Within the last 3 years, Magnitogorsk Steel Works spent over USD 5 billion on upgrades, renovations, and new construction.  

Moody’s altered the outlook of the rating for Magnitogorsk Steel Works from Ba3 “stable” to “positive.” The company’s national scale rating is Aa3.ru. The agency’s decision was based on the 2009 performance of the steel company, which managed to maintain low leverage and high returns despite the difficult market situation. The EBITDA margin for Magnitogorsk Steel Works was 24.2 percent, and the debt-to-EBITDA ratio was 1.78. The ratio is one of the lowest in the steel industry. As a whole, the financial results of Magnitogorsk Steel Works show that the company’s liquidity level is more than satisfactory. The factors driving the rating downward include the company’s vertical integration and an expansive capex plan for 2010 that can result in negative free cash flow.

The company’s cumulative indebtedness at USD 2.1 billion at the end of 2009 is considered to be low, especially in view of substantial capital expenditures that the company made since 2007. Within the last 3 years, Magnitogorsk Steel Works spent over USD 5 billion on upgrades, renovations, and new construction.  

Magnitogorsk Steel Works in 2009 finalized a major investment project Mill 5000 that has the capacity of producing 1.5 million tons of thick plates annually. The company is also engaged in constructing steel-making facilities in Turkey. The company has traditionally been vulnerable to the fluctuations of raw materials prices as a consequence of its vertical integration.   

The purchase of the Belon unit in 2009 allowed Magnitogorsk Steel Works to meet 50 percent of its coal requirements with its own production. The company was thus able to protect its profitability against increasing coal prices in 2010.

The Ba3 “positive” rating for Magnitogorsk Steel Works shows that the company has a good track record of solid operating performance and robust internal cash generation that has enabled the company to modernize its asset base and implement extensive capital investments in downstream production. Magnitogorsk Steel Works also has a leading market position in a number of value-added product segments, such as hot-rolled, cold-rolled, and galvanized flat steel. The company continued to focus on vertical integration and on improving its raw material supply. Magnitogorsk Steel Works also pursued conservative financial policies and avoided large mergers and acquisitions.

Moody’s rating also indicates that the company is not fully integrated in the iron ore segment and only partial integrated in coal. The rating further evidences the company’s concentrated ownership, its dependency on export revenue, accounting for 36 percent of total revenue in 2009. The company has an ambitious capital expenditures plan, which might require additional capital and result in increased leverage going forward.

According to analysts at the rating agency, the score of Magnitogorsk Steel Works can be increased if the company maintains a conservative financial profile with the ratio of gross debt to EBITDA below 2 and the company’s negative free cash flow is reduced to under USD 500 million in 2010.

Moody’s further expects that Magnitogorsk Steel Works will espouse a cautious liquidity policy.