Updated September 23, 2008

The deal of Russia’s Severstal JSC on the purchase of the US coal company PBS Coals Corporation for $1,3 billion is in its final stage. It is the fourth asset already purchased by the Russian metallurgical company in the USA this year. In April, the separate Severstal International division was established to manage Severstal’s foreign steel making assets. Its head, Gregory Mason, said that the company had occupied already the 4th place at the steel market of the USA, and it wasn’t interested in China’s assets, but studied deals in Europe, India and the CIS.

- How significant is the contribution of three American assets purchased this year to the overall financial indices of the Group by the IFRS standards (International Financial Reporting Standards) for 1H?

- At the moment, the contribution is small, because the reporting has covered the indices of Sparrows Point and WCI Steel for several months only within which we have owned new assets. Moreover, the deal on Esmark was finalized only on August, 6, therefore, we will calculate its indices from 3Q. Our enterprises in North America were given EBITDA of $228 million, including $128 million from single transactions. For comparison: in 1H 2007, this index totaled $38 million. The results of the North-American affiliate turned out higher than we had planned. If we mention the synergistic effect, we estimate it at about $135 million as per the result of this year, and by 2011 – over $200 million. We speak here about our four enterprises in the USA, except for the fifth – SeverCorr that we have incorporated in one group, Severstal North America (SNA). We operate SNA as the combined company.

- What investments volume do your American assets require?

- The overall amount on SNA’s enterprises can reach nearly $1,4 billion by 2011.

- Did you calculate the total capitalization of SNA?

- No, and we don’t have any intentions, since we assess Severstal as one company and calculate the capitalization of one company. I can say now that, according to the proforma of this year, the American enterprises will produce nearly 9,7 million tons of steel.

- Why don’t you pay any attention to the assets in Asia?

- Why so? We watch carefully this region as well. The Asian market is huge, but the profitability, especially of the assets we have studied, is quite low. Moreover, we have studied the range of enterprises in China and have come to the conclusion that they are not worth of purchasing, since the country’s raw materials are expensive and it has problems with the electric energy. So, we have decided that we have to concentrate on the market, where we are presented already. However, now, we study the market of India and don’t eliminate the probable purchases in this region. There are some interesting M&A projects in Europe as well, and we are studying them. Moreover, we pay much attention to the assets in the CIS countries: if there are some interesting assets, we will be pleased to enter this market. For instance, we would be interested in some Ukrainian assets.

- What were the aims in the USA, when you were purchasing Rouge Steel in 2004? What are they now, when you have already five steel making assets in this region?

- At the very beginning, we intended to establish a strong and flexible company at the American market that will gain high earnings at the growing market and will manage to remain stable at the falling market from the financial viewpoint. Probably, it is a recipe for success in any industry. Now, SNA occupies already the 4th place in America by the production capacities after ArcelorMittal, Nucor and US Steel. The overall price of assets that Severstal purchased this year totaled nearly $2,8 billion, or $380 per one ton of steel. Now, the US aggregate capacities total about 12,5 million tons of steel a year. By 2009, when we will launch the second section of Severstal Columbus, they will grow by 1,5 million tons. Now, we would have occupied the 3rd place with such volume of flat rolled products production.

- Are you intended to hold IPO of the incorporated SNA?

- At the moment, no.

- Why did it take you four years to reach the second deal in the USA after the first one?

- Don’t forget that within this period we purchased Lucchini Group in Europe. We had to settle all issues and problems with the purchased asset, and later, we will study the next objects. The construction of SeverCorr in the USA was started after one and a half year passed from the day of Rouge purchase.

- If you characterize the market of the USA as good, so, why are the majority of your purchased assets unprofitable or close to bankruptcy?

- It is better to mark that the companies that we purchased this year can’t be characterized as bankrupts or unprofitable. Our first purchase made in 2003-2004 was indeed unprofitable, because it had concurred with the bankruptcy of the range of the American enterprises. Then, it was related to the very low market prices for metal products and to the low demand as well. However, after China resumed its activity, the demand, as well as the prices, went up within two quarters. So, at the moment, we have the opposite American market condition.

- To what markets do your productions orient?

- After we had purchased new enterprises in the USA, we extended the range of products that our assets produce. Now, we produce the tinplate, and we have extra volumes in the galvanization. Sparrows Point is specializing in slabs with the gauge of 315-350 mm to make thick plates both for the further production and for the sale. Worren WCI is engaged in the production of high tensile, alloyed and high carbon steel. These products have their separate niche at the market. If earlier we were focused on the motor industry in Detroit, now, we entered already the market of building structures, household appliances, domestic technique, and heavy engineering. Thus, our stake in the motor industry didn’t fall, but we increased our presence at other markets due to the diversification.

- What criteria do you use to select the next structure for the takeover?

- The key criteria for the selection of any company are as follows: whether it satisfies us from the strategic viewpoint, whether it fits into our business in a region by products and assets, whether it has any synergy with our productions. In addition, we assess the price of the purchase to one ton of the produced capacity (EV/ton.). If we take to account this ratio, in 2004 for Rouge we paid about $98 per one ton, and two years later, the world metallurgical companies were sold for $1000-1200. For instance, Turkey’s Erdemir. Even now, we select our purchases with the lower ratio: we paid nearly $225 per ton for Sparrows Point, WCI Steel – nearly $275, Esmark Inc.- about $500. The construction of SeverCorr, one of the most today’s technologically perfect enterprises worldwide, cost nearly $500-550 per one ton. In other words, we assess the benefits from the purchase first of all and the opportunity of value creation later. The value creation implies the potential realization of an enterprise.

- Why did you buy these assets exactly?

- They satisfied our criteria and strategy. For instance, the US Antimonopoly Committee has forced ArcelorMittal to sell Sparrows because of the non-competitiveness in the area of tinplate production. It was sold by means of the tender that E2 Consortium had won with the offer of $1,35 billion for the asset. We didn’t take part then in the tender because the asset was too expensive in our opinion. However, the winner couldn’t close the deal. As per the results of the second tender, we purchased this asset for $810 million. By the way, the following reassessment of this asset made by the public accountants resulted in the extra $219 million to Severstal’s net income according to the results of 1H 2008

The strategy of our purchases is that we buy companies with the potential for the additional value. Therefore, when we make such purchases, we don’t indicate EBITDA in the reporting on the new asset that the market would like to see. Some time is required. However, we are convinced that we make good and important investments.

- How did you manage to settle the issues with the American trade unions?

- You should understand that the United Steel Workers (USW) assists us not because we are nice guys with blue eyes and charming smile. Severstal has approved itself in the USA as a very strong and serious metallurgical company since our first purchase of Rouge Steel in 2004. In fact, we both made investments in this enterprise settled with the trade unions and launched extra projects targeted at the company’s development. Moreover, the following construction of the brand new works of Severstal Columbus in Mississippi has proved that we have serious intentions to settle at the American market.

- Will you continue to follow the strategy at the international agreements you have presented?

- Not necessarily. Everything depends on a situation and assets. Though, I can say that at the moment, I don’t see large companies similar to WCI in the USA that could integrate easily into the synergistic structure that we have there now. Moreover, it doesn’t go about synergistic effect alone, it goes about the opportunity to sell them. I admit that there are some enterprises, but the companies would hardly sell them.

- It means that in the future you will have to focus on the purchase of the related productions in the USA to establish the vertically integrated structure?

- This would be logic. Now, when we have the large stake in the steel making, we have to close ourselves with raw materials. Foremost, we require the coal for our coke-oven blocks, the ore for our blast furnaces, as well as the scrap or alternative materials for our electric furnaces and converter processes. We have announced already the next object of our purchase – PBS Coals Corporation, and we will pay $1,3 billion for it.

- Don’t you afraid that your forecasts in the USA may not realize due to the aggravated geopolitical situation after Georgia-South Ossetia war conflict?

- We are doing business, and we are treated as businessmen. Our future in the USA will be predetermined by the current Severstal’s reputation as the global metallurgical company that has specific aims concerning the long-term growth at the North-American market.

Gregory Mason
Was born in Odessa, Ukraine in 1952. Graduated from the Leningrad Shipbuilding Institute. In 1978 emigrated to the USA. Was the Vice President in Detroit Steel Company, the technical director in Caparo Steel, the director for metallurgical production technology in Davy International and the senior engineer in KRUPP Industries. Since 1997 was heading own consulting company, Metal Strategies. At 2003-end, provided Severstal with consultations in the agreement on the purchase of Rouge Steel. Works in Severstal since 2005. This year, was named CEO of Severstal International division. The deputy CEO for production in Severstal JSC.

Severstal International
One of three Severstal JSC’s divisions. Was established in April, 2008 to manage the holding’s foreign assets. It integrates Italian Lucchini (79,8% belongs to Severstal) and the range of assets in the USA: Severstal Columbus (former SeverCorr) in Mississippi and the incorporated company Severstal North America (SNA) that consists of Severstal Dearborn in Michigan (former Rouge Steel), Severstal Sparrows Point in Maryland (Sparrows Point), Severstal Warren in Ohio (WCI Steel) and Severstal Wheeling in Western Virginia (Esmark Inc.), as well as several joint ventures. The total production capacities of all division’s enterprises attain 12,5 million tons of steel products. SNA alone occupies the 4th place by the volume of the produced steel in the USA among the full integrated works.