jp morgan annual emea equity conference — london
TRANSCRIPT
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DisclaimerDisclaimer
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 the 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 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 intend or have 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.
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Evraz HighlightsEvraz Highlights
Vertically integrated steel and mining business, among the 15 largest steel producers in the world
2006 Production of 16.1 million tonnes of crude steel and 14.5 million tonnes of rolled products
1H06 Revenue grew 5.3% y-o-y to $3,825 mln reflecting 23% increase in sales volumes to 8.3 million tonnes
1H06 EBITDA flat y-o-y at $1.1 bn, EBITDA margin remains strong at 29%
Leader in Russian long products market with 30-100% market share
High level of vertical integration and self-sufficiency in iron ore and coal
One of the lowest cost producers of steel in Russia and CIS with mines located close to steel production sites
Strong commitment to high standards of corporate governance
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EVRAZ GROUPEVRAZ GROUP’’S MAIN LOCATIONSS MAIN LOCATIONS
NakhodkaSea Port
Neryungriugol
ZapSib
Mine 12
Raspadskaya
NKMK
YKU
EvrazRudaNTMK
VGOKKGOK
Moscow
Stratcor
Vitkovice Steel
Palini e Bertoli
Highveld (24.9%)
LuxembourgLondon
Stratcor
OSM
OSM
OSM
Steel mills Iron ore mining
Sea port Main export countriesCoal miningVanadium
5
VISION AND STRATEGIC GOALSVISION AND STRATEGIC GOALS
Our Vision is to be a world class steel and mining company
and one of the Top 5 most profitable steelmakers globally by
ROCE and EBITDA margin through:
Leadership in CIS construction and railway steel product markets
Strengthened positions in global flat product markets
Lowest costs secured by superior efficiency and 100% self-sufficiency in raw materials
Growing vanadium business
6
1H 2006 HIGHLIGHTS*1H 2006 HIGHLIGHTS*
Revenue grew y-o-y 5.3% to $3,825 mln backed by sales volumes increase of 23%
23% growth in Russian construction products sales volumes
Favourable domestic steel pricing environment
5.0x y-o-y increase in non-Russian sales to mature European and US markets to $714 mln
EBITDA flat y-o-y at $1.1 bn, EBITDA margin remains strong at 29%
Consolidated cash cost per tonne increased y-o-y by 6.8% to $235
$262 mln capital investment to improve efficiency
*Excluding Oregon Steel Mills operations
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STRONG BALANCE SHEET STRONG BALANCE SHEET (excluding OSM)(excluding OSM)
Current credit ratings (reaffirmed after OSM tender offer): BB by Fitch; Ba3 by Moody’s; BB- by S&P
Well-capitalised balance sheet to fund future growth
1Net debt equals total debt less cash & cash equivalents and short-term bank deposits
1,374
2,394 2,652
1,094
1,736
1,883
1.0
0.5
0.9
0
500
1,000
1,500
2,000
2,500
3,000
2004 2005 LTM0
0.2
0.4
0.6
0.8
1
1.2
Total Debt Net Debt Net Debt/EBITDA
2Evraz have not prepared audited or reviewed financial statements for the 12 month period ended 30 June 2006. Financial indicators presented under LTM (last twelve months) are calculated as a sum of 1H06 financial results and FY05 less 1H05 financial results3ROCE represents profit from operations plus profit from equity investments less income tax over total equity plus interest bearing loans and lease average for the period
Net Debt-to-EBITDA Ratio Total Assets
4,253
6,663
7,317
20%
27%
67%
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
2004 2005 LTM0%
10%
20%
30%
40%
50%
60%
70%
80%
Total Assets ROCE
$ mln $ mln
2
13
2
8
STEEL SEGMENT*STEEL SEGMENT*
0
100
200
300
400
500
600
Rebars Sections Rails Billets Slabs
1H042H041H052H051H06
Russia50%
Asia28%
Europe16%
CIS3%
North and South
America3%
Prices for Main Steel ProductsSteel Segment Sales by Regions
Consolidated steel products sales volume up 23% to 8.3 mln tonnes
Excellent performance of the Russian construction market (sales volumes grew by 23%)
Sales into attractive European and US markets increased by a factor of 5
Non-Russia
$/tonne
Russia
*Excluding Oregon Steel Mills operations
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STEEL SALES BY PRODUCT*STEEL SALES BY PRODUCT*
21% increase in semi-finished sales volumes driven by organic growth and world steel market demand
Strong plates sales growth due to acquisitions of premium Vitkovice Steel and Palini e Bertoli plate mills
(in volume terms)
Products (‘000 tonnes) 1H 2006 1H 2005 %
Semi-finished 4,164
2,197
830
789
139
181
8,300
3,443 21%
Construction 2,106 4%
Plates 194 328%
Railway 828 (5)%
Mining 123 13%
Other** 56 223%
Total 6,750 23%
*Excluding Oregon Steel Mills operations**Includes rounds, cut shapes, strips and other products
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WELLWELL--POSITIONED POSITIONED IN DOMESTIC MARKETIN DOMESTIC MARKET
Russian market share by volume, 2005
Steel Consumption Growth Structure
Construction growth in Russia and CIS continues to outperform GDP
Russian and CIS steel consumption remains below global benchmarks
100%
84%
49%
30% 28%
0%
20%
40%
60%
80%
100%
Rails H-beams Chanels Rebars Rail-wheels
#1#1
#1
#1 #2
Enhanced leadership position in the rapidly growing construction market with estimated market share of 38%
2002 =100%
GDPConstruction:Rebar consumption
100
150
200
250
300
350
2002
2003
2004
2005
2006
2007
2008
2009
2010
400
Construction Output Forecast to Exceed GDP Growth
39,9
30,5 31,6 33,4 35,137,3
2005 2006 2007 2008 2009 2010
Pipes
Long Products
Flat Products0
20
40
60
80
100%
21%
42%
38%
18%
43%
39%
Source: Evraz, EIU, Chermet, Metall Expert
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RUSSIAN AND CIS MARKETSRUSSIAN AND CIS MARKETS
Russia remains key market contributing 50% to total steel segment revenue
Total sales volumes increased by 13.8% to 3.65 million tonnes
Favourable pricing environment set to continue in 2H 2006 and beyond
Sales Mix Average Market Prices*
744573
784
663
541
499
871
879
714
597
1H05 1H06
Rebars Sections Rails Other finished Semis
+30%
+18%
+8%
-1%
+20%
‘000 tonnes $/tonne
100
250
400
550
700
850
1,000
Aug-
03Oct
-03
Dec-0
3Fe
b-04
Apr-0
4Ju
n-04
Aug-
04Oct
-04
Dec-0
4Fe
b-05
Apr-0
5Ju
n-05
Aug-
05Oct
-05
Dec-0
5Fe
b-06
Apr-0
6Ju
n-06
Aug-
06Oct
-06
Dec-0
6
H-beams Channels Angles Rebars
* On FCA basisSource: Metall Courier
12
NONNON--RUSSIAN SALES*RUSSIAN SALES*
1H06 steel sales volumes increased by 31.8% to 4.65 million tonnes
European assets (Vitkovice Steel and Palini e Bertoli) successfully integrated and contributed $454 mln to consolidated revenue while plates sales volumes increased 843%
Construction steel export volumes shifted to attractive Russian market
Non-Russian Sales Product Mix Non-Russian Prices for Slabs & Billets
1,4911,412
1,342
1,053
617
380
416
580
669
71
110
42
1H05 1H06
Billets Slabs Other semisConstruction Plates Other finished
6%
27%
60%
-28%
‘000 tonnes $/tonne
0
100
200
300
400
500
600
Aug-
03Oct
-03
Dec-0
3Fe
b-04
Apr-0
4Ju
n-04
Aug-
04Oct
-04
Dec-0
4Fe
b-05
Apr-0
5Ju
n-05
Aug-
05Oct
-05
Dec-0
5Fe
b-06
Apr-0
6Ju
n-06
Aug-
06Oct
-06
Dec-0
6
Billet (FOB, Far East) Slab (FOB, Far East)
Source: SBB
*Excluding Oregon Steel Mills operations
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MINING SEGMENTMINING SEGMENT
1H06 Mining segment revenues decreased y-o-y by 19.2% to $480 mln
Iron ore sales volumes flat y-o-y at 8.4 mln tonnes
Decline in average prices of iron ore and coal
Iron ore self-sufficiency remains strong at 78%
Mining Segment Performance
4,198 4,418
2,898 2,794
1,397 1,181
1H05 1H06
Kachkanarsky GOK Evrazruda Vysokogorsky GOK
Iron Ore Production
‘000 tonnes$ mln
4110
594
480
253
133
1H05 1H06Revenues EBITDA Profit from assoc iates
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NATURE OF VANADIUM MARKET
Best strength to weight ratio of common engineering materials
With 0.1% addition of vanadium in structured steel, strength can be increased by 10 to 20%; structures’ weight can be reduced by 15 to 25%
Sheet, 27%
Plate, 40%
Sections, 14%
Bars, 9%
Alloys, 7%
Chemicals, 3%
Steel industry (90%)High strength low alloy (HSLA) Steels
Full Alloy Steels
Tool Steels / Stainless Steel
Carbon Steels
Airspace industry (7%)Titanium alloys for jet engine parts, airframes, rockets, nuclear
New alloys for modern aircrafts and jets totals 20% of the weight (A380 and B787)
Chemicals and Batteries (3%)Catalyst for sulphuric acid and plastics
Dietary, glasses, pigments
Source: CRU
World Vanadium Market
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StratcorStratcor
In April 2006, Evraz purchased a 73% economic interest in Stratcor, one of the world’s leading producers of vanadium products
Acquisition adds vanadium processing capabilities, significant technical know-how, and allows Evraz to capitalise on strong trends in vanadium market
Stratcor acquisition will markedly improve Evraz’s integration in vanadium products, and will allow the company to extract higher margins and cash flows from vanadium products
Income Statement (USD thousands) Production Highlights
2005
Sales 258,112
Gross Profit 131,932
Gross margin %% 51%
Operations margin %% 44%
Interest income 1,664
Profit from Operations 105,642
EBITDA 112,660
EBITDA margin %% 44%
Interest expense (2,553)
Income Tax (39,516)
Net profit 69,407
2005
Vametco (South Africa)000 lbs
V2O5
Nitrovan 9,480
FeV 980
V2O5 656
Stratcor Inc. (USA)
Production Feed (different vanadium products) 8,733
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Highveld Steel and Vanadium
In July 2006 Evraz purchased 24.9% of Highveld Steel and Vanadium Corp. Ltd., a leading vanadium producer
Evraz benefits from a call-option allowing an increase in ownership up to 79%.
Transaction significantly increases vanadium processing capabilities
Improve Evraz’s integration in vanadium products, and will allow the company to extract higher margins and cash flows from vanadium products
Income Statement (USD thousands) Production Highlights
2005
Total steel – tons 735,307
Vanadium pentoxide – kg V2O5 4,406,811
Ferrovanadium and Ferrovanadium nitride – kg V 1,749,762
2005
Sales 1,133,914
Profit from Operations 439,461
Operations margin %% 39%
EBITDA 514,739
EBITDA margin %% 45%
Income Tax (180,032)
Net profit 303,645
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COST STRUCTURECOST STRUCTURE
1H06 Cost of revenues up y-o-y 11.9% to $2,520 mln as a result of higher steel sales volumes, lower raw material prices and acquisitions impact
Consolidation of volumes of European assets contributed $253 mln to cost increase
SG&A expenses remain flat due to strict cost management
Risk of further cost increase concentrated in energy and labour expenses
Steel Segment Costs Mining Segment Costs
Raw materials20%
Staff20%
Depreciation7%
SG&A11%
Other18%
Energy24%Transport
10%
SG&A10%
Raw materials54%
Other8%
Staff8%
Energy7%
Depreciation3%
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CAPEXCAPEX
Key focus on efficiency improvement at the front end of steel production
Implementation of major projects on track
Capital spending of $262 mln in 1H06 vs. $280 mln in 1H05
FY2006 capex annual budget estimated at $550 mln
On-goingRevamp of EAF at NKMK
On-goingInstallation of ISSM at Vitkovice Steel
On-going Reconstruction of converter shop at NTMK
CompleteRevamp of CB5 at NTMK
CompleteRevamp of BF5 at NTMK
StatusProject
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Successful IPO of RaspadskayaSuccessful IPO of Raspadskaya
Russian leading
coking coal producer
One of the 10 largest producers of coking coal in the world
781 mln tonnes of high quality coking coal proved and probable reserves in Russia
Evraz interests remains at 40 %
Efficiency
Cash cost of concentrate production in the bottom quartile of the global cash cost curve (19$/t)
Operational efficiency on par with global peers
Compact integrated operating complex
Banks-managers
Credit Suisse, Deutsche UFG, Morgan Stanley
Listing 18% of the capital placed on RTS and MICEX
Pricing
$2.25 per share
Implied market value of $1.76bn
2.1 times oversubscribed
Strong financial
performance
EBITDA margin – c. 60% in each of the last two years
ROCE in 2005(1) – 31%
Growth potential
Target production volume growth 2006-2010 –12% CAGR
Projects under way to further strengthen Raspadskaya’s positions in domestic market
Growth of market share in Ukraine and Eastern Europe and access to rapidly growing markets of South East Asia
Production Growth
17.0
9.7
6.7
CAGR 2001-2005 - 10%
2001 2005 2010T
CAGR 2006-2010 - 12%
Source: Raspadskaya, IMC
421
541
218259
322
120127165
51
2004 2005 1H 2006
Revenue EBITDA Net income
Financial Highlights
‘mln tonnes
$ mln
20
Oregon Steel MillsOregon Steel Mills
In January 2007 Evraz successfully completes tender offer for shares ofOregon Steel with approximately 91.5% of shares tendered at $63.25 per share.
The acquisition of Oregon Steel represents a solid platform for Evraz as a footprint in North America.
Transaction secures an important place on the attractive plate market andin the expanding pipe business in North America.
The combined company will also be the leading rail producer globally
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238
350
229
23%
-8%
19%16%
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2003 2004 2005 2006E
-10%
-5%
0%
5%
10%
15%
20%
25%
Revenue EBITDA* EBITDA Margin
723
1,185 1,258
1,500
1,6351,725
1,4861,660
2,000
2003 2004 2005 2006E 2007E
Sales, million tonsFinancial Highlights
Source: Oregon Steel Mill
$ mln
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Oregon Steel MillsOregon Steel Mills
Leading West Coast steel producer with total capacity of 2.3 million tonnes
Leading commodity and specialty plate producer in the Western United States
Leading rail producer in North America
Leading large diameter line pipe producer in North America
PortlandPlate MillStructural Tube MillCut-to-Length LineLarge Diameter Pipe Mill
PuebloSteel MillRails MillRod and Bar MillSteamless Pipe Mill
CamrosePipe Mill
Rocky MountainSteel Mill
801,000 tonnes48%
Oregon SteelMill Division
858,000 tonnes52%
2006E Sales by Product
Structural Tubing 77,000
5%
Welded Pipe 265,000 16%
Plate and Coil 516,000 31%Rail 448,000
27%
Seamless Tube 65,000 4%
Rod and Bar 288,000 17%
Source: Oregon Steel Mill
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OSM US Peers Profitability
Superior profitability of OSM vs most US peers due to high margin product mix
Sales per tonne ratio of $846 in 2005 and $951 in 3Q06
EBITDA per tonne of $155 in 2005 and $249 in 3Q06
846
608 621
876
714
951
733702
957
740
Oregon Steel Mill Steel Dynamics Nucor Ipsco US Steel
2005 Q3 2006
Revenue per tonne (US$)
155
89
117135
294
249
121
167184
296
Oregon Steel Mill US Steel Nucor Steel Dynamics Ipsco
2005 Q3 2006
EBITDA(1) per tonne (US$)
(1) EBITDA is defined as the sum of net income, depreciation and amortization, interest, and income taxexpense and excludesfixed and other asset impairment charges,labor dispute settlement charges, settlement of litigationand loss on earlyextinguishment of debt
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1H 2006 Evraz and Oregon 1H 2006 Evraz and Oregon Results OverviewResults Overview
EVRAZ
2005 1H 2006
3,825
1,096
28.7%
571
14.9%
8,300
6,508
1,860
29%
1,009
16%
12,200
OSM
2005 1H 2006
Revenue 1,258 704
EBITDA* 242 153
EBITDA margin 19% 22%
Net Profit** 116 77
Net Profit margin 9% 11%
Sales volumes*** (‘000 tonnes) 1,486 793
$ mln unless otherwise stated
*EBITDA represents profit from operations plus depreciation and amortisation, impairment of assets and loss (gain) on disposal of PP&E** Net profit attributable to equity holders of Evraz Group S.A. *** Steel Segment sales volumes
24
Evraz 2006 Production Results*Evraz 2006 Production Results*
6395
17085
842
9160
16137
588
Evraz (Mine12) Raspadskaya Yuzhkuzbassugol
20052006
4,053 4,275
2005 2006
Q4
9M
3,639
4,103
2005 2006
Q49M
3,218
3,610
2005 2006
Q49M
2,955
3,085
2005 2006
Q4
9M
Rolled Products, ‘000 tonnesPig Iron, ‘000 tonnes
+11.4%
+19.6%11,453 12,754
12,086 14,457
Steel, ‘000 tonnes
13,852 16,115
+16.3%
IRON ORE ‘000 tonnes
*Mine 12 operational results are consolidated into the Group since April 2005. Evraz Group holds 40% beneficial interest in OAO Raspadskaya and 50% interest in Yuzhkuzbassugol. Operational results of Yuzhkuzbassugol are consolidated into the Group since December 31, 2005, while operational results of OAO Raspadskaya are consolidated into the Group since March, 2004, and include production by MUK-96 and Razrez Raspadsky since their acquisition in May 31, 2006.
COAL**, ‘000 tonnes
+43.2%
+43.2%
(5.5)%
16,666 16,989+1.9%
**Excluding Oregon Steel Mills operations
25
Average Russian Market Prices for Long Products*
US$
100
250
400
550
700
850
1,000
Aug-
03Oct
-03
Dec-0
3Fe
b-04
Apr-0
4Ju
n-04
Aug-
04Oct
-04
Dec-0
4Fe
b-05
Apr-0
5Ju
n-05
Aug-
05Oct
-05
Dec-0
5Fe
b-06
Apr-0
6Ju
n-06
Aug-
06Oct
-06
Dec-0
6
H-beams Channels Angles Rebars
* On FCA basis
Source: Evraz market estimates
26
Non-Russian Prices for Slabs & Billets
US$
0
100
200
300
400
500
600
Aug-
03Oct
-03
Dec-0
3Fe
b-04
Apr-0
4Ju
n-04
Aug-
04Oct
-04
Dec-0
4Fe
b-05
Apr-0
5Ju
n-05
Aug-
05Oct
-05
Dec-0
5Fe
b-06
Apr-0
6Ju
n-06
Aug-
06Oct
-06
Dec-0
6
Billet (FOB, Far East) Slab (FOB, Far East)
Source: Metall-courier