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By John Helmer, Moscow

Severstal, the Russian steelmaker owned by Alexei Mordashov (image, far left, far right) reported today that in the final quarter of 2012 the company suffered a loss of $150 million after revenues fell to $3.12 billion, down 13.2% from the third quarter; earnings (Ebitda) contracted 36.4% to $347 million; and operating profit plunged 63.1% to $136 million. These results were significantly worse than Moscow steel industry analysts had been forecasting.

This is not the biggest quarterly loss at Severstal which Mordashov has run up in recent years. In 2009, for example, the first-quarter loss came to $303.3 million; that was topped in the second quarter by a loss of $685.5 million. The third-quarter bottom-line was barely above break-even, but in the fourth quarter of that year, the loss came to $97.3 million. Then Mordashov achieved his worst-ever quarterly loss — $777.9 million in the first quarter of 2010.

The record was so bad that in June 2009 Mordashov and the public shareholders agreed not to pay the annual dividend for 2008. The dividend was not resumed until December of 2010, according to the company’s financial report for that year. See — page 57.

This time Mordashov, who owns 79.2% of Severstal shares, has announced that despite the quarter of loss-making – the year-end profit was down 63% to $762 million – he is proposing to cast his votes to oblige the company to change its dividend policy. Instead of paying out 25% of bottom-line profit in dividends to shareholders, Mordashov has decided to pay a bigger proportion of a smaller pot… to himself.

But he is shy about admitting it. The company has told shareholders: “The Board is recommending a dividend of 1.89 roubles per share (approximately $0.06) for the twelve months ended 31 December 2012, reflecting the Board’s commitment to shareholder returns and confidence in the medium term outlook and the financial strength of the company.”

Uralsib Bank steel analyst Valentina Bogomolova has reported to clients “we expect
Severstal’s 2012 payout ratio to be higher than the 25% minimum stipulated in the dividend policy. “ When Severstal was asked what the payout ratio will be, a spokesman said; “[You] can calculate the ratio by yourself.” Dividing the reported dividend payout of “about Rb10.24 billion” ($340 million) by the total on the net income line of $762 million, the new payout ratio turns out to be 45%.

According to Bogomolova, the new ratio will be “more than 30% — about 32% to 33%. It depends on how to count net profit, including the paper write-downs or without them. I say 33% if we assume that the net profit for the 4th quarter was zero, excluding the write-downs. Accordingly, if you assume that in the 4th quarter they had a loss, then naturally, [the payout ratio] will be higher.”

Mordashov’s decision to reward himself for failure comes after the company announced last week that it has already cut back on investment spending last year, and plans even more cutting this year. Last month Severstal said it had reduced its plan of investment by $300 million from its September estimate of $1.7 billion. According to Alexei Kulichenko, chief financial officer of Severstal, “we adopt a prudent approach to our capital expenditure, adjusting investment to market conditions.”

In remarks to Moscow analysts yesterday evening, Mordashov admitted he cannot afford to develop the Putu iron-ore mining project in Liberia, and is looking to sell a majority stake; he said that privately in London last year.

This time Mordashov also said he is not proceeding with plans to build a new steelworks in India, nor an ironworks in Trinidad. Together, the investment required to proceed would be at least $900 million. Mordashov blamed the Indian and Trinidad authorities for not granting more favourable terms.

As for blame for its performance weakness in the December quarter, Severstal said in a report released yesterday that the decline in revenues reflected seasonal shrinkage of demand because of winter, plus the cyclical downturn in demand, lower realized sale prices, and lower sales volumes. Winter was also to blame in the December quarter of 2009, but loss-making in the second quarter of 2009 and the first quarter of 2010 cannot have been meteorological.

In Severstal’s latest report, there were several additional, also non-meteorological problems the management acknowledges. The company has reported a write-down in asset value (impairment) of $49 million at its struggling PBS Coals division in West Virginia, plus another $101 million written down for the value of North American assets sold. For an assessment of how Mordashov’s business strategy in North America cost more than $2 billion, see here.

In the last quarter in the Russian division, Severstal says it booked an impairment charge of $42 million for doubtful debts owed to the mining division, Severstal Resources, and for a writedown in the value of unsold steel inventories.

The company offers several cautious forecasts for this year. In Russia, it says, “Although high oil prices support the Russian economy, steel consumption growth decelerated from 13% in 2011 to 2% in 2012. On the positive side, we may see growing steel demand in 2013 on the back of construction and infrastructure projects.”

In the Russian mining division, the company says that for this year “we anticipate average global iron ore prices to remain flat y/y, while coking coal prices could be lower, as compared to 2012.” In North America, demand for steel is expected to continue growing in the automotive sector. “After 17% growth in 2012, the automotive industry continues its upward trend with 2013 NAFTA auto production projected to increase 3% over 2012 to 15.9 million units. US pipe and tube demand has moderated but there are signs of recovery in 2013 based on increasing drilling activity and new pipeline projects.”

According to Mordashov, “our efficient business model and focus on costs control encourage us to remain confident about the future resilience and development of Severstal.”

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