Norilsk Nickel (MOEX: GMKN) — one of the global leaders in the mining and metallurgical industry, the company accounts for global production 44% palladium, 22% nickel, 15% platinum and 14% cobalt. At the beginning of 2021, the total proven reserves of the enterprise amounted to 742.8 million tons of raw materials, which provides it with resources for the following 75 years.
About company
The main activity of Norilsk Nickel is the production of non-ferrous and precious metals: palladium, nickel, copper, platinum, rhodium, cobalt, gold, silver, Iridium, Selena, ruthenium, tellurium and sulfur. The company's business is divided into three divisions: Norilsk, Kola and Transbaikal.
Norilsk Division. Key industrial asset of the company, it includes a full cycle of metal production - from mining to shipment of finished products. In 2020, this division provided the release 72% copper and 42% platinum group metals (MPG) of the total volume of final products of the group.
Stages of production:
- Mining. In 2020, it amounted to 18.8 million tons and occurred at six mines: «Taimyrsky», «Oktyabrsky», «Komsomolsk», «Rockyman», "Mayak" and "Zapolyarny". Norilsk Nickel produces copper-nickel ores of three categories: with a high content of non-ferrous and precious metals, with high copper content, with a relatively low metal content.
- Enrichment. It takes place at two factories - Talnakh enrichment and Norilsk enrichment - and includes the processing of extracted raw materials.. Basic technological operations: splitting up, milling, flotation and thickening.
- Metallurgy. Consists of three assets. First — Nadezhda Metallurgical Plant (NMZ), with its help, Norilsk Nickel receives a nickel Feinstein, which in the future will be sent for processing to the Kola division.
The process at nmz is as follows: raw materials from concentrating plants enter the suspended smelting furnaces, then the company gets some by-product, called stein, is an alloy of iron sulphides and non-ferrous metals, which is converted to obtain Feinstein.
Second asset — Copper Plant (MZ), his group uses the division's entire copper concentrate to produce cathode copper., elemental sulfur and sulfuric acid for their technological needs.
Third — metallurgical shop (MC) as part of the MoZ, with the help of which the sludge of the copper electrolysis shop of the Moscow Plant and the copper electrolysis shop of the Kola MMC is processed and a concentrate of precious metals is obtained, technical selenium and tellurium.
Kola Division. Consists of assets on the Kola Peninsula and one Finnish processing plant. In 2020, the division produced 100% nickel, 15% copper and 58% PGM from the company's total result.
Stages of production:
- Mining. In 2020, it amounted to 7.7 million tons of copper-nickel ore, extracted by the company at the Severny mine and at the Kaula-Kotselvaara mine.
- Enrichment. Takes place at a factory in the city of Zapolyarny. Copper-nickel concentrate undergoes briquetting, and then sent for processing, where Feinstein is produced.
- Metallurgy. Russian assets. Consist of chemical and metallurgical, refining shops, as well as nickel electrolysis shops No. 1 And 2, thanks to which the company produces cathodic and carbonyl nickel, nickel and copper semi-finished product for sale, cathode copper, sulfide and cobalt concentrate, cathode cobalt, precious metal concentrates, sulfuric acid and crushed Feinstein for the Finnish plant.
Finnish assets. Consists of one subsidiary - Norilsk Nickel Harjavalta, namely the factory in Harjavalta, which produces nickel cathodes and briquettes, nickel salts, powders and solutions, cobalt in sulfate and solution, copper cake containing pgm.
Transbaikal Division. It includes Bystrinsky GOK, which was put into commercial operation in 2019, and in March 2021, the main shareholders of the group decided to separate it into a separate company with the subsequent IPO, but in September they revised this decision due to the position of Rusal, the second largest shareholder of Norilsk Nickel.
Stages of production:
- Mining. The division develops gold-iron-copper ores of the Bystrinsky deposit, whose production in 2020 amounted to 16 million tons.
- Enrichment. Consists of Bystrinsky Concentrating Plant, processing the company's own ore and obtaining copper and iron ore concentrate at the output, it is sent to third parties, and gold-bearing — for further processing to the Norilsk division.
Nkomati. This is a joint venture between Norilsk Nickel and African Rainbow Minerals in South Africa, which was mothballed in the first half of 2021.
Additional assets. In addition to the main activity, the company has a secondary, which does not play a significant role, bringing about 4% income. This business includes energy facilities - the company owns four gas fields; transport assets - they include their own Arctic fleet, aviation companies, transport branches and ports.
The structure of the company's income, million dollars
| Revenue | Share in the overall result | |
|---|---|---|
| Palladium | 3676 | 41% |
| Nickel | 1696 | 19% |
| Copper | 1575 | 18% |
| Rhodium | 644 | 7% |
| Platinum | 366 | 4% |
| Gold | 305 | 3% |
| Other metals | 335 | 4% |
| Additional assets | 346 | 4% |
Basket of non-ferrous metals
This section will analyze the five main metals of Norilsk Nickel: palladium, nickel, copper, platinum and rhodium, which bring companies about 90% income.
Palladium. Brings the greatest income to the company. The main demand for this metal comes from the automotive industry., which uses it for exhaust gas cleaning systems. Palladium, due to its unique catalytic properties, has practically no alternatives in this field of application - except for platinum, currently used predominantly in diesel vehicles, and rhodium, which is characterized by high price volatility due to the risk of physical shortage of the metal and the small size of the market: world annual production is only 23 Tons.
According to the estimates of the management of Norilsk Nickel, project to replace palladium with platinum in autocatalysts, despite active promotion in the media by some industry participants, not yet widely adopted. Therefore, it can become a significant factor for the pgm market only in the long term..
Norilsk Nickel's outlook on the palladium market is positive, management expects, that in 2021 and 2022 the market will have a deficit of 0.9 million and 0.7 million ounces against the background of an increase in metal consumption by 14 And 15% during these periods. By 2030, the company predicts an increase in demand for palladium for 25% thanks to orders from the automotive industry.
Sectoral structure of palladium consumption
| Share in overall results | |
|---|---|
| Exhaust gas control systems | 82% |
| Electronics | 7% |
| Chemical catalysts | 5% |
| Dental alloys | 3% |
| Jewelry | 2% |
| Other | 1% |
Nickel. Second revenue segment. The main sales market is China, where the metal is used for the production of different grades of stainless steel, which in their composition may contain up to 20% nickel. The addition of nickel enhances their corrosion resistance and strength in different operating temperatures, gives steel good ductility and resistance in aggressive environments, makes it non-magnetic.
Norilsk Nickel's outlook for the nickel market is neutral in the short term and optimistic in the long term. The company expects the deficit to remain in 2021 against the background of the recovery of world economies and a surplus in 2022 due to the continued expansion of production in Indonesia.
Battery sector, which is now showing double-digit growth rates due to measures of state support for electric vehicles, will remain the main demand driver over the next 5-10 years as, how the world will move towards carbon neutrality.
Sectoral structure of nickel consumption
| Share in overall results | |
|---|---|
| Stainless steel | 73% |
| Batteries | 9% |
| Spetsstal | 5% |
| Electroplating | 5% |
| Alloys | 5% |
| Other | 3% |
Copper. Norilsk Nickel ranks 11th among all mining companies of this metal with a global share of 2%. Key market - China, it has to 54% global consumption. Copper is used in many industries due to its high electrical conductivity., Thermal conductivity, plasticity and corrosion resistance.
Norilsk Nickel's outlook on the copper market is neutral, since the current price is significantly higher than the cost curve. The company expects a small deficit in 2021 of 282 kt on the back of global growth in copper consumption due to improved overall economic activity.
Sectoral structure of copper consumption
| Share in overall results | |
|---|---|
| Construction | 28% |
| Electrical networks | 28% |
| Consumer goods | 21% |
| Transport | 12% |
| Heavy Engineering | 11% |
Platinum. Norilsk Nickel is the world's third largest producer of platinum. The main field of application is the automotive industry, in which more 30% the metal consumed in this industry is used for the production of exhaust gas converters for diesel cars. Platinum is used in jewelry, chemical and glass industry, and also as a tool for investment - for example, you can buy physical metal through exchange ETF.
Norilsk Nickel's outlook on the platinum market is neutral. Recovery of demand in the automotive industry, jewelry industry and other industries will lag behind the growing supply, resulting in a 1 million ounce surplus in the market.
Sectoral structure of platinum consumption
| Share in overall results | |
|---|---|
| Exhaust gas neutralization systems | 34% |
| Jewelry | 27% |
| Chemical process catalysts | 9% |
| Glass production | 6% |
| Electronics | 4% |
| Other | 20% |
Rhodium. This is the fastest growing segment of the company, for the first half of 2021, it tripled against the background of an increase in the average selling price of the metal from 9343 to 24 052 $ per troy ounce, current price — about 14 000 $. The main reason for the rapid growth is the fall in production in South Africa due to quarantine restrictions..
Norilsk Nickel is the world's fourth largest producer of rhodium. The key branch of its application is the automotive industry, where, due to its unique chemical properties, rhodium is used to make catalytic converters for emissions, since this metal is considered the best catalyst for cleaning up nitrogen oxide emissions in gasoline engines.
Sectoral structure of rhodium consumption
| Share in overall results | |
|---|---|
| Exhaust gas neutralization systems | 87% |
| Chemical process catalysts | 7% |
| Glass production | 3% |
| Electronics | 1% |
| Other | 2% |
Structure of metal consumption by regions
| Palladium | Nickel | Copper | Platinum | Rhodium | |
|---|---|---|---|---|---|
| China | 31% | 59% | 54% | 28% | 27% |
| Rest of Asia | 11% | 23% | 14% | 15% | 14% |
| Europe | 20% | 13% | 15% | 25% | 23% |
| America | 20% | 5% | 11% | 20% | 19% |
| Other | 18% | 0% | 6% | 12% | 17% |
Profit distribution
In 2016, the main owners of Norilsk Nickel signed a shareholder agreement until the end of 2022 and consolidated the following dividend policy:
- the company distributes 60% EBITDA, if the net debt/EBITDA ratio is less 1,8;
- from 30 to 60% EBITDA, if this multiplier will be from 1,8 to 2,2;
- 30% EBITDA, if "net debt/EBITDA" is more 2,2.
But the main shareholders have formed different views on the company's dividend policy after 2022.. Rusal is in favor of maintaining the current principle, and Interros is in favor of lower payments and wants to tie distribution to free cash flow (FCF). According to preliminary data, we can talk about paying 50-75% FCF.
Switching to an FCF payout will reduce the dividend - this will happen due to the fact that, that the company's capital expenditures will double (CAPEX).
Dynamics of capital expenditures of Norilsk Nickel, billion dollars
| 2020 | 1,8 |
| 2021 | 3 |
| 2022—2025 | 4 |
| 2026—2030 | 2 |
1,8
Dynamics of profit distribution for the last 5 years
| 9m2016 | 444,25 R |
| 12m2016 | 446,10 R |
| 6m2017 | 224,20 R |
| 12m2017 | 607,98 R |
| 6m2018 | 776,02 R |
| 12m2018 | 792,52 R |
| 6m2019 | 883,93 R |
| 9m2019 | 604,09 R |
| 12m2019 | 557,20 R |
| 9м2020 | 623,35 R |
| 12м2020 | 1021,22 R |
444,25 R
Current results
Strong growth in prices of metals mined by Norilsk Nickel allowed the company to demonstrate record financial results. At the same time, management predicts a slight decrease in production indicators in 2021 due to two accidents.: flooding of two underground mines in the Norilsk division and the collapse of the building of the ore reloading point and the adjoining gallery of the crushing shop at the Norilsk concentrating plant.
Financial results for the last 5 years, billion dollars
| Revenue | EBITDA | Net profit | FCF | net debt | |
|---|---|---|---|---|---|
| 2016 | 8,259 | 3,899 | 2,531 | 1,591 | 4,530 |
| 2017 | 9,146 | 3,995 | 2,123 | −0,173 | 8,201 |
| 2018 | 11,670 | 6,231 | 3,059 | 4,931 | 7,051 |
| 2019 | 13,563 | 7,923 | 5,966 | 4,889 | 7,060 |
| 2020 | 15,545 | 7,651 | 3,634 | 6,640 | 4,705 |
| 6м2021 | 8,943 | 5,700 | 4,304 | 1,397 | 7,734 |
Comparison with competitors
| EV / EBITDA | P / E | net debt / EBITDA | |
|---|---|---|---|
| Norilsk Nickel | 4,72 | 5,93 | 0,67 |
| VSMPO-AVISMA | 14,60 | 31,62 | 1,32 |
| Vale | 2,62 | 4,69 | −0,02 |
| Freeport-McMoRan | 7,12 | 18,68 | 0,43 |
| Southern Copper | 8,67 | 16,58 | 0,71 |
Arguments for
Basket of non-ferrous metals. Norilsk Nickel's business is well diversified due to the extraction of a large amount of metals. This allows the Russian company to show more stable financial results compared to other competitors, e.g. Freeport-McMoRan, whose activities are focused on the production of one metal.
Production growth until 2030. Norilsk Nickel management announced strategic goals until 2030 for its key metals:
- production of palladium and platinum will add 40-50%, from 105 tons in 2017 to 150-160 tons in 2030;
- nickel production will increase by 20-30%, from 210 thousand tons in 2017 to 250-270 thousand tons in 2030;
- copper production will grow by 20-30%, from 398 thousand tons in 2017 to 490-530 thousand tons in 2030.
High level of profit sharing. The company's management confirmed, what will distribute in 2021 60% EBITDA. For the first half of 2021, this may result in a payment of 1600 R. Current dividend yield for the first six months of 2021 - 7%.
Moderate debt burden. It allows the management of Norilsk Nickel to distribute 60% EBITDA for dividend payments. The company currently has a net debt of $7.734 billion., and the net debt / EBITDA multiplier is equal to 0,67.
Arguments against
Risk of dividend cut in 2023. If the main shareholder of Norilsk Nickel manages to convince the other shareholders to switch to the payment from the FCF, then until 2025 this will reduce dividends and may lead as early as 2022 to a new shareholder conflict with Rusal..
Claim from Rosrybolovstva. The profile federal agency filed a lawsuit against a subsidiary of Norilsk Nickel in the amount of 58.7 billion rubles due to the accident at norilsk CHPP-3, because of which more than 20 thousand tons of diesel fuel got into the water and soil. If the claim is satisfied, this could reduce the dividend in 2021 by 382 R.
What's the bottom line?
Norilsk Nickel is a leader in its sector. The company offers investors a double-digit dividend yield, stable financial results and the opportunity to participate in the development of Arctic resources.
At the same time, the company also has risks.. In addition to those, that were voiced in the arguments against, this can also include a number of incidents in 2020-2021 against the background of the deterioration of the old infrastructure, ESG problems, after all, Norilsk is considered the most polluted city in the world in terms of emissions into the atmosphere - 1.9 million tons, and different views of shareholders on the further development of Norilsk Nickel.
