Bloomberg News

Severstal May Invest $2 Billion a Year in Steel, Coal, Ore

September 29, 2011

(Updates with CEO comments from second paragraph.)

Sept. 29 (Bloomberg) -- OAO Severstal, Russia’s second- biggest steelmaker, will invest about $1.5 billion to $2 billion a year to raise output and mine more raw materials, feeding its own plants while expanding sales at home and abroad.

“Mining is an essential part of our company, a very strong generator of revenues and earnings,” Chief Executive Officer Alexey Mordashov said today in an interview in London. “The contribution of mining will be bigger in the future.”

Severstal is seeking to almost triple iron-ore output from last year to 38.2 million metric tons by 2020 as it starts mining in Latin America and Africa, the company said today in a presentation. Coking-coal volumes will rise to 17.9 million tons from 7.3 million tons, helping Severstal increase steel output by a third to 19.6 million tons, it said.

The company has snapped up iron ore deposits in Brazil and West Africa as it seeks to counter rising raw-material costs. After selling three unprofitable steel mills in the U.S. in March and separating its Italian Lucchini SpA unit last year, Severstal has followed competitors in tapping emerging markets, where demand growth has outpaced expansion elsewhere.

“Our strategy is about upstream integration into raw materials and presence on the markets with good opportunities to grow,” Mordashov said.

India Venture

The company agreed in December to form a joint venture with NMDC Ltd. in India, where ArcelorMittal and South Korea’s Posco have already unveiled plans for steel projects. Severstal and NMDC have agreed to invest 150 billion rupees ($3.1 billion) to build a steel plant in the southern state of Karnataka, NMDC Chairman Rana Som said yesterday in New Delhi.

India’s per-capita steel consumption, lower than in Brazil, Russia and China, is projected to grow as the population expands by a forecast 25 percent by 2025, Severstal said in today’s presentation.

“Asia is very, very attractive,” Mordashov said. Countries like Indonesia, Vietnam could be interesting for us just because of the fundamentals. Latin America as well could give us good opportunities.”

In May, Cherepovets-based Severstal agreed to buy 25 percent of SPG Mineracao, which owns iron-ore exploration licenses in northern Brazil, and has an option to buy a further 50 percent. It also controls an iron-ore project in Liberia. The company has scaled back in markets such as the U.S., where it sold plants to Renco Group Inc. in March.

Follow the Trend

“It’s good to be in mature markets as long as you can have a sound business model, like we have in the U.S. now after the reshuffle of our portfolio,” Mordashov said, adding that “because of very clear fundamentals, we believe we should follow the trend of the market and be more focused on Asia.”

In 2015 or 2016, Severstal aims to be among the world’s top 5 steelmakers by earnings before interest, tax, depreciation and amortization, the CEO said. “We would like to be a big company but in terms of profits, in terms of money-making. We would like to be as big as we can in Ebitda generation.”

Severstal also mines gold in Guinea and Burkina Faso and studied a uranium acquisition last year, before talks with Berkeley Resources Ltd. failed to reach an agreement. The company said today it will spin off its Nord Gold unit, which postponed a proposed initial public offering in London in February, citing an unfavorable market.

Good Decision

“It’s good Severstal decided to focus on steel-related mining as investors haven’t understood its attempts to bid for uranium and nickel deposits, which is quite extravagant for a steelmaker,” Dmitry Smolin, an analyst at UralSib Capital in Moscow, said by telephone. “It would be good for the company to spin off its Nord Gold unit as well, as gold trades at different multiples to steel.”

Severstal’s largest investment in the next decade will be in mining. It plans to spend as much as $3.5 billion at the Putu Range in Liberia, and as much as $2 billion at the Amapa iron ore project in Brazil, according to today’s presentation. The company is considering feeding its U.S. steel mills with iron ore from Brazil and Canada, Mordashov said.

Severstal is seeking to double output at its U.S. PBS Coals unit by 2015 and spend as much as $2.8 billion to develop the Tyva coking-coal deposit in East Siberia by 2020.

--Editors: Amanda Jordan, Stephen Cunningham

To contact the reporter on this story: Ilya Khrennikov in London, via the Moscow newsroom at ikhrennikov@bloomberg.net

To contact the editor responsible for this story: John Viljoen at jviljoen@bloomberg.net


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