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Norilsk Nickel growth strategy risks dividend cut

Norilsk Nickel growth strategy risks dividend cut
Mining News Pro - Norilsk Nickel plans to boost spending on new projects over the next decade to increase production and capitalize on the growing electric car trend, but investors may need to brace for lower dividends down the road.
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According to Mining News Pro - The Russian metals and mining company currently pays out 60% of its earnings before interest, tax, depreciation and amortization as dividends to shareholders, making it one of the biggest dividend payers in the mining industry.

Norilsk — which describes itself as the world’s largest producer of palladium and refined nickel as well as one of the largest producers of platinum and copper — signalled dividends may be reduced between 2022 and 2025 to maintain its investment-grade credit rating, as capital expenditures are expected to peak at between US$3.4 billion to US$4 billion per year.

That compares to an estimated US$1.3 billion to US$1.5 billion in 2019, US$2.5 billion to US$2.8 billion in 2020 and US$3 billion to US$3.4 billion in 2021.

“With management laying out a plan for the decade ahead, investors can decide for themselves, if they can stomach the reduced dividends for a greater gain in the future,” investment site Seeking Alpha said in a recent article.

“In the long run, this will be beneficial. Once the new projects enter cash-generation phase and leverage will be brought down to lower levels, shareholders will reap the rewards of higher payouts from higher cash flows.”

Seeking Alpha believes Norilsk is set to benefit from the increased demand for the metals it produces, including those used in hybrid and electric vehicles.

Norilsk’s sales mostly come from nickel, copper, palladium and platinum. Nickel is a key component in lithium batteries used in electric vehicles, while palladium and platinum are used in catalytic converters to reduce the harmful emissions from gasoline engines.

The company’s flagship asset is the Talnakh mine in north Russia, which has some of the largest nickel-copper-palladium deposits in the world.

Norilsk’s American Depositary Receipts (ADRs), which are used for a foreign company’s stock in the U.S., currently yield about 9.5%, which is not uncommon given the five-year average yield is about 10.8%, Seeking Alpha notes.

Vladimir Potanin, Norilsk’s chairman and president, is also the company’s largest shareholder with a 34.6% stake, according to Reuters. The news agency also reported recently that he may increase that amount if the opportunity arises.

Russian aluminum producer Rusal has a 27.8% stake, according to The Financial Times, which also reported ongoing tensions between Potanin and Rusal over dividends. “Potanin wants to invest more of the company’s cash in growing the business and to make its operations more environmentally friendly,” the newspaper reported. “This has been opposed by Rusal, which uses the dividend payments it receives from Norilsk to help service its debt load.”

The company said the current dividend policy will be in place until 2022 when a shareholder agreement expires.

Norilsk’s spending and dividends announcement was made as part of its recent investor day in London, where the company also said it would take additional measures to slash its sulphur dioxide emissions by 45% from 2015 levels by 2023, 90% by 2025 and 95% by 2030.

The company also plans to tap into the growing market for hybrid and electric vehicles, believing it has “an excellent starting position in order to support the global transition to environmentally friendly transport.” It said toughening legislation around fuel emissions and electric vehicles are “two megatrends” expected to “significantly increase the demand for the company’s products in the next 10 years and beyond.”

Norilsk estimates that by 2030 it will be able to supply PGM volumes to produce 25-40 million autocatalysts to the world market, which it claims will reduce air pollutants by 170-to-270 million tons (during the entire life of the car). Meantime, it said its production of high-quality nickel will make it possible to produce 3.5-to-5.5 million battery packs for electric vehicles, which will reduce CO2 emissions by 50-to-100 million tons (over the entire life of the car).

In a Nov. 19 note to investors, Credit Suisse analyst Conor Rowley said the company’s near-term outlook is largely unchanged, “albeit now given in more granular detail.” And while the growth in nickel and PGMs offers long-term value for the company, Rowley has a “neutral” rating on the stock and target price of US$27.10.

“Norilsk shares have performed well in recent months following the unexpected early reintroduction of the Indonesian export ban but [year-to-date] shares have run a little far vs the underlying commodity mix,” he wrote. The shares are up more than 40% so far this year on the U.S. market.

UBS analyst Daniel Major says the company has delivered the highest total share return of the large-cap global miners in the last decade, “and is likely to continue to deliver robust returns over the next 12 [months] driven by its idiosyncratic (nickel/palladium) commodity mix, low costs/high margins and high dividend,” he writes in a Nov. 18 note. Major has a “neutral” rating on the stock and raised his target price from US$26 to US$28.


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