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OAO Severstal (56IZ)

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Monday 01 November, 2004

OAO Severstal

Interim Results

OAO Severstal
01 November 2004

                                                                     NOT AUDITED
                                   Severstal
                  Condensed consolidated financial statements
                     for the six months ended June 30, 2004

Contents

Condensed consolidated balance sheet

Condensed consolidated statement of operations

Condensed consolidated statement of cash flows

Condensed consolidated statement of changes in shareholders' equity

Notes to the condensed consolidated financial statements

                                    
                                    Severstal
                      Condensed consolidated balance sheet
                                 June 30, 2004
               (Tabular amounts expressed in millions of roubles)

                                                    June 30,       December 31,
                                                       2004               2003
                                                     --------          --------
Assets
  Current assets:
    Cash and cash equivalents                        35,497            13,657
    Reserves at Central Bank of Russia                  371               390
    Banking assets                                    5,451             3,463
    Trade accounts receivable                         9,752             4,889
    Inventories                                      20,024             9,993
    Amounts receivable from related parties           2,344             1,516
    VAT recoverable                                   2,890             2,450
    Income tax recoverable                              381                65
    Other current assets                              5,641             2,086
    Lease receivables                                     2                 6
    Financial assets                                 10,574             7,543
                                                     --------          --------
  Total current assets                               92,927            46,058
                                                     --------          --------

  Non-current assets:
    Amounts receivable from related parties           4,437             5,344
    Lease receivables                                     -                 1
    Financial assets                                  7,610             4,626
    Property, plant and equipment                    61,642            57,166
    Intangible assets                                    31                34
                                                     --------          --------
  Total non-current assets                           73,720            67,171
                                                     --------          --------

Total assets                                        166,647           113,229
                                                     ========          ========

Liabilities and shareholders' equity
  Current liabilities:
    Trade accounts payable                            6,733             3,170
    Bank customer accounts                            1,258             1,499
    Amounts payable to related parties                1,791             1,059
    Income taxes payable                              2,813               175
    Other taxes and social security payable             900               505
    Deferred income                                      44                62
    Debt finance                                      3,669             5,324
    Lease liabilities                                    15                 7
    Dividends payable                                   307             1,163
    Other current liabilities                         5,022             3,730
                                                     --------          --------
    Total current liabilities                        22,552            16,694
                                                     --------          --------

  Non-current liabilities:
    Debt finance                                     40,837            10,100
    Lease liabilities                                    11                13
    Deferred tax liabilities                          7,629             7,143
    Other non-current liabilities                     1,316             1,171
                                                     --------          --------
    Total non-current liabilities                    49,793            18,427
                                                     --------          --------

  Minority interest                                   1,929             1,612
                                                     --------          --------

  Shareholders' equity:
    Share capital                                    97,528            97,528

    Treasury shares                                      (3)                -
    Revaluation reserve                              20,076            21,457

    Accumulated deficit                             (25,228)          (42,489)
                                                     --------          --------
    Total shareholders' equity                       92,373            76,496
                                                     --------          --------

Total
liabilities
and
shareholders'
equity                                              166,647           113,229
                                                     ========          ========

                                    Severstal
                 Condensed consolidated statement of operations
                         Six months ended June 30, 2004
 (Tabular amounts expressed in millions of roubles, except shares and earnings
                                   per share)

                                                Six months       Six months
                                                 June 30,         June 30,
                                                      2004               2003
                                                    --------           --------

Sales
  Sales - external                                  74,030             42,786
  Sales - to related parties                         5,288              2,488
                                                    --------           --------
                                                    79,318             45,274

  Cost of sales                                    (48,346)           (27,599)
                                                    --------           --------
Gross profit                                        30,972             17,675

  Indirect taxes and contributions                    (121)              (353)
  Selling, general and administration               (3,683)            (1,694)
  expenses
  Distribution expenses                             (5,569)            (4,666)
  Net other operating expenses                        (756)               153
  Net expenses with insurance operations              (291)              (321)
  Net income from bank lending operations              123                 15
  Net income/(expenses) from securities                542                404
  operations
                                                    --------           --------
Profit from
operations                                          21,217             11,213

  Non-operating expenses                              (309)              (475)
  Impairment of property, plant and                    272                  -
  equipment
  Impairment of goodwill                                 -                  -
  Write off of negative goodwill                     2,128                 77
  Share of associates losses                           108                  -
                                                    --------           --------
Profit before
financing and
taxation                                            23,416             10,815

  Net financing (expense)/income                    (1,283)               (45)
                                                    --------           --------
Profit before
income tax                                          22,133             10,770

Income tax
expense                                             (4,750)            (2,582)
                                                    --------           --------
Profit/(loss)
for the year                                        17,383              8,188

Profit
attributable
to minorities                                         (173)               (47)
                                                    --------           --------
Profit/(loss)
attributable
to
shareholders                                        17,210              8,141
                                                    ========           ========

Weighted average number of
  shares outstanding during the year            22,074,192         22,074,192
                                                    ========           ========

Basic and
diluted
earnings per
share
(roubles)                                           779.64             368.80
                                                    ========           ========

                                    Severstal
                 Condensed consolidated statement of cash flows
                         Six months ended June 30, 2004
               (Tabular amounts expressed in millions of roubles)

                                                          Six months     Six months
                                                           June 30,       June 30,
                                                                2004           2003
                                                              --------       --------
Operating activities:
  Profit before financing and taxation                        23,416         10,815

  Adjustments to reconcile profit to cash provided by
  operating activities:
    Depreciation of property, plant and                        3,295          3,278
    equipment
    Amortization of intangible assets                              3              2
    Asset impairment                                            (272)             -
    Negative goodwill written off                             (2,128)           (77)
    Remeasurement (gain)/loss                                      -           (961)

    Loss on disposal of property, plant                          474            125
    and equipment

    Loss on disposal of financial                                143             (3)
    assets

    Adjustment of financial assets to                           (390)          (182)
    fair value
    Share of associates income                                  (108)             -
    Bank loan loss provisions                                     22             26
    Provision for doubtful accounts                               98              3
    receivable

    Changes in operating assets and
    liabilities:
      Reserves at Central Bank of                                 19           (114)
      Russia
      Banking assets                                          (2,010)        (1,668)
      Trade accounts receivable                               (3,048)          (828)
      Amounts receivable from related                            115         (5,089)
      parties
      VAT recoverable                                           (438)          (130)
      Inventories                                             (4,303)          (256)
      Lease receivables                                            5              6
      Other current assets                                    (2,424)          (192)
      Short term bank deposits                                (2,282)          (111)
      Trade accounts payable                                   2,251            652
      Bank customer accounts                                    (241)           270
      Amounts payable to related                                 231            (52)
      parties
      Other taxes and social security                             21            570
      payable
      Deferred income                                            (18)           (21)
      Other current liabilities                                  517            866
      Other non-current liabilities                              145            153
                                                              --------       --------
  Cash generated from operations                              13,093          7,082

    Interest received (excluding banking                         499            306
    operations)
    Interest paid (excluding banking                            (849)          (305)
    operations)
    Income tax paid                                           (3,209)        (3,153)
                                                              --------       --------
  Net cash provided from operating                             9,534          3,930
  activities                                                  --------       --------

Investing activities:
  Additions to property, plant and                            (6,023)        (2,392)
  equipment

  Additions to financial assets                               (1,651)       (10,180)
  Buy out of minority interests                                    -            (12)
  Net cash outflow on acquisition of:
    Severstal North America Inc                               (6,985)             -
    OAO Fingo                                                    (50)             -



  Purchase of treasury shares                                     (3)             -

  Proceeds from disposal of property,                            221             67
  plant and equipment

  Proceeds from disposal of financial                            485          8,595
  assets

                                                              --------       --------
  Cash used for investing activities                         (14,006)        (3,922)
                                                              --------       --------

Financing activities:
  Proceeds from debt finance                                  38,102          4,682
  Repayment of debt finance                                   (9,778)        (2,483)

  Repayment of lease finance                                     (15)             3
  Parent company dividends paid                               (2,318)        (1,026)
  Minority capital contributions                                  21              -

  Dividends from associates                                      166              -

                                                              --------       --------
  Cash provided from financing                                26,178          1,176
  activities                                                  --------       --------

Effect of
exchange rates
on cash and
cash
equivalents                                                      134            224

Net
(decrease)/inc
rease in cash
and cash
equivalents                                                   21,840          1,408

Cash and cash
equivalents at
beginning of
year                                                          13,657          5,579
                                                              --------       --------
Cash and cash
equivalents at
end of year                                                   35,497          6,987
                                                              ========       ========

                                    Severstal
      Condensed consolidated statement of changes in shareholders' equity
                         Six months ended June 30, 2004
               (Tabular amounts expressed in millions of roubles)

                          Share      Additional     Treasury     Revaluation     Accumulated
                         capital      capital        shares        reserve         deficit        Total
                          -------      -------       -------        -------        --------       -------

Balances at
December 31,
2002                      97,528              4            -          24,508         (52,362)    69,678

  Dividend                     -              -            -               -          (1,014)    (1,014)
  Realization of
  revaluation reserve:

    Disposals                  -              -            -             (83)             83          -
    Depreciation               -              -            -          (1,834)          1,834          -
    Deferred tax on            -              -            -             456            (456)         -
    realization

  Loss attributable to         -              -            -               -           8,141      8,141
  shareholders
                          -------        -------      -------        -------        --------    -------
Balances at
June 30, 2003             97,528              4            -          23,047         (43,774)    76,805
                          =======        =======      =======        =======        ========    =======



Balances at
December 31,
2003                      97,528              -            -          21,457         (42,489)    76,496

  Dividends                    -              -            -               -          (1,462)    (1,462)

  Purchase of treasury         -              -           (3)              -               0         (3)
  shares




  Realization of
  revaluation reserve:

    Disposals                  -              -            -             (73)             73          -
    Depreciation               -              -            -          (1,743)          1,743          -
    Deferred tax on            -              -            -             435            (435)         -
    realization






  Foreign exchange             -              -            -               -             132        132
  differences
  Profit attributable          -              -            -               -          17,210     17,210
  to shareholders
                          -------        -------      -------        -------        --------    -------
Balances at
June 30, 2004             97,528              -            -          20,076         (25,228)    92,373
                          =======        =======      =======        =======        ========    =======

                                    Severstal
            Notes to the condensed consolidated financial statements
                     for the six months ended June 30, 2003
               (Tabular amounts expressed in millions of roubles)

1. Commentary on results
The results of the six months ended June 30, 2004 reflect (i) the continued high
steel prices around the world arising not least form high Chinese demand; and
(ii) the acquisition of the steel making assets of the Rouge Steel Company Inc.
These assets contributed Rbs 11,444 million of sales and Rbs 154 million of net
profits to the Group result in the five months following their acquisition.
The consequences of the above two items (high world steel prices and former
Rouge assets) essentially explain all the changes in the results between 2004
and 2003.
2. Accounting policies
These consolidated financial statements for the OAO Severstal Group ('the
Group') are prepared in accordance with International Financial Reporting
Standards ('IFRS') as issued by the International Accounting Standards Board,
and use the accounting conventions and accounting policies as were used to
prepare the Group's consolidated financial statements for the year ended
December 31, 2003 except for the functional and presentation currency.
After extensive reviews of OAO Severstal's ('the Parent Company') present and
expected future operations management has determined that the Parent Company's
functional currency changed from the United States dollar ('US dollar') to the
Russian rouble. This change reflects (i) the consequences of the recent changes
in the Russian economic environment; and (ii) a move away from commodity steels
sold in spot markets to value added products for specific customers; both of
which combined together to permit the Parent company to move its selling and
purchasing activities from mainly US dollar based transactions to mainly rouble
based transactions.
As a result of this change in the Parent Company's functional currency, these
condensed consolidated financial statements have been presented in roubles and
the date of transition to rouble reporting has been set at January 1, 2004. The
comparative information contained in these financial statements has been
converted into roubles by multiplying financial information presented previously
in US dollars by the official Central Bank of Russia exchange rate on January 1,
2004 of Rbs 29.4545 per US$ 1.00.
3. Seasonality
There are no material seasonal effects in the business activities of the Group.

4. Related party balances
                                                       June 30,   December 31,
                                                           2004           2003
Amounts receivable from related parties:
  Advances paid                                             423            390
  Trade accounts receivable                               1,892          1,111
  Other receivables                                       4,466          5,359
                                                          6,781          6,860
                                                        =======        =======
Maturity analysis:
  within one year                                         2,344          1,516
  after more than one year                                4,437          5,344
                                                          6,781          6,860
                                                        =======        =======

Banking assets include loans to
related party
customers of                                                711          1,225

Current financial assets include the following
balances with related parties:
  Held to maturity securities - bank deposits             1,536            641
  Originated loans                                          634            285
  Trading securities - promissory notes                     339            537

Non-current financial assets include the following
balances with related parties:
  Originated loans                                        3,190          3,047
  Held-to-maturity securities - promissory notes             81              2

Amounts payable to related parties:
  Advances received                                         127             50
  Trade accounts payable                                  1,600            696
  Other accounts payable                                     12            297
  Bank demand deposits                                       52             14
  Bank term deposits                                          -              2
                                                          1,791          1,059
                                                        =======        =======

Debt finance
includes loans
received from
related parties of                                          407            184

5. Related party transactions
                                     Six months June           Six months June
                                            30, 2004                  30, 2003
Income:
  Sales                                        5,288                     2,488
  Insurance premiums                              50                        28
  Banking income                                  78                        26
Expenditure:
  Purchases - non capital                     11,279                     6,848
  Purchases - capital                             28                        17
  Bank expenses                                    -                         -
  Insurance claims                                21                        11

6. Commitments and Contingents
The Group has provided for all significant contingent liabilities which are
probable of assertion and success.
As at June 30, 2004 the Group had capital commitments of Rbs 8,479 million
(December 31, 2003: Rbs 6,129 million).
At June 30, 2004 the Group had given Rbs 5,416 million (December 31, 2003: Rbs
4,521 million) of guarantees for bank borrowings, of which Rbs 3,913 million
(December 31, 2003: Rbs 1,517 million) were in respect of related parties. Of
these guarantees, all except one for Rbs 1,415 million (December 31, 2003: Rbs
221 million), mature within one year. The Rbs 1,415 million (December 31, 2003:
Rbs 221 million) guarantee to a bank matures as the loan is repaid in
installments up to 2011.
7. Subsidiary and associated companies
On January 30, 2004 the Group acquired the assets and business of the Rouge
Steel Company Inc, through its US subsidiary Severstal North America Inc, for
Rbs 7,565 million.
During January 2004, the Group acquired 30% of the share capital of OAO Fingo
for Rbs 56 million, with an obligation to purchase an additional 23% of the
outstanding share capital.
These acquisitions had the following effect on the Group's assets and
liabilities:
Cash and cash equivalents                                                  586
Trade accounts receivable                                                2,026
Amounts receivable from related parties                                     36
VAT recoverable                                                              2
Inventories                                                              5,728
Other current assets                                                       823
Financial assets                                                         2,447
Property, plant and equipment                                            2,177
Trade accounts payable                                                  (1,314)
Amounts payable to related parties                                        (501)
Other taxes and social security payable                                    (66)
Other current liabilities                                                 (775)
Debt finance                                                               (14)
Lease liabilities                                                          (16)
Deferred tax liabilities                                                (1,267)

Net identifiable assets and liabilities                                  9,872
Minority interest                                                         (123)
Goodwill on acquisition                                                 (2,128)

Consideration satisfied in cash/dividend payout                          7,621
Net cash outflow                                                         7,035

In December 2003, the Group acquired a 100% controlling interest in the share
capital of ZAO Firma Stoik, from a company under common shareholder control. In
accordance with the Group's accounting policies for such transactions, the
comparative financial information in these condensed consolidated financial
statements has been restated to include the results of ZAO Firma Stoik.
8. Segmental information - Statement of operations

                                            Net Sales              Profit before
                                                                   financing and
                                                                           tax
Six months ended June 30, 2004:
  Steel segment                                        76,260           22,497
  Metalware segment                                     7,345              624
  Financing segement                                        -               34
  Insurance segement                                        -              177
  Inter segmental transactions                         (4,287)              84
  Total                                                76,260           23,416

Six months ended June 30, 2003:
  Steel segment                                        42,178           10,389
  Metalware segment                                     3,280               10
  Financing segement                                        -               52
  Insurance segement                                        -              227
  Inter segmental transactions                           (184)             137
  Total                                                45,274           10,815

9. Post balance sheet events
During July 2004 the Group acquired an additional 10.12% of the ordinary share
capital of OAO Orlovsky Steel Rolling Mill ('OSPAZ') for Rbs 135 million,
thereby increasing the Group's total shareholding in OSPAZ to 29.12%.
On September 14, 2004 Severstal's shareholders approved an interim dividend for
the first half-year of 2004 of Rbs 100.00 per share. On October 22, 2004 the
Board of Directors recommended the payment of an interim dividend for the third
quarter of 2004 of Rbs 230.00 per share.
On October 6, 2004 Severstal applied for regulatory approval of share split (1
to 25) following the authorization given by Severstal's shareholders on May 21,
2004.
On October 12, 2004 ZAO Severgal drew down the remaining US$ 25 million of its
US$ 90 million credit facility with European Bank for Reconstruction and
Development.
                                     * * *



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