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Annual Report & Accounts 2012

Chairman's statement

Our strategy is aimed at increasing long-term value and providing the conditions for growth and our key focus will be on continuing to strengthen the stability of our business.

Vladimir Lisin

Chairman of the Board of Directors

Strategic progress

The past year has been a challenging one for the global steel industry. The imbalance between demand and supply has grown and there are now approximately 0.5 bn t of surplus production capacity. This situation in the industry is nothing new but this time it is on a much greater scale and is exacerbated by high raw material prices. The risk of a prolonged recession in the Eurozone and the lack of clear signals of accelerated growth from the Chinese economy make the crisis in the traditional steel producing regions especially grave. Under these conditions, the most stable companies are those that have been able to integrate quality raw material sources, that have access to large markets, or are able to supply premium products and services. In the course of the last fifteen years, we have established exactly this type of business – one that focuses on our main advantages, stable and capable of developing under any market conditions. The result has lived up to our expectations and has been well worth the effort. NLMK is consistently one of the most profitable companies in the industry, demonstrating impressive growth.

For more information on the market environment

Performance overview

In 2012, as the result of our new efficient production facilities in Russia, the Group increased production by 25% to 14.9 mt. Sales also increased to a record 15.2 mt, thanks to the close integration with our rolling assets in key markets. Profits (EBITDA) were US$ 1.9 billion and profitability reached 16%, one of the highest in the industry.

For more information on our financial performance

This year, the decision to pay out dividends was taken based on an all-round analysis of possible development scenarios. We came to the conclusion that the Group has sufficient internal resources to maintain stability. This certainty is supported, among other things, by our unchanged high investment grade ratings, the successful placement of the second Eurobond issue in February 2013 and an agreement on restructuring with the workers of La Louvière, our Belgian asset. Based on this, we have decided to pay out dividends for 2012 in the amount of RUB 0.62 per share, or 20% of the Company’s net profit, strictly in line with our dividend policy that the Company has adhered to over the last ten years.

For more information for our shareholders

Strategy

Our strategy is aimed at increasing long-term value and providing the conditions for growth and our key focus will be on continuing to strengthen the stability of our business. Through a programme of modernization coupled with an increase in production capacity, we have been able to diversify both geographically and in terms of our product range. Over 90% of our steel production is in Russia, where our raw material assets are located, and this enables us to retain our leading position as a cost-effective producer. Meanwhile, the significant growth in finished product manufacturing capacity, including the organic growth of niche segments and the acquisition of rolling assets, has allowed us to increase sales of high value added products in close proximity to our end consumers. This is true for sales of automotive steel and thick plates in Europe and of pre-painted steel and rebar in Russia.

The period of organic growth that began in 2005 will come to an end in 2013 with the launch of NLMK Kaluga mini mill. The focus today is on further improving the business, which includes making efforts to lower costs, through improving the supply of raw materials and by increasing operating efficiency. Another important area is expanding sales of new products and developing better service.

Going forward, we intend to stick to our conservative financial policy and investment discipline. We believe it is optimal to invest only in those projects that guarantee high returns on capital. If it is not possible to invest on this basis, funds will be returned to shareholders.

For more information on our strategy

Corporate governance

I would like to note the importance of the continuity in the successful development of the Group. Last year, Oleg Bagrin took over as President of the Group. He has been on the Board of Directors since 2004 and was recently Chairman of the Strategic Planning Committee. I am confident that, under his leadership, the management team will be able to successfully take on the challenges we face today and move forward.

I also consider it vitally important that all members of the Board of Directors have the rich industry experience necessary to fairly assess the work of the management team, to make timely and relevant decisions and to implement rigorously changes to improve the business. The investment community and experts have a high regard for NLMK’s level of transparency and its overall system of corporate governance, which is rightly considered to be one of the best in the industry.

For more information on our corporate governance

Employees

I am deeply confident that the long-term success of the Group is down to the quality of our HR policy, led by a cohesive management team, which motivates all staff. Therefore in 2010, as Chairman of the Human Resources, Remuneration and Social Policies Committee of the Board of Directors, I made the decision to lead work on making constant improvements in this area. I envisage one of the main projects for the near future to be increasing organizational efficiency, developing a culture of involvement where all staff members take an interest in the results of their work. The aim of this is to establish the conditions required for all employees to realize their full potential.

For more information on our employees

Corporate responsibility

One of the key goals for us is to improve the working conditions and safety for our employees. Production upgrades and the management’s consistent efforts have allowed us to make significant progress in this area. Nonetheless, today it is critically important for us to continue to fight against the conscious violations of safety rules, to ensure that normative documents correspond to the actual state of things and to prevent dangerous situations through the efforts of our engineering personnel. We are committed to consistently improving the working conditions for our staff and to making working conditions safer.

Over the last ten years, US$ 870 million has been invested into projects directly related to water treatment and dedusting systems, to reducing emissions and waste. This means that despite a 38% growth in production, we have reduced emissions per tonne of steel by 42% at Novolipetsk. We are also striving to make improvements at our other sites and our new mill in Kaluga is designed as the cleanest in Russia. Investments in reducing environmental impact may not bring the highest capital returns today but they are critically important for the long-term value of the Group.

Summing up, I would like to particularly note the contribution of the Group’s employees in achieving excellent results in 2012 and wish NLMK continued success for the benefit of all of its staff and shareholders.

Sincerely,

Vladimir Lisin

Chairman of the Board of Directors

World steel capacity and run rates

Crude steel production (mt)

Excess capacity (mt)

Capacity utilization rates, rhs

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Sustainable production growth

Crude steel production at Novolipetsk (mt), lhs

Specific air emissions (kg/t), rhs

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Productivity growth at Novolipetsk (t/employee)
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Dividend payments (US$ m)

Dividend payment (US$ m), lhs

Dividend payout ratio, rhs

* The total dividend payment for the year 2012 is subject to approval by the annual General Meeting of shareholders, to be held in June 2013
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