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a top metals investment case By BTC Peers


Nornickel is a case study in top metals investments

Nornickel’s long-term strategy was updated Monday by the company with a strong focus on production targets and an increase in investment.

The company is the largest producer of so-called green metals – essential ingredients in the technologies based on renewable energy such as high capacity batteries and thus presents a great investment case. With a drop of around 13% year-to-date, its shares represent a bargain. The group’s shares are listed in Moscow, London, New York and other exchanges.

Nornickel, which is expected to pay a yield of over 13% this year, ranks among the top Russian dividend-payers. Because it is bound by shareholder agreements between key shareholders, the company must pay out dividends at a greater share of core earnings (EBITDA).

Because of the availability to high-quality ore with a mixture of metals and long mine lives, the company was able maintain diversification in revenue by product and region. The company has maintained a healthy EBITDA margin while reducing its debt exposure. All three international rating agencies have confirmed that investment grade credit ratings are valid.

Another important feature of the miner’s business model is high upstream and downstream integration: it runs own power generation capacities, smelters and refineries, sea and river fleet, which the company said would be expanded mid-term.

With its unmatched ore reserves, the group is in the best cash cost position for global mining. This cash cost advantage allows for the company to remain profitable in even the most volatile commodities price environments.

Nornickel develops complex metal ore deposits around the Arctic city of Norilsk and refines them at its factories in Russia’s North. The company’s top managers presented an updated strategy outlook on Monday in an annual Capital Markets Day event held in Moscow.

In 2021, production disruptions related to mine flooding and Norilsk concentrator suspension resulted in a decrease of the group’s output. Nornickel anticipates that production will resume normal operations in 2022, with full recovery expected to be completed by 2020.

Investors have been watching fiscal regime tightening in Russia’s metals and mining sector this year as authorities are scrambling to pull together cash to carry out costly social spending programme. Nornickel was one of those companies whose taxes have been severely affected.

A 3.5 times increase in the mineral extraction tax rate from January 2021 and the introduction of export duties from August has taken Nornickel’s MET + export duties to revenue ratio of 6% in 2021, up from 1% in 2020.

In 2022, more changes will take place: an increase of the extraction tax will affect Nornickel’s Norilsk operations and account for current high metal prices, which will be offset by cancellation of export duties. Overall, the company doesn’t material changes in the group’s tax burden in 2022 compared to 2021, its CFO Sergey Malyshev said at the investor-focused event.

According to CFO, $7.5 million of liquidity remains at the company. “Moreover, in October, we placed a new 5-year $500 million Eurobond with a coupon rate of 2.80% and the lowest ever spread to benchmark in the history of Nornickel’s public offerings. The liquidity provided by this level covers debt repayments for the next three years. Our forex debt position is naturally hedged with foreign currency revenues”.

Malyshev stated that the company prides itself on maintaining a low cost debt service.

“Our debt portfolio effective interest rate decreased by 1.9 percentage points since 2018 and totalled 2.8% at the end of November 2021”, said the CFO.

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