PJSC Mining and Metallurgical Company Norilsk Nickel

Hello, everyone, and welcome to our company, Norilsk Nickel 2019 IFRS Financial Results Conference Call. Let me introduce the speakers for today.

This will be Sergey Malyshev, Senior Vice President and Chief Financial Officer; Sergey Dyachenko, First Vice President, Chief Operating Officer; Sergey Dubovitsky, Vice President, Head of Strategy and Strategic Projects; Anton Berlin, Head of Strategic Marketing. It's now my pleasure to pass the microphone to Sergey Malyshev, Chief Financial Officer.

Good afternoon. Let me start with key financial highlights of 2019.

Consolidated revenue increased by 16% year-on-year to $13.6 billion, primarily driven by high palladium, nickel and rhodium prices. In addition, we increased production volumes of all base metals, but this effect was partly offset by lower prices for copper, platinum and cobalt.

EBITDA expanded by 27% year-on-year to $7.9 billion, owing to higher revenue, productivity gains and ramp-up of Bystrinsky project. The negative factors, inflation and one-off provision for shutdown of certain Kola production facilities.

EBITDA margin amounted to 58%. In terms of profitability, we remain one of the leaders among the global despite mining measures.

Net working capital amounted to $1 billion, in line with medium-term target level. CapEx decreased by 15% year-on-year to $1.3 billion.

Free cash flow was flat year-on-year at $4.9 billion. EBITDA growth and lower CapEx was offset by increase in income tax payments.

Net debt-to-EBITDA ratio decreased to 0.9x as of December 31, 2019. In February 2019, the Moody's International Rating Agency increased our credit rating to Baa2 with a stable outlook.

The company continues to maintain investment-grade rating from all 3 major agencies. Total interim dividends amounted to $3.7 billion and paid in October 2019 and January 2020.

And let me pass the floor to Mr. Dyachenko.

Good afternoon, everyone. My first slide, 4, is on health and safety update for 2019.

As you can see on the slide, we gradually reduced our lost time injury frequency rate from what it was in 2013 at 0.8 to 0.32 in 2019 as a result of gradual reduction in the number of accidents from 2013 to 2019 by some 58%. 2019 wasn't quite good for our company with regards to the safety statistics.

Unfortunately, we sustained 9 fatalities, and there was a slight increase in the lost time injuries in the company. And at the same time, we continue with our program, building strong safety culture and implementing all safety stance within the company.

Slide 5 talks about our major standards. That's the -- regarding transportation and pedestrian safety, working at heights, isolation of energy sources and rock fall.

For each of these standards, we've got the quite comprehensive program. And these programs actually already indicated the good results with regards to the reduction number of incidents and accidents.

Slide 6, we still show the -- probably the lowest lost time injury frequency rate in the mining industry. And we continue with external audits on our safety culture.

Last year, we had external audit done by Bain & Company. And we invited all the participants from majors, from Rio Tinto and Anglo American and from the actual operations.

And by doing this, we scored 2.8 on Bradley Curve, which shows gradual improvement in our safety culture. And our strategic objectives remain 0 fatalities, and we do continuous improvement with our goal to reduce lost time injuries by 15% every year.

Slide 7 talks about our tailings dams. And that's in relation we see the latest events in the mining industry.

That was done with the request from Church of England Pension Fund -- Pension Board. And we actually demonstrated first time we operate 6 tailings dam, and Kola Peninsula and Polar Division Taymir Peninsula and our new operation, Bystrinsky project.

We stated all tailings dams built in -- and operate was in one designed parameters. Every unit got a special team -- task team that monitor performance of these tailings dams.

And we also stated we didn't have environmental accidents for the last 5 years. Why 5 years?

Because that's during -- the terms in the seat, and we can actually know the quote for last 5, 6 years. And we didn't have the E&E sightings from the government bodies with regards to the operations of these tailings dams.

So that's with regards to Slide 7, and I give the floor to Vladimir Zhukov on the ESG.

As you may know, what Sergey Dyachenko just discussed, it all sort of adds up to what's called ESG, environmental, social and governance, and this is something, as you can appreciate, is really at the top of our management agenda and it's been there already for the past 5 to 6 years. We are aware that our ESG efforts are assessed independently by various dedicated rating agencies.

And here, we show you a few sort of charts and most recent ESG rating updates that illustrate that -- improvements in our ESG performance as -- which we have been just communicated to you, have been duly appreciated externally and reflected in the improvement of various ESG ratings such as Sustainalytics, MSCI and a number of others. Now it's my pleasure to pass the microphone to Anton Berlin, Head of Strategic Marketing.

Our market section starts at Slide 10 with a look at the macro environment that we do find a bit challenging. China decline was expected to be on the downside.

But now, with the coronavirus, the downside risk is larger than it was a few months ago. It is important as China is the biggest consumer of base metals, consuming roughly half of global nickel and copper output.

And it is a sizable market for the precious metals at roughly 29% in platinum and almost 1/4 of global palladium. So if we look at the metal market fundamentals on Slide 11.

The markets are very sustainable to us. The nickel market is really balanced.

We think that a surplus of 40,000 tonnes is not meaningful to market, which is over 2 million tonnes. The stockpiles are at a typical level, historical average for this market.

Midterm, we see this market as flattish. But in the long run, we are bullish on the fundamentals of the nickel market.

Copper, we have a flattish view both midterm and long term. We think it's fairly balanced.

And through the history of this market has proved that it's very mature, very well balanced, and it's -- continue -- expect to continue as this. With the palladium market, we have seen incredible developments and we still have a bullish view on this market.

We are in the deficit for quite some period of time. We see the deficit increase in this year as last year, there was a one-off increase in supplies.

Quantities, the platinum market is in a surplus, although not too excessive. In 2019, this was relieved by very good demand from the investment community through EPS.

This year, we don't know if it happens, so it's not reflected in the market balance. And outside investment, it could be a surplus.

But of course, investment to platinum might change the landscape. If we dive into the nickel market, Slide 12.

The stock exchanges, which are the most notable reflection of the market downs, have done quite a twist. There was a sharp decline in the LME stocks in 2019, which was rather technical as will be covered further on, and most of the network has returned.

So in effect, the stockpile levels are similar to what they were end of 2018. The nickel inventory moved to a normal level for a rather short period of time.

But if we look at the historical average, the current market is really at its historical averages. For copper, the inventories are much lower on a relative basis, just a few days of global consumption.

And the current stocks is still 1/3 of what they were at the peak when the market was in heavy surplus. If we look at what's driving nickel demand, Slide 13.

Stainless remains the biggest sector for the nickel market. We had good growth in China last year.

9% is the growth for the 300 series, which is a nickel-heavy type of stainless steel. And there are not so many asset that can show a number like this in growth.

There was high increase of nickel into China in 2019, and this includes both ore and ferronickel. So one is a product that can be used for stainless steel.

Immediately, the other is a source of material that has to be converted before becoming feed for stainless. In 2020, we expect the growth in stainless will continue, although the number would be less impressive.

We still have to wait for the impact of the coronavirus. It may slow down things a bit.

But prior to this, we expected growth in China as well as Indonesia. And percentage-wise, the Indonesian growth is very high double-digit.

And as long as China is growing, we are in the safe side. Batteries are another exciting sector in nickel, Slide 14.

It's not a big part of the chart yet, but we are strongly convinced that in a few years, it will become second to stainless only. And it is driven mostly by electric vehicles.

The positive drivers for the nickel market are double sided. There's the growth in the number of vehicles, and there is evolution of the chemistry of the batteries that is turning more towards higher content of nickel displacing other chemical elements.

If we look at the growth that is going on, the percentage is very volatile. 2018 was 64% growth, incredible.

2019 was lower, but that's because subsidies were canceled in China. For 2020, we expect, again, very high growth.

But it's really driven more by hybrid and battery-electric vehicles. So it's not the same huge impact for the nickel demand.

The nickel demand in this sector is expected to grow only 8%. But in the long run, this is a very sustainable continued growth.

The electric vehicles and the hybrids are important to allow car companies to comply with the climate change regulation, and this market will continue to grow. So if we look at the overall nickel market balance, Slide 15.

We believe that this market is balanced, and we expect this to continue into this year and next year. China and stainless are one of the biggest drivers in this market.

The batteries are second to stainless. On a relative basis, a percentage higher, but because of the lower base, in absolute numbers, it's a smaller increase.

On the supply side, most of the growth is happening with the stainless steel grade of nickel that's mostly NPI. The growth in other forms of nickel that is suitable for other types of production is not as impressive.

We have some increase in Class 1 nickel and chemicals driven by batteries, but it's more as [indiscernible] to the stainless steel grade. Moving to copper, Slide 16.

This market is not as exciting. There are not so much things that change.

Typically, the biggest change in this market is the disruptions in the mining, meaning actual production versus planned. The historical average is about 5% or 6%.

Last year, it was 4%. And if you look at the history of the market, that's the typical expectation, 5% to 6%.

So we have to see if 2020 will be different from the rest, but so far, there are no events that seem dramatic to this market. The copper imports to China are increasing, but percentage-wise, it's a very small number in comparison to where it was a year ago.

We think that the copper supply is typically very well matching the demand for the metal. It's mostly open pit operations, so ability to increase production is not as restricted as PGMs or nickel.

And most likely, copper mining will match whatever the demand is for this metal. Last year, we had basically no change.

This year, we expect a 1% increase in output and a slightly higher growth in 2021. The inventories, however, stay at the low level, Slide 17.

This is somewhat technical as we're looking at the inventories that are with one exchange. There are other inventories globally that are not part of warehouses.

And we don't think that the shortage of copper is likely to happen. The market balances over the last few years, they have been statistical from the copper market point of view given that's 24 million tonnes.

A misbalance of 50,000 or 100,000 tonnes is really irrelevant. So it's in a perfect shape.

Moving to palladium, Slide 18. This is probably the most exciting metal in our basket.

We are in a very structural deficit that has been going on for quite -- in our peers. Automotive demand remains the biggest part of the consumption, and it's driven not only by the number of cars but also the environmental standards.

And this is the part of demand that has been -- [indiscernible] the most of the growth in overall demand. Supply is very much constrained.

We had an increase last year, 2019, but it was rather one-off as mining companies have processed some of the -- accumulate some processed material. So this is done and will not happen in 2020.

The system market of platinum, Slide 19, is in a structural surplus to the contrast of palladium. The surplus has been very much absorbed by investment demand, which is a very positive development.

Looking at the prices, this is probably a very good time to invest in platinum as this metal fundamentally is undeveloped, and it is a crucial component of many technologies. We think that the demand is flattish.

We had a bit of decline last year, but we think that the diesel story has exhausted itself. We don't expect the diesel sector to contract any further.

On the supply side, same as palladium. There was a bit of increase last year through processing of accumulated feed.

This year, actually, we're expecting a decline because the feed is no more available, and possibly growth around 2021. Moving to the automotive sector, Slide 20.

The change that happened last year was the transition of Europe and China to a new stage in the regulation, which required higher loadings. So despite -- though automotive sales globally were down 4%, China was the most sensitive, and it was down 8%.

The loadings were increased by a greater percentage, up to 20% in China, 3% to 5% the rest of the world. And this led to consumption still growing despite car productions being less than a year before.

The electric vehicles are another important part of the automotive market, Slide 21. This is a wonderful technology, but still, the affordability in cost is rather high.

So without the subsidies, the consumer interest is less than it is with the subsidies. And we expect that this market will grow at a slow rate unless the subsidies are reinstalled.

At least, this will continue until EVs can reach a price point, which makes them truly competitive in comparison to the ICE vehicles or hybrids. The subsidies, at some point, would reach as much as $8,000.

So that's an important component. We think that China is very likely to reintroducing new subsidies just so they would expand the technical requirements and would require a longer driving range to be entitled to subsidies when you buy a battery-electric vehicle.

And again, the penetration rate in China has been very impressive, especially when we look into the taxis and buses in the big cities. And we think that their policy has been very consistent and very efficient.

The vehicle electrification, Slide 22, is actually more than just the battery-electric vehicle. Although Tesla is probably the most hype name recognized in this area, most car companies are targeting hybrids more than battery-electric vehicles.

It does help to reach their environmental targets, especially the carbon footprint. And this is a technology which is less demand in sense of infrastructure.

So it's commercial today. And it is viable without the subsidies.

So it's likely to have a quicker penetration rate in comparison to the battery-electric vehicles. The outlook for new energy vehicles, as they now pull, is still very bullish in the longer term and even become more aggressive.

In the short term, it's downgraded due to coronavirus and the lower sales in 2019. But this is a very short development.

When we look at platinum and palladium, what the consumers observe is an incredible premium that palladium has developed over platinum. And this is a sharp contrast to what we've seen in the historical prices, Slide 23.

So there is quite often assumption that -- because of the price differential, there will be a reverse substitution. But it's not just the price which affects this possible substitution.

There are many technical aspects of it. Today, in a gasoline car, palladium does have a higher value-in-use because its thermal durability is higher, so you can run the engine at high temperatures and make it more efficient.

The change in the catalyst and position would require more than just the chemistry. We would need to change the full design of the exhaust system, lower the temperatures, so further decrease the efficiency of the engine and increase platinum LOIs as we now run at lower temperature.

So the solution is not very much on the surface, especially given that the car companies have looked not at the spot prices but at the forward prices, say, 2 years ahead, when the gap in the metal is not as big as it is for the spot price. Another important point of the catalyst is rhodium, Slide 24.

It is a small metal, and we don't always mention it, but it is a key component in the automotive sector because this is the most efficient now for the treatment of nitrogen oxides. And that is a must under the environmental regulation.

Rhodium can be substituted by palladium, but it takes 3 to 5 units of palladium to substitute rhodium. In the current market, it's a rather unusual coincidence.

We are short of both rhodium and palladium, which makes the market very sensitive to the supply and supply disruptions. So all now moving to the metals basket we have versus the automotive market development, Slide 25.

We actually benefit from every technology that exists in the automotive market as it requires a full set of the metals that are in our basket. And let me pass the microphone to our CFO, Mr.

Sergey Malyshev.

Thank you, Anton. Beginning of financial part, Slide 27.

I would like to start with the overview of financial results with the analysis of our revenue from metal sales. In 2019, sales volume of all our metals increased.

Sales volume of nickel and copper increased by 7% and 5%, respectively. Nickel sales growth was driven by the increased production volumes, while copper sales were up, owing to higher copper semi-product sales driven by ramp-up of our Chita project.

Palladium sales volume was almost flat year-on-year as higher production volumes were offset by the absence of refined stock sales. Platinum sales increased by 7% due to release of work-in-progress PGM inventory.

In 2019, prices for our metals were going in different directions. Palladium price is -- was mentioned -- it grow by 9% year-on-year on average, owing to the ongoing structural deficit of the global market.

We don't expect market situation to change, and the difficulty is likely to remain. Different price trends changed the structure of our sales basket.

Palladium share increased to 39%, while nickel and copper dropped to 26% and 22%, respectively. Share of platinum remains unchanged at 5%.

Palladium metal sales comprising palladium, platinum and rhodium accounted for almost 50% of our metal revenue. Slide 28, revenue from metal sales.

Revenue from nickel sales grow by 12%, owing to higher prices and volumes. Copper, revenue decreased by 3% as low prices were -- but fortunately, offset by volume growth.

Palladium ended 67% -- 37% owing to higher realized prices. Revenue from platinum increased 5% driven by volumes.

Next slide, 29. In 2019, consolidated metal revenue increased by 70% to $12.9 billion, owing to palladium prices and higher sales volumes.

I would like to note that we reduced the resale of palladium as a result of -- owing to metals production growth. The geographic breakdown of our sales did not change significantly.

We will present our key markets with 52% market share. The change year-on-year driven by the copper price in [indiscernible].

The share of sales in Asia fell to 25%. Share of Americas increased to 18%, owing to relocation of sales from Asia region.

Slide 30. Our EBITDA increased by 27% to $7.9 billion with EBITDA margin of 58%.

Macro factors improved the schematics by more than $1.3 billion. High palladium prices and weaker ruble were partly offset by the negative impact of inflation.

As mentioned earlier, we made a one-off provision for the scheduled shutdown of certain production facilities at Kola MMC in the total amount of $190 million. Operating factors had a positive impact on our EBITDA.

Ramp-up of Bystrinsky project brought us additional $253 million year-on-year. The total EBITDA of Chita project amounted to $349 million in 2019.

Increased sales volumes of all key metals and semi-products resulted in EBITDA growth of $203 million. The main drivers were efficiency gains and increase in ore mined.

Next slide, 31, cash operating costs. In 2019, cash operating costs increased by 2% to $3.8 billion.

Macro factors increased our cash costs by $3 million. Depreciation of Russian rubles was offset by domestic inflation.

Operating factors increased our cash costs by $72 million driven by a ramp-up of Bystrinsky project. Labor continue to be our main cost item totaling 34% of the cash costs.

Cash costs adjusted for FX impact, purchases of refined metal and semi-product and expenses of Bystrinsky increased by 4.7%, slightly above Russia's CPI. Labor costs increased in line with the terms of collective bargaining agreement.

Services temporarily increased due to higher refining costs as a result of precious metals production growth. The increase in other costs was driven mainly by the inflation as well as higher mineral extraction tax payments due to increased volume of ore mine.

Slide 32, net working capital. In 2019, our net working capital amounted to $1 billion.

Macro factors increased our working capital by $171 million. Strengthening of Russian ruble and high metal prices were partly offset by changes in income tax payable.

Operating factors decreased working capital by $33 million driven by lower volumes of Rostec concentrate and stock. On the other hand, we [indiscernible] the work-in-progress due to ongoing modernization of the refining facilities at Kola MMC.

This effect amounted to $67 million. About CapEx, Slide 33.

CapEx decreased by 15% to $1.3 billion driven by completion of Chita project and active phase of Kola upgrade. In the reported period, we continue to invest in the modernization of our energy facilities and upgrade of refining facilities at Kola MMC.

Out of overall capital expenditure, $522 million were allocated to commercial projects with economic return and $778 million to stay-in-business projects investment. $24 million was spent on the sulfur project.

In 2019, we received the configuration of the project and initial bidding procedures. Certain steps were completed in 2020.

We plan to start the active phase of the project in the first half of 2020. Slide 34, sensitivity.

A substantial part of our operational and capital expenses is ruble denominated. This explains high sensitivity of our results to the exchange rate of the national currency.

As you can see from the chart, at 'the U.S. dollars to ruble rate 61.9 as of end December of previous year, a 1% change of the rate drives $42.6 million EBITDA change and $72 million of free cash flow change.

In 2019, share of ruble-denominated operational and capital expenses stood at 88% and 86%, respectively. Slide 35, free cash flow.

Our free cash flow in 2019 amounted to $4.9 billion. EBITDA growth was offset by the dynamics of net working capital and increase in income tax paid on the back of higher taxable profit.

Cash inflow from other investing activities was driven primarily by the redemption of the loan extended to fund the feasibility study of Baimskaya, the deposit, as well as changes in the bank deposits. Slide 36, balance sheet management.

At the end of 2019, the company's net debt amounted to $7.1 billion. Net debt-to-EBITDA ratio decreased to 0.9x, which is in line with mid-cycle level.

The company continues debt portfolio optimization. We have revised terms and conditions for credit lines totaling $1 billion, which allowed us to extend the duration of debt portfolio by more than 2.5 years, 2.5 years, while keeping average cost of debt at the market levels, at max levels.

In the second half of the year, we raised funds on the bonds market, both domestic and international, for the total amount of more than $1.1 billion at the lowest ever interest rates. Debt portfolio utilization activities resulted in a reduction of effective interest rate to 4.3%.

The company continues to demonstrate strong liquidity of $7.7 billion. This includes $2.8 billion of cash and $4.9 billion of committed credit lines.

This level of liquidity covers the debt repayment over the next 3 years. Regarding the debt structure, it remains stable with a slight increase of share of short-term debt to 12%.

The stability of our financial position is confirmed by investment-grade rating received from the 3 leading agencies. And in addition, this year, as I already mentioned, the Moody's International Agency increased our credit rating to Baa2 with a stable outlook.

Slide 37. Once again, I would like to mention that over the past 12 months, the company's debt portfolio effective rate decreased to 4.3% due to debt optimization activities and low base interest rates.

Moreover, despite the increase of the company's gross debt over the past 2 years, we have managed to reduce cash interest payment by almost $200 million from $642 million in 2017 to $460 million in 2019. Last week, the company signed with select group of international banks' syndicate facility in the amount of $4.15 billion with the overall turnover of 5.8 years, including 3 years of grace period, at historically low interest rate of 1 month LIBOR, plus 1.4% per annum.

And now I'm passing again the floor to Mr. Dyachenko.

Slide 39. I will start with the brief update on our major projects.

The first one is Skalisty mine development. In 2019, Skalisty produced 2.3 million tonnes per annum, which is in line with our production scenario and schedule.

We completed construction of our one vertical shaft for the deep mine. And the second shaft has been -- construction is complete, and we started with the engineering, recon the shafts, which will be completed in 2021.

And we started with the pre-feasibility study for the deep mine. And according to schedule, the first ore from the deep mine is due in 2024.

The next project is in the South Cluster, that's the Bear Creek. We announced this project already and currently are finalizing the feasibility study.

Feasibility study is due in the first half of this year for the investment decision. And in the meantime, it will increase treatment work.

It's actually been on -- done on schedule. The information that you see on the slide is still actually in order to maintain, these figures will be actually not as given in the feasibility -- pre-feasibility study.

Bystrinsky project, you already had information about the ramp-up of this project. In 2019, it's managed to treat 8 million tonnes per annum, and the full throughput is scheduled for 2020.

And copper in concentrate expected in 2020 goes to 65,000 tonnes. So this is also on schedule.

Slide 42, that's Kola nickel refinery upgrade. It's a new technology.

And we complete our construction work, and currently, the project is in the hot commissioning stage. We expect to have the full technical capacity of this project by the end of 2020.

Next one is Slide 43, and that's a part of our large environmental program. That's the -- in order to decrease our pollutions in the Kola Peninsula in the area of Nickel, the village across the Norwegian border.

The unit is -- construction is complete, and we're starting shipment of first portions of the concentrates. The low-grade concentrate [indiscernible] at the end of December.

And in 2020, it's scheduled to almost full capacity. And also, we're preparing ourselves for the shutdown of the nickel smelter.

And the largest story on the sulfur program number 2, we give Mr. Dubovitsky, Slide 44.

Good afternoon, ladies and gentlemen. So let me remind you that one of the key pillars of our strategy is our environmental program and more broadly speaking, sustainable development program.

And the program is comprehensive. It does cover all our operations, and it does set quite ambitious goals in terms of sulfur dioxide emissions, which is a key element in terms of air emissions.

So Slide 44 reminds of our plans towards cleaner operations at Kola Division. Mr.

Dyachenko has just outlined a number of investment projects that will allow us to dramatically reduce emissions at this division by 7x, so 45%, already within the next couple of years. So it does include shutting down of smelting operations at Nickel town, as was already outlined, and rationalization of some of our corporate line operations in Monchegorsk.

And again, as a part of our comprehensive program, so we will -- we plan to redirect our product flows so that we end up with more -- with much cleaner operations at Kola Peninsula. Slide 45 gives an overview of what we are going to do at Polar Division.

So let me remind you that we are not starting from the scratch. So we've been through quite important element of our environmental program since we shut down the outdated facilities, smelting facilities of nickel smelter in the city limits of Norilsk that happened back in 2016.

Now we are starting the next phase of our environmental program, which actually aims to bring the emissions down 10x or 90% by 2025. And we adopt a staged approach to this program.

And half of this impact, namely 45%, so we aim to achieve already by 2023. And our strategic ambition for 2030 plus is actually to reduce the emissions by 20x.

So basically, to achieve best-in-class standards in environmental agenda for Norilsk. Slide 46 illustrates our key, what we call, flagship projects at Nadezhda.

And let me inform you that just today, in the morning, we signed an EPC contract for this particular project. And we are in full steam in terms of execution of this project.

The budgets for this project that should actually capture and neutralize all the sulfur coming from our nickel stream at Nadezhda smelter is over USD 1 billion. And as said, so we are starting the construction as we speak.

The site is fully prepared, and we already are in the process of contracting key long-lead items for this project. And as said, the EPC contractor is already selected and the construction agreement is signed.

Slide 47 gives you a reminder of our -- one of our growth projects, namely the third stage of Talnakh concentrator upgrade. Just a couple of highlights to remind of this project.

That's going to be the project that brings additional 8 million tonnes of concentrating capacity, additional to 10 million that we have right now based on the first and second stage of Talnakh concentrate upgrade that we did in the recent years. So as said, it will bring the overall capacity of Talnakh concentrator to 18 million tonnes.

It will also have the efficiency impact as we planned that we get additional recovery improvements, 4% to 7% of recovery improvement for our key metals as an outcome of this project. And this project is also a prerequisite for our mining operations expansions.

First of all, the South Cluster development. We are -- the project is in execution phase.

So we've been through the dismantling stage and also started some of the construction works based on our captive firm -- contractors and are in the process of contracting the EPC contractor as well as big long-lead items for equipment and materials. The project is to be launched in 2023.

Slide 48 gives overall information overview of the project called Arctic Palladium. Just to remind that quite a big greenfield project that is to be done in a partnership with another Russian company called Russian Platinum.

It consists of 3 deposits, I mean, the asset itself. One of the deposits is owned by Norilsk, Maslovskoye deposit; and other 2 are owned by Russian Platinum.

That's the southern part of Norilsk-1 deposit and Chernogorskoye deposit. In 2019, we've been through the pre-feasibility development for this project and identified this project as potentially a Tier 1 opportunity.

It could be developed in stages. So as you can see here on the slide, so starting from the Stage 1, based on potential open pit mine development at Chernogorskoye deposit and then another two possible stages quite long term, but that, altogether, have the potential to extend these operations up to 21 million tonnes of ore production.

As we outlined in our Strategy Day back in November, so the business opportunity is identified, but the corporate approvals are still pending. So the status since the Strategy Day hasn't changed.

So thank you for your attention, and so let me pass the microphone back to Mr. Dyachenko.

Slide 49 talks about the energy infrastructure modernization, and it's really for our generation. So our generating capabilities and also about utilities.

This program is for 5 years from 2022 to 2025 and it will cost the company up to USD 2 billion. To date, we have managed to replace 6 turbines at the Ust-Khantayskaya hydro power plant and there's a seventh in the progress.

And at the same time, we do a replacement of one of the power generating units at the thermal power plant 2. And next will be complete in 2021, that will be second, second power generation units -- unit.

Slide number 50 talks about the production guidance for 2020. We achieved our targets in 2019, as I discussed before.

And 2020 will be at the steady-state production, close to our numbers in 2019, with the slight reduction in copper production due to the gradual depletion of our secondary feedstock. That's been actually purchased from the government company, and that's also linked to our PGM productions.

It will be steady state with a slight reduction in our 2021, '22. And the strategy session, we informed, this will be due to the capital replace on our major furnaces at Nadezhda smelter.

And I will pass floor to Mr. Malyshev.

Now moving to our traditional outlook slide. First, let me provide our -- these brief comments on the metal markets.

We have neutral outlook for nickel, copper and platinum. Positive outlook for palladium as emission regulation are tightened in all major markets, and there is no evidence of evident -- of platinum substitution due to technical challenges.

We come from our metal production guidance for 2019-2020, we expect net working capital to stand at $1 billion by the end of the year. We expect CapEx of up to 22 to 20 -- sorry, up to $2.2 billion to $2.5 billion.

And the final dividend will be announced in May and paid in July 2020. Thanks very much.

Now we are ready to take your questions.

My first question on the CapEx, perhaps if you could give us a bit more color behind the -- on the CapEx revision behind moves been -- besides moving actually? Second question on the cash tax, which was at $1.9 billion.

So this is more and a bigger rate than in the P&L. So even if I understand, of course, you would have timing differences between when you pay the installments.

Could you please explain the reason for the delta because that's almost a 25% tax rate there? And of course, related to that, any guidance you could provide on both P&L and cash tax rate for 2020?

One question -- so my third question, to Anton on rhodium. So you commented about the physical shortage.

What is your analysis of how inventories in volume got depleted so much in spite of the automotive downturn last year? Or were there any new applications?

Any change or material change in the loadings for rhodium? That would explain that the OEM customers have been surprised that much.

And lastly, if you could, on the ESG front, give us an idea of what is your estimate of the percentage of your power supply coming from coal-fired power plants, as you described your infrastructure on the energy side. And lastly, if you've already formalized reduction targets for emissions in the scope 1 and 2.

Of course, 3, if you have that. Of course, you commented about the reduction in sulfur targets already, but what have you got in mind in terms of targets to tackle scope 1 and 2 already?

It's Sergey Dubovitsky. So let me take the first question on CapEx, CapEx solution that you mentioned.

So the adjustment is due to some delays in our corporate approval procedures, and its relates to a number of investment projects and problems. And our predictive monitoring systems give us indication to this -- for this adjustment.

But let me reiterate that the company, the management stays committed to all our strategic plans and strategic projects.

This is Alexey Zakharov, Deputy CFO. As you probably know, our group comprises a number of Russian companies, and there is a variety of intragroup transactions taking place.

We have somewhat changed the scheme of intragroup transactions in 2019, which resulted in some of the income being recognized earlier during the year. That's why in cash terms, the tax has increased and you can see a sort of one-off spike in the cash tax rate.

This is just a one-off factor. We intend to keep the current intragroup scheme in place going forward, which means that going forward, you would see a reversion to our typical tax rate, which is pretty close to the tax rate of 20%, with some small exceptions because we have some of the nondeductible items.

But all in all, to be pretty close to 20% going forward in both P&L and cash, both statements.

With volume, the problem didn't happen overnight. It was building up as with the environmental standards.

The companies had to treat the nation oxide, too high to give a degree of purification. But the challenge in volume is that it's a byproduct and it's mostly coming out of South Africa.

Our share in platinum is bigger than our share in volume. So with their production being on decline since some level , there's less rolling being produced.

At the same time, unlike platinum and palladium, there were no sizable stockpile. So that's why we're coming into clinch.

There's just not enough metal physically and the price is climbing up to try and gather some of the metal wherever it's available.

Regarding your last two questions on the percentage of power generated by coal-fired power plants, we don't have an in coal-fired power plants, all our power generation in Norilsk area is about 40% of power generation is renewable energy, which is hydro and the remaining 60% is really gasified power stations and gases is sourced locally. And as you know, gas is really a low-carbon source of fossil fuels.

And our coal operations, which source the energy from third parties to get the energy from the local energy pool, and they predominantly source energy in the local energy pool, these local nuclear power stations. So the only very little use of coal that we have in our energy mix is really -- that's a coal that is consumed by our various metallurgical operations, not coal-fired power plants.

With regards to the reduction of our scope 1 and scope 2 targets for facility emissions, just a kind of -- just a reminder that, first of all, we -- when we benchmarked ourselves against our global peers, as you're probably aware yourselves, we are already sort of significantly lower than them. And therefore, in terms of our carbon footprint, in terms of scopes 1 and 2, and combined stands at about 10 million tonnes of CO2 per annum, we are already are much lower than our peers.

With regards to the targets, we're currently in the process of sort of formulating our climate change strategy. We hired external auditor that is calculating -- that has calculated scope 1 and 2 emissions in line with GHG Protocol which is internationally-recognized protocol.

And we'll be making disclosure in due course. That's something that we have planned for the coming year.

And as part of the disclosure and going forward, we plan to prepare and now sell targets, but we're not ready yet for that. Thank you.

Next question, please.

The first one, just on the Palladium Fund, can you talk about what do you have in there now and your plans for this year? Second question on Chita.

What's the latest thinking around possible IPO? Is that still potentially on the cards or some other transaction?

And then the third question just on South Cluster. Can you confirm when you actually expect the first ounces from South Cluster?

I know you've got the mining volumes there from 2021, 2022. Are those volumes also being processed at the same time?

Or will there be some delay before the ounces actually get produced?

This is Anton Berlin. Let me refer to the global planning fund.

It's continuous operations as usual. We can't disclose much as it's commercially sensitive, but typically, the purchase and sales by the fund, by 300,000 to 500,000 ounces per year, and this is what we expect to happen in 2020.

On Chita -- Alexey Zakharov again. Nothing has changed since the strategy day, no specific strategic option chosen so far.

Everything is on the table, including potentially IPO or even a spin-off. We will revisit this question later this year, taking into account the assets ramp-up profile as well as market conditions at the time.

And with regards to South Cluster, I refer you to you Slide 40. Right here, exact numbers, which means '21 is, we will be actually achieving 1.3 million tonnes in the ore coming out of the open pit, but this still -- the remaining schedule, it's on the slide.

I have also one question on your Palladium Fund. There were some media reports recently saying that you may sell about 100,000 ounces of palladium from the fund into the market to cover this, at least partially the deficit.

Are these reports correct? Is it the final number for the sales from the fund for this year?

Or you may consider selling more if the palladium price goes higher?

This is Anton again. This was a statement made by the company that we plan to sell up to 200,000 ounces on top of business as usual from the global Palladium Fund into the market, into the clear system to ease liquidity in this market.

So this is an intention. It's certainly not a final plan.

We will see how the market develops because this has been done gradually.

I would like to add that for the fund, in total, this year, we're looking to sell approximately 400,000 to 500,000 ounces of palladium. This is slightly more than last year, but in line with the prior 2 years of 2017 and '18 when we were selling for the fund approximately 550,000 ounces per annum.

And this 100,000 ounces or 3 tonnes as was in the news that Anton has just explained, it's really a part of that, say, 400,000 to 500,000 ounces target, it's not coming on top of that. And also, these ounces will be sold in the form of ingots, which is specifically the form that is preferred by traders and speculators, exactly with the purpose to sort of ease the speculative pressure on the metal.

Would it be correct to estimate that your sales of palladium this year will be this -- I mean, your total company sales of palladium will be in this 400,000 to 500,000 ounces from the fund, plus all the amount produced by the company?

Yes, that's a correct assumption.

Couple of questions. Firstly, on the Arctic Palladium joint venture, there was some news flow with respect to potential government support for the CapEx of the project.

I wonder if you could make any comments there. And secondly, can you give us, at this stage, any indication of the CapEx split between you and your JV partner relative to the numbers that you disclosed at the Capital Markets Day and in the presentation today?

And then the second question relates to CapEx. You brought down the CapEx guidance for 2020.

And I think with the exception of 2017, capital spend has been below your guidance. Should we still be modeling a similar profile to what you disclosed in the Capital Markets Day presentation out over the next 3 or 4 years?

Or is there some sort of contingency built into that?

On Arctic Palladium, our JV partners and we are developing a financing structure for the project, and we've made, in sale, different options, including equity financing, including from third parties, project financing as well as some kind of government support in one form or another. And this is something that is still ongoing in conjunction with the setup of the JV.

And at this stage, we have nothing concrete to report on the final financing structure.

This is Sergey Dubovitsky. Yes, on the CapEx guidance beyond 2020.

As I said previously, so we stay committed to our strategic agenda. So meaning key elements of the program, which are the environmental program, mining growth projects as well as downstream growth projects.

Just in simple terms, so we reiterate the guidance for 2021 and beyond, as we outlined it back in November 2019 at our strategy day. But the disclaimer that we give in our strategy presentation that specific schedules will depend on the outcomes of the pre-feasibility and feasibility studies.

And if we look at our portfolio of the projects for 2022 and beyond, over 50% of those projects are still at the first, in the first stage. So the specific numbers and the specific schedules could be different, but overall level of magnitude in terms of numbers and overall CapEx levels.

So we reiterate those levels.

Okay. And perhaps if I could just -- one follow-up for Anton on the -- or Vlad on the switch to supplying a little bit more ingots into the market.

Can you give us any sense of the pricing spread between ingots and other forms of palladium? Is there a substantial premium at the moment.

Any sort of sense of the dynamics of the pricing other than what we see on the screen?

Now there are only two forms: sponge, basically power and ingots. The spread is insignificant, it's a few dollars per ounce.

Can you please at least provide some comments on the current, like coronavirus situation? Do you see any impacts on the markets and for the company in terms of demand, like cash collections and maybe some other issues?

Well, we don't see the coronavirus affecting cash collection, not in our company, definitely. It's very difficult to make the assessment because most of the economic data is coming out on a quarterly basis.

So we know that industrial production is down in China. We know consumer spendings are down in China.

But to make the assessment, how much and what would be the total outcome for the year is a bit premature. We still have to wait, to see some hard economic data to make a true assessment rather than a guesstimation.

But if you look at commodity prices performance, and probably, they speak for themselves. So palladium continues to trade near record highs.

Base metal prices are somewhat depressed, because perhaps the market believes that these are the metals that are more sensitive, obviously, the uncertainty in terms of the outlook is more sensitive to the coronavirus. But also, as you may know, coronavirus epidemic, at least in China seems to be on a decline.

There is a certain pickup elsewhere. But since China is the largest consumer for pretty much all of our mills and the main driver of global commodity prices.

If China starts recovering, I think it will be definitely positive news.

I have two questions. One first small follow-up on Palladium Fund.

If you could disclose what was the size of the fund by end of the year. I think you used to provide this information in previous occasions?

And my second question is for Anton, really. I appreciate that the huge spread between palladium and platinum may not be a significant incentive or sufficient incentive for catalyst producers to switch.

But I think the bigger thing out there is that, as you mentioned, there is 900,000 ounce deficit looming, which on the face of it, poses something more serious like a risk of significant shortages or maybe even disruptions for many of palladium users. And this -- if this understanding sinks in, maybe we could see a resurge into replacement doubling, trebling, quadrupling, which, over time, could lead to a very significant demand disruption simply because people will not want to be associated with something so scarce.

How do you assess a risk of such scenario development?

As to the fund of the -- inventories by the year-end were on the hundred thousand ounces. As to the substitution of palladium by platinum, we don't see it as a risk.

We hope that it will occur because we do need a high usage of platinum to balance future consumption. If we look at the overall basket of the metals, we need the full 3 PGMs to satisfy automotive demand.

And this has been the historical challenge that the -- at different times, they tend to lean too much to single metal, be it palladium platinum. So as a producer, we would welcome a more balanced consumption, but we have no control over this.

There is a solution that has been developed for the leading autocar companies. At least, that was the statement they've made a few weeks ago at the Pre-daba -- Indaba Conference.

And according to them, the car companies so far are not interested in this solution. So it's doable.

It will probably take a 6 to 18 months to do the substitution, 6, if you ignore the cost of it and just do it. 18, a more sort of softer transition, but the technical opportunity does exist, and it would make all markets more sustainable.

And of course, part -- this would be softened but are delivered from the global fund. This was the goal and purpose of this fund from the very start.

So the 900,000 ounces deficit estimate that we produce for the current year is excluding the delivers from above the ground stocks. And as you know, as we admit ourselves, we do contribute to some of those deliveries.

So that will definitely help to mitigate some of the physical deficit.

Majority of my questions have been already answered, but just the remaining 2. First, could you please elaborate on the -- a bit more on the nature of your $190 million provision that you recorded for 2019 in other operating expenses line, which was apparently related to shutdown of certain facilities at Kola?

And given that you will continue with the modernization program over the next several years, can -- should we expect some similar provisions to be recorded in the next couple of years? That's the first question.

And the second question on dividends. So it seems that for 2019, currently, the dividends, including the final ones, which had to be declared, will be declared 3x versus semiannual declaration in previous years, i.e., 2x?

So my question is what dividend declaration frequency should we expect for this year and going forward?

On your first question, the $190 million, as we mentioned, first, to certain provisions to potential decommissioning of assets at Kola Peninsula. And this includes mainly smelting shop and nickel town as well as some of the other facilities.

At this stage, we don't foresee any further provision -- provisions based on our reconfiguration plans in the next 1 or 2 years at least.

Anna, on the number of -- the frequency of paying interim dividends, if that was your question. This is something that is decided each year at halt [ph] by shareholders, and we cannot commit to any certain frequency for the current year.

Congratulations with quite strong results. Three questions from our side, please.

The first one is actually on Slide 14, 1-4. Here, you expect global NEV sales to rise almost 60% year-on-year in 2020, whereas nickel demand from this sector is expected to rise roughly 15% year-on-year.

So could you please elaborate on the reasons for such a negative view on nickel offtake per EV, please?

The new electric vehicles is inclusive of all types offtake of the use of the batteries. So that's the BEV and the hybrids.

And if you look at the chart, most of the growth would grow for hybrids that use a much smaller batteries. That's why the growth in nickel consumption is substantially lower than the growth in the number of electric vehicles.

Also, some of them will use batteries that do not contain nickel, like LFP, for example. So this explains the difference in numbers.

Okay, got it. So in terms of LFC -- sorry, LFP, do you expect actually the share of them to rise in 2020?

And why?

Well, so far, we've seen the Tesla announcement to use LFP, which is not a typical engineering solution. Yes, that's only for the Chinese market to make the car more affordable.

But typically, this type of battery goes into buses because it doesn't like the volatility in currents it's really good for steady state operations, so something some like a forklift. And I think it's a bit of a test.

We'll see how those vehicles would perform in a normal exploitation and we see if this experience will be copied by others or avoided by others.

Okay, fair enough. Another question is on some comments by the management team about tokenization of Norilsk Nickel metal sales.

Correct me if I'm wrong, but long-term goal of the team -- of the company is to have 20% of its metal revenues to be sold in form of tokens. So do you have any plans for kind of a shorter period of time for 2020, for example, in terms of the share of metals sold in tokens and potential impact on your financials?

Let me respond in reverse order. We don't expect this to affect our financials because whether you do this through traditional contracts or digital contracts, the revenue should be same and it's market-based.

We don't put 20% as our long-term goal because, again, for us, the digital assets and digital platform is just a way to address the motor market and the motor economy. So this is the assumption, we said that we were prepared to sell up to, but it's subject to demand, obviously.

And we think that interdigital actually has benefits both for the seller and the bar. When we speak about industrial deliveries, it does simplify many things and brings the transaction costs now.

Okay. And the last one, probably on your -- one of your colleagues in the industry.

Anglo American recently disclosed estimate of palladium deficit, in 2020 of around 1.9 million ounces. Where do you think you are different from their estimates?

But maybe just a guess estimate or rough estimate.

Well, I don't know because, to my knowledge, they're using Johnson Matthey numbers the question should be addressed to Johnson Matthey of Anglo Platinum. And typically, no one discloses the underlying numbers and how they make their assessments.

I mean, looking at the market, it's hard to envision that we're able to survive with a 2 million deficit. I mean, how can you consume something which is not there?

We can understand how you cover if you kind count ounces, but 2 million, just it doesn't fit our view and feeling of the market to be honest.

My first question is, given where the palladium prices are at the moment, you're obviously going to generate significantly more cash this year. How do you -- what are your sort of capital allocation priorities, given that you have got quite a bit of CapEx coming up over the next number of years?

Do you distribute that? Or do you rather look at continued de-gearing and potentially save up some money for your CapEx in the future?

And then also, just thank you for the slide you provided, I think, it's Slide 20 where you show the estimated increase in loadings by region. My question is how much of the increase from China is relating to China 6a and how much of that would you say is relating to early compliance on China 6b?

Regarding your first question, in terms of our capital allocation policies. First of all, we have our capital investment program, which was -- which, for the current year, is to spend $2.2 billion to $2.5 billion.

Then we have a major shareholders' agreement that governs our dividend payouts and there is a formula. And so essentially, we'll have to make payments in line with the shareholder agreement.

And thirdly, we -- as you know, we maintain a fairly conservative balance sheet but delivering itself as much with the management target, what is the management target is to maintain investment-grade credit ratings. Currently, we have investment-grade credit ratings from all 3 major international agencies, and that's the way we want to basically stay.

So that's regards to our capital allocation policy.

As to the growth in loadings that can attribute to 6a and 6b, you can say that China has effectively skipped 6a, as many producers were being sort of preemptive and they were switching to 6b direct without going for 6a because it was, in any case, limited to just some of the promises in China. So that was the step you remove from China 5 to 6b directly.

Well done on your results. I have a question on Arctic Palladium.

I see that the increase in ounces from the South Cluster at Norilsk is about 800,000 ounces of PGMs or about 600,000 ounces of palladium and maybe 200,000 ounces of platinum, more or less. South Cluster -- well, Arctic Palladium looks like at 7 million tonnes per annum at 5.9 grams a tonne.

It looks like it's about the same production rate by about 2025. And then in 3 stages, 800,000 ounces per annum in stage 1, stage 2 and stage 3.

Am I correct in that assumption? Or am I missing the mark somewhere?

Yes. So if I understood your question correctly, so you try to compare the South Cluster PGM production to Arctic Palladium, and namely, stage 1.

Yes, in terms of scale and grades, it's close. So we are talking about 9 millions tonnes of ore production at South Cluster and 7 million tonnes at Chernogorskoye open pit mine.

So yes, the grades are a bit lower. But -- yes, so from the first stage -- so the number, when it's ramped up, it would be up to 20 tonnes of PGMs.

So it means 600,000 tonnes. So that's a level of magnitude for the first stage in terms of PGM production.

And the split to Artic Palladium, is that 100% palladium? Or is it the same 3:1 ratio, palladium-platinum?

It's close to the split that we have in South Cluster. So it's a bit more towards palladium if compared to Talnakh ore cluster, but it's kind of similar to South Cluster.

It's actually the extension of the South Cluster ore volume.

Dear all, thank you very much for participating. As usual, we'll hope to see many of you at the forthcoming weeks during our road shows at the various investment conferences.

And thank you very much for dialing in. Have a very good day.

Bye-bye.