Nornickel - Water Inflow Stopped at Oktyabrsky and Taimyrsky Mines

Nornickel announced today that it had stopped the water inflow at its Oktyabrsky and Taimyrsky mines and reiterated its 2021 production guidance. We think that today's news materially reduces the risks of a delay in the ongoing relief operation at the affected mines. Assuming 2022 output at pre-accident levels, the stock is trading at a distressed 2022E EV/EBITDA of 4.1 and FCF yield of 14%. Despite the ongoing debate between key shareholders regarding dividends and even though much remains to be done on production safety, we believe that pressure on the share price from shorting should decline, while speculative buying could gain momentum. > Water inflow stopped. Nornickel announced today that on Thursday (March 25) it had completed the second phase of its two-stage plan to deal with the water inflow at the mines (the first phase was completed on March 13; see our report). The second phase included installing additional water barriers, filling the adjacent workings with a backfill mix and releasing water. On Saturday (March 27), the water flow was stopped at the Oktyabrsky mine (and thus at Taimyrsky, which is connected to Oktyabrsky) by closing the valves after the stowing mix had solidified. More than 32 kt of concrete mixture was poured into the mine workings during the two stages. > Previous guidance on 2021 production losses unchanged. Nornickel reiterated its guidance with regard to the relaunch of both mines. Oktyabrsky (5.0 mtpa capacity) should fully resume production in early May and Taimyrsky (4.3 mtpa) is scheduled to resume production in early June. The guidance on production losses this year (35 kt of nickel, 65 kt of copper and 710 koz of PGM) was reiterated as well. Assuming commodity prices stay close to spot until year-end, we estimate 2021 EBITDA at around $11 bln and FCF of around $3 bln (including the $2 bln environmental fine and an around $2.5-3 bln loss due to the accidents).> Capex program broadly unchanged, still no agreement on dividends. Today, the Nornickel BoD held a meeting to discuss the 2021-30 investment program and dividend targets. The management presented the capex program (with key numbers from the 2020 investor day unchanged; see our daily story) to the BoD, which "has taken note" of the proposal. As for the dividend targets, the management proposed to distribute 50-75% of FCF and invited the shareholders to continue discussions on dividend targets based on the distribution of FCF. Last Thursday, Interros proposed to distribute a slightly lower level of FCF in dividends of 50-60% (see our daily story). According to Bloomberg, reducing 2020-21 dividends was not discussed.> Valuations look distressed. At spot commodity prices and the current USD/RUB of 76, the stock is trading at a 2021E EV/EBITDA of 5.2 and at just 4.1 for 2022 (when production should return to the initial guidance from the 2020 investor day). The 2021E FCF yield is 8% but should climb to 14% assuming output normalizes in 2022. The stock is trading at distressed valuation levels near what was seen several months after last year's fuel spill. We think that the water inflow being stopped should materially reduce the downside risks to output this year. Despite the ongoing shareholder debate over dividends and though much remains to be done to improve production safety, we believe that speculative buying could resume and push the stock price up in the near term.