Nornickel - 3Q20 Production Results: Back on Track

Nornickel has released strong 3Q20 production results, which suggest it is on track to meet its full-year production guidance. At spot commodity prices and the current USD/RUB, the stock is trading at an undemanding 2021E EV/EBITDA of 4.0, FCF yield of 16% (adjusted for a one-off potential fine payment) and yield on dividends to be paid out over the next 15 months of 21% (including the interim and final payments for 2020 and the interim for 2021).> Nickel production at the core assets (Polar, Kola and Harjavalta) rose 7% Q-o-Q to 59 kt, supported by the ramp-up of chlorine-leaching at the Kola division. In 3Q20, Nornickel started processing chlorine-leaching residues at Kola instead of shipping them to the Polar division. Palladium production rose 8% Q-o-Q to 782 koz, while platinum production increased 10% Q-o-Q to 191 koz. Copper output declined 6% Q-o-Q to 103 kt because of scheduled repairs at the Talnakh concentrator. The 2020 production guidance was reiterated across all metals. In 9m20, nickel and copper production at the core assets totaled 72-73% of the full-year guidance midpoint, while PGM production was 76-80% of the guidance midpoint, meaning that Nornickel is well on track to meet its full-year guidance.> Bystrinsky continued ramping up, delivering record-high quarterly output across all metals, with copper production rising by 3% Q-o-Q to 16 kt and gold production by 7% Q-o-Q to 62 koz. In 9m20, copper and gold output was a respective 76% and 77% of the full-year guidance midpoint. Assuming the project reaches full capacity metals output next year, it might alone generate around $700 mln in FCF at spot commodity prices and USD/RUB, thanks to both gold and copper prices being strong.> Despite the strong performance of Nornickel's commodity basket in recent months (including rhodium, sales of which should bring $1 bln in revenues next year at spot price versus less than $300 mln in 2019), the stock was under pressure, due to investors' concerns over environmental risks following the May 29 fuel spill. At spot commodity prices and the current USD/RUB, the stock is trading at an undemanding 2021E EV/EBITDA of 4.0, FCF yield of 16% (adjusted for a one-off potential environmental fine of R148 bln) and yield on dividends to be paid out over the next 15 months of 21% (including the interim and final payments for 2020 and the interim for 2021). Nornickel will host an investor day on December 1, where we expect the focus to be on capex updates. The results of the fuel spill investigation by Rostechnadzor (the state agency for industrial safety), which should state the reasons behind the accident, are to be ready by October 30.