Russian Metals and Mining - Valuation Tracker
The measures to slow the spread of Covid-19 in the US and EU may push commodities into oversupply, sending prices even lower. Russian base metal and steel producers should be able to generate positive FCF even if commodity prices drop more than 15% from spot levels. That said, if things get worse, there is a risk that steel producers' export volumes will drop, drastically reducing their FCF generation, a scenario that surely is not priced in. Alrosa's sales volumes are also at risk, with the 2008-09 crisis possibly serving as a guide here. If one has to stay invested in the market, Russian gold stocks could be an alternative to cash (though perhaps inferior), as they may be supported by massive monetary stimulus and a weak ruble. > Commodity prices were resilient from mid-February to the first week of March, when production was being restored in China and new coronavirus cases were starting to decrease. However, commodities joined the selloff when the virus began spreading rapidly outside of China, leading the WHO to call it a pandemic. > The US, EU and other countries began with a monetary response but eventually implemented other measures to limit travel, socializing and business activity to slow the spread of Covid-19. So far, there has been limited progress. The UK, for example, is even guiding that the epidemic will pick up in the next 10-14 weeks. Assuming other countries will witness a decline in business at least half that seen in China, the impact on metal demand in the short term is likely to be huge, pushing commodity markets into oversupply and driving prices even lower. The ruble's sharp depreciation really helps the Russian metals and mining sector, though we still think that the potential damage is not fully priced in and that stocks could further decline before they start to recover.> Russian steel stocks are down almost 30% YTD, which we argue reflects the 10% drop in steel prices. If the shutdowns outside China result in significantly reduced construction activity and auto production, Russian steel exports could decline. In contrast with the 2008-09 crisis, Russian companies have strong balance sheets and should be able to make it through several quarters with zero or negative cash flow. That said, the stocks are likely to face pressure in any case, as investors will question whether mills will sustain dividend payouts of above 100% of FCF.> A 10-15% drop in global car production now does not seem unrealistic in a worst-case scenario. This could wipe out the entire 1.2 mln oz deficit in palladium, the key driver behind the outperformance of palladium prices and Nornickel. Assuming a palladium price of $1,400/oz, a 15% decline from spot levels for other metals in Nornickel's basket and an average USD/RUB rate of 75, we expect Nornickel's FCF yield to decline from the current 11% to 7% this year. While this is still decent, we do not think it is fully priced in.> In relative terms, Polyus and Polymetal may outperform the metals sector, supported by monetary stimulus. However, the stocks are not immune to liquidation selloffs, and we see them as an inferior alternative to cash.AK Alrosa PAO. AK Alrosa PAO (Aktsionernaya kompaniya ALROSA PAO or ALROSA Company PJSC), formerly AK Alrosa OAO, is a Russia-based company which is principally engaged in the exploration, mining, manufacture and sales of diamonds. Its operations include five Integrated Mining and Processing Complexes: Mirny, Udachny, Aikhal, Anabar and Nyurba located in the Sakha Republic; sorting divisions and diamond cutting and polishing division. The Company is a member of variable diamonds associations. It operates through several representative offices, branches and subsidiaries, including Alrosa-Nyurba OAO, Almazy Anabara OAO and Severalmaz OAO.
Evraz engages in the production and distribution of steel and related products and coal and iron ore mining. Co. also produces vanadium products. Co. has four segments: Steel, which includes production of steel and related products at all mills except for those in North America, and includes the extraction of vanadium ore and production of vanadium products, iron ore mining and enrichment and certain energy-generating companies; Steel, North America, which includes production of steel and related products in the U.S. and Canada; Coal, which includes coal mining and enrichment; and Other operations, which includes energy-generating companies, shipping and railway transportation companies.
Magnitogorskiy Metallurgicheskiy Kombinat PAO, formerly Magnitogorskiy metallurgicheskiy kombinat OAO, is a Russia-based company, active in the steel industry. Its main products are sinter, coke, iron, crude steel, rolled products and ore materials. The Company offers a wide range of products such as wire rod, rebars, square bars, strips, round bars, among others. It is also involved in the coal ore mining, processing of ore materials, sale of ferrous metal products and others. Magnitogorskiy metallurgicheskiy kombinat OAO operates as a supplier for such industries as: pipelines, vehicles, railway, construction and shipbuilding, among others. Its subsidiaries include Lys'venskaya Metallurgicheskaya Kompaniya OOO, among others. The Company operates domestically, as well as exports its products to the Commonwealth of Independent States (CIS) countries, Asia, the Middle East and Europe.
MMC Norilsk Nickel PJSC is a global producer of nickel, palladium, platinum and copper. Co. also produces by-products, such as cobalt, chromium, rhodium, silver, gold, iridium, ruthenium, selenium, tellurium and sulfur. Co. is involved in prospecting, exploration, extraction, refining and metallurgical processing of minerals, as well as in production, marketing and sale of base and precious metals. Co.'s production facilities are located in five countries: Russia, Australia, Botswana, Finland, and South Africa. Co.'s production units are integrated and include: the Polar Division (the Taimyr Peninsula); and the Kola Mining and Metallurgical Company (Kola MMC or the Kola Peninsula).
Novolipetsk Steel is a vertically integrated steel manufacturing and production group based in Russia. Co. specializes in the manufacturing of high-quality hot and cold rolled steel in a variety of grades and sizes. Co. is also engaged in production and sales of flat steel products including slabs, hot rolled and cold rolled sheet, electrical steel, galvanized steel, cold rolled sheet with polymeric coatings. In addition, Co.'s areas of manufacturing include sintering, coke production, blast furnace production, steel-making, hot and cold-rolled flat steel production, galvanized and prepainted steel production. Co. exports its products to 70 countries around the world.
Polymetal International is the ultimate parent entity of Polymetal Group, a precious metals mining group operating in Russia, Kazakhstan and Armenia. Co. has five reportable segments: Magadan; Ural; Khabarovsk; Kazakhstan; and Armenia. Each segment is engaged in gold, silver or copper mining and related activities, including exploration, extraction, processing and reclamation.
PJSC Polyus is an open joint stock company based in Russia. Co. is engaged in operations as a gold production company. Co.'s major assets are: in Krasnoyarsk region, Olympiada deposit as well as Blagodantoe, Titimukhta, Tyrada, Olenii, Razdolinskaya, Zyryanovskaya and Panimba fields; in Irkutsk region, Zapadnoe, Verninskoe, Pervenets, and Chertovo Koryto and Mukodek goldfields as well as some 94 placer deposits; in Magadan region, Natalka deposit and smaller Degdekan and Vostochnoye fields; in the Republic of Sakha (Yakutia), Kuranakh ore body and Kyutchus field as well as 50% interest in the giant Nezhdaninskoye field; and in Amur region, Bamskoe gold field.CJSC Deloitte & Touche CIS
PAO Severstal is an integrated Iron & Steel works company with a range of products: hot and cold rolled steel, roll-formed shapes and pipes, rolled sections, a large group of coke products and by-products. Co. also has various social responsibilities such as the operation and maintenance of sports complexes, holiday and recreational facilities and public housing. Co.'s operations are organized along three principal divisions: Severstal Russian Steel engaged in crude steel production; Severstal Resources engaged in the production of iron ore concentrate, pellets and coking coal; and Severstal International engaged in the production of high-quality flat-rolled products.
United Company Rusal is a producer of aluminium and alloys. Co.'s production chain include bauxite and nepheline ore mines, alumina refineries, aluminium smelters and casting houses, foil mills and packaging production centres. Co. operates in four reportable segments: Aluminium, which is involved in the production and sale of primary aluminium; Alumina, which involved in the mining and refining of bauxite into alumina and the sale of alumina; Energy, which include the mining and sale of coal and the generation and transmission of electricity; Mining and Metals, which includes the equity investment in Co.'s joint venture, PJSC MMC Norilsk Nickel.
Sberbank CIB Investment Research is a research firm offering equity, fixed income, economics, and strategy research. It covers analysis on all aspects of Russia’s capital markets, issues and industries. The firm analyzes trends in Russia and combines local knowledge with a global perspective. It processes macroeconomic data, market and company-specific news, stock quotes and other information for providing research reports. The firm provides details and latest prices on the most traded names and most traded paper on all segments Russian market. In strategy research, it provides thematic research, tips and descriptions of the methodology used to evaluate companies.
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