Nornickel - Accident at Norilsk Concentrator

On February 20, Nornickel reported an accident that may affect the operations of its Norilsk Concentrator and result in lower 2021 production. We estimate that this facility contributes to around 15-18% of Nornickel's annual revenues at spot commodity prices and to production of 25-30% of total palladium (7-7.5% of global market). The company is yet to comment on the consequences of the accident, i.e. the timing of a potential halt to operations at the facility. The recurring nature of accidents (after fuel spill in May) may curtail the re-rating that started following the ESG strategy presentation. > On February 20, the building housing the ore reloading facility and the adjoining walkway collapsed in the Norilsk Concentrator (NC) during repairs to reinforce the structure. According to preliminary information from the company, three employees of Norilsknickelremont, a contractor conducting repairs at the site, died and five people were injured. An investigation into the causes of the incident is underway. The preliminary reason cited by Nornickel is gross violations of safety rules by the management of the Norilsk Concentrator. The general director of the Norilsk Concentrator was dismissed. Russia's Investigative Committee has initiated an official inquiry and detained four senior officers of the Norilsk Concentrator and its contractor. The Norilsk Concentrator continues operating at reduced capacity. Rostechnadzor will carry out an inspection and then make a decision about whether the facility where the accident occurred will need to be shut down, according to TASS.> The company has not disclosed any information on the potential impact on its operations and financials. As the debris is still being cleared, it will take some time for Nornickel to understand if any of its equipment at one of the Norilsk Concentrator's crushing mill sections was affected and how long it will take to construct a new building. This, coupled with the size of the inventory at the Norilsk Concentrator, should determine the ultimate impact on the company's sales and production. > The Norilsk Concentrator processes all disseminated ores from the Norilsk-1 deposit (South Cluster), cuprous and disseminated ores from the Oktyabrskoye and Talnakhskoe deposits, and low-grade ores from the copper plant to produce nickel and copper concentrates. It processes 7.5 mtpa of low-grade ore (40% of all ore processed by Nornickel on Taimyr and around 20% of total ore processed by the company). Based on the reported reserve grades for the specific types of ore and Nornickel's reported average processing grades for recent years, we calculate that the Norilsk Concentrator contributes to production around 20-25 kt of nickel, 70-80 kt of copper and 750-800 koz of palladium (7-7.5% of global market). This corresponds to around 9-11% of total projected saleable nickel in 2021, 15-18% of copper and 26-29% of palladium. > At spot commodity prices, we estimate that the Norilsk Concentrator is crucial for generating $2.8-3.1 bln of annual revenues, or 15-17% of total annual revenues (not accounting for metals other than nickel, copper, platinum and palladium, which can add a couple of percentage points). Importantly, any major production disruption may affect the palladium market, which Nornickel estimated to be in deficit by around 0.2 mln oz (or just balanced if accounting for the sales of metal from inventory that the company plans for this year). That means that the negative impact on Nornickel's revenue from a production loss (if there ends up being a significant one) can be partially compensated for by growth in palladium prices.> It is important to mention that this accident comes less than a year after a fuel spill. Such frequency may force investors to yet again revise their view on the operational risks at Nornickel. This could put a cap on the re-rate that started following the strategy day on December 1, where the company emphasized its commitment to safety and environmental improvement.