Nornickel expects significant working capital release by year-end, but new sanctions bring uncertainty - sources

MOSCOW. Aug 26 (Interfax) - MMC Norilsk Nickel expects significant release of working capital by the end of 2024, in which case it can expect positive adjusted FCF, although new sanctions bring uncertainty, the Russian mining and smelting giant's managers said on Monday during a conference call for investors following the IFRS reporting for the first half of the year.

Several sources familiar with the content of the call told Interfax about the main talking points.

A Nornickel representative declined to comment, citing the closed format of the call.

Net working capital increased 20% since the start of the year to $3.7 billion, driven mostly by the accumulation of saleable metal inventory owing to logistics issues, including in the Red Sea, as well as the increase of receivables caused by difficulties with cross-border payments.

Working capital release is already actively underway, Nornickel executives said, however, a headwind in the form of a slowdown in China, which is affecting nickel and copper prices, cannot be ruled out. Asia was Nornickel's biggest market with a 52% share in H1 2024.

In addition to low prices for base metals, the situation is complicated by problems with logistics and payments and high interest expenses, which creates the conditions for a perfect storm, the manager said. This is compounded by the U.S. sanctions against Bystrinsky GOK, which supplies copper and iron ore concentrates to China. Bystrinsky's contribution to consolidated revenue is at least 10%

The sanctions against Bystrinsky need further evaluation, and this factor may affect ability to release working capital, the manager said during the call. Much depends on how the Chinese partners behave, a person present on the call told Interfax.

Most of the sanctioned Nornickel divisions are not directly related to operating activities, but the restrictions may worsen the situation with logistics and cash transactions, said Vasily Danilov from Veles Capital.

The release of working capital might slow if logistical and transactional difficulties persist under the influence of the recent sanctions, Danilov said. In this regard, he does not expect interim payments for the first half of 2024 and considers there is little likelihoods of 9M dividends being recommended. Final dividends for 2024 are possible at around 8 rubles per share, implying yield of 6.9% against current quotes, in accordance with dividend policy, which is at least 30% of EBITDA for the year, Danilov said.