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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DJ NORNICKEL REPORTS FIRST HALF 2019 INTERIM -2-
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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palladium consumption forecast in automotive industry downward by 0.5 mln ounces to 8.9 mln ounces in 2019. Nonetheless, in our opinion, palladium demand has a strong support coming from the tightening environmental regulations in the most important car markets and the roll out of RDE, both of which require OEMs to increase PGM loadings. For instance, the launch of China 6 emissions standard this year has already translated into a stronger palladium offtake. We estimate that palladium loadings in light-duty petrol (gasoline) vehicles in China will increase by 15-20% y-o-y in 2019 and will continue to grow next year. We do not anticipate any major palladium substitution with platinum in the near term because of the technological challenges owing to specific chemical properties of the two metals, making them not fully interchangeable in the modern auto catalysts. According to our industry knowledge currently, automakers have a little appetite for changes in the catalysts chemistry as their engineering resources are focused on meeting new tighter emission legislation and RDE testing, and they do not have enough resources to conduct new catalyst formulation testing. In 2019, palladium demand from other sectors is expected to be flat at approximately 2.1 mln ounces. According to our estimates, primary palladium supply will reach 7.1 mln ounces (+250 thousand ounces) in 2019 due to increased production in Russia and South Africa, mostly as a result of the release of previously accumulated work-in-progress. Recycling volumes will also grow to 3.3 mln ounces (+100 thousand ounces). However, the growth of supply will not be able to fully cover the demand, implying that the market will remain in a structural deficit, which we estimate at approximately 0.6 million ounces in 2019. Platinum in 1H2019 - price rebounded from historic lows supported by investment demand on the back of gold rally; nonetheless, the price remained under pressure from weak automotive and jewelry demand. In 1Q2019, platinum price managed to rebound from USD 790 to USD 850 per ounce supported by higher investment demand as gold rallied after all major central banks continued to keep interest rates at almost-zero levels. However, fundamental factors such as soft demand from automotive (diesel share of new car sales in Europe fell from 38% in 1H2018 to 33% in 1H2019) and jewelry sectors kept the price under pressure. In 1H2019, the average LBMA platinum price decreased 12% y-o-y to USD 832 per ounce. Platinum outlook - cautiously positive; automotive demand is expected to remain soft, but jewelry consumption should stabilize, while the investment demand is likely to strengthen; platinum-intensive fuel cells may present a viable carbon-free alternative to electric cars in public transportation and heavy-duty vehicles. In 2019, we expect that the automotive demand will remain soft as the diesel ratio in Europe continues to fall. Nonetheless, we see some stabilization of jewelry demand as well as improving platinum consumption in electronics and glass industries. Supply is expected to increase 4% y-o-y to 8.6 mln ounces in 2019 driven mostly by higher recycling and additional ounces coming from the release of work-in-progress inventory in South Africa and to lesser extent at Norilsk Nickel. Some supply rationalization remains feasible, in our opinion, as the completion of Sibanye's acquisition of Lonmin may lead to curtailment of unprofitable mines. In our view, major downside risks for platinum are already priced-in. Dovish policies of major central banks and risks of global recession are stimulating investors to buy precious metals as a safe haven asset, which should be supportive for investors demand for platinum. We forecast that investment demand for platinum should amount to approximately 1 mln ounces in 2019. KEY SEGMENTAL HIGHLIGHTS1 USD million (unless stated otherwise) 1H2019 1H2018 Change,% Revenue 6,292 5,834 8% GMK Group 6,117 4,816 27% KGMK Group 465 486 (4%) NN Harjavalta 522 486 7% GRK Bystrinskoye 1 - 100% Other mining 74 61 21% Other non-metallurgical 647 813 (20%) Eliminations (1,534) (828) 85% EBITDA 3,719 3,079 21% GMK Group 4,300 3,296 30% KGMK Group 87 129 (33%) NN Harjavalta 40 24 67% GRK Bystrinskoye 160 5 n.a. Other mining (4) 6 n.a. Other non-metallurgical 12 (1) n.a. Eliminations (494) (23) n.a. Unallocated (382) (357) 7% EBITDA margin 59% 53% 6 p.p. GMK Group 70% 68% 2 p.p. KGMK Group 19% 27% (8 p.p.) NN Harjavalta 8% 5% 3 p.p. GRK Bystrinskoye n.a. n.a. n.a. Other mining (5%) 10% (15 p.p.) Other non-metallurgical 2% 0% 2 p.p. 1) Segments are defined in the consolidated financial statements In 1H2019, revenue of Group GMK segment increased 27% to USD 6,117 million. This was primarily driven by the growth of intersegmental sales revenue due to the launch of direct sales of semi-products to KGMK Group, which was additionally supported by higher refined metals production volumes and palladium price. The revenue of Group KGMK segment decreased 4% to USD 465 million. Increase in revenue from metal sales to external customers was offset negatively by the complete cessation of sales of own feed to NN Harjavalta and lower nickel price. Revenue of NN Harjavalta increased 7% to USD 522 million. Higher sales volumes were partially offset by lower nickel price. Revenue of GRK Bystrinskoye generated during the hot commissioning phase was included into other operating income and expenses. Revenue of Other mining segment increased 21% to USD 74 million mostly driven by higher semi-products sales volumes and palladium price. Revenue of Other non-metallurgical segment decreased 20% to USD 647 million owing to lower sales from Palladium Fund. In 1H2019, EBITDA of GMK Group segment increased 30% to USD 4,300 million owing primarily to higher revenue and depreciation of Russian rouble. EBITDA of GMK Group segment included unrealized profit from the sale of semi-products to Group KGMK segment and was eliminated from EBITDA of the Group. EBITDA of Group KGMK segment decreased 33% to USD 87 million primarily owing to the decrease of operating margin due to the reduction of realized nickel price and inflationary growth of expenses, which was exacerbated by the start of direct purchases of Polar division semi-products. EBITDA of NN Harjavalta increased by USD 16 million to USD 40 million owing primarily to increased revenue. EBITDA of GRK Bystrinskoye segment increased by USD 155 million and amounted to USD 160 million due to higher sales volumes generated during the hot commissioning stage. EBITDA of Other non-metallurgical segment increased by USD 13 million to USD 12 million. EBITDA of Unallocated segment changed 7% to a negative USD 382 million. Higher selling, administrative and other operating income and expenses were partly positively offset by Russian rouble depreciation. SALES VOLUME AND REVENUE 1H2019 1H2018 Change,% Metal sales Group Nickel, thousand tons¹ 113 101 12% from own Russian feed 108 98 10% from 3d parties feed 2 1 100% in semi-products³ 3 2 50% Copper, thousand tons¹,² 223 201 11% from own Russian feed 205 191 7% in semi-products³ 18 10 80% Palladium, koz¹ 1,537 1,528 1% from own Russian feed 1,485 1,505 (1%) in semi-products³ 52 23 2x Platinum, koz¹ 390 353 10% from own Russian feed 380 349 9% in semi-products³ 10 4 3x Average realized prices of refined metals produced by the Group Metal Nickel (USD per tonne) 12,781 14,141 (10%) Copper (USD per tonne) 6,221 6,989 (11%) Palladium (USD per oz) 1,406 1,032 36% Platinum (USD per oz) 829 930 (11%) Revenue, USD million4 Nickel 1,499 1,494 0% including semi-products 100 86 16% Copper 1,385 1,405 (1%) including semi-products 108 69 57% Palladium 2,374 1,950 22% including semi-products 101 38 3x
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