Nornickel - 1Q20 Production Weak; Full-Year Guidance Intact

Nornickel has released weakish 1Q20 production results due to a switch to a new technology of chlorine leaching at the refining shop at Kola MMC, and also due to a temporary buildup of semis inventory. However, the company reiterated its full-year production guidance, so we expect a neutral market reaction to the results. At spot commodity prices and the current USD/RUB rate, Nornickel is trading at a 2020E EV/EBITDA of 5.7, a FCF yield of 10.8% and a yield on the dividends yet to be paid this year of 7% (assuming the 1H20 dividend accounts for 30% of the full-year expected dividend).> Production results at core assets weak, as we expected. Nickel production fell 7% y-o-y to 52 kt due to the pre-commissioning of a new chlorine leaching refining shop at Kola MMC and a buildup of semi-finished inventories at Norilsk Nickel Harjavalta to ensure uninterrupted production during the time when there is no shipping by sea. As part of the strategic diversification of sales into premium products, production of carbonyl nickel (which trades at a significant premium to refined nickel) increased 39% y-o-y to 1.6 kt. Copper production at the core assets dropped 14% y-o-y to 100 kt. Palladium production fell the most, sinking 29% y-o-y to normalized first-quarter levels from a very high base in 1Q19, when Nornickel processed work-in-progress inventory accumulated at Krasnoyarsk Precious Metals Refinery. > Bystrinsky ramp-up on schedule. Output at Bystrinsky was strong, with copper volumes up 51% y-o-y to 15 kt and gold production rising 31% y-o-y to 56 koz. The 1Q20 results suggest that Nornickel is on track to meet its production guidance at Bystrinsky.> Full-year guidance reiterated despite sluggish output in 1Q20. Nornickel's mine output rose 5% y-o-y in 1Q20, though saleable metal output declined y-o-y due to the pre-commissioning of the new chlorine leaching refining shop at Kola MMC and the associated inventory buildup. Nornickel expects a recovery in saleable metal production this year and it therefore reiterated its full-year production guidance for all metals and projects.