Money - into business: Interros offers Rusal to cut Norilsk Nickel dividends

Ivan Petrovsky

To begin with, let us explain that in the spring, each joint-stock company is obliged to distribute the profits accumulated at the end of the previous year. Such an industry giant as Norilsk Nickel has financial flows scheduled for years ahead, and dividends are calculated according to a shareholders' agreement valid until 2023.

The existing formula for calculating dividends suggests that $ 3.5 billion should go to the accounts of shareholders, the main of which are Vladimir Potanin's Interros (34% of shares) Oleg Deripaska's Rusal (27.8%), as well as Roman Abramovich's Crispian and Alexander Abramov (4.2% of shares).

However,according to Interfax, Vladimir Potanin suggested that Oleg Deripaska change the usual formula ahead of schedule. Interros general director Sergey Batekhin told Interfax that the proposal will be considered at a meeting of Norilsk Nickel's board of directors on March 29.

The arguments are more than serious. The need to cut dividends in Interros is explained by the growth of expenses for the modernization of the enterprise and the beginning of the investment cycle of the long-term development program of Norilsk Nickel until 2030.

"We are in favor of a more adequate proportion between dividends and investments in the development of the company", - Batekhin said. Under the current formula, Norilsk Nickel will need to borrow in order to pay dividends and support the investment program, he explained.

It should be noted that the discussion about dividends is taking place against the background of unprecedented payments by Norilsk Nickel in the claim of Rosprirodnadzor in the amount of 146 billion rubles. Although it is known that Potanin proposed to limit annual payments to the amount of $ 1 billion even before the diesel spill in Norilsk.

In addition, the MMC has already transferred about $ 1.2 billion to shareholders in the form of interim payments for 9 months of 2020. According to Interros, paying another 3.5 billion would be "socially unacceptable for Russian society".

And here it should be clarified why it is now that the social justice thesis interferes with the distribution of profits. The key will be the position of President Putin, who literally stated the following:

"The task of the Government is to create such conditions under which the available resources and those resources that may appear in connection with the situation in the world market would be more efficient, to direct these funds not to pay dividends and not to distribute them somewhere there - legally, I understand, but somewhere out there, in quiet harbors - quiet today, tomorrow what will happen, we do not know, meaning these uncertainties - but direct them to the development of our own businesses or new businesses within the Russian Federation".

The situation with the Norilsk Nickel investment program fits directly into the call of the head of state "to direct money for the development of their own businesses", and Vladimir Potanin decided not to wait for repeated reminders.

By the way, there is nothing unusual or discriminatory for the shareholders of a large company in the new formula for calculating dividends.

"We propose to agree on a change in approach now. Our proposal to pay from free cash flow, that is, from real money that the company earns, minus the costs of current activities and development, and not from the accounting EBITDA indicator, which does not take into account capital investments," Sergei Batekhin told Interfax, recalling that this is how the Rusal holding En+, as well as the majority of mining companies, calculates dividends (emphasis added - ed.)

In general, Interros considers 50-60% free cash flow optimal for the future.

"This benchmark will give the market understanding and predictability regarding future payments. Norilsk Nickel will be able to guarantee the market a dividend yield of 5-7% throughout the entire period of the 10-year development program - with stable or growing prices for our base metals", - Batekhin said...

“Before the accident, we were in favor of limiting dividends, but now, all the more, we cannot ignore the challenges that the company faces when transferring high dividends to shareholders... You need to be socially acceptable for the society in which you live - and for 80 thousands of their employees, both for the public and for the authorities", - concluded the head of Interros.

However, according to Mr. Batekhin, it follows that the main partner in the person of Oleg Deripaska is against changes in the dividend policy. Whether he is ready to meet halfway and start discussing a compromise option, will show in the near future. Moreover , Rusal's financial position has stabilized compared to the situation in 2012, when the parties entered into an agreement.

The trump card in negotiations with Deripaska is the fact that if it is not possible to agree on a reduction until 2023, Norilsk Nickel may deduct the surplus that shareholders will receive in 2021-22 from future dividends.

"The dividend spike that occurs within a year and a half before the expiration of the agreement, we propose to consider it as a kind of advance payment on account of payments over the next 10 years [for the period up to 2030]. This means that in the following periods the dividends will be less", - Batekhin.

The agreement, concluded at the end of 2012, gives Rusal a veto on operational issues, using which the aluminum company blocked the Arctic Palladium JV, although the deal was economically viable.

"In world practice, there are not many examples of the use of shareholder agreements... I advocate that this agreement should cease to exist and Norilsk Nickel returned to the classical management model, which is typical for most large public companies", - Batekhin said.

Obviously, the most unpleasant thing about the agreement with Rusal is that it allows a shareholder to interfere in the day-to-day activities of management through a system of their own controllers. This add-on is redundant, because any public company has internal and external audits.

By the way, Rusal was against the payment by Norilsk Nickel of 146 billion rubles in damages at the claim of Rosprirodnadzor, although the company's management argued the need to agree with the decision of the court of first instance in the circumstances.

“Unfortunately, we have a very weak basis for agreements, due to the fact that we look at the future and the very role of Norilsk Nickel differently. This is a choice between strategy and tactics: a focus on long-term development with the payment of adequate dividends during for a long time or to squeeze out of Norilsk Nickel as big dividends as possible now, because some of the shareholders need money for another asset", - Batekhin said.

At the same time, he added that Interros has no plans to increase its stake in Norilsk Nickel: “We are satisfied with the block of shares in Norilsk Nickel that Interros now owns.