Mining and Metallurgical Norilsk Nickel : Nornickel reports 1H 2023 interim consolidated IFRS financial results 02 august 2023 1 MB

PRESS RELEASE

Public Joint Stock Company «Mining and Metallurgical Company «NORILSK NICKEL» (PJSC «MMC «NORILSK NICKEL», «Nornickel», the «Company», the «Group»)

NORNICKEL REPORTS FIRST HALF 2023 INTERIM CONSOLIDATED IFRS FINANCIAL

RESULTS

Moscow, August 2, 2023 - PJSC MMC Norilsk Nickel the world's largest palladium and high-

grade nickel and a major producer of platinum and copper, reports interim consolidated IFRS financial results for the six months ended June 30, 2023.

1H2023 HIGHLIGHTS

• Consolidated revenue decreased 20% y-o-y amounting to USD 7.2 billion following the decline of prices for all key metals despite higher physical sales of PGMs and gold;
• Successful diversification of metal sales resulted in Asia becoming the largest market with a revenue share of almost 50% for the first time in the Company's history;
• EBITDA decreased 30% y-o-y to USD 3.4 billion owing to lower revenue while EBITDA margin remained at healthy 47%;
• Cash operating costs decreased 12% y-o-y to USD 2.7 billion mostly driven by the management focus on operating efficiencies that allowed to mitigate inflationary pressure on expenditures in spite of higher repair and maintenance costs aimed at improvement of industrial safety;
• CAPEX decreased 19% y-o-y to USD 1.5 billion driven by optimization of payments to contractors as well as rescheduling of investment projects owing to voluntary self- sanctions imposed by foreign suppliers of equipment and technologies resulted in redesign of many initiatives;
• Net working capital decreased 20% year-to-date to USD 3.2 billion driven mostly by devaluation of ruble and decrease in receivables;
• Net debt decreased 8% y-o-y to USD 9.1 billion with net debt/EBITDA ratio as of June 30, 2023 slightly increasing to 1.2x;
• The Company continued the optimization of its debt portfolio to adapt to changing debt market reality and new lending terms. In May 2023, Nornickel placed five-year RUB 60 billion exchange-traded bonds.

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KEY CORPORATE HIGHLIGHTS

USD million (unless stated otherwise)	1H2023	1H2022	Change,%
Revenue	7,161	8,979	(20%)
EBITDA1	3,370	4,797	(30%)
EBITDA margin	47%	53%	(6 p.p.)
Net profit	1,070	5,062	(79%)
Capital expenditures	1,467	1,816	(19%)
Net working capital²	3,220	4,0034	(20%)
Net debt²	9,054	9,8354	(8%)
Net debt/12M EBITDA	1.2x	1.1x4	0.1x
Dividends paid per share (USD)³	-	40.5	(100%)
Free cash flow²	1,347	1,051	28%
Interest paid5	389	259	50%
Dividends paid to non-controlling interest5	503	73	7x

1. A non-IFRS measure, for the calculation see the notes below.
2. A non-IFRS measure, for the calculation see an analytical review document ("Data book") available in conjunction with Consolidated
   IFRS Financial Results on the Company's web site.
3. Paid during the current period
4. Reported as of December 31, 2022
5. Regular outflows, financed from free cash flow

MANAGEMENT DISCUSSION AND ANALYSIS

The President of Nornickel, Vladimir Potanin, commented on the results,

"Restrictive measures imposed on Russia and the decline of prices of our key metals affected our financials putting a lot of pressure on revenue and EBITDA. However, the management delivered solid performance in terms of cost control and diversification of sales.

The company successfully managed to re-direct our sales to friendly countries and in 1H23, our deliveries to Asia increased two-fold accounting for almost 50% of total metal revenue. Cash operating costs were down 12% year-on-year despite inflationary pressure and higher repair and maintenance expenses. The growth of the working capital has also been stopped owing to stabilization of sales volumes and changes of the payment terms with counterparties.

We have continued execution of strategic projects, including our major environmental initiative 'Sulfur programme 2.0" at the Nadezhda Smelter that is entering its final stage. After the launch of its first stage this autumn, we expect to decrease sulfur dioxide emissions in Norilsk by 20%. The launch of the second stage in the third quarter next year will result in a 45% emissions drop as compared to 2015 base. Meanwhile, voluntary self-sanctions imposed by some foreign contractors and suppliers forced us to reschedule and redesign some investment projects. Considering this changes as well as the optimization of payment terms on some of the investment contracts our CapEx in 1H23 deceased to USD 1.5 billion year-on-year.

We will continue to work on labour productivity, optimization of working capital without forgetting about investments in mitigation of physical risks of production assets, environment and industrial safety. Our main priority remains financial stability of the Company and compliance with all social obligations".

HEALTH AND SAFETY

In 1H2023, the number of lost time injuries increased to 40 vs 37 in 1H2022 owing to a relentless focus of the Company's management on the transparency of reporting data collection. Obtaining the most accurate data not only on serious and fatal cases, but also on micro, light and medium injuries provides for the development of more efficient initiatives to improve industrial safety.

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Regretfully, in the reported period the number of fatal accidents increased from 1 to 4 y-o- y. We continue to implement a wide range of programmes and various initiatives to prevent occupational injuries and fatalities. Among the key initiatives are the increased involvement of the Company's management in labor safety issues, the transformation of the safety culture and the implementation of IT-services for accident prevention at production sites. The management reiterates its major strategic focus of transforming Norilsk Nickel into a zero-fatality mining company.

METAL MARKETS NICKEL

Nickel in 1H2023: nickel has been the worst performer among base metals on the LME amidst worsening market fundamentals; a substantial surplus in the Class 2 market driven by growing production of low-grade nickel in Indonesia; the exchange-traded Class 1 nickel market is balanced amidst the steady drawdown of exchange inventories and robust demand for nickel in alloys and special steel sectors.

The LME nickel was down by over 30% since the beginning of 2023. The price started this year at over USD 31,000 per tonne, but declined to USD 28,000-30,000 per tonne triggered by news that some Chinese nickel producers were considering launching nickel cathodes production in China and Indonesia as early as 2023.

By the end of January, the price recovered towards USD 30,000 per tonne as the China reopening story continued to support commodity prices. However, since February 1, when benchmark LME nickel settled at USD 30,060 per tonne, the contract has shed by 27% to USD 21,895 per tonne on March 23 driven mainly by a combination of sluggish domestic demand in China (as the expectations of a strong economic recovery hadn't materialised) and the prospect of further monetary policy tightening.

In early March, the US banking crisis forced the US Federal Reserve to inject additional liquidity into the system, which provided some support for the prices. Nevertheless, even though the worries about the banking turmoil had eased, the base metals prices remained under pressure as investors braced for a credit squeeze that would restrict economic growth.

In April, the nickel price rebounded to over USD 25,000 per tonne, boosted by short covering by speculative players, dwindling exchange inventories and a softer US dollar, but the price gains were pared as any further upside was still curbed by looming additional supply. Nickel retreated to USD 20,000-21,000 per tonne at the end of May and remained at 20,000 per tonne in June as the generally expected Chinese economic recovery has lost its momentum, with bearish pressures dominating nickel trading.

As a result, the average LME nickel price in 1H2023 declined by 12% y-o-y to USD 24,205 per tonne.

In 1H2023, primary nickel use increased 3% y-o-y. Lower nickel demand from the stainless steel sector (-0.5%y-o-y) due to operational difficulties at one of the production plants in Indonesia (-15%y-o-y) was offset by moderate increase in Chinese stainless (+5% y-o-y), although slower than expected, robust nickel use by the battery industry (+16% y-o-y) and other non-stainless applications (alloys, superalloys and special steel), which rose 7% y-o-y due to solid end-use demand from the aerospace, oil & gas and other industries.

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On the contrary, primary nickel supply surged by an exceptional 16% y-o-y due to a continuous expansion of the Indonesian NPI output (+25% y-o-y, representing a 136 kt increase) and the production of nickel compounds for the EV market (+91% y-o-y) driven mainly by the new NPI-to-matte conversion facilities and HPAL projects. Nickel metal output increased 8% y-o-y as a result of the commissioning of new capacities to produce nickel cathodes in China.

We estimate that the nickel market was in an over 200 kt surplus in 1H 2023. However, since nickel exchange inventories declined by 16 kt over this period to the level last seen in 2007, amounting to less than 5 days of global consumption, we believe that the surplus was predominantly in low-grade nickel, whereas the exchange-traded Class 1 nickel market was relatively balanced.

Nickel outlook: cautious in the near-term, but more positive long-term; we expect the market surplus to remain at around 200 kt in 2023 and around 180 kt in 2024, with low-grade nickel still accounting for the bulk of the volume due to the ramp-up of new nickel capacities in Indonesia; nickel supply is likely to exceed demand in China and Indonesia in 2023-2024, while Western markets are expected to be fairly balanced because of their reliance on nickel from conventional suppliers.

We expect the primary nickel demand to increase by 7% and 11% y-o-y in 2023 and 2024, respectively, primarily driven by the expansion of stainless steel production in China and recovery in Indonesia as well as ongoing strong growth in the battery sector amidst the EV-supportive policies, optimisation of battery costs and increasing acceptance of EVs by consumers.

Primary nickel supply is forecast to rise 10% and 9% y-o-y in 2023 and 2024, respectively, owing to the continuing ramp-up of NPI projects in Indonesia, growing production of nickel chemicals through NPI-to-matte conversion and HPAL for the EV sector and commissioning of new Class 1 nickel capacities in China and Indonesia.

Nickel use remains very robust in the long run benefiting from the battery sector and renewable energy. Recently, it proved to be even stronger as mass production of commercially viable sodium-ion batteries for EVs had been introduced. This is net-positive for nickel as the most common type of these cathodes contains 16% Ni with plans to increase their nickel content in the next chemistry generation. Moreover, despite some drawbacks (e.g. lower energy density), it is a cheaper alternative to the LFP batteries, which means it could take some share in entry- and mid-level EVs as well as energy storage applications.

COPPER

Copper in 1H 2023: lukewarm growth in China, tightening of monetary conditions, and global economic slowdown expectations were not fully offset by price-supportive conditions that included low exchange stocks , liquidity injections by central banks to ease the banking crisis and mine disruptions in Latin America.

At the beginning of the year, copper prices started at USD 8,400 per tonne with a positive trend based on China re-opening after COVID-19 lockdowns. Additionally, protests in Peru, low exchange stocks, and a weakening US dollar pushed copper price to USD 9,400 per tonne by mid-January. However, disappointing recovery pace in China as well as the US interest rates growth resulted in a price correction to USD 8,750 per tonne by the end of February.

During the spring months the metal price was marked by high volatility due to a combination of various factors such as the banking crisis, inconsistent behaviour of central banks and growing divergence between China's growth expectations and the factual numbers. As a result, the price of copper dropped to its lowest level since November 2022 at USD 7,910 per tonne at the end of May. In June, copper prices rebounded owing to a weaker US dollar, a gradual decrease in copper exchange stocks, floods in Chile and a fire at Boliden's refinery.

The average price of copper in 1H 2023 decreased 11% y-o-y to USD 8,703 per tonne.

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In 1H 2023, copper demand was weaker than expected due to the global recession concerns and soft demand growth in China that increased 5% Y-o-y in 1H2023 to 6.6 Mt, while the rest of the world consumption was up only 1% to 5.8 Mt, making the total copper demand grow 3% to 12.4 Mt in 1H2023.

On the supply side, global copper production increased 5% to 12.5 Mt in 1H2023. The decrease in Chilean production by 5% was offset by growing (despite the strikes) output in Peru that increased 19%y-o-y.

Overall, the copper market in 1H2023 was balanced with a marginal surplus of 150kt. Meanwhile, global exchange stocks decreased dramatically to 170 kt (2 days of consumption) by the end of 1H2023 and bonded stocks in China were at 67 kt. The stock drawdown was caused by the willingness of consumers and investors to buy at attractive price levels.

Copper outlook: neutral in the medium term, positive in the long term. Economic uncertainty puts pressure on the copper market, but transport electrification, green energy transition as well as lack of new sizeable projects are going to shift the market into structural deficit.

Global copper demand is estimated to reach 25.4 Mt (+3% y-o-y) in 2023. We anticipate that China's copper use will increase 3% y-o-y to 14.1Mt +3% while demand in Europe and North America will stay flat at 3.3 Mt and 2.2 Mt, respectively.

Global mine copper production is expected to add 2% to 22.4 Mt in 2023 due to the commissioning of new projects and the expansion of existing ones. Refined copper production is estimated at 25.3 Mt (+3% y-o-y). The production in Americas, one of the major suppliers of red metal, is going to decrease 4% y-o-y driven by continuous problems in Chile and Peru, while output in Europe and Asia will grow 4% y-o-y. The only notable increase of 15% is expected from Africa driven by ramp-up of new projects in Zambia and Congo.

Overall, the copper market in 2023 is balanced with the deficit of about 130 kt or less than

1% of global consumption.

Car electrification and green energy transition require a significant amount of new copper supply going forward. Despite optimizing the use of copper in electric vehicles, copper usage in electrified transport and charging infrastructure will almost triple by 2030 to 3 Mt, and green energy-related consumption, including the grid, will more than double to 2.5 Mt in 2030. The long-term supply growth is less certain due to lack of new low-cost projects, inflationary pressure on both CAPEX and OPEX as well as unpredictability of regulatory environment in 'high-risk' jurisdictions such as Latin America and Africa.

PALLADIUM

Palladium in 1H2023: price fall attributed to speculative pressure and the sales of previously accumulated metal inventories held by market participants, primarily carmakers and manufacturers of catalytic systems; gross demand slightly recovered on the back of moderate ICE-powered vehicles sales.

Owing to the palladium stock optimization by the industry participants that started in late 2022 as well as low ICE-powered auto sales in the first two months of 2023 the palladium price continued its downward movement up until mid-March when the trend reversed. The latter was triggered by the Silicon Valley Bank fallout, which caused a rise in stock market volatility and positively impacted precious metals' prices as investors started to seek alternative assets and, more importantly, the market lowered its expectations of the terminal interest rate level. Through the spring palladium remained on an upward trend reaching USD 1,600 per troy ounce in the beginning of May as the automotive market showed some meaningful growth supported by resumed spot buying by OEMs.

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