Nornickel - Update on the Recent Accidents

Nornickel reported yesterday that it has not stopped the water inflow yet, but under its base-case plan it aims to restore full capacity at its flooded Oktyabrsky and Taimyrsky mines within the next 3-4 months. At the Norilsk Concentrator, the cuprous ore line was restarted on March 15, while the restart of the disseminated ore processing line (affected by the collapse of the ore reloading gallery) has been delayed by one month to April 15 (still subject to Rostechnadzor's approval). The company estimates that the accidents will have a 15-20% impact on this year's production guidance for all key metals. At spot commodity prices, we calculate the impact on 2021 EBITDA at around $3 bln, or 22% of what EBITDA at spot prices would have been had there been no accidents.> Nornickel is implementing a two-stage plan to stop the inflow at the mines. On March 13, it completed the installation of cofferdams to block the ventilation shaft through which the water was flowing in. Then on March 15, it started the second stage, which involved installing additional cofferdams, filling the neighboring workings with backfill mix and discharging the water. Once the backfill mix has hardened, the water inflow will be stopped by closing the valves. So far, the company estimates that by April 1 (when it plans to start to pump the water out) there is likely to be around 1 mln m3 of water in the mine workings (this is slightly less than the volume of Wembley Stadium). The water will be pumped out through three pipelines with a total throughput of 2,100 m3 per hour (around 50k m3 per day).> Nornickel reconfirmed that the mining equipment has not been impacted and is ready to be put back into operation. So far, the water inflow has been contained in the mine ventilation cross level, which has been shut off, and the adjacent underground workings have been backfilled. Hence, the company thinks there should be no material impact on ore reserves.> Nornickel guides that the Oktyabrsky mine (5.0 mtpa of ore capacity) should gradually ramp up in the second half of April or in May. Mining is scheduled to be resumed at the Taimyrsky mine (4.3 mtpa of ore) in early June, with a full recovery expected to take approximately one month, according to the current guidance. The schedule for relaunch is longer than what we had assumed (see our report).> The company warned that blocking the water inflow is complicated by the high intensity of the flow and the geological conditions where the cofferdams are located. Due to this, it acknowledges that there is a risk of an additional delay in the implementation of its plan.> There have already been delays, likely because the company underestimated the water inflow from the very beginning. Natural groundwater inflow was detected at the 350-meter level at the Oktyabrsky mine on February 12 during tunnelling operations. On March 1, a concrete two-section waterproof cofferdam was installed. Then on March 3, Nornickel CEO Vladimir Potanin guided that the water inflow was expected to be brought under control by March 9 and that an estimate of the impact on production would be provided then. However, on that day the deadline was moved to March 16. The water inflow has still not been stopped, and additional cofferdams will be required. > Meanwhile, at the Norilsk Concentrator, the relaunch of the disseminated ore processing line (affected by the accident) was delayed by one month to April 15, subject to permission from the Federal Service for Environmental, Technological and Nuclear Supervision (Rostechnadzor) and the company's internal auditors. The cuprous ore processing line (not affected by the accident), which was halted last week for an early upgrade to limit the risk of further incidents, was relaunched this Monday, as guided. The disseminated ore and cuprous ore processing lines have nameplate capacity of 5.2 mtpa and 4 mtpa, but we estimate their total operating capacity at around 8.0 mtpa.> In its current base case, Nornickel expects to lose 35 kt of nickel, 65 kt of copper and 710 koz of PGM production this year. This is 14-16% of the midpoint of the pre-accident 2021 production guidance for base metals and around 19-20% for PGMs (see the table below). We estimate that the lost palladium output in 2021 could amount to 560-570 koz, or 5% of global consumption, which should drive the market into deficit. The palladium price has already reacted to the news of Nornickel's production losses, jumping close to $2,500/oz. > Based on the guided impact on metal production, and assuming spot base metal prices and palladium at $2,300-2,600/oz, we estimate the potential EBITDA impact at $2.8-3.4 bln, though an increase in palladium prices could soften the blow. This would correspond to a 2021E EV/EBITDA of 5.2-5.6 and a yield on the dividends to be paid this year of around 10% (based on a 60% EBITDA payout). > Given that there have already been a couple of delays in the timelines for the stabilization of the water inflow at the two mines and the restart of the concentrator, we believe that Nornickel may have started to provide more conservative guidance. However, until the water inflow is fully stopped, the uncertainty over the timeline for restoring production will persist and further negative surprises could still be possible, so the stock could remain under pressure.