Barry Ehrlich, CFA

Senior Analyst, Moscow (+7 495) 785-9568

Maxim Semenovykh
Analyst, Moscow (+7 495) 795-3725

Russian Steel
China Slowdown Outweighs Japan Reconstruction Opportunity
Japanese reconstruction efforts add 22mt, or 1.5%, to global steel demand in FY12, according to our preliminary estimate. This unanticipated volume expansion is dwarfed by slowing growth in China, where PMI and domestic steel prices are lead indicators, and both have fallen in recent months. We expect global steel demand to slow considerably in FY11. Therefore, despite considerable theoretical upside for steel producers on spot steel prices, we believe risk outweighs opportunity and move U/W the subsector, reducing our rating on MMK to E/W, on NLMK and SVST to U/W, and reiterating our U/W rating on EVR. Upside to peak cycle valuation: Investors who believe spot is the best indicator of future prices should be long the subsector. We introduce our peak-cycle valuation methodology, which identifies peak stock price potential under the assumption that current spot prices are sustainable. Evraz offers the most upside of 35%. Reconstruction generates 22mt incremental steel demand: We estimate reconstruction efforts in Japan add 22mt, or 1.5%, to global demand in 2012 relative to pre-earthquake forecasted growth. but we see prices falling on China PMI, domestic discount: China consumes almost 9x the steel that Japan does, so our view on a slowdown in China takes precedence. Chinas PMI has declined in the past two months, and there is a strong relationship between PMI and steel prices four months later. Furthermore, Chinas domestic steel price has moved to a discount to Black Sea, a rare development that typically signals declining global steel prices. Subsector to U/W: Slowing demand growth will likely cause steel prices to begin declining in 2Q11 as shortages in raw materials are relieved. We lower NLMK, SVST and MMK one notch each and leave EVR at U/W. Taking into account our February 22 downgrade of FXPO to E/W, we are now U/W Russian ferrous and steel. Valuation: We value steel on sum-of-the-parts, utilizing DCF for currently or soon-to-be operating assets, risked NPV for long-dated mining assets, and market value for non-controlling stakes. FY12 multiples unattractive: We view the subsector as unattractive on average FY12 EV/EBITDA and P/E of 5.9x and 10.5x, respectively. Risk to top-down forecast is high: We are aware that this top-down call 1) conflicts with valuations implied by spot prices; 2) carries greater forecast risk than usual due to macroeconomic uncertainties; and 3) may play out only after a rally to peak valuation levels.

Russian Equity Research

Metals & Mining

March 15, 2011

Summary

Bloomberg ticker Rating Closing Price* Target Price Return to TP Bloomberg ticker Rating Closing Price* Target Price Return to TP Bloomberg ticker Rating Closing Price* Target Price Return to TP Bloomberg ticker Rating Closing Price* Target Price Return to TP

EVR LI U/W 36.4 29.6 -19% MMK LI E/W 13.3 14.2 7% NLMK LI U/W 44.1 41.6 -6% SVST LI U/W 18.3 17.3 -5%

Investment Case

Relative price performance

1 50% 1 40% 1 30% 1 20% 1 0% 1 1 00% 90% 80% Oct-1 0 No v-1 0 EVR Dec-1 0 MMK Jan-1 1 NLM K Feb-1 1 M ar-1 1 SVST

Valuation & Risks

Source: Bloomberg

RESEARCH DEPARTMENT research@alfabank.ru

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

Equity Market

TABLE OF CONTENTS:
Investment Summary ......................................................................................................3 Valuation, Forecasts, Multiples ......................................................................................5 Upside on Peak Cycle .....................................................................................................8 Japan Reconstruction: +1.5% to Global Steel Demand .............................................10 Scrap use reduces raw material inputs.........................................................................10 Steel demand growth slows despite Japan...................................................................10 Lifting our steel price forecast on higher raw material prices ........................................11 China Slowdown Key Driver for Steel to Decline........................................................12 Economy and steel demand slowed in 2H10................................................................12 China steel demand declined in 2H10 ..........................................................................14 Tightening measures to continue..................................................................................15 Testing the PMI/global steel price relationship .............................................................18 Possible explanations for break in relationship.............................................................19 Chinese metals premiums shrinking often a leading indicator ...................................21 Stock Specific Issues and Risks ..................................................................................24 Financial Statements.....................................................................................................25

Russian Steel China Slowdown Outweighs Japan Reconstruction Opportunity

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Investment Summary
While we believe that steel volume growth will slow, causing steel prices to peak in 2011 and decline thereafter, we recognize that this is a minority view and that investors require valuation guidance for other commodity price scenarios.

Peak-cycle valuation indicates upside on steel spot

Peak cycle valuation indicates upside on spot metals prices We introduce our peak-cycle valuation methodology, which identifies peak stock price potential under the assumption that current spot prices are sustainable. The upside on peak cycle is considerable, with MMK, Evraz and Severstal poised to gain the most. We therefore believe that investors who believe strongly that current steel prices are sustainable or will rise further should be Overweight the subsector.

Japan reconstruction to add 22mt demand

We roughly estimate that reconstruction efforts will add 22mt to FY12 demand relative to pre-earthquake forecasts. This represents a not inconsiderable 1.5% increase in demand in FY12 relative to our earlier forecast. China steel consumption fell in 2H10

China demand 9x that of Japan, and demand is slowing

China represents 9x the steel demand of Japan, so developments in China will likely dwarf those of Japan. Many investors probably do not realize that Chinese steel consumption declined in 2H10 on a h/h and y/y basis, showing that policy-tightening measures have slowed steel demand.

Chinese PMI is weakening

China PMI has weakened. There is a strong correlation between Chinese PMI with a four-month lead and global steel prices. Steel prices have risen sharply over the past few months, contrary to what this relationship would suggest. We attribute this to supply-side shocks in iron ore and coking coal, as well as a restocking cycle. Our view is that steel prices are most likely to decline in coming quarters as this relationship is reestablished.

Construction to slow in China, remain weak elsewhere

Construction remains weak in key global economies Construction is likely to slow in China as tightening efforts take their desired effect. Other than Japan, there are few signs of construction demand growth in other major economic regions, in particular the US and Europe. Global steel demand growth is likely to slow to 5% in FY11 from 15% in FY12. This will relieve pressure on raw materials, allowing the cost of making steel and therefore steel prices to move down.

China domestic steel discount to Black Sea is often a lead indicator of declining prices

China steel discount to Black Sea is a negative indicator

Steel in China typically trades at a premium to Black Sea, but this relationship has now moved to a discount. During the steel price spike of April 2010, which preceded a substantial move down in steel prices, the same phenomenon occurred. We view the domestic discount as further evidence that demand in China has weakened and global steel prices are set to decline.

Russian Steel China Slowdown Outweighs Japan Reconstruction Opportunity

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Revised forecasts and target prices

We revise our one-year target prices, moving MMK modestly lower and EVR, NLMK and SVST modestly higher. We value steel on sum-of-the-parts, utilizing
DCF for currently or soon-to-be operating assets, risked NPV for long-dated mining assets, and market value for non-controlling listed holdings.

Our revised target prices indicate downside for most steel names. Figure 1: Target prices, upsides and recommendations
Price, $ New 12-month target price, $ Previous target price, December 2, $ New rating Previous rating Return to 12-month TP Source: Alfa Research, Bloomberg Evraz 36.4 29.6 28.8 U/W U/W -19% MMK 13.3 14.2 16.1 E/W O/W 7% NLMK 44.1 41.6 40.0 U/W E/W -6% Severstal 18.3 17.3 15.9 U/W E/W -5%

Risks heightened on top-down call

The Alfa metals & mining team strongly prefers stock calls that are bottom-up rather than top-down. Top-down calls entail greater-than-normal risks However, in this report, we highlight top-down factors for our Underweight position in Russian steel. We are aware of the substantial upside to peakcycle valuation as discussed above and the far higher forecast and recommendation risk associated with top-down-driven recommendations. However, we believe there is sufficient evidence to support our steel price and subsector Underweight based on top-down factors.

Russian Steel China Slowdown Outweighs Japan Reconstruction Opportunity

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Valuation, Forecasts, Multiples

Our commodity price forecasts are unchanged except for steel, which we lift to $730/t from $670/t in FY11 and $710 from $680/t in FY12. Earlier this year, in dedicated iron ore and coking coal studies, we lifted our iron ore and coking coal forecasts. The increase in our steel forecast in this report is mainly driven by the increase in earlier forecasted raw materials costs, which underpin higher steelmaking costs for non-backward integrated producers. Figure 2: Commodity forecasts, $ mln/ton
2010E Iron ore, FOB Austr. Iron ore Russian domestic Hard coking coal, FOB Austr. Coking coal Russian domestic blend HRC, FOB Black Sea Ruble/USD Source: Alfa Research New 100 90 195 140 606 30.4 Old 100 90 195 140 593 30.0 New 155 145 255 200 730 30.0 2011E Old 155 145 255 200 670 30.0 New 135 125 240 175 710 30.0 2012E Old 135 125 240 175 680 30.0

We adjust our company forecasts as follows. Figure 3: Changes to company forecast, $ mln
2010E New Evraz Domestic steel finished, mln t International steel finished, mln t Revenues, $ mln EBITDA, $ mln Net income, $ mln match MMK Finished steel, mln t International steel finished, mln t Revenues, $ mln EBITDA, $ mln Net income, $ mln match NLMK Finished steel, mln t Revenues, $ mln EBITDA, $ mln Net income, $ mln match Severstal Domestic steel finished, mln t International steel finished, mln t Revenues, $ mln EBITDA, $ mln Net income, $ mln 11.7 4.1 14,023 2,371 137 Old 11.7 4.1 14,023 2,371 168 2011E New Old 12.5 4.2 17,515 3,694 1,311 12.5 4.2 17,051 3,287 1,062 2012E New Old 12.4 4.4 17,323 3,354 1,284 Sep'09 12.6 2.1 12,460 2,578 1,143 Sep'09 16.0 12,946 3,882 2,366 Sep'09 10.8 4.7 18,260 4,070 2,031 12.4 4.4 17,600 3,516 1,454 Sep'09 12.6 2.3 12,042 2,783 1,344 Sep'09 15.5 12,483 3,998 2,452 Sep'09 10.8 7.2 25,008 3,958 1,951

10.2 0.2 8,099 1,672 579

10.2 1.5 8,099 1,672 579

11.7 0.8 10,772 2,272 932

11.7 2.3 10,889 2,357 1,019

11.6 8,150 2,381 1,317

11.5 8,150 2,381 1,317

13.0 11,003 3,435 2,091

13.2 10,574 3,249 1,953

9.8 3.7 13,573 3,365 -576

9.8 6.2 16,989 2,923 171

10.8 4.0 17,853 4,333 2,207

10.8 7.2 24,445 3,798 1,817

Source: Alfa Research, *SVST 2010 financial results are actual not expected

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

Russian Steel China Slowdown Outweighs Japan Reconstruction Opportunity

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Figure 4: Earnings multiples

EV/EBITDA 2008 2009 2010 2011 2012 PE 2008 2009 2010 2011 2012 Source: Company data, Alfa Research, Bloomberg Evraz 3.7 17.6 9.1 5.4 5.5 4.7 nm nm 12.2 12.4 MMK 4.6 11.3 8.2 6.3 5.3 9.5 nm 19.7 12.3 10.0 NLMK 6.1 19.2 11.9 8.2 7.0 9.7 41.8 20.1 12.6 11.2 Severstal 5.2 13.8 6.6 5.3 5.2 6.6 nm 12.7 8.3 9.0

Figure 5: Sector multiples

Russia Evraz MMK NLMK Severstal Average Emerging markets POSCO Baoshan Steel Cia Siderurgica National (CSN) Gerdau Steel Authority of India Wuhan Iron & Steel China Steel Tata Steel Erdemir Hyundai Steel Maanshan Iron & Steel Average Developed markets ArcelorMittal Nippon Steel ThyssenKrupp JFE Holding (NKK+Kawasaki) Nucor USX-U.S. Steel Group Voestalpine Salzgitter AG - Stahl und Technologie Allegheny Technologies Steel Dynamics AK Steel Average Source: Alfa Research, Bloomberg Country Russia Russia Russia Russia MCap $ mln 15 074 11 424 26 670 18 360 2010E 1.6 1.8 3.5 1.7 2.0 EV/S 2011E 1.2 1.4 2.6 1.3 1.5 EV/S 2011E 0.9 0.7 2.6 1.2 1.4 0.6 1.2 0.9 1.3 1.0 0.6 1.0 EV/S 2011E 0.8 0.7 0.4 0.9 0.9 0.5 0.8 0.3 1.3 0.7 0.3 0.7 2012E 1.1 1.2 2.1 1.2 1.4 EV/EBITDA 2010E 2011E 2012E 9.1 5.4 5.5 8.2 6.3 5.3 11.9 8.2 7.0 6.6 5.3 5.2 9.1 6.3 5.9 EV/EBITDA 2010E 2011E 2012E 5.2 5.5 4.8 4.8 4.2 3.5 7.2 5.6 4.8 7.7 6.6 5.1 5.4 7.4 6.3 6.4 6.2 4.9 7.9 8.0 7.4 15.1 6.5 5.6 8.2 7.3 6.3 10.7 6.1 4.8 5.5 4.8 4.5 6.8 5.8 5.0 EV/EBITDA 2010E 2011E 2012E 8.5 6.6 5.3 11.9 6.1 5.5 6.8 5.5 4.2 8.9 6.4 5.7 16.6 7.7 5.7 19.7 5.5 4.1 9.8 6.1 5.2 5.6 5.1 3.6 17.9 8.4 6.6 9.7 5.4 4.9 19.6 4.9 3.8 9.5 6.3 5.1 2010E nm 19.7 20.1 12.7 nm P/E 2011E 12.2 12.3 12.6 8.3 11.0 P/E 2011E 8.0 8.6 8.9 12.3 10.9 14.5 13.8 8.9 10.5 8.1 13.0 9.6 P/E 2011E 11.9 16.9 14.4 18.8 16.9 12.1 11.0 20.4 17.9 9.7 16.7 14.0 2012E 12.4 10.0 11.2 9.0 10.5

Country South Korea China Brazil Brazil India China Taiwan India Turkey South Korea China

MCap $ mln 34 901 18 830 23 020 18 167 14 260 5 483 15 280 12 457 4 891 9 362 4 266

2010E 0.8 0.8 3.1 1.3 1.3 0.7 1.5 1.2 1.7 1.5 0.6 1.1

2012E 0.7 0.6 2.3 1.0 1.4 0.5 1.1 0.8 1.1 0.8 0.6 0.9

2010E 8.9 9.8 12.2 14.5 10.0 20.4 12.5 neg 10.9 11.2 21.2 12.2

2012E 6.4 7.3 7.4 8.7 9.1 10.1 10.9 7.6 9.1 7.7 11.5 7.9

Country Netherlands Japan Germany Japan USA USA Austria Germany USA USA USA

Mcap $ mln 52 870 22 918 19 978 18 419 14 238 7 583 7 449 4 495 6 027 3 890 1 612

2010E 0.9 1.0 0.5 1.0 1.0 0.6 1.2 0.3 1.6 0.9 0.3 0.8

2012E 0.7 0.7 0.4 0.8 0.8 0.5 0.7 0.3 1.2 0.7 0.3 0.6

2010E 14.4 neg 20.8 57.3 nm neg 63.2 97.4 62.5 25.0 neg 32.1

2012E 8.4 12.1 8.9 11.9 11.7 8.0 8.4 11.0 12.6 7.8 10.0 9.6

Our target prices move down slightly for EVR and MMK, and move up slightly for NLMK and SVST. We downgrade MMK, NLMK and SVST We downgrade MMK to E/W and NLMK and SVST to U/W. We reiterate our U/W rating on EVR.

Russian Steel China Slowdown Outweighs Japan Reconstruction Opportunity

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Figure 6: Valuation summary, $ mln

Price Share count, mln Market cap, $ mln Risk free rate Equity risk premium Beta WACC Terminal growth EOY11 DCF, legacy ($ mln) Value of long-dated mining assets Rasp. (Evr), Fort. (MMK), Au (SVST) EOY11 value of assets EOY11 DCF, equity ($ mln) DCF $/share Target price Return to 12-month t.p. Rating Previous rating Source: Alfa Research, Bloomberg Evraz 36.4 438 15,943 4.4% 6.5% 1.5 12.5% 1.5% 15,762 600 2075 18,437 11,346 25.9 29.6 -19% U/W U/W MMK 14.2 860 11,433 4.4% 6.5% 1.2 11.2% 1.5% 12,200 900 682 13,782 10,906 12.7 14.2 7% E/W O/W NLMK 44.1 599 26,410 4.4% 6.5% 1.1 10.7% 1.5% 24,038 180 0 24,218 22,350 37.3 41.6 -6% U/W E/W Severstal 18.3 1,005 18,365 4.4% 6.5% 1.5 12.5% 1.5% 15,167 700 3,500 19,367 15,238 15.2 17.3 -5% U/W E/W

Following the downgrade of FXPO from O/W on 22 February, we have no O/W recommendations in the subsector.

Russian Steel China Slowdown Outweighs Japan Reconstruction Opportunity

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Upside on Peak Cycle

Stocks undervalued on peak-cycle methodology The question that has been posed by many investors is what stock price would be achievable under current spot prices. To answer this question, we introduce our peak cycle valuation approach. The upside is as high as 35%. Figure 7: Peak valuation summary, $ mln
NI at forward metal prices EBITDA at forward metal prices Target P/E Target Mcap based on P/E Target EV/EBITDA Target Mcap based on EV/EBITDA Target Mcap (average) Current stock price, $/share Target stock price, $/share Upside (downside), % Source: Alfa Research EVR 2,285 4,771 8.4 19,287 5.3 23,929 21,608 36.4 49.3 35% MMK 1,628 3,173 8.4 13,741 5.3 15,678 14,710 13.3 17.1 30% NLMK 3,090 4,849 8.4 26,081 5.3 25,068 25,575 44.1 42.7 -4% SVST 2,315 5,545 8.4 19,540 5.3 26,952 23,246 18.3 23.1 26%

The peak cycle approach involves two steps: 1) Apply spot prices to estimate FY12 earnings; 2) Apply forward earnings multiples at the peak of the last cycle to estimate the peak stock price potential, assuming this cycles valuations reach the same peak level as the last cycles. Relies on the previous cycles peak forward earnings multiple We note that the multiple was above the mid-cycle multiple, representing a higher-than-normal multiple during a period of rising prices and bullish sentiment, similar to the current period. Peak cycle commodity prices utilized are shown in the left-hand column and for comparison purposes we show our actual forecasts to the right. Figure 8: Peak cycle commodity scenario and Alfa forecast, $/t
Peak cycle (2Q11E) Iron ore FOB Australia Iron ore domestic Coking coal FOB Australia Coking coal domestic HRC FOB Black Sea 170 160 300 235 800 2011E Alfa forecast 155 145 255 200 730 2012E Alfa forecast 135 125 240 175 710 2013E Alfa forecast 125 115 230 168 700

Source: Alfa Research Note: Under the peak scenario, domestic prices are theoretical netbacks not actual/forecasted 2Q11 figures

Peak cycle upside suggests stocks undervalued on spot

Investors who believe spot is sustainable should O/W the subsector Investors that prefer to utilize spot prices and believe these are sustainable or will rise further should be long the subsector.

Russian Steel China Slowdown Outweighs Japan Reconstruction Opportunity

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Figure 9: Peak cycle valuation, $ mln

EVR 2Q08 Price, $/ADR Share count, mln MCap, $ mln Net debt (YE09 consensus), $ mln Investments, $ mln EV, $ mln NI (2009 consensus) 2-yr forward P/E EBITDA (2009 consensus) 2-yr forward EV/EBITDA 1Q11 Price, $/ADR Share count, mln MCap, $ mln Net debt (YE2012 consensus), $ mln Investments, $ mln EV, $ mln NI at forward prices EBITDA at forward prices Target P/E Target MCap based on P/E Target EV/EBITDA Target MCap based on EV/EBITDA Target MCap (average) Current stock price, $/share Target stock price, $/share Upside (downside), % Source: Alfa Research MMK NLMK SVST

98.9 390.4 38,611 3,700 1,858 40,452 4,000 9.7 7,000 5.8

17.1 859.6 14,699 1,000 947 14,752 1,800 8.2 2,800 5.3

49.7 599.3 29,785 -1,000 28,785 3,300 9.0 5,400 5.3

25.4 1007.7 25,596 2,700 28,296 3,700 6.9 5,900 4.8

35.9 437.9 15,721 3,400 2,075 17,046 2,285 4,771 8.4 19,287 5.3 23,929 21,608 36.4 49.3 35%

13.2 859.6 11,347 1,800 681 12,465 1,628 3,173 8.4 13,741 5.3 15,678 14,710 13.3 17.1 30%

42.9 599.3 25,710 600 26,310 3,090 4,849 8.4 26,081 5.3 25,068 25,575 44.1 42.7 -4%

18.1 1007.7 18,239 2,400 20,639 2,315 5,545 8.4 19,540 5.3 26,952 23,246 18.3 23.1 26%

Russian Steel China Slowdown Outweighs Japan Reconstruction Opportunity

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Japan Reconstruction: +1.5% to Global Steel Demand

We roughly estimate that the Japanese reconstruction effort will increase crude steel demand by about 8mt in 2011 and 22mt in 2012 relative to our pre-earthquake forecast levels. These are preliminary estimates subject to an extremely high margin of error depending on the degree of damage, government response, construction design, scrap collection and other factors. We estimate 8mt and 22mt increases in Japanese crude steel demand in 2011 and 12 This estimate was made by assuming a 25% increase in construction activity in 2011 and then a further 30% in 2012, for a total two-year increase of 63%. Figure 10: Japan crude steel apparent consumption, mmt
Production Net export Apparent consumption Change yo/ Note construction and distribution 2009 88 33 55 27 2010 110 42 68 13 29 2011E 100 24 76 8 37 2012E 112 22 90 14 48

Source: Japan Iron and Steel Federation, Ministry of Finance, Bloomberg, Alfa Research estimates

We sanity check this estimate by assuming the construction of 1m homes providing 65m m2 of living area and 100m m2 of total construction area and an equivalent volume of commercial and infrastructure building. Then we assume 0.22mt of crude steel (~200kg steel product) per m2 of total construction area. Total volume of reconstruction work may require 40-45mt This generates a total volume of 40mt, which is not far from the incremental volumes anticipated through 2013 of 45mt (8mt, 22mt and 15mt per year in 2011 through 2013). It represents about 1.5% incremental global steel demand in 2012.

Scrap use reduces raw material inputs

Recovered scrap may reduce raw material inputs Some of the higher steel demand will not require iron ore inputs because of increased scrap availability as a result of clean-up efforts, we believe. We are guessing that approximately one-third of the additional steel requirement will be met by available scrap. This will lead to an incremental requirement for iron ore and coking coal to meet the remaining 2/3 of steel demand that will be produced by pig iron instead of scrap input.

Steel demand growth slows despite Japan

We lift steel and iron ore forecasts by 0.7% p.a. We lift our steel and iron ore volume growth forecast by approximately 0.7% per annum in FY11 and FY12, respectively, to reflect the increased demand in Japan. Steel demand growth in 2011 should slow to 5% in 2011 from a level of 15% in 2010, and remain in the mid-single-digit range in 2012.

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Figure 11: Global steel and pig iron production forecast, mmt
2006 Steel Global production growth, % Chinese production growth, % Global ex-China growth, % Global capacity Capacity utilization note: China % of global Pig iron Global production/consumption growth, % 1 251 423 828 1470 85% 34% 869 875 2007 1 351 8% 495 17% 856 3% 1546 87% 37% 949 950 9% 2008 1 350 0% 500 1% 850 -1% 1626 83% 37% 933 930 -2% 2009 1 220 -10% 568 14% 652 -23% 1686 72% 47% 891 891 -4% 2010E 1 413 16% 627 10% 786 21% 1736 81% 44% 1023 1 023 15% 2011E 1 480 5% 664 6% 816 4% 1804 82% 45% 1074 1 074 5% 2012E 1 564 6% 714 8% 849 4% 1872 84% 46% 1138 1 138 6%

Source: World Steel Association for historical data, Alfa Research forecasts

Lifting our steel price forecast on higher raw material prices

We increase steel prices to reflect higher raw material prices previously forecasted Earlier this year, in dedicated iron ore and coking coal studies, we lifted our iron ore and coking coal forecasts. The increase in our steel forecast in this report is mainly driven by the increase in earlier forecasted raw materials costs, which underpin higher steelmaking costs for non-backward integrated producers. We lift our HRC FOB Black Sea forecast, which serves as a benchmark in our steel sector models, to $730/t from $670/t in FY11 and $710 from $680/t in FY12. Figure 12: Commodity forecasts, $ mln/ton
2010E Iron ore, FOB Austr. Iron ore Russian domestic Hard coking coal, FOB Austr. Coking coal Russian domestic blend HRC, FOB Black Sea Ruble/USD Source: Alfa Research New 100 90 195 140 606 30.4 Old 100 90 195 140 593 30.0 New 155 145 255 200 730 30.0 2011E Old 155 145 255 200 670 30.0 New 135 125 240 175 710 30.0 2012E Old 135 125 240 175 680 30.0

Russian Steel China Slowdown Outweighs Japan Reconstruction Opportunity

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China Slowdown Key Driver for Steel to Decline

We focus so much attention on China because the countrys share in global steel consumption has risen from 32% in 2006 to 43% in FY10-FY11. Figure 13: Chinas share in global steel apparent demand, mln t
China ROW Share 2006 399 1,251 32% 2007 457 1,351 34% 2008 499 1,350 37% 2009 558 1,220 47% 2010E 602 1413 43% 2011E 639 1480 43%

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

Chinese market an order larger than Japans

The level of Chinas real estate investments are nearly 10x that of Japans, and so is its steel consumption. Figure 14: Chinas construction market dwarfs Japans, FY10
Construction completed, mln m2 Residential, under construction, mln m2 All buildings, under construction, mln m2 Residential construction starts, m units Residential sales, mln m2 Capital investment construction, local currency USD Total steel apparent demand, mln t Japan NA NA NA 0.8 NA 10 069 114 68 China China x Japan 834 3149 7500 NA 931 7249 1082 9.5 602 8.9

Source: China Economic Information Network, Ministry of Finance of Japan, steel demand sources cited above

Chinas investment in real estate is nearly 10x that of Japans

Chinas area of buildings under construction totaled 7.5bn m2 at the end of 2009, and areas of buildings completed was 834m m2 in 2010. China reported 931m m2 of real estate sales during 2010, which assuming an average apartment size of 80 m2 is about 11.6m units. This compares to 0.8m units started in Japan during the same period.

Economy and steel demand slowed in 2H10

PMI has slowed on a y/y basis PMI has slowed relative to the previous years levels. Electricity consumption growth, considered to be a reliable indicator for economic activity, has slowed along with PMI to a level of 6% y/y in January 2011, but then rebounded on a y/y basis in February.

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Figure 15: China PMI and electricity change, seasonally adjusted

30% 25% 20% 15% 10% 5% 0% Jan-05 Jan-05 May-05 May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 -5% -10% -15% -20% PMI Electricity

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

Figure 16: China PMI and 3-month MA

60 58 56 54 52 50 48 46 44 42 40 May-08 May-09 May-10 May-07 May-06 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Jan-11
13

PMI
Source: China Federal of Logistics and Purchasing

3mo MA

Steel demand was flat in 2H10 y/y, and down h/h

The growth rate in Chinese steel apparent demand moved slightly negative in August-September, 2010, and has since rebounded, albeit to levels below the 2009-1Q10 peak growth rates.

Russian Steel China Slowdown Outweighs Japan Reconstruction Opportunity

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Figure 17: China steel apparent demand, change y/y and 3-month MA, %
50% 40% 30% 20% 10% 0%
May 09 Mar 09 Jan 09 Nov 08 Sep 08 Jul-07 May -07 Mar- 07 Jan-07 Jul 08 May 08 Mar 08 Nov -09 Sep -09 Jul 09 Jan 08 Nov-07 Sep-07 May -10 Mar -10 Jan-10 Jan-11 Nov -10 Sep -10 Jul-10

-10% -20% -30%

Consumption, yoy

3mo MA

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

China steel demand declined in 2H10

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

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Figure 18: Movement in Chinese steel demand by half, mln t

Production 2008 1H 2H 2009 1H 2H 2010 1H 2H 262 237 266 300 323 303 Net exports 22 23 1 5 15 10 Apparent demand 241 214 265 296 308 294

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

Tightening measures to continue

We believe China is in the early stages of tightening to control significant inflationary pressures. Interbank rates have moved back to 2008 levels, while the lending policy rate is still well below those levels. Figure 19: China policy and interbank rate, deposit reserve ratio, %
10 9 8 7 6 5 4 3 2 1 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11

Lending

Interbank

Deposit reserve/2

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

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

Russian Steel China Slowdown Outweighs Japan Reconstruction Opportunity

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Equity Market

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

30%

20%

10% 3/31/06 6/30/06 9/30/06 12/31/06 3/31/07 6/30/07 9/30/07 12/31/07 3/31/08 6/30/08 9/30/08 12/31/08 3/31/09 6/30/09 9/30/09 12/31/09 3/31/10 6/30/10 9/30/10 12/31/10

CNY loan grow th

3mo MA

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

Loan growth exceeds official levels because of OBS lending

The official growth rates understate real growth due to the use of off-balancesheet and non-bank-lending financing sources. Based on the estimates provided in a recent PBOC press release, it appears that net loans to the system expanded at about $1.6-1.7bn p.a. over the past two years, at a compound annual growth rate of 34%. Chinas loans-to-GDP ratio is about 150%.

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Russian Steel China Slowdown Outweighs Japan Reconstruction Opportunity

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Figure 21: $1.6-1.7tn net increase in bank/non-bank lending p.a.

YE08 Net increase FY09 YE09 Net increase FY10 YE10 CNY loans FOREX loans OBS/non-bank Total loans Total loans ($mln) 30.3 1.9 2.0 34.2 5.0 9.6 0.7 0.4 10.7 1.6 40.0 2.6 2.4 44.9 6.6 8.0 0.4 3.0 11.4 1.7 48.0 3.0 5.4 56.3 8.5 % of GDP 109% 34% 135% 34% 150%

Source: China Economic Information Network, PBOC press release

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

Construction growth likely to slow

China floor space under construction turned negative as steel growth weakened Total floor space under construction in China slowed down to mid-20%s growth in the autumn, but rose again to a near-record growth level in February 2011. Construction represents about half of total steel demand, we believe. Therefore, the earlier discussed slowdown in steel demand in China indicates that other segments of the economy that are heavy consumers of steel are slowing considerably. Given that one of the main policy objectives is to slow housing price growth, it is likely that volume growth will slow down. Neither US nor European construction activity will likely prove to be a strong growth engine, as both were in negative territory as of December. Figure 22: Construction indicators in major economies
40%

Other key regions are not showing construction growth

30%

20%

10%

0% Dec-10 Sep-10 Jun-10 Mar-10 Dec-09 Sep-09 Jun-09 Mar-09 Dec-08 Sep-08 Jun-08 Mar-08 Dec-07 Sep-07 Jun-07 Mar-07 Dec-06 Sep-06 Jun-06 Mar-06 Dec-05 Sep-05 Jun-05 Mar-05 Dec-04 Sep-04 Jun-04 Mar-04 China US Europe
17

-10%

-20%

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

Russian Steel China Slowdown Outweighs Japan Reconstruction Opportunity

Equity Market

Testing the PMI/global steel price relationship

Relationship between PMI with four-month lead and global steel There is a strong and growing relationship between Chinese PMI with a lead of approximate four months and global steel prices. Since 2008, this relationship has strengthened, which makes sense given the increased weight in global consumption that China represents. Global steel prices move approximately 2x the rate of change in the PMI. Figure 23: Chinese PMI+4 months and Black Sea HRC relationship
Since 2005 Since Mar 2008 Correlation 0.48 0.66 Slope 1.45 1.90

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

The relationship is evident in the scatter plots below. Figure 24: PMI+4 months vs. Black Sea HRC since 2005, 3-mo MA %

10% 8% 6% 4% PMI+4m o 2% 0% -30% -20% -10% -2%0% -4% -6% -8% -10% Black Sea 10% 20%

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

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Russian Steel China Slowdown Outweighs Japan Reconstruction Opportunity

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Figure 25: PMI+4 months vs. Black Sea HRC since Mar 2008, 3-mo MA %
10% 8% 6% 4% PMI+4mo 2% 0% -20% -10% -2% -4% -6% -8% Black Sea -10%
Source: Three month moving average of monthly change in Chinese PMI, with a four-month lead, vs. threemonth moving average of monthly change in Black Sea HRC, China Federation of Logistics and Purchasing, Metal Bulletin

-30%

0%

10%

20%

Over the past four months, PMI has moved 2%, 1%, -2% and -2%. HRC rose 22% over this period. As a result, the steel price probably overshot its natural level.

Possible explanations for break in relationship

Raw material supply shocks supported steel prices The relationship between China PMI and steel prices may have been affected by supply-side shocks in raw materials and the restocking cycle. During 2H10, the iron ore market absorbed the loss of volumes from the state of Karnataka in India, after an export ban was put in place over the summer. During early 2011, the coking coal market absorbed the loss of volumes from flooding in Queensland. Restocking took place Based on measures of steel and iron ore inventory at Chinese ports and US service centers, it appears that inventory levels have moved up. If we extrapolate these restocking volumes throughout the value chain, the volumes can be significant enough to have an impact on steel prices.

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Equity Market

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

15 14 13 12 11 10 9 8 7 6 5 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11

China steel
Source: Steelhome, Metals Service Center Institute

China iron ore

US steel

Iron ore prices are easing back from record levels

While coking coal prices are settling sharply up in 2Q10, iron ore prices have begun to ease. Figure 27: First month swap, 62% iron ore fines, CFR China, $/ton
200 180 160 140 120 100 80 60 Oct-09 Nov-09 Dec-09 May-10 Oct-10 Nov-10 Dec-10 Feb-10 Feb-11 Mar-10 Aug-10 Sep-10 Mar-11 Jan-10 Jun-10 Jul-10 Apr-10 Jan-11

Source: SGX AsiaClear

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Russian Steel China Slowdown Outweighs Japan Reconstruction Opportunity

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Chinese metals premiums shrinking often a leading indicator

Chinese domestic metals below global prices We show below that Chinese domestic price premiums on steel, copper and aluminum have all been declining. In February, domestic steel prices moved to a discount to Black Sea Figure 28: China premium to global benchmarks, %
40%

30%

20%

10%

0% May-05 Aug-05 Nov-05 Feb-06 May-06 Aug-06 Nov-06 Feb-07 May-07 Aug-07 Nov-07 Feb-08 May-08 Aug-08 Nov-08 Feb-09 May-09 Aug-09 Nov-09 Feb-10 May-10 Aug-10 Nov-10 Feb-11

-10%

-20% Steel Cu Al

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

Chinese prices often lead global prices so this is a negative sign

The Chinese relative price is important because China is often a lead indicator for global pricing. This makes sense because of its substantial weight in global consumption. This chart shows the absolute levels instead of the discount. HRC Black Sea has moved above Chinese rebar (and HRC as shown in the chart above). During the April/May 2010 period, we experienced a similar development and this preceded a significant drop in global steel prices.

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Equity Market

Figure 29: Global steel prices, $/mt

900 800 700 600 500 400 300 11/27/09 11/27/10
2011E 1 480 5% 664 6% 816 4% 1804 82% 45% 1074 1 074 5%

3/27/09

5/27/09

7/27/09

9/27/09

1/27/10

3/27/10

5/27/10

7/27/10

9/27/10

China rebar spot

Source: Metal Bulletin, LME

LME billet

HRC Black Sea

Reiterate our volume slowdown forecast

Chinese construction and economic activity is likely to slow from elevated levels. Steel demand will slow sharply in FY11/FY12 We reiterate our view that steel demand growth will slow from around 15% y/y in FY10 to a level of 5-6% (previously 4-5%) in the FY11-FY12 period. During January 2011, the World Steel Association estimates that global production grew 5.3% y/y and the three months through January at a rate of 5.2% y/y. Figure 30: Global steel and pig iron production forecast, mmt
2006 Steel Global production growth, % Chinese production growth, % Global ex-China growth, % Global capacity Capacity utilization note: China % of global Pig iron Global production/consumption growth, % 1 251 423 828 1470 85% 34% 869 875 2007 1 351 8% 495 17% 856 3% 1546 87% 37% 949 950 9% 2008 1 350 0% 500 1% 850 -1% 1626 83% 37% 933 930 -2% 2009 1 220 -10% 568 14% 652 -23% 1686 72% 47% 891 891 -4% 2010E 1 413 16% 627 10% 786 21% 1736 81% 44% 1023 1 023 15% 2012E 1 564 6% 714 8% 849 4% 1872 84% 46% 1138 1 138 6%

Source: World Steel Association for historical data, Alfa Research forecasts

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Russian Steel China Slowdown Outweighs Japan Reconstruction Opportunity

1/27/11

Equity Market

Decline risk greater than upside

Evidence suggests steel prices will decline in 2Q11 The decline in 2010 began in April and took $150/t off the price of HRC and nearly $200/t off rebar. Subsector stocks lost 30-50% (EVR 49%, NLMK 36%, FXPO -42%) over this period. We are not calling for such a large decline, but we do not exclude this possibility. We recognize that prices could also rise into 2Q11 especially given positive sentiment related to Japanese reconstruction efforts. Our view is that the downside risk over the coming quarters is substantially greater than the upside potential. Figure 31: HRC Black Sea, $/ton - FY10 all over again?
800 750 700 650 600 550 500 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11

Source: Metal Bulletin

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Equity Market

Stock Specific Issues and Risks

We have the following specific expectations that could affect individual stocks over the coming quarters: 1) The domestic steel premium, which shrank to close to zero in 1Q11, will expand to a level of $30/t in 2-3Q11. This will help MMK to catch up on earnings growth as of 2Q11. 2) The domestic coking coal discount to the global benchmark will widen in 2Q11 as the domestic price lags. This will help NLMK continue to deliver strong earnings growth in 1H11 despite the increase in global coking coal prices. As of 2H11, NLMK will face headwinds from higher domestic coking coal prices as these slowly catch up to global prices. 3) 1Q11 financials will not be indicative of full-year results due to a lag in achieving higher prices from export prices and the collapse in the domestic premium as discussed above in point 1. 4) The most important Middle East export market is Iran, accounting for approximately 60% of regional volumes and 15% of overall Russian steel exports. The most exposed company in our subsector, we believe, is MMK given its traditional volume flow to that market.

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Russian Steel China Slowdown Outweighs Japan Reconstruction Opportunity

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Financial Statements
Figure 32: Evraz income statement, $ mln
Revenues Operating Profit EBITDA Interest expense Other non-operating items EBT Tax Net income Minority interest Net income to shareholders EPS Margins Operating Net EBITDA Source: Company data, Alfa Research 2006 8,292 2,298 2,601 -229 -22 2,087 -637 1,450 -73 1,377 3.33 2007 12,808 3,523 4,380 -409 -1 3,051 -984 2,179 -76 2,103 5.08 2008 20,380 3,632 6,286 -599 0 3,051 -1,192 1,859 -62 1,797 4.34 2009 9,772 -1,047 1,237 -730 0 -1,600 339 -1,261 10 -1,251 -3.02 2010E 14,023 821 2,371 -717 0 233 -65 168 -6 162 0.37 2011E 17,515 2,194 3,694 -585 0 1,881 -526 1,354 -45 1,309 2.99 2012E 17,323 1,904 3,354 -398 0 1,865 -522 1,343 -45 1,298 2.96

28% 17% 31%

28% 17% 34%

18% 9% 31%

-11% -13% 13%

6% 1% 17%

13% 8% 21%

11% 8% 19%

Figure 33: Evraz balance sheet, $ mln

Cash and cash equivalent Inventories Receivables Other current assets Total current assets PP&E Other non-current assets Total Assets Total debt Payables Other current liabilities Other long-term liabilities Shareholders' equity Total Liab and Shrhlds' equity Net debt Source: Company data, Alfa Research 2006 842 864 556 562 2,824 5,479 2,031 8,510 2,596 462 672 545 4,235 8,510 4,000 2007 327 1,618 1,803 766 4,514 12,489 4,153 18,634 6,756 1,241 1,966 2,318 6,353 18,634 6,000 2008 930 2,416 1,369 1,569 6,284 9,012 4,152 19,448 9,986 1,479 1,137 1,872 4,917 19,448 8,970 2009 675 1,886 1,001 691 4,253 14,941 4,230 23,424 7,923 1,181 553 3,146 10,608 23,424 7,248 2010E 319 2,100 1,300 1,386 5,105 14,341 4,230 23,676 7,423 1,200 553 3,146 10,776 23,676 7,104 2011E 867 2,277 1,401 1,386 5,931 13,741 4,230 23,902 6,523 1,244 553 3,146 12,130 23,902 5,656 2012E 1,555 2,252 1,386 1,386 6,578 13,191 4,230 23,999 5,623 1,257 553 3,146 13,473 23,999 4,068

Figure 34: Evraz cash flow statement, $ mln

Net income Depreciation and amort Other/interest Working capital changes Cash flow from operations Net additions to PP&E Other investing cf Cash flow from investing Net borrowings Net interest income (expense) Dividends Paid - Common Other financing cf Cash flow from financing Source: Company data, Alfa Research 2006 1,450 303 465 95 2,084 -896 -673 -1,569 246 -229 -352 -235 -341 2007 2,217 698 583 -132 2,957 -7,010 1,374 -5,636 4,160 -409 -916 -1,109 2,135 2008 1,859 1,195 1,641 -126 4,569 -1,103 -2,633 -3,736 3,230 -599 -1,276 -1,482 -127 2009 -1,261 1,632 730 600 4,569 -441 0 -441 -2,063 -634 0 0 -2,382 2010E 168 1,550 717 -494 1,812 -950 0 -950 -500 -717 0 0 -1,217 2011E 1,354 1,500 585 -234 2,933 -900 0 -900 -900 -585 0 0 -1,485 2012E 1,343 1,450 398 54 2,886 -900 0 -900 -900 -398 0 0 -1,298

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Equity Market

Figure 35: MMK income statement, $ mln

Revenues Operating Profit EBITDA Interest expense Other non-operating items EBT Tax Net income Minority interest Net income to shareholders EPS Margins Operating Net EBITDA 2006 6,447 1,788 1,976 -6 -124 1,658 -468 1,442 -2 1,440 1.67 2007 8,197 2,078 2,289 -46 -168 1,865 -507 1,778 -2 1,776 2.07 2008 10,550 1,174 2,497 32 82 1,106 -25 1,081 -6 1,075 1.25 2009 5,081 288 1,122 -31 -85 257 -38 219 13 232 0.27 2010E 8,099 922 1,672 -165 0 756 -177 579 -2 577 0.67 2011E 10,772 1,542 2,272 -202 0 1,235 -290 945 -5 940 1.09 2012E 12,460 1,878 2,578 -172 0 1,542 -362 1,181 -8 1,173 1.36

28% 22% 31%

25% 22% 28%

11% 10% 24%

6% 4% 22%

11% 7% 21%

14% 9% 21%

15% 9% 21%

Source: Company data, Alfa Research

Figure 36: MMK balance sheet, $ mln

Cash and cash equivalent Inventories Receivables Other current assets Total current assets PP&E Other non-current assets Total Assets Total debt Payables Other current liabilities Other long-term liabilities Shareholders' equity Total Liab and Shrhlds' equity Net debt 2006 891 688 851 50 2480 2764 445 5689 977 553 11 109 4,039 5,689 2007 1928 946 1391 26 4291 3879 1212 9382 1,454 686 11 320 6,911 9,382 0 2008 1106 996 991 535 3628 9751 818 14197 1,681 1321 44 51 9,852 9,397 575 2009 165 856 941 468 2,430 11,276 1,127 14833 2,074 928 43 43 10,325 14,833 1,909 2010E -2 1,000 1,200 468 2,666 12,576 1,127 16,369 2,874 1,200 43 43 10,962 16,369 2,876 2011E 64 1,185 1,400 468 3,117 13,246 1,127 17,490 2,974 1,360 43 43 12,096 17,490 2,910 2012E 189 1,371 1,620 468 3,647 13,646 1,127 18,420 2,574 1,581 43 43 13,513 18,420 2,385

Source: Company data, Alfa Research

Figure 37: MMK cash flow statement, $ mln

Net income Depreciation and amort Other/interest Working capital changes Cash flow from operations Net additions to PP&E Other investing cf Cash used in investing Net borrowings Net interest income (expense) Dividends Paid - Common Other financing cf Cash from financing 2006 1189 188 -288 -250 839 -698 -382 -1080 337 0 -1077 -39 -779 2007 1344 211 -10 -642 903 -1207 -1024 -2231 428 0 -547 931 812 2008 1300 240 -970 985 1555 -1812 0 -1812 -500 0 -402 0 -902 2009 219 735 85 -203 849 -1613 -278 -1891 393 -85 0 0 78 2010E 579 750 165 -131 1364 -2050 0 -2050 800 -165 -58 0 577 2011E 945 730 202 -225 1757 -1400 0 -1400 100 -202 -189 0 -291 2012E 1,181 700 172 -184 2032 -1100 0 -1100 -400 -172 -236 0 -808

Source: Company data, Alfa Research

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Russian Steel China Slowdown Outweighs Japan Reconstruction Opportunity

Equity Market

Figure 38: NLMK income statement, $ mln

Revenues Operating Profit EBITDA Interest expense Other non-operating items EBT Tax Net income Minority interest Net income to shareholders EPS Margins Operating Net EBITDA 2006 6,046 2,243 2,601 -30 883 2,624 -707 1,917 -26 1,891 3.16 2007 7,719 2,998 3,406 -31 86 3,106 -837 2,269 -24 2,245 3.75 2008 11,699 4,061 4,538 -30 0 2,979 -703 2,276 2 2,278 3.80 2009 6,139 891 1,444 -111 0 280 -182 98 117 215 0.36 2010E 8,150 1,881 2,381 -107 0 1,775 -458 1,317 0 1,317 2.20 2011E 11,003 2,885 3,435 -78 0 2,807 -716 2,091 0 2,091 3.49 2012E 12,946 3,257 3,882 -95 0 3,162 -795 2,366 0 2,366 3.95

37% 32% 43%

39% 29% 44%

35% 19% 39%

15% 2% 24%

23% 16% 29%

26% 19% 31%

25% 18% 30%

Source: Company data, Alfa Research

Figure 39: NLMK balance sheet, $ mln

Cash and cash equivalent Inventories Receivables Other current assets Total current assets PP&E Other non-current assets Total Assets Total debt Payables Other current liabilities Other long-term liabilities Shareholders' equity Total Liab and Shrhlds' equity Net debt 2006 665 857 1,150 377 3,050 3,988 1,679 8,717 297 664 80 866 6,809 8,717 2007 1,155 1,236 1,696 301 4,388 6,450 2,238 13,076 1,610 1,395 71 1,009 8,992 13,076 500 2008 2,160 1,556 1,488 93 5,346 6,826 1,892 14,064 3,037 1,879 21 431 8,723 15,573 892 2009 1,247 1134 913 582 3,876 7,316 1,309 12,501 2,495 841 19 536 8,718 12,501 1,248 2010E 65 1,400 1,212 582 3,260 8,616 1,309 13,185 1,933 1,033 19 536 10,298 13,185 1,868 2011E 117 1,650 1,430 582 3,780 9,766 1,309 14,855 1,933 1,135 19 536 12,912 14,855 1,816 2012E 197 1,942 1,683 582 4,404 10,341 1,309 16,054 1,133 1,360 19 536 15,870 16,054 936

Source: Company data, Alfa Research

Figure 40: NLMK cash flow statement, $ mln

Net income Depreciation and amort Other/interest Working capital changes Cash flow from operations Net additions to PP&E Other investing cf Cash used in investing Net borrowings Net interest income (expense) Dividends Paid - Common Other financing cf Cash from financing 2006 2,066 358 -104 -735 1,585 -1,931 -112 -2,043 244 3 -767 -413 -933 2007 2,247 408 -3 -128 2,524 -2,869 1,602 -1,268 1,288 25 -703 -1,440 -830 2008 2,964 519 -667 373 3,072 -1,435 -667 -2,102 -492 1,919 -471 2 958 2009 98 478 111 -41 1179 -1121 0 -1121 -542 -111 0 -471 -681 2010E 1,317 500 107 -373 1551 -1800 0 -1800 -562 -107 -263 0 -932 2011E 2,091 550 78 -367 2353 -1700 0 -1700 0 -78 -523 0 -601 2012E 2,366 625 95 -320 2767 -1200 0 -1200 -800 -95 -592 0 -1487

Source: Company data, Alfa Research

Russian Steel China Slowdown Outweighs Japan Reconstruction Opportunity

27

Equity Market

Figure 41: Severstal income statement, $ mln

Revenues Operating Profit EBITDA Interest expense Other non-operating items EBT Tax Net income Minority interest Net income to shareholders EPS Margins Operating Net EBITDA 2006 12,449 2,356 2,960 -143 -98 2,356 -635 1,479 -56 1,423 1.42 2007 15,245 2,970 3,773 -116 -180 2,970 -700 1,876 -26 1,850 1.84 2008 16,065 3,572 4,410 -531 192 3,572 -490 2,740 -717 2,023 2.01 2009 9,594 925 1,623 -591 -200 925 -134 13 -1,051 -1,038 -1.03 2010 13,573 2,652 3,365 -464 -292 2,652 -487 1,428 -2,004 -576 -0.57 2011E 17,853 3,433 4,333 -341 0 3,092 -884 2,207 -40 2,167 1.58 2012E 18,260 3,120 4,070 -276 0 2,845 -814 2,031 -40 1,991 1.46

19% 12% 24%

19% 12% 25%

22% 17% 27%

10% 0% 17%

20% 11% 25%

19% 12% 24%

17% 11% 22%

Source: Company data, Alfa Research

Figure 42: Severstal balance sheet, $ mln

Cash and cash equivalent Inventories Receivables Other current assets Total current assets PP&E Other non-current assets Total Assets Total debt Payables Other current liabilities Other long-term liabilities Shareholders' equity Total Liab and Shrhlds' equity Net debt 2006 2,006 2,222 1,324 1,927 7,479 6,470 765 14,714 2,948 1,246 774 1,134 8,554 14,714 2007 2,007 2,537 1,675 1,779 7,998 7,293 1,426 16,717 3,942 1,207 1,112 1,160 10,211 16,717 1,291 2008 3,472 4,279 2,006 935 10,692 9,827 1,961 22,480 8,317 1,527 1,192 1,880 9,554 22,480 4,671 2009 2,854 2974 1458 899 8,185 9,485 2,334 19,644 7,126 1378 972 1,691 8,376 19,644 4,272 2010 2,013 2,367 967 2600 9,567 9,152 1,900 19,329 6,142 914 4,019 934 7,320 19,329 4,129 2011E 951 3,047 1,261 2600 7,860 10,252 1,900 18,722 5,342 961 4,019 934 9,969 18,722 4,391 2012E 1,219 2,739 1,096 2600 7,653 10,502 1,900 18,765 3,871 851 4,019 934 12,406 18,765 2,652

Source: Company data, Alfa Research

Figure 43: Severstal cash flow statement, $ mln

Net income Depreciation and amort Other/interest Working capital changes Cash flow from operations Net additions to PP&E Other investing cf Cash used in investing Net borrowings Net interest income (expense) Dividends Paid - Common Other financing cf Cash from financing 2006 1,421 604 0 0 1,729 -1,244 -925 -2,169 1,379 -1,495 -269 1,112 726 2007 1,936 803 -663 -1,035 2,315 -1,562 -419 -1,980 2,794 -2,623 -736 -4 -569 2008 2,740 838 531 -1,753 3,435 -2,152 -2,780 -4,932 750 3,106 -1,347 -85 2,425 2009 13 698 591 1,704 3,193 -946 -92 -1,038 -1,191 -591 0 0 -691 2010 1,428 794 1,474 -463 2,515 -1,118 -814 -1,932 -1,036 -464 -130 157 -1,630 2011E 2,207 900 341 -927 2,521 -2,000 0 -2,000 -800 -341 -441 0 -1,583 2012E 2,031 950 276 364 3,621 -1,200 0 -1,200 -1,472 -276 -406 0 -2,153

Source: Company data, Alfa Research

28

Russian Steel China Slowdown Outweighs Japan Reconstruction Opportunity

Contact Information
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IMPORTANT INFORMATION The contents of this document have been prepared by Barry Ehrlich, a Senior Analyst at Open Joint Stock Company Alfa Bank ("Alfa Bank"), as Investment Research within the meaning of Article 24 of Commission Directive 2006/73/EC implementing the Markets in Financial Instruments Directive 2004/39/EC ("MiFID"). Alfa Capital Markets ("ACM") is distributing this document to its clients in the EEA and accepts no responsibility towards any other classes of recipient. Alfa Bank and ACM have in place appropriate conflicts of interest policies and procedures aimed at ensuring the objectivity of the information contained in this document. The information contained in this document is provided for information purposes only and is not a marketing communication, investment advice or personal recommendation within the meaning of MiFID. The information must not be used or considered as an offer or solicitation of an offer to sell or to buy or subscribe for any securities or financial instruments. In the UK, this document does not constitute a Financial Promotion within the meaning of section 21 of the Financial Services and Markets Act 2000 (as amended). ACM is regulated by the Financial Services Authority (FSA) with FSA registration number 416251, for the conduct of UK investment business and is the trading name of the UK branch of Alfa Capital Holdings (Cyprus) Limited (ACC), which is authorized by the Cyprus Securities and Exchange Commission under license number CIF 025/04. This document is not for distribution to retail clients as defined by MiFID and may not be communicated to such persons. This document is not for distribution or use by any person or entity in any jurisdiction where such distribution or use would be contrary to local law or regulation or which would subject Alfa Bank, ACC , ACM or any other group entity to authorization, licensing or other registration requirements under applicable laws. The information contained in this document is the exclusive property of Alfa Bank. Unauthorized duplication, replication or dissemination of this document, in whole or in part, without the express written consent of Alfa Bank is strictly prohibited. Although the information in this document has been obtained from, and is based on, sources Alfa Bank believes to be reliable, no representation or warranty, express or implied, is made by Alfa Bank, ACM or the authors. ACM and its officers and employees do not accept any responsibility as to the accurateness or completeness of any information herein or as to whether any material facts have been omitted. All information stated herein is subject to change without notice. ACM makes no warranty or representation that any securities referred to herein are suitable for all recipients and any recipients considering investment decisions should seek appropriate independent advice. Nothing in this document constitutes tax, legal or accounting advice. Alfa Bank, ACC and their associated companies, officers, directors or employees (excluding any financial analysts or other personnel involved in the production of research), from time to time, may deal in, hold or act as market makers or advisors, brokers or commercial and/or investment bankers in relation to the securities, financial instruments and companies mentioned in this email, or may have been, or may be represented on the board of such companies. If such circumstances arise, ACM, Alfa Bank, ACC and their associated companies have in place appropriate conflicts of interest policies and procedures to ensure that investment research remains independent and objective. A summary of ACC's conflicts of interests policy (which also covers ACM), containing details relevant to investment research, is available upon request from ACC or ACM. ACC and ACM have arranged for Alfa Bank and other relevant group entities involved in the production of research to implement equivalent policies. This document is distributed in the United States by Alforma Capital Markets, Inc., a subsidiary of Alfa Bank, which accepts responsibility for its contents. Alforma Capital Markets, Inc. did not contribute to the preparation of this report and the authors are neither employed by, nor are associated persons of, Alforma Capital Markets, Inc. The issuing entity and authors may not be subject to all of the disclosures and other US regulatory requirements to which Alforma Capital Markets, Inc. and its employees are subject. Any US person receiving this report who wishes to effect transactions in any securities referred to herein should contact Alforma Capital Markets, Inc., not its affiliates. Alfa Bank is incorporated, focused and based in the Russian Federation and is not affiliated with US-based Alfa Insurance.