Anna Kravchenko in Moscow -
Russian miner Norilsk Nickel is to shed non-core assets and exhausted mines, the company said at a strategy presentation in London on May 19. Norilsk Nickel stock went up by 1.8% on the London Stock Exchange on May 19 after the presentation.
After reviewing several paths for reorganisation, the board will approve the final draft plan in early 2016, first deputy CEO Pavel Fyodorov said. But non-core Australian and African projects will already be sold off by the end of the third quarter of 2015, bringing in an estimated $1bn to Norilsk, Fyodorov said.
Cluster by cluster
Among the non-core enterprises selected for potential sale or reconfiguration are Norilskgazprom and the Arkhangelsk commercial port, while mining assets include the southern cluster of the Zapolyarny subsidiary, Medvezhy Ruchei quarry and Norilsk processing plant. All service and logistic companies, including ports on the Yenisei River and the Yenisei Steamship line, will also be restructured or sold.
The Zapolyarny field and Medvezhy Ruchei have been worked for 60 years and the Norilsk plant operated even longer. The company expects the level of nickel mining in this cluster to fall by 55% to 1.2mn tonnes of ore per year, with reserves forecast to peter out in the next two decades. The share of the cluster in Norilsk’s total output is 4%, its revenue is $600mn, and EBITDA margin about 35%. The cluster may be interesting because of the 70% content of platinum group metals (PGM) in the ore, the Vedomosti business daily cited VTB Capital analyst Boris Sinitsyn as saying. However, the level of reserves depletion is also high, now standing at 70%-75%.
One of the most attractive assets under review is Norilskgazprom, Sinitsyn believes. Its gas reserves are at 317 bcm, with annual production of up to 3.8 bcm. The field is capable of producing up to 13-16 bcm a year but is not connected to the main pipeline. But since the Norilsk industrial region consumes only 3 bcm a year, there was no sense in running it at full capacity before. According to Norilsk's presentation, the nearest gas pipeline is 300km away, and the $1.5bn cost of building a pipeline is planned to be shared with a potential partner.
The company's new growth focus is the ongoing development of the Skalisty mine and the Bystrinsky copper field in East Siberia, as well as a potential major new platinum group metals (PGM) source at the Maslovskoye mine, which may prove to be the world’s largest. Earlier in May, Norilsk Nickel said it would receive a $1bn loan from state-owned VTB Bank for developing the Bystrinsky project.
But as grand as the plans sound, the jury is still out for some analysts about their attractiveness and what it will do for Norilsk in the long term.
"I still don’t share the optimism about the company," said Oleg Petropavlovsky of BCS, pointing out that the new programme is not so different from the plan Norilsk presented last year. "Firstly because of the state of the global market. No matter how good the strategy is, the company still depends on the situation on the global market," Petropavlovsky told bne IntelliNews. "Secondly, the assets [selected for sale] are complicated, they demand significant investments, and some of them located in regions where only Norilsk Nickel operates."
Heavy metal revival
Norilsk Nickel was reenergised two years ago when a new management team was brought in under the personal control of the company’s owner Vladimir Potanin, now officially the richest man in Russia with a fortune at $14.6bn, according to Forbes.
Potanin's team lowered the share of inefficient capital from 25% to 2-3% which led to a 29% surge of capital return. The company almost tripled its IFRS net profit for 2014 to $2bn compared with $0.77bn in 2013.
The new management started that year by selling off the company's foreign assets. The North Eastern Goldfields Operations gold mining project was sold for $35.2mn, and the Black Swan project for $1.5mn. The company sold its Australian subsidiary Lake Johnston and agreed the sell off its African projects with Botswana’s state-owned BCL Limited for $337mn, sources told Vedomosti.
Again, analysts gave a mixed verdict on the results of the revamp.
"What’s more important here is not the restructuring itself but the management’s vision," Dinnur Galikhanov of Aton told bne IntelliNews. "They realistically evaluated the assets and took a ‘nothing is sacred’ approach. It’s nice to know there is such a pragmatic team in a Russian company."
"The management team is indeed strong, it improved the company’s results, but basically the team is doing what it should be doing," countered Petropavlovsky of BCS. "And the quality of Norilsk’s assets is so high that any mistakes by the management would barely be noticeable."
After the sell-off the company paid $2.2bn in 2014 dividends. With revenues to come from the sale of Russian assets and a payout ratio of 50% of EBITDA, Norilsk has potentially the most attractive dividend policy amongst global and Russian peers, with forecast dividends yields of 8-9% driving sector-leading returns, VTB Capital said.
Meanwhile, a recently announced $500mn share buyback is to be used to stabilise the company's stock in periods of high market volatility.
"Norilsk's 2015 Strategy Update in London confirmed that its major restructuring programme is on track to deliver the most important change in the company’s investment case for more than 15 years," VTB Capital added in a note.
The bank analysts expect efficiency gains, lower cash costs and improved returns to boost EBITDA by $1bn on a cumulative basis in 2015-17, rising to $350-400mn by 2018, with further benefits from a new growth focus on greenfield projects, brownfield expansions and leveraging existing resources.
"While the stock has strongly outperformed in the past 12 months, we remain positive on the outlook and reiterate our 'Buy' recommendation," VTB urged its clients.
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