Wermuth Asset Management Investor Trip 20 October 2010 Giacomo Baizini, CFO
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Wermuth Asset Management Investor Trip20 October 2010
Giacomo Baizini, CFO
02
This document does not constitute or form part of and should not be construed as, an offer to sell or issue or the solicitation of an offer to buy or acquire securities of Evraz Group S.A. (Evraz) or any of its subsidiaries in any jurisdiction or an inducement to enter into investment activity. No part of this document, nor the fact of its distribution, should form the basis of, or be relied on in connection with, any contract or commitment or investment decision whatsoever. No representation, warranty or undertaking, express or implied, is made as to, and no reliance should be placed on, the fairness, accuracy, completeness or correctness of the information or the opinions contained herein. None of Evraz or any of its affiliates, advisors or representatives shall have any liability whatsoever (in negligence or otherwise) for any loss howsoever arising from any use of this document or its contents or otherwise arising in connection with the document.This communication is only being distributed to and is only directed at (i) persons who are outside the United Kingdom or (ii) investment professionals falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the “Order”) or (iii) high net worth companies, and other persons to whom it may lawfully be communicated, falling within Article 49(2)(a) to (d) of the Order (all such persons together being referred to as “relevant persons”). Any person who is not a relevant person should not act or rely on this document or any of its contents. This document contains “forward-looking statements”, which include all statements other than statements of historical facts, including, without limitation, any statements preceded by, followed by or that include the words “targets”, “believes”, “expects”, “aims”, “intends”, “will”, “may”, “anticipates”, “would”, “could” or similar expressions or the negative thereof. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors beyond Evraz’s control that could cause the actual results, performance or achievements of Evraz to be materially different from future results, performance or achievements expressed or implied by such forward-looking, including, among others, the achievement of anticipated levels of profitability, growth, cost and synergy of recent acquisitions, the impact of competitive pricing, the ability to obtain necessary regulatory approvals and licenses, the impact of developments in the Russian economic, political and legal environment, volatility in stock markets or in the price of our shares or GDRs, financial risk management and the impact of general business and global economic conditions.Such forward-looking statements are based on numerous assumptions regarding Evraz’s present and future business strategies and the environment in which Evraz Group S.A. will operate in the future. By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. These forward-looking statements speak only as at the date as of which they are made, and Evraz expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statements contained herein to reflect any change in Evraz’s expectations with regard thereto or any change in events, conditions or circumstances on which any such statements are based.Neither Evraz, nor any of its agents, employees or advisors intends or has any duty or obligation to supplement, amend, update or revise any of the forward-looking statements contained in this document.
The information contained in this document is provided as at the date of this document and is subject to change without notice.
Disclaimer
03Evraz Group in Brief
◦ World-class steel and mining company, 14-th largest steel company globally in 2009
◦ Leader in the Russian and CIS construction and railway products markets
◦ A lead player in the European and North American plate and large diameter pipe markets
◦ One of the world’s lowest cost steel producers due to production efficiency and high level of vertical integration
◦ One of the leading producers in the global vanadium market
◦ In 2009, Evraz produced 15.3 million tonnes of crude steel and sold 14.3 million tonnes of rolled products
◦ 2009 consolidated revenue amounted to US$9.8 billion; EBITDA was US$1.2 billion
◦ GDRs are listed on London Stock Exchange; market capitalisation of approx. US$13.4 billion
04Evraz’s Global Business
05
Consolidated Revenue and EBITDAUS$ mln
4,369619
1,121 6,379
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
1H09 Revenue Volumes Prices 1H10 Revenue
Revenue Drivers in 1H10 vs. 1H09US$ mln
Consolidated Adjusted EBITDA
389738
94
390
81
(34)
70
85
(51) (140)-200
0
200
400
600
800
1,000
1,200
1,400
1H09 1H10Steel MiningVanadium Other operationsUnallocated subsidiaries & eliminations
468
1,154
1H 2010 Financial Highlights
US$ mln
◦ In 1H10 Group revenue rose by 38% vs. 1H09, largely driven by increase in sales volumes of steel products and higher average prices
◦ 1H10 Group EBITDA advanced by 147% reflecting revenue expansion and cost control
◦ 1H10 Mining segment EBITDA more than quadrupled, largely due to the growth in iron ore and coal prices
◦ EBITDA margin improved from 10% in 1H09 to 18% in 1H10
10,723 9,657
4,6396,379
5,1333,706
2,509
468 769 1,154
0
2,000
4,000
6,000
8,000
10,000
1H08 2H08 1H09 2H09 1H10
Revenue EBITDA
06Steel: Product Mix Improvement
Steel Sales Volumes by ProductSteel Sales Volumes by ProductSteel Product Sales Volumes by OperationsSteel Product Sales Volumes by Operations
◦ Recovery in demand for construction and railway products in Russian market raised the proportion of finished products in the portfolio
◦ Share of construction products increased from 25% to 32%
◦ Share of semi-finished products fell from 40% to 29%
◦ Share of Group’s sales volumes in the Russian market increased from 29% to 33% following recovery in domestic demand
◦ Domestic sales of Russian and Ukrainian operations advanced from 44% to 53%
’000 tonnes ’000 tonnes
1,834
821 887
391 268186
2,704
2,2622,470
9741,304
436
0
500
1,000
1,500
2,000
2,500
3,000
Semi-finished
Construction Railway Flat-rolled Tubular Other steel
1H09 1H10
5,187
944413
5,532
1,276
603303279
0
1,000
2,000
3,000
4,000
5,000
6,000
Russian &Ukrainian
North American European South African
1H09 1H10
domestic
export
53%44%
47%56%
200
300
400
500
600
700
800
900
Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10
Slabs, Russia, export* Billets, Russia, export*Rebars, Russia, FCA Plate, North America, FCA
07Recent Market Developments
◦ Overall growing trend in steel prices is driven by demand recovery and increases in input costs
◦ International prices for semi-finished steel declined in May-June due to seasonal and regulatory factors but stabilised in July
◦ Russian domestic demand for construction steel is expected to be approx. 10% higher in 2010 than in 2009
◦ Anticipated steelmaking capacity utilisation in 4Q10:
◦ Russia – to remain >95%
◦ North America – >95%
◦ Czech Republic – temporarily closed since July
◦ South Africa – >95%
◦ Russian mining assets are running at 75% capacity in coal and 90% in iron ore
◦ Vanadium expected to perform better than steel asvanadium usage rates in the emerging markets’ steel production sector approach the levels of industrially developed countries
Evraz Selling PricesUS$/t
Vanadium Prices, FeV, LMBUS$/kg V
15
2025
3035
40
Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10
* Weighted average contract prices
8
Consumption of construction steel in Russia
Recovery of construction steel product consumption began in 2010
Increase of shaped sections demand vs. rebar might be greater in the next years due to infrastructureprojects development
Sources: Rosstat, Railway statistics, Customer service statistics, Metal Courier, Rusmet
5,8 6,2
4,1 4,5 4,9 5,5 5,8 6,1
1,4 1,1
0,70,8
0,91,1
1,31,3
1,6 1,3
0,91,0
1,1
1,31,6
1,6
1,00,8
0,50,6
0,8
0,91,0
1,1
0
2
4
6
8
10
12
2007 2008 2009 2010B 2011F 2012F 2013F 2014F
mln.t.
20
30
40
50
60
70
80
90
100mlm sq.m.
Rebar Channels Angles Beams Buildings completion, mln.m2
08
09Growth Strategy
Product mix improvements
Cost-saving measures
Increase in production volumes
◦ Implementation of pulverised coal injection projects at the Russian steel mills to eliminate usage of natural gas in blast furnaces and reduce consumption of coking coal. Added effect will be an increase in pig iron production volumes and, therefore, crude steel production
◦ Cost saving programmes in place, yielding US$20-30m efficiency gains a year at each plant
◦ Reconstruction of 4th converter and 3rd slab machine at NTMK should increase crude steel output by up to 0.5 mtpa
◦ Considering construction of a second converter shop at NTMK with additional crude steel capacity of 1.5-2.0 mtpa
◦ Modernisation of rail mills enabling the production of high value-added products◦ Upgrade of wheel shops◦ Shift to production of American Petroleum Institute certified slabs and other enhanced quality higher
margin steel products◦ Product mix expansion geared to local market demand (new rebar grades, beams, pipe blanks, sheet) ◦ Exploring opportunities for development of construction steel rolling capacities in regions with high
demand
Raw material base development◦ Development of a coal deposit in Yerunakovsky region of Kuzbass◦ Expansion of resource base and development of the Mezhegey coal deposit◦ Increase of own iron ore production and supplementary exploration at existing sites
10Key Investment Projects◦ CAPEX in 2010 expected to be around US$950m vs. US$441m in 2009◦ Approximately US$550m of 2010 CAPEX to be directed to increasing productivity
and development projects, key projects being:
Project Total CAPEX Cum CAPEX by 31.12.09
2010 CAPEX Project Targets
Reconstruction of rail mill at NKMK
US$440m
US$55m
US$320m
US$260m
US$60m
US$100m
TBD
US$220m ◦ Capacity of 950k tonnes of high-speed rails, including 450k tonnes of 100 metre rails
◦ On-stream by 2013
US$30m
US$28m
US$0m
US$230m
US$5m
US$87m
BOF workshopreconstruction NTMK
US$20m ◦ Modernisation of production◦ Increasing capacity from 3.8 to 4.2 mtpa◦ On-stream by 2010
Reconstruction of wheel & tyre mill (heat treatment shop) NTMK
US$13m ◦ Production of higher-quality wheels◦ On-stream by 2010
US$1m
Reconstruction of CCM Slab №3 NTMK
US$40m
Reconstruction of rail mill at NTMK
US$27m ◦ Production of higher-quality rails ◦ 550k tonnes capacity◦ On-stream by 2012
Pulverised coal injection (PCI) at NTMK and ZSMK
US$40m ◦ Lower coke consumption from 420 to 320 kg/tonne◦ No need for gas consumption◦ On-stream by 2013
◦ Modernisation of production◦ Further increase in steelmaking capacity from 4.2 to
4.5 mtpa◦ On-stream by 2010
Development of Mezhegey coal deposit
Less than US$90m, including license cost
◦ Maintaining self-sufficiency in high-quality hard coking coal after depletion of existing deposits
◦ On-stream by 2015
11Summary
◦ Focus on infrastructure markets and vertical integration into raw materials
◦ Gradual recovery in the key markets after the crisis
◦ Rapidly rising raw material prices provide support for steel prices and create cost pressure, especially for non-integrated steel producers
◦ Increase in the proportion of finished products in the mix reflecting demand improvement in key markets of Russia and North America
◦ Strategic focus on operational efficiency, modernisation of existing capacities, development of mining base and integration of international assets
◦ Improved demand and stronger pricing environment together with our cost leadership leave us well positioned to fully capitalise on the market recovery
Appendices
Steel Price Dynamics
13Source: Metal-Expert, Metal Courier, Rosstat, Evraz estimates
Price of construction steel achieved the level of 2007
There was a substantial increase of construction steel prices in 2Q 2010
Produsers prices on structerals (exw), rub./t without VAT
10 000
15 000
20 000
25 000
30 000
1Q.07 2Q.07 3Q.07 4Q.07 1Q.08 2Q.08 3Q.08 4Q.08 1Q.09 2Q.09 3Q.09 4Q.09 1Q.10 2Q.10 3Q.10
Rebar
Angles
Channels
Prices of construction steel (ExW), RUB/t excluding VAT
13
268
324
224
420394 341
253285
430402
150
200
250
300
350
400
450
1H08 2H08 1H09 2H09 1H10
Slab Billet
* Average for Russian steel mills, integrated cash cost of production, EXW
14Cost Dynamics
◦ Growth in scrap, coking coal and iron ore prices in 1H 2010 increased steelmakers’ costs
◦ This cost increase was significantly offset by Evraz’s high level of vertical integration into iron ore and coking coal
◦ Consolidated cost, approx. 65% of which is Rouble denominated, was negatively impacted by 10% Rouble appreciation vs. US dollar compared to 1H09
◦ Increase in cash cost of coking coal concentrate resulted from lower production volumes due to postponed longwall repositioning at the Ulyanovskayamine
Consolidated Cost of Revenue, 1H 2010 Cash Cost, Russian Coking Coal and Iron Ore Products
US$/t
Cash Cost*, Slabs & BilletsUS$/t
Source: Management accounts
50
61
47
56
43
55
69
43
63
47
35
45
55
65
75
1H08 2H08 1H09 2H09 1H10
Coal concentrate Iron ore products, 58% Fe
4%11%
6%
15%
13% 7%
10%
12%
5%
5%7%
5%
Iron ore Coking coal ScrapFerroalloys Purchased semis Auxilliary materialsElectricity Natural gas Staff costsTransportation Depreciation Other
5% 7%10% 11%
26% 25%
27% 22%
14% 16%
19%18%
1H09 1H10 Raw materials Transportation Staff costs Depreciation Energy Other
15Cost Structure by Segment
Cost Structure of Vanadium SegmentCost Structure of Vanadium Segment
Cost Structure of Steel SegmentCost Structure of Steel Segment
Cost Structure of Mining SegmentCost Structure of Mining Segment
13% 15%11% 11%7% 15%
58%
1%
69%
1H09 1H10
Transportation Staff costs Depreciation Energy Other
◦ Rapid rises in coking coal, iron ore and scrap prices caused an increase in the contribution of raw materials to steel segment costs
◦ Vertically integrated model largely protects steelmaking segment from escalation in raw material prices
◦ Exception is scrap prices, although portion of increase is managed through the scrap-based price formula for certain products
12% 17%8%
13%11%14%5%
6%10%
5%5%
6%10%8%12%
11%8%9%
11%19%
1H09 1H10
Iron ore Coking coal ScrapOther raw materials Semi-finished products TransportationStaff Depreciation EnergyOther
EBITDA to FCF Reconciliation 16
* Free cash flow comprises cash flows from operating activities less interest paid, covenant reset charges, cash flows from investing activities
US$ mln
(308)
(397)
744(101)
(258)1,103(51)1,154
12 51
0
400
800
1200
1600
AdjustedEBITDA
Non-cashitems
EBITDA(excl. non-cash items)
Changes inworkingcapital(excl.
income tax)
Income taxpaid
CF fromoperatingactivities
Interest andcovenant
resetpayments
Capex CF frominvestingactivities
(excl.capex)
Free cashflow*
8,482 7,923 7,873
46%
25% 22%
0
2,000
4,000
6,000
8,000
10,000
30-Jun-09 31-Dec-09 30-Jun-100%
20%
40%
60%
80%
100%
Total Debt Short-term Debt, % of Total Debt
Proportion of Short-term Debt to Total DebtProportion of Short-term Debt to Total Debt
◦ RUB15bn (equivalent to US$500 million) 3-year bonds issued in March 2010, swapped into US dollars to minimise Rouble currency exposure
◦ In May 2010, Evraz drew down US$950 million 5-year Gazprombank loan and repaid US$1,007million VEB loan
◦ In June-July 2010, Evraz refinanced US$357 million Nordea Bank loan due 4Q10 with new 4-year Nordea loan facilities in the amount US$404 million
◦ In the process of syndication of 5-year pre-export financing facility for up to US$1 billion
◦ In the process of 5-year RUB 15 billion (approx. US$500 million) bond issue
Capital Market Developments 17
US$ mln
1 085996
721
1 778
1 4191 543
15 11
509
0
400
800
1 200
1 600
2 000
2010 2011 2012 2013 2014 2015 2016 2017 2018Q1 Q2 Q3 Q4
◦ Total debt of approx. US$7.9bn, net debt of US$7.2bn as of 30 June 2010
◦ Consolidated cash balance of not less than US$500 million constantly maintained
◦ Liquidity (defined as cash and cash equivalents, amounts available under credit facilities and short-term bank deposits with original maturity of <3 months) totalled approx. US$1,598 million as of 30 June 2010
◦ Declining cost of capital (bond yields have decreased from approx. 10% in October 2009 to around 6%) reflects improvements in Evraz’s performance and market conditions and permits further refinancing of short-term debt
◦ We intend to further decrease our leverage and extend debt maturities
Balanced Debt Maturity Profile
Debt Maturities Schedule (as of 30 June 2010)Debt Maturities Schedule (as of 30 June 2010)
18
US$ mln
279
593 786
Syndicated loans Overdrafts Russian bilateral loans
(as at 30 June 2010) (as at 30 June 2010)
* Principal debt (excl. interest accrued)
US$ mln
Breakdown of Short-term Debt* Breakdown of Short-term Debt*
19Steel Products Sales by Market
’000 tonnes
1,950
311
577
948
2,799
238
2,4332,518
442
704
1,307
310
0
500
1,000
1,500
2,000
2,500
3,000
Russia CIS Europe Americas Asia Africa & RoW
1H09 1H10
117
589
342135
1,2081,433
173216
636525
1,210
1,046
174237
567448
1,229
814
0
200
400
600
800
1,000
1,200
1,400
1,600
Semi-finished products Construction products Railway products Flat-rolled products Tubular products Other steel products
3Q09 2Q10 3Q10
20
3Q 2010 Operational Results
Production of Rolled Products‘‘000 tonnes
◦ In 3Q10, consolidated crude steel output was 3.9 mt, -9% vs. 3Q09 and -10% vs. 2Q10, mainly due to scheduled repairs and modernisation at Russian production facilities
◦ Crude steel volumes to be recovered in 4Q as scheduled works are over
◦ Product mix improvement: increase in the finished products volumes◦ construction products: Russia: +3%, Ukraine: +21%◦ railway products: Russia: +34%, NA: +20%◦ flat-rolled products: Europe: +18%, NA: +79%◦ tubular products: NA: +103%.
◦ Volumes of semi-finished products decreased by 43% vs. 3Q09 and -22% vs. 2Q10, because of the temporary decline in crude steel output, increasing demand for higher margin products and increase in intercompany consumption of Russia-produced semis for re-rolling at non-Russian mills
-43% +2%
+31% -4%
+103% +29%
% - year-on-year comparison
50 62 48 49 43
98 10798 85 90
56 8 7 16
0
50
100
150
200
250
300
3Q09 4Q09 1Q10 2Q10 3Q10
Construction products Flat-rolled products Other steel products
33 33 36 49 29
226 246 205274
266
6 46
74
0
50100
150
200
250300
350
3Q09 4Q09 1Q10 2Q10 3Q10
Construction products Flat-rolled products Other steel products
108 92 104 94 93
79 71 90 94 94
186 195239 206
136
117 139
193 216237
0
100
200
300
400
500
600
700
3Q09 4Q09 1Q10 2Q10 3Q10
Construction products Railway products Flat-rolled products Tubular products
1,497 1,4551,106 1,282 1,107
936 868913
923 967
263 321360
430353
7571
907679 146
149128
125122
0
500
1,000
1,500
2,000
2,500
3,000
3,500
3Q09 4Q09 1Q10 2Q10 3Q10
Semi-finished Construction Railway Flat-rolled Other steel
21
3Q10 Production of Rolled Products by Assets
‘000 tonnes
2,896 2,845 2,596
Russia
2,8562,648 560
610
490 498
627
North America‘000 tonnes
‘000 tonnes‘000 tonnes
South AfricaEurope
330 299264 284
248
141 149157175
154
22Revenue by Geography of Customers
1H 2009 1H 2010
Africa & RoW3%
Russia28%
Ukraine2%
Other CIS3%
Americas30%
Europe9%
China5%
Middle East10%
Thailand3%
Other Asian7% Other Asian
11%
Thailand4%
Middle East4%
China3%
Europe9%
Americas24%
Other CIS4%
Ukraine4%
Russia34%
Africa & RoW3%
8,809 9,955 9,608
5,3014,998
3,655
2,1312,015
2,351
0
3,000
6,000
9,000
12,000
15,000
18,000
1H09 2H09 1H10
Iron ore products Raw coking coal Raw steam coal
652
1,120
94
390
0
200
400
600
800
1,000
1,200
1H09 1H10Revenue EBITDA
23Benefiting from Rising Prices for Iron Ore and Coal
Iron Ore and Raw Coal Production‘000 tonnes
◦ Volumes of coking coal mined decreased due the repositioning of longwall at Ulyanovskaya mine
◦ Mining segment revenue doubled and EBITDA quadrupled reflecting the growth in prices
◦ A decline in coking coal supplies, following the Raspadskaya mine explosion, led to lower external sales of coke and a negative EBITDA effect of approx. US$5 million per month
Raw Material Prices (Domestic Markets)Raw Material Prices (Domestic Markets)US$/t
Mining Segment Revenue* and EBITDA
* Includes intersegment sales
US$ mln
0
100
200
300
400
Jan-09
Mar-09
May-09
Jul-09
Sep-09
Nov-09
Jan-10
Mar-10
May-10
Jul-10
Sep-10
Scrap, Russia, CPT Scrap, USA
Iron ore concentrate, Russia, ExW Coking coal concentrate, Russia, FCA
9,011
10,397 10,580
8,8099,955 9,608
0
2,000
4,000
6,000
8,000
10,000
12,000
1H09 2H09 1H10
Consumption Production
24Mining: Vertical Integration
Washed Coking Coal (Concentrate) Self-Coverage*
◦ High level of vertical integration into iron ore sustained and continues to mitigate effect of rising raw material
prices
◦ Coking coal volumes decreased due to postponement of longwall repositioning at the Ulyanovskaya mine
◦ Third quarter volumes depressed due to temporary safety shutdowns and safety inspections
‘000 tonnes
3,679
4,504 4,3484,317
5,288
3,642
0
1,000
2,000
3,000
4,000
5,000
6,000
1H09 2H09 1H10
Consumption Production
84%117%
117%
73%**
* Self-coverage, %= total production (for coal, plus 40% of Raspadskaya production) divided by total steel segment consumption** Coking coal self-coverage excl. 40% Raspadskaya share
Iron Ore Self-Coverage*
‘000 tonnes
98% 96% 91%87%** 50%**
RASPRASP
RASP
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