DJ NORNICKEL REPORTS FIRST HALF 2019 INTERIM CONSOLIDATED IFRS FINANCIAL RESULTS
MMC Norilsk Nickel (MNOD)
NORNICKEL REPORTS FIRST HALF 2019 INTERIM CONSOLIDATED IFRS FINANCIAL
RESULTS
20-Aug-2019 / 14:31 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
Public Joint Stock Company «Mining and Metallurgical Company «NORILSK
NICKEL»
(PJSC «MMC «NORILSK NICKEL», «Nornickel», the «Company», the «Group»)
NORNICKEL REPORTS FIRST HALF 2019 INTERIM CONSOLIDATED IFRS FINANCIAL
RESULTS
Moscow, August 20, 2019 - PJSC MMC Norilsk Nickel, the largest refined
nickel and palladium producer in the world, reports IFRS financial results
for six months ended June 30, 2019.
1H2019 HIGHLIGHTS
· Consolidated revenue increased 8% y-o-y to USD 6.3 billion owing to
output growth of all key metals and higher palladium price;
· EBITDA expanded 21% y-o-y to USD 3.7 billion owing to higher metal
revenue and the ramp-up of the Bystrinsky copper project, with EBITDA
margin reaching 59%;
· CAPEX was almost unchanged from last year amounting to USD 0.5 billion.
The Company made final investment decisions on strategic growth projects
such as the expansion of the Talnakh concentrator (TOF-3 project) and the
South Cluster mining project, with the active construction phase scheduled
to start in 2H19;
· Net working capital temporarily increased to USD 1.3 billion as a result
of scheduled amortization of advance payments for delivered metals from
customers;
· Free cash flow amounted to USD 2.2 billion;
· Net debt/EBITDA ratio decreased to 0.8x as of June 30, 2019;
· Cash interest paid decreased 23% to USD 202 million owing to the ongoing
optimization of debt portfolio;
· 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.
RECENT DEVELOPMENTS
· On July 1, 2019, the Company paid final dividend for 2018 in the amount
of RUB 792.52 (approximately USD 12.56) per ordinary share for the total
amount of approximately USD 2.0 billion;
· On August 20, 2019, the Company's Board of Directors recommended to the
General Meeting of shareholders (EGM) to approve interim dividend for the
first half of 2019 in the amount of RUB 883.93 per share (USD 13.27 at the
RUB/USD exchange rate the Russian Central Bank as of August 20, 2019) for
the total amount of USD 2.1 billion. The Board of Directors set the date
of the EGM on September 26, 2019 and the EGM record (the list of
shareholders eligible to vote) date on September 2, 2019. The Board of
Directors proposed to set the dividend record date (the list of
shareholders entitled to the dividend) on October 7, 2019.
KEY CORPORATE HIGHLIGHTS
USD million (unless stated otherwise) 1H2019 1H2018 Change,%
Revenue 6,292 5,834 8%
EBITDA¹ 3,719 3,079 21%
EBITDA margin 59% 53% 6 p.p.
Net profit 2,997 1,653 81%
Capital expenditures 500 536 (7%)
Free cash flow² 2,206 2,600 (15%)
Net working capital² 1,282 8674 48%
Net debt² 5,357 70514 (24%)
Net debt/12M EBITDA 0.8x 1.1x4 (0.3x)
Dividends paid per share (USD)³ - - 0%
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) Reported as of December 31, 2018
MANAGEMENT DISCUSSION AND ANALYSIS
The President of Nornickel, Vladimir Potanin, commented on the results,
"The first half of 2019 was marked by weak global macro environment as
investors' sentiment was dominated by concerns over the slowdown of global
economy and unfavorable outcome of the US-China trade negotiations.
Therefore, prices on all our key metals except for palladium went
substantially down.
Amid these challenging market conditions, our Company managed to deliver
solid financial performance owing to operating efficiency gains, which were
further supported by strong palladium market. Output and sales of all our
key metals increased and, importantly, the operating cost inflation was
maintained below the Russian CPI.
As result, the first half of 2019 revenue increased 8% y-o-y to USD 6.3
billion, while EBITDA was up 21% to USD 3.7 billion including about USD 160
million contributed by the Bystrinsky project that continued to ramp up. Our
leading position among global diversified mining majors in terms of EBITDA
margin was sustained.
The Company continued to execute its key investment projects including
construction of Bystrinsky copper project and upgrade of Kola refining
capacity, which are nearing their completion. In the second half of the
year, we plan to enter the active construction phase of recently approved
South Cluster and third stage of Talnakh Concentrator upgrade (TOF-3)
projects. We also reiterate our firm commitment to radically reduce the
environmental footprint in the regions of our operations and implement the
projects aiming at a substantial reduction of sulfur dioxide emissions in
Norilsk and at Kola Peninsula.
Taking into consideration USD 2.2 billion free cash flow and conservative
leverage with net debt/EBITDA ratio down to 0.8x, the Board of Directors
recommended for the shareholders' approval an interim dividend in the total
amount of USD 2.1 billion".
HEALTH AND SAFETY
The lost time injury frequency rate (LTIFR) marginally increased 4% to 0.28
in 1H2019 from 0.27 in 1H2018, remaining well below the global mining
industry average. At the same time, the number of lost time injuries was
flat y-o-y, but dropped more than three times (from 43 to 15) since 1?2015
driven the by the roll-out of cardinal basic safety rules, launch of
video-information system, introduction of electronic medical examination
systems, improvement of labour safety management system and a number of
other initiatives.
Regretfully, in 1H2019 Company suffered four fatal injuries. The management
considers the health and safety of its employees as the key strategic
priority and reiterates its commitment to target zero fatality rate and
continues to implement a wide range of initiatives aiming at further
improvement of the health and safety records. In 1H2019, selected
initiatives included the following:
· 44 internal audits of HSE management system;
· 70 employees fired for violation of cardinal health and safety rules
(versus 33 in 1H2018).
In May 2019, Bain & Company Russia Consulting conducted an annual
independent assessment of the current level of the occupational safety
culture as well as changes to the HSE systems of the Group made during the
year. According to this assessment, the company's integral score was raised
to 2.8 points (out of the maximum of 4) in 2019 up from 2.6 points in 2017
(and compared to 1.4 points in 2014).
METAL MARKETS
Nickel in 1H2019 - market was in deficit as strong Chinese demand from
stainless and battery sectors was negatively offset by surge in NPI
production; exchange inventories were down another 40 thousand tonnes
year-to-date helping to cover some of the deficit; LME nickel price was down
11% y-o-y as bearish macroeconomic sentiment and China-US trade tensions
continued to negatively affect the market expectations despite positive
sector-specific developments.
In 1H2019, nickel price was quite volatile as the macro backdrop was
negative due to trade tensions between the US and China as well as weakening
global manufacturing PMI. On the other hand, sector-specific developments
were positive, including the shutdown of Onça Puma, major upward capex
revision of Tsingshan's HPAL project at Morowali in Indonesia and robust
demand from Chinese stainless sector. At the very end of June, the
Indonesian government reaffirmed its intention to reinstate the ban on the
export of nickel ore as previously planned in 2022. If enforced the ban
could wipe away almost 10% of global nickel supply. The market reacted
positive to this news taking the metal price above USD 14,000 per tonne in
July.
In 1H2019, the LME nickel price averaged USD 12,315 per tonne, down 11%
y-o-y.
Developments on the supply side in 1H2019 were dominated by strong expansion
of NPI output in China and Indonesia, which combined were up almost 25%
y-o-y driven by the availability of relatively cheap high-grade ore, which
additionally benefited NPI smelters' margins. At the same time, production
of ferro-nickel was lower owing to the closure of Onça Puma in Brazil and
underperformance of Koniambo and Doniambo in New Caledonia, while the
production of high-grade nickel products was flattish as higher output by
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Norilsk Nickel and Jinchuan was offset by production decline at Vale.
Demand dynamics was mixed across various geographies. While the stainless
steel demand in China was up 10% y-o-y (though most of the growth was at
stainless mills integrated upstream into NPI), the rest of Asia was flat.
Noticeably, in 1H2019 the Chinese stainless steel producers accelerated the
substitution of Class 1 nickel feed with NPI. European stainless output was
down 6% y-o-y alongside contracting PMI, while the US was also down, but
that was a result of high base effect of 1H2018.
Battery industry remained the hottest spot of the nickel demand driven by
growing EV production, higher driving range requirements, and ongoing shift
in battery cathodes' chemistry mix towards reduced cobalt loadings in favor
of higher nickel loadings. In 1H2019, nickel demand from the battery sector
was up 38% y-o-y with China leading the growth with NCM cathode material
production increasing by 50%. Electric car sales in 1H2019 soared 92%
despite weak market conditions for the global light vehicles industry. In
China, in particular, BEV sales jumped 111% y-o-y in a contrast with the
total car sales being down 12% in the country.
In line with our expectations nickel market remained in deficit in 1H2019.
Exchange inventories continued their steady decline decreasing another 40
thousand tonnes supporting our assessment of the market running a deficit.
At the end of June, the combined LME and SHFE nickel stocks stood at 182
thousand tonnes (or 28 days of global annual consumption).
Nickel outlook - neutral; we expect the deficit in 2019 to narrow to
approximately 60 thousand tonnes as Indonesia and China will continue
growing their NPI output; Indonesian export ban if reinstated as scheduled
in 2022 or earlier will put around 10% of global nickel production at risk,
which could substantially alter the global supply landscape; EV batteries
continue to be the key demand growth driver in the medium- and long-term
supported by the carbon-free mainstream narrative.
We expect that NPI production growth both in Indonesia and China will drive
the nickel market into a mild surplus in 2H2019. In 2019, we forecast an
annual deficit of approximately 60 thousand tonnes, implying a small
increase from our prior estimate of 50 thousand tonnes deficit.
In 2019, global nickel demand is expected to increase 4% y-o-y. We estimate
that nickel consumption in stainless will grow 3% propelled solely by
300-series output in China (+7% y-o-y). Nickel consumption in specialty
steels and alloys should also increase by approximately 3% y-o-y driven
largely by aerospace and petrochemical processing industries.
We anticipate that battery sector demand will slow down in 2H2019 due to
steady fading of NEV subsidies in China, but still amount to approximately
25% y-o-y increase in 2019. The next big shift in nickel intensity in
cathode materials is dependent on the roll out of the 8:1:1 (NCM)
formulation and may take a few years, as the development has somewhat lost
its steam due to the collapse in cobalt price and thus weakened incentive to
reduce cobalt loadings in batteries. Nonetheless, the Chinese government NEV
subsidies, which stimulate production of electric vehicles with longer
driving range, continue to incentivize the chemistry shift in favour of
higher nickel loadings, with a number of NCM 8:1:1 based cells already
approved for the EV application. Hence, we expect that the 8:1:1 chemistry
will gradually increase its market share and become the mainstream
technology by 2025.
In the long run, the biggest potential disruption for nickel supply and the
market overall could come from the Indonesian government that is
contemplating to reinstate the ore export ban. Under the 2017 mining
regulation, Jakarta is scheduled to stop export of unprocessed ore starting
January 2022 following a five-year grace period provided to miners deemed
sufficient enough for them to build smelters onshore. Recently, however, the
Indonesian officials suggested in public comments that the government might
consider bringing the ban forward. At present, Indonesia exports annually
over 220 thousand tonnes of nickel contained in the ore, which represents
approximately 10% of the global supply. Whether Philippines as the only
other alternative source of nickel ore feed to China will be able to
compensate for the potential loss of Indonesia supply and to what extent
remains to be seen.
Copper in 1H2019 - volatile macro environment and bearish investors'
sentiment undermined the price that was down 11% y-o-y
The copper roller coaster seen in 2018 continued in 1H2019 as weakening
global economy, strong US dollar performance and speculative positioning
aligned with worse-than-expected industry fundamentals. In March-April,
copper price made an attempt to consolidate at the level of USD 6,500 per
tonne on expectations of an imminent trade deal between the US and China,
but as the prospects for any near term resolution of the conflict got pushed
back, metal price plunged below USD 6,000 per tonne in May.
The average LME copper price in 1H2019 decreased 11% y-o-y to USD 6,165 per
tonne.
In terms of fundamentals, copper market in 1H2019 was by and large balanced.
Global refined copper demand growth was sluggish (+1% y-o-y) as China
disappointed on grid investments and auto production, while the copper
consumption in the world ex-China was at best flat. Supply was mostly in
line with the market expectations while disruptions were running low (less
than 2% of global supply vs 5-6% historical average).
Copper outlook - neutral; the market is expected to remain largely balanced
in 2019-2020; the outcome of the US-China trade negotiations and currency
movements will continue to dominate the investors' sentiment.
We anticipate that copper market will remain largely balanced in the
near-term running a marginal deficit of approximately 1% of the global
consumption. In 2019, the deficit is forecasted of approximately 200-250 kt.
Chinese demand should improve in 2H2019 as result of the local government
accelerating investments into energy infrastructure. At the same time, the
mine supply growth will continue to be constrained by the limited pipeline
of new projects as producers worry of the global macro uncertainty and muted
prospects of a positive outcome of the US-China trade conflict are likely to
put on hold new developments. Global exchange inventories are running low,
making the market balance sensitive to any potential major supply disruption
or positive demand news.
Palladium in 1H2019 - price consolidated above USD 1,400 per ounce; premium
to platinum sustainably expanded above USD 500 per ounce as there was no
indication that any substitution was happening or even contemplated; market
continued to be in structural deficit as higher PGM loadings were offsetting
weakening global auto sales.
The rally in palladium price that started in 2H2017 continued through 2018
and well into 1Q2019, when in March the price hit the all-time high of USD
1,604 per troy ounce. This long winning streak was interrupted in late March
when palladium price fell by nearly 200 USD in just two days. This downward
correction was caused by a number of factors, which together comprised a
short-term "perfect storm", including:
· liquidation of speculative long position following an almost non-stop
price rally since August 2017;
· adjustment of the metal lease rates that took the upward pressure off
the physical market;
· additional refined metal supply coming from secondary sources;
· material decrease in 1Q2019 automotive sales globally (-5% y-o-y) with
negative dynamics in all key regions, including China (-11%), North
America (-3%) and Europe (-2%).
However, after a couple of days of elevated volatility, palladium price
consolidated at USD 1,350-1,500 per ounce as investors regained confidence
in the industry sustaining its strong fundamentals.
The average LBMA palladium price in 1H2019 increased 40% y-o-y to USD 1,410
per ounce.
In 1H2019, on our estimates, demand increased ahead of supply due to the
rollout of new tighter environmental regulations in practically all largest
regional car markets, including China 6, Tier 3 in the US, Euro 6d in the
EU, Bharat 6 in India, which offset positively weak light vehicle production
volumes. The market deficit was covered mainly by the release of
work-in-progress materials by Norilsk Nickel and South African producers as
well as sales of third party refined metal by Norilsk Nickel via its
Palladium Fund.
Palladium premium to platinum exceeded USD 500 per ounce. According to our
observations, there was a little appetite for substitution of palladium with
platinum as OEMs had not just to meet the stricter requirements of the
tighter emission regulations, but also to comply with the more demanding
environment of real world driving emission tests (RDE).
Palladium outlook - positive; market deficit to amount to 0.6 mln ounces in
2019 driven by continuous growth of demand from autos on the back of tighter
emission regulations in all major markets and introduction of RDE; no
substitution with platinum is expected due to technical challenges;
palladium remains the metal of choice for gasoline catalytic converters.
Taking into consideration a softer auto market in 1H2019 we revise our
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