasted sales prices decrease by 22% in 2009 and then increase by 5% p.a. in 2009 to 2013; thereafter prices remain constant at the –2013 level;operating costs are forecast to increase on average by 7% p.a. in the forecast period and remain constant at the 2013 level thereafter; –pre-tax discount rate of 10.5% (in US$ terms). –



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the forecast sales volumes increase on average by 19% p.a. in 2010 to 2011 and remain constant thereafter; –forecasted sales prices increase on average by 4% p.a. in 2010 to 2014 and remain constant at the 2014 level thereafter; –operating costs are forecast to increase by 23% p.a. in 2010, increase on average by 7% p.a. in 2011 to 2014 and remain –constant thereafter;pre-tax discount rate of 17.0% (in US$ terms). –






the forecast sales volumes decrease by 7% in 2011, increase on average by 4% p.a. in 2012 to 2015 and remain constant thereafter; –forecast sales prices decrease on average by 4% p.a. in 2011 to 2012 and then increase on average by 2% p.a. in 2013 to 2015 and –increase on average by 1.8% p.a. thereafter;operating costs are forecast to decrease by 8% in 2011, increase on average by 1% p.a. in 2012 to 2015 and increase on average by –1.8% p.a. thereafter;pre-tax discount rate of 16.9% (in US$ terms). –


a 1% increase in discount rate causes the carrying amount of the cash generating unit to exceed its recoverable amount by –US$ 5.1 million;a 10% decrease in future planned revenues causes the carrying amount of the cash generating unit to exceed its recoverable amount –by US$ 72.1 million.

Scrap processing companies2009An impairment loss was recognized in 2009 in the amount of US$ 33.8 million and was allocated to property, plant and equipment in the amount of US$ 26 million and to intangible assets in the amount of US$ 7.8 million.





the forecast sales volumes increase by 53% in 2010, increase on average by 5% p.a. in 2011 to 2014 and remain constant at the –average level of the forecast period thereafter;the forecast scrap prices increase by 30% in 2010, increase on average by 2% p.a. in 2011 to 2014 and remain constant at the average –level of the forecast period thereafter as above;operating costs are forecast to increase by 76% in 2010, increase on average by 8% p.a. in 2011 to 2014 and remain constant at the –average level of the forecast period thereafter as above;pre-tax discount rate of 15.6% (in US$ terms). –



Other units2008An impairment loss related to other cash generating units within the segment was recognized in the amount of US$ 13.1 million in 2008 and was allocated to specific items of property, plant and equipment.

2009An impairment loss related to other cash generating units within the segment was recognized in the amount of US$ 5.7 million in 2009 and was allocated to specific items of property, plant and equipment.

2010An impairment loss related to other cash generating units within the segment was recognized in the amount of US$ 21.1 million in 2010 and was allocated to specific items of property, plant and equipment in the amount of US$ 10.7 million and intangible assets in the amount of US$ 10.4 million.

Severstal North America segment2010An impairment loss was recognized in the amount of US$ 44.2 million in 2010 and was allocated to specific items of property, plant and equipment in the amount of US$ 34.1 million and intangible assets in the amount of US$ 10.1 million.

9. Net other non-operating (expenses)/income Year ended December 31,

2010 2009 2008

Social expenditure (29,651) (17,803) (43,664)

Charitable donations (15,837) (14,239) (32,277)

Depreciation of infrastructure assets (1,783) (2,496) (4,293)

Gain on disposal of subsidiaries and associates (Note 29) – – 314,435

Other 2,827 2,748 4,744

(44,444) (31,790) 238,945



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10. TaxationThe following is an analysis of the income tax expense:


2010 2009 2008

Current tax charge (419,610) (109,612) (925,135)

Corrections to prior year’s current tax charge 21,094 9,367 1,289

Deferred tax (expense)/benefit (88,733) (33,715) 387,121

Effect of change in statutory tax rate – – 46,277

Income tax expense (487,249) (133,960) (490,448)

In 2008, the Russian Government enacted a change in the Russian statutory tax rate from 24% to 20%. The new rate became effective beginning January 1, 2009.

The following table is a reconciliation of the reported net income tax expense and the amount calculated by applying the Russian statutory tax rate of 20% (24%: 2008) to reported profit before income tax.


2010 2009 2008

Profit before income tax 1,913,980 147,948 3,237,447

Tax charge at Russian statutory rate (382,796) (29,590) (776,987)

Profits taxed at different rates 90,363 308,788 273,498

Corrections to prior years’ current tax charge 21,094 9,367 1,289

Non-tax deductible expenses, net (60,362) (28,077) (48,416)

Tax-loss carry forwards expired – (10,662) (4,477)

Changes in non-recognized deferred tax assets (150,861) (383,843) 18,368

Reassessment of deferred tax liabilities (4,687) 57 –

Effect of change in statutory tax rate – – 46,277

Income tax expense (487,249) (133,960) (490,448)

The composition of the net deferred tax liability based on the temporary differences arising between the fiscal and reporting balance sheets of the consolidated companies, is given below: Year ended December 31,

2010 2009 2008

Deferred tax assets:

Tax-loss carry forwards 279,670 426,618 317,872

Property, plant and equipment 38,077 23,368 55,284

Intangible assets 495 12,401 15,515

Inventory 29,965 54,268 82,644

Accounts receivable 18,683 26,306 28,271

Provisions 68,955 372,907 349,782

Financial investments 37,705 28,292 53,387

Other 112,988 165,234 88,907

Gross deferred tax assets 586,538 1,109,394 991,662

Less offsetting with deferred tax liabilities (485,132) (869,559) (745,121)

Recognized deferred tax assets 101,406 239,835 246,541





2010 2009 2008

Deferred tax liabilities:

Property, plant and equipment (560,735) (756,112) (680,148)

Provisions (3,570) (4,635) (1,560)

Intangible assets (322,663) (239,353) (288,120)

Inventory (23,177) (97,032) (103,213)

Investments in joint ventures (38,164) (75,096) (79,714)

Accounts receivable (62) – (275)

Financial liabilities (24,875) (19,050) (43,669)

Other (5,166) (73,271) (44,801)

Gross deferred tax liabilities (978,412) (1,264,549) (1,241,500)

Less offsetting with deferred tax assets 485,132 869,559 745,121

Recognized deferred tax liabilities (493,280) (394,990) (496,379)

Net deferred tax liability (391,874) (155,155) (249,838)

The movement in the net deferred tax liability is as follows:


2010 2009 2008

Opening balance (155,155) (249,838) (445,224)

Recognized in income statement (84,020) 78,623 470,895

Recognized in other comprehensive income (7,626) (3,589) 1,180

Business combinations (93,637) – (350,789)

Reclassified to liabilities related to assets held for sale (51,690) – –

Foreign exchange difference 254 19,649 74,100

Closing balance (391,874) (155,155) (249,838)

The Group has not recognized cumulative tax-loss carry forwards in the following amounts and with the following expiry dates (stated in millions of US dollars): Year ended December 31,

2010 2009 2008

In the following year 2.9 2.1 1.1

Between one and five years 105.2 125.5 3.4

Between five and ten years 127.3 30.5 24.2

Between ten and twenty years 1,836.4 1,177.0 46.4

No expiry 85.5 109.6 105.1

2,157.3 1,444.7 180.2

Taxable differences, related to investments in subsidiaries where the Group is able to control the timing of the reversal and it is probable that the temporary difference will not reverse in the foreseeable future, amounted to US$ 4,603.4 million at December 31, 2010 (December 31, 2009: US$ 4,139.0 million; December 31, 2008: US$ 4,201.3 million).



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11. Related party transactions Year ended December 31,

2010 2009 2008

Sales to related parties:

Sales to associates 30,194 3,866 10,420

Sales to joint ventures 859 372 699

Sales to other related parties 31,282 48,880 166,362

Interest income 18,496 17,909 18,082

80,831 71,027 195,563

Purchases from related parties:

Purchases from associates:

Non-capital expenditures 60,586 54,550 71,206

Purchases from joint ventures:


Purchases from other related parties:


Capital expenditures 6,862 20,782 5,215

Interest expense 159 1,775 5,019

180,612 195,079 376,547




12. Related party balances December 31,

2010 2009 2008

Joint ventures’ balancesLong-term loans 34,792 – –

Short-term trade accounts payable 7,959 6,136 5,267

Associates’ balances

Short-term trade accounts receivable 3,046 – –

Long-term loans 3,915 21,804 3,886

Short-term trade accounts payable 6,510 – –

Other related party balances

Cash and cash equivalents at related party bank and pension fund 346,868 335,539 322,865

Short-term deposits with related party bank and pension fund 12,627 26,803 115,488

Accounts receivable from other related parties:

Trade accounts receivable 2,603 12,560 27,796

Advances paid 5,870 10,606 4,812

Other receivables 840 3,550 31,223

Short-term loans 487 12,697 2,952

Short-term promissory notes 4,146 4,940 18,951

Long-term loans – 3,563 15,269

Held-to-maturity securities and deposits – – 1,485

Available-for-sale securities 7,653 – –

21,599 47,916 102,488

Short-term trade accounts payable to other related parties:

Trade accounts payable 556 7,972 38,644

Advances received – 600 1,353

Short-term payables for acquisition of subsidiaries – – 10,211

Other accounts payable 1,692 1,948 16,485

2,248 10,520 66,693

Debt financing includes the following balances with other related parties:

Short-term debt financing – 1,324 32,186

Long-term debt financing 4,315 20 1,675

4,315 1,344 33,861

The amounts outstanding are expected to be settled in cash. The Group did not hold any collateral for amounts owed by related parties.

Loans given to related parties were provided at interest rates ranging from nil to 15% per annum, and were given to finance working capital and investments.



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13. Cash and cash equivalents December 31,

2010 2009 2008

Petty cash 412 386 552

Cash at bank 1,043,239 1,840,855 2,163,535

Short-term deposits with maturity of less than 3 months 969,011 1,012,135 488,801

2,012,662 2,853,376 2,652,888

14. Short-term bank depositsShort-term bank deposits totaled US$ 12.7 million at December 31, 2010 (December 31, 2009: US$ 95.5 million, December 31, 2008: US$ 818.5 million) and consisted of deposits with an original maturity of more than three months but remaining period to maturity of less than one year. The majority of such deposits have an original maturity of less than 6 months, and such deposits are used by the Group to earn investment income, while preserving a high liquidity position. Substantially all such deposits can be withdrawn, in case of necessity, prior to the maturity date with no loss in principal but reduced interest income.

15. Short-term financial investments December 31,

2010 2009 2008

Held-for-trading securities:Promissory notes and bonds 18,350 25,505 27,982

Quoted equity securities – – 44,489

Loans 3,881 30,893 24,712

Available-for-sale securities – 567 6,254

Held-to-maturity securities 5,232 16,164 9,345

27,463 73,129 112,782

16. Trade accounts receivable December 31,

2010 2009 2008

Customers 1,033,179 1,540,787 2,032,399

Allowance for doubtful debts (65,342) (83,136) (90,523)

967,837 1,457,651 1,941,876

17. Inventories December 31,

2010 2009 2008

Raw materials and supplies 1,157,403 1,472,724 2,377,183

Work-in-progress 517,743 540,942 731,591

Finished goods 691,778 960,561 1,163,112

2,366,924 2,974,227 4,271,886

Of the above amounts US$ 709.3 million (December 31, 2009: US$ 434.3 million, December 31, 2008: US$ 1,987.4 million) are stated at net realizable value.

During the year ended December 31, 2010, the Group recognized a US$ 44.8 million release and a US$ 42.5 million allowance to reduce the carrying amount to a net realizable value (December 31, 2009: US$ 136.4 million and US$ 8.2 million, respectively; December 31, 2008: US$ 25.0 million and US$ $ 204.9 million, respectively).




18. Other current assets December 31,

2010 2009 2008

Advances paid and prepayments 248,067 193,564 188,484

Other taxes and social security prepaid 8,826 23,774 17,346

Other assets 41,177 68,115 73,877

298,070 285,453 279,707

19. Long-term financial investments Year ended December 31,

2010 2009 2008

Available-for-sale securities 155,477 88,778 48,958

Loans 38,935 26,184 19,545

Held-to-maturity securities and deposits 10,820 13,654 1,839

205,232 128,616 70,342



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20. Investments in associates and joint venturesThe Group’s investments in associated and joint ventures companies are described in the tables below. The Group structure and certain additional information on investments in associated and joint ventures, including ownership percentages, is presented in Note 29.

December 31,

2010 2009 2008

AssociatesAir Liquide Severstal 17,878 13,829 10,096

Intex Resources ASA 14,609 – –

Iron Mineral Beneficiation Services (Proprietary) Ltd 7,177 – –

Other 693 2,164 2,219

Joint venturesSpartan Steel Coating LLC 47,507 49,082 51,552

Ohio Coatings Company – 17,762 16,595

OOO Gestamp-Severstal-Kaluga 18,032 16,267 –

Double Eagle Steel Coating Company 18,476 15,623 19,354

LLC Gestamp Severstal Vsevolozhsk 14,907 15,869 –

Severstal-Gonvarri-Kaluga LLC 10,015 – –

Prognoz Serebro LLC 5,547 6,572 6,765

Bethlehem Roll Technologies, LLC – 3,916 4,326

Todlem S.L. 3,723 2,773 –

158,564 143,857 110,907

The following is summarized financial information in respect of associates and joint ventures: December 31,

2010 2009 2008

Current assets 227,308 136,432 87,144

Non-current assets 469,438 463,945 312,282

Short-term liabilities 104,440 89,184 70,658

Long-term liabilities 174,042 163,050 99,852

Equity 418,265 348,143 228,916


2010 2009 2008

Revenues 159,396 274,673 305,991

Net income 14,273 20,982 21,512




21. Property, plant and equipmentThe movements in property, plant and equipment are as follows:

Other Land and Plant and productive Infrastructure Construction- Total buildings machinery assets assets in-progress assets

Cost:December 31, 2007 2,499,880 7,485,450 350,662 109,411 1,031,787 11,477,190

Reclassifications (3,513) (27,901) 23,677 7,737 – –

Additions – – – – 2,057,876 2,057,876

Business combinations 449,623 2,064,508 75,259 141 78,561 2,668,092

Disposals (14,207) (156,022) (9,353) (1,355) (28,490) (209,427)

Business de-combinations (3,827) (5,056) (344) (336) (2,178) (11,741)

Reclassified to assets held for sale – (2,976) (9) – (15) (3,000)

Transfer to other assets – – – – (22,343) (22,343)

Transfers 228,441 965,953 95,916 7,766 (1,298,076) –

Foreign exchange difference (345,503) (913,674) (67,424) (19,553) (157,064) (1,503,218)

December 31, 2008 2,810,894 9,410,282 468,384 103,811 1,660,058 14,453,429

Reclassifications (1,902) (41,591) 17,917 742 24,834 –

Additions – – – – 904,775 904,775

Offsetting with government grant (29,717) – – – – (29,717)

Disposals (37,954) (125,201) (16,137) (12,880) (17,865) (210,037)

Reclassified to assets held for sale (20,566) (8,592) – – – (29,158)

Reclassified from assets held for sale – 2,976 – – – 2,976

Transfer to other assets – – – – (16,401) (16,401)

Transfers 164,600 571,352 57,128 17,295 (810,375) –

Foreign exchange difference (43,523) (100,916) (8,314) (2,184) (7,234) (162,171)

December 31, 2009 2,841,832 9,708,310 518,978 106,784 1,737,792 14,913,696

Reclassifications (18,926) 162,663 (174,436) (811) 31,510 –

Additions – – – – 1,229,687 1,229,687

Business combinations 5,373 141,435 2,804 – 35,999 185,611

Disposals (20,215) (99,457) (5,833) (5,071) (14,609) (145,185)

Business de-combinations (22,409) (42,310) (64,719)

Reclassified to assets held for sale (693,951) (3,397,658) (102,788) (172) (319,585) (4,514,154)

Transfers from/(to) other assets – – 15,511 – (26,706) (11,195)

Transfers 128,063 368,943 27,821 5,874 (530,701) –

Foreign exchange difference (47,894) (133,004) (1,248) (998) (16,786) (199,930)

December 31, 2010 2,171,873 6,708,922 280,809 105,606 2,126,601 11,393,811

Of the above amounts of additions to construction-in-progress US$ 42.3 million (2009: US$23.6 million, 2008: US$ 11.6 million) is interest capitalized.



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Other Land and Plant and productive Infrastructure Construction– Total buildings machinery assets assets in-progress assets

Depreciation and impairment:December 31, 2007 562,935 2,317,244 144,963 73,334 89,598 3,188,074

Reclassifications 8,411 (20,891) 10,163 2,317 – –

Depreciation expense 163,024 805,799 62,193 4,293 – 1,035,309

Disposals (21) (95,570) (5,866) (570) (15,997) (118,024)

Business de-combinations (1,497) (1,768) (341) (436) – (4,042)

Reclassified to assets held for sale – (1,096) (9) – – (1,105)

Transfers – (10) (1) 1,941 (1,930) –

Impairment of assets 146,625 876,020 11,914 3,702 40,863 1,079,124


December 31, 2008 769,456 3,489,770 194,954 70,871 100,986 4,626,037

Reclassifications 50 (7,435) 7,117 268 – –

Depreciation expense 108,753 657,139 73,352 2,496 – 841,740

Disposals (18,050) (87,905) (12,476) (8,516) (11,585) (138,532)

Reclassified to assets held for sale (14,150) (5,678) – – – (19,828)

Transfers 1,510 7,495 199 119 (9,323) –

Impairment of assets 89,019 57,356 837 469 28,562 176,243


December 31, 2009 920,184 4,077,077 261,880 63,312 105,763 5,428,216

Reclassifications 6,740 73,465 (79,064) (1,141) – –

Depreciation expense 96,725 604,935 56,998 1,783 – 760,441

Disposals (9,369) (74,230) (4,281) (1,887) (11,337) (101,104)

Reclassified to assets held for sale (225,023) (1,602,879) (100,593) (51) (33,411) (1,961,957)

Business de-combinations (15,949) (32,337) – – – (48,286)

Transfers 1,488 3,725 140 81 (5,434) –

Impairment/(reversal of impairment) of assets 5,298 (14,494) 33,307 (22) 17,310 41,399

Foreign exchange difference (11,710) (62,560) (2,057) 1,121 (1,527) (76,733)

December 31, 2010 768,384 2,972,702 166,330 63,196 71,364 4,041,976

Net book values:December 31, 2008 2,041,438 5,920,512 273,430 32,940 1,559,072 9,827,392

December 31, 2009 1,921,648 5,631,233 257,098 43,472 1,632,029 9,485,480

December 31, 2010 1,403,489 3,736,220 114,479 42,410 2,055,237 7,351,835

Other productive assets include transmission equipment, transportation equipment and tools.




22. Intangible assets Evaluation and Other Mineral exploration intangible Goodwill rights Software assets assets Total

Cost:December 31, 2007 156,946 252,480 36,747 168,921 84,425 699,519

Additions – 3,005 28,058 33,650 28,149 92,862

Business combinations 588,351 418,935 604 113,853 206,844 1,328,587

Disposals – (168) (1,014) (121) (13,270) (14,573)

Business de-combinations (3,621) – – – – (3,621)


December 31, 2008 720,929 669,443 62,815 285,801 293,394 2,032,382

Additions – 4,326 28,530 36,485 3,567 72,908

Disposals – (407) – (3,630) (979) (5,016)

Foreign exchange difference (17,790) (30,936) 312 (9,712) 2,936 (55,190)

December 31, 2009 703,139 642,426 91,657 308,944 298,918 2,045,084

Additions – 4,753 33,075 65,372 33,336 136,536

Business combinations 50,763 476,754 – – – 527,517

Transfers from other assets – – 7,422 – 903 8,325

Disposals – (19,985) – – (3,404) (23,389)

Business de-combinations – – – – (13,676) (13,676)

Reclass to assets held for sale (70,943) – (45,210) – (118,435) (234,588)

Foreign exchange difference (3,516) (7,440) (384) (2,135) (193) (13,668)

December 31, 2010 679,443 1,096,508 86,560 372,181 197,449 2,432,141

Amortization and impairment:December 31, 2007 24 1,422 4,941 – 6,065 12,452

Amortization expense – 28,864 5,905 – 17,343 52,112

Impairment 461,139 – – – – 461,139

Disposals – (172) (367) – (981) (1,520)

Foreign exchange difference (4) (1,165) (489) – (801) (2,459)

December 31, 2008 461,159 28,949 9,990 – 21,626 521,724

Amortization expense – 44,165 8,849 – 62,410 115,424

Impairment – – – – 42,776 42,776

Disposals – – – – (113) (113)

Foreign exchange difference (848) (3,316) 228 – 5 (3,931)

December 31, 2009 460,311 69,798 19,067 – 126,704 675,880

Amortization expense – 53,920 7,143 140 24,358 85,561

Impairment – – – 842 26,204 27,046

Disposals – (2,312) – (29) (4) (2,345)

Business de-combinations – – – – (13,044) (13,044)

Reclass to assets held for sale (70,943) – (10,328) – (57,293) (138,564)

Foreign exchange difference (1,043) (337) (215) 3 (577) (2,169)

December 31, 2010 388,325 121,069 15,667 956 106,348 632,365

Net book values:December 31, 2008 259,770 640,494 52,825 285,801 271,768 1,510,658

December 31, 2009 242,828 572,628 72,590 308,944 172,214 1,369,204

December 31, 2010 291,118 975,439 70,893 371,225 91,101 1,799,776



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23. Debt finance December 31,

2010 2009 2008

Eurobonds 2009 – – 325,000

Eurobonds 2013 543,552 1,250,000 1,250,000

Eurobonds 2014 375,000 375,000 375,000

Eurobonds 2017 1,000,000 – –

Ruble bonds 2011 492,176 495,963 –

Ruble bonds 2013 492,176 – –

Severstal Columbus bonds 525,000 – –

Other issued notes and bonds 145,984 31,780 14,150

Bank financing 2,474,183 4,960,512 5,957,041

Factoring of receivables – 71,592 191,623

Other financing 68,896 53,549 144,912

Accrued interest 106,629 102,232 104,449

Unamortized balance of transaction costs (81,562) (113,768) (96,257)

6,142,034 7,226,860 8,265,918

Total debt is denominated in the following currencies:

US Dollars 4,188,186 4,389,704 4,967,699

Euro 827,305 2,152,251 2,616,523

Rubles 1,092,543 669,616 653,339

Other currencies 34,000 15,289 28,357

6,142,034 7,226,860 8,265,918

Total debt is contractually repayable after the balance sheet date as follows:

Less than one year 1,422,262 1,478,301 2,038,693

Between one and five years 3,093,679 5,602,895 5,342,449

After more than five years 1,626,093 145,664 884,776

6,142,034 7,226,860 8,265,918

Bonds issuedIn April 2004, Citigroup Germany, a non-related party, issued US dollar-denominated loan participation notes in an aggregate principal amount of US$375.0 million for the sole purpose of financing a loan facility between the Group and Citigroup Germany. The loan is due in April 2014 and bears interest at an annual rate of 9.25% payable semi-annually in April and in October each year. As at December 31, 2010 the amount outstanding under this facility was US$ 375.0 million.

In July 2008, the Group issued US$1,250.0 million US dollar–denominated bonds maturing in 2013. Bonds bear an interest rate of 9.75% per annum which is payable semi-annually in January and July each year. As at December 31, 2010 the amount outstanding under the facility was US$ 543.6 million.

In September 2009, the Group issued US$ 494.0 million bonds denominated in rubles maturing in three years with an option for early redemption, exercisable by the bondholders after two years. Bonds bear an interest rate of 14% per annum, which is payable semi-annually in March and September each year. As at December 31, 2010 the amount outstanding under this facility was US$ 492.2 million.

In February 2010, the Group’s subsidiary Severstal Columbus issued US dollar-denominated bonds in an aggregate principal amount of US$525.0 million maturing in 2018. These bonds bear an interest rate of 10.25% per annum, which is payable semi-annually in February and August each year, beginning in August 2010. As at December 31, 2010 the amount outstanding under this facility was US$ 525.0 million.




In February 2010, the Group issued ruble-denominated bonds in an aggregate principal amount of US$498.0 million maturing in 2013. These bonds bear an interest rate of 9.75% per annum, which is payable semi-annually in February and August each year, beginning in August 2010. As at December 31, 2010 the amount outstanding under this facility was US$ 492.2 million.

In October 2010, the Group issued US$ 1.0 billion US dollar-denominated bonds maturing in 2017. Bonds bear an interest rate of 6.7% per annum which is payable semi-annually in April and October each year, beginning in April 2011. These bonds were issued under the Group’s newly established US$ 3 billion Loan Participation Note Programme. As at December 31, 2010 the amount outstanding under this facility was US$ 1.0 billion. The proceeds from the bonds issuance were used to fund the purchase of US$706.4 million nominal of Group’s US$1,250.0 million Eurobonds in US dollars and for refinancing of certain other Group’s debts.

Bank financingIn December 2007 the Group entered into a syndicated facility with the European Bank for Reconstruction and Development (EBRD) (subsequently amended in March 2008), for a maximum principal amount of €600.0 million. The facility expires in 2017 with the outstanding principal amount being amortized from 2009 until the expiration date and bear interest at EURIBOR six month plus 2.0-2.2%. As at December 31, 2010 the amount outstanding under this facility was US$618.4 million.

In September 2008, the Group entered into a PXF syndicated facility with mandated lead arrangers for a maximum principal amount of US$2,500.0 million maturing in 2013, with the outstanding amount being amortized from 2010 until the expiration date and bearing interest at LIBOR three month plus 2.35%. As at December 31, 2010 the amount outstanding under this facility was US$880.0 million.

Debt finance arising from banks and unused long term credit lines are secured by the following charges:

US$ 2,255.0 million (December 31, 2009: US$ 2,081.0 million; December 31, 2008: US$ 2,837.0 million) of the net book value of plant –and equipment;US$ 892.3 million (December 31, 2009: US$ 1,267.0 million; December 31, 2008: US$ 2,303.6 million) of current assets and revenues –from export contracts;US$ 112.0 million (December 31, 2009: US$ 59.3 million; December 31, 2008: US$ nil) of investments to available-for-sale securities; –all Group’s ownership in Societe Des Mines de Taparko and Guinor Gold Corporation, 50% of Group’s ownership in Mountain State –Carbon, the Group’s subsidiaries, and investments in Spartan Steel Coating LLC and Double Eagle Steel Coating Company, the Group’s joint ventures, at December 31, 2010;all Group’s ownership in Berezitovy Rudnik LLC, Societe Des Mines de Taparko, 99.56% of Group’s ownership in OJSC Buryatzoloto, –50% of Group’s ownership in Mountain State Carbon, the Group’s subsidiaries, and investments in Spartan Steel Coating LLC and Double Eagle Steel Coating Company, the Group’s joint ventures, at December 31, 2009;all Group’s ownership in Berezitovy Rudnik LLC, Societe Des Mines de Taparko, 99.56% of Group’s ownership in OJSC Buryatzoloto, –50% of Group’s ownership in Mountain State Carbon and 50% ownership in IPM, the Group’s subsidiaries, and investments in other associates and joint ventures in the Severstal North America segment at December 31, 2008.

A part of the Group’s debt financing is subject to certain covenants. The Group complied with all debt covenants, including equity ratios, during the years ended December 31, 2010, 2009 and 2008.

At the reporting date the Group had US$ 350.0 million (December 31, 2009: US$ 537.0 million; December 31, 2008: US$ 950.6 million) of unused long-term credit lines available to it.



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24. Other current liabilities December 31,

2010 2009 2008

Advances received 210,314 172,855 105,611

Amounts payable to employees 189,944 273,832 396,578

Accrued expenses 23,786 31,778 63,718

Retirement benefit liability (Note 25) 17,127 49,386 57,231

Lease liabilities 7,965 12,896 23,280

Derivative financial liabilities 5,713 22,448 19,110

Provisions (Note 26) 6,320 101,919 80,918

Deferred income 61 5,227 3,321

Decommissioning liability (Note 26) – 17,123 5,308

Onerous contracts – 20,415 71,509

Payable for acquisition of subsidiaries and other payables 70,506 35,351 41,825

531,736 743,230 868,409

25. Retirement benefit liabilitiesThe Group provides for its employees the following retirement benefits, which are actuarially calculated as defined benefit obligations: lump sums payable to employees on retirement, monthly pensions, jubilee benefits, invalidity and death lump sums, burial expenses compensations, healthcare benefits, life insurance and other benefits.

The current portion of retirement benefit liabilities is included in caption ’Other current liabilities’. The total amount of the retirement benefit liabilities is presented in the table below:

December 31,

2010 2009 2008

Current portion 17,127 49,386 57,231

Non-current portion 164,555 738,328 722,065

Total 181,682 787,714 779,296

The following assumptions have been used to calculate the retirement benefit liability: December 31,

2010 2009 2008

Discount rates:

Russia 7.3 to 7.8% 8.5% to 8.7% 8.5% to 10.6%

USA 4.75% 5.3% to 6.1% 5.3% to 6.5%

UK – 5.7% 6.7%

Italy and France – 4.7% 4.4% to 5.3%

Future rates of benefit increase:

Russia 5.2% to 6.3% 6.6% to 7.4% 6.3% to 8.2%

USA Fixed at 0% or Fixed at 0% or Fixed at 0% 3.5% to 10.0% 4.0% to 10.0%

UK – 2.7% 2.7%

Italy and France – 2.5% 3.0% to 6.0%




The present value of the defined benefit obligation less the fair value of plan assets is recognized as a retirement benefit liability in the statement of financial position.

December 31,

2010 2009 2008 2007 2006

Present value of the defined benefit obligation 237,109 1,008,654 987,418 495,713 549,009

Fair value of the plan assets (55,427) (220,940) (208,122) (108,315) (106,055)

Retirement benefit liability 181,682 787,714 779,296 387,398 442,954

The movements in the defined benefit obligation are as follows:


2010 2009 2008

Opening balance 1,008,654 987,418 495,713

Business combinations – – 526,630


Benefits paid (55,486) (69,282) (60,698)

Interest cost 48,551 56,496 33,065

Service cost 20,984 35,867 27,602

Curtailment – (12,010) –

Actuarial loss 14,416 13,701 25,889

Foreign exchange difference (12,350) (3,536) (60,783)

Closing balance 237,109 1,008,654 987,418

The movements in the plan assets are as follows:


2010 2009 2008

Opening balance 220,940 208,122 108,315


Reclassified to assets held for sale (162,163) – –

Contributions made during the year 16,588 40,711 38,637

Benefits paid (27,944) (39,053) (28,232)

Return on assets 10,323 15,998 (1,045)

Actuarial loss (470) (5,187) (7,252)

Foreign exchange difference (1,847) 349 (19,516)

Closing balance 55,427 220,940 208,122

The defined benefit obligation analysis is as follows:

December 31,

2010 2009 2008

Wholly unfunded 143,724 361,101 497,129

Partly funded 93,385 647,553 490,289

Total 237,109 1,008,654 987,418



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The plan assets analysis is as follows:

December 31,

2010 2009 2008

Equity instruments 8,912 55,160 38,161

Deposits 4,585 8,953 14,946

Shares in mutual funds 12,479 14,760 34,531

Cash 1,067 54,260 75,565

Government bonds 2,688 30,264 11,557

Corporate bonds 22,747 55,607 14,335

Other investments 2,949 1,936 19,027

Total 55,427 220,940 208,122

The Group’s best estimate of contributions expected to be paid to the plan in 2011 is US$ 21.7 million.

The overall expected rate of return on pension plan assets is calculated based on the expected long-term investment returns for each category of assets that forms the portfolio. The assessment of expected returns is based on historical returns and predictions of the market for each category of assets in the portfolio in the next twelve months. Expected and actual rates of return on plan assets is presented in the table below:

2010 |||| 2009

|||| 2008

Actual Expected Actual Expected Actual Expected

Russia 4.0% 4.0% 3.7% to 5.5% 4.0% to 9.6% 4.0% 16.0%

USA – – 7.5% to 13.1% 7.5% to 7.8% –10.0% to 0% 0% to 3.0%

UK – – 3.6% 3.6% –15.0% 3.6%

The retirement benefit expenses recognized in the income statement are contained in the caption: ’Cost of sales’, ’General and administrative expenses’ allocated proportionally to related salary expenses, except for the interest cost, which is recognized in the caption ’Interest expense’.

26. Other non-current liabilities December 31,

2010 2009 2008

Decommissioning liability 181,989 262,303 254,740

Amounts payable to employees 29,735 45,755 66,479

Provisions 18,271 101,119 139,445

Derivative financial liabilities 16,573 26,508 11,183

Lease liabilities 2,894 38,211 53,174

Deferred income 2,610 3,908 31,591

Restructured tax liabilities 725 1,811 758

Other liabilities 23,447 28,651 62,591

276,244 508,266 619,961




Decommissioning liabilityThe Group has environmental liabilities related to restoration of soil and other related works, which are due upon the closures of its mines and production facilities. These costs are expected to be incurred between 2012 – 2050. The present value of expected cash outflows were estimated using existing technology, and discounted using a real discount rate. These rates, presented by segment, are as follows:

Discount rates,%

2010 2009 2008

Severstal Resource:

Russia 0.0 – 2.0 0.1 – 2.4 2.0 – 2.8

Kazakhstan 0.1 – 0.9 0.2 – 0.4 1.0

USA 1.0 – 3.3 1.7 – 2.9 2.4 – 6.8

Burkina Faso 0.6 – –

Guinea 0.8 – –

Severstal North America – 1.7 – 2.9 1.8

The movements in the decommissioning liability are as follows:


2010 2009 2008

Opening balance 279,426 260,048 108,961

Additional accrual 9,992 25,666 –

Change in assumptions – – (3,841)

Interest cost 10,585 9,998 18,173

Business combinations 9,451 – 160,775

Usage of decommissioning liability (21,762) (12,157) (4,709)



Closing balance 181,989 279,426 260,048

December 31,

2010 2009 2008

Current portion – 17,123 5,308


181,989 279,426 260,048



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ProvisionsThe current portion of provisions is included in the caption ’Other current liabilities’. The total amount of the provisions is presented in the table below: December 31,

2010 2009 2008

Environmental claims 2,682 36,708 42,730

Restructuring – 43,671 12,664

Social security claims 2,555 36,713 32,421

Other employee related 9,724 28,013 22,089

Legal claims 3,378 18,633 40,034

Other 6,252 39,300 70,425

24,591 203,038 220,363

December 31,

2010 2009 2008

Current portion 6,320 101,919 80,918


24,591 203,038 220,363

These provisions represent management’s best estimate of the potential losses arising in these cases, calculated based on available information and appropriate assumptions used. The actual outcome of those cases is currently uncertain and might differ from the recorded provisions.

The movements in the provisions are as follows:


2010 2009 2008

Opening balance 203,038 220,363 110,876

Charge to the income statement 7,919 58,764 95,875


Usage of provisions (14,459) (72,705) (27,648)



Closing balance 24,591 203,038 220,363

27. Share capitalThe Parent Company’s share capital consists of ordinary shares with a nominal value of RUR 0.01 each. Authorized share capital of Severstal at December 31, 2010, 2009 and 2008 comprised 1,007,701,355 issued and fully paid shares.

The nominal amount of initial share capital was converted into US dollars using exchange rates during the Soviet period, when the Government contributed the original capital funds to the enterprise. These capital funds were converted into ordinary shares on September 24, 1993 and sold by the Government at privatization auctions.




The total value of issued share capital presented in these consolidated financial statements comprises: Number of shares, thsd. US$’000

Share capital at December 31, 2008 1,007,701 3,311,288



All shares carry equal voting and distribution rights.

During 2008, the Parent Company repurchased 2,499 thousand of issued shares for a total consideration of US$ 26.3 million.

Capital managementThe Group’s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. This policy includes compliance with certain externally imposed minimum capital requirements. The Group’s management constantly monitors profitability and leverage ratios and compliance with the minimum capital requirements. The Group uses the return on assets ratio which is defined as profit from operations divided by total assets (averaged over the measurement period) and the leverage ratio calculated as net debt, comprising of long-term and short-term indebtedness less cash, cash equivalents and short-term bank deposits, divided by shareholder’s equity. The level of dividends is also monitored by the Board of Directors of the Group.

There were no changes in the Group’s approach to capital management during the year.

DividendsThe maximum dividend payable is restricted to the total accumulated retained earnings of the Parent Company determined according to Russian law.

On June 27, 2008 a Meeting of Shareholders approved the annual dividend of 4.0 rubles (US$ 0.2 at June 27, 2008 exchange rate) per share and per GDR in respect of 2007.

On June 27, 2008 a Meeting of Shareholders approved an interim dividend of 5.2 rubles (US$ 0.2 at June 27, 2008 exchange rate) per share and per GDR for the first quarter of 2008.

On September 30, 2008 a Meeting of Shareholders approved an interim dividend of 18.35 rubles (US$ 0.7 at September 30, 2008 exchange rate) per share and per GDR for the first half of 2008.

On December 26, 2008 a Meeting of Shareholders approved an interim dividend of 7.17 rubles (US$ 0.2 at December 26, 2008 exchange rate) per share and per GDR for the third quarter of 2008.

On June 15, 2009, a Meeting of Shareholders approved the decision not to pay the annual dividend in respect of 2008.

On December 20, 2010 an Extraordinary Meeting of Shareholders approved an interim dividend of 4.29 rubles (US$ 0.14 at December 20, 2010 exchange rate) per share and per GDR for the nine months of 2010.



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28. Discontinued operations and assets held for saleThe Group’s discontinued operations represent the Lucchini segment and Severstal Sparrows Point LLC, Severstal Warren LLC, Severstal Wheeling Inc and Mountain State Carbon LLC, which are an operating segment within the North America reporting segment that are classified as held for sale as at December 31, 2010 following management’s decision to sell these entities within 12 months after the reporting date.

The results of discontinued operations were as follows:


2010 2009 2008

Revenue 4,286,917 3,467,711 6,340,557

Expenses (4,841,624) (4,716,896) (6,998,612)

Loss on remeasurement of disposal groups to fair value less costs to sell (1,300,050) – –

Loss before income tax (1,854,757) (1,249,185) (658,055)

Income tax (expense)/benefit (86,988) 116,102 (27,018)

Loss for the year (1,941,745) (1,133,083) (685,073)

Attributable to:

shareholders of OAO Severstal (1,940,769) (1,050,041) (711,672)

non-controlling interests (976) (83,042) 26,599

Furthermore, there was a cumulative net loss of US$ 46.8 million and gain of US$ 33.0 million recognized in other comprehensive income as at December 31, 2010 in relation to foreign exchange differences and changes in cash flow hedges for the Lucchini segment and the fair value adjustment upon acquisition of subsidiary to previously held interest for the North America disposal group, respectively.

The fair value less costs to sell of the Lucchini segment was measured using a combination of valuation techniques. The valuation is sensitive to changes in certain assumptions, including forecast operating results, the market prices of equity instruments, as well as other inputs related to current and future market conditions.

The North America disposal group was measured at the fair value less costs to sell determined based on price offers available.

The loss on remeasurement of the Lucchini and North America disposal groups to fair value less costs to sell recognized in 2010 in the amounts of US$ 1,010.3 million and US$ 289.8 million, respectively, was allocated to property, plant and equipment and intangible assets within each related disposal group on a pro-rata basis.

Included in expenses in 2009 is an impairment loss in the amount of US$ 104.6 million in respect of the Lucchini segment and in the amount of US$ 26.5 million in respect of Severstal Warren LLC.

Included in expenses in 2008 is an impairment loss in the amount of US$ 382.6 million in respect of Severstal Warren LLC and in the amount of US$ 621.8 million in respect of Severstal Wheeling Inc.




The major classes of assets and liabilities of the disposal groups measured at the lower of carrying amount and fair value less costs to sell at December 31, 2010, 2009 and 2008 were as follows:

December 31,

2010 2009 2008

Current assets:Cash and cash equivalents 208,928 1,267 46

Short-term financial investments 5,862 – –

Trade accounts receivable 711,162 5,868 –

Accounts receivable from related parties 3,835 – –

Inventories 1,135,314 1,617 5,525

VAT recoverable 8,870 263 1,406

Income tax recoverable 13,163 – –

Other current assets 65,429 1,627 –

Total current assets 2,152,563 10,642 6,977

Non-current assets:Long-term financial investments 38,972 – –

Property, plant and equipment 1,204,978 13,773 1,895

Intangible assets 70,335 – –

Deferred tax assets – – –

Other non-current assets 42,964 – –

Total non-current assets 1,357,319 13,773 1,895

Total assets 3,509,882 24,415 8,872

Current liabilities:Trade accounts payable 680,535 2,870 –

Short-term debt finance 1,071,286 – –

Income tax payable 4,360 – –

Other taxes and social security payable 64,433 111 4

Other current liabilities 223,160 8,360 –

Total current liabilities 2,043,774 11,341 4

Non-current liabilities:Long-term debt finance 354,820 – –

Deferred tax liabilities 53,723 – –

Retirement benefit liabilities 592,772 – –

Other non-current liabilities 227,265 638 –

Total non-current liabilities 1,228,580 638 –

Total liabilities 3,272,354 11,979 4

The short-term debt finance included US$ 767.0 million of the Lucchini segment debt finance reclassified to short-term due to breach of finance covenants of related loan agreements.



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29. Subsidiaries, associates and joint venturesThe following is a list of the Group’s significant subsidiaries, associates and joint ventures and the effective ownership holdings therein:

December 31,

Company 2010 2009 2008 Location Activity

Russian Steel segment:Subsidiaries:ZAO Severgal 100.0% 100.0% 100.0% Russia Hot dip galvanizing

ZAO Severstal SMZ-Kolpino 100.0% 100.0% 100.0% Russia Steel constructions

ZAO Severstal TPZ-Sheksna 100.0% 100.0% 100.0% Russia Steel constructions

ZAO Severstal Steel Solutions 100.0% 100.0% 100.0% Russia Steel constructions

ZAO Severstal Long Products Mill Balakovo 100.0% 100.0% 100.0% Russia Iron & steel mill

OOO SSM-Tyazhmash 100.0% 100.0% 100.0% Russia Repairs & construction

OAO Domnaremont 65.5% 82.7% 82.7% Russia Repairs & construction

OOO Severstal-Promservis 99.9% 99.9% 99.9% Russia Repairs & construction

OAO Metallurgremont 75.0% n/a n/a Russia Repairs & construction

OOO Energoremont n/a 100.0% 100.0% Russia Repairs & construction

OOO Electroremont n/a 100.0% 100.0% Russia Repairs & construction

Victory Industries, Inc 99.9% 99.9% 100.0% USA Repairs & construction

OOO AviaCompany Severstal 100.0% 100.0% 100.0% Russia Air transport

Severstal Export GmbH 99.8% 99.8% 100.0% Switzerland* Steel sales

AS Severstallat 84.2% 84.2% 50.5% Latvia* Steel sales

Latvijas Metals 84.2% 84.2% 50.5% Latvia* Steel sales

ZAO SeverStalBel 100.0% 100.0% 100.0% Belarus* Steel sales

Severstal-Ukraine LLC. 51.0% 51.0% 51.0% Ukraine* Steel sales

Armaturu Servisa Centrs SIA n/a 84.2% 50.5% Latvia* Steel service center

ZAO Neva-Metall 100.0% 100.0% 100.0% Russia Shipping operations

Upcroft Limited 100.0% 100.0% 100.0% Cyprus* Holding company**

Varndell Limited 100.0% 100.0% 100.0% Cyprus* Holding company

Baracom Limited 100.0% 100.0% 100.0% Cyprus Holding company

ZAO Vtorchermet 85.6% 71.2% 85.6% Russia Processing scrap

ZAO Rospromresursy 100.0% 100.0% 100.0% Russia Processing scrap

OAO Murmanskvtormet 74.6% 50.9% 75.1% Russia Processing scrap

OAO Arhangelskii vtormet 75.0% 50.0% 75.0% Russia Processing scrap

ZAO Trade House Severstal-Invest 100.0% 100.0% 100.0% Russia Metal sales

ZAO North Steel Company 99.9% 99.9% 99.0% Russia Leasing

OAO Rostovmetall 95.0% 94.6% 87.0% Russia Leasing

ZAO PPTK-1 100.0% 100.0% 99.0% Russia Leasing

ZAO RC Group 100.0% n/a n/a Russia Leasing

ZAO Izhora Pipe Mill 100.0% 100.0% 100.0% Russia Wide pipes

OAO Severstal-Metiz 100.0% 100.0% 100.0% Russia Steel machining

OAO Dneprometiz 98.7% 98.7% 96.8% Ukraine Steel machining

Carrington Wire Ltd n/a n/a 100.0% UK Steel machining

Redaelli Tecna S.p.A. 100.0% 100.0% 100.0% Italy Steel machining

OOO UniFence 100.0% 100.0% 100.0% Russia Steel machining

OOO ChSPZ MKR (UniSpring) 100.0% 100.0% 100.0% Russia Mattress springs

OOO “Severstal-metiz: welding consumables” n/a 100.0% n/a Russia Welding consumables




December 31,


Associates:Air Liquide Severstal 25.0% 25.0% 25.0% Russia Production liquid oxygen

Joint venturesTodlem S.L. 25.0% 25.0% n/a Spain Holding company

Severstal-Gonvarri-Kaluga LLC 50.0% n/a n/a Russia Iron & steel mill

OOO Gestamp-Severstal-Kaluga 25.0% 25.0% n/a Russia Production car body components

LLC Gestamp Severstal Vsevolozhsk 25.0% 22.5% n/a Russia Production car body components

Subsidiaries classified as held for sale:

OOO “Severstal-metiz: welding consumables” 100.0% n/a 100.0% Russia Welding consumables

Carrington Wire Ltd n/a 100.0% n/a UK Steel machining

(*) – Russian Steel segment contains Russian production entities, foreign trading companies, which are selling products primarily produced in Russia, and other foreign companies, which either provide services to Russian production entities or are managed from Russia.

(**) – Upcroft is holding 29.0% of Lucchini SpA.

December 31,


Severstal North America segment:Subsidiaries:Severstal US Holdings, LLC 100.0% 100.0% 100.0% USA Holding company

Severstal Dearborn, LLC 100.0% 100.0% 100.0% USA Iron & steel mill

Severstal Columbus, LLC 100.0% 100.0% 91.8% USA Steel mill

Severstal Warren, LLC n/a 100.0% 100.0% USA Steel mill

Severstal Wheeling Inc n/a 100.0% 100.0% USA Steel mill

Severstal Sparrows Point, LLC n/a 100.0% 100.0% USA Steel mill

Mountain State Carbon, LLC n/a 100.0% 100.0% USA Coking coal

Associates:Delaco Processing LLC 49.0% 49.0% 49.0% USA Steel slitting

Joint venturesSpartan Steel Coating LLC 48.0% 48.0% 48.0% USA Hot dip galvanizing

Double Eagle Steel Coating company 50.0% 50.0% 50.0% USA Electro-galvanizing

Bethlehem Roll Technologies LLC 50.0% 50.0% 50.0% USA Grinding steel mill rolls

Ohio Coatings Company 50.0% 50.0% 50.0% USA Tin plate steel

Mississippi Steel Processing, LLC 20.0% n/a n/a USA Steel service center

Subsidiaries classified as held for sale:Severstal Warren, LLC 100.0% n/a n/a USA Steel mill

Severstal Sparrows Point, LLC 100.0% n/a n/a USA Steel mill

Severstal Wheeling Inc 100.0% n/a n/a USA Steel mill

Mountain State Carbon, LLC 100.0% n/a n/a USA Coking coal

Lucchini segment (classified as assets held for sale):Subsidiaries:Lucchini SpA 49.2% 79.8% 79.8% France Holding company

Ascometal SAS 49.2% 79.8% 79.8% France Steel manufacturing



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December 31,


Ascometal GmbH 49.2% 79.8% 79.8% Germany Sales

Bari Fonderie Meridionali SpA n/a 79.8% 79.8% Italy Forgings

GSI Lucchini SpA 34.1% 55.3% 55.3% Italy Steel spheres

Lucchini Asia Pacific Pte Ltd 49.2% 79.8% 79.8% Singapore Sales

Lucchini Holland BV 49.2% 79.8% 79.8% The Netherlands Investment holding

Lucchini Iberia SI 49.2% 79.8% 79.8% Spain Sales

Lucchini Servizi Srl 49.2% 79.8% 79.8% Italy Dormant

Lucchini Siderprodukte AG n/a n/a 51.9% Switzerland Sales

Lucchini USA Inc 49.2% 79.8% 79.8% USA Sales

Servola SpA 49.2% 79.8% 79.8% Italy Asset holding

Sideris Steel SAS 49.2% 79.8% 79.8% France Investment holding

Associates:ESPRA SAS 17.2% 27.9% 27.9% France Steel scrap

Logistica Servola Srl 24.6% 39.9% 39.9% Italy Dormant

Tecnologie Ambientali Pulite Srl 12.2% 19.9% 19.9% Italy Environmental services

GICA SA 12.3% 19.9% 19.9% Switzerland Carbon dioxide trading

Subsidiaries classified as held for sale:Bari Fonderie Meridionali SpA 49.2% n/a n/a Italy Forgings

Severstal Resource segment:Subsidiaries:OAO Karelsky Okatysh 100.0% 100.0% 100.0% Russia Iron ore pellets

OAO Olkon 100.0% 100.0% 100.0% Russia Iron ore concentrate

Severstal Liberia Iron Ore Ltd 61.5% 61.5% 61.5% Liberia Iron ore

OAO Vorkutaugol 88.1% 94.0% 94.0% Russia Coking coal concentrate

OAO Mine Vorgashorskaya 75.0% 75.0% 75.0% Russia Coking coal concentrate

PBS Coals Limited 100.0% 100.0% 100.0% USA Coking coal concentrate

OOO Neryungri Metallic 100.0% 100.0% 100.0% Russia Gold mining

ZAO Mine Aprelkovo 100.0% 100.0% 100.0% Russia Gold mining

Celtic Resources Holdings Ltd 100.0% 100.0% 100.0% Ireland Holding company

JSC FIC Alel 100.0% 100.0% 100.0% Kazakhstan Gold mining

Zherek LLP 100.0% 100.0% 100.0% Kazakhstan Gold mining

High River Gold Mines Ltd 72.6% 50.1% 53.8% Canada Holding company

OJSC Buryatzoloto 61.6% 42.6% 45.7% Russia Gold mining

Berezitovy Rudnik LLC 72.6% 49.6% 53.3% Russia Gold mining

Societe Des Mines de Taparko 65.4% 45.1% 48.4% Burkina Faso Gold mining

Semgeo LLP 100.0% 100.0% 100.0% Kazakhstan Gold mining

Crew Gold Corporation 93.4% n/a n/a Canada Holding company

Societe Miniere de Dinguiraye 93.4% n/a n/a Guinea Gold mining

OAO SPB-Giproshakht 100.0% 100.0% 100.0% Russia Engineering

Mining Holding Company LLC 100.0% 100.0% 100.0% Russia Holding company

Lybica Holding B.V. 100.0% 100.0% 100.0% The Netherlands Holding company

7029740 Canada Limited 100.0% 100.0% 100.0% Canada Holding company

Nord Gold N.V. 100.0% 100.0% n/a The Netherlands Holding company

Altcom Limited 100.0% 100.0% n/a The Netherlands Holding company




December 31,


Joint ventures:Prognoz Serebro LLC 50.0% 50.0% 50.0% Russia Silver project

Associates:Iron Mineral Beneficiation Services Republic of Research & investing (Proprietary) Ltd 25.6% n/a n/a South Africa

Intex Resources ASA 21.7% n/a n/a Norway Mining and exploration

In addition, at the reporting date, a further 51 (December 31, 2009: 45; December 31, 2008: 42) subsidiaries and associates, which are not material to the Group, either individually or in aggregate, have been included in these consolidated financial statements.

Information on carrying amounts of associated companies is disclosed in Note 20 of these consolidated financial statements.

Investments in associates and other equity investmentsIn February 2010, the Group acquired a 26.6% stake in Crew Gold Corporation for a total consideration of US$ 90.3 million. Crew Gold Corporation (“CGC”) is a mining company based in London, UK. CGC owns and operates a gold mining project in Guinea, West Africa.

In May 2010, the Group acquired a 16.5% stake in Core Mining Limited (“CML”) for a total consideration of US$ 15.0 million. CML is a private company registered in the Isle of Man focused on the exploration, development and operation of iron ore projects in Central and Western Africa, mainly in Republic of Congo (Brazzaville) and Republic of Gabon.

In July 2010, the Group acquired an additional 13.8% stake in Crew Gold Corporation for a total consideration of US$ 84.5 million, increasing its ownership interest up to 40.4%.

In September 2010, the Group acquired a 21.7% stake in Intex Resources ASA (“Intex Resources”) for a total consideration of US$ 13.0 million. Intex Resources is a public mining and exploration company listed on Oslo Stock Exchange with its headquarters in Oslo, Norway. Intex’s main asset is the Mindoro Nickel Project — a substantial nickel laterite deposit in the Philippines. In addition, Intex has two molybdenum assets in Norway, as well as Maniitsoq, a diamond province in Greenland.

During 2010, the Group acquired an 11% stake in Sacre-Coeur Minerals, Ltd. (“SCM”) for a total consideration of US$ 6.2 million, increasing its ownership up to 18.1%. SCM is engaged in the acquisition, exploration and development of properties for the potential mining of gold and metals in South America, initially focusing on exploration for gold on its properties in Guyana.

During 2010, the Group acquired a 25.6% stake in Iron Mineral Beneficiation Services (Proprietary) Limited (IMBS) for a total consideration of US$ 7.5 million. IMBS is a research and development company based in Johannesburg, South Africa. IMBS has developed a coal-based Finesmelt technology capable of processing unusable iron ore fines and thermal coal into valuable metallic products similar to DRI/HBI. Currently IMBS is developing its first commercial project in Phalaborwa, South Africa.

Acquisitions of subsidiaries from third and related partiesAcquisitions in 2008In January 2008, the Group acquired a 91.6% stake in OAO StalMag for a total consideration of US$ 17.6 million. OAO StalMag is a ferroniobium producer whose production will be used by the Group’s entities.

The acquiree’s profit since the acquisition date included in the Group’s profit for 2008, as well as the revenue and profit of the acquired entity from the beginning of the period to the date of acquisition are insignificant to the Group’s revenue and profit for 2008.



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In May 2008, the Group acquired a 100% stake in Severstal Sparrows Point, LLC (“Sparrows Point”), for a total consideration of US$ 818 million, subject to certain adjustments of US$ 48 million, resulting in a final consideration paid of US$ 770 million. Sparrows Point is an integrated steel plant on the East Coast of USA with its own deep water port and rail connection to the main East Coast rail networks.

The acquiree’s loss from the beginning of the period to the date of acquisition is insignificant to the Group’s profit for 2008. The loss since the acquisition date included in the Group’s profit for 2008 amounted to US$ 130.8 million. The acquiree’s revenue from the beginning of the period to the date of acquisition comprised US$ 766.1 million.

In July 2008, the Group acquired a 100% stake in WCI Steel Inc. (re-named to Severstal Warren Inc.) for a total consideration of US$ 443.1 million. WCI Steel Inc. operates a steel mill in Warren, Ohio, and is an integrated producer of flat-rolled steel products, including high carbon, alloy, ultra high strength, and heavy-gauge galvanized steel.

The acquiree’s loss from the beginning of the period to the date of acquisition is insignificant to the Group’s profit for 2008. The loss since the acquisition date included in the Group’s profit for 2008 amounted to US$ 41.7 million. In addition an impairment loss of US$ 382.6 million has been recognized and was allocated to property, plant and equipment in the amount of US$ 376.0 million and to goodwill in the amount of US$ 6.6 million, as discussed in Note 8. The acquiree’s revenue from the beginning of the period to the date of acquisition comprised US$ 498 million.

In July 2008, the Group acquired a 100% stake in Redaelli Tecna SpA for an approximate total consideration of € 35 million (US$ 54.8 million at the transaction date exchange rate). Redaelli Tecna SpA is a manufacturer of high performance wire ropes for industrial hoisting, mining, cableways, material transportation, etc.

The acquiree’s profit since the acquisition date included in the Group’s profit for 2008, as well as the revenue and profit from the beginning of the period to the date of acquisition are insignificant to the Group’s revenue and profit for 2008.

In August 2008, the Group acquired a 100% stake in Esmark (re-named to Severstal Wheeling Inc.) for a total consideration of US$ 977.8 million. Esmark was a manufacturer and distributor of flat rolled and other steel products in the United States. The Group acquired all of Esmark’s business, including the remaining 50% stake in Mountain State Carbon LLC previously accounted for under the equity method.

The acquiree’s profit from the beginning of the period to the date of acquisition comprised US$ 29.6 million. The profit since the acquisition date included in the Group’s profit for 2008 amounted to US$ 166.9 million. In addition an impairment loss of US$ 621.8 million has been recognized and was allocated to property, plant and equipment in the amount of US$ 557.4 million and to goodwill in the amount of US$ 64.4 million, as discussed in Note 8. The acquiree’s revenue from the beginning of the period to the date of acquisition comprised US$ 1,629.0 million.

In August 2008, the Group acquired a 100% stake in Semgeo LLP, operating a gold mine Balazhal in East Kazakhstan for a total consideration of US$ 38.9 million. Management determined that the fair value of the net identifiable assets and liabilities acquired was substantially the same as the book value.


In November 2008, the Group acquired a 100.0% stake in PBS Coals Ltd, a U.S. coal mining company, for a total cash consideration of US$ 876.8 million.

The acquiree’s profit from the beginning of the period to the date of acquisition comprised US$ 8.4 million. The loss since the acquisition date included in the Group’s profit for 2008 amounted to US$ 4.1 million. In addition an impairment loss of US$ 361.1 million has been recognized and was allocated fully to goodwill, as discussed in Note 8. The acquiree’s revenue from the beginning of the period to the date of acquisition comprised US$ 184.9 million.




In November 2008, the Group acquired a 53.8% stake in High River Gold Mines Ltd. for a total cash consideration of US$ 62.5 million. High River is a gold company with interests in producing mines, mines under development and advanced exploration projects in Burkina Faso and Russia. Two producing mines, Zun-Holba and Irokinda (OJSC “Buryatzoloto”), are situated in the Lake Baikal region of Russia. Two new open pit gold mines, Taparko-Bouroum (Societe Des Mines de Taparko) in Burkina Faso, and Berezitovy (Berezitovy Rudnik LLC) in Russia, were put into full production in 2008.

The acquiree’s loss from the beginning of the period to the date of acquisition comprised US$ 38.9 million. The loss since the acquisition date included in the Group’s profit for 2008 amounted to US$ 5.8 million. The acquiree’s revenue from the beginning of the period to the date of acquisition comprised US$ 177.0 million.

In December 2008, the Group acquired a 61.5% stake in African Iron Ore Group Ltd (re-named to Severstal Liberia Iron Ore Ltd) for a total cash consideration of US$ 32.0 million. Severstal Liberia Iron Ore Ltd. is performing geological survey and exploration of the iron ore deposits in Putu Range, Liberia. Management determined that the fair value of the net identifiable assets and liabilities acquired was substantially the same as the book value.


Acquisitions in 2010In July 2010, the Group acquired an additional 9.8% stake in Crew Gold Corporation for a total consideration of US$ 70.9 million, increasing its ownership interest up to 50.2%.

Management has not yet completed the estimation of fair values of the acquired assets and liabilities. The final purchase price allocation is expected to be completed within one year starting from the date of acquisition.

The acquiree’s profit from the beginning of the period to the date of acquisition comprised US$ 10.8 million. The acquiree’s revenue from the beginning of the period to the date of acquisition comprised US$ 140.6 million. The profit since the acquisition date included in the Group’s loss for the period amounted to US$ 8.9 million. Revenue since the acquisition date included in the Group’s revenue for the period amounted to US$ 98.6 million.

During October-November 2010, the Group paid a US$ 7.2 million of contingent consideration in respect of the acquired 61.5% stake in African Iron Ore Group Ltd (re-named to Severstal Liberia Iron Ore Ltd) in December 2008.



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A summary of assets and liabilities acquired from third and related parties excluding acquisitions from the Majority Shareholder during 2010, 2009 and 2008 is presented below:


2010 2009 2008

Cash and cash equivalents 29,929 – 180,048

Trade accounts receivable 6,656 – 579,804

Inventories 57,366 – 1,397,780

Deferred tax assets – – 33,391

Property, plant and equipment 185,611 – 2,668,092

Intangible assets 476,754 – 740,236

Other current assets 9,644 – 147,887

Other non-current assets 4,651 – 60,521

Trade accounts payable (17,271) – (585,642)

Other taxes and social security payable (51) – (2,929)

Deferred tax liabilities (93,637) – (384,180)

Retirement benefit liability – – (410,532)

Debt finance (107,412) – (579,822)

Other current liabilities (38,717) – (296,819)

Other non-current liabilities (11,339) – (271,639)

Net identifiable assets and liabilities acquired 502,184 – 3,276,196

Non-controlling interests (250,059) – (152,821)

Severstal’s share of net identifiable assets and liabilities acquired 252,125 – 3,123,375

Investments at equity (182,846) – (112,809)

Fair value adjustment upon acquisition of subsidiary to previously held interest (41,628) – (33,020)

Consideration:

Consideration in cash (78,414) – (3,255,971)

Consideration of other financial assets – – (17,600)

Consideration payable – – 7,230

Positive goodwill on acquisition of subsidiaries (50,763) – (588,351)

Negative goodwill on acquisition of subsidiaries – – 292,326

Net change in cash and cash equivalents (48,485) – (3,068,693)

Included in negative goodwill in 2008 is US$ 197 million which is the difference between the purchase price and fair market value of the acquired net assets of Sparrows Point LLC. This difference arose primarily due to Severstal’s competitive position in negotiations based on exclusive USW’s (United Steelworkers of America) support in bidding and time restrictions in the administered sales process.

Also included in negative goodwill in 2008 is US$ 78 million which is the difference between the purchase price and fair value of the acquired consolidated net assets of High River Gold Mines Ltd. This difference arose primarily due to a lack of High River’s and its prior shareholders’ ability to service its debt.

Transactions with Majority ShareholderDuring 2008, Severstal completed acquisitions of controlling stakes in a number of companies previously controlled by Severstal’s Majority Shareholder. These consolidated financial statements take account of such acquisitions as if they had occurred at the beginning of the earliest comparative period presented or, if later, at the date on which control was obtained by the common controlling shareholder.




In January 2008, the Group completed the acquisition of a 100% stake in Baracom Limited for a total consideration of US$ 84.4 million. Baracom Limited owns 79.9% of the voting stock of the holding structure which controls 74.2% of Severstal Columbus, LLC (former SeverCorr, LLC). Severstal Columbus is a mini-mill which produces high quality steel for motor-car, construction, pipe and engineering industries.

In December 2008, the Group completed the acquisition of a 100.0% stake of a trading company, ZAO Trade House Severstal-Invest, for a total consideration of US$ 27.4 million. ZAO Trade House Severstal-Invest owns a 99.0% stake in OOO North Steel Company, an 87.0% stake in OAO Rostovmetall, and a 99.0% in ZAO PPTK-1.

In June 2010, the Group sold a 50.8% stake in Lucchini S.p.A. for a total consideration of € 1 (US$ 1.2 at the transaction date exchange rate). The Group continues to consolidate the Lucchini segment primarily due to a call option exercisable within the following five years and a contractual entitlement, for the benefit of the Group, to any gain on a subsequent sale of this stake to a third party. At the transaction date the Lucchini segment’s net assets were assessed at fair value less costs to sell as disclosed in Note 28.

Disposals of subsidiariesDisposals in 2008In February 2008, the Group sold 100.0% of OOO Georesurs to a third party for a total consideration of RUR 100,000 (US$ 4 thousands at the transaction date exchange rate).

In April 2008, the Group sold its 97.9%, 99.5% and 100.0% participation in OAO Mine Berezovskaya, OAO Mine Pervomaiskaya and ZAO Zhernovskaya-3 respectively to ArcelorMittal for a total consideration of US$ 652 million.

In June 2008, the Group sold its 100% and 40.0% participation in Relco Spzoo and Coimpex Spzoo respectively for a total consideration of € 12 million (US$ 18 million at the transaction date exchange rate).

In December 2008, the Group sold its 59.4% participation in OAO Metallurgremont to a company controlled by Severstal’s Majority Shareholder for a total consideration of RUR 75.9 million (US$ 2.7 million at the transaction date exchange rate).

Disposals in 2010In May 2010, the Group sold Northern Steel Group, a group of companies within the Severstal North America segment, for a total consideration of US$ 124.0 million.



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A summary of assets and liabilities disposed during 2010, 2009 and 2008 is presented below:


2010 2009 2008

Cash and cash equivalents – – (1,498)

Trade accounts receivable (49,723) – (3,885)

Inventories (90,841) – (7,725)

Financial investments – – (551)

Other assets (1,547) – (13,470)

Property, plant and equipment (16,433) – (7,699)

Intangible assets (632) – (3,621)

Assets held for sale – – (443,021)

Trade accounts payable 35,307 – 4,833

Other taxes and social security payable – – 945

Retirement benefit liability – – 1,117

Debt finance – – 3,150

Liabilities related to assets held for sale – – 88,942

Other liabilities 5,222 – 21,661

Net identifiable assets (118,647) – (360,822)

Non-controlling interests – – 2,042

Sub-total (118,647) – (358,780)

Consideration in cash 118,647 – 673,215

Net gain on disposal – – 314,435

Net change in cash and cash equivalents 118,647 – 671,717

Dilution of Group ownershipIn December 2009, the Group’s share in High River Gold Mines Ltd decreased from 61.7% to 50.1% as a result of a private placement of 150 million common shares to a third party for a total consideration of US$ 54.3 million.

Acquisitions of non-controlling interestsAcquisitions in 2008In January 2008, the Group completed the acquisition of a 100% stake in Celtic Resources Holdings Plc. by acquiring the remaining 13.7% stake in the company for a total consideration of US$ 44 million. Celtic Resources Holdings is a mining company based in Dublin, Ireland, which owns and operates gold mines, including the Suzdal Mine (JSC FIC Alel) and Zherek Mine (Zherek LLP) in Kazakhstan.

In April 2008, the Group acquired an additional 9.4% stake in Columbus from the former management and a 34.6% stake in OAO Dneprometiz from third parties for a total consideration of US$ 40 million.

In August 2008, the Group acquired an additional 4.1% stake in Columbus from the former management for a total consideration of US$ 16 million.

In August – September 2008, the Group acquired a 0.9% stake in OAO Vorkutaugol for a total consideration of US$ 5.3 million.

In August – October 2008, the Group completed the acquisition of 100% stakes in OAO Karelsky Okatysh, OAO Olkon and in OAO Severstal-Metiz by acquiring the remaining 5.2%, 7.3% and 3.0% stakes in entities for a total consideration of US$ 70.6 million, US$ 32.7 million and US$ 9.7 million, respectively.




Acquisitions in 2009In June 2009, the Group acquired all newly issued shares in High River Gold Mines, Ltd. resulting in a 3.5% stake increase. Furthermore, in August 2009, the Group acquired an additional 4.5% stake in High River Gold Mines, Ltd. from non-controlling shareholders for a total consideration of US$ 8 million.

In June 2009, the Group completed the acquisition of a 100% stake in Columbus by acquiring the remaining 8.2% stake in the company from the former management for a total consideration of US$ 14.9 million.

Acquisitions in 2010In March 2010, the Group acquired a 20.2% stake in Lucchini S.p.A. from a Lucchini family company for a total consideration of €82.5 million (US$ 113.3 million at the transaction date exchange rate). After the acquisition, the Group’s share in the capital of Lucchini S.p.A. became 100%.

In May 2010, the Group acquired an additional 18.8% stake in High River Gold Mines, Ltd. for a total consideration of US$ 107.3 million, increasing its ownership interest up to 68.9%.

In August 2010, the Group acquired an additional stake in High River Gold Mines Ltd. upon exercise of warrants held by the Group for a total consideration of US$ 25.1 million, increasing its ownership interest up to 70.4%.

In September 2010, the Group acquired an additional 43.2% stake in Crew Gold Corporation for a total consideration of US$ 214.8 million, increasing its ownership interest up to 93.4%.

In October 2010, the Group acquired an additional 2.3% stake in High River Gold Mines Ltd. for a total consideration of US$ 19.7 million, increasing its ownership interest up to 72.6%.

Disposals of non-controlling interestsIn November 2010, the Group sold a 5.9% stake in OAO Vorkutaugol for a total consideration of US$ 5.8 million.



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30. Segment informationSegmental statements of financial position as at December 31, 2010: Severstal Inter Severstal Russian North segment Resource Steel Lucchini America balances Consolidated

AssetsCurrent assets: Cash and cash equivalents 278,679 1,700,229 – 33,754 – 2,012,662Short-term bank deposits 22 12,668 – – – 12,690Short-term financial investments 3,573 677,564 – – (653,674) 27,463Trade accounts receivable 143,657 613,854 – 210,326 – 967,837Amounts receivable from related parties 207,707 110,524 – 39 (305,912) 12,359Restricted cash – 41,313 – – – 41,313Inventories 382,360 1,527,266 – 522,968 (65,670) 2,366,924VAT recoverable 57,932 220,662 – – – 278,594Income tax recoverable 8,270 20,570 – 10,738 – 39,578Other current assets 88,360 171,495 – 38,216 – 298,070Assets held for sale 3,266 10,899 1,853,849 1,643,991 (2,123) 3,509,882

Total current assets 1,173,826 5,107,044 1,853,849 2,460,032 (1,027,379) 9,567,372

Non-current assets:Long-term financial investments 144,123 861,084 – 6,000 (805,975) 205,232Investments in associates and joint ventures 26,883 5,615,163 – 64,539 (5,548,021) 158,564Property, plant and equipment 1,628,556 3,573,159 – 2,174,087 (23,967) 7,351,835Intangible assets 1,641,360 137,918 – 19,229 1,269 1,799,776Restricted cash 24,470 37,244 – – – 61,714Deferred tax assets 12,958 38,448 – 50,000 – 101,406Other non-current assets 18,448 16,982 – 47,190 – 82,620

Total non-current assets 3,496,798 10,279,998 – 2,361,045 (6,376,694) 9,761,147

Total assets 4,670,624 15,387,042 1,853,849 4,821,077 (7,404,073) 19,328,519

LiabilitiesCurrent liabilities:

Trade accounts payable 159,987 408,026 – 329,377 – 897,389Amounts payable to related parties 6,067 175,419 – 8,305 (173,075) 16,717Short-term debt finance 514,542 1,301,799 – 57,777 (451,856) 1,422,262Income taxes payable 32,996 8,234 – – – 41,230Other taxes and social security payable 87,758 67,766 – 554 – 156,078Dividends payable – 17,131 – – – 17,131Other current liabilities 124,703 354,597 – 48,289 4,147 531,736Liabilities related to assets held for sale 12,795 1,057 2,026,696 1,705,094 (473,288) 3,272,354

Total current liabilities 938,848 2,334,029 2,026,696 2,149,396 (1,094,072) 6,354,897

Non-current liabilities:Long-term debt finance 291,849 3,731,224 – 1,370,428 (673,729) 4,719,772Deferred tax liabilities 354,151 153,090 – – (13,961) 493,280Retirement benefit liabilities 22,582 88,894 – 53,079 – 164,555Other non-current liabilities 204,117 36,566 – 35,553 8 276,244

Total non-current liabilities 872,699 4,009,774 – 1,459,060 (687,682) 5,653,851

Equity 2,859,077 9,043,239 (172,847) 1,212,621 (5,622,319) 7,319,771

Total equity and liabilities 4,670,624 15,387,042 1,853,849 4,821,077 (7,404,073) 19,328,519




Segmental statements of financial position as at December 31, 2009: Severstal Inter Severstal Russian North segment Resource Steel Lucchini America balances Consolidated

AssetsCurrent assets:

Cash and cash equivalents 126,550 2,063,808 473,765 189,253 – 2,853,376

Short-term bank deposits 136 89,597 – 5,800 – 95,533

Short-term financial investments 19,318 315,927 567 – (262,683) 73,129

Trade accounts receivable 80,993 670,978 411,831 293,849 – 1,457,651

Amounts receivable from related parties 84,284 28,875 3,726 3,063 (93,232) 26,716

Inventories 258,952 1,129,755 600,883 996,344 (11,707) 2,974,227

VAT recoverable 52,179 172,336 63,517 – – 288,032

Income tax recoverable 9,491 18,440 5,594 72,494 – 106,019

Other current assets 57,588 127,102 18,180 82,583 – 285,453

Assets held for sale – 23,115 – 1,300 – 24,415

Total current assets 689,491 4,639,933 1,578,063 1,644,686 (367,622) 8,184,551

Non-current assets:Long-term financial investments 70,830 5,942,956 8,438 11,752 (5,905,360) 128,616

Investments in associates and joint ventures 6,572 48,738 2,164 86,383 – 143,857

Property, plant and equipment 1,379,835 3,391,735 1,481,522 3,262,165 (29,777) 9,485,480

Intangible assets 1,109,294 113,576 37,197 109,137 – 1,369,204

Restricted cash 17,541 – – – – 17,541

Deferred tax assets 30,321 45,563 73,951 90,000 – 239,835

Other non-current assets 1,272 24,072 3,932 45,526 – 74,802

Total non-current assets 2,615,665 9,566,640 1,607,204 3,604,963 (5,935,137) 11,459,335

Total assets 3,305,156 14,206,573 3,185,267 5,249,649 (6,302,759) 19,643,886


Trade accounts payable 116,088 326,088 423,598 512,526 – 1,378,300

Amounts payable to related parties 7,355 92,792 233 9,756 (93,480) 16,656

Short-term debt finance 240,224 648,419 156,672 560,015 (127,029) 1,478,301

Income taxes payable 2,603 25,454 4,786 1,307 – 34,150

Other taxes and social security payable 56,116 75,490 57,004 20,474 – 209,084

Dividends payable 32 5,672 – – – 5,704

Other current liabilities 108,728 270,754 136,922 226,826 – 743,230

Liabilities related to assets held for sale – 11,979 – – – 11,979

Total current liabilities 531,146 1,456,648 779,215 1,330,904 (220,509) 3,877,404

Non-current liabilities:Long-term debt finance 674,419 4,198,250 1,009,304 1,097,674 (1,231,088) 5,748,559

Deferred tax liabilities 251,004 143,053 3,143 – (2,210) 394,990

Retirement benefit liabilities 22,828 110,048 117,123 488,329 – 738,328

Other non-current liabilities 187,625 25,242 75,910 219,489 – 508,266

Total non-current liabilities 1,135,876 4,476,593 1,205,480 1,805,492 (1,233,298) 7,390,143

Equity 1,638,134 8,273,332 1,200,572 2,113,253 (4,848,952) 8,376,339




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Segmental statements of financial position as at December 31, 2008: Severstal Inter Severstal Russian North segment Resource Steel Lucchini America balances Consolidated

AssetsCurrent assets:

Cash and cash equivalents 151,122 1,543,215 663,171 295,380 – 2,652,888

Short-term bank deposits 147 812,598 – 5,800 – 818,545

Short-term financial investments 4,476 260,303 6,163 – (158,160) 112,782

Trade accounts receivable 89,221 809,718 695,522 347,415 – 1,941,876

Amounts receivable from related parties 62,978 70,190 8,286 7,041 (84,664) 63,831

Inventories 261,145 1,436,198 893,736 1,696,077 (15,270) 4,271,886

VAT recoverable 51,336 233,164 77,042 – – 361,542

Income tax recoverable 16,489 137,558 7,508 11,392 – 172,947

Other current assets 45,154 132,463 19,099 82,991 – 279,707

Assets held for sale – 8,872 – – – 8,872

Total current assets 682,068 5,444,279 2,370,527 2,446,096 (258,094) 10,684,876

Non-current assets:Long-term financial investments 27,401 5,010,356 10,993 – (4,978,408) 70,342

Investments in associates and joint ventures 6,765 10,223 2,112 91,807 – 110,907

Property, plant and equipment 1,467,180 3,475,931 1,597,947 3,313,302 (26,968) 9,827,392

Intangible assets 1,237,963 114,121 25,744 132,830 – 1,510,658

Restricted cash 12,734 – – 8,969 – 21,703

Deferred tax assets 44,802 25,837 29,369 146,533 – 246,541

Other non-current assets (41) 18,444 3,521 19,583 – 41,507

Total non-current assets 2,796,804 8,654,912 1,669,686 3,713,024 (5,005,376) 11,829,050

Total assets 3,478,872 14,099,191 4,040,213 6,159,120 (5,263,470) 22,513,926


Trade accounts payable 126,672 365,282 529,653 506,846 – 1,528,453

Amounts payable to related parties 3,921 132,194 4,875 16,120 (85,150) 71,960

Short-term debt finance 288,693 1,221,740 247,014 438,663 (157,417) 2,038,693

Income taxes payable 12,121 9,656 24,354 – – 46,131

Other taxes and social security payable 58,272 63,838 74,890 16,315 – 213,315

Dividends payable 33 128,682 – – – 128,715

Other current liabilities 99,452 296,262 159,038 313,657 – 868,409

Liabilities related to assets held for sale – 4 – – – 4

Total current liabilities 589,164 2,217,658 1,039,824 1,291,601 (242,567) 4,895,680

Non-current liabilities:Long-term debt finance 801,189 3,900,255 1,069,548 1,452,437 (996,204) 6,227,225

Deferred tax liabilities 320,404 103,856 75,514 – (3,395) 496,379

Retirement benefit liabilities 47,908 106,622 114,487 453,048 – 722,065

Other non-current liabilities 182,436 8,029 125,543 303,953 – 619,961

Total non-current liabilities 1,351,937 4,118,762 1,385,092 2,209,438 (999,599) 8,065,630

Equity 1,537,771 7,762,771 1,615,297 2,658,081 (4,021,304) 9,552,616





Segmental income statements for the year ended December 31, 2010:

Severstal Inter Severstal Russian North segment Resource Steel Lucchini America transactions Consolidated

RevenueRevenue – third parties 1,989,723 8,610,139 – 2,911,068 – 13,510,930

Revenue – related parties 1,494,527 204,615 – 444 (1,637,251) 62,335

3,484,250 8,814,754 – 2,911,512 (1,637,251) 13,573,265Cost of sales (1,781,493) (6,003,200) – (2,911,608) 1,586,085 (9,110,216)

Gross profit/(loss) 1,702,757 2,811,554 – (96) (51,166) 4,463,049General and administrative expenses (138,094) (423,862) – (78,353) 1,906 (638,403)Distribution expenses (210,559) (780,872) – – 704 (990,727)Other taxes and contributions (105,989) (75,802) – (560) – (182,351)Share of associates’ profit 3,767 2,906 – 12,728 – 19,401Net gain/(loss) from securities operations 35,457 (140,151) – – – (104,694)(Loss)/gain on disposal of property, plant and equipment and intangible assets (29,810) (20,337) – 3,399 – (46,748)

Net other operating (expenses)/income (10,332) (2,855) – 1,473 (3,574) (15,288)

Profit/(loss) from operations 1,247,197 1,370,581 – (61,409) (52,130) 2,504,239Impairment of non-current assets (15,827) (21,136) – (44,160) – (81,123)Net other non-operating expenses (17,933) (26,511) – – – (44,444)

Profit/(loss) before financing and taxation 1,213,437 1,322,934 – (105,569) (52,130) 2,378,672

Interest income 8,766 282,853 – 184 (188,407) 103,396Interest expense (170,436) (469,673) – (151,024) 160,358 (630,775)Foreign exchange difference 15,165 47,522 – – – 62,687

Profit/(loss) before income tax 1,066,932 1,183,636 – (256,409) (80,179) 1,913,980Income tax expense (204,665) (235,830) – (58,505) 11,751 (487,249)

Profit/(loss) from continuing operations 862,267 947,806 – (314,914) (68,428) 1,426,731Loss from discontinued operations – – (1,210,076) (757,845) 26,176 (1,941,745)

Profit/(loss) for the year 862,267 947,806 (1,210,076) (1,072,759) (42,252) (515,014)

Additional information:

depreciation and amortization expense 274,074 287,571 37,981 237,711 – 837,337capital expenditures 433,787 575,633 15,183 341,620 – 1,366,223intersegment revenue (incl. in revenue from related parties) 1,494,524 142,782 7,066 – (1,644,372) –



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Revenue – to related parties 723,931 97,707 – – (768,520) 53,118

1,870,787 6,179,141 – 2,312,485 (768,520) 9,593,893

Cost of sales (1,405,604) (4,081,420) – (2,491,902) 769,163 (7,209,763)

Gross profit/(loss) 465,183 2,097,721 – (179,417) 643 2,384,130

General and administrative expenses (107,560) (340,902) – (71,603) 3,202 (516,863)

Distribution expenses (141,936) (638,735) – (13,470) 2,636 (791,505)

Other taxes and contributions (85,827) (64,011) – (163) – (150,001)

Share of associates’ (loss)/profit (2) 5,084 – 8,216 – 13,298

Net (loss)/gain from securities operations (2,045) 3,592 – – (13,707) (12,160)

(Loss)/gain on disposal of property, plant and equipment and intangible assets (19,955) (10,906) – 824 (21) (30,058)

Net other operating expenses (16,755) (16,114) – (2,139) (2,667) (37,675)

Profit/(loss) from operations 91,103 1,035,729 – (257,752) (9,914) 859,166

Impairment of non-current assets (48,691) (39,364) – (1) – (88,056)

Net other non-operating expenses (7,978) (26,591) – – 2,779 (31,790)

Profit/(loss) before financing and taxation 34,434 969,774 – (257,753) (7,135) 739,320

Interest income 1,259 303,507 – 519 (213,833) 91,452

Interest expense (226,492) (346,705) – (96,110) 190,854 (478,453)

Foreign exchange difference (52,047) (152,324) – – – (204,371)

(Loss)/profit before income tax (242,846) 774,252 – (353,344) (30,114) 147,948

Income tax benefit/(expense) 25,896 (169,672) – 11,002 (1,186) (133,960)

(Loss)/profit from continuing operations (216,950) 604,580 – (342,342) (31,300) 13,988

Loss from discontinued operations – – (411,505) (741,979) 20,401 (1,133,083)

(Loss)/profit for the year (216,950) 604,580 (411,505) (1,084,321) (10,899) (1,119,095)


depreciation and amortization expense 282,506 272,726 158,002 246,113 (2,183) 957,164

capital expenditures 242,325 368,627 133,247 238,476 (4,992) 977,683

intersegment revenue (incl. in revenue from related parties) 723,925 44,595 7,105 (775,625) –







Revenue – related parties 1,383,443 213,051 – 94 (1,419,107) 177,481

2,452,704 12,063,784 – 2,968,378 (1,419,107) 16,065,759

Cost of sales (1,376,371) (7,388,040) – (3,243,050) 1,464,901 (10,542,560)

Gross profit/(loss) 1,076,333 4,675,744 – (274,672) 45,794 5,523,199

General and administrative expenses (173,906) (506,222) – (125,025) 3,625 (801,528)

Distribution expenses (180,911) (798,564) – (16,401) 144 (995,732)

Other taxes and contributions (78,850) (74,221) – – – (153,071)

Share of associates’ profit/(loss) – 3,632 – (6,319) – (2,687)

Net gain/(loss) from securities operations 2,548 (82,223) – – (20,201) (99,876)

Loss on disposal of property, plant and equipment and intangible assets (7,608) (29,836) – (6,202) 135 (43,511)

Net other operating (expenses)/income (31,906) (10,165) – 608,245 (10,509) 555,665

Profit from operations 605,700 3,178,145 – 179,626 18,988 3,982,459

Impairment of non-current assets (489,874) (42,101) – – – (531,975)

Negative goodwill 79,862 – – – – 79,862

Net other non-operating income/(expenses) 293,797 (59,504) – – 4,652 238,945

Profit before financing and taxation 489,485 3,076,540 – 179,626 23,640 3,769,291

Interest income 16,318 187,104 – 5,139 (79,721) 128,840

Interest expense (105,084) (282,058) – (85,492) 74,719 (397,915)

Foreign exchange difference 97,073 (359,847) – 5 – (262,769)

Profit before income tax 497,792 2,621,739 – 99,278 18,638 3,237,447

Income tax (expense)/benefit (183,557) (642,141) – 344,595 (9,345) (490,448)

Profit from continuing operations 314,235 1,979,598 – 443,873 9,293 2,746,999

Profit/(loss) from discontinued operations – – 136,459 (816,880) (4,652) (685,073)

Profit/(loss) for the year 314,235 1,979,598 136,459 (373,007) 4,641 2,061,926


depreciation and amortization expense 232,943 467,129 162,056 225,293 – 1,087,421

capital expenditures 413,074 709,199 337,828 693,926 (3,289) 2,150,738

intersegment revenue (incl. in revenue from related parties) 1,379,629 39,478 13,600 – (1,432,707) –



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The following is a summary of non-current assets other than financial instruments and deferred tax assets by location:

December 31,

2010 2009 2008

Russian Federation 5,111,242 4,830,744 4,960,427

North America 2,790,550 3,978,452 4,139,364

Africa 988,421 262,206 246,720

Central Asia 275,463 256,752 279,591

Europe 130,269 1,618,873 1,775,158

9,295,945 10,947,027 11,401,260

The locations are primarily represented by the following countries: Lithuania, Italy and Ukraine as at December 31, 2010 and Italy and France (as at December 31, 2009 and 2008) in Europe, the USA in North America, Burkina Faso, Liberia and Guinea in Africa, and Kazakhstan in the Central Asia.

31. Financial instrumentsThe Group’s risk management policies are established to identify and analyze the risks faced by the Group, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Group’s activities.

The Group’s Board of Directors oversees how management monitors compliance with the Group’s risk management policies and procedures and reviews the adequacy of the risk management framework in relation to the risks faced by the Group.

Exposure to credit, liquidity, interest rate and currency risk arises in the normal course of the Group’s business. The Severstal Resource segment of the Group has not used derivative financial instruments to reduce exposure to fluctuations in foreign exchange rates and interest rates. The use in the Russian Steel and Severstal North America segments of derivatives to hedge their interest rates, commodity inputs and foreign exchange rate exposures were not material to these consolidated financial statements.

Management believes that the fair value of its financial assets and liabilities approximates their carrying amounts except for the following borrowings:

December 31, 2010

Market value Book value Difference

Ruble bonds 2011 516,834 492,176 24,658

Ruble bonds 2013 514,160 492,176 21,984

Eurobonds 2013 605,044 543,552 61,492

Eurobonds 2014 418,361 375,000 43,361

Eurobonds 2017 988,125 1,000,000 (11,875)

Severstal Columbus bonds 561,425 525,000 36,425

3,603,949 3,427,904 176,045




December 31, 2009


Ruble bonds 518,331 495,963 22,368

Eurobonds 2013 1,265,663 1,250,000 15,663

Eurobonds 2014 377,858 375,000 2,858

2,161,852 2,120,963 40,889

December 31, 2008


Eurobonds 2009 325,858 325,000 858

Eurobonds 2013 689,584 1,250,000 (560,416)

Eurobonds 2014 197,048 375,000 (177,952)

Bank financing 5,448,072 5,809,349 (361,277)

6,660,562 7,759,349 (1,098,787)

The above amounts exclude accrued interest.

The market value of the Group’s Eurobonds was determined based on London Stock Exchange quotations. The market value of the Group’s Ruble bonds was determined based on Moscow Interbank Currency Exchange.

Credit riskThe maximum exposure to credit risk is represented by the carrying amount of each financial asset in the statement of financial position and guarantees (see note 32e). The Group has developed policies and procedures for the management of credit exposures, including the establishment of credit committees that actively monitors credit risk.

The maximum exposure to credit risk for financial instruments including accounts receivable from related parties was:

December 31,

2010 2009 2008

Cash and cash equivalents 2,012,662 2,853,376 2,652,888

Loans and receivables 1,138,656 1,653,386 2,158,186

Held-to-maturity securities and deposits 28,742 125,351 829,729

Available-for-sale financial assets 155,477 89,345 55,212

Held-for-trading securities 18,350 25,505 72,471

Restricted cash 103,027 17,541 21,703

3,456,914 4,764,504 5,790,189



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The maximum exposure to credit risk for trade receivables including trade receivables from related parties by geographic region was:

December 31,

2010 2009 2008

Russian Federation 432,626 404,500 601,362

North America 228,910 324,492 395,736

Europe 202,661 568,448 878,778

Africa 37,311 28,062 24,178

China and Central Asia 35,973 99,159 32,564

South-East Asia 26,457 9,245 3,353

Central and South America 6,121 16,065 7,879

The Middle East 3,787 25,943 27,040

973,846 1,475,914 1,970,890

The maximum exposure to credit risk for trade receivables including trade receivables from related parties by type of customer was:

December 31,

2010 2009 2008

Industrial consumers 757,760 1,253,325 1,633,117

Wholesale customers 122,215 159,040 296,016

Retail customers 59,769 39,956 5,813

Other customers 34,102 23,593 35,944

973,846 1,475,914 1,970,890

The Group holds bank and other guarantees provided as collateral for financial assets. Amount of collateral held does not fully cover Group’s exposure to credit risk.

Impairment lossesThe aging of trade receivables including trade receivables from related parties was:

December 31,

2010 |||| 2009

|||| 2008

Gross Impairment Gross Impairment Gross Impairment

Not past due 887,212 (17,795) 1,178,117 (6,432) 1,302,128 (2,238)

Past due 0-30 days 55,913 (179) 143,154 (484) 376,301 (2,854)

Past due 31-90 days 18,566 (162) 55,568 (3,023) 247,305 (36,976)

Past due 91-180 days 12,410 (1,139) 89,670 (3,118) 84,930 (12,650)

Past due 181-365 days 25,479 (10,948) 30,394 (19,284) 11,310 (2,275)

More than one year 41,516 (37,027) 64,660 (53,308) 50,280 (44,371)

1,041,096 (67,250) 1,561,563 (85,649) 2,072,254 (101,364)

The impairment allowance at December 31, 2010 included the impairment allowance in respect of trade receivables from related parties for the total amount of US$ 3.4 million (December 31, 2009: US$ 2 million; December 31, 2008: US$ 10.8 million).

At December 31, 2010 trade receivables included accounts in the amount of US$ nil (December 31, 2009: US$ 4.5 million; December 31, 2008: US$ 170.2 million) whose terms of settlements were renegotiated during 2010 (2009 and 2008, respectively). Management of the Group believes that receivables will be repaid in full, thus no impairment loss is recognized.




The movement in allowance for impairment in respect of trade receivables including trade receivables from related parties during the years was as follows:


2010 2009 2008

Balance at 1 January (85,649) (101,364) (46,970)

Impairment loss recognized (64,920) (36,333) (72,802)

Impairment loss reversed 64,584 51,023 23,654

Reclassified to assets held for sale 16,288 – –

Foreign exchange difference 2,447 1,025 (5,246)

Balance at 31 December (67,250) (85,649) (101,364)

The allowance account in respect of trade receivables including trade receivables from related parties is used to record impairment losses unless the Group is satisfied that no recovery of the amount owing is possible; at that point the amount is considered irrecoverable and is written off against the financial asset directly.

The allowance for doubtful debts contains primarily individually impaired trade receivables from debtors placed under liquidation or companies which are in breach of contract terms.

At December 31, 2010 the Group recognized an impairment allowance in respect of deposit in the amount of US$ 134.0 million (December 31, 2009: nil; December 31, 2008: nil) (Note 6).

Concentration of credit risk2010The Group has a concentration of cash and short-term bank deposits with banks AB Russia, OAO Bank VTB, OAO Sberbank Russia and with a related party commercial bank that at December 31, 2010 represented US$ 267.8 million, US$ 393.5 million, US$ 300.0 million and US$ 168.2 million, respectively.

The Group has a concentration of available-for-sale financial assets with Detour Gold Corporation that at December 31, 2010 represented US$ 90.6 million.

2009The Group has a concentration of cash and short-term bank deposits with banks AB Russia, OAO Bank VTB and with a related party commercial bank that at December 31, 2009 represented US$ 363.0 million, US$ 454.7 million and US$ 306.9 million, respectively.

2008The Group has a concentration of cash and short-term bank deposits with bank AB Russia and with a related party commercial bank that at December 31, 2008 represented US$ 449.0 million and US$ 384.0 million, respectively.

Liquidity riskThe Group manages liquidity risk with the objective of ensuring that funds will be available at all times to honor all cash flow obligations as they become due by preparing an annual budgets, by continuously monitoring forecast and actual cash flows and matching the maturity profiles of financial assets and liabilities.



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The following are the contractual maturities of financial liabilities, including estimated interest payments and excluding the impact of netting agreements:

December 31, 2010 Carrying Contractual less than More than amount cash flows 1 year 1-2 years 2-5 years 5 years

Non-derivative financial liabilitiesDebt finance 6,142,034 (7,716,557) (1,784,457) (1,126,555) (2,619,640) (2,185,905)

Lease liabilities 10,859 (10,860) (7,966) (842) (952) (1,100)

Trade and other payables 1,025,190 (1,029,186) (1,002,788) (5,250) (17,646) (3,502)

Derivative financial liabilities 22,286 (28,445) (9,377) (4,642) (14,426) –

7,200,369 (8,785,048) (2,804,588) (1,137,289) (2,652,664) (2,190,507)


Non-derivative financial liabilitiesDebt finance 7,226,860 (8,886,216) (1,862,856) (1,567,264) (5,291,367) (164,729)

Lease liabilities 51,107 (58,882) (13,375) (17,474) (19,142) (8,891)

Trade and other payables 1,454,830 (1,454,830) (1,435,411) (18,635) (741) (43)


8,781,753 (10,470,954) (3,349,129) (1,616,666) (5,331,496) (173,663)


Non-derivative financial liabilitiesDebt finance 8,265,918 (10,019,689) (2,339,252) (1,426,007) (5,319,950) (934,480)

Lease liabilities 76,454 (91,330) (26,394) (14,688) (46,364) (3,884)

Trade and other payables 1,813,473 (1,813,473) (1,771,444) (5,156) (34,999) (1,874)


10,186,138 (11,964,797) (4,156,874) (1,456,291) (5,411,394) (940,238)

2010At December 31, 2010, the Group has a concentration of bank financing with Deutsche Bank AG and European Bank for Reconstruction and Development of US$ 880.0 million and US$ 618.4 million, respectively.

2009At December 31, 2009, the Group has a concentration of bank financing with Deutsche Bank AG and European Bank for Reconstruction and Development of US$ 1,201.2 million and US$ 803.8 million, respectively.

2008At December 31, 2008, the Group has a concentration of bank financing with Deutsche Bank AG and European Bank for Reconstruction and Development of US$ 1,201.5 million and US$ 848.5 million, respectively.




Currency riskCurrency risk arises when a Group entity enters into transactions and balances not denominated in its functional currency. The Group has assets and liabilities denominated in several foreign currencies. Foreign currency risk arises when the actual or forecasted assets in a foreign currency are either greater or less than the liabilities in that currency.

The Group’s exposure to foreign currency risk was as follows based on notional amounts:

December 31, 2010

Euro USD GBP RUR CHF CAD KZT NOK Other

Available-for-sale financial assets – 15,582 6,920 – – – – – –Held-to-maturity securities and deposits – – – – – 690 – – –Loans and receivables 1,332,624 1,527,205 18,736 33,520 – 67,322 54,501 – 310Cash and cash equivalents 210,260 944,596 596 22 3,311 – – – 2,686Restricted cash 14,082 29,337 – – – – – – –Debt finance (853,446) (3,680,171) (3,435) (660) – (120,504) – (83,169) (383)Finance lease liabilities (236) (662) – – – – – – –Trade and other payables (192,984) (94,896) (175) (981) (52) (10) – – –Derivative financial liabilities – (14,039) – – – – – – –

Net exposure 510,300 (1,273,048) 22,642 31,901 3,259 (52,502) 54,501 (83,169) 2,613

December 31, 2009

Euro USD GBP RUR CHF CAD KZT Other

Available-for-sale financial assets 22 – – – – – – –

Held-to-maturity securities and deposits 57,898 9,356 – – – – – –

Loans and receivables 274,262 1,380,710 1,926 67,122 2,858 65,516 59,010 4,238

Cash and cash equivalents 325,831 519,778 1,170 – 4,083 – – 259

Debt finance (1,036,645) (3,923,995) – (18,304) – (101,002) – –

Finance lease liabilities (774) (2,185) – – – – – –

Trade and other payables (214,471) (88,978) (562) (24,876) (140) (319) – (326)

Derivative financial liabilities – (39,949) – – – – – –

Net exposure (593,877) (2,145,263) 2,534 23,942 6,801 (35,805) 59,010 4,171

December 31, 2008

Euro USD GBP RUR CHF CAD KZT Other

Available-for-sale financial assets – 3,994 350 – – 284 – –

Held-to-maturity securities and deposits 275,898 259,678 – – – – 147 –

Loans and receivables 211,390 1,384,027 7,005 39,264 – 86,214 59,232 7,857

Cash and cash equivalents 367,549 713,667 353 – 16,795 895 373 702

Debt finance (1,275,253) (4,057,559) – (8,973) – (98,177) – (19)

Finance lease liabilities (1,870) (5,888) – – – – – –

Trade and other payables (60,736) (79,509) (260) – (10) (13,519) (469) (218)

Derivative financial liabilities – (11,490) – – – – – –

Net exposure (483,022) (1,793,080) 7,448 30,291 16,785 (24,303) 59,283 8,322



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Sensitivity analysisA 10 percent strengthening of the following currencies against the functional currency at December 31, 2010 would have increased/(decreased) profit and equity by the amounts shown below.

This analysis assumes that all other variables, in particular interest rates, remain constant and no translation difference into the presentation currency is included. The analysis is performed on the same basis for 2009 and 2008.


2010 2009 2008

Net profitEuro 40,241 (47,509) (36,708)

USD (98,234) (170,415) (133,147)

GBP 1,684 203 566

CHF 294 544 1,276

CAD (3,923) (3,625) (1,320)

RUR 2,690 2,890 2,566

KZT 4,103 3,629 3,294

NOK (5,988) – –

Other 209 385 702

A 10 percent weakening of these currencies against the functional currency at December 31, 2010 would have had the equal but opposite effect to the amounts shown above, on the basis that all other variables remain constant.

Interest rate riskInterest rates on the Group’s debt finance are either fixed or variable, at a fixed spread over LIBOR or Euribor for the duration of each contract. Changes in interest rates impact primarily loans and borrowings by changing either their fair value (fixed rate debt) or their future cash flows (variable rate debt). Management does not have a formal policy of determining how much of the Group’s exposure should be to fixed or variable rates. However, at the time of raising new loans or borrowings management uses its judgment to decide whether it believes that a fixed or variable rate would be more favorable to the Group over the expected period until maturity.

The Group’s interest-bearing financial instruments at variable rates were:

December 31,

2010 2009 2008

Variable rate instrumentsFinancial assets 31,386 539,818 414,398

Financial liabilities (2,279,275) (4,280,828) (4,915,822)

(2,247,889) (3,741,010) (4,501,424)

Other Group’s interest-bearing financial assets and liabilities are at fixed rate.




Fair value sensitivity analysis for fixed rate instrumentsThe Group does not account for any fixed rate financial assets and liabilities at fair value through profit or loss. Therefore a change in interest rates would not affect profit or loss.

Cash flow sensitivity analysis for variable rate instrumentsA change of 100 basis points in interest rates would have increased/(decreased) profit and equity by the amounts shown below. This analysis assumes that all other variables, in particular foreign currency rates, remain constant. The analysis is performed on the same basis for 2009 and 2008.

Net profit

100 bp increase 100 bp decrease

December 31, 2010Financial assets 251 (251)Financial liabilities (18,234) 18,234

Cash flow sensitivity (net) (17,983) 17,983

December 31, 2009 Financial assets 4,319 (4,319)

Financial liabilities (34,249) 34,249


December 31, 2008Financial assets 3,149 (3,149)

Financial liabilities (37,360) 37,360


Fair value hierarchyThe table below analyses financial instruments carried at fair value, except financial instruments measured at amortized cost, by valuation method. The levels in the fair value hierarchy into which the fair value measurements are categorized were disclosed in accordance with IFRS.

Level 1 Level 2 Level 3 Total

Balance at 31 December 2010 120,863 (4,051) 34,729 151,541

Available-for-sale financial securities 120,748 – 34,729 155,477

Held-for-trading securities 115 18,235 – 18,350

Derivative financial liabilities – (22,286) – (22,286)

Balance at 31 December 2009 69,309 (15,012) 11,597 65,894

Available-for-sale financial securities 69,309 8,439 11,597 89,345

Held-for-trading securities – 25,505 – 25,505


Balance at 31 December 2008 69,943 14,845 12,602 97,390

Available-for-sale financial securities 25,454 17,156 12,602 55,212

Held-for-trading securities 44,489 27,982 – 72,471




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The following table shows a reconciliation from the beginning balances to the ending balances for fair value measurement in Level 3 of the fair value hierarchy:

Available-for- Held-for- Derivative sale financial trading financial securities securities liabilities

Balance at 31 December 2010 34,729 – –Losses recognized in income statement (580) – –

Purchases of financial instruments 23,712 – –

Balance at 31 December 2009 11,597 – –


Sales of financial instruments (4,277) – –

Other movements (3,295) – –

Balance at 31 December 2008 12,602 – –


Sales of financial instruments (821) – –

Transfers out of Level 3 – (56,270) –

Other movements (1,256) – –

Balance at 31 December 2007 8,443 56,270 –

32. Commitments and contingenciesa. For litigation, tax and other liabilitiesThe taxation system and regulatory environment of the Russian Federation, Kazakhstan, Burkina Faso and Guinea are relatively new and characterized by numerous taxes and frequently changing legislation, which is often unclear, contradictory and subject to varying interpretations between the differing regulatory authorities and jurisdictions, who are empowered to impose significant fines, penalties and interest charges. Events during recent years suggest that the regulatory authorities within these countries are adopting a more assertive stance regarding the interpretation and enforcement of legislation. This situation creates substantial tax and regulatory risks. Management believes that it has complied in all material respects with all relevant legislation.

At the reporting date, the Russian, Kazakhstan, Burkina Faso and Guinea tax authorities had made contingent claims for taxes, fines and penalties in the amount of approximately US$ 137.4 million (December 31, 2009: US$ 6.3 million, December 31, 2008: US$ 4 million) to certain of the Group’s entities. Management does not agree with the tax authorities’ claims and believes that the Group has complied with existing legislation in all material respects. Management is unable to assess the ultimate outcome of the claims and the outflow of financial sources to settle such claims, if any. Management believes that it has made adequate provisions for other probable tax claims.

b. Long term purchase and sales contractsIn the normal course of business group companies enter into long term purchase contracts for raw materials, and long term sales contracts. These contracts allow for periodic adjustments in prices dependent on prevailing market conditions.

c. Capital commitmentsAt the reporting date the Group had contractual capital commitments of US$ 1,546.6 million (December 31, 2009: US$ 1,142.0 million; December 31, 2008: US$ 1,275.3 million).

d. InsuranceThe Group has insured its property and equipment to compensate for expenses arising from accidents. In addition, the Group has insurance for business interruption on a basis of reimbursement of certain fixed costs. The Group has also insured third party liability in respect of property or environmental damage. However, the Group does not have full insurance coverage.



OAO Severstal and SubsidiariesNotes to the consolidated financial statementsfor the years ended December 31, 2010, 2009 and 2008 (continued)(Amounts expressed in thousands of US dollars, except as otherwise stated)

e. GuaranteesAt the reporting date the Group had US$ 38.2 million (December 31, 2009: US$ 43.5 million; December 31, 2008: US$ 42.3 million) of guarantees issued, including guarantees issued for related parties in amount of US$ 10.0 million (December 31, 2009: US$ 26.8 million; December 31, 2008: US$ 18.5 million).

33. Subsequent eventsIn January 2011, the Group acquired an additional 6.6% stake in Crew Gold Corporation for a total consideration of US$ 32.9 million, increasing its ownership interest up to 100%.

In February 2011, the Group signed an amendment to Lucchini’s share purchase agreement with Majority Shareholder which cancelled the buy-back call option and the entitlement, for the benefit of the Group, to any gain on a subsequent sale of this stake to a third party.


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Shareholder information and financial calendarIn Russia, Severstal shares are traded on the RTS and on MICEX stock exchanges. Overseas, they are circulated in the form of depositary receipts, on the London Stock Exchange and through the PORTAL trading system in the US.

Severstal shares/GDRs at stock exchanges

Stock Exchange Ticker

MICEX, Moscow CHMF

RTS, Moscow CHMF

LSE, London SVST

According to the consensus of sector analysts, Severstal shares (GDRs) remained solid potential for growth at the beginning of 2011. Severstal’s GDR price reached $16.85 at the end of 2010, 67% higher than at the beginning of 2010. Market capitalisation grew to US$17.0 billion at 31 December 2010. Severstal shares and GDR turnover increased significantly in 2010: GDR turnover grew more than 170% in US$ at LSE, and Severstal shares turnover increased by more than 169% in RUB at MICEX and approximately 250% in US$ at RTS.

Severstal’s stocks make part of major indices at the stock exchanges where the company is listed. For instance, Severstal is a solid part of MSCI Russia and FTSE Russia IOB at LSE and a sizeable contributor to the MICEX and RTS indices in Russia.

Severstal share/GDR performance in 2009-2010 London Stock Exchange 2010 2009

Maximum (closing price), US$ 17.07 9.50

Minimum (closing price), US$ 9.35 2.21

At year beginning 10.12 2.99

At year end 16.85 9.50

Change,% 67% 218%

Number of trades 184,970 150,160

Turnover, US$ mln 6,373 2,360

GDR price at LSE in 2010

4 Jan 15 Feb 29 Mar 13 May 25 Jun 6 Aug 20 Sept 1 Nov 13 Dec

0

2

4

6

8

10

12

14

16

18 USD

Severstal contribution to key indices Index Weight*

RTS 1.53%

MICEX 3.11%

MSCI Russia 1.36%

FTSE Russia IOB 1.71%

* At the end of 2010 Source: Bloomberg, 2011.

Share price at MICEX in 2010

11 Jan 24 Feb 7 Apr 21 May 5 Jul 16 Aug 27 Sept 10 Nov 21 Dec

0

100

200

300

400

500

600 RUB

MICEX 2010 2009

Maximum (closing price), Roubles 519.21 259.76

Minimum (closing price), Roubles 294.85 73.85


At year end 518.19 253.25

Change,% 71% 189%

Number of trades 3,146,148 1,609,041

Turnover, million Roubles 202,730 75,497

Share Price at RTS in 2010

11 Jan 9 Feb 17 Mar 14 Apr 17 May 5 Jul 8 Sep 21 Oct 6 Dec

0

2

4

6

8

10

12

14

16

18 USD

RTS 2010 2009

Maximum (closing price), US$ 17.10 8.80

Minimum (closing price), US$ 9.65 2.40


At year end 17.10 8.44

Change,% 71% 231%

Number of trades 614 222

Turnover, US$ million 21 6


Credit ratings Severstal has a clear corporate credit profile and aims to make its position transparent to the market. Significant book oversubscription and interest levels, that were at a historic low for the recent public debt issuances, resulted in a high acceptance and demonstrated confidence from investors. Our credit ratings issued by international rating agencies reflect the ongoing improvements. The company maintains mandated credit ratings by Moody’s and S&P. The specific role of rating agencies creates a time lag between an improved profile and any positive impact on the rating. Nevertheless 2010 brought a moderate improvement from post-crisis downgrades in year 2009: in October 2010, S&P revised the outlook to Stable. On the back of the resolution of outstanding issues and a generally better business environment for Severstal’s market activities, we expect further improvements in the next 12 months. The company has developed sound relations with the agencies, achieved a good understanding and is well on track to strengthen its ratings in the future.

OAO Severstal Moody’s Standard&Poor’s

Credit Rating (Long Term, Foreign Currency) Ba3 / Negative BB- / Stable

Latest Rating action 27 May 2009 17 February 2011

Dividends The company’s dividend policy is stated at the corporate website and is available at: http://www.severstal.com/eng/ir/shareholder_services/dividends/

In 2010, following the decision of the Severstal EGM held on December 20, 2010, OAO Severstal paid out a dividend of 4.29 roubles (which is approximately $0.14) per share for the 9 months of 2010. This represents a pay-out ratio of 25% of net profits for the second and third quarters of 2010.

On March 1, 2011 the Board of Directors also recommended a dividend of 2.42 roubles (approximately $0.08) per share for the year ended 31 December 2010. This represents approximately 25% of Q4 2010 net profit of continued operations. Approval of the dividend is expected at the Company’s AGM which will take place on 27 June 2011. The record date is 22 May 2011.

2011 Financial Calendar

Date* Event

10 February 2011 Full year 2010 Operational results

3 March 2011 Full year 2010 IFRS financial statements

28 April 2011 Q1 2011 Operational results

17 May 2011 Q1 2011 IFRS financial statements

27 June 2011 Shareholders’ Annual General Meeting

July 2011 H1 & Q2 2011 Operational results

August 2011 H1 2011 IFRS financial statements

October 2011 9M & Q3 2011 Operational results

Q4 2011 Severstal North America analysts site visit

6 – 7 November 2011 5-year Anniversary of listing at London Stock Exchange. Investor meetings in London

December 2011 Q3 2011 IFRS financial statements

*Starting from May 2011 the dates are preliminary and may be subject to change.

Shareholder information and financial calendar

ContactsOAO SeverstalLegal address: 30 Mira St. CherepovetsVologda Region, 162608, RussiaPostal address: 2/3 K. Tsetkin StreetMoscow, 127299, RussiaTel: +7 (495) 926 7766Fax: +7 (495) 926 7761www.severstal.com

Corporate SecretaryOleg TsvetkovTel: +7 (8202) 53 0900Fax: +7 (8202) 53 2159E-mail: [email protected]

Public RelationsElena KovalevaTel/Fax: +7 (495) 926 77 66E-mail: [email protected]

Investor RelationsVladimir ZaluzhskyTel/Fax: +7 (495) 926 77 66E-mail: [email protected]

Human Resources – SeverstalTatiana OvchinnikovaTel: +7 (495) 926 77 61E-mail: [email protected]

Human Resources – NordgoldAishat ChekunovaTel: +7 (495) 981 0910Fax: +7 (495) 981 0918E-mail: [email protected]

Corporate Social ResponsibilityNatalia PoppelTel/Fax: +7 (495) 926 77 66E-mail: [email protected]

AuditorZAO KPMG10, Krasnopresnenskaya Naberezhnaya,Block C, floor 31, Moscow, 123317, RussiaTel: +7 (495) 937 4477Fax: +7 (495) 937 4499

RegistrarZAO PartnyorAddress: 22, Pobedy Ave., Cherepovets162606, Vologda Region, RussiaTel: +7 (8202) 53 6021Fax: +7 (8202) 55 3335Licence no.: 10-000-1-00287Date of issue: 04.04.2003 r.Expiry date: no expiry dateIssued by: FSFM of Russia

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