Norilsk Nickel (OTCPK:NILSY) has been experiencing very good times lately. Its revenues grew by 28% year-over-year, the EBITDA grew by 55% and net earnings increased by 44%. The net debt decreased and dividends increased. Despite all the positive developments, Norilsk's ADR price (1 common share = 10 ADRs) experienced a small decline in 2018 and although it is up year-to-date, it still hasn't broken the long-term resistance level in the $20-22 area.
Norilsk Nickel's revenues grew from $9.146 billion in 2017 to $11.670 billion in 2018. The growth was driven especially by the growth of copper and palladium production and also by the growth of nickel (22% up), palladium (19% up) and copper (6% up) prices. Especially palladium prices that reached new record highs, surpassing even the gold price, provided a very nice cash inflow. Palladium contributed to the total 2018 revenues by 34% (chart below). Further 27% of revenues were attributable to nickel and copper, 5% to platinum and 7% to other revenue sources.
As revenues grew significantly and capital expenditures experienced a decline from $1.95 billion to $1.6 billion, the free-cash-flow climbed to $4.9 billion. Also EBITDA recorded strong growth, from $3.995 billion to $6.231 billion. Norilsk's EBITDA margin stands at the 53% level, which is a very impressive number. Net earnings increased from $2.123 billion to $3.059 billion. As a result, EPS increased from $13.5 to $19.5 (from $1.35 to $1.95 per ADR, as 1 common share = 10 ADRs).
As of the end of 2018, Norilsk Nickel held cash of approximately $1.4 billion. Its liquidity was further supported by available credit lines amounting $4.3 billion. Total debt declined from $9.053 billion to $8.439 billion (by 7%) and net debt declined from $8.201 billion to $7.051 billion (by 14%).
The management seems to be neutral regarding the expected 2019 copper and nickel price development, however, it is positive about palladium. Another positive information is that after the completion of the Bystrinsky copper project, some new growth projects are being evaluated. According to the management discussion and analysis to the 2018 financial results:
The Company is also looking to make final investment decisions on some of what we consider as potentially attractive growth opportunities, while our productivity improvement program should yield further positive results.
Norilsk Nickel is relatively attractively valued right now. At an ADR price of $21.5 and earnings per ADR of $1.95, the P/E ratio stands at 11. The price-to-free-cash-flow ratio equals 6.98. Both values are quite conservative and they leave Norilsk Nickel some more room for share price growth. Moreover, if the current metals prices (especially the palladium price) prevail over the remainder of this year, the 2019 financial results should be even better compared to the 2018 results.
But Norilsk Nickel is attractive for one more reason. It implements a very generous dividend policy. The adopted principle says that at least 30% of EBITDA should be used to pay dividends. In 2018, two dividend payments occurred. In July, the final year 2017 dividend of $0.96 per ADR was paid. And in October, the interim 2018 dividend of $1.15 per ADR was paid. It means that over the last twelve months, the dividend payments equaled $2.11 per ADR. At the current ADR price, it means a very high dividend yield of 9.81%.
Given Norilsk's production mix, it is possible to expect growth of revenues and earnings, and probably also dividends, also in the following years. The good news is that all the three main metals produced by Norilsk Nickel were in deficit last year and should remain in deficit also in 2019. While the nickel market deficit is expected to decline in 2019, the copper market deficit is projected to grow from 120,000 tonnes (265 million lb) to 320,000 tonnes (705 million lb). The palladium market deficit is expected to increase from 600,000 to 800,000 toz.
While the rapid growth of palladium prices may lead to more notable supply growth in the mid-term, which may limit further price growth, the copper and nickel markets don't face this potential problem. Quite the contrary, significant supply growth is needed to meet the expected rapid growth of demand, fueled especially by automotive and battery industries. Also Norilsk Nickel wants to be a part of the revolution in transportation and it started a collaboration with BASF (OTCQX:BASFY) that will build a new battery materials factory in Harjavalta, near Norilsk's nickel and cobalt refinery.
Although Norilsk Nickel is a good, strong company, the biggest palladium producer and second biggest nickel producer in the world, there are several potential threats that have a negative impact on its share price. If Norilsk Nickel was a U.S. or Canadian company, given the quality of its assets, its market capitalization would be probably notably higher. The problem is that western investors are often afraid of the political risks related to Russia. In 2018, Norilsk's share price was negatively affected especially by the sanction fears. However, it is important to realize that although one of the major owners of Norilsk Nickel, Oleg Deripaska, was added on the sanction list, Norilsk Nickel alone cannot be sanctioned efficiently, as it controls approximately 40% of global palladium market and also a significant portion of the global nickel market. If the U.S. government decides to impose some serious sanctions on Norilsk Nickel, it may damage some of the U.S. companies, especially the car producers, that need palladium for autocatalysts.
Other potential problems are related to the complicated relations between the major shareholders of Norilsk Nickel. The biggest shareholder is Vladimir Potanin who owns almost 30.8% of shares. Aluminum producer Rusal, controlled by Oleg Deripaska, owns 27.8% shares of Norilsk Nickel. For several years, Potanin and Deripaska have been fighting for control over Norilsk Nickel. Last year, Potanin purchased an additional 2.1% stake in the company from Roman Abramovich, however, Deripaska tried to stop the transaction via a court ruling. And he was successful. But Potanin appealed the decision and the fight still continues. Although the conflict between the oligarchs hasn't had a meaningful negative impact on the company yet, this may change in the future.
Norilsk Nickel is a very profitable major diversified mining company with significant exposure to palladium, nickel, and copper, metals that are experiencing a market deficit right now. Given the expected continuation of the electric revolution in transportation, copper and nickel should do well also in the coming years. And Norilsk Nickel should do well as well. The company carries some risks that are related to the political situation, however, the willingness of investors to accept those risks is rewarded by very generous dividends. Right now, the dividend yield equals approximately 10%. Norilsk Nickel is a large-cap company and it is hard to expect some explosive gains from it, however, it should bring some reasonable capital gains supplemented by very generous dividends in the coming years.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in NILSY over the next 72 hours. 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.