NLMK - Good 3Q20 Trading Update; Earnings Preview

NLMK has reported a healthy 3Q20 trading update, showing higher steel product sales and an improved sales mix. Despite this, we expect EBITDA to stay flat Q-o-Q at $580 mln on the back of a two-week stoppage at the company's iron ore asset due to an accident (though it is already back up and running). We project 3Q20 FCF of $170 mln for a 1.3% yield. At spot commodity prices and USD/RUB, NLMK is trading at a 2021E EV/EBITDA of 4.8 and an attractive yield on the dividends to be paid in 2021 of 12%.> Consolidated crude steel production was unchanged Q-o-Q at 3.8 mln tonnes. Crude steel production at the Russian flat division was 2.9 mln tonnes, down 9% Q-o-Q due to the second stage of the overhauls of a blast furnace and basic oxygen furnace, but slightly ahead of the guided 2.8 mln tonnes. NLMK should complete both overhauls in November and production should climb to around 3 mln tonnes in 4Q20. Production at the Russian long and US divisions increased significantly in 3Q20 from the depressed 2Q20 levels. > Consolidated steel product sales increased 2% Q-o-Q to 4.4 mln tonnes, driven by the Russian long division, which saw volumes jump 35% Q-o-Q to 0.8 mln tonnes on seasonal and post-lockdown pent-up demand from the construction sector. Despite a 9% Q-o-Q drop in steel production at the Russian flat division (excluding pig iron), steel product sales at the division (including pig iron) fell just 4% Q-o-Q to 3.3 mln tonnes thanks to the release of steel inventories and higher pig iron sales (up 6% Q-o-Q to 0.39 mln tonnes). The sales mix improved, as the share of HVA in the Russian flat division's sales increased 6 pp Q-o-Q to 27%, while the share of semis eased 4 pp Q-o-Q to 52%. NLMK does not disclose realized prices in its trading updates, but we estimate that the average realized price at the Russian flat division rose 5% Q-o-Q in 3Q20 on the improved sales mix, which is in line with Severstal's reported figure.> Despite good steel sales volumes and higher realized prices, we expect EBITDA to stay flat Q-o-Q at $580 mln in 3Q20 due to the two-week stoppage at Stoilensky, NLMK's iron ore asset, following an accident, which has cost it around $50 mln in EBITDA, we estimate. Stoilensky was relaunched on September 23 and is already running at full capacity. We estimate FCF at $170 mln for a 1.3% yield (versus our estimate of 3% for Severstal's 3Q20 FCF yield). Based on NLMK's dividend policy, we expect a 3Q20 dividend of around $250 mln for a 1.9% yield (versus 3.3% for Severstal). NLMK will report its 3Q20 IFRS results on October 21.