DJ MMC Norilsk Nickel: NORNICKEL REPORTS FULL YEAR 2018 AUDITED CONSOLIDATED IFRS FINANCIAL RESULTS
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MMC Norilsk Nickel (MNOD)
MMC Norilsk Nickel: NORNICKEL REPORTS FULL YEAR 2018 AUDITED CONSOLIDATED
IFRS FINANCIAL RESULTS
26-Feb-2019 / 12:30 MSK
Dissemination of a Regulatory Announcement that contains inside information
according to REGULATION (EU) No 596/2014 (MAR), transmitted by EQS Group.
The issuer is solely responsible for the content of this announcement.
PRESS RELEASE
February 26, 2019
Public Joint Stock Company «Mining and Metallurgical Company «NORILSK
NICKEL»
(PJSC «MMC «NORILSK NICKEL», «Nornickel», the «Company», the «Group»)
NORNICKEL REPORTS FULL YEAR 2018 AUDITED CONSOLIDATED IFRS FINANCIAL RESULTS
Moscow - PJSC MMC Norilsk Nickel, the largest refined nickel and palladium
producer in the world, reports today IFRS financial results for the full
year ended December 31, 2018.
2018 HIGHLIGHTS
· Consolidated revenue increased 28% y-o-y to USD 11.7 billion on the back
of improved metal prices, higher copper output and sale of palladium from
earlier accumulated stocks;
· EBITDA expanded 56% y-o-y to USD 6.2 billion owing to higher metal
revenue, ramp-up of the Bystrinsky project and lower operating expenses
driven by efficiency gains;
· EBITDA margin reached 53%, a leading level among the global diversified
metals and mining majors;
· CAPEX decreased 22% y-o-y to USD 1.6 billion driven by completion of
Bystrinsky project and downstream reconfiguration as well as optimization
of investment schedules;
· Net working capital decreased by almost USD 1.3 billion to USD 0.9
billion as a result of palladium destocking and optimization of capital
structure;
· Free cash flow increased to USD 4.9 billion;
· Net debt/EBITDA ratio returned to 1 .1x as of the end of 2018;
· Cash interest paid decreased 14% to USD 551 million owing to
optimization of debt portfolio despite rising market interest rates;
· In October 2018, the Company paid interim dividend for 1H2018 in the
amount of RUB 776 (approximately USD 11.65) per ordinary share for the
total amount of approximately USD 1.8 billion;
· In January 2018, Moody's rating agency raised Nornickel credit rating to
the investment grade level, "Baa3", and changed the outlook from "Stable"
to "Positive". As result, Nornickel got assigned investment grade credit
ratings by all three major international rating agencies, including Fitch
and S&P Global.
RECENT DEVELOPMENTS
· On February 12, 2019, Moody's upgraded the Company's credit rating to
"Baa2" with a "Stable" outlook in the wake of raising Russia's sovereign
ceiling for foreign currency debt to "Baa2" and upgrade of Russia's
sovereign rating to investment grade level of "Baa3" with "Stable"
outlook.
KEY CORPORATE HIGHLIGHTS
USD million (unless stated otherwise) 2018 2017 Change,%
Revenue 11,670 9,146 28%
EBITDA¹ 6,231 3,995 56%
EBITDA margin 53% 44% 9 p.p.
Net profit 3,059 2,123 44%
Capital expenditures 1,553 2,002 (22%)
Free cash flow² 4,931 (173) n.a.
Net working capital² 867 2,149 (60%)
Net debt² 7,051 8,201 (14%)
Net debt, normalized for the purpose of 5,160 7,495 (31%)
dividend calculation4
Net debt/12M EBITDA 1.1x 2.1x (1.0x)
Net debt/12M EBITDA for dividends 0.8x 1.9x (1.1x)
calculation
Dividends paid per share (USD)³ 21.3 18.8 13%
1) A non-IFRS measure, for the calculation see the notes below.
2) A non-IFRS measure, for the calculation see an analytical review document
("Data book") available in conjunction with Consolidated IFRS Financial
Results on the Company's web site.
3) Paid during the current period
4) Normalized on interim dividends and deposits with maturity of more than
90 days
MANAGEMENT DISCUSSION AND ANALYSIS
The President of Nornickel, Vladimir Potanin, commented on the results,
«The year 2018 was marked for us by favourable developments in macro
environment and strong operating performance. The markets of pretty much all
our core commodities except for platinum, posted strong gains, inflation
pressure on our cost base was subdued as the domestic inflation in Russia
was running at low levels. We increased copper and palladium sales volumes
by approximately 20% and got first tangible results in the form of operating
cash cost savings from our long-term efficiency program, including
digitalization projects, and generated almost USD 100 million from
Bystrinskoye copper project.
As result, in 2018, our topline expanded 28% y-o-y to USD 11.7 billion,
while EBITDA increased 56% to USD 6.2 billion, reaching the highest level
since 2011. With EBITDA margin of 53%, Nornickel became one of the most
profitable global diversified mining majors in 2018.
As promised to our shareholders, we reduced net working capital to less than
USD 900 million by the year-end. We consider USD 1 billion as a sustainable
level of working capital in the medium-term.
Capital expenditures reduced to USD 1.6 billion as a number of large
capital-intensive projects such as downstream reconfiguration in the Polar
division and construction of Bystrinsky copper project were completed in
2017.
The year 2018 was also a record year for our free cash flow, which reached
almost USD 5 billion. The Company's leverage returned to mid-cycle average,
with Net debt/EBITDA ratio falling to 1.1x. After the rating upgrade from
Moody's in January 2018, Nornickel was assigned investment grade credit
ratings by all three major rating agencies.
Solid financial performance in 2018 and robust commodity markets improve our
financial strength and provide a good platform to support the management'
strategy to further advance Nornickel on the path of sustainable growth. We
have started the second phase of a very ambitious environmental program,
launched infrastructure and digitalization projects and initiated a number
of other initiatives supported by the Russian state as national priorities
in the medium term. The Company is also looking to make final investment
decisions on some of what we consider as potentially attractive growth
opportunities, while our productivity improvement program should yield
further positive results. Overall, we are expecting an increase of our
capital investments to USD 2.2 - 2.3 billion in 2019.
We anticipate that Nornickel will maintain a leading position in the global
metals and mining sector in terms of shareholders returns and reiterate our
focus on sustainable value creation for all shareholders by developing the
world's best Tier 1 assets".
HEALTH AND SAFETY
The lost time injury frequency rate (LTIFR) decreased 48% y-o-y in 2018 from
0.44 to 0.23, reaching historical lows and remaining below the global mining
industry average. At the same time number of lost time injuries dropped two
times y-o-y (from 60 to 32) and total recordable fatal accidents decreased
25% y-o-y (from 8 to 6) driven the by the roll out of cardinal basic safety
rules and improvement of management system. The management considers the
health and safety of its employees with a zero fatality rate as the key
strategic priority and continues to implement a wide range of initiatives
targeting further improvement of the health and safety records. In 2018,
selected initiatives included the following:
· 45 internal audits of Occupational safety and Health management systems
· 105 employees were fired for violation of cardinal safety rules.
METAL MARKETS
Nickel in 2018 - deficit expanded to 130 kt (approximately 6% of global
consumption) driven by resilient demand growth in stainless steel and
booming battery sector; by the year end exchange inventories were down 47%
(or -191 kt) to approximately 32 days of global consumption which was
already below historical average; average LME price was up 26% year-on-year
with some volatility in 4Q 2018 as bearish macroeconomic expectations and
fears of China-US trade war prevailed in the market sentiment.
Strong industrial demand, primarily from stainless steel and fast growing
battery sector, coupled with a steady drawdown of exchange stocks drove
nickel price up sharply in 1H2018. On June 7, 2018, the LME nickel cash
settlement price closed at $15,750 per tonne reaching the highest level
since 2014.
However, in 2H 2018, the sentiment turned bearish on the entire base metals
basket, where consumption growth is heavily reliant on Chinese demand as the
expectations were building that the US-China trade tensions might end in a
full-scale trade war. This negative sentiment was exacerbated by the news
from Tsingshan of its plans to build an HPAL (high-pressure acid leaching)
nickel plant in Indonesia in a joint venture with GEM, BRUNP, and Indonesia
Morowali industrial Park with target capacity of 50 kt at an unprecedentedly
low capital cost of USD 14,000 per tonne. As the reported capital cost was
remarkably lower than any other similar HPAL projects realized globally so
far, this implied a material downside risk to the long-held market consensus
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DJ MMC Norilsk Nickel: NORNICKEL REPORTS FULL YEAR -2-
view on long-term incentive price. We hold a cautious view on the project as
the announced project parameters and construction timeline (also
unprecedented for this type of project of 2 years) are yet to be proven.
Nonetheless, the weak sentiment dragged the LME price below $12,000 per
tonne in 4Q2018.
The LME nickel price averaged USD 13,122 per tonne in 2018, up 26% y-o-y.
In 2018, global nickel consumption increased 7% y-o-y (or 112 kt) primarily
on the back of strong stainless production growth in Indonesia. Stainless
demand elsewhere was by and large unchanged, with China's consumption down
1% and the rest of Asia being flat, where a drop in stainless output in
Taiwan was offset by marginal growth in Japan, Korea and India. Primary
nickel demand in the European stainless sector was slightly down y-o-y and
the US was flat.
Nickel demand from the battery sector increased by 40% y-o-y, with the
demand from Li-ion batteries alone exceeding 100 kt in 2018. As the
production of nickel sulphates (an intermediate product used in the
production of battery cathodes) was lagging behind the demand, the consumers
were tapping into nickel inventories. We estimate that 56 kt of briquettes
were withdrawn from LME warehouses for the ultimate consumption in the
battery sector. The battery demand growth was driven not just by the rising
EV production volumes, but also by the technological shift of battery
cathodes' chemistry towards more nickel-intensive formulations. Thus, if in
2016 the most popular technology was NCM 1:1:1 (with a share of nickel in
the cathode material of 21%), in 2018, NCM 5:3:2 and NCM 6:2:2 became the
prevailing cathode chemistries, with nickel share of cathode materials of
32% and 38%, respectively.
Nickel consumption in other sectors such as alloys, specialty steels and
plating increased modestly by approximately 2% y-o-y.
Similar to demand, Indonesia was also the main driver of global nickel
supply, which increased 7% y-o-y (or +150 kt). In 2018, the country exported
18 million tonnes of ore to China helping the recovery of Chinese NPI output
to the 2014 levels of approximately 470 kt of nickel contained. In addition,
Indonesia itself produced more than 250 kt of nickel in NPI as domestic NPI
projects continued to ramp up and new projects were launched. Overall,
global output of low-grade nickel increased 16% y-o-y (or by 170 kt) in
2018.
In a contrast to NPI, production of high-grade nickel decreased 2% y-o-y (or
by 22 kt) in 2018 driven primarily by lower output in Canada. As we have
been pointing out over the past couple of years, many conventional nickel
mines were heavily underinvested, with CAPEX underspent inevitably to take
its toll.
By the year-end 2018, the combined nickel inventories at LME and Shanghai
Futures Exchange (SHFE) reduced almost by half to 219 kt from 410 kt owing
to strong physical demand. We estimate that the bulk of stocks withdrawn
from the exchange warehouses were consumed, as the apparent market deficit
reached 130 kt. We believe that approximately 30% of all stocks withdrawn
from the exchanges were relocated to off-exchange warehouses for strategic
stockpiling by financial players and consumers anticipating consumption
growth.
Nickel outlook - neutral; we expect persisting, yet narrowing deficits in
2019-2021 as Indonesia and China continue to increase NPI output; the demand
from stainless sector is expected to be robust; EV story continues to be the
key demand growth driver in the medium- and long-term as the xEV penetration
grows and the share of nickel-intensive cathode materials keeps growing
alongside.
In 2019, we expect the apparent nickel deficit to decrease to approximately
50 kt from 130 kt in 2018 as the ramp-up of NPI capacities in Indonesia and
their recovery in China will outpace the growth of demand. We see however a
risk to supply outlook, as the majority of holders of the export quota for
laterite nickel ore have not been fulfilling their obligations to build
local processing facilities. The market has already seen some friction in
quota policy from the Indonesian authorities and we expect that it will
continue to become more stringent, potentially capping the ore supply and
hence, the NPI output in China.
We will be watching out for further announcements on large-scale HPAL
projects in Indonesia as well as the status updates on the Tsinghan's 50
ktpa project. While we believe that laterite leaching could become one of
the prospective alternatives to provide new battery grade nickel material,
we consider it by no means being of low capital intensity and technological
simplicity. HPAL projects have been notorious not only for their high CAPEX,
which historically was in the range of USD 50,000 - 100,000 per tonne of
capacity, but also for significant budget overruns and major ramp-up delays.
In our opinion, the economics of laterite leaching projects drastically
deteriorated recently as the by-product credit for cobalt (often contained
in laterite ores) has reduced alongside falling payable cobalt price. We do
not expect a recovery in cobalt price in the medium term due to a looming
oversupply of cobalt intermediates.
In 2019, we expect a 4% global nickel demand growth in stainless steel
driven mainly by Indonesia. Nickel consumption in specialty steels and
alloys should increase by approximately 3% driven largely by aerospace,
petrochemical and chemical processing industries.
In our view, nickel consumption in battery sector will increase by
approximately 20% in 2019, which would be below 2018 growth rate as the
shift to the NCM 8:1:1 formulation (nickel share in cathode material of 48%)
will unfold gradually and could take a few years. Overall, we believe that
EV penetration growth will remain the key driver for high-grade nickel
demand in the next 5-7 years.
We also do not expect that potential trade war between China and the US
could have a material negative impact on nickel demand as even if all
nickel-bearing goods imported from China were completely displaced from the
US market (20kt Ni pa), manufacturers from other regions would fill the
niche. The trade war could, nevertheless, possess a greater risk at the
macro level impacting the income levels and echoing at the local nickel
end-use in China.
Copper in 2018 - strong demand pushed the market into a small deficit; price
was volatile as concerns over the demand implications from the US-China
trade conflict and global economic slowdown offset robust industry
fundamentals; double-digit growth of copper imports to China alleviated
concerns over weak industrial consumption in the country; the supply
disruption rate was abnormally low, while scrap market remained constrained.
Copper price was on a rollercoaster in 2018. In 1H2018, expectations of
potential labour-related supply disruptions at copper mines in Chile and
Peru supported by the low level of exchange inventories and EV-related
positive market sentiment pushed the copper price to a 4-year high of USD
7,300 per tonne. An escalation of the US-China trade tensions, successful
negotiations between miners and trade unions in Latin America and rising
investors' pessimism on the expectations of global economic slowdown brought
copper price down to USD 5,800 per tonne in August 2018. In 4Q18, the price
stabilized in the range of USD 5,950 and USD 6,300 per tonne.
In 2018, the average LME copper price increased 6% y-o-y to USD 6,523 per
tonne.
In 2018, we estimate that global copper demand increased 3% y-o-y to 23.7
mln tonnes driven mostly by grid development in China, which was supported
by a moderate industrial consumption growth in Europe and the US. Weathering
out the market concerns over sustainability of copper demand growth in
China, the country recorded a very robust increase of refined copper (+13%
y-o-y) and copper concentrate (+14% y-o-y) imports. We estimate that the
market shifted into a small deficit of 120 kt deficit in 2018, while the
exchange stocks dropped 35% by the year end to 351 kt, which indicated a
very tight inventories level of 5 days of global consumption.
Copper outlook - neutral; Chinese demand growth of approximately 2% in 2019
is expected to be sufficient enough to keep the market in a small deficit,
which we forecast at approximately 320 kt; some major uncertainties remain.
In 2019, we expect that the Chinese copper demand (especially in
concentrates) will remain robust driven by the government stimulus measures
launched in 2018, which aimed at infrastructure expansion and support of
consumer demand. At the same time, we forecast that the supply will lag
behind the demand as new production from the ramping up greenfield projects
in Panama and Ecuador will be offset by output reduction in Chile and
Indonesia. Overall, in our view, the market will remain in apparent deficit
of approximately 320 kt or 1.3% of the global demand, which we do not
consider material and thus not suggesting any significant upside risks to
spot copper price.
The main risks to our copper market balance forecast include the Chinese
stimulus being not sufficient to support the demand, the US-China trade
tensions not getting resolved and global supply disruption ratio remaining
at the abnormally low level of 2018.
Palladium in 2018 - price rallied to almost USD 1,300 per ounce in late
December 2018 as the demand reached the all-time high of 10.7 mln ounces and
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structural deficit extended; premium to platinum expanded to USD 400 per
ounce with no signs of reverse substitution by the industrial users;
physical market was tight despite sales from ETFs and other above-ground
stocks.
After a short-term downward price correction in 1H 2018, palladium resumed
its rally heading to all-time high of USD 1,440 per ounce in January 2019.
In 2018, the market was in a structural deficit (ex. ETFs or other stock
movements) for the ninth consecutive year in a row. Nonetheless, only in the
last two years the apparent market deficit started to translate into real
physical tightness on the spot market as price sensitive stocks had been
depleted and metal lease rates increased five-fold as the forward curve went
into backwardation.
In 2018, the average LBMA palladium price increased 18% y-o-y to USD 1,029
per troy ounce.
In 2018, gross palladium demand reached an all-time high of 10.7 mln ounces
(+2% y-o-y) mostly driven by automotive sector, which increased metal
consumption 3% y-o-y to 8.6 mln ounces. Within the automotive sector the
following developments were supportive of palladium demand:
· Higher palladium offtake by the value chain in anticipation of tighter
environmental regulations rolled over in Europe, China, US, coupled with
the launch of technically challenging Real Driving Emission (RDE) testing;
· Powertrain shift to gasoline hybrids, SUVs and light trucks.
In 2018, gross supply was flat y-o-y. Mine production decreased 2% y-o-y
driven by mine closures and smelting bottlenecks in South Africa, while the
recycled volumes were up 11% y-o-y fully offsetting the primary supply
decline.
Spot palladium market practically dried out. Elevated lease rates at the end
of the summer and early autumn of 2018 indicated that the market was very
tight as the metal available for spot purchases was in shortage. Release of
stocks from palladium ETFs, which reduced below 1 mln ounces for the first
time since 2009, and supply of the extra metal by Nornickel's Palladium Fund
eased the market tightness to some extent.
Palladium outlook -positive; market deficit expected to amount to 0.8 mln
ounces in 2019 driven by strong demand on the back of tighter emission
regulations in all major markets; no reverse substitution into platinum is
anticipated due to technical challenges; palladium remains the metal of
choice for gasoline catalytic converters.
In 2019, we expect the palladium consumption to grow 500 koz to 11.2 mln
ounces owing to strong demand from autocatalyst producers. In spite of
slowing auto sales in China, we believe that the launch of China's 6
emission standard by July 2020 will provide additional demand for PGMs
already in 2019, as the industry will have to restock these metals across
the entire fabrication value chain. Moreover, the introduction of real
driving emission tests coupled with rising hybridization of the light
vehicles will put additional requirements on the car emission systems
implying additional demand for palladium.
In 2018 and year-to-date 2019, there has been no indications from the
industry of the substitution of palladium with platinum in gasoline vehicles
despite a substantial price difference. Contrary to a common market
misbelief, platinum and palladium are not fully interchangeable and
typically, more than one PGM is needed for a catalyst. Palladium has better
thermal durability and better NOx reduction properties than platinum, and
therefore, it is more efficient in contemporary gasoline vehicles.
In 2019, we expect primary supply to increase 280koz to 7.1 mln ounces on
the back of ramp-up of Stillwater's Blitz project and increase of production
in South Africa as a result of processing of the previously accumulated
stocks in the pipeline. Recycled volumes are forecasted to grow by 80koz to
3.3 mln ounces. Increase of gross supply, in our opinion, will not be able
to match rising demand and thus we are forecasting that the structural
deficit will persist in 2019 and will reach approximately 0.8 mln ounces.
Platinum in 2018 - pressure from lower automotive and jewelry demand
combined with the stable supply drove the price to 10-year lows.
In 2018, platinum price continued its downward trend, which started in 2017.
Soft demand from automotive and jewelry sectors as well as overall strong
anti-diesel sentiment pushed the price to its multi-year lows of
approximately USD 800 per ounce by the year-end. Improvement of the PGM
basket prices (supported by palladium and minor PGMs) had a positive effect
on the financial performance of South African miners, as a result of which,
in our view, they will likely to delay the restructuring of their
operations.
In 2018, the average LBMA platinum price decreased 7% y-o-y to USD 880 per
troy ounce.
Platinum outlook - cautiously positive; automotive and jewelry demand to
stabilize in 2019; no incentive to make investments into new mining projects
at current price levels; potential supply rationalization still feasible.
In 2019, we expect the automotive demand for platinum to be flat as the
anti-diesel story is gradually fading away. In our opinion, the concerns
over diesels are grossly overblown as the technology is critical to ensure
the EU fleet's compliance with the CO2 targets in 2021-2025 (especially for
heavy-duty engines). We also expect the stabilization of jewelry demand
together with increase in platinum consumption in electronics and other
industrial applications.
We forecast that supply in 2019 will increase 6% to 8.9 mln ounces driven
mostly by recycling and additional ounces coming from processing of stocks
accumulated in the producers' pipeline in South Africa. We have reasonable
expectations that industry rationalization could take place as, for
instance, subject to the completion of Sibanye's acquisition of Lonmin,
Rustenburg operations might face some curtailments.
In our view, most of negative news for platinum are already priced-in. We
believe that the risk-reward trade-off is now more skewed to upside as we
anticipate normalization of industrial consumption and rebound of investment
demand. For instance, platinum ETF holdings are 15% up 2019 to-date.
KEY SEGMENTAL HIGHLIGHTS1
USD million (unless stated otherwise) 2018 2017 Change,%
Revenue 11,670 9,146 28%
GMK Group 9,742 7,447 31%
KGMK Group 911 897 2%
NN Harjavalta 1,026 840 22%
GRK Bystrinskoye 8 15 (47%)
Other mining 108 128 (16%)
Other non-metallurgical 1,514 1,286 18%
Eliminations (1,639) (1,467) 12%
EBITDA 6,231 3,995 56%
GMK Group 6,602 4,559 45%
KGMK Group 190 182 4%
NN Harjavalta 71 61 16%
GRK Bystrinskoye 96 (65) n.a.
Other mining (6) (3) 100%
Other non-metallurgical 50 18 3x
Eliminations (13) (34) (62%)
Unallocated (759) (723) 5%
EBITDA margin 53% 44% 9 p.p.
GMK Group 68% 61% 7 p.p.
KGMK Group 21% 20% 1 p.p.
NN Harjavalta 7% 7% 0 p.p.
GRK Bystrinskoye n.a. n.a. n.a.
Other mining (6%) (2%) (4 p.p.)
Other non-metallurgical 3% 1% 2 p.p.
1) Segments are defined in the consolidated financial statements
In 2018, revenue of Group GMK segment increased 31% to USD 9,742 million.
This was primarily driven by higher realized metal prices, sales of
palladium stock accumulated in 2017 and higher copper production volumes.
The revenue of Group KGMK segment increased 2% to USD 911 million. The main
growth driver was higher realized metal prices, which was partly offset by
lower revenue from tolling operations of Polar Division's feed due to
depreciation of Russian rouble.
Revenue of NN Harjavalta increased 22% to USD 1,026 million mainly due to
higher realized metal prices.
Revenue of GRK Bystrinskoye generated during the hot commissioning phase is
included into other operating income and expenses.
Revenue of Other mining segment decreased 16% to USD 108 million mostly
driven by lower Nkomati production volumes that was partly offset by higher
realized metal prices.
Revenue of Other non-metallurgical segment increased 18% to USD 1,514
million owing to higher turnover of Palladium Fund.
In 2018, EBITDA of GMK Group segment increased 45% to USD 6,602 million
owing primarily to higher revenue and depreciation of Russian rouble.
EBITDA of Group KGMK segment increased 4% to USD 190 million primarily owing
to the increased revenue and lower cash costs due to depreciation of Russian
rouble.
EBITDA of NN Harjavalta increased by USD 10 million to USD 71 million owing
primarily to increased revenue.
EBITDA of GRK Bystrinskoye segment amounted to USD 96 million due to the
revenue generated during the hot commissioning stage.
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