Metals and Mining - Rusal Rejects Interros's Offer to Cancel Dividends in 2020

> Interfax reported today that Interros (controlled by Vladimir Potanin) had proposed to Rusal that Nornickel cancel its dividends yet to be paid in 2020 (the final payment for 2019 and interim for 2020). The virus outbreak has spurred a decline in global economic activity and commodity prices that may result in a material decline in Nornickel's earnings. In this environment, Interros believes that it makes sense to accumulate cash and consider buying back shares from the open market. Rusal has reportedly already rejected the proposal to cancel Nornickel's dividends. There is no information on whether a decision has been made on the buyback. > Nornickel has yet to pay the dividend for 4Q19 (the BoD decision is due on March 7; our forecast is $1.15 bln, for a 3.0% yield) and the dividend for 1H20. At spot commodity prices and the current USD/RUB rate we estimate the 1H20 dividends at $1.7-2.8 bln (for a 4.5-7.5% yield) subject to whether the interim payment will be 60% of 1H20 EBITDA or 30% of the expected total dividend payout in 2020. To recap, back in 2017, the interim dividend payment was just $600 mln versus the $2.2 bln paid in total for the year.> As Rusal rejected Interros's proposal, this means that the dividends in 2020 will be paid according to the shareholder agreement. We think that the interim dividend for 1H20 may be closer to the lower bound of the range. That means marked-to-market, the total dividend payment in 2020 could be around $2.8 bln (7.5% yield).> We see the actions of both parties as logical. Potanin, the core shareholder of Nornickel, is looking to significantly expand the company's operations in the coming years (see our report) and is interested in ensuring financial stability during the current crisis. If the dividend payment in 2020 were to be canceled, we estimate that this could help bring Nornickel's net debt/EBITDA to just 0.4 at the end of this year (based on spot commodity prices and the current USD/RUB rate). However, Rusal relies heavily on dividends from Nornickel. We forecast Rusal's FCF in 2020 at close to zero at spot prices. Therefore, the potential $0.8-1.1 bln in dividends from Nornickel this year are essential to keep paying down the debt.> This discussion about dividends provides another example of the disagreement between Nornickel's shareholders on capital allocation. In March, a lack of approval from Rusal forced Russian Platinum to exit its Arctic Palladium JV with Nornickel. According to Kommersant, the IPO of the Bystrinsky project was previously delayed for the same reason - a lack of approval from Rusal, which has the right to veto large deals under the Nornickel shareholder agreement (the agreement expires on January 1, 2023). Rusal's power as a shareholder is set to diminish materially after that, so we think it will do everything it can to negotiate an extension and secure a dividend stream after 2022.> At spot commodity prices and the current USD/RUB rate, Nornickel is trading at a 2020E EV/EBITDA of 4.7, a 2020E LFCF yield of 13% and a 7.5-10.5% yield on dividends yet to be paid in 2020. While this looks very attractive compared with historical averages, there could be some downside from the current levels, as commodities remain under pressure and over-owned stocks are prone to correction. Meanwhile, Potanin reiterated last year that he might be interested in growing his stake in the company. This is especially important considering the looming expiration of the shareholder agreement, in our view, so we think he could start buying shares in the market at some point in time.