Page 126 - RusRPTMay19

6%, as upside potential from better geological model reconciliation and softer ore was achieved (see our Polymetal International; Kyzyl site visit, of 22 October 2018). The company expects to update its mine plan to incorporate better mining conditions in 4Q19.
● Steel
Russian steel mill Novolipetsk Metallurgical Kombinat (NLMK) has reported a mixed 1Q19 trading update. Sales volumes were supported by additional volumes realised from the inventory (lagged from the fourth quarter of 2018). However, this was partly offset by a slightly worse overall mix, as well as a 4% q/q decline in steel output on maintenance works. This is to fall further in 2Q19, as the refurbishment of BF#6 kicks-off, suggesting that 2Q19 onward volumes might be some 10% below those in 1Q19. Inventory release supports volumes. Output of crude steel and steel products were down 4% q/q, below our forecasts due to maintenance in steelmaking. However, sales volumes were largely flat q/q, and 7% better than we had expected, mainly due to higher slab and flat export deliveries realisation (from the fourth quarter of 2018). Volumes greater than we had forecast were only partly offset by worse mix (share of HVAs were down only 0.3pp q/q), and therefore, the numbers were supportive for the top line. At the same time, lower steel output in 1Q19 might put upward pressure on cash costs. Raw materials output reflects lower steel production. Resources output was on average 4% above expectations, despite the fact it was down q/q, in line with reduced needs from the NLMK steel mill. 1Q19 sales volumes peak as blast furnace #6 refurbishment starts in 2Q19. While the reported numbers might be slightly supportive for 1Q19 vs. our initial expectations, we still expect EBITDA to fall some 20% q/q due to lower prices (unlikely to shock the market). Due to the 300kt+ decrease of the still products inventory, FCFE might be additionally supported by the respective working capital release, suggesting 1Q19 DPS could see just a slight reduction vs. the fourth quarter of 2018. Given NLMK is to start a major overhaul of blast furnace #6 in May, our focus is on the company’s outlook for the magnitude of the 2Q19 output reduction, as well as the associated decrease in needs/output of iron ore.
Russian metal majors NLMK posted revenue decline of 5% quarter-on- quarter in 1Q19 to $2.87bn, with Ebitda down by 18% q/q to $695mn, and net profit down by 25% q/q to $382mn. Top line and earnings of the company missed expectations of the analysts in the reporting quarter. However, the company showed a 35% q/q surge of free cash flow to $678mn due to a $262mn working capital release on inventory reduction and low capital spending. “Overall, despite the mixed results, we see the report as mostly neutral,” BCS Global Markets commented on April 24, noting a huge outperforming on free cash flow. NLMK confirmed the previously announced dividend payout ratio of 100% of FCF, with the total dividend for the quarter possibly increasing by 28% to RUB44bn. For 2018 the company would pay about $2.03bn in dividends, out of which about $1.7bn would go to Fletcher Group Holdings Limited of Vladimir Lisin owning 84% in NLMK, Vedomosti daily estimated on March 5. But, the FCF could erode in the coming quarters as capex that declined by 29% q/q to $178mn in 1Q1 is expected to increase starting from the second quarter. In addition, going forward, the company expects steel production to decline by 6-8% q/q in 2Q19 due to maintenance works.
Russian steel mill Severstal published a 1Q19 trading update on April 11 that was in line with expectations. Steel sales volumes grew 3% q/q to
126 RUSSIA Country Report May 2019 www.intellinews.com