| MMC Norilsk Nickel (MNOD) NORNICKEL REPORTS FIRST HALF 2020 INTERIM CONSOLIDATED IFRS FINANCIAL RESULTS 11-Aug-2020 / 14:00 MSK Dissemination of a Regulatory Announcement that contains inside information according to REGULATION (EU) No 596/2014 (MAR), transmitted by EQS Group. The issuer is solely responsible for the content of this announcement. PRESS RELEASE Public Joint Stock Company «Mining and Metallurgical Company «NORILSK NICKEL» (PJSC «MMC «NORILSK NICKEL», «Nornickel», the «Company», the «Group») NORNICKEL REPORTS FIRST HALF 2020 INTERIM CONSOLIDATED IFRS FINANCIAL RESULTS Moscow, August 11, 2020 - PJSC MMC Norilsk Nickel, the world's largest producer of palladium and high-grade nickel and a major producer of platinum and copper, reports interim consolidated IFRS financial results for six months ended June 30, 2020.
1H2020 HIGHLIGHTS
RECENT DEVELOPMENTS
KEY CORPORATE HIGHLIGHTS
1) A non-IFRS measure, for the calculation see the notes below. 2) A non-IFRS measure, for the calculation see an analytical review document ("Data book") available in conjunction with Consolidated IFRS Financial Results on the Company's web site. 3) Paid during the current period 4) Reported as of December 31, 2019 MANAGEMENT DISCUSSION AND ANALYSIS The President of Nornickel, Vladimir Potanin, commented on the results, "First half of 2020 turned out to be very challenging for our Company. The coronavirus pandemic had a significant ripple effect on the global economy as all major consumers of our products experienced an unprecedented downturn of business activity. Even though most analysts are currently forecasting a quick economic recovery, we remain cautious regarding the recovery prospects for our metals' demand at least until the end of this year. COVID-19 challenged not only our operating model, health and well-being of our employees and their families, but literally all the Company's stakeholders in the regions of our operations. Owing to the timely support that we have provided to local authorities and regional healthcare, socially vulnerable communities, small and medium enterprises, as well as safeguarding measures for our employees, the Company managed to pass the peak of the pandemic without any material impact on operations. We remain committed to continue our support to the regions of our operations to combat the spread of coronavirus. The end of the first half was also marked by an unprecedented in our own history environmental incident, when the leak of diesel fuel at the industrial site of the Heat and Power Plant № 3 in the Kayerkan neighborhood of Norilsk resulted in an adverse environmental impact. We immediately started a comprehensive clean-up operation to collect the leaked fuel and remove contaminated soil, actively engaging third parties, including government and private partners, as well as launched a number of initiatives to prevent such incidents in the future. We have also engaged into an active cooperation with the various government bodies regarding the rehabilitation of the incident. Overall, we would like to reiterate reduction of the environmental impact and improving ecological performance as strategic priorities of the Company. In spite certain issues with the mobilization of a third party contractor workforce in Norilsk as well as new risks for the shipment of imported equipment due to coronavirus pandemic, we have launched the active construction phase of our flagship desulfurization project in Norilsk and the expansion of Talnakh concentrator. We reiterate our strategic target to decrease sulfur dioxide emissions in Norilsk by 90% in 2025. Our revenue in the first half of 2020 increased 7% to USD 6.7 billion owing to higher palladium and rhodium prices. Our EBITDA, however, decreased 51% to USD 1.8 billon due to a USD 2.1 environmental provision, with EBITDA margin falling to 27% and net income reducing to USD 45 million. At the same time, free cash flow increased 21% to USD 2.7 billion as the environmental provision was not a cash item. The leverage remained at a low level with net debt to EBITDA ratio increasing to 1.2x. Amidst the high level of uncertainty on global markets, the Company increased its liquidity cushion by drawing down some of the available credit lines. We continued our long run campaign to refinance debt portfolio, having managed to further decrease the average cost of debt despite an increase of gross debt. Financial stability is among strategic our priorities. The world's leading credit rating agencies appreciate strong financial standing of the Company, having confirmed our credit ratings at investment grade level". HEALTH AND SAFETY The lost time injury frequency rate (LTIFR) decreased 29% y-o-y from 0.28 to 0.20 in 1H2020, remaining well below the global mining industry average. Furthermore, the number of lost time injuries decreased 27% y-o-y (from 15 to 11) following the roll-out of base corporate industrial safety standards of, launch of a risk control project aiming at the reduction of safety related risks and improvement of labour safety management system initiatives. Regretfully, in 1H2020 Company suffered five fatal injuries. The management considers the health and safety of its employees as the key strategic priority, targeting zero fatality rate, and continues to implement a wide range of initiatives targeting further improvement of the health and safety records. In 1H 2020, selected initiatives included the following:
In May 2020, Bain & Company Russia Consulting conducted an annual independent audit of the current level of the occupational safety culture of the Company as well as changes in its HSE systems over the past year. According to this audit, the Company's integral score was raised to 3.0 points from 2.8 as of May 2019 (1.4 points in 2014). METAL MARKETS Nickel in 1H2020 - nickel price showed a surprising resilience averaging USD 12,475 per tonne despite a rising surplus owing to the spread of COVID-19; global demand suffered from the coronavirus-related lockdowns, while the ramp-up of Indonesian NPI was a major positive offset of the supply disruption in other regions and lower Chinese NPI; exchange stocks increased to 263 kt by the end of June reflecting the market running a surplus. Nickel price started this year with a nosedive falling below USD 11,000 per tonne in the end of March as the outbreak of COVID-19 that initially affected China spread into Europe and North America forcing the governments across the globe to impose social lockdowns in attempts to contain the pandemic. In April, however, the price trend reversed as all major central banks boosted the capital markets with unprecedented liquidity injections. In May-June, the price recovery accelerated driven by markets' increasing optimism as the lockdowns were gradually removed in Europe and the economic activity in China was rebouncing strongly. As a result, by the end of 1H2020 nickel price returned to its pre-pandemic level of USD 12,850 per tonne, with US Dollar weakening additionally contributing to an increase of the price to above USD 14,500 per tonne by the first week of August. In 1H2020, average LME nickel price was practically unchanged (up 1% y-o-y) at USD 12,475 per tonne. In our view, the quick nickel price rebound in 2Q2020 was somewhat out of touch from market fundamentals as demand disruptions owing to the COVID-19 affected materially all nickel-consuming sectors. Apart from the stainless steel nickel consumption in China, which was down 2% y-o-y in 1H2020 (with even larger end-use demand contraction as smelters preferred to increase their inventories of finished goods rather than idle capacities), pretty much all other major stainless-producing countries, recorded a far greater decline, ranging from EMEA - down 19%, India - 21%, Taiwan - 11%, Japan - 5% and South Korea - 4%. Non-stainless industries consumption (including specialty steels, alloys and plating) reduced over 10% y-o-y owing to the contraction of end-use demand in aerospace and oil and gas industries. Even the battery industry that used to be the fastest growing nickel consumer in the past couple of years, decreased nickel consumption over 15% y-o-y. Dismal NEV sales in China (down 40% y-o-y) were partly offset positively by strong NEV sales in Europe (up 68% y-o-y) owing to stellar performance in January-February (+148% y-o-y) and recovery in May-June. Global nickel production was also affected by the coronavirus. Over 75 kt of high-grade nickel and ferronickel supply was wiped out by COVID-related temporary shutdowns in Canada, Madagascar and South Africa, which was amplified by 35 kt of price-driven production cuts by small independent producers. In China, NPI production was down 7% (or 20 kt) y-o-y exacerbated by ceased availability of rich Indonesian ore following the export ban. On the other hand, all these production losses have been offset positively by the rapid ramp-up of NPI capacities in Indonesia that added over 80 kt of new supply (+50% y-o-y). We estimate that nickel market surplus expanded to 80 k in 1H2020 as COVID-related demand disruptions substantially exceeded the supply losses. As a result, combined nickel inventories at LME and SHFE increased by almost 40% during 1H2020 from 188 kt to 263 kt reflecting the apparent market surplus. Nickel outlook - negative in the short-term, but more constructive longer-term; we expect market surplus to expand to approximately 150 kt in 2020; demand to suffer a 7% pandemic-related decline; supply is expected to be flat as the disruptions caused by COVID-19 are compensated by the rapid expansion of NPI in Indonesia; despite the recent weakness, the battery demand will remain the major consumption driver in the next 5-10 years as the world is steadily moving towards carbon neutral economy. Spread of COVID-19 has had a material damaging impact on the global nickel demand, which, in our opinion, has not been yet fully realized by the market as the first-use demand usually lags the end-use demand due to extended supply lead time in major manufacturing sectors. As was highlighted in our Quintessentially Nickel report in May, in order to estimate accurately the real pandemic's impact on the nickel demand, one needs to study all major end-use sectors and evaluate the impact on each and single of them. We expect the main end-use sectors (food & beverage contact materials, construction, process engineering, transport, electronics etc.) to contract by approximately 20% in 2020, that is considerably more than the expected decline in the first-use demand (-7% y-o-y). Taking into account a potential forced restocking due to coronavirus, the lag in metal consumption by the end-use industries will amount to 4-7 months, in our view, thus pushing the negative impact on the first-use demand to 2H2020 and further into 1Q2021. Indonesia continues commissioning new NPI projects and is to increase its annual output by over 200 kt this year. We expect that the NPI production in China will shrink by approximately 160 kt owing to the lack of ore feed, while production of other nickel forms will contract by approximately 40 kt following temporary quarantine-related shutdowns. Therefore, assuming a 7% reduction in demand and relatively flat supply, nickel market, on our estimates, should develop a substantial surplus of approximately 150 kt in 2020. xEV auto market is showing promising signs of recovery mainly driven by the roll-out of European subsidies. Currently, the total announced capacities of all gigafactories to be opened in Europe by 2025, funded by both European and Asian investors, amount to over 400 GWh, which is equivalent to approximately 300 kt of nickel consumption. We remain bullish on the growth prospects of the xEV industry in the long run on the back of multibillion investments in the infrastructure and the average price of battery pack steadily falling towards USD 100/kWh. We anticipate that public transportation and car sharing will be heavily impacted by the COVID pandemic and, therefore, we expect an increase in private vehicles' use. This creates a positive momentum for the auto sales and, consequently, NEVs. NEVs are better suited for everyday commuting within city environment. Overall, we reiterate our view that the long-term growth in nickel demand will primarily come from the NEV industry, although at a slower pace than previously forecasted. Copper in 1H2020 - coronavirus-related drop in demand shifted the market into a moderate surplus; acceleration of supply disruptions in 2Q2020 and optimism related to Chinese economy reopening boosted the price back to pre-Covid levels in June. Having started the year at USD 6,200 per tonne, copper price was hammered by coronavirus crisis in 1Q2020. By the end of January the infection outbreak in China pushed the metal price down to USD 5,500 per tonne, with the price taking the second hit in March declining below USD 4,600 per tonne as the virus spread from China into the rest of the world. In April, however, copper market started to recover as China emerged from lockdown and restarted its economy. In May-June, the rally accelerated as more stimuli have been unleashed by global central banks supporting the price of risky assets, while manufacturing data from China showed promising signs of broader economic recovery. In July, copper price increased to USD 6,500 per tonne, levels not seen since April 2019. The average LME copper price in 1H2020 decreased 11% y-o-y to USD 5,500 per tonne. In 1H2020, the underlying market fundamentals were severely impacted by the coronavirus pandemic as the copper market shifted to a moderate surplus. As manufacturing activities across major economies tumbled to their lowest levels in decades, global copper demand was down 4% y-o-y. China reopened its economy after a 2 months-long strict lockdown, getting its GDP back to a growth trajectory in Q2 (+3.2% y-o-y). The GDP recovery in China was primarily driven by industrial production and fixed assets investment, all of which were supporting a rebound of copper consumption. June trade statistics provided additional evidence that the Chinese copper demand was recovering, as import of unwrought copper increased 50%, albeit also benefiting from an arbitrage opened between Shanghai and London copper prices, which made it cheaper to import the metal rather than to buy it locally. Global copper production was equally impacted by the pandemics. February started with Chinese smelters cutting production on the back of COVID-19 containment measures and scarcity of both scrap and concentrate supply. As the coronavirus hot spot migrated to the Western hemisphere a flurry of mine disruption news from Chile and Peru provided additional tightness to the concentrate market and therefore support to the copper price. Overall, we estimate that global copper supply was down 3% y-o-y in 1H2020. Exchange stocks in January-June increased by 85 kt reflecting a moderate surplus. Copper outlook - neutral; the market to develop a moderate surplus of 210 kt; global consumption to decrease 3% y-o-y in line with deterioration of broader economic conditions; China's recovery is on track supported by a new government stimulus package, but PMIs in other geographies are still weak assuming soft end-use demand in the second half of the year; global production to contract 2% following COVID-19 containment measures in Americas. We anticipate that copper market will remain largely balanced in the near-term running a marginal surplus of less than 1% (or 210 kt) of the global consumption as coronavirus outbreak will continue to have an equal impact both demand and supply sides. In spite of an overall positive market sentiment stemming from the gradual recovery of the global economic activity, the outlook for copper end-use demand does not look very promising, on our estimates. Positive data coming out from China on increasing grid investments, 5G development and durable goods sales are in sharp contrast with a major deterioration in economic conditions in the rest of the world (ex-China demand is estimated below levels seen 15 years ago). Moreover, the weakness of economic recovery outside China may negatively affect the Chinese demand itself as approximately 20% of its copper consumption is dependent on export markets. In our view, global copper demand will reduce 3% y-o-y to 22.8 mt in 2020 driven mainly by weak industrial machinery (-7% y-o-y), consumer goods (-5% y-o-y) and construction (-3% y-o-y) industries. At the same time, according to our estimates, the COVID-19 related production disruptions in Latin America and uncertainty around scrap availability in China should reduce global copper output 2% to 23.0mt in 2020 (from 23.5mt in 2019). We expect broadly balanced copper market in 2020, with a moderate surplus of 210 kt (representing less than 1% of global demand). Palladium in 1H2020 - price managed to hold its ground above USD 2,000 per ounce despite plunge in global car sales and substantially deteriorated outlook for the global automotive market; global supply reduced owing to coronavirus-related stoppages in South Africa and lower output in Russia. Palladium started the year very strongly, reaching its all-time high of USD 2,795 per ounce on February 28, 2020. The price rally was driven by the lack of ingots in the spot market and high physical demand in China driven by the roll-out of China-6 emission standards. Additional boost for palladium came from rhodium (which is often a good lead indicator for palladium price), that sky-rocketed from USD 6,000 per ounce in December 2019 to USD 14,000 per ounce in early March. Whenever rhodium is in physical shortage, car-makers are forced to increase their palladium loadings substantially. The outbreak of COVID-19 derailed the palladium price rally, with shutdowns both in automotive industry and catalyst fabrication leading to demand contraction, resulting in a sharp price decrease to less than USD 1,600 per ounce on March 18, 2020. However, as the South Africa started to halt its mines for sanitation and global central banks further loosened their monetary policies, the palladium price recovered to USD 1,800-2,000 per ounce range in 2Q2020. The average palladium price in 1H2020 increased 51% y-o-y to USD 2,136 per ounce. In 1H2020, government-imposed lockdowns across the globe caused massive losses in both auto production and auto sales. According to LMC Automotive global car sales were down 28% in 1H2020, with largest declines recorded in Europe (-37%), North America (-25%) and China (-20%). The global palladium supply was not immune to coronavirus either. Even before the infection outbreak Anglo Platinum put one of its smelters on care and maintenance for two and a half months, resulting in the reduction of refined PGM production by approximately 0.5 moz. National lockdowns introduced in South Africa hit severely palladium mined output, with exports from South Africa decreasing 29% or 240koz y-o-y in 1H2020. Even though Norilsk Nickel managed to avoid any coronavirus-related operational disruptions, its palladium production was down 17% y-o-y owing to a very high base of 2019, when previously accumulated work-in-progress inventory was released. Palladium outlook - neutral; the market is expected to be balanced this year; auto industry is likely to suffer its worst crisis in decades driving the palladium demand down 16% y-o-y; supply to decrease 14% y-o-y due to supply losses in South Africa and lower recycling. We expect industrial palladium consumption to decrease 16% y-o-y to 9.1 moz following an unprecedented contraction of end-use demand. On our estimates, car sales are expected to plunge 22% y-o-y to 70 million units in 2020, while other palladium-consumers such as dental, chemical, electronics and jewelry industries also expected to remain depressed. Given a substantial reduction in demand, consumers' stockpiles throughout the entire value chain should contribute additionally to supply, thus further reducing metal purchasing. The only visibly strong market so far is China, where after coronavirus-related restrictions in 1Q2020 retail car sales recovered strongly in April-June. However, according to analysts consensus view, there is a concern that other countries will be unable to follow Chinese recovery pace, and there is a risk that although automakers have just relaunched their factories, production could subside again if deliveries to dealerships do not pick up accordingly.
Palladium supply is normalizing as South African companies re-opened their mines though at reduced capacities. However, even assuming that some of the accumulated work-in-progress material will be released during the rest of the year, the output losses incurred in 1H2020 will not be fully recouped, in our view, and we expect the global primary supply to decrease by more than 1.0 moz this year. Recycling volumes are also expected, on our estimates, to decrease by 0.4 moz. In total, in our view, the global supply will reduce 14% to 9.1 moz in 2020. In 2021, we expect the global light vehicle sales to recover to over 82 million units (up 16% y-o-y) from 70 million units in 2020. Full recovery in recycling and primary South African supply should balance the market in 2021, with the market remaining in a balance, in our opinion. In an aftermath of the COVID pandemic, we see a clear trend towards increasing popularity of individual mobility, since people would likely to avoid less safe public transport, taxis and car sharing. Restrictions on the mass transit transportation systems as well as concerns over not meeting the minimum social distancing in a public transport should encourage personal car ownership and usage. Platinum in 1H2020 - market remained oversupplied amidst falling auto and jewelry demand; price quickly recovered to pre-coronavirus levels helped by the gold rally and mine disruptions in South Africa. Platinum price was relatively stable in January-February trading in the tight range of USD 900-1,000 per ounce before crashing to USD 600 per ounce in March. However, it recovered quickly to pre-coronavirus levels of USD 800-850 per ounce on the back of lockdown introduced in South African mining industry and the gold price rally. The ETF demand did not record any inflows in 1H2020 unlike 2019, and we therefore believe that the apparent surplus was accumulated in other non-transparent stocks. Market fundamental factors continued to deteriorate as diesel car sales underperformed both gasoline and NEV sales across all markets. Closed luxury goods stores and weak consumer confidence also severely affected jewellery sales. In 1H2020, global primary refined platinum production was also hit severely as South African mines were put on care and maintenance on March 26 for 21 days due to COVID-19. In April, the operations were re-started, but continued to operate at lower capacity utilization rates, ranging from 50% to 80%. The average LBMA platinum price increased 2% y-o-y to USD 848 per ounce. Platinum outlook - neutral; both automotive and jewelry demand are expected to decrease 20% y-o-y, in our view; substitution of palladium in autocatalysts is not happening; rationalization of supply in South Africa is expected to be put on the back burner due to strong PGM basket price performance owing to rhodium and palladium; ETFs inflows in June and July indicate some revival of investors' interest as other precious metals continue to rally. We expect platinum market (excl. investments) to remain in surplus of approximately 0.7 moz (almost 10% of the global demand) in 2020.
In 2020, we forecast that global industrial demand will decrease 17% y-o-y to 6.3 moz. The automotive demand will fall by 15%, with lower diesel car sales will be partly offset positively by higher offtake in HDD vehicles. In our view, jewelry demand will contract by 20% following overall weakness in luxury goods retail. According to our knowledge, palladium substitution with platinum, albeit being actively communicated to the public by some industry participants, has not been implemented and thus has no immediate impact on demand. We regard it rather as a long-term prospect. Moreover, refined platinum supply (incl. scrap) is highly dependent on South Africa (which accounted for approximately 60% of the global supply in 2019), the region challenged by multi-year underinvestments, electricity supply issues, and uncertainty over COVID-19 impact. This feeds, in our opinion, to consumer concerns over the long-term platinum supply availability, which, in its own turn, should result in a slower changes in the metal mix used in auto-catalysts. ETF investment demand increased to over 400koz in May-July, thus fully offsetting the fund outflows in Jan-Apr. We expect further acceleration of investment demand from both retail and institutional investors as prospects of more stimulus coming from global central banks should drive higher investment demand for precious metals overall, and platinum, in particular. Platinum supply is expected to fall 17% y-o-y to 7.0 moz, on our estimates, driven by supply disruptions in South Africa and lower recycling. We do not expect any additional supply rationalization as at ZAR/USD 17 exchange rate, high cost PGM producers can afford rhodium price decreasing to USD 3,000 per ounce and palladium to USD 1,500 per ounce before the basket price drops below break-even. The only major uncertainty remains to be the spread of coronavirus as the situation in South Africa remains challenging: as of the end of July around 3,500 mining industry workers were infected. KEY SEGMENTAL HIGHLIGHTS1
1) Segments are defined in the consolidated financial statements In 1H2020, revenue of GMK Group segment increased 3% to USD 6,080 million. The growth was primarily driven by higher palladium and rhodium prices that were partly compensated by the decrease in PGMs sales volumes and by the launch of direct sales of semi-products to KGMK Group in 1H2019. PGMs sales volumes decreased due to higher base effect in 1H2019 owing to the release of work-in-progress inventory in 1H2019. Revenue of South cluster segment decreased 33% to USD 311 million due to the launch of direct sales of semi-products to GMK Group in 1H2019. Revenue of KGMK Group segment increased nine times to USD 4,015 million due to the launch of direct sales of semi-products supplied by GMK Group segment. Revenue of NN Harjavalta increased 15% to USD 599 million driven by higher sales volumes of semi-products and higher palladium price. Revenue of GRK Bystrinskoye amounted to USD 421 million, which included sales of semi-products since the full commissioning of Bystrinsky project in September 2019. Revenue of Other mining segment decreased 47% to USD 39 million mostly owing to lower semi-products sales, which was partly compensated by higher palladium price. Revenue of Other non-metallurgical segment increased 11% to USD 719 million. Higher sales volumes from Palladium Fund and higher palladium prices were partly compensated by lower air transportation and fuel sales. In 1H2020, EBITDA of GMK Group segment decreased 51% to USD 2,003 million owing to accrual of environmental provision. EBITDA of GMK Group segment included profit from the sale of semi-products to KGMK Group segment, which was eliminated from EBITDA of the Group. EBITDA of South cluster segment decreased 33% to USD 176 million due to decrease in metal sales. EBITDA of KGMK Group segment increased almost 5 times to USD 424 million primarily owing to the launch of direct sales of semi-products supplied by GMK Group segment. EBITDA of NN Harjavalta increased by USD 19 million to USD 59 million as result of higher revenue. EBITDA of GRK Bystrinskoye segment increased by USD 117 million to USD 277 million due to higher production volumes. EBITDA of Other non-metallurgical segment decreased by USD 15 million to negative USD 3 million owing to lower air transportation and fuel sales. EBITDA of Unallocated segment remained almost unchanged and amounted to a negative USD 386 million.
1) All information is reported on the 100% basis, excluding sales of refined metals purchased from third parties and semi-products purchased from Nkomati. 2) Includes semi-products, produced by GRK "Bystrynskoe" after ramp-up of Bystrinsky project that was fully commissioned in September 2019. 3) Metal volumes represent metals contained in semi-products. 4) Includes metals and semi-products purchased from third parties and Nkomati. Includes revenue from semi-products, produced by GRK "Bystrynskoe", after ramp-up of Bystrinsky project that was fully commissioned in September 2019. Nickel Nickel sales contributed 20% to the Group's total metal revenue in 1H2020, down from 25% in 1H2019. This reduction in nickel share of metal revenue was primarily driven by increase of palladium's share in metal revenue. In 1H2020, nickel revenue was down 16% to USD 1,264 million. The decline was driven by the decrease in sales volume (-USD 220 million). Nickel revenue wasn't significantly affected by the change in average realized nickel price. The average realized price of refined nickel remained practically unchanged at USD 12,739 per tonne in 1H2020 vs USD 12,781 per tonne in 1H2019. Sales volume of refined nickel produced from own Russian feed, decreased by 14% (or -15 thousand tonnes) to 93 thousand tonnes due to lower production volume caused by pre-commissioning works of the new nickel refinery workshop at the Kola MMC, as well as the weak global demand for the metal owing to the coronavirus pandemic. Sales volume of nickel produced from third-party feed decreased 50% to 1 thousand tonnes primarily due to the decreased processing of third-party feed at Harjavalta refinery. In 1H2020, sales of nickel in semi-products decreased by 30% to USD 70 million primarily owing to lower sales volume of semi-products. Copper In 1H2020, copper sales accounted for 18% of the Group's total metal sales, decreasing 16% (or -USD 217 million) to USD 1,168 million. The decline was driven by both lower realized copper price (-USD 167 million) and decrease in sales volume (-USD 50 million). The average realized price of refined copper decreased 12% from USD 6,221 per tonne in 1H2019 to USD 5,475 per tonne in 1H2020. Physical volume of refined copper sales from the Company's own Russian feed decreased by 11% (or -23 thousand tonnes) to 182 thousand tonnes primarily due to earlier navigation break at the port of Dudinka in 1H2020. This effect was exacerbated by the reduction of output at Kola MMC due to reduction of capacity owing to unfavorable meteorological conditions in order to reduce environmental impact and lower copper production from concentrate purchased from Rostec. Revenue from copper in semi-products in 1H2020 increased 56% to USD 168 million primarily due to ramp-up of the Bystrinsky project that was fully commissioned in September 2019, which was partly negatively compensated by processing of semi-products produced by Kola MMC and NN Harjavalta at the Polar division refinery in 2020. Palladium In 1H2020, palladium accounted for 48% of total metal revenue, increasing 8 p.p. y-o-y. Palladium revenue increased 30% (or +USD 701 million) to USD 3,075 million due to higher realized price (+USD 1,053 million) which was partly compensated negatively by lower sales volume (-USD 534 million). The average realized price of refined palladium increased 50% from USD 1,406 per troy ounce in 1H2019 to USD 2,102 per troy ounce in 1H2020. Physical volume of refined palladium sales from the Company's own Russian feed decreased by 15% (or -223 thousand troy ounces) to 1,262 thousand troy ounces in 1H2020 due to higher base effect in 1H2019 owing to the release of work-in-progress inventory. Revenue of palladium in semi-products decreased 46% to USD 55 million in 1H2020 primarily due to lower sales volume of semi-products resulting from processing of semi-products produced by Kola MMC and NN Harjavalta at the Polar division refinery in 2020. In 1H2020, revenue from the resale of palladium purchased from third parties amounted to USD 367 million (vs USD 185 million in 1H2019). Platinum In 1H2020, platinum sales decreased 16% (or -USD 52 million) to USD 278 million and accounted for 4% of the Group's total metal revenue. The decline of sales volume (-USD 60 million) was partly positively offset by increase in realized platinum price (+USD 8 million). Physical volume of refined platinum sales from the Company's own Russian feed decreased 15% (or -58 thousand troy ounces) to 322 thousand troy ounces in 1H2020 due to higher base effect in 1H2019 owing to the release of work-in-progress inventory. Revenue of platinum in semi-products in 1H2020 decreased 60% to USD 6 million primarily due to lower sales volume of semi-products resulting from processing of semi-products produced by Kola MMC and NN Harjavalta at the Polar division refinery in 2020. Other metals In 1H2020, revenue from other metals increased 88% (or +USD 308 million) to USD 660 million. This was primarily driven by higher revenue from gold (+USD 164 million) mainly due to the ramp-up of Bystrinsky project, higher revenue from rhodium (+USD 103 million) primarily due to strong prices, which was partly offset negatively by the decrease in cobalt revenue (-USD 18 million) primarily owing to lower sales volume. OTHER SALES In 1H2020, other sales decreased 24% to USD 266 million. Negative impact owing to Russian rouble depreciation amounted to USD 17 million and was exacerbated by a decrease of air transportation services and oil products sales. COST OF SALES Cost of metal sales In 1H2020, the cost of metal sales increased 1% (or +USD 16 million) to USD 2,197 million, with the main impacts coming from the following changes:
Cash operating costs In 1H2020, total cash operating costs increased 7% (or +USD 127 million) to USD 1,900 million. The positive effect of Russian rouble depreciation (-USD 71 million) was partly compensated by inflationary growth of cash operating costs (+USD 13 million) and higher expenses primarily due to the pandemic (+USD 38 million). Cash operating costs increased due to the full commissioning of Bystrinsky project by USD 117 million in 1H2020.
Labour In 1H2020, labour costs increased 13% (or USD 81 million) to USD 696 million amounting to 37% of the Group's total cash operating costs driven by the following factors:
Materials and supplies In 1H2020, expenses for materials and supplies increased 15% (or USD 40 million) to USD 315 million driven by the following factors:
Purchases of refined metals for resale In 1H2020, expenses related to purchase of refined metals for resale increased 55% (or USD 105 million) to USD 297 million owing to the increase in palladium price. Mineral extraction tax and other levies In 1H2020, mineral extraction tax and other levies increased 4% (or USD 4 million) to USD 114 million driven by the following factors:
Third-party services In 1H2020, cost of third party services increased 10% (or USD 10 million) to USD 106 million mainly driven by:
Purchases of raw materials and semi-products In 1H2020, purchases of raw materials and semi-products decreased 59% (or USD 145 million) to USD 101 million driven by the following factors: palladium and rhodium prices
Electricity and heat energy In 1H2020, electricity and heat energy expenses decreased by USD 3 million to USD 74 million driven by the following:
Fuel In 1H2020, fuel expenses increased 23% (or USD 11 million) to USD 59 million driven by the following factors:
Transportation expenses In 1H2020, transportation expenses increased 21% (or +USD 8 million) to USD 46 million driven by the following factors:
Sundry costs In 1H2020, sundry costs increased 21% (or +USD 16 million) to USD 92 million mainly driven by the commissioning of Bystrinsky project and higher expenses in Norilsk industrial region. Depreciation and amortisation In 1H2020, depreciation and amortisation expenses increased 29% (or USD 97 million) to USD 437 million. Positive effect of the Russian rouble depreciation amounted to -USD 18 million. Depreciation charges in real terms increased by USD 115 million mainly due to transfers from construction in progress to production assets including the full commissioning of Bystrinsky project. (Increase)/decrease in metal inventories In 1H2020, comparative effect of change in metal inventory amounted to -USD 208 million resulting in a decrease of cost of metal sales, primarily driven by accumulation of refined metals and work-in-process in 1H2020 excluding the changes in Rostec concentrate.
COST OF OTHER SALES In 1H2020, cost of other sales decreased by USD 51 million to USD 304 million. Cost of other sales decreased primarily due to lower air transportation and fuel sales exacerbated by the positive effect of Russian rouble depreciation. SELLING AND DISTRIBUTION EXPENSES
In 1H2020, selling and distribution expenses increased 4% (or USD 2 million) to USD 57 million. GENERAL AND ADMINISTRATIVE EXPENSES
In 1H2020, general and administrative expenses decreased 3% (or USD 14 million) to USD 429 million. Positive effect of the Russian rouble depreciation amounted to -USD 24 million. Changes of the general and administrative expenses in real terms were primarily driven by the following:
OTHER OPERATING (EXPENSES)/income, net
In 1H2020, other operating expenses increased by USD 2,377 million to USD 2,359 million driven by the following factors:
FINANCE COSTS, NET
In 1H2020, finance costs increased five times to USD 481 million primarily due to a change in the fair value of cross-currency interest rate swaps y-o-y, caused by a comparative effect of depreciation of the Russian ruble against the US dollar in 1H2020 and its appreciation in 1H2019, and also due to a change in fair value of current liabilities. This effect was reinforced by the increase in interest expense on borrowings, net of amounts capitalized, by 29%, the main drivers for which were the increase in accrued interest by USD 17 million as the Company obtained new long-term borrowings in 1H2020, and the decrease in interest capitalization by USD 35 million primarily due to the commissioning of Bystrinsky GOK in September 2019.
In spite of the increase in gross debt, the effective interest rate of the Company's debt portfolio decreased owing to:
INCOME TAX EXPENSE In 1Н2020, income tax expense decreased 92% y-o-y to USD 60 million driven mostly by the decrease of profit before tax. The effective income tax rate in 1H2020 of 57.1% was above the Russian statutory tax rate of 20%, which was primarily driven by relatively low profit before tax and recognition of non-deductible social expenses. The breakdown of the income tax expense:
EBITDA
In 1H2020, EBITDА decreased 51% (or -USD 1,881 million) to USD 1,838 owing to environmental provision of USD 2,134 million that was partly offset by higher metal revenue. STATEMENT OF CASH FLOWS
In 1H2020, free cash flow increased to USD 2.7 billion. Higher cash generated from operating activities and decrease in income tax payments were partly offset negatively by more cash used in investing activities. In 1H2020, net cash generated from operating activities increased 23% to USD 3.2 billion primarily driven by higher palladium price and ramp-up of Bystrinsky project as well as decrease in income tax payments due to lower taxable profit. In spite of the reduction in the average cost of debt, interest paid was up 25% to USD 253 million following the increase in gross debt. Reconciliation of the net working capital changes between the balance sheet and cash flow statement is presented below.
Capital investments breakdown by project is presented below:
In 1H2020, CAPEX increased 10% (USD 51 million) following higher investments in mining projects, launch of the active phases of sulfur project and expansion of Talnakh Concentrator as well as the increase of capitalized repair costs. DEBT AND LIQUIDITY MANAGEMENT
As of June 30, 2020, the Company's total debt increased by 23% (or USD +2,283 million) to USD 12,127 million as compared to December 31, 2019. The gross debt increased mainly due to the draw down of long-term funds in the amount of USD 1,565 million from a syndicated loan facility, which had its funding limit increased to USD 4,150 million in February 2020 from USD 2,500 million in December 2019, as well as drawing of long-term funds in the amount of RUB 60 billion from a revolving credit facility. The Company's net debt as of June 30, 2020 changed insignificantly from December 31, 2019, due to the increase in cash and cash equivalents by 74% (or USD +2,056 million) which largely offset increase in the total debt. Net debt/12M EBITDA ratio as of June 30, 2020, increased by 0.3x as compared to December 31, 2019, to 1.2x following the recognition of environmental provision in 1H2020. On June 8, 2020, international rating agency Fitch affirmed the Company's credit rating at "BBB-" with "Stable" outlook. As of June 30, 2020, Nornickel had investment grade credit ratings assigned from all three international rating agencies, Fitch, Moody's and S&P Global, and Russian rating agency, "Expert RA". Attachment A INTERIM CONDENSED CONSOLIDATED INCOME STATEMENT (UNAUDITED) FOR THE SIX MONTHS ENDED 30 JUNE 2020 US Dollars million
Attachment B INTERIM CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION (UNAUDITED) AT 30 JUNE 2020 US Dollars million
Attachment C INTERIM CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) FOR THE SIX MONTHS ENDED 30 JUNE 2020 US Dollars million
Attachment C INTERIM CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) FOR THE SIX MONTHS ENDED 30 JUNE 2020 (CONTINUED) US Dollars million
Attachment D NET WORKING CAPITAL
This announcement contains inside information in accordance with Article 7 of EU Regulation 596/2014 of 16 April 2014. Full name and position of person making the announcement - Vladimir Zhukov, Vice - president, Investor Relations
ABOUT THE COMPANY MMC Norilsk Nickel is a diversified mining and metallurgical company, the world's largest producer of palladium and high-grade nickel and a major producer of platinum and copper. The company also produces cobalt, rhodium, silver, gold, iridium, ruthenium, selenium, tellurium, sulphur and other products. The production units of Norilsk Nickel Group are located at the Norilsk Industrial District, on the Kola Peninsula and Zabaykalsky Krai in Russia as well as in Finland and South Africa. MMC Norilsk Nickel shares are listed on the Moscow and on the Saint-Petersburg Stock Exchanges, ADRs are traded over the counter in the US and on the London, Berlin and Frankfurt Stock Exchanges. Media Relations: Investor Relations: Phone: +7 (495) 785 58 00 Phone: +7 (495) 786 83 20 Email: pr@nornik.ru Email: ir@nornik.ru
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| ISIN: | US55315J1025 |
| Category Code: | MSCH |
| TIDM: | MNOD |
| Sequence No.: | 81152 |
| EQS News ID: | 1115037 |
| End of Announcement | EQS News Service |
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