Mining segment
Severstal Mining consists of four high-quality mining complexes in northwest and northeast Russia producing iron ore and coking coal and is the second largest producer of pellets and coking coal in Russia. With the capacity to supply all of the iron ore and coal needs of Russian Steel and Metalware, Severstal Mining forms the basis of Severstal’s balanced and vertically integrated business model. With a focus on high value-added products, such as export quality pellets and coking coal concentrate, Severstal Mining had a total output of 12.8 million tonnes of iron ore and 8.7 million tonnes of coking coal in 2005. Its reserves and resources were estimated by IMC Limited to be 1.8 billion tonnes of iron ore as at 1 January 2006 and 0.7 billion tonnes of coal as at 1 April 2006.
Based in northwest and northeast Russia, Severstal Mining comprises four mining complexes in Russia:
- Karelsky Okatysh, located in the Karelia Republic, produces iron ore and has an annual output of 8.8 million tonnes and estimated JORC reserves and resources of 1,338 million tonnes;
- Olkon, located in the Murmansk region of Russia produces iron ore concentrate and has an annual output of 4.0 million tonnes and estimated JORC reserves and resources of 416 million tonnes;
- Vorkutaugol, located in the Komi Republic, produces coking and thermal coal concentrate and has an annual output of 6.9 million tonnes and estimated JORC reserves and resources of 325 million tonnes.
In aggregate, higher value-added products, such as pellets and coking coal concentrate, represent over [60] percent of Severstal Mining’s total output by volume.
Current iron ore and coking coal prices are at levels significantly in excess of Severstal Mining’s cost of production.
At expected rates of operation, audited JORC reserves of iron ore and coking coal are estimated to be sufficient for at least 14 years of operation. Severstal Mining believes it will be able to achieve significant reserve extension potential (increasing life of mine to at least 28 years) through conversion of resources into reserves and acquisition of adjacent reserves.
Strategy
Severstal Mining’s strategies include the following:
- increase production through modernisation, best practices and debottlenecking;
- increase higher value products;
- actively participate in consolidation of Russian/CIS iron ore and coking coal industries;
- gain access to sea-borne coal markets through participation in large-scale greenfield projects in Russia and neighbouring countries;
- form alliances with mining majors;
- improve labour and equipment productivity in order to maintain the favourable operating cost position of the assets;
- optimise capital expenditure; and
- increase production and remove negative fluctuations in production levels enabling Severstal Mining to increase the volume of export sales while maintaining the ability to meet all of the supply requirements of Severstal’s Russian steel-making operations.
Facilities
Karelsky Okatysh. Karelsky Okatysh is located in Kostomuksha in the Karelia Republic in the northwest of Russia. It mines low-grade magnetite-quartzite ores and produces high-quality iron ore pellets with an iron content of 64 to 66 percent. Karelsky Okatysh operates four major deposits that have an estimated life of 44 years. The average iron content of the reserves at Karelsky Okatysh is approximately 29 percent. The increase in medium term forecast for pellet prices, together with the efficiency improvements that have been made at the Kostomuksha operation, have boosted the production capacity of Karelsky Okatysh to 30 million tonnes of ROM ore per year.
The most valuable production asset of Karelsky Okatysh is its large pelletiser. It enables valorisation of fines into pellets (pellets trade at a premium to fines). The pelletiser has three production lines, each with a capacity of up to 4 million tonnes per year. The total capacity of the three lines is approximately 11 million tonnes. However, Severstal believes that this capacity could be increased to 12 million tonnes per year with relatively minor investments and operational debottlenecking.
Kostomuksha. The arch shaped Kostomuksha deposit consists of three sections, with a total strike extent of 13,000 metres. The depth of the open pit at its largest section reaches 400 meters below sea level with a stripping ratio of 1.13 in 2005. The Fe content in the ore is medium (29 percent total Fe, 24 percent Fe magnetite). However, it is well suited for relatively simple magnetic beneficiation and the deposit produces high quality fines (68 percent Fe) and pellets (65 percent Fe). The Kostomuksha deposit has a capacity of 24 million tonnes of ROM ore at 29 percent Fe per year.
Korpanga. A new mine is under construction at the Korpanga deposit, which consists of east and west sections. It is an isoclinal synform that has been refolded into a plunging anticline along a northeast-southwest axis. The west and east sections form the two flanks of the plunging anticline, and have respective strike lengths of 3,800 metres and 3,000 metres. The ore qualities at Korpanga are similar to the Kostomuksha deposit.
The Korpanga deposit is expected to add 7.5 million tonnes of ROM ore at 29 percent Fe per year.
Extracted ore is delivered to the beneficiation plant by railway. The beneficiation plant is located 7 kilometres from Central Section and 25 kilometres from Korpanga. The current design capacity of the beneficiation plant is 9.6 million tonnes of fines (representing 28 million tonnes of input ore). Severstal believes that this capacity could be increased to 11.7 million tonnes per year by 2008 with a relatively minor amount of investment. The planned investment would include installation of dry magnetic separation equipment at the open pits to reduce the waste feed into the crushers. The plant beneficiation consists of 2 crushing lines and 12 beneficiation circuits with primary magnetic and secondary gravitational separation equipment.
Olkon. Olkon is located in the Murmansk region in northwest Russia. It mines low-grade magnetite-quartzite ores and produces high-quality (67.5 percent Fe content) iron-ore fines. Currently, ore mining is carried out in five open pits: Olenegorsky, Kirovogorsky, Baumansky, XVth Anniversary of October and Komsomolsky in conjunction with the new site at the Olenegorsky underground mine, which was built in 2005. The estimated life of deposit reserves and resources is more than 28 years.
There are 133 million tonnes of ore within the existing boundary of the open pit and the remainder will be mined from new underground mines that will extend the current open pits. The average iron content in the Olkon reserves is 28 percent total iron, 23 percent iron magnetite. Olkon produces iron ore concentrate with an average iron content of 65.7 percent. The average stripping ratio was 1.2 in 2005 but will decline due to the increase in underground mining. The original design capacity at Olkon was 12 million tonnes of ore per year. This is expected to increase to 16.5 million tonnes per year in 2008 once the underground mines are fully operational. The ore from the Kirovogorsky, Baumansky, XVth Anniversary of October and Komsomolsky pits is delivered to the beneficiation plant by railway, between 11 and 15 kilometres. The beneficiation plant has a production of 4.0 million tonnes of fines and a capacity of is 5.0 million tonnes of fines, representing 15 million tonnes of input ore. It consists of 2 crushing lines and 12 beneficiation circuits with primary magnetic and secondary gravitational separation equipment. Severstal believes that, with minor amounts of capital expenditure, the plant capacity could be increased to 4.6 million tonnes of concentrate by 2008.
Vorkutaugol. The Vorkutaugol and Vorgashorskaya mines are located near the town of Vorkuta, in the Komi Republic in northeast Russia. The Vorkutaugol and Vorashorskaya mines are separate legal entities but are integrated operations from a production perspective. The mining area of Vorkutaugol consists of five underground mines, with an estimated useful life of at least 33 years, and one open pit located within the Vorkutinskoye deposit. The Vorkutinskoye deposit covers an area of 280 square kilometres and is in the form of a basin with outcrops around the perimeter, dipping towards the centre of the deposit. The Vorgashorskaya mine is located on the adjacent Vorgashorskaya coal deposit approximately 25 kilometres northeast of Vorkuta. Premium grades of hard coking coal account for a high proportion of the Vorkutaugol reserves.
There are three principal seams currently under operation at the Vorkutinskoye deposit. Two of the seams, Triple and Fourth seam, are between 1.5 and 2.5 metres and are suitable to be extracted by conventional longwall shears. The Fifth seam is 0.8 metres thick and is currently extracted by a longwall shear, primarily for degasification of the two thicker seams. However, with the near-term introduction of plough technology, the operating economies of the mining operation at the Fifth seam will improve significantly.
The average ash content in Vorkutaugol is relatively high (32-33 percent), partly due to the extraction of a thin seam with unsuitable mining equipment. The management of Severstal Mining believes that the 2007 installation of new mining equipment to operate these seams will resolve this issue.
Despite the problem with high ash content, the concentrate produced by Vorkutaugol is of high quality, with a majority of output being a premium grade category, medium volatility, high fluidity hard coking coal.
There is only one seam of workable thickness at the Vorgashorskaya mine, which combines the three sub-seams of the Triple, and Fourth seam. The total seam thickness is between 2.7 metres and 3.0 metres. The mine has two high-productivity faces, with an annual production capacity exceeding 2 million tonnes (on a ROM basis). Because Vorgashorskaya does not have its own washing facility, the ROM coals are processed at the central Pechorskaya plant.
There are currently three washing facilities in Vorkuta (Severnaya - located at the Severnaya mine, Vorkutinskaya - located at the Vorkutinskaya mine and central Pechorskaya) with a total capacity of approximately 10 million tonnes per year. In addition, the washing facilities in Cherepovets have an additional production capacity of 1.8 million tonnes per year. The washing process reduces ash content to 8-9 percent, enabling the production of concentrate with a high market value. Coking coal concentrate from Vorkutaugol can be used directly in coke batteries. The most valuable coal is washed on the site at Vorkuta. Middlings are currently shipped and washed in Cherepovets.
Products
Severstal Mining produces a high proportion of premium products, such as iron pellets from iron ore and coking coal from concentrate from coal, for domestic and international customers. In 2005, iron pellets constituted 70 percent of Severstal Mining’s production of iron ore, and coking coal concentrate constituted 55 percent of its coal production. In 2010, Severstal Mining expects that iron pellets will still constitute 70 percent of Severstal Mining’s production of iron ore and that coking coal concentrate will increase to 67 percent of total coal production
Karelsky Okatysh Production
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Pellet production |
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Karelsky Okatysh produces iron ore pellets. These have a Fe content of 65.6 percent for non-fluxed and 63.6 percent for fluxed pellets. Pellets are a higher value-added iron ore product, as they can be used directly in the blast furnace without intermediate sintering. They also ensure optimal coke consumption in the furnace and significantly reduce the carbon dioxide emissions in the furnace operation.
Olkon Production
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Fines production |
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Olkon produces iron ore fines with a Fe content of 67.5 percent. Currently these fines are shipped only to Russian Steel and Metalware where they are used as sinter feed, before being blended with coke and loaded into the blast furnace.
Vorkutaugol Production
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Coking coal concentrate |
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4.0 |
5.0 |
3.9 |
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Raw coking coal |
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3.0 |
2.1 |
1.8 |
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Energy coal |
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Total production |
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Vorkutaugol’s two main products are premium hard coking coal concentrate and medium grade hard coking coal concentrate, with an ash content of 8-9 percent. Vorkutaugol produces more than 90 percent of the total premium hard coking coal mined in Russia. Vorkutaugol also produces relatively large amounts of energy coals that are predominantly sold to local heating and power plants in the Komi region.
Additionally, a major initiative is underway to increase the productivity at each face level, with record levels of production already being achieved at the pilot face during the early part of 2006.
Supply Chain
Raw materials. Raw materials used by Severstal Mining include petroleum products, liquid explosives and metallic raw materials and supplies.
Petroleum products are the largest raw material type consumed by Severstal Mining. In order to take advantage of economies of scale, Severstal Mining has centralised the purchasing of items that are used in all of its operations. Purchases of petroleum products are centralised and made pursuant to annual contracts with several large Russian suppliers. Suppliers are selected on the basis of the competitiveness of their commercial terms. Actual prices are determined on a monthly basis with a subset of the suppliers chosen from the wider group, based on their offer for that month. In respect of the year 2006, a total of 11 contracts were entered into with petroleum suppliers, however, no more than three to five suppliers actually supply petroleum products in any given month. The purchasing of metal-based raw materials, cables, conveyor belts and explosives is also centralised.
Following a competitive tender process, Karelsky Okatysh signed a six-year contract for liquid explosives with one of the market leaders, UEE. Under the contract, a new manufacturing plant for liquid explosives is to be constructed in Kostomuksha. A similar contract is planned for Olkon and bids are currently under review. A final agreement is expected to be signed during 2006.
Contracts for the supply of metallic raw materials and supplies are signed annually, while prices are fixed on a quarterly basis.
Severstal Mining expects that during the next 10 years it will have a raw materials surplus. Severstal Mining believes that such a surplus would provide it with enhanced stability in terms of raw material supplies and enable it to meet potential future production growth.
Sales and Marketing
Customers. Within Severstal, Severstal Mining sells both iron ore and coking coal to Russian Steel and Metalware and, increasingly, to Lucchini. In 2005, Severstal Mining’s total iron ore and coal production was 20.9 million tonnes, of which 13.3 million tonnes were sold to Russian Steel and Metalware and Lucchini, 5.0 million tonnes were sold domestically and 2.4 million tonnes were exported.
Of Severstal Mining’s total production of 8.8 million tonnes of pellets and 6.9 million tonnes of coal concentrate in 2005, demand by Russian Steel and Metalware was 4.1 million tonnes and 6.2 million tonnes, respectively, and demand by Lucchini was 2.8 million tonnes and 1.6 million tonnes, respectively.
Severstal Mining plans to continue selling iron ore and coking coal to the Cherepovets plant and currently covers 100 percent of the Cherepovets plant's production needs in pellets and coking coal and approximately half of its needs in fines. During 2006, Severstal Mining has increased its sales to Lucchini.
Severstal Mining’s main customers are steel plants, with a smaller amount of coal also being sold to stand-alone coking companies and power plants. Severstal Mining’s largest domestic customers are NLMK, Mechel, MMK and Evraz Holding. Major foreign customers include Ruukki, Corus and Arcelor Eko Stahl.
Of Severstal Mining’s exports in 2005, 39 percent were sold to Finland, 33 percent to the Netherlands, 17 percent to Ukraine, 6 percent to China, 2 percent to Turkey, 2 percent to Norway and 1 percent to other countries in Europe.
Products. Severstal Mining’s sales are dominated by pellets, which accounted for more than 55 percent total sales in 2005. Premium hard coking coal and hard coking coal together accounted for 27 percent of sales, while all other products represented 10 percent or less of the total sales of Severstal Mining. Coal sales have increased during the first quarter 2006.
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