NLMK - 2Q20 Trading Update Good; Earnings Preview

NLMK has released a fairly good 2Q20 trading update, showing resilient sales volumes, as it managed to redirect sales from the weak Russian and European markets to Asia. Despite a significant deterioration in the sales mix, the weak ruble should provide support and we expect EBITDA to contract just 12% Q-o-Q to $525 mln. We expect FCF to be a solid $240 mln for a 2% quarterly yield, higher than that of Severstal and MMK. We expect a quarterly dividend of 100% of FCF. NLMK will report its 2Q20 IFRS results on July 23. > Consolidated crude steel output dropped 9% Q-o-Q in 2Q20 to 3.8 mln tonnes. This was attributable partially to guided maintenance at the flat division (production down 5% Q-o-Q or by 180 kt to 3.15 mln tonnes), though the major driver was weak demand for long products in Russia in April (long division production was down 7% Q-o-Q or by 48 kt to 0.6 mln tonnes; most of the decline happened in April) and for steel products in the US (US division production was down 72% Q-o-Q or by 134 kt to 0.05 mln tonnes).> Consolidated steel sales volumes were very resilient, declining just 3% Q-o-Q (by 150 kt) to 4.35 mln tonnes - due mainly to the weak performance at the US division, where sales were down 39% Q-o-Q (by 200 kt). However, the sales mix deteriorated significantly, as NLMK accelerated sales of commodity-grade products (semis and HRC) to Asian markets due to weak demand in Russia and Europe during the lockdowns. As a result, the flat division's sales volumes were stable Q-o-Q at 3.43 mln tonnes, the share of exports expanding 9 pp Q-o-Q to 69% and that of HVA contracting 4 pp to 21%. The share of HVA in consolidated sales came in at a record low 25%, down 5 pp Q-o-Q. We estimate that the flat division's average realized price dropped 10-15% Q-o-Q, in line with MMK's price performance (down 12% Q-o-Q) but weaker than Severstal's (down 4% Q-o-Q). > The mining division continued ramping up production, as had been guided. Production of iron ore products rose 6% Q-o-Q and 8% y-o-y to 4.9 mln tonnes. NLMK sold around 450 kt of concentrate to third parties, taking advantage of strong iron ore prices.> Despite the significant deterioration in the steel sales mix, we believe the good sales volumes and weak ruble should support earnings in 2Q20. We expect EBITDA to decline 12% Q-o-Q to $525 mln for a 24% margin (flat Q-o-Q). NLMK has guided capex at just $200 mln in 2Q20. We expect $240 mln in FCF for a 2.1% quarterly yield, above that of Severstal (1.6%) and MMK (close to zero). We anticipate a 100% dividend payout from FCF.