Nornickel: a top metals investment case

Nornickel: a top metals investment case
Photo by Jeremy Bezanger / Unsplash

Nornickel updated its long-term strategy on Monday with key focus on higher production goals and a huge investment spending expansion.

The company is the largest producer of so-called green metals – essential ingredients in the technologies based on renewable energy such as high capacity batteries and thus presents a great investment case. Especially since its share are a great bargain with around 13% drop year-to-date. The group’s shares are listed in Moscow, London, New York and other exchanges.

Nornickel is among top Russian dividend payers with a dividend yield this year expected at over 13%. It has to pay dividends as a larger share of its core earnings (EBITDA) as its hands are tied up by a shareholder agreement between key shareholders.

Thanks to the access to the high-grade ore containing a mix of metals, long mine life and extensive global customer base the company has been able to maintain diversified revenue both by product and by region. It has been able to sustain a high EBITDA margin and conservative debt leverage. Investment grade credit ratings have been confirmed by all three major international rating agencies.

Another important feature of the miner’s business model is high upstream and downstream integration: it runs own power generation capacities, smelters and refineries, sea and river fleet, which the company said would be expanded mid-term.

Coupled with unique ore reserves the group stands on most competitive cash cost position in the global mining. The cash cost position allows the company to be profitable even in the most volatile commodity price environment.

Nornickel develops complex metal ore deposits around the Arctic city of Norilsk and refines them at its factories in Russia’s North. The company’s top managers presented an updated strategy outlook on Monday in an annual Capital Markets Day event held in Moscow.

In 2021, production disruptions related to mine flooding and Norilsk concentrator suspension resulted in a decrease of the group’s output. However, Nornickel expects production recovery starting in 2022 with full recovery to 2020 level by 2024.

Investors have been watching fiscal regime tightening in Russia’s metals and mining sector this year as authorities are scrambling to pull together cash to carry out costly social spending programme. Nornickel is among companies whose tax payments have been heavily affected.

A 3.5 times increase in the mineral extraction tax rate from January 2021 and the introduction of export duties from August has taken Nornickel’s MET + export duties to revenue ratio of 6% in 2021, up from 1% in 2020.

In 2022, more changes will take place: an increase of the extraction tax will affect Nornickel’s Norilsk operations and account for current high metal prices, which will be offset by cancellation of export duties. Overall, the company doesn’t material changes in the group’s tax burden in 2022 compared to 2021, its CFO Sergey Malyshev said at the investor-focused event.

The company maintains strong liquidity position of $7.5 billion, the CFO said. “Moreover, in October, we placed a new 5-year $500 million Eurobond with a coupon rate of 2.80% and the lowest ever spread to benchmark in the history of Nornickel’s public offerings. This level of liquidity covers the debt repayments for almost next 3 years. Our forex debt position is naturally hedged with foreign currency revenues”.

In terms of balance sheet management, Malyshev said, the company proudly maintains the cost of debt service at a record low level in its corporate history.

“Our debt portfolio effective interest rate decreased by 1.9 percentage points since 2018 and totalled 2.8% at the end of November 2021”, said the CFO.

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