Severstal PAO 1Q16IFRS highlights:strong liquidity,low leverage and weak earnings

　　Severstal today reported 1Q16 IFRS results. Overall, we view Severstal’s creditmetrics as solid underpinned by strong liquidity and low and manageableleverage. However, sluggish operating environment in Russia, lower averageselling prices, weaker sales volume and production disruptions related toSevernaya mine weighed on Severstal’s earnings performance. 1Q16 totalrevenues and EBITDA declined 28.3% and 53.5% YoY respectively. This wasled by sharp decline in average selling prices (-16% QoQ and -27% YoY) andlower sales volume. Lower COGS (-13% YoY and -19% QoQ) and SG&A (-11%YoY and -7% QoQ) helped in partially containing margin contraction as EBITDAmargin declined to 24.5% (-300bps QoQ and1,323bps YoY). 1Q16 Net incomeimproved significantly compared to net loss in 4Q15, driven by USD175m ofFX gains.

　　Strong liquidity and low leverage.

　　Severstal’ 1Q16 net leverage (net debt / EBITDA) stood at 0.5x, up marginallyfrom 0.4x a quarter ago. Total debt remained unchanged at USD2.4bn whilenet debt was reported at USD887m. The company’s short term maturity profileis manageable with only USD582m due in the next one year (includingUSD247m of Eurobond due in July-16). Severstal has a strong liquidity bufferwhich includes USD1.5bn of cash (80% denominated in USD) and USD625mof committed credit lines which together covers approximately 90% of thecompany’s total outstanding debt.