Norilsk Nickel: Holding Despite Weak Expectations

| About: MMC Norilsk (NILSY)

Summary

Volumes of Norilsk Nickel production are on the level of management forecasts for 2016.

I expect weak result for the 1H 2016, but it is already taken into account by the market.

Prices for basic products Norilsk Nickel are growing, so 2H 2016 should be much better.

I expect dividends for 1H 2016 in the range of $ 0.39- $ 0.58 per ADR.

Norilsk Nickel (OTCPK:NILSY) has announced its production results for 2Q2016 and 1H2016. The report for 1H2016 itself should be published in the end of August. Although NILSY gives a production data quarterly, I will use half-year data for better understanding of what results we can see in reports.

Nickel

The total value of production in 1H 2016 is around 122,000 tons, which is for 7% lower than the same period in last year. Company explains such decrease by closing an old Nickel Factory during the continuing within the ongoing restructuring of the concentrating and smelting operations in the Polar Division. However, in general, relative to the 2H2015 the growth amounted to 11.5%.

Prices for raw materials, which NILSY produces, in 1H 2016 were lower than in 2H 2015. The average price of nickel has fallen from $ 10,044 to $ 8,692 per ton, or by 13.5%.

Copper

The total production of copper in 1H2016 totaled 177,000 tons of copper, which is for 3% lower than in 1H2015, but also better than in 1H2016 (for 11.5%). The average copper price for 1H2016 has decreased by 7.7% to $ 4,676 per ton.

Palladium and platinum

At the end of 1H2016, the production of palladium and platinum was 1.33 million ounces and 333,000 ounces, which is higher than in 2H2015 (for 20.5% and 33.7% respectively), but lower by 2% than in 1H2015. Weighted average prices were also lower than in 2H2016.

Expectations on Reporting

In general NILSY has focused on maintaining profitability, and not on the growth of manufacturing. The company is closing inefficient plants, finishing the sale of the main non-core assets and modernizing existing enterprises.

As you can see, the average volume of manufacture of NILSY products is still at the same level, at the same time the company faced minimum prices for nickel, copper and palladium in the 1H 2016. Accordingly, the company's results will be worse than in 2H 2015. However, the decline in primary commodity prices is partially offset by the strengthening of the ruble. At the end of 1H 2016, I expect the fall of revenue for 9% compared to 2H 2015 (to 3.3 billion dollars) and a decrease of EBITDA for 3.5% (to 1.5 billion dollars).

I think these data are already included in the share price, so there shouldn't be any surprises for market. The more important question is: whether can continue the rise in prices for raw materials, or at least remain at current levels. If so, then the NILSY shares are still a better bet for this growth.

The expected deficit in 2016-2017 at the nickel and palladium market at the background of reducing of inefficient capacities should give additional support to prices. Norilsk Nickel itself estimates the volume of world nickel consumption the same as 2015 year level (1.9 million tonnes) with a deficit of approximately 70-90 thousand tons.

Dividends

Last year, the Board of Directors made its recommendations on dividends for 1H 2015 on 4-th of August, 2015. Accordingly, pretty soon you can expect some clarity on this point. Based on the approved new dividend policy, the company can direct on payment of dividends 60% of EBITDA. Based on this logic, we get a dividend of $ 0.58 per ADR, which makes about 3.9% to the current market rate of return. But I think this is the upper ceiling. In fact the management of the company will insure itself for the case of resumption of the fall in prices of raw materials and, currently, will prefer to pay somewhat less now and pay the rest on the basis of 2016 results. In prior periods the company paid at least $ 0.45 per ADR, however, against the background of weak results for 2H 2015 the company approved a total $ 0.39 per ADR. 1H 2016 will be even weaker, but I think that 0.39 $ per ADR can be considered as the lower boundary. In this case, the dividend yield will be 2.6%.

I continue to stay long on NILSY, because I consider it as the strongest player in the sector. The advantages of the company are: a) The low cost of production, b) an acceptable debt, c) a clear dividend policy, d) regular dividend payments for at least 2 times a year. In addition the rise in nickel prices as a consequence of the deficit will act as an additional catalyst for the growth of financial indicators, and, then, the capitalization of Norilsk Nickel.

Disclosure: I am/we are long NILSY.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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