Nornickel - 2Q20 Operating Results Healthy; 1H20 Earnings Preview

Nornickel has reported healthy 2Q20 operating results and reiterated its full-year production guidance for 2020. For 1H20, we project cash EBITDA (excluding provisions) of $3.9 bln for a good 58% margin. The reported EBITDA, however, may include a provision for an environmental damage payment of up to $2.1 bln, which would bring EBITDA to $1.8 bln. Given the uncertainty about the fine, we do not expect an announcement on an interim dividend until late autumn.> Catchup in production underway; 2020 guidance reiterated. After a rather weak 1Q20 trading update (see our note), Nornickel significantly increased production of all metals at its key assets in 2Q20 (Polar, Kola and Harjavalta divisions). Nickel production rose 8% Q-o-Q to 56 kt (thanks to ramping up of the Kola refinery), copper production 10% Q-o-Q to 109 kt, palladium output 32% Q-o-Q to 722 koz and platinum 15% Q-o-Q to 173 koz (thanks to processing of work-in-progress materials at the Krasnoyarsk refinery). Nornickel reiterated its 2020 production guidance for all metals. In 1H20, production across the four metals was 47-50% of the full-year target, so we see Nornickel as on track to meet the guidance at its key assets.> Bystrinsky production doing well; full-year guidance on track. At Bystrinsky, copper production was flattish Q-o-Q in 2Q20 (15 kt), while gold production increased 3% Q-o-Q to 58 koz. In 1H20, production of both copper and gold reached 50% of the full-year guidance, so the company seems on track to hit the full-year target.> Reported EBITDA might be affected by provision for environmental payment. We expect Nornickel's cash EBITDA (including Covid-related costs and fuel cleanup costs of up to a total of R15 bln, but excluding provisions) to decrease 7% H-o-H in 1H20 to $3.9 bln for a good 58% margin. The reported EBITDA may include a provision for the environmental damage payment. It is yet difficult to judge how much the provision will be, and we conservatively model $2.1 bln - the full amount for the payment proposed by Rosprirodnadzor, Russia's environmental regulator. Therefore, the reported EBITDA with this provision could be as low as $1.8 bln. As this is a non-cash expense, FCF should still be quite strong. We model $1.9 bln for a 4.5% yield, assuming $0.8 bln in capex and a $0.3 bln working capital buildup. Given the uncertainty about the environmental damage payment - the size and whether it will be recorded in the P&L (and thus impact both dividends and taxes paid) - we think an interim dividend announcement might be postponed until October-November, as in 2016. Nornickel will report 1H20 financial results on August 11. According to Rosprirodnadzor, a meeting with the company is scheduled for tomorrow.