Credit Opinion: OJSC MMC Norilsk Nickel

Transcription

1 Credit Opinion: OJSC MMC Norilsk Nickel Global Credit Research - 24 Apr 2014 Russia Ratings Category Outlook Issuer Rating NSR LT Issuer Rating -Dom Curr MMC Finance Limited Outlook Bkd Senior Unsecured Moody's Rating Stable Baa2 Aaa.ru Stable Baa2 Contacts Analyst Phone Denis Perevezentsev/Moscow Gianmarco Migliavacca/London Jean-Michel Carayon/Paris Key Indicators [1]OJSC MMC Norilsk Nickel EBIT Margin 27.7% 35.2% 43.8% 53.4% 39.9% Return on Average Tangible Assets (EBIT / Avg. Tangible 15.9% 21.6% 28.8% 30.1% 16.5% Assets) Debt / Book Capitalisation 39.0% 28.4% 31.6% 14.1% 26.6% Debt / EBITDA 1.6x 1.0x 0.8x 0.4x 1.4x EBIT / Interest Expense 10.2x 18.6x 61.0x 69.3x 23.9x FCF / Debt -12.3% -4.4% 22.6% 83.5% 41.8% (CFO - Dividends) / Debt 18.3% 46.4% 63.5% 140.9% 61.2% [1] All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non- Financial Corporations. Source: Moody's Financial Metrics Note: For definitions of Moody's most common ratio terms please see the accompanying User's Guide. Opinion Rating Drivers - The world's largest nickel and palladium producer, with significant global market shares in platinum and copper - Good product diversification and cost leadership in nickel - Stabilisation of shareholder relationships comes at the cost of elevated dividends over the next three-to-five years

2 - Solid cash-flow generation might not be sufficient to balance the aggressive distribution policy if market conditions deteriorate Corporate Profile OJSC MMC Norilsk Nickel (Baa2 stable) is the world's leading producer of nickel and palladium and Russia's largest mining company. The company's principal activities are exploration, extraction, refining, and the sale of base and precious metals. The company's major production facilities are located in the Taimyr and Kola Peninsulas of the Russian Federation, and in Australia, Finland, Botswana and South Africa. The company benefits from a high-quality portfolio of low-cost assets and vast reserves in nickel, copper, palladium, platinum and other metals. In 2013, Norilsk Nickel reported revenue of $11.5 billion (2012: $12.4 billion) and Moody's adjusted EBITDA of $4.0 billion (2012: $5.1 billion). SUMMARY RATING RATIONALE The Baa2 issuer rating reflects (1) the company's global footprint in selected metals, with its production of nickel and palladium in 2013 representing 17% and 41% of global primary production in those metals, respectively, as per the company's estimates; (2) low-cost production profile, supporting strong cash flow generation through the cycle; (3) long-life of reserves, with total proven and probable reserves as of 31 December 2013 of 7.6 million tonnes of nickel content (12% of global nickel reserves, according to the company), and an average reserve life of about 20 years at current production levels; (4) high product diversification as the company's mineral deposits contain nickel, copper, palladium and platinum, accounting for 46%, 25%, 15% and 9%, respectively, of the company's total metal sales revenue in 2013; and (5) the company's adherence to improved corporate governance following the sign-off of the major shareholders agreement in December The rating also incorporates a significant amount of uncertainty surrounding the base metals outlook, with nickel prices recovering to above $17,500/tonne (on London Metal Exchange) in April 2014 and given the significant amount of volatility exhibited over recent years: the average price of nickel (London Metal Exchange) was $15,004 in 2013 (2012: $17,526). The company is also exposed to Europe, where it generated about 52% of total metal sales revenue in 2013 and where stainless steel producers - the company's main customers - operate at very low capacity utilisation rates. In addition, the stabilisation of the shareholder relationships, which improved the company's corporate governance, comes at the cost of elevated dividends over the next several years. Given that the company's ability to maintain conservative credit metrics depends on its willingness to cut the dividends in the period of subdued metals demand and weak commodities market outlook, increased dividends are a credit constraint. The Baa2 rating is supported by our expectation that the company's leverage as measured by Moody's-adjusted debt/ebitda does not exceed 2.0x and that the company will maintain strong profitability through the economic cycle. DETAILED RATING CONSIDERATIONS FINANCIAL POLICY TO REMAIN SHAREHOLDER FRIENDLY FOLLOWING SIGN-OFF OF THE MAJOR SHAREHOLDERS AGREEMENT IN 2012 Norilsk Nickel's controlling shareholders entered into an agreement in December 2012 that stabilised their relationships and made the company's corporate governance process more transparent and predictable to stakeholders. Interros, RUSAL and Millhouse now hold 30.3%, 27.8% and 5.87% of the company's ordinary shares, respectively. The board of directors is composed of four independent directors, four representatives of Interros, four representatives of RUSAL and one representative of Millhouse. Mr. Potanin was appointed as general director of Norilsk Nickel in December Interros and RUSAL each pledged 7.5% of their Norilsk Nickel shares from their respective stakes to a bank agent's escrow account, with Millhouse having received a voting right over a total of 22% of Norilsk Nickel shares in certain circumstances. Reserved matters such as dividend policy, share buybacks, amendments to the company's charter, related-party transactions, material transactions in excess of $200 million, M&A and marketing strategy require consent of each of the controlling shareholders (Interros, RUSAL, Millhouse). Interros, RUSAL and Millhouse have committed not to sell their Norilsk Nickel shares for a period of five, five and three years, respectively. In October 2013, the company's Board of Directors approved dividend targets in line with the terms of the major

3 shareholders agreement, with a regular annual dividend payout ratio set at 50% of EBITDA. Annual dividends for (to be paid out in ) will be calculated as 50% of EBITDA for the relevant year, but in any event not less than $2 billion, and any proceeds received from disposal of non-core assets in will be paid out as a special dividend in an aggregate amount of up to $1 billion. Annual dividend payment in 2016 for the 2015 financial year will comprise 50% of EBITDA for 2015 plus the difference between $7 billion and the total aggregated actual dividends paid (including any special dividend) in (with a potential deferral in payment of up to 20% of such amount until the following year). The major shareholders agreement provides transparency to the decision-making process and enables Norilsk Nickel's management to focus on the company's strategy and operating and financial efficiencies. However, the agreement stipulates very generous dividends for the next several years, which will constrain the rating and will limit the company's headroom under the current rating category. GOOD PRODUCT DIVERSIFICATION AND GLOBAL COST LEADERSHIP UNDERPIN STRONG PERFORMANCE THROUGH THE CYCLE Norilsk Nickel benefits from its substantial multi-mineral and high grade ore deposits of nickel, copper and platinum group metals (PGM) located in the Kola and Taimyr regions of Russia, with the total proven and probable reserve live of around 24 years. The deposits' unique ore body allows the company to enjoy the world's lowest nickel production cash cost as per the company's estimates (2013: negative -$3 per tonne; 2012: $263 per tonne; 2011: negative -$2,405 per tonne after copper and PGM by-product credits; cash costs per tonne of nickel without byproduct credits was flat at $20.2 thousand/tonne in and increased slightly to $21.2 thousand/tonne in 2013). Substantial volume of by-products in the company's sales mix ensures that nickel production is profitable, even under an unfavourable market environment when the price fluctuates near levels equal to the marginal cost of production for the majority of producers (the company estimates that around half of Chinese nickel pig iron production was loss-making in 2013). At year-end 2013, the company estimated its share in global nickel production at 17%, and palladium production at 41%, while also maintaining 11% and 2% global market shares in the production of platinum and copper, respectively. Most of Norilsk Nickel's revenue is derived from the production of four metals (nickel, palladium, platinum and copper). The majority of the company's revenue and cash flow generation is derived from nickel (42% of the company's metal sales revenue in 2013 (2012: 47%), while copper accounted for 26% of the company's metal sales revenue in 2013 (2012: 26%) and platinum and palladium together accounted for 28% of 2013 metal sales revenue (2012: 25%). The company's operations are not well diversified geographically. In 2013, the production of nickel, copper, palladium and platinum in Russia represented 81%, 97%, 98% and 97% of the company's total production of those respective metals. The company's Polar Division and Kolar MMC operate unique deposits with high grades of multiple metals (by-products) that limit its core metal (nickel) cash costs. The Polar division is located above the Arctic Circle in the Krasnoyarsk region of Russia and is not connected to Russia's rail and road network or national electricity grid, which explains the company's integration into various transportation and energy generation infrastructure. The company is seeking to further increase its copper business, as illustrated by its focus on the development of its $2 billion Chita copper/gold/iron ore/molybdenum project, which consists of the Bystrinskoe and Bugdainskoe deposits. The Bystrinskoe development project will require annual capex of about $340 million in until it is launched and is being developed as a private-public partnership, with the company responsible for $250 million in railroad capex (approximately 30% of the construction costs; the road was launched in the first half of 2012). With the launch and ramp-up of the Chita project in , the company expects to increase copper production by about 66,000 tonnes annually. Although it is likely to launch the Bystrinskoe project (mainly copper) on time, the development of the Bugdainskoe deposit (mainly molybdenum) will be delayed by five years, according to the company, owing to negative market sentiment and low molybdenum prices. The company announced plans to dispose of its international operations (Australian and African assets), which it now considers to be non-core to its business. Negative pricing trends contributed to the company's decision to suspend operations in Lake Johnston in Australia in April 2013, the development of which was halted during the global financial crisis, and it is possible that the company may decide to suspend operations at Tati Nickel in Botswana. In January 2014, Norilsk Nickel sold its gold and some of its nickel assets in Australia for around AUD40 million to Saracen Metals Pty Ltd. SOLID CASH-FLOW GENERATION ON ROBUST DEMAND, BUT ELEVATED DIVIDENDS CONSTRAIN FINANCIAL FLEXIBILITY

4 The company estimates that primary nickel consumption in stainless steel (72% of total consumption) increased globally by 10% year-on-year in 2013 while in China consumption increased by 22%. China consumes more than 50% of nickel in the world. Despite such robust demand, Norilsk Nickel reported weaker financial results in 2013, as a result of lower nickel prices and slightly lower nickel and PGMs production volumes. Higher realised prices for palladium in 2013 of $725/ounce compared with $643/ounce in 2012 and slightly higher copper production volumes in 2013 did not compensate for lower average prices for nickel, copper and platinum, which were 14.5%, 7.7% and 4.4% lower, respectively, in 2013 compared with Recently nickel prices have recovered to above $17,500/tonne on the export ban of unprocessed ore from Indonesia. The company expects that nickel prices will continue recovering in , while the nickel market will turn from balanced demand/supply in 2014 to deficit in 2015 provided that the Indonesian ban remains in place and is effectively enforced. Global primary nickel production increased by 8% in 2013 but the company estimates that it will fall by 3% in 2014 owing to shut down of high cost facilities and decrease in nickel pig iron (NPI) production following introduction of the ban, which supports the company's expectation of the nickel market developing a deficit in Moody's believes that primary nickel consumption will remain sustained in The company expects an overall 7% consumption growth in 2014, while it will increase by 13% in China. Moody's estimates that the copper market will remain in surplus in 2014 on capacity additions expected in , while strong demand from China counterbalances still sluggish demand from Europe. Currently copper prices are below $7,000/tonne, which is lower than the company's realised prices in 2013 and 2012 of $7,397/tonne and $8,015/tonne, respectively. Platinum and palladium are likely to remain in deficit in 2014 on strong demand from the auto sector (the company estimates this sector drives around 70% of demand for PGM), which is showing signs of recovery in Europe. The company estimates that palladium price is likely to continue growing further, reducing its discount to platinum, which the company believes is still unjustified. As a result of lower prices in 2013, most importantly for nickel, Norilsk Nickel's revenue decreased by 7% yearon-year to $11.5 billion in 2013, while its Moody's-adjusted EBITDA fell to $4.0 billion (2012: $5.1 billion). Leverage, as measured by Moody's-adjusted debt/ebitda increased to 1.6x (2012: 1.1x). We expect that debt/ebitda will remain within the 1.3x-1.6x range over the next months, despite elevated dividends as the company will continue generating strong operating cash flows owing to its advantageous cash cost position and cost-reduction efforts. The pace of free cash flow (FCF) generation has reduced as a result of higher dividends payouts, with Moody'sadjusted FCF/debt being negative 12% in 2013 (2012: negative 4% ) despite 27% lower capex spending as a result of a more disciplined approach to capital allocation. The company expects that its reported net debt/ebitda of 1.1x as of December 2013 will slightly decrease in Liquidity Profile Norilsk Nickel's liquidity position is strong. At year-end 2013, the company had around $1.6 billion of cash and equivalents and around $2.4 billion of available committed credit facilities. In addition to substantial cash and available credit facilities, the company holds a 13.21% of common shares of Inter RAO JSC (Ba1 stable). This stake, which is currently worth about $300 million, provides an additional source of liquidity. We estimate cash flows of approximately $3.0-$3.5 billion in 2014, which, coupled with a substantial cash balance, should be sufficient to fund around $2 billion of capex, around $1 billion of debt repayments and around $1 billion dividend payments, which remain to be paid for 2013, in line with the terms of the major shareholders agreement. Debt repayments in 2015 are quite comfortable at around $0.9 billion. Rating Outlook While the high distribution policy has reduced the financial flexibility, the stable outlook on Norilsk Nickel's rating continues to reflect its strong cost position, which will continue to positively support the company's profitability. The stable outlook assumes that the company will maintain its conservative approach to debt levels such that net debt/ebitda does not exceed 2.0x. What Could Change the Rating - Up Given the currently challenging market conditions for the base metals sector and provisions of the shareholder

5 agreement stipulating elevated level of dividends over the next three-to-five years, we do not currently envisage any upward pressure on the rating despite the company's solid cash-flow generation. Positive pressure on the rating could develop if the base metals outlook improves, with Norilsk Nickel demonstrating a track record of adhering to a more conservative capital structure and distribution policy. What Could Change the Rating - Down Conversely, negative pressure could be exerted on the rating if the company's performance deteriorates as a result of lower metal prices, higher operating costs or falling metal recoveries - exacerbated by its shareholderfriendly finance policy - such that adjusted debt/ebitda exceeds 2.0x on a sustained basis. The rating could also be affected by a significant deterioration of the sovereign's credit profile, which is currently on review for downgrade, but this review is at this point not expected to trigger a downgrade of Norilsk Nickel. Rating Factors OJSC MMC Norilsk Nickel Mining Industry Grid [1][2] Current FY [3]Moody's Month Forward 31/12/2013 View as of April 2014 Factor 1 : Reserves (8%) Measure Score Measure Score a) Reserves A A A A Factor 2: Cost Efficiency & Profitability (17%) a) Mining EBIT Margin (3-year average) 36% Aaa 30% - 35% Aaa b) Return on Average Tangible Assets 22% Aaa 17% - 20% Aa (3-year average) Factor 3: Financial Policies (17%) a) Debt / Book Capitalisation 39% A 32% - 35% A b) Debt / Mining EBITDA (3-year 1.1x Aaa 1.3x - 1.6x Aa average) Factor 4: Financial Strength (25%) a) Mining EBIT / Interest (3-year 21.3x Aaa 12x - 14x Aaa average) b) FCF / Debt (3-year average) 1% B -3% - 0% Caa c) (CFO - Dividends) / Debt (3-year 41% Aa 17% - 20% Ba average) Factor 5: Business Diversity & Size (33%) a) Business Diversity Score 3 Baa 3 Baa b) Net Consolidated Sales (USD $11.5 Aa $12 Aa billions) Factor 6: "Other" Liabilities Adjustments a) "Other" Liabilities to Book Equity 0% Aaa 0% Aaa Rating: a) Indicated Rating from Grid Aa3 A1- A2 b) Actual Rating Assigned Baa2 [1] All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non- Financial Corporations. [2] As of 31/12/2013; Source: Moody's Financial Metrics [3] This represents Moody's forward view; not the view of the issuer; and unless noted in the text, does not incorporate significant acquisitions and divestitures.

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