Nornickel - Partial Mining Suspension at Oktyabrsky and Taimyrsky Mines

Nornickel has partially suspended mining at two of its mines that account for half of the company's metal production. The reason for the stoppage is elevated water inflow. Once the relief operation is complete, the company will assess the impact on its production. Additionally, we expect the company to come up with an estimate for the potential processing capacity loss following this weekend's accident at the Norilsk Concentrator. Given the high uncertainty over 2021 production and the state's reaction to the chain of accidents, we have closed our buy trade idea on the stock (fixing a 22% total return) and put our recommendation and target price under review.> Yesterday, Nornickel announced that it has partially suspended its Oktyabrsky and Taimyrsky mines due to increased water inflows, which the company found unsafe. On February 12, during tunnelling operations at Oktyabrsky, natural groundwater inflow was detected in the mine headwall at a depth of 350 meters. Due to the increased water flowing into the drainage systems, operations at the mine have been suspended until the flooding ceases. The waterlogging is currently being eliminated.> Since Oktyabrsky is connected to Taimyrsky and water has found its way into the latter mine's horizon, operations there have also been partially suspended. The company is currently installing a cofferdam to stop further water inflow. Once the cofferdam is in place, Nornickel will be able to estimate the amount of water accumulated in the mine workings and enhance drainage there as quickly as possible. > Nornickel plans to assess the impact of the partial mine suspension on metal production guidance once the relief operation is complete. We estimate that these two mines account for almost half of all metals mined and that a one-month full disruption would entail a $750 mln drop in revenues at spot commodity prices. These mines account for 13% of global annual primary and recycled palladium production, 4% of platinum, 3% of nickel and 1% of copper, meaning that any prolonged shutdown may affect commodity prices, palladium in particular.> This incident comes just days after an accident at the Norilsk Concentrator, where operations have been partially disrupted due to the collapse of the building housing the ore reloading facility and the adjoining walkway (see our note). Rostechnadzor has said that it 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. We think the watchdog may also decide to inspect the mines where the water inflow was observed. > As of now, it is difficult to assess the impact on 2021 output and financials from the partial mining suspension and disruption at the concentrator, as we do not know a number of variables, such as the severity of the flooding; how long it will take to restore operations at the mines; how much ore inventory has been accumulated that can compensate for the loss in mining; and the flexibility in terms of redirecting some ore from the Norilsk Concentrator to the Talanakh Concentrator. There are many possible scenarios. For example, assuming the Norilsk Concentrator operates at reduced capacity for three months, operations at Taimyrsky are partially disrupted for two weeks and Oktyabrsky is partially disrupted for a month, we estimate the potential production loss at around $950 mln at spot prices (5% of 2021 estimated revenues). > Since peaking following the MSCI 10/40 weight increase on February 19, the stock has dropped 13% and the market cap has fallen by around $8 bln. It is now trading at around $32-33/ADR, in line with where it was at the beginning of February, when EBITDA at spot was around $12.5 bln (versus $14 bln now, not accounting for any production losses). While the stock price correction already prices in a substantial production loss, we believe that investors may still decide to sell as they reassess operational risks and wait to see what the reaction of the government will be. We close our buy trade idea (fixing a 22% total positive return). We also recall our BUY recommendation and put the financials and target price under review.