Russian Metals & Mining
PTs cut on poor outlook. Cost advantages a boon for
exporters.
Steel
Yuriy A VlasovAC
(7-495) 967-7033
yuriy.a.vlasov@jpmorgan.com
J.P. Morgan Bank International LLC
Summary Ratings and Estimates
Company Price Rating Price Target PT End Date Metric Current FYE Next FYE
Evraz Group SA ($) 6.50 OW ($) 20.00 Feb-10 Adj. EPS ($) 11.20 ($) 3.75
prior ($) 33.00 Sep-09 ($) 12.91 ($) 5.91
Magnitogorsk Iron & Steel Works OSJC ($) 0.15 N ($) 0.50 Feb-10 Adj. EPS ($) 0.19 ($) 0.08
prior Oct-09 ($) 0.20 ($) 0.11
Severstal OAO ($) 2.40 UW ($) 5.30 Feb-10 Adj. EPS ($) 3.02 ($) 0.41
prior Oct-09 ($) 3.19 ($) 0.61
Raspadskaya Coal Company ($) 0.82 N ($) 2.00 Feb-10 Adj. EPS ($) 0.70 ($) 0.12
prior Dec-09 ($) 0.58 ($) 0.21
Source: Company data, Reuters, J.P. Morgan estimates. All prices as at 22 Jan 09 except for Severstal[21 Jan 09].
See page 35 for analyst certification and important disclosures, including non-US analyst disclosures.
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Russian steel output dynamics, y/y
%
15%
-7%
-25% -40%
-20%
0%
20%
2008E 2009E 2010E
Source: J.P. Morgan estimates.
Downside risks to our PT and rating:
-Falling demand for steel and coal
-Low pricing due to excess of steel
offered
-End of the state financial support
-Rising cost of debt and credit
unavailability
-Protective measures for the Russian
steel at export market
Upside risks to our PT and rating:
-Strong global recovery in steel and
coal demand
-Growing cost differentiation between
domestic and export prices
-Rapid recovery of the domestic steel
demand.
• Cautious outlook for 2009, partial recovery in 2010. 2009 EPS are down
to -57-86% (from -43-81% y/y) reflecting worsening industry fundamentals.
Partial recovery in earnings is expected in 2010 with EPS up 12-63% y/y.
The view is based on 2009 Russian GDP decline of -1% y/y, (3.5% y/y in
2010) and RUB/$ average exchange rate of 35.3 in 2009 (34.8 in 2010).
• 2009 revenue to decline by 41-54% y/y on weak volumes and falling
prices. We see a 25% y/y drop in domestic steel output in 2009. As steel
prices look set to weaken (-31% y/y, HRC, EXW, JPMe) we forecast
revenue decline of 41-54% y/y in 2009. Domestic industry moderate
recovery in volumes (15% y/y) and pricing (6-8% y/y) support revenue
growth (6-21% y/y) in 2010, we believe.
• Margins are expected to decline despite falling costs in 2009. With costs
down (-53% y/y, coking coal, EXW, JPMe), margins in 2009 should decline
as fixed costs to remain unchanged. We expect margin recovery in 2010 due
to neutral cost dynamics (0% y/y for coal) and improved operational
leverage.
• Non-payments are seen as the main issue. Some Russian steel and mining
corporates still receiving state financial support, with comfortable levels of
cash-flow to service their debts. The problem of non-payment is evident,
coal producers to be affected the most as the last part of the payment chain.
• We maintain our cautious outlook for the industry. 1H09 is going to be a
difficult period for the industry due to deteriorating environment and low
visibility. With much of fundamental deterioration is priced in, we intend to
re-test our fundamentals with better market visibility.
• Cost advantage could be the next trigger. Cost advantage ($120/t, JPMe)
due to a weak ruble could re-focus the Russian steelmakers on the export
market, quick global steel recovery allowed. Lower tariffs and transport
availability should provide an additional incentive to export.
• Evraz remains OW (PT $20.00, down from $33.00) on low cash cost and
export exposure. Raspadskaya (PT of 2.00) and MMK (PT of $0.50) remain
Neutral. Severstal (PT of $5.30) remains UW due to its strong expansion
into distressed US assets and exposure to the US automotive sector.

Table of Contents
Investment thesis .....................................................................3
Economy and industry outlook...............................................5
New domestic macroeconomic forecast.......................................................................5
Global industry outlook ...............................................................................................5
Domestic industry outlook...........................................................................................7
Domestic long steel market..........................................................................................8
Domestic flat steel market ...........................................................................................9
Export dynamics ........................................................................................................10
Domestic steel output.................................................................................................12
Cost structure .............................................................................................................12
Steel pricing outlook..................................................................................................14
Company Profiles...................................................................17
Evraz Group ............................................................................18
Valuation analysis......................................................................................................18
Risks to our Rating and Price Target .........................................................................19
Recent events .............................................................................................................20
MMK.........................................................................................22
Valuation analysis......................................................................................................22
Risks to our Rating and Price Target .........................................................................23
Recent Events ............................................................................................................24
Severstal .................................................................................26
Valuation analysis......................................................................................................26
Risks to our Rating and Price Target .........................................................................28
Recent events .............................................................................................................28
Financial Summary ....................................................................................................29
Raspadskaya ..........................................................................30
Valuation....................................................................................................................31
Risks to our Rating and Price Target .........................................................................33
Recent events .............................................................................................................34
Financial Summary ....................................................................................................34