Page 132 - RusRPTNov22

RusHydro is the prime beneficiary of deregulation in the Far East. As previously highlighted, cost-based tariffs in the Far East lead to suboptimal situations. For example, rising cost of fuel cannot be instantly passed on to the end-users resulting in losses. Since 3Q21, RusHydro is facing major fuel cost inflation. Hydro stations will be able to get higher prices if liberalization covers all generation. However, liberalization will not be quick – it may take years to fully liberalize the market, hence the impact on financials will be gradual as well. We keep our Sell for RusHydro, however will watch for potential positive changes to make respective amendments to our models.
9.2.11 Mines and Minerals - gold & diamonds
Alrosa confirms exploration plans for 2022, says the company’s Chief Geologist Konstantin Garanin. Alrosa will invest up to Rb8bn in exploration – similar to previous years’ spending. The company uses mainly domestic equipment for geological exploration such as drilling rigs and heavy machinery. However, there are risks in terms of software and laboratory equipment that are mainly imported, Garanin admitted.
Alrosa may slightly exceed the production guidance for 2022, Interfax reports citing CEO Ivanov. The company is also preparing to start restoring of the Mir mine. To remind, Alrosa's production target for this year is 34-35mn carats (+6% y/y). The miner expects to produce about the same amount in 2023, Ivanov said in September.
9.2.12 Mines and Minerals - steel & iron
NLMK may lose 18% of steel output amid new sanctions. European Union has imposed a ban on slabs and square billets produced in Russia. The embargo will come into force for a square billets on 1 April 2024, for a slab — on 1 October 2024. Until then, quotas for slabs and billets are imposed approximately at the level of current export volumes. European market accounts for nearly a third of NLMK’s slab deliveries primarily because of existing European assets. Once the EU’s ban on Russian semis comes into force, NLMK would likely face issues with redirection of 2.4mt of slab to other markets. We believe local steel consumption is unlikely to recover in 2 years to offset those losses.
Mining segment may also be affected. NLMK's iron ore production should decline (provides c30% of total EBITDA) as steel production falls and logistics issues limit export capabilities. Another headwind may arise from the competition with Metalloinvest.
Worst case scenario: 2025e sales/EBITDA/profit seen down 14/11/14%. This
132 RUSSIA Country Report November 2022 www.intellinews.com