Nornickel - Core Shareholders Approaching a Crossroad

As the current shareholder agreement expires in 2023, Vladimir Potanin and Rusal will be faced with the choice of signing a new one, triggering a shootout or proceeding without an agreement, thus allowing Nornickel's charter to assume primacy over corporate affairs. The charter gives lots of power to the simple majority, whereas owners of blocking stakes have no control over management appointments and dividends. We think that Potanin could procure more votes and avoid signing a new agreement; Rusal, which has a smaller stake and limited funding capacity, is set to push hard for a new agreement with a fixed dividend formula. If it fails to secure one it could consider triggering a "shootout," a mechanism for resolving deadlocks that is in force till end-2022. We thus think the risk of a full-blown conflict should be limited, which would be positive for minority investors.> Rusal and Potanin will be faced with signing a new agreement, triggering a deadlock-breaking mechanism or proceeding without an agreement, thus letting the corporate charter assume primacy. Although the charter does stipulate that the owners of blocking stakes, which both Potanin and Rusal possess, have a say over buybacks and any significant M&A activity - the proposed spin-off of Bystrinsky and JV with Russian Platinum are two currently contentious issues - any party with a simple majority on the BoD and at general meetings enjoys full control over management appointments and dividends. > We thus think that Rusal, which has a smaller stake and less funding capacity to fight to raise its stake, will be reluctant to accept reverting to the charter and will push hard for a new agreement to ensure a certain level of dividends. Should the parties fail to reach one, Rusal could consider a shootout. Although somewhat of an extreme option, this is the mechanism for resolving deadlocks in the current agreement. If triggered, it would likely preclude any conflict extending after 2023. Because we think it likely that either a new agreement will be reached or the shootout triggered, the risk of a full-blown shareholder conflict after 2023 appears limited, which should be positive for minority investors.> At spot commodity prices, Nornickel is trading at a 2021E EV/EBITDA of 4.0, an FCF yield of 16% (adjusted for the spill-related fine) and a 17% yield on the dividends to be paid over the next 14 months. This implies a distressed valuation versus the historical EV/12-month forward EBITDA of 6.0-6.5. We reiterate our BUY on the stock, though we think the re-rate could be a long process. In addition to any developments on the shareholder front, investors are awaiting clarity on the condition of the company's infrastructure, progress on the environmental issues and details on capex (which has so far been running below target).