Russian Miners With Billions of Dollars Weigh Dividend Increase

Russian metals exporters that are piling up cash after the ruble collapse are sharing the wealth with investors as the economy tilts into recession and global demand slows.

The weaker ruble has benefited Russia’s resource companies, which have costs in the national currency and revenues in dollars or euros. OAO Novolipetsk Steel, OAO GMK Norilsk Nickel and four other of Russia’s largest metals and mining companies together held $8.3 billion in cash and equivalents at the end of December, according to data compiled by Bloomberg. They had about $5.7 billion a year earlier.

Companies are using the windfall to reward shareholders, switching focus from debt repayments or investments. Prices for major materials have softened as China’s economic growth slowed last year to the weakest since 1990. Russia is sliding into its first recession in six years, as U.S. and European sanctions add to slowing consumer demand and a slump in oil prices.

“It makes no sense to start large investments now, and it’s better to pay excessive cash to the owners,” Kirill Chuyko, head of equity research at BCS Financial Group, said by phone on March 31. “The cost of capital for Russian companies increased, which also makes companies rethink their dividend policies.”

Returning Capital

Steel and nickel prices fell more than 20 percent in the past 12 months, while copper has dropped about 9 percent. At the same time, Russian producers have turned into world leaders in terms of profit margins and cost cutting. The ruble plunged 46 percent last year before stabilizing in the first quarter, while the economy is forecast to contract 3 percent this year.

Novolipetsk Steel, known as NLMK, said this week it’s overhauling its dividend policy. The steelmaker, which cut its debt ratio to among the lowest in the industry last year, may double distributions and is adding free cash flow as a basis for its payouts.

“In the coming years, we are well positioned to start returning capital to our shareholders,” Chief Executive Officer Oleg Bagrin said Monday.

Dividends on this year’s profit may jump to $325 million to $472 million, according to Deutsche Bank AG estimates. Russia’s largest steelmaker paid an annual dividend of $115 million for 2013 and made an interim payment of $134 million for 2014.

Severstal, Norilsk

PAO Severstal is moving in the same direction. Norilsk and Severstal combined paid more than $3 billion in interim dividends in 2014, boosting the yields to the highest levels since 2007 and 2009 respectively.

Payouts are preferable to share buybacks, Severstal Chief Financial Officer Alexey Kulichenko said Feb. 18. The company lowered its ratio of net debt to earnings before interest, taxes, depreciation and amortization to 0.7, allowing it to pay half of its annual profit in dividends, he said. That compares with 0.67 for NLMK at the end of 2014.

In October, OAO Magnitogorsk Iron & Steel altered its dividend policy to use free cash flow as a basis for payouts. The dividend yield should jump to about 5 percent or 8 percent on this year’s profit, according to estimates from Deutsche Bank and BCS Financial Group respectively. The current 12-month yield is 4.1 percent, according to data compiled by Bloomberg.

Polyus Gold International Ltd. also plans to diversify its policy as net income can be affected by one-time issues, CEO Pavel Grachev said in March.

Rusal, Novatek

Even United Co. Rusal, once considered Russia’s most indebted mining company, will be allowed to pay dividends under its debt covenants this year, Morgan Stanley said in a Feb. 10 report.

Metals and mining companies have had an easier year than oil and gas producers, with more price stability than crude and lower debt. Russia’s six largest oil and gas companies boosted their combined cash pile to $81 billion at end of the third quarter from $65.5 billion at the end of 2013. Still, only a handful are likely to increase dividends.

OAO Novatek, the second-largest natural gas producer, said this month it’ll pay a record 31.27 billion rubles for 2014, up 30 percent from 2013. OAO Surgutneftegas, with the largest cash pile, may show the biggest increase on payments -- as much as 260 percent on preferred shares -- given a possible non-cash gain on dollar deposits, said Ildar Davletshin, an oil and gas analyst at Renaissance Capital.

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