NLMK - 4Q20 Trading Update Augurs Strong Earnings

NLMK has reported a 4Q20 trading update showing a slight decline in sales volumes and an almost unchanged geographical and product sales mix. Assuming that NLMK was able to capture the bulk of the export price growth seen in late 3Q20 and the beginning of 4Q20 and that the average realized price for the flat division rose 15% Q-o-Q, we project a 44% Q-o-Q jump in EBITDA to $835 mln. We forecast the 4Q20 dividend at $370-410 mln, for a yield of 2.5%.> Production in line at Lipetsk but below forecast at the long division. Crude steel output at the Lipetsk plant grew 4% Q-o-Q to 2.97 mln tonnes, in line with our forecast, as NLMK has completed a capacity upgrade at the division, taking it to 14.2 mtpa. We expect it to reach full capacity utilization (3.55 mln tonnes per quarter) in 2Q21, and we plug in 3.2 mln tonnes of output for 1Q21. At the Russian long division, production slumped 10% Q-o-Q due to seasonal maintenance, which was conducted despite very good prices and demand for longs.> Sales volumes fall, but realized price should rise strongly. Consolidated steel product sales fell 5% Q-o-Q in 4Q20 to 4.2 mln tonnes from the high base of 3Q20 (there was an inventory release), with a 3% decline at the flat division (to 3.17 mln tonnes) and a 17% fall at the long division (to 0.68 mln tonnes) amid the low production. The product mix was virtually unchanged Q-o-Q, with the share of HVA easing 1 pp to 27%. In the flat division, the share of HVA slipped 2 pp Q-o-Q to 27%, but the share of export sales rose 1 pp to 62%, which is positive, as export prices outperformed domestic during the quarter. We believe that NLMK's average realized price in the flat division could have grown by more than 15% Q-o-Q, which would be below the growth in export benchmark prices (22% Q-o-Q in 4Q20 with a two-month lag) but well above Severstal's reported price growth of 8% Q-o-Q.> Iron ore production recovers quickly. NLMK relaunched the processing plant at its iron ore asset in September following the accident and has already ramped it up to full capacity. Iron ore output jumped 17% Q-o-Q to 4.8 mln tonnes in 4Q20. We think NLMK is on track to reach its 20 mtpa iron ore production target this year.> 4Q20 financials likely to be strong. We expect EBITDA to soar 44% Q-o-Q to $835 mln, outperforming Severstal's EBITDA growth (less than 10%). However, FCF is likely to be pressured by a working capital buildup and seasonally high capex, so we expect it to rise just 10% Q-o-Q to $260 mln, for a 1.7% yield (versus Severstal's 1.2%). We calculate the remaining dividend for 2020 to be paid for 4Q20 at a hefty $370-410 mln, for a 2.5% yield (in line with Severstal). NLMK will report its 4Q20 IFRS results on February 11. > At spot commodity prices and the current USD/RUB rate, the stock is trading at an undemanding 2021E FCF yield of 22-24%. We estimate it would still be yielding 15-16% if steel prices were to correct 15% from spot levels and the HCC price were to rise to $160/tonne (NLMK is short in HCC and price growth here is negative for it).