Norilsk Nickel management proposes to allocate $1.5 billion for dividends

The management of Norilsk Nickel, headed by the largest co-owner Vladimir Potanin, proposed to reduce the company's dividends to $1.5 billion a year in order to spend more on investments.Other shareholders did not object

At the Board of Directors of Norilsk Nickel, which took place on December 15, 2022, the company's management, headed by its largest co-owner Vladimir Potanin (owns 37%), proposed to reduce dividends for 2022 to $1.5 billion after $6.3 billion paid on results of 2021. RBC was told about this by three sources close to the board of directors of Norilsk Nickel.

The meeting was devoted to the company's budget for 2023. it unanimously approved the volume of capital investments at the level of about $4.7 billion, which is 10% more than a year ago, the company reported. This means an increase in investments by about $430 million. According to all three interlocutors of RBC, management justified the need for a significant reduction in dividends with a large investment program. "Surprisingly" representatives of the other largest shareholders, including UC Rusal (26.39%), which has always opposed the dividend cut, "peacefully" accepted the proposal, one of the sources said: "This is not the worst compromise." The reaction of the shareholders was "understanding", another source confirms: there was no sharply negative reaction from their side, they understand the logic of management.

The final decision on dividends has not yet been made. It is expected in March-April, when the board of directors makes a recommendation for the shareholders' meeting, two interlocutors of RBC indicate. “The Board of Directors of Norilsk Nickel adopted a draft budget prepared by the company. The fact that the budget was adopted unanimously at least indicates that in general terms there is agreement on most issues. But there is also room for discussion," Elena Bezdenezhnykh, Vice President for Regional Policy and Cooperation with Authorities and Government of UC Rusal, a member of the Board of Directors of Norilsk Nickel, told RBC through a representative. “The Board of Directors decided that the amount of dividends will be determined after the close of the financial statements for a difficult 2022, focusing on the company’s current dividend policy,” she added.

The current dividend policy adopted by Norilsk Nickel in 2016, referred to by Bezdenezhnykh, provides for the payment of dividends to shareholders in the amount of at least 30% of EBITDA. According to the forecast of Sinara investment bank, the company's EBITDA in 2022 decreased from $10.5 billion to $9.9 billion, and according to the BCS forecast - to $9 billion. Based on these forecasts, with the current dividend policy, shareholders could expect to pay $2 .7–3 billion

Representatives of Interros Vladimir Potanin and Norilsk Nickel declined to comment.

Why Norilsk Nickel's management proposed to reduce dividends

Until the end of 2022, the issue of Norilsk Nickel dividends was regulated by a shareholder agreement that representatives of Interros, UC Rusal and the third co-owner of the company - Crispian Roman Abramovich and Alexander Abramov (about 4%) - concluded in December 2012 for ten years. It assumed that dividends should account for at least 60% of EBITDA with a net debt to EBITDA ratio of less than 1.8x. If this ratio is higher, the minimum dividend level was 30% of EBITDA, but not less than $1 billion. Norilsk Nickel's dividends for 2021 amounted to $6.3 billion, or 60% of EBITDA.

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Interros has repeatedly proposed to reduce payments to shareholders in order to spend more on the company's development and infrastructure upgrades. In 2020, he proposed limiting dividends to a minimum level of $1 billion, as the company needed to spend significant funds to clean up the consequences of an accident with a diesel fuel spill at CHPP-3 near Norilsk (in March 2021, Nornickel paid a record fine due to this accident 146 billion rubles, or about $2 billion). But UC Rusal was against it. “Dependence on Norilsk Nickel’s dividends is the main reason why UC Rusal once again rejected Interros’ proposal to reduce dividend payments,” Potanin said in August 2020. UC Rusal directs a significant part of the money received to pay off its debt.

In July 2022, the HEAD of Norilsk Nickel said in an interview with RBC that after the expiration of the shareholder agreement, “dividends in the amount that investors have become accustomed to lately, of course, they will not be in 2022, nor, presumably, in 2023." “As I have already outlined the system of priorities, it is still, first of all, maintaining the continuity of production, ensuring obligations to employees, the state and partners. And the shareholders here were, unfortunately for the shareholders, including me, not the first in this queue,” he said.

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The company's press service explained plans to increase capital investments in 2023 as "the peak of the investment cycle." The investment program provides funding for such key projects as the Sulfur Program 2.0, mining projects, projects to maintain the infrastructure of the fuel and energy complex of the Norilsk industrial region and to replace equipment and capitalized repairs, as well as social projects.

Could UC Rusal not approve the budget

UC Rusal, being a shareholder of Norilsk Nickel since 2008, has repeatedly blocked decisions not only on dividends, but also on major transactions. But representatives of the aluminum company, under the terms of the shareholder agreement (still in force in December 2022), are required to approve the budget proposed by management, Maxim Poletaev, who at that time served as Deputy CEO of UC Rusal, made it clear in an interview with Kommersant in October 2021. “Invest now. We cannot prohibit investing [in the development of the company] more or less,” he said.

UC Rusal emphasized that in recent years the level of development of the investment program by Norilsk Nickel did not exceed 75%, therefore, according to the company, there is no direct connection between the volume of dividends paid and the need to increase spending, as presented by Interros. There is a direct link between free cash flow (FCF) and dividends, the growth of capital expenditures reduces FCF, and hence the base for dividends, Dmitry Smolin, a senior analyst at Sinara, retorts. But there are a number of other factors that could have negatively affected the company's free cash flow, he adds: the growth of working capital (inventory growth), the impact of the ruble exchange rate, the purchase of materials and equipment against the backdrop of international sanctions.

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Nevertheless, Poletaev acknowledged that the "dividend formula" provided for by the shareholder agreement contains a mechanism that allows reducing dividend payments if market conditions change or a certain level of investment is planned. Now the shareholders of Norilsk Nickel must "digest the input" at the suggestion of the company's management, and after that they will already make a decision on dividends, a source close to the board told RBC.