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Rating Action:

Moody's changes Norilsk Nickel's outlook to negative; affirms Baa2 ratings

18 Dec 2020

London, 18 December 2020 -- Moody's Investors Service, ("Moody's") has affirmed the Baa2 long-term issuer rating of MMC Norilsk Nickel, PJSC's (Norilsk Nickel), one of the world's leading producers of refined nickel and palladium. Concurrently, Moody's has affirmed the Baa2 senior unsecured rating of MMC Finance DAC, a company incorporated as a designated activity company under the laws of Ireland, for the sole purpose of financing loans to Norilsk Nickel. The outlook on the ratings of Norilsk Nickel and MMC Finance DAC has been changed to negative from stable.

RATINGS RATIONALE

The affirmation of the ratings reflects the company's significant share in the global production of nickel, palladium, and low-cost production profile, long life reserves and high product diversification because its mineral deposits contain nickel, copper, palladium and platinum. The affirmation also reflects high profitability, backed by a weak rouble and low costs because of its unique multimineral ore deposits, low leverage and strong liquidity, long-term debt maturity profile and easy access to local and international capital markets. The important role which Norilsk Nickel plays in global energy transition as refined nickel is used in the majority of electric vehicle batteries, was also among the reasons to affirm the ratings.

Moody's estimates that the company will generate over $8 billion of EBITDA in 2020 and between $5.5 billion and $6.5 billion in EBITDA per year in 2021 and 2022 based on a range of conservative price scenarios for nickel and copper of $11,500-$13,200 per tonne and $5,500-$6,000 per tonne, respectively, as well as conservative price scenarios for palladium and platinum of $1,500 per ounce and $850 per ounce, respectively. Moody's estimates that the company's leverage, as measured by Moody's-adjusted debt/EBITDA, will amount to 1.2x by year-end 2020 (year-end 2019: 1.2x) and will grow to 1.7x-2.0x by year-end 2021 and 2.1x-2.3x by year-end 2022 under a scenario assuming conservative price assumptions for its key metals and that it will pay the $2.1 billion fine estimated by Russia's Federal Service for the Supervision of Natural Resources (Rosprirodnadzor) for the damage caused by the diesel fuel spill in full in 2021. That level of leverage is still below the 2.5x quantitative trigger for a downgrade. It remains to be seen whether the company would be willing to modify its substantial dividend distributions to maintain a stronger credit profile under this scenario taking into account growing capital spending of up to $3.2 billion in 2021 and up to $3.8 billion in 2022 (2019: $1.4 billion). Moody's expects dividend payments of up to $3.9 billion-$4.2 billion in 2021 and up to $2.7 billion-$3.9 billion in 2022 under a range of conservative price assumptions.

The changing in outlook to negative reflects Moody's concerns over the company's internal controls and corporate governance practices, which seem to have not been sufficiently stringent enough given the chain of environmental accidents that have occurred in 2020. Moody's recognises the changes the company has introduced as a result of the accidents along with the company's success in reducing its sulphur dioxide footprint over the last few years and its well articulated strategy to modernise the company's assets base with a focus on reducing its environmental footprint further, as evidenced by a forecast growth in capital spending plans in 2021-25. Although the damage amount estimated by Rosprirodnadzor of about $2.1 billion, which the company is challenging in court, in itself does not represent a material risk to the company's credit profile even if paid in full, the growing capital spending in 2021-2025, part of which will be dedicated to further reducing the company's sulphur dioxide footprint, coupled with quite substantial dividend distributions, and lower profitability due to higher mineral extraction tax rate effective from 2021, could lead to credit profile weakening over the next 12-24 months.

Norilsk Nickel had strong liquidity as of 1 December 2020, comprising about $5.4 billion in cash, more than $2.8 billion in available credit facilities and more than $5 billion in operating cash flow, which Moody's expects the company will generate in 2021 under a range of price scenarios. This liquidity will cover short-term debt maturities of around $0.1 billion due in 2021, capital spending of up to $3.2 billion and dividend payouts, which Moody's estimates in the range of $3.9-$4.2 billion in 2021. Beyond 2021, Norilsk Nickel is due to repay around $1.9 billion maturing debt in 2022, $3.6 billion in 2023 and $4.4 billion in 2024 and beyond. This liquidity will also be sufficient to cover the payment of the diesel fuel damage fine, the amount of which will be determined by the court in the future but which is unlikely to exceed Rosprirodnadzor's estimate of $2.1 billion.

RATIONALE FOR THE NEGATIVE OUTLOOK

The negative rating outlook reflects Moody's view that following a number of accidents that took place in 2020, including the diesel fuel spill, and the steps the company has had to take to strengthen its internal controls and corporate governance weaknesses, the company may be exposed to having its Baa2 rating deteriorate over the next 12-18 months unless it follows through on balancing its shareholder remuneration policies characterised by substantial dividend distributions with the increased investment it has already identified and may need to increase further in conjunction with addressing the further environmental and maintenance investments that will be needed in response to the increased controls introduced in this area amid elevated capital spending plans in 2021-25 while the company's profitability will be negatively affected due to higher mineral extraction tax effective from 2021.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Moody's does not expect any positive rating pressure over the next 12-18 months. Moody's can stabilise the outlook on the ratings if the company improves its internal controls and corporate governance practices, while demonstrating the track record of adhering to a balanced financial policy amid higher capital spending plans. Moody's expects to be able to assess whether the mitigating actions taken by the company to address its environmental challenges and related governance practices are effective over the next 12-18 months.

Moody's could downgrade the ratings if it were to downgrade Russia's sovereign rating or lower Russia's Baa2 foreign-currency bond country ceiling, or if the company's (1) Moody's-adjusted total debt/EBITDA was to have a trajectory of increasing towards 2.5x on a sustained basis; (2) post-dividend FCF were to remain negative on a sustained basis; or (3) operating and financial performance, market position or liquidity were to deteriorate materially. Norilsk Nickel's ratings could also be downgraded if the company's actions to improve its corporate governance and internal control practices prove not effective, including the track record of material environmental accidents recurring.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) CONSIDERATIONS

Environmental considerations

Norilsk Nickel is exposed to environmental, social and governance issues that are typical for a company in the mining sector. The environmental risks include, but are not limited to, air, soil and water pollution as a result of the processes used in the mining, processing and smelting of metals. Moody's generally views these risks, including water shortages and man-made hazards, as very high for mining companies. Such hazards may include wall collapses at the company's open-pit mines, flooding, underground fires and explosions, and cave-in or ground falls at underground mines. The city of Norilsk is the primary area affected by the multifaceted operations of the company's Polar division. In this area, 54 pollutants are emitted into the air. The key pollutant is sulphur dioxide, accounting for 97% of all emissions (1.9 million tonnes in 2018, up by 4.7% from 2017 and down by 7.6% from 2010). Reduction in air emissions (especially those of sulphur dioxide and dust containing non-ferrous metals) is the key environmental objective pursued by the company. The total investments aimed at improving the company's environmental footprint are about $4 billion for 2013-22. Notable projects include the shutdown of the nickel plant (2016), which, together with the upgrade of the Talnakh concentrator and ramp-up of smelting capacities at the Nadezhda metallurgical plant, led to 30%-35% lower sulphur dioxide emissions in the residential areas of Norilsk. The sulphur dioxide-capturing project, which is being implemented at the company's Polar division since 2017, continues the company's focus on air emissions reduction and will allow to lower sulphur dioxide emissions in Polar division by 90% by 2025, compared with that in 2015 (Sulphur Programme 2.0 with the capital spending of about $3.6 billion).

Rostekhnadzor stated that the accident was the result of internal control weaknesses at the company, among other reasons, which led to excessive wear and tear of HPP-3's equipment. Shortly after the accident, a few criminal cases were filed against HPP-3's management. Investigators detained several of the plant's employees, including its general director and chief engineer. The company's investigation, supported by the assessment made by ERM, one of the leading global independent ESG consulting firms, led to the conclusion that the key reasons for the accident were the flaws in the design and construction of the fuel storage tank, which was built in 1985. After undergoing capital repairs in 2017-2018 the tank went through hydraulic testing and industrial safety audit in 2018, however, the permafrost thawing led to the collapse of the diesel tank's supporting pillars.

Jointly with Rosprirodnadzor, once the accident occurred, Norilsk Nickel has embarked on a remediation programme, moving contaminated soil and water to a special storage facility. Special containment lick bars have been installed in the Ambarnaya River to minimise the spill from spreading downstream.

On 10 September 2020, Rosprirodnadzor filed a claim to the Arbitrage court of Krasnoyarsk region requesting to pay damages of RUB148 billion ($2.1 billion) for the environmental harm caused by the accidental spillage that took place in May. On 5 October 2020, NTEC (a subsidiary of the company) submitted to the court a response to the claim with its own estimate of the damage amounting to RUB21.4 billion (around $0.3 billion) referring to the incorrect damage assessment.

Governance considerations

Governance risks are an important consideration for all debt issuers and are relevant to bondholders and bank lenders because governance weaknesses can lead to a deterioration in a company's credit quality, while governance strengths can benefit its credit profile. The corporate governance risks are mitigated by the fact that Norilsk Nickel is a listed company and demonstrates a high level of public information disclosure. The risk that Norilsk Nickel might favour shareholders' interests over debt providers' amid substantial dividend distributions is mitigated to some extent by the company's financial policy with clearly articulated levels of dividend distributions aligned with the company's net leverage. Corporate governance is exercised through the oversight of independent members, which make up seven out of thirteen seats on the board of directors, chaired by the independent director, as well as via the relevant board committees.

There has been a number of corporate governance enhancements in response to the diesel fuel spill accident, including a set-up of environmental task force team reporting to the chairman, management risk committee chaired by the company's president, environmental department to ensure internal oversight of the environmental matters. Subsidiaries have been granted greater autonomy as far as the capital spending is concerned to ensure investment flexibility in tackling near-term investment needs.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Mining published in September 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1089739. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Norilsk Nickel, Russia's largest mining company, is one of the world's leading producers of refined nickel and palladium. The company's principal activities are exploration, extraction, refining and the sale of nickel, copper, palladium and platinum. Its major production facilities are located in the Taimyr and Kola peninsulas of the Russian Federation, and in Finland. For the last twelve months ended 30 June 2020, Norilsk Nickel generated revenue of $14 billion and Moody's-adjusted EBITDA of $8.4 billion. Norilsk Nickel's major shareholders are Olderfrey Holdings Limited (which controls 34.2% of the company's share capital as of September 2020) and UC RUSAL, IPJSC (Ba3 stable, 27.8%), other shareholders hold 38%.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Denis Perevezentsev, CFA
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Limited, Russian Branch
7th floor, Four Winds Plaza
21 1st Tverskaya-Yamskaya St.
Moscow 125047
Russia
JOURNALISTS: 44 20 7772 5456
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David G. Staples
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

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No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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