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.
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
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
ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) 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
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
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
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%.
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.
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Moody's general principles for assessing environmental, social
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At least one ESG consideration was material to the credit rating action(s)
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Denis Perevezentsev, CFA
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Limited, Russian Branch
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David G. Staples
MD - Corporate Finance
Corporate Finance Group
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