Nornickel: Business as Unusual for the Russian Stock

By way of a very unusual foreword, AlphaValue is unrepentant when it comes to offering a view of Nornickel. Post the outbreak of war, only four firms, including AlphaValue, have continued their coverage of the name. AlphaValue is fiercely independent when it comes to equity research and has no conflict of interest whatsoever as it does not trade and does not sell to corporates. It defends its customers by never dropping any of its coverage as part of continuing service. AlphaValue has had its fair share of issues with Rusal’s (Nornickel’s key shareholder) governance when it initiated coverage 13 years ago with a SELL, is deeply upset by the Ukraine war but tries to navigate an impossible path between an investment opportunity ‘only’ trading in Moscow (as its UK trading remains suspended to date) and Western pressure on Russian financial assets. Nornickel is central to the world's nickel, PGM and copper supplies (which are critical for a greener global economy), and is likely to recover its leading position when the politically disastrous skies eventually clear up.

Almost one year into the Ukraine-Russia war, its economic ramifications have become brutally clear as the world is staring at a severe slowdown. Unlike the past couple of months, during which vulnerabilities in the US and Europe have been a bone of contention, now even China is in a deep mess – thanks to its COVID-19 mismanagement. While this means that the record run-up for commodities – which has been one of the best- and consistently-performing asset classes for the past two-plus years – is set for a reality check, one may also see the China-heavy diversified miners, who are balance sheet-wise very sorted, facing some tricky questions. However, one exception to the diversified miners’ woes in the AV coverage is Nornickel – which is an undisputed leader in key green transition metals such as high-grade nickel (#1; c.17% global share), palladium (#1; c.38%), primary nickel (#4; c.6%), platinum (#4; c.10%), copper (#12; c.2%) and cobalt (#12; c.2%). Post the outbreak of war, while even Nornickel has paid a hefty price (in share price terms) for its Russian patronage, it remains a c.$33bn market cap giant. It is one of the many Russian stocks that we cover.

‘Relatively’ resilient vs. its Russian counterparts

Importantly, a big validation of our pre-war confidence in the Russian giant’s assets has been its ‘relative’ share price resilience, despite the indefinite suspension of its UK trading and Moscow being the only (half) liquid market venue. Clearly, markets have sensed the ‘strategic’ importance of Nornickel’s supplies/dominance (discussed above) and hence, yet again laid bare the West’s hypocrisy as Nornickel continues to operate sanction-free. While Vladimir Potanin i.e. Nornickel’s President and largest shareholder (c.36% stake) was sanctioned by the UK and US in June 2022 and December 2022, respectively, the intent was never to clip Nornickel’s wings – as the West was already paying a hefty price for the prevalent energy market chaos.

Not bad H1 results

While the H1 22 ‘operating’ results were below our expectations, they weren’t a complete disaster – considering the firm’s Russian lineage. Also, the top-line and bottom-line beat vs. consensus was 8% and 47%, respectively. Sales were $9bn (flat yoy), with reversion to normal operations – after the H1 21 disruption, and higher prices (ex. palladium and platinum) being offset by logistical disruptions. The ‘reported’ EBITDA was down 16% yoy to $4.8bn due to much-higher costs but the margin was >50%. While net attributable profit was up 23% to $5bn, it was a big beneficiary of stronger rouble-induced foreign currency debt revaluation gains. ‘Reported’ OCFs were $2.8bn (+18%), despite working capital use of $1.7bn as the comparable period had been impacted by Arctic disaster-related environmental headwinds. The capex binge was sustained, with an H1 spend of $1.8bn (+86%). 

Net debt increased materially to c.$10bn (vs. c.$5bn at 2021-end) due to lower FCFs and 2021 dividend payments. Importantly, the company continued to ‘duly service’ all its debt obligations, although risk of late (coupon) payments due to clearing and/or payment infrastructure bottlenecks were flagged. Fortunately, near-term liquidity was $5.4bn, comprising $2bn of cash and $3.4bn of credit facilities, thereby quelling financing concerns.
Interestingly, despite the animosity towards Russian companies, Europe still accounted for 49% of group sales (vs. 51% in 6M 21), and the share of ‘North + South’ American sales was 19% (vs. 17% in H1 21). In effect, legacy customer ties remained intact.

Intriguing market dynamics

One of the biggest and direct beneficiaries (in the commodities space) of the war has undoubtedly been nickel, which is pivotal for EV batteries and where Russia/Nornickel (at present) is a key supplier. No wonder the outbreak of war resulted in nickel market chaos and, suddenly, prices galloped to c.$100k/t, after trading in the range of $10-20k/t for most of the past decade. While a wrong bet by a Chinese firm (i.e. Tsingshan) was the reason for a short squeeze and prices have subsequently normalised to around c.$28k/t, they remain high and both buyers-suppliers are worried about a repeat of the market mayhem. As a result, Indonesia – which has the majority (c.25%) of the world’s nickel reserves – recently floated the idea of an OPEC-style cartel for nickel and other key battery metals. But besides Russia, Australia and Canada are other key nickel producers; hence, reaching a consensus is far from straightforward. This means that supplies are likely to remain unpredictable/tight, which is good news for Nornickel as efforts to reduce Russian dependence would take many years of heavy investments and critical government negotiations – as environmental clearances (key for newer initiatives) have been really tough to secure in recent years.

On the other hand, Nornickel is now open to merger talks with Rusal which already owns a c.25% stake in Nornickel. This is an essential development, given the legacy of bitterness between their respective largest shareholders i.e. Vladimir Potanin and Oleg Deripaska. While there is no commodity overlap between the two firms, a bigger Russian natural resources giant would only further the Kremlin’s strategic priorities. Also, from an operational standpoint, there should be benefits for both: with Nornickel gaining access to Rusal’s liquid Hong Kong listing and Rusal having access to Nornickel’s healthier and more predictable cashflows and, hence, better ability to service debt. Lastly, with En+ being a key shareholder in Rusal (via a c.57% stake), access to cheap energy via its well-run Energy arm is another probable advantage vs. peers dependent on external energy vulnerabilities.

More importantly, while the petro-yuan (a Chinese oil trading currency) was introduced in 2018, perhaps now, when both China and Russia have been cornered by the West on a host of issues, this alternative oil trading payment mechanism stands its best chance of witnessing growing acceptance. Moreover, its replicability for key base metals, where China is an undisputed consumer – >40% global share for many commos – cannot be ruled out, which again should be reassuring for the likes of Nornickel. 

There’s substantial value, provided one has the appetite

While Nornickel has recovered well in recent months, the upside on offer is c.30% – with sizeable value for the fundamental metrics (+37%-69%), despite taking on board Russian patronage risks. Moreover, its ability to ensure exceptional shareholder rewards (perhaps as good as the Aussie miners), despite an ambitious capex plan, remains a re-validation of its exceptional cash generation capabilities. While investors may prefer to ignore Nornickel’s attractions – fearing the obvious risks - they simply can’t prevent the firm’s metal output having a clear impact on (green) businesses in which they are heavily invested. 

Analyst - Varun Sikka

Contact - metalsmining@alphavalue.eu