DJ NORNICKEL REPORTS FULL YEAR 2020 AUDITED CONSOLIDATED IFRS FINANCIAL RESULTS
MMC Norilsk Nickel (MNOD)
NORNICKEL REPORTS FULL YEAR 2020 AUDITED CONSOLIDATED IFRS FINANCIAL RESULTS
16-Feb-2021 / 14:30 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.
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PRESS RELEASE
Public Joint Stock Company «Mining and Metallurgical Company «NORILSK NICKEL» (PJSC «MMC «NORILSK NICKEL», «Nornickel»,
the «Company», the «Group»)
NORNICKEL REPORTS FULL YEAR 2020 AUDITED CONSOLIDATED IFRS FINANCIAL RESULTS
Moscow, February 16, 2021 - Nornickel the world's largest producer of palladium and high-grade nickel and a major
producer of platinum and copper, reports audited consolidated IFRS financial results for the full year ended December
31, 2020.
FY2020 HIGHLIGHTS
- Consolidated revenue increased 15% y-o-y to USD 15.5 billion owing to higher prices of palladium and rhodium as
well as the scheduled ramp-up of Bystrinsky project;
- EBITDA decreased 3% y-o-y to USD 7.7 billion due to the USD 2 billion environmental provision related to the
reimbursement of environmental damages caused by the fuel spill at the Polar Division, expenses related to
containment of COVID-19 spread and increase of inventory of saleable metals;
- CAPEX increased 33% y-o-y to USD 1.8 billion owing to the execution of mining projects at Talnakh deposit,
development of South Cluster, increased capital repairs of energy infrastructure, investments into improvement of
industrial safety as well as the launch of an active construction phase of the Sulfur project;
- Net working capital decreased 28% to USD 0.7 billion mainly driven by the depreciation of the Russian rouble and
changes in income tax payable, which was partly compensated by increase of inventory of saleable metals;
- Free cash flow increased 36% y-o-y to USD 6.6 billion driven by higher revenue and scheduled ramp-up of Bystrinsky
project;
- Net debt was down 33% y-o-y to USD 4.7 billion. Net debt/EBITDA ratio decreased to 0.6x as of December 31, 2020.
The Company's financial stability was confirmed by investment grade credit ratings from all three major rating
agencies;
- On May 29, 2020, diesel fuel leaked from the emergency fuel tank at the heat and power plant ?3 (HPP-3) due to
sudden sinking of support posts based in permafrost. By now, the main phase of the clean-up operations has been
completed;
- On September 10, 2020, the Federal Service for Supervision of Natural Resources ("Rosprirodnadzor") filed a claim
with the Arbitration Court of the Krasnoyarsk region seeking compensation from the Company of damages caused to the
environment in the amount of RUR 147.78 billion (or approximately USD 2 billion);
- In September 2020, the Company successfully placed a 5-year USD 500 mln eurobond offering with a record low annual
coupon rate of 2.55%;
- In December 2020, in line with its complex environmental programme the Company shut down a smelter at Nickel town
(Kola GMK), which resulted in the complete elimination of sulphur dioxide emissions in the cross-border area with
Norway and alongside other environmental initiatives should enable a reduction of sulphur dioxide emissions in the
Murmansk region by 85% by the end of 2021.
- In response to coronavirus, the Company provided a comprehensive support to safeguard the health and safety of its
employees and regional communities s. In total, the Group spent USD 157 million net of VAT to prevent and combat
spread of COVID-19;
- Starting from 2021, Mineral Extraction Tax has been increased 3.5x for certain minerals, including ores mined by
Norilsk Nickel.
RECENT DEVELOPMENTS
- In January 2021, investment tokens backed by physical metal were issued using EU-registered financial vehicle
listed on Deutsche Börse and London Stock Exchange;
- On February 5, 2021, Arbitration Court of Krasnoyarsk Kray announced that it decided to award diesel spill damages
claimed by Rosprirodnadzor in the amount of RUB 146.2 bn (USD 1 979 million at the exchange rate as of December 31,
2020). The Company has set up a provision that fully covers both the damages and the expenses related to
liquidation of incident consequences and rehabilitation of disturbed area;
- On February 12, 2021, the Company made an early repayment of exchange-traded bonds in the amount of RUB 15 billion
(USD 203 million at the exchange rate as of 31 December 2020).
KEY CORPORATE HIGHLIGHTS
USD million (unless stated otherwise) 2020 2019 Change,%
Revenue 15,545 13,563 15%
EBITDA¹ 7,651 7,923 (3%)
EBITDA margin 49% 58% (9 p.p.)
Net profit 3,634 5,966 (39%)
Capital expenditures 1,760 1,324 33%
Free cash flow² 6,640 4,889 36%
Normalized net working capital2,5 712 985 (28%)
Net debt² 4,705 7,060 (33%)
Net debt, normalized for the purpose of dividend calculation? 3,469 4,952 (30%)
Net debt/12M EBITDA 0.6x 0.9x (0.3x)
Net debt/12M EBITDA for dividends calculation 0.5x 0.6x (0.1x)
Dividends paid per share (USD)³ 26.3 26.3 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) Normalized on interim dividends (at the rate of the Board of Directors meeting date) and deposits with maturity of more than 90 days
5) Normalized on receivables from the registrar on transfer of dividends to shareholders
MANAGEMENT DISCUSSION AND ANALYSIS
The President of Nornickel, Vladimir Potanin, commented on the results,
"In 2020, our Company faced a number of major challenges that required a maximum effort from all employees, and I want to emphasize that we have managed to overcome them. The coronavirus pandemic has not only led to an unprecedented global economic recession and, therefore, a substantial drop in demand for our metals, but also affected our operating model, our personnel, their families and other stakeholders. However, the timely support that we have provided to regional governments, regional healthcare systems and socially vulnerable communities as well as safeguarding measures, which have been introduced for our employees, allowed us to pass the peak of the pandemic without any material impact on our operations.
In the end of May 2020, we experienced a major environmental incident related to the leak of diesel fuel in Norilsk industrial area. The Company immediately started a comprehensive clean-up operation, with the main phase of which being completed by the end of 2020. We are currently developing the most effective approach for the rehabilitation of the damaged ecosystem in close cooperation with all stakeholders and taking into consideration the recommendations of the Great Norilsk Expedition organized by the Russian Academy of Sciences with a support from Nornickel.
The Company has drawn an important lesson from this incident and dramatically reviewed its approach to environmental risk management, water stewardship, biodiversity restoration and climate change, having set specific targets in each of these areas.
The Company intends to increase its investments into industrial safety and an upgrade of energy infrastructure, gradually substituting the use of diesel fuel with natural gas that has a lower carbon footprint. We also confirm our commitment to reach the targets set in our Sulfur programme and dramatically reduce our adverse impact on the environment. As part of this programme, we shut down a Kola MMC's smelter at Nickel town that along with other initiatives should enable a reduction of sulfur dioxide emissions at Kola peninsula by 85% by the end of 2021.
We delivered strong financial results in 2020. Our revenue increased 15% to USD 15.5 billion driven by higher prices of palladium and rhodium and the ramp up of Bystrinsky project. EBITDA was down 3% to USD 7.7 billion due to a large environmental provision related to the damages caused by the fuel spill, COVID-related expenses and temporary build-up of metal inventory. Capital expenditures in rouble terms increased more than 50%, while in dollar terms they were up 33% to USD 1.8 billion.
Our net debt decreased more than 30% with net debt/EBITDA ratio falling to 0.6x. Financial stability of the Company was confirmed by investment grade credit ratings from all three major global rating agencies"
HEALTH AND SAFETY
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The lost time injury frequency rate (LTIFR) decreased 38% y-o-y in 2020 from 0.32 to 0.20, reaching historical lows and remaining below the global mining industry average. At the same time, the number of lost time injuries dropped 32% (from 44 to 30) and total recordable fatal accidents decreased 11% y-o-y (from 9 to 8) driven the by the roll out of cardinal basic safety rules and improvement of management systems. Each fatal accident has been reported to the Board of Directors and has been thoroughly investigated in order to prevent fatalities in future. The Company's management considers the health and safety of employees with a zero fatality rate as the key strategic priority and continues to implement a wide range of initiatives to prevent occupational injuries.
In May 2020, an independent consultant conducted an annual audit of the current level of the occupational safety culture of the Company as well as changes in its HSE systems over the past year. According to this audit, the Company's integral score was increased to 3.0 points from 2.8 as of May 2019 (1.4 points in 2014).
METAL MARKETS
Nickel in 2020: nickel price showed a surprising resilience averaging USD 13,789 per tonne with almost no change from last year despite a rising surplus; global demand for Class I Ni decreased 15% driven by the coronavirus-related lockdowns, while the global supply increased as the ramp-up of Indonesian NPI capacities more than offset reduced NPI output in China and supply cuts elsewhere; as a result exchange stocks increased by 75kt to 265 kt by the year-end.
Nickel price started the year 2020 with a considerable slump falling below USD 11,000 per tonne in the end of March as the outbreak of COVID-19 forced the governments across the globe to impose social lockdowns in attempts to contain the pandemic. However, starting from April the metal price entered into a rally reaching 17,500 per tonne by mid-December driven by a combination of positive macroeconomic and sector specific factors as well as investors' speculative demand. A 'V-shape' industrial recovery in China in 2H2020 resulted in a robust growth of nickel-intensive 300 stainless steel series output and increase in nickel ore price amid the export ban on ore in Indonesia and COVID-related mine disruptions in the Philippines. At the same time, investors' speculative demand was fueled by extremely low interest rates and trillion-dollar liquidity injections by major central banks. Additional boost to the investment demand came from Elon Musk's public comments to 'mine more nickel. efficiently and in an environmentally sensitive way' which increased excitement over already widely held view that nickel market is bound into tightness in the long-term as the battery demand rises.
In 2020, average LME nickel price remained almost unchanged against prior year (down 1% vs 2019) at USD 13,789 per tonne.
The COVID-19 affected materially all nickel-consuming sectors in 2020. Apart from the stainless steel nickel consumption in China and Indonesia, which were up 8% and 16%, respectively, owing to the stimulus package launched by the Chinese government in 1Q2020, all other major stainless-producing regions recorded a material decline. EMEA was down 11% y-o-y, USA - 16%, India - 30%, Japan - 20%, South Korea - 8% and Taiwan - 20%.
Nickel consumption in non-stainless applications (including specialty steels, standard alloys, superalloys and plating) decreased 13% owing to the contraction of end-use demand in aerospace, automotive and oil and gas industries. The only exception was the battery industry that has been the fastest growing nickel consumer in the past couple of years. In 2020, the battery demand for nickel increased over 10% on the back of strong NEV sales in Europe (+114% y-o-y in January-November 2020) and recovery in China (+62% y-o-y in July-November 2020) after 12 consecutive months of decline following the cut of government subsidies in 2019.
In 2020, global nickel production increased 5% (or by 114 kt) to 2.5 mln tonnes stemming from the rapid ramp-up of NPI capacities in Indonesia, which added over 220 kt of new supply (+63%) more than offsetting reduced NPI production in China (down 12% or 72 kt). The combined nickel supply from South Africa, Canada and Madagascar was down 3% y-o-y due to COVID-related curtailments. Production of ferronickel and nickel oxide decreased 3% and 22%, respectively, while supply of nickel compounds increased by 9%.
In 2020, nickel market surplus expanded to 89 kt on the back of COVID-related demand disruptions and surge in Indonesian NPI production. Combined nickel inventories at LME and SHFE increased by over 40% y-o-y to 265 kt by the year-end reflecting the apparent surplus.
Nickel outlook: neutral in the short-term, but more positive longer-term; we expect market surplus to stay at over 90 kt in 2021; demand to recover by 8% driven by growth of Indonesian stainless and battery sectors; rapid expansion of Indonesian NPI to continue translating into a 8% increase in global supply; the battery sector will remain the major consumption driver in the next 5-10 years as the world is steadily moving towards carbon neutral economy.
In 2021, we expect the primary nickel demand to increase 8% driven primarily by the ramp up of stainless steel production in Indonesia (+36%), a moderate stainless growth in China (+3%) as well as continuously strong increase in consumption by the battery sector (+21%). Other non-stainless industries are expected to increase their nickel demand by 6% following the recovery of the end-use demand.
The Indonesian total nickel output to increase to over 900 kt in 2021 owing to the steady commissioning of new NPI projects, which should more than offset drive further reduction of NPI production in China (-38%) owing to the lack of ore feed. There is a risk of additional supply disruptions of up to 50 kt should VNC and some ferronickel assets get shutdown as their output could be substituted by NPI in stainless sector.
Longer term, the global EV market is expected to maintain double-digit growth rates driven by the roll-out of subsidies in Europe. The total announced capacities of all gigafactories to be opened in Europe by 2030, funded by both European and Asian investors, already amount to over 700 GWh. The negative impact of the pandemic on the global EV industry turned out to be lower than initially anticipated and we maintain the view that the long-term growth in nickel demand will primarily come from the battery sector.
Copper in 2020: mainly balanced market as coronavirus equally affected supply and demand; the rally in copper price in the last nine months of 2020 from March lows was driven by the rapid recovery in Chinese demand, tightness in imported scrap volumes, significant supply disruptions as well as a significant investor demand fueled by global liquidity injections and expectations of copper-intensive transition to a 'green economy'.
Having started the year at USD 6,200 per tonne, copper price was hammered by coronavirus crisis down to USD 4,600 per tonne in March as COVID-19 was spreading from China into the rest of the world. In April, however, copper market started strong recovery as China emerged from lockdown and successfully kickstarted its economy. In 2H20, the rally accelerated as massive stimuli were unleashed by global central banks inflating the prices of physical assets, while manufacturing data from China was improving and successful tests of various COVID-19 vaccines increased the market optimism. In December, copper price reached its highest level since early 2013 of USD 7,964 per tonne, which was supported by supply disruptions in Latin America, introduction of a new policy in China of re-classifying scrap as a raw material and broader optimism on potential US 'Green Deal' infrastructure plan following the victory of Joe Biden in the US presidential elections.
The average LME copper price in 2020 increased 3% to USD 6,181 per tonne.
In 2020, the underlying market fundamentals were negatively impacted by the coronavirus pandemic as the copper market shifted to a moderate surplus. As a result of manufacturing activities across major economies tumbling to their lowest levels in decades, global copper demand down -1,3% y-o-y driven mainly by industrial machinery (-3% YoY), consumer goods (-6% YoY), construction (-5% YoY). China reopened its economy after a 2 month-long lockdown, getting its GDP back to a growth trajectory at 2.3% rate by the end of the year. The economic recovery in China was primarily driven by industrial production and increase in fixed assets investment, both of which contributed significantly to a rebound in copper consumption in 2H20.
The supply was also affected by the pandemic and decreased to 23.3 Mt (-1.4% YoY) but global copper output, according to our estimates, increased slightly by 1,5% to 23.9 Mt in 2020 (from 23.5 Mt in 2019). Mine production decreased to 20,6 Mt (-1,4% YoY).
The negative effect of pandemic on the supply side was rather pronounced just in 2Q20, when coronavirus hot spot migrated to the Western hemisphere causing a flurry of mine disruptions in Chile and Peru, driving a concentrate market into tightness. This was mostly overcome in 2H20, with the total 2020 global copper mine production down marginally (1%), whereas the refined copper output increased 2%.
Overall, copper market in 2020 was balanced with a marginal surplus of 544 kt (less than 2% of total consumption).
Copper outlook: neutral in the short-term as the market will remain balanced in 2021, in our view, with a surplus moderately expanding, as the recovery of supply (+1%) post-COVID should outpace the expected rebound in consumption of 3%; positive in the longer term as copper is a critically important metal for the global transition to a carbon-neutral economy.
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We expect the copper market to remain balanced in the near-term. In 2021, on our estimates, global mine production should increase by 3% to 21.3 million tonnes (net of a 5% disruption allowance) driven by the ramp-up of new projects in Peru, Indonesia, China, US, Australia, Zambia, the DRC and other regions.
Further reopening of economies together with expected stimuli to advance carbon-neutral agenda should support copper demand both in the short- and mid-term.
We expect broadly balanced copper market in 2021.
Palladium in 2020: despite COVID-related challenges palladium price increased 43% remaining above USD 2,000 per ounce level owing to a better-than-expected auto sector demand and substantial supply disruptions in South Africa.
In spite of the generally negative market impact of the COVID-19 pandemic, palladium was the best performing commodity in our core metals' basket. After reaching its all-time high of USD 2,795 per ounce on February 27th, palladium price was down almost 45% in March amidst the global spread COVID-19. However, this flash crash was followed by an equally quick recovery supported by better-than-expected rebound of the automotive industry and shutdown of mines in South Africa. Palladium price gained additional positive momentum owing to weakening US dollar and negative real yields in major economies stemming from extraordinary monetary and fiscal measures undertaken by global central banks. By the year-end, palladium price consolidated between USD 2,315 - 2,350 per ounce.
The average LPPM palladium price in 2020 increased by 43% to USD 2,197 per ounce.
In 2020, the deficit of palladium supply was fully offset by the reduction in consumers' inventories as the catalyst fabricators and auto OEMs decided to reduced stocks of raw materials to a minimum level owing to the fall in demand and COVID-19 related uncertainties. Industrial consumption of palladium decreased 13% y-o-y to 9.7 Moz largely due to a decline in automotive demand. At the same time, global automotive sales delivered a better-than-expected results falling "just" 14% vs. initial expectations of as much as -25%. The rebound of automotive industry was led by China (-4%), while the European (-20%) and the US (-15%) markets lost their recovery momentum in September following the tightening of coronavirus restrictions. The decrease in car sales volumes was partly compensated by tightening of environmental legislation across many regions and higher SUV market share in the US requiring higher PGM loadings per vehicle.
Palladium supply decreased 13% to 9.3 Moz mainly owing to a decline in primary production in South Africa (-28%) as well as lower scrap collection (-13%). South African supply was hit by the pandemic and Amplats' Converter Plant (ACP) outages. Following the national lockdown, all South African operations were put on care and maintenance on March 26th, but already in April the operations were re-started and returned to the 85-100% of their capacity by the end of June. Two incidents at Amplats' smelting operations resulted in an increase in the work-in-progress material of up to 1.2 Moz of PGMs. Palladium recycling decreased in 2020 due to a combination of COVID-related lockdowns and lower car sales. Part of the market deficit was covered by ETFs outflows (over 100koz).
Palladium outlook: neutral; the market is expected to be balanced in 2021, in our view, as additional metal demand will be offset by the release of work-in-progress inventory by South African miners and recovery in recycling volumes.
We expect the palladium market to develop a marginal deficit of 0.2 Moz in 2021 as additional metal demand from the recovering automotive industry and other sectors will outweigh the release of work-in-progress inventory by Amplats and higher recycling flows. According to our estimates, the consumption should increase 11% to 10.8 Moz owing mainly to a rebound in automotive demand. We expect the global light vehicle sales to increase 13% to 85 million units from 75 million units in 2020. In an aftermath of the COVID pandemic, we see a clear trend towards increasing popularity of individual mobility, since people would prefer to avoid public transport, taxis and car sharing. Moreover, there is an upside risk for demand, in our view, as the industry could do a massive restocking to recover depleted inventories.
We expect palladium supply to increase 13% to 10.7 Moz owing to the increased production from South Africa as the previously accumulated pipeline stocks will be processed. Palladium recycling volumes are set to expand, we estimate, 14% to 3.5 Moz with more old vehicles being scrapped as new vehicle sales recover.
Among the risks for the palladium market, both on the demand and supply side, we see government-imposed lockdowns and electricity outages in South Africa, processing incidents at major production sites and semiconductor shortage, which is already disrupting production of parts and vehicles around the world.
Platinum in 2020: strong price recovery from March lows driven by the recovery in auto industry, supply disruptions in South Africa and strong investment demand.
Platinum price was relatively stable in January-February trading in the tight range of USD 900-1,000 per ounce before crashing to its lowest level in a decade of USD 600 per ounce in March. However, it recovered quickly to pre-coronavirus levels of USD 800-850 per ounce on the back of lockdown measures introduced in the South African mining industry and the rally in other precious metals. In 2H2020, platinum price continued to increase reaching by the year-end the level of August 2016 of USD 1,050 per ounce, with a support from Amplats incidents and ETFs inflows (+500koz).
The average LPPM platinum price in 2020 increased by 2% to USD 884 per ounce.
Market fundamentals continued to deteriorate as diesel car sales underperformed both gasoline and NEV sales across all markets. Lower diesel car sales were partly offset by higher offtake in heavy-duty diesel vehicles. Closed luxury goods stores and weak consumer confidence severely affected jewelry sales. According to our estimates, jewelry demand contracted by 20% following overall weakness in luxury retail.
In 2020, global platinum supply was down sharply, as the mine disruptions and smelter outages in South Africa led to refined production and recycled volumes decreasing by 29% and 18%, respectively.
Platinum outlook: neutral; we expect that a significant surplus driven by weak industrial demand and inventory release by Amplats may be absorbed by ETFs and retail investors as low interest rate environment and new stimulus from global central banks should drive higher investment demand.
In 2021, we expect platinum market to develop a significant surplus (over 1.0 Moz) as the incremental demand from industrial applications will not be able to absorb increased supply, which will be driven primarily by the work-in-progress material release by South African producers. According to our estimates, the automotive consumption should increase 13% and jewellery demand - 11% on the back of strong recovery in luxury sales in China. Nonetheless, we also expect that a substantial share of this surplus can be purchased by ETF funds and other investors as prospects of more stimulus coming from global central banks should drive higher investment demand for precious metals overall, and platinum, in particular.
According to our assessment, palladium substitution with platinum, albeit being actively communicated to the public by some industry participants, has not been widely implemented and thus has no immediate impact on demand. We regard it as a long-term opportunity. Moreover, refined platinum supply (incl. scrap) is highly dependent on South Africa (which accounted for approximately 60% of the global supply in 2019), where situation is challenged by multi-year underinvestment and electricity supply issues. This feeds, in our opinion, to consumer concerns over the long-term platinum supply availability, which, in its own turn, should result in slower changes in the metal mix used in auto-catalysts.
KEY SEGMENTAL HIGHLIGHTS1
USD million (unless stated otherwise) 2020 2019 Change,% Revenue 15,545 13,563 15% GMK Group 12,700 13,836 (8%) South cluster 694 864 (20%) KGMK Group 8,926 3,115 3x NN Harjavalta 1,308 1,172 12% GRK Bystrinskoye 1,004 201 5x Other mining 137 133 3% Other non-metallurgical 1,387 1,412 (2%) Eliminations (10,611) (7,170) 48% EBITDA 7,651 7,923 (3%) GMK Group 6,171 9,522 (35%) South cluster 407 475 (14%) KGMK Group 1,757 58 30x NN Harjavalta 70 74 (5%) GRK Bystrinskoye 717 349 2x Other mining (14) (31) (55%) Other non-metallurgical 31 31 0% Eliminations (556) (1,770) (69%) Unallocated (932) (785) 19% EBITDA margin 49% 58% (9 p.p.) GMK Group 49% 69% (20 p.p.) South cluster 59% 55% 4 p.p. KGMK Group 20% 2% 18 p.p. NN Harjavalta 5% 6% (1 p.p.) GRK Bystrinskoye 71% n.a. n.a. Other mining (10%) (23%) 13 p.p. Other non-metallurgical 2% 2% 0 p.p.
1) Segments are defined in the consolidated financial statements
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