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Rating Action:

Moody's changes the outlook of MMK's Ba3 rating to positive

22 Jul 2010

Moscow, July 22, 2010 -- Moody's Investors Service has changed the outlook for Magnitogorsk Steel OJSC's ("MMK") Ba3 corporate family rating and the outlook on MMK's Aa3.ru national scale rating to positive from stable.

This rating action reflects the fact that in spite of negative global conditions for steel producers in 2009, the company demonstrated stable financial results as evidenced by modest leverage and sound profitability. The resilient performance in 2009 is indicated by a strong EBITDA margin of 24.3% and debt/EBITDA leverage of 1.78x based on Moody' s adjusted numbers -- presently, one of the lowest in the steel industry. Overall, the company's recent financial results indicate improving profitability, a sound liquidity profile, and conservative financial metrics. Still weighing on the rating nonetheless are the relatively low historical vertical integration of the company's operations and the ambitious capital expenditures program which is likely to lead to material negative free cash flow in 2010.

Moody's notes that the company's level of total debt, USD 2.1 billion as of December 31, 2009, has remained relatively low in spite of significant capex investments made over the last 3 years totaling USD 5 billion. In 2009, MMK completed a significant investment project - Mill-5000 with a thick plate annual capacity of 1.5mnt and continues to invest in the construction of steel making facilities in Turkey which should help to improve MMK's business profile.

Historically, the company had a significant exposure to volatility in raw materials prices due to limited vertical integration. The 2009 acquisition of Belon, the Russian coal producer, helped improve MMK's level of self-sufficiency in coal to 50% and to protect its profitability against rising coal prices in 2010 and onward.

The current Ba3 rating reflects: (i) a historical track record of solid operating performance and robust internal cash generation that has enabled the company to modernise its asset base and implement extensive capital investments in downstream production; (ii) a leading market position in a number of value-added product segments, such as hot-rolled, cold-rolled and galvanised flat steel; (iii) a continued focus on vertical integration and improvements in its raw material supply; and (iv) conservative financial policies including an aversion to large M&A transactions.

Furthermore, the rating continues to reflect: (i) the company's lack of full integration in iron ore and only partial integration into coal; (ii) the company's concentrated ownership; (iii) the company's dependency on export revenue which accounted for 36% of total revenue in 2009; (iv) an ambitious on-going capex plan which might require additional capital and result in increased leverage going forward; and (v) the challenging operating environment in Russia, which is characterised by significant political, legal, fiscal and exchange-rate risks.

The rating could be moved up if the company continues to demonstrate a conservative financial profile with 1) the ratio of gross debt/EBITDA maintained below 2.0x on a sustainable basis and 2) negative free cash flow is progressively reduced from 2009 to not exceed materially USD 500 million in 2010 with visibility towards further improvement thereafter. Moody's also expects that MMK's liquidity will be prudently managed.

The last rating action was on February 02, 2009 when Moody's downgraded MMK rating to Ba3 with a stable outlook.

The principal methodology used in rating MMK was Moody's Global Steel Industry rating methodology, published January 2009, which can be found at www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating MMK can also be found in the Rating Methodologies sub-directory on Moody's website.

Magnitogorsk Iron & Steel Works ('MMK"), created in 1932 at that time in close proximity to iron-ore reserves, is one of Russia's largest integrated steel producers (by volume and assets). MMK's principal assets include a single site for crude steel in Magnitogorsk in the Southern Urals region.

For the financial year 2009, MMK produced 9.6 million tons of crude steel and 8.8 million tons of steel products. In 2009, the company reported USD 5.1 billion in revenue and USD 1.3 billion in EBITDA. In 1Q 2010, MMK generated USD 1.65 million in revenue and USD 364 million in EBITDA.

The company is majority controlled by its Chairman of the Board of Directors, Mr. Victor Rashnikov, who presently holds 87.3% stake in the company. Following the IPO MMK has a free float of 12.7%.

Paris
Eric de Bodard
MD - Corporate Finance
Corporate Finance Group
Moody's France S.A.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moscow
Larissa Loznova
Vice President - Senior Analyst
Corporate Finance Group
Moody's Eastern Europe LLC
Telephone: +7 495 228 6060
Facsimile: +7 495 228 6091

Moody's changes the outlook of MMK's Ba3 rating to positive
No Related Data.
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