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MKT&IND REPORTS |
 Russian metals giant Norilsk Nickel released IFRS financial results for January–June demonstrating a three-fold increase in net profit, capital spending reduction, as well as provided palladium market forecast for 2014.
CAPEX
In January–June, capital expenditures decreased 45% on the year to $500 million.
CEO Vladimir Potanin said: “Due to the roll-out of stringent investment governance discipline and a recent completion of the review of the downstream configuration, we have scaled down our mandatory capital investment plans and, where possible, deferred some of the spending until July–December 2014 and 2015. Having also factored in the improvement of payment terms with a number of key contractors in favor of Norilsk and depreciation of the Russian ruble against USD, we revise our annual capex guidance down to $1.7 billion in 2014”, he said.
Vladimir Zhukov, the company’s investor relations head, said Norilsk plans to keep its 2015 capital expenditures (capex) forecast at $2.5 billion. “For now we keep the forecast for 2015 – $2 billion of main capex and $500 million of capex for the Chita project (of constructing Bystrinsky plant) and everything connected with closing a nickel plant,” he said.
Zhukov said that considering the country’s set zero export duties for nickel and copper, the company plans to finance the closure of outdated production lines in Norilsk using 11.5 billion rubles of the windfall funds.
Additionally, Norilsk Nickel plans to coordinate project financing of the Bystrinsky plant construction “with one of the largest state-owned banks” till the end of the year. The company also plans to diversify financial sources and decrease the plant’s cost by attracting other partners, including Chinese banks.
The Bystrinsky plant, whose launch is scheduled for 2018, will produce 65,800 tonnes of copper concentrate, 6.86 tonnes of gold concentrate, and 2.1 million tonnes of iron concentrate annually. The reserves of the Bystrinsky deposit amount to about 292 million tonnes of ore, containing 2 million tonnes of copper, 236 tonnes of gold, 1,060 tonnes of silver, and 67,700 million tonnes of iron. Investments in the plant stand at 10 billion rubles in 2014 only.
DIVIDENDS
“Taking into account a significant increase of cash flow and liquidity reserves, which we had formed for the stated period, we are sure in the possibility to fully finance dividend payments in the coming years in line with targets”, Sergei Malyshev, deputy CEO for economy and finance, said in a conference call.
He said that the company plans to pay interim dividends for January–September and will announce details in late October. Funds from the sale of non-core and foreign assets will be used for dividend payments. Since the beginning of the year, the company already got $76 million from the sale.
Exit from non-core and non-Tier 1 assets progressing well with the disposal of gold (North Eastern Goldfields) and nickel mines in Australia (Avalon and Cawse), announced in January and May respectively, followed by the announcements in July of the disposal of Black Swan and Silver Swan nickel mines.
Malyshev said that Norilsk Nickel plans to sell Australia’s nickel producer Lake Johnston and two African companies Nkomati and Tati in September-December.
The talks on selling Lake Johnston, suspended in March-May 2013, “are now being finalized,” while the company is still in talks to sell Nkomati and Tati. “I hope we will inform you about the results of the deals in September-December,” Malyshev said.
Norilsk Nickel does not plan to speed up the sale of a large non-core asset – a 13% stake in power holding Inter RAO. “We can use the option within 1.5 years. We do not want to depend on market restrictions, which can affect the price of the deal,” Malyshev added.
He also said the company sees no reason in buying its bonds from the market. “We’ve considered the possibility, but our bonds’ price is high and it rarely falls, so there could only be a minor effect on the company from the purchase. This is our conclusion and a result of consultations with banks.”
Last year Norilsk Nickel placed two bond issues: 5-year bonds worth $750 million and 7-year bonds worth $1 billion.
PALLADIUM DEFICIT
“We believe that the company has a unique market position being the world’s largest producers of two metals that will be in structural deficit in 2015 – nickel and palladium. We expect that the improvement in the fundamentals of the nickel market started in January–June will continue throughout the remainder of the year and further onto medium term. We believe that the recent change in export regulations in Indonesia has triggered a fundamental change of the nickel industry globally. We also continue to look favorably at our PGM basket benefiting from the supply issues outside Russia combined with the strong demand growth in China and the recovery in the developed world”, CEO Vladimir Potanin said.
Norilsk Nickel expects a deficit on the palladium market of about 3 million ounces in 2014 due to increased consumption and reduced supply, the company said in a report.
In January–June, palladium was the best performer among precious and most of industrial metals. A 5-month long labor strike in South Africa put a halt to 20% of global palladium production and resulted in over $2 billion in lost revenue. Norilsk Nickel believes that the pre-strike mine production capacity could be reached not earlier than September 2014 at best.
“We expect a reduction of palladium supply from South Africa by over 400,000 ounces this year as compared to 2013. We estimate that there were no sales of palladium from the Russian government stockpiles in the first half of the year, thus confirming the market view that these stockpiles have by and large depleted by now”, the company stated.
The company expects an increase of gross palladium consumption by around 2% in 2014 to 9.5 million ounces. Rising consumption combined with reduced supply of the primary metal should drive the palladium market to a wider deficit in 2014 of over 2 million ounces (over 20% of global gross consumption) up from approximately 1.0 million ounces deficit in 2013.
Platinum
In January–June, platinum price was quite volatile fluctuating in the range of $1,370-$1,490 per ounce. The price did not respond much to the supply issues caused by the labor strikes at Amplats, Impala and Lonmin in South Africa, resulting in the 55% of the country’s platinum mine production (about 40% of the world’s) halted. Even though the South African PGM producers accumulated inventories of both ore and refined platinum inventories in anticipation of the strike, which helped to mitigate the reduced mine output, some producers still had to declare force majeure on their contractual obligations and reduce deliveries. Taking into account the potential ramp-up period and re-starts of the idled mine production, we expect the platinum supply from South Africa to decrease by over 750,000 ounces year-on-year in 2014.
The company expects platinum gross consumption to increase by more than 5% on year in 2014. Platinum ETFs are enjoying another year of net-inflows, with 300,000 ounces added to ETFs in January–June.
Taking into account the potential ramp-up period and re-starts of the idled mine production, the company expects the platinum supply from South Africa to decrease by over 750,000 ounces on the year in 2014.
Nickel
The company remains bullish on nickel in the medium term assuming that the Indonesian ban remains in place unaltered.
“We expect nickel pig iron (NPI) output in China to reduce by over 50,000 tonnes on the year this year and at least another 150,000 tonnes in 2015. We also expect that the substantial part of the lost Chinese NPI volumes to be compensated by the ramp-up of new laterite projects in Indonesia, Oceania, Madagascar and Latin America”, it stated.
Norilsk Nickel added that the ramp-up of these projects is likely to accelerate driven by stronger nickel price, but is still subject to the successful resolution of many technical issues.
Copper
The beginning of 2014 was marked by a weakness in copper market with prices falling below $6,500 per tonne in March. The average price in January–June stood at $6,916 per tonne, down 8% on the year.
The company expects copper market to remain fairly balanced as the incremental production will be matched by the consumption growth. The level of exchange copper inventories remains relatively low, keeping copper price vulnerable on the upside to potential supply disruptions and demand recovery in the developed world.
Andrei Tretelnikov, analyst at Rye, Man and Gor Securities, views the results as positive but expected.
“All the outcomes were guided before by management so we do not expect any market reaction. In our view nickel price hovers around hypothetical cash costs of future production in Indonesia while ample storage volumes cap current spot prices. As substantial new supply from Indonesia is expected to come not earlier than 2016, spot prices are open for speculative gains as inventories go down and market feels deficit. New price levels show small fundamental upside for Norilsk Nickrl shares, but we do not exclude speculative spikes connected for further price gains. We still view shares as attractive dividend idea with the 7-8% yield with possible bonus from asset sales”.
End
02.09.2014 12:17
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