Norilsk Nickel Review: the world's largest producer of nickel and palladium

Обзор «Норникеля»: крупнейший в мире производитель никеля и палладия

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

Norilsk Nickel's main activity is the production of non-ferrous and precious metals: Palladium, Nickel, copper, Platinum, Rhodium, cobalt, gold, silver, Iridium, Selena, Ru, tellurium and sulfur. The company's business is divided into three divisions: Norilsk, Kola and Trans-Baikal.

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 (PGM) of the total volume of the group's final products.

Stages of production:

  1. Mining. In 2020, it amounted to 18.8 million tons and occurred at six mines.: «Taimyrsky», «Oktyabrsky», «Komsomolsk», «Rockyman», "Mayake" and "Zapolyarny". Norilsk Nickel produces copper-nickel ores of three categories: with high content of non-ferrous and precious metals, with high copper content, with a relatively low metal content.
  2. 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.
  3. 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 School of Medical Care and the copper electrolysis shop of the Kola MINING Complex are processed and the 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:

  1. Mining. In 2020, it amounted to 7.7 million tons of copper-nickel ore, which the company extracted at the Severny mine and in the Kaula-Kotselvaara mine.
  2. 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.
  3. 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 cathode 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 plant in Harjavalta, which produces nickel cathodes and briquettes, nickel salts, powders and solutions, cobalt in sulfate and solution, copper piped medd.

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Transbaikal Division. It includes Bystrinsky GOK, which in 2019 was put into commercial operation, 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 reconsidered this decision because of the position of Rusal., the second largest shareholder in terms of share of Norilsk Nickel.

Stages of production:

  1. Mining. The division develops gold-iron-copper ores of the Bystrinsky deposit, production of which in 2020 amounted to 16 million tons.
  2. 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 for sale 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 total 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

In this section, the five main metals of Norilsk Nickel will be dismantled: 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 platinum, which is currently used mainly in diesel cars, and rhodium, which is characterized by high price volatility due to the risk of physical shortage of metal and small market size: 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 the active promotion in the media by some industry participants, not yet widely available. Therefore, it can become a significant factor for the PGM market only in the long term..

Norilsk Nickel's forecast for 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%
Jewellery 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 stability in aggressive environments, makes it non-magnetic.

Norilsk Nickel's forecast for the nickel market is neutral in the short term and optimistic in the long term. The company expects the deficit to continue by the end of 2021 against the background of the recovery of global economies and 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 driver of demand for the next 5-10 years as it, how the world will move towards carbon neutrality.

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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 companies in the extraction of this metal with a global share 2%. Key market — China, it accounts for 54% global consumption. Copper is used in many industries due to its high electrical conductivity, Thermal conductivity, ductility and corrosion resistance.

Norilsk Nickel's forecast for 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 thousand tons amid 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 platinum producer. 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 as an investment tool, such as, you can buy physical metal through exchange ETF.

Norilsk Nickel's forecast for 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 surplus of 1 million ounces on the market.

Sectoral structure of platinum consumption

Share in overall results
Exhaust gas neutralization systems 34%
Jewellery 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 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 region

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%
Rest 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 stands for the preservation of the current principle, and Interros for reducing payments and wants to tie the distribution to free cash flow. (FCF). According to preliminary data, it can be a payment of 50-75% of FCF.

Switching to a payout from FCF will reduce the dividend – this will happen due to the fact that, that the company's capital expenditures will double (CAPEX).

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Dynamics of capital expenditures of Norilsk Nickel, billion dollars

2020 1,8
2021 3
2022—2025 4
2026—2030 2


Dynamics of profit distribution for the last 5 years

9m2016 444,25 Р
12m2016 446,10 Р
6m2017 224,20 Р
12m2017 607,98 Р
6m2018 776,02 Р
12m2018 792,52 Р
6m2019 883,93 Р
9m2019 604,09 Р
12m2019 557,20 Р
9м2020 623,35 Р
12м2020 1021,22 Р

444,25 Р

Current results

Strong growth in prices of metals mined by Norilsk Nickel allowed the company to demonstrate record financial results. At the same time, in 2021, management predicts a slight decrease in production indicators due to two accidents.: flooding of two underground mines in the Norilsk Division and collapse of the building of the ore transshipment point and the adjacent gallery of the crushing plant at the Norilsk Processing Plant.

Обзор «Норникеля»: крупнейший в мире производитель никеля и палладия

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 in comparison with other competitors, e.g. Freeport-McMoRan, whose activities are sharpened in the production of one metal.

Production growth until 2030. Norilsk Nickel's management announces 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 Р. 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. At the moment, the company's net debt is $ 7.734 billion., and the net debt / EBITDA multiple is 0,67.

Arguments against

Risk of dividend reduction in 2023. If the main shareholder of Norilsk Nickel manages to convince the rest of the shareholders to switch to payment from FCF, then until 2025 this will reduce dividends and may lead as early as 2022 to a new shareholder conflict with Rusal..

Lawsuit from Rosrybolovstvo. 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 what 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 Р.

What is the bottom line

Norilsk Nickel is a leader in its sector. The company offers investors a double-digit dividend yield, sustainable financial results and the opportunity to participate in the development of Arctic resources.

At the same time, the company 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 deterioration of the old infrastructure., ESG issues, after all, Norilsk is considered the dirtiest 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.

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