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September 10, 2003

Moody's changes outlook on all ratings assigned to OJSC Magnitogorsk Iron & Steel works to positive from stable. new Ba3 rating assigned to mmk finance s.a's proposed USD 300 million guaranteed senior unsecured notes

Approximately USD 300 Million of Debt Securities Affected

London, 10 September 2003 -- Moody's Investor's Service today changed the outlook on all ratings assigned to OJSC Magnitogorsk Iron and Steel Works ("MMK") to positive from stable. At the same time Moody's assigned a Ba3 rating to MMK Finance SA's proposed USD 300 million guaranteed senior unsecured notes, due 2008. The proposed notes are guaranteed by MMK. MMK's Ba3 senior implied rating and Ba3 senior unsecured issuer rating were affirmed.

The change in outlook reflects (i) a consistent improvement in MMK's operating track record, particularly since Moody's initial rating; (ii) MMK's strengthening financial performance, particularly in 2003 and expectation that adequate financial flexibility will be sustained throughout the cycle; (iii) expectation of MMK's adherence to conservative financial policies going forward and (iv) the overall strengthening of the macro economic fundamentals in Russia and the positive economic implications for the strategically important steel industry.

Following a USD 1.0 billion investment programme over the last 5 years, MMK has increased output levels by over 45% and has continued to improve operating yields; Moody's expects that output will now stabilise at 10.1 million tons, with further modernisation investment directed to improving processes and downstream operations. MMK is now positioned as the 15th largest steel producer in the world and is a leading ferrous metal producer in Russia with c. 20% of domestic market. MMK's internal cash flow generation has remained strong, sufficient to cover c. 95% of past expenditures whilst maintaining total debt to EBITDA at less than 1.0-times; Moody's expects similar investment levels per annum going forward. Although MMK's current cash flows are buoyed by an overall improvement in the pricing environment and better product mix, Moody's believes that the modernisation programme will allow for increased cushion in a down cycle. Moody's expects that MMK will continue to diversify its customer base and increasingly switch product sales from exports towards the strengthening domestic market.

MMK's financial performance has improved since Moody's initial rating. At the year end 2002, revenues increased by 30% over 1998 to $2.1 billion with EBITDA increasing 110% to $429 million. Full year 2003 revenues and profitability are expected to be stronger than 2002 following higher production and price increases. Moody's notes that MMK's debt protection measures are among strongest in the global steel industry and Moody's also expects that financial policies will remain conservative over the cycle. Increased production and higher prices are strengthening alternate liquidity above $222 million in cash and equivalents at year end 2002.

Steel is the second largest industry in Russia and as such is deemed strategically important to Russian economy. Stable and growing domestic demand and favourable pricing environment underpinned strengthening conditions in the Russian steel industry in 2002. The positive outlook also takes into account of expectations of improving economic fundamentals to drive the steel industry revenues in 2003-2004. Market experts expect domestic steel demand to out-perform GDP, given the low steel intensity in the economy and the substantial need for re-investment. Domestic steel consumption is expected to grow 5%+ annually (2003-05). As a result, improvements in MMK's cash flow and profitability in 2003 expected to be driven substantially by higher average steel prices, better product mix and cost improvements through investment.

The ratings at Ba3, however, continue to reflect (i) risks related to operating in the Russian Federation (rating Ba2); (ii) cyclicality of the steel industry with current pricing at a 5 year peak (iii) MMK's financial flexibility being highly dependent upon on sustained buoyancy in the average selling price (iv) uncertainty with respect to sale of government stake (24%) in the company and the uncertainty over potential future shareholders and implications on strategy; (v) substantial future investments required in order to sustain competitiveness; (vi) expectation of rising cash costs relating to raw material, transport and labour cost and (vii) potential for renewed protectionist measures on export of semi-finished goods and the overall potential impact on exports over medium term as a result of higher raw material costs, appreciation of Rouble exchange rates, export tariffs/quotas and declining import quotas.

OAO Magnitogorsk Iron and Steel Works, headquartered in Magnitogorsk in western Russia, is a leading integrated steel manufacturer

Eric de Bodard
Managing Director
European Corporate Finance
Moody's France S.A.
JOURNALISTS: 33 1 53 43 93 78 SUBSCRIBERS: 44 20 7772 5454

Michael West
Senior Vice President
European Corporate Finance
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454




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