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NMMZ CLN Comment Eng

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ƒƒƒƒƒƒƒƒƒƒARRANGER COMMENT The paper presents a brief sector and business survey as well as financial performance overview of Closed JSC Nizhneserginsky NSMMZ Metizno-Metallurgichesky Zavod (“NSMMZ” or “the Company”) regarding the announced placement of Credit Linked Notes. Highlights NSMMZ is a key producer of section steel and hardware of Key Financial Indicators, IFRS (US$ mln) metallurgy division of the Maksi-Group, which also incorporates division for iron and steel scrap collection and preparation. 200320042005 П 2006 ПNet Sales 124 215 429 560 According to IFRS financial statements, NSMMZ revenue has Operational Expenses 112 161 279 374increased in dollar terms by 73% to US$215 mln in 2004, the EBITDA 144112144Company’s EBITDA totaled US$44 mln. Net Profit (7)2 46 58 9 The Company has announced a substantial increase in sales in Operational Cash Flow (13) 50 92 1122005 due to modernization completion and further expansion of CAPEX 78212658production facilities. Free Cash Flow (92) (162) 27 104Margins In 2004, scrap collection exceeded internal needs more than two EBITDA margin 12 02 62 6times, thus providing substantial raw material base for further Net Profitargin (5)1 11 51growth of crude steel production in the coming years. Cash Flow margin (11) 23 21 20 The scrap-processing division of the Group consists of 42 Debt Indicators subsidiaries located throughout the country and secures second * *Total Debt 99 221 246 ...
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A RRANGER C OMMENT    The paper presents a brief sector and business survey as well as financial performance overview of Closed JSC Nizhneserginsky Metizno-Metallurgichesky Zavod (NSMMZ or the Company) NSMMZ  regarding the announced placement of Credit Linked Notes.  Highlights  ƒ  NSMMZ is a key producer of section steel and hardware of Key Financial Indicators, metallurgy division of the Maksi-Group, which also incorporates IFRS (US$ mln) division for iron and steel scrap collection and preparation.  2003 2004 2005 П 2006 П ƒ  According to IFRS financial statements, NSMMZ revenue has Net Sales 124 215 429 560 increased in dollar terms by 73% to US$215 mln in 2004, the Operational Expenses 112 161 279 374 Companys EBITDA totaled US$44 mln. EBITDA 1 44 112 144 Net Profit (7) 24 65 89 ƒ  The Company has announced a substantial increase in sales in Operational Cash Flow (13) 50 92 112 2005 due to modernization completion and further expansion of CAPEX 78 212 65 8 production facilities. Free Cash Flow (92) (162) 27 104 ƒ  In 2004, scrap collection exceeded internal needs more than two Margins times, thus providing substantial raw material base for further EBITDA margin 1 20 26 26 growth of crude steel production in the coming years. Net Profit margin (5) 11 15 16 Cash Flow margin (11) 23 21 20 ƒ  The scrap-processing division of the Group consists of 42 Debt Indicators subsidiaries located throughout the country and secures second Total Debt 99 * 221 * 246 204  position among competitors that allows the Group to control a Short-term Debt 7 18 50 34 cost of production. Long term Debt 34 124 195 169 ƒ  NSMMZ employs modern technology of scarp smelting in electric Interest Expense 2 6 16 17 furnaces. Installation of new furnaces, together with expansion Cash & Equivalents 2 0 69 114 of rolling facilities up to 1 mln tons, are to ensure significant Net Debt 39 136 177 90 growth in sales in 2005-2006. Debt/Sales 0.8 1.0 0.6 0.4 Debt ITDA 87.5 4.9 ƒ  At present, NSMMZ holds strong market positions: 11.6% of Debt//AEsBsets 0.50.502..5201..34 steel wire market, 9% of steel rod, 6.5% of other hardware, 4.5% of section steel for construction. Scrap division of the EExBpITenDsAe/ Interest 078.36.88.3 . Group provides for 5.2% of iron and steel scrap market. Liquidity ƒ  According to management, NSMMZ will reach 15% net margin in Current Ratio 0.7 0.6 1.3 1.7 2005-2006, due to increase in sales and tight cost control. Quick Ratio 0.5 0.4 1.0 1.4 Annualized ƒ  A successful public debt placement on the domestic bond market RUR/USD rate 30.628.828.028.5 in May 2005 has reduced average financial debt interest rate. RUR/USD rate  ƒ  Rapid sales growth created additional challenges for the end of year 29.45 27.828.028.5 management: cost control, further development of distribution * Including interest free loans granted by parent company chains and logistics are the primary ones.  Note: 2003-2004 financial statements are audited by PricewaterhouseCoopers.   
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Overview JSC Nizhneserginsky Metizno-Metallurgichesky Zavod (the Company) is a part of Maksi-Group (the Group), which consists of metallurgy division and division for iron and steel scrap collection and preparation. The Company receives procured scrap as a raw material from the latter division and produces hot-rolled section steel and hardware. The Companys production facilities are located in Urals region of Russian Federation, nearby Yekaterinburg  administrative and economic center of the region. The production facilities include an electric furnace steelmaking complex in Revda and a rolling complex in Nizhnie Sergy, another steelmaking and rolling production complex located in Berezovsky is currently under construction. Urals region provides for strong consumer demand for ferrous metallurgy output (24% of national consumption) and, in turn, for a good part of ferrous scrap supply. About 60% of scrap collection by the Groups scrap-preparing division is also made in the area.
Strategy The business strategy of the Group is aimed on strengthening its positions in high value-added end-use products market such as section steel for construction, steel wire and hardware. The strategy implies horizontal expansion of the Groups structure, modernization of production facilities and a substantial growth of production volumes. The key feature of Companys development concept is construction of mini-plants that would use electric furnace steelmaking technology and produce section steel by cost-effective continuous casting. The first mini-plant in Revda has been started in 2004; the second one is to be started in 2005. Construction of the third mini-plant in Berezovsky, as expected, is to be completed in 2007-2008. All of the plants are established on the base of the operating production facilities and use its infrastructure and capabilities. Nominal annual production capacity of each mini-plant is 1 mln tons. Companys long-term prospects include construction of 5 mini-plants in Borovsk (Kaluzhskaya oblast), Toliatti (Samarskaya oblast), Dzerzhinsk (Nizhegorodskaya oblast), Volgodonsk (Rostovskaya oblast) and Tosno (Leningradskaya oblast). In order to integrate the production cycle from scrap collection to production of section steel and hardware and ensure sustainable output growth, the Group has an ambition to develop one of the largest scrap collection networks in Russia and other CIS countries. The expansion strategy includes construction of new scrap collecting and preparing facilities and acquisition of other procured scrap producers, which are currently highly fragmented.
Ownership Structure And Brief History The Maksi-Group was established in 1998, by consolidation of the principal shareholders assets, acquired in mid 90s. At present, the Group is structured as a holding managed by JSC Maksi-Group. The only Shareholder of the Maksi-Group is Mr. Nikolay V. Maksimov. The consolidated organizational structure of the Group is presented below.
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Figure 1. Organizational structure of the Group Mr. Maksimov N.V. 100% JSC Maksi-Group
100% JSC Metallurgichesky Holding
100% Closed JSC «NMMZ»
100% LLC «Intehremont»
100% Closed JSC Uralvtorchermet
60-100% 42 subsidiaries
30% 40% 30% JSC Investment Company Maksi  Source: the Company The metallurgy division of the Group unites NSMMZ and Intehremont  associated service and repair company. The only shareholder of these companies is JSC Metallurgichesky Holding. The latter also incorporates five companies that represent mini-plants under construction. The scrap-processing division consists of 42 companies located mainly in Urals, Central and Volga regions. Closed Joint Stock Company Uralvtorchermet owns from 60% to 100% of these companies equity. JSC Investment Company Maksi is managing operational activities of both metallurgy and scrap-preparing divisions. The company stands as a guarantor for loans and public debt obligations of NSMMZ.
Market Overview A substantial increase in demand for crude steel at global market has resulted in production volumes growth. In 2003 world output of crude steel has increased by 6.9% and reached record-breaking 965 mln tons. In the first half of 2004 an annual expected production volume has raised to 1 bln tons. By 2024 global production of crude steel is expected to reach 1.12 bln tons. The production of high-quality section steel remains one of the leading sectors of Russian ferrous metallurgy industry. In 2004 the production volume has increased by 10.3% and exceeded 31 mln tons. Production of sheet steel rose to 23 mln tons in 2004. Stable growth of the national economy and favorable situation on global markets ensure good prospects for crude and rolled steel production growth. According to Atkins analytical agency, an increase in rolled steel consumption in Russia may amount to 5-8.5 mln tons by 2008, in particular  in section steel production 2.1-3.9 mln, in sheet steel 2.9-4.6 mln tons. The major growth factor of domestic demand for ferrous metals is the increase of production in two key industries  construction and mechanical engineering, which both account for up to 80% of total consumption of rolled steel in Russia. According to the Rosstat federal statistics service, the growth rate of production in mechanical engineering sector has totaled 11.7%, in construction sector  10.1%. By estimations, the construction sector demands for up to 30% of rolled steel production. Another determinant of production increase is ever growing prices for ferrous metals. On average, the prices for section steel have grown by 46-55% in 2004, for sheet steel  by 30-52% (depending on a kind of product). Hot-rolled steel has shown the most rapid price growth: beams  55.2%, reinforcing bars  51.4%, sheets 52.2%. The favorable situation in ferrous metallurgy products market, in turn, ensures significant improvements in financial performance of metallurgical enterprises. The total revenue of ferrous metallurgy enterprises has grown by 44% in 2003 and by 64% in 2004.
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Business Overview The key NSMMZ products are high quality section steel, steel rod and hardware, mainly  wires and nails.  Table 1. NSMMZ production, ths tons  2003 2004 2005E 2006E 2007E 2008E Steel rod and hardware 197 206 296 320 720 1,274 Section steel 219 235 309 1,000 1,000 1,046 Rolling billets 367 333 316 548 - -Total  416 441 972 1,653 2,036 2,868 Source: the Company The products are sold primarily in domestic market, in particular  Urals, Central and Volga regions, which account for 35%, 20% and 15% of sales respectively. The main NSMMZ customers are industrial producers and trading companies that distribute goods to a wide range of end-consumers. Trading companies predominate in the Companys sales structure. Total number of NSMMZ customers is over 100, the number of section steel customers is about 30. Top 5 customers accounted for 42.5% of net sales in 2004. Export accounted for no more than 3% of the Companys total sales. Table 2. NSMMZ and major producers of section steel in 2004  Volume, Market ths tons share Evrazholding 10,178 45% Mechel 3,658 16% Severstal 2,460 11% OEMK 2,184 10% NSMMZ 235 1% Source: the Company According to Companys prospects, NSMMZ is to produce about 1 mln tons of hardware, section steel and rolling billets in 2005 and thus may become one of the largest producers of electric steel in Russia. Table 3. Major producers of electric steel in 2004  Volume, Market mln tons share OEMK 2.5 24% ChMK 1.5 14% Novokuznetsk MK 1.1 11% Severstal 1.1 10% Uralskaya stal 0.8 7% Source: the Company NSMMZ holds strong positions in the steel hardware market and increases its production constantly. Ranked fourth in 2004, the Company plans to become one of the leaders of the market within next few years. Table 4. NSMMZ and major producers of hardware  Volume, Market ths tons share Cherepovetsk SRP 600 27% Magnitogorsk KZ 340 15% Beloretsk MK 290 13%
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A RRANGER C OMMENT     Volume, Market ths tons share NSMMZ 225 10% Magnitogorsk MMZ 210 9% Source: the Company The primary raw material for the Companys production is iron and steel scrap. The domestic market for procured scrap is not transparent and provides poor information about amounts produced. Nevertheless, according to the data available, production of scrap has reached 26 mln tons in 2004, export accounted for 48% of production. In the future, export volume is expected to decline as new electric furnace steelmaking facilities will be launched in Russia. The structure of domestic scrap market remains highly fragmented that ensures good opportunities for consolidation. Top 10 producers accounted for only 35% of overall production in 2004, half of them did not supply scrap to domestic market. In order to ensure continuous supply of procured scrap for steel production, the Group is going to expand its scrap-collecting capacity either organically or by acquiring small players. Table 5. Top 10 suppliers of iron and steel scrap in 2004, ths tons  Domestic Export Total sales Market market sales share sales MAIR 610 1,742 2,352 9% Maksi-Group 1,554 140 1,370 5% Profit Group 887 128 1,015 4% Evrazholding 1,003 - 1,003 4% Interlink - 938 938 4% Source: the Company Table 6. The Group in national scrap market  2005E 2006E 2007E 2008E  2009E  2010E Total scrap preparation in Russia, mln tons 30 32 34 36 38 40 Scra re aration b Maksi-Group, mln tons 2.1 3.0 5.0 7.5 7.5 7.5 Share of Maksi-Group, % 7% 11% 15% 18% 18% 18% Source: the Company Thus, main competitive advantages of the Company are:  Access to own raw material base, since raw materials are contributing more than 50% of costs; ƒ ƒ  Relatively low cost of steel production due to using steel scrap  20% lower compared to using pig iron or pig iron scrap;  Efficient technology: 2% less raw materials consumption compared to industry average; 7% less of ƒ defective output; does not utilize black oil; ƒ  High overall production efficiency and production flexibility; ƒ  Advantageous geographical location, low costs of transportation.   5
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RRANGERC MOEMN T
Value-Added Chain Structure Figure 2. Maxi-Group value-added chain structure steel rodrolling billetsprepared scrapiron sacnrda psteel 
NMMZ Uralvtorchermet
steel hardware steel rod section steel rolling billets prepared scrap
S A L E S T O O U T S I D E C U S T O M E R S  Source: the Company The table below shows the Companys production and sales structure. The prices of goods to be sold for outside customers can be considered as proxies for market prices. The table also shows profit margins of various stages of production. Table 7. The Companys production and sales satructure   2005E 2006E 2007E 2008E Scrap     Production, ths tn 2,100 3,000 5,000 7,500 to be sold to outside customers 1,016 1,090 2,648 4,196 Price for outside customers, $ per tn 102 98 77 85 Cost of scrap, $ per tn 97 93 72 79 Gross margin 5% 5% 6% 6% Rolling Billets Production, ths tn 992 1,706 2,100 2,901 to be sold to outside customers 367 333 316 548 Price for outside customers, $ per tn 306 273 250 231 Cost of rolling billets, $ per tn 304 263 241 220 Gross margin 1% 4% 4% 5% Section Steel Production, ths tn 605 1,320 1,720 2,320 to be sold to outside customers 309 1,000 1,000 1,046 Price for outside customers, $ per tn 438 340 330 339 Cost of section steel, $ per tn 309 289 286 279 Gross margin 29% 15% 13% 18% Steel Rod Production, ths tn 296 320 720 1,274 Price of steel rod, $ per tn 492 426 352 362 Cost of steel rod, $ per tn 342 308 305 298
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 2005E 2006E 2007E 2008E  Gross margin 30% 28% 13% 18% Source: the Company In 2004, production of steel wire, nails and other hardware from steel rod totaled 203 ths tons, gross margin came to about 23%. According to the table, the Company plans to increase production of high-margin products such as section steel, steel rod and other hardware the next years and to increase sales to outside customers up to 1 mln tons.
Financial Performance Since 2003, NSMMZ provides financial statements in accordance with International Financial Reporting Standards. The Companys IFRS financial statements are audited by PricewaterhouseCoopers. Financial estimations presented below are based on the model developed for evaluation of the modernization program efficiency and its effect on the Companys future performance. Table 8. Key financial performance indicators and forecast  2003 2004 2005E 2006E  2007E  2008E Net Sales 124 215 429 560 605 627 EBITDA 1 44 112 144 173 160 Operating profit -5 37 102 134 164 149 Net Profit -7 24 65 89 112 104 Source: the Company Production facilities enable NSMMZ to almost double sales in 2005. The Company plans to maintain high growth rates up to 2007, when new electric furnace in Revda and section mill facilities in Nizhnie Sergy and Berezovsky are launched at full productive capacity. The Companys net profit increased up to 24 mln in 2004 as a result of favorable situation on global and domestic markets of rolled steel and the Companys technology and equipment modernization. In 2005-2008 net margin is expected at the level of above 15%. The scenario is based on good prospects of global ferrous metal commodities market and the effect of continuous modernization of the Companys production facilities. According to management, cost control at all stages of production, improvements in logistics and transaction cost structure are to become the main priorities for the period. Figure 3. Sales in 2003-2008, USD mln 700 560 420 280 140 0 2003 2004 2005E 2006E 2007E 2008E  Source: the Company
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A RRANGER C OMMENT    Figure 4. Net profit and net profit margin in 2003-2008 12525% 10020% 7515% 50 10% 25 5% 0 0% -25 -5% 2003 2004 2005E 2006E 2007E 2008E Net Margin, $mln Net Margin  Source: the Company Credits and public loans are the main sources of financing for the Company. In 2003 and 2004 NSMMZ was also granted interest-free loans from the parent Maksi-Group (56 mln and 75 mln respectively). In 2005 the Company is planning to substitute these loans by public borrowings. Figure 5. Total debt and Debt/EBITDA ratio in 2003-2008 300 5 240 4 180 3 120 2 60 1 0 0 2004 2005E 2006E 2007E 2008E Total Debt, $mln Debt/EBITDA  Source: the Company According to the financial plan, total debt of the Company is to reach its maximum value of 246 mln in 2005 and will decrease gradually the next 3 years. As the Company uses its operating profit for debt repayment, Total Debt/EBITDA and other debt ratios are to decrease. Thus, Total Debt/EBITDA ratio is to fall to 1 by 2007. The analysis of debt duration structure shows that the peak of debt payments will occur in 2009, aside the case of ruble bond issue early redemption option execution in 2006 (face amount about 35 mln USD). Till the end of 2005, the Company is intending to borrow other USD 70 mln (including CLN), so the current schedule for debt repayment will suffer changes. Figure 6. The Companys debt repayments schedule 70 56 42 28 14 0 2005E 2006E 2007E 2008E 2009 П 2010 П 2011 П  Source: the Company   8
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Due to a rapid increase in sales, turnover of accounts receivable has accelerated, while turnover of accounts payable has become slower. Table 9. Turnover of receivables and payables, DOH  2003 2004 Accounts receivable 12.4 16.8 Accounts payable 52.1 31.7 Source: the Company Table 10. Debt and Liabilities  Total liabilities Short-term Long-term Financial Debt Short-term Long-term Interest payments Cash & Equivalents Net Debt Source: the Company
2003 2004 2005E 2006E 138,404 290,553 336,482 319,590 49.98% 40.47% 37.70% 42.60% 50.02% 59.53% 62.30% 57.40% 41,351 138,465 245,727 203,719 82.49% 88.07% 79.55% 83,11% 17.51% 11.93% 20.45% 16.89% 1,525 5,519 16,414 17,361 2,427 322 69,047 113,506 38,924 138,143 176,680 90,213
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A RRANGER C OMMENT    APPENDIX. Closed joint-stock company Nizhneserginsky Metizno-Metallurgichesky Zavod  Financial Statements Balance Sheet at 31 December 2004 (IFRS), US$ 000  2004 2003 ASSETS   Current assets   Cash and cash equivalents 322 2,427 Accounts receivable and prepayments, net 45,272 28,498 Inventories, net 21,153 10,822 Short-term investments 2,067 4,238 Total current assets 68,814 45,985    Non-current assets Intangible assets 69 -Property, plant and equipment 297,617 106,033 Advances for capital construction 23,918 8,054 Other current assets  letters of credit 18,128 25,803 Long-term investments 61 694 Total non-current assets 339,793 140,585   Total assets 408,607 186,570    LIABILITIES AND SHAREHOLDERS EQUITY   Current liabilities   Accounts payable and accrued expenses 44,054 24,148 Lease payable 1,130 -  Advances from customers 1,055 1,579 Short-term borrowings 71,335 43,449 Total current liabilities 117,574 69,176    Non-current liabilities   Long-term borrowings 44,054 24,148 Deferred tax liability 1,130 -Lease payable 1,055 1,579 Total non-current liabilities 153,624 69,228 Total liabilities 281,870 138,404    Shareholders equity   Share capital 21,602 6,831 Share premium 3,503 3,311 Legal reserve (non distributable reserve) 2,177 -Additional paid-in capital 58,331 20,237 Retained earnings 41,124 17,787 Total shareholders equity 126,751 48,166    Total liabilities and shareholders equity 408,607 186,570  Note: Original Balance Sheet figures have been converted into USD in accordance with the RUR/USD exchange rate of 27.83 and 29.45 at the end of 2004 and 2003 respectively.   10
A RRANGER C OMMENT    Statement of Income for the year ended 31 December 2004 (IFRS), US$ 000   2004 2003 Sales 215,106 124,051 Cost of sales (161,094) (112,111) Gross profit 54,012 11,940 Selling, general and administrative expenses (17,718) (16,520) Operating profit 36,294 (4,580) Net foreign exchange loss (2,240) (131) Interest expense, net (5,324) (1,465) Gain on sales of investments 3,051 -Profit before taxation 31,781 (6,177) Income tax expense (8,168) (509) Net profit/(Loss) 23,613 (6,686) Note: Original Statement of Income figures have been converted into USD in accordance with the RUR/USD annualized exchange rate of 28.85 and 30.66 for 2004 and 2003 respectively.   11
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