• Mon - Sat 8:00 - 6:30, Sunday - CLOSED

Public Joint Stock Company Mining and Metallurgical Company Norilsk Nickel (NILSY) Q4 2021 Results - Earnings Call Transcript

Public Joint Stock Company Mining and Metallurgical Company Norilsk Nickel (NILSY) Q4 2021 Results - Earnings Call Transcript

Public Joint Stock Company Mining and Metallurgical Company Norilsk Nickel (OTCPK:NILSY)Q4 2021 Earnings Conference Call February 10, 20229:00 AM ET

Company Participants

Sergey Malyshev – Chief Financial Officer

Sergey Stepanov – Senior Vice President of Operations

Andrey Bougrov – Senior Vice President of Sustainable Development

Sergey Dubovitsky – Senior Vice President of Strategy, Strategic Projects, Logistics and Procurement

Anton Berlin – Vice President of Sales and Commerce

Vladimir Zhukov – Vice President of Investor Relations

Conference Call Participants

Sylvain Brunet – BNP Paribas

Sergey Donskoy – Sberbank CIB

Nina Dergunova – Goldman Sachs

Anton Fedotov – Bank of America Merill Lynch

Timothy Riminton – Barclays

Operator

Good day and welcome to the Norilsk Nickel full-year 2021 financial results. Today's conference is being recorded. At this time I would like to turn the conference over to Vladimir Zhukov, Vice President for Investor Relations. Please go ahead.

Vladimir Zhukov

Everyone we are pleased to host you today at our conference call dedicated to 2021 IFRS financial results, and we have the full management team here at our head office in Norilsk. And it's my pleasure now to pass the microphone over to our CFO, Sergey Malyshev, who will start with overview of our financial results. Sergey, over to you.

Sergey Malyshev

Good afternoon, everyone. Let me start the review of our financial performance for the 2021 with selected financial highlights. Consolidated revenue increased 15% year-on-year to almost $80 million bid on those primarily driven by higher metal prices, sales of palladium and nickel from stock and for sale of copper. This has fully offset the negative impacts of low-production volumes caused by industrial [Indiscernible] shows half of 2021 and shed wood decline in production of Nickel and Copper.

Our EBITDA increased 37% to$10.5 billion primarily due to higher revenue, which was contribute to $1.1 billion years to our EBITDA in 2021. EBITDA margin increased to 59%, putting us among the leaders in the global mining industry. Networking capital increased to $1.3 billion primary [Indiscernible] to change in income tax receivable. Another key driver was increased in the metal inventory is the result of a higher mineral extraction tax rate. Free cash flowing decreased and by 35% to $4.4 billion primarily as a result of settlement of our environmental obligations in 2021, higher capital expenditures and high income tax paid.

Our capital expenses increased 37%, almost $3 billion. But compared to our target for 2021, accelerating investments in both commercial and stay-in business projects. Our spending in Sulphur Program exceed $500 million in the reporting period. In addition, we increased investments in the modernization and upgrade of equipment and facilities aiming at the improvement of industrial property. Net debt EBITDA ratio remained at conservative level of 0.5 times as of December 31st. In 2021, we reduced our financial close to a record low - level. And then some great credit ratings have been controlled both free metric in international rating agencies. Total payments to shareholders in previous year amount to $4.3 billion, which included the final dividends for 2021 in the amount of $2.2 billion, and the share buyback in the amount of $2.1 billion. And now, let's give of the floor to Mr. Sergey Stepanov.

Sergey Stepanov

Thank you Sergey. GM [Indiscernible], guest analyst. Let me start from the Slide number five. The first message is unfortunate, we have 11 fatal cases during 2021 partly caused these higher than usual number partly caused by group accident on Norilsk plant in March 2021, when we lost three whom been doing maintenance and repair of one of the old [Indiscernible]. And on the next Slide, there is some information on our approach for how to deal with these major problem. So there are two major factors considered on this Slide. Number 1 is maintenance and repair. Five fatal cases and several serious injuries happened during maintenance works last year.

And when we are rolling out from the middle of the year, we are rolling out special program which includes training sites, [Indiscernible] of old constructions and video analytics, and also the discipline especially during works on heights. Second big source or contributor to the fatal cases in 2021 was mining operations. And here, you can see some details of what's doing in [Indiscernible], we have created special underground expert group, which is responsible for development and execution. Special set of measures to decrease physical risks to understand, behave, and to implement some new technologies or ensure that technologies, which we're using are implemented thoroughly.

And that they save people's lives. On the Slide number seven there are information on how Sulfur Oxide emission, let me start with reminding that in 2016, slightly more than 5 years ago, our company has closed Nickel plant in Norilsk, which cuts emissions of Sulfur Oxide by 30% to 35%. What was important that these Nickel plant was like heated in the sense of Norilsk and presented the major danger for people's health. Also in 2021, we have closed two smelters on Kola Peninsula in our Kola division. It was especially important that one of these smelter was very close to Norwegian border. And currently we have no smelting capacities in our Kola division. And the last, but probably the most important message is that in 2000 and by the end of this year, we would like to launch -- we are going to launch first line of our sulfur program project in Norilsk and then Sergey Dubovitsky will tell you many details this project, but this projects should basically solve this major problem of SO2 emission in Norilsk by the end of 2025. And we -- we would see major progress as you can see on the Slide next year. In the middle of 2023, there will be a major cut off SO2 emission in Norilsk. So going to the next Slide, this year, we're also rolling out Air Monitoring Program.

There are two parts of this program One is industrial, which is measuring SO2 and other gas emission at source. And the second part is the residential. Residential includes sensors, which allocated all around Norilsk. And the goal of these two programs is to give people to us to and to [Indiscernible] community, excess probably next year when the system would be ready to give excess to online data on SO2 and other gases emissions. It's -- we believe that it would be an important to have these system fully in place approximately beginning of middle 2023, when we will launch our [Indiscernible] project. And the system will allow us to see -- to measure the difference and to see how the project influence the clearness of the [Indiscernible] in our [Indiscernible]. So on the Slide number nine, that is information of our carbon footprint.

Our carbon footprint, as you know, is one of the lowest in the industry, because we supply our operations 50% by [Indiscernible], which is the cleanest energy, probably all-in-all. And 50% by natural gas energy, it's also we can call it the cleanest burning substance. So it's much cleaner than fuel oil or coal for example. And nevertheless, we have also CO2 to decrease program, and some [Indiscernible] else you can see from the Slide number 10 on the next Slide. So our major task is 25% reduction of carbon footprint by 2028.

And as you can see on this waterfall, our current level of emission, there's about 10 million, so on including residential consumption. So if we deduct residential, the starting number for us would use approximately nine million tons of CO2. And you remember that we have beak production increase program, which should add till 2020, till 2030, approximately 3 million ton of additional CO2 emission, but by that time we have two steps for the reduction of these emission.

One is our short-term decarbonization program. We can give you some details on the next Slide. And the second big step is our renewable energy offset program, which should cut or offset, let's say, approximately 2.3 million ton of CO2 by 2028. These renewable energies of our program which consists 50% of solar energy and approximately 50% of wind amateur. We are in the good development stage. On the next Slide number 11, you can see some details. The first step for cutting CO2 It's $1.9 million on the reduction program, and it includes a lot of alliance and operations, the good thing about that, these program was developed in details for each line which you see, we have a detailed plan from almost 2021, so we deeply understand each of this line.

And we're pretty sure of because of that that these 1.9 reduction will be achieved. So on the Slide 12, there is some information about our building. Let's say building and foundations monitoring center. So after the incident with the tank, there was a question about foundations and buildings and how structures of old facilities, how this [Indiscernible] especially to the new environment with global heating and so on. And here, you can see the portal. This is our dispatch center, the new facility. So in this center, we are given an information from the new drilling holes, which [Indiscernible] temperature in the major buildings. Also, there is information regarding in clients, information regarding last quarters from satellites on building and last, climate changes. So these sensor is responsible for sending signals to stop some operations, to stop, to put away people from some buildings. And as you remember, we already them stuff operations in 2021 in approximately 40 buildings in not only production building, but some sewer buildings as well. And we will --I will keep you updated on these program as well. So on the Slide 13, there is information on building energy infrastructure, and we talked about last time as well. Let me first reward -- award to my colleague, Andrey Bougrov, who will tell you a lot of interest in the important information.

Andrey Bougrov

Good afternoon, everyone. I would continue on sustainability issues that were ably described by my colleague Sergey Stepanov. And I would like to start with the short update on the cleanup of the legacy pollution in Norilsk. As you may know, we had launched this program at the end of 2020 the team will almost 900 people that are fully equipped with necessary machinery.

During the last year, the [Indiscernible] unit clean a total area of over 1 million square meters in the Norilsk industrial district. They collected more than 300,000 tons of different wastes and almost 440,000 tons of scrap metal dismantled, more than 100 obsolete buildings and structures. Our plans for this year are even greater. There we're going to clean almost 4 million square meters from waste and scrap metal and the cement of another 154 abandoned buildings and structures. Also want to remind you that total budget for this program until 2013 is $600 million. Next Slide, Slide 15. I would like to dive deeper into our social investments. We used to focus too much on the Letter E in our ESG Agenda. And rightly so. While the Letter S is not getting sufficient attention. I believe it is unfair as we see our contribution to the wellbeing of local communities as an important pillar about ESG strategy. Firstly, I want to highlight that we spent more than $200 million to fight coronavirus during the last two years.

We provided support to healthcare institutions in our regions of operations, supported our employees, and managed to reach over 70% vaccination rate at the main production facilities. Secondly, we continued to execute our corporate healthcare program. At the end of the last year, we opened our first proprietary healthcare center in Norilsk.

Overall, we plan to roll out a network of six healthcare centers in Kola in Norilsk to provide best-in-class medical services through the residents of our regions. Thirdly, we signed an agreement with federal and local governments to contribute ₽81 billion until 2035 to the renovation of Norilsk housing and social infrastructure. And last but not least, we signed a 5-year agreement with indigenous folk people of Taimyr for a total of ₽2 billion rubles to support the traditional way of life and preserve their culture, habitat, and language. Next Slide, please. Overall, our social expenditure amounted to $1 billion last year, that is around 5% of the company's total revenue. And I believe it is the highest in Russian metals and mining industry. As you can see on the pie chart -- the bulk of that spending refers to the provisions we've set for the renovation of the city of Norilsk, while the rest are numerous charity initiatives, including support for a local small and medium size enterprises, NGOs, as well as for sports and re-creation events.

Now, next Slide, I would like to elaborate a bit more on Norilsk renovation programs. The total size throughout contribution, like I said before, is 81 billion rubles or roughly $1.1 billion until year 2035. And that program includes dismantling our obsolete buildings and the construction of multi and low-rise residential apartment blocks. Utilities are great, including a thermal sterilization of soils on the residential buildings and social facilities also reconstruction of sewage and heating systems. It also includes development of digital technologies, the so called Norilsk Smart City project, construction and overhaul of social infrastructure facilities, basically clinics, kindergartens, a sport center, construction of Arctic Museum of Modern Art, and infrastructure for development of [Indiscernible]. It includes -- and it's an important element, urban redevelopment of public spaces.

And last point I want to mention the program with resettlement of families currently residing in Norilsk and [Indiscernible] to other Russian regions with more favorable living conditions. The next two Slides just simply wanted to illustrate some of the projects related to this long-term program. And you could see that includes construction over residential buildings, reconstruction of the sewage hospital, new [Indiscernible] stadium, new swimming pool, and various other important for local population, facilities. I would like to finish my part of the presentation with recent upgrades for our ESG ratings. As you can see, we have been constantly improving our positions despite the unfortunate environmental incident of 2020 and we plan to further enhance our disclosure and improve internal ESG management system to make our company more attractive to investors. That concludes my part of the presentation. I give the floor to Anton Berlin. You have the floor, sir.

Anton Berlin

Thank you. The market section starts Slide 22. This Slide shows the achievements we have in identifying the carbon footprint per product that we manufacture. Sergey Stepanov has spoken about the efforts we've taken to use our greenhouse emissions and footprint that obviously this exercise targeted by investigating where we stand today, we have the methodology and the assessment certified by third-parties. We are lower than average for most of our projects.

We are at par by the global industry with copper and in nickel, we are in the first quartile and given our market share, the average is rather low because of nickel. If you exclude us from this exercise, then the global average without Norilsk would be substantially higher. So we believe that this is our contribution to the green economy. And it does give us competitive edge in supplying our metals to industrial consumers. Slide 23 speaks about the mid-term fundamentals [Indiscernible] in the metals markets. Obviously, the global economy is recurring from the pandemic. So we do have a low starting point in 2020. Things have improved this year.

We have seen a very sizable decline of Nickel stocks at the LME. Over the course of 2021, there was over a 160 pounds that were taken away from the LME warehouses. If we look at the stocks today. It's about 80 tons [Indiscernible], half of them are canceled ones. That means they're not accessible by the market participants. In the Copper market, we do see it while the balance. So supply and demand have been evolving hand-in-hand and we do expect this market to stay fairly balanced in the long run. On the Palladium side, with the major decline in car sales in 2020 in view of pandemic we were hoping for very sizable recovery this year, but unfortunately it was slowed down by the issues with cheap electronic supply for the cars so this put a bit of cap on the speed of recovery. In automotive, we do expect it fully recover this year.

Platinum also experienced this attack on the automotive but there were other sectors with improving demand, but this was offset by increase in supply and mostly coming from work in progress that has been accumulated in South Africa and that has been [Indiscernible] the market last year and this year. Moving further into individual metals, Slide 24 speaks about the current nickel market. It has become rather tight. We can see through the decreased level of Commodity Exchange stockpiles. It's also illustrated by the growth in backwardation, as you probably know, typically market stay in [Indiscernible] on the future price is higher than the current price, but this has not been the case in nickel lately. And the backwardation is hundreds of dollars, which is an indication of physical tightness in the stock market. If we look at what's driving the nickel markets like [Indiscernible] stainless steel remains the biggest source of demand and will continue to do so for a very long time. We have seen very good welcome demand in stainless. The biggest, however, is Indonesia that is increasing their capacity, and they have been second to China in growth rate. If we look at the numbers across the globe, China is 8% increase, which is a very high number if you look at other industries and other countries. But even this was surpassed by Indonesia on relative basis. Its production increased by more than quarter, by 26%, which is remarkable in today's economy is seeing double-digit growth. But the rest of the world had a few percent increase so the total of stainless steel production was up 9%. And this obviously contributed to higher nickel demand.

Slide 26 speaks about the second most important and probably the most hype sect of demand that's the batteries for electric vehicles. The electrical sales are increasingly globally. There is very much political support and sponsorship. Did you promote the usage of high recent battery electric vehicles? China is taking the lead and they're ahead for everyone else. Europe is trying to follow them and keep up with production, but China is ahead by a couple of years they had an early start with building the full value chain. Europe still has to focus on debt. There is better light vehicle production in Europe.

The full value chain has just been established. So the better production, capital production, cost of production will take a few years to ramp up and make Europe self-dependent. But in any case it's another positive factor point nickel demand if we'll look at the increase last year and [Indiscernible] 2020, we see incredible growth, but this is due to the low base -- This is just -- this market is just forming. So those numbers are impressive, but it's just the beginning of the trend. Overtime, this market will mature and growth would be smaller percentage wise, but obviously coming off a higher base in absolute numbers, it will still be sizable. We expect that the next couple of years, [Indiscernible] will become second only to stainless steel production. Looking at the market, we have to look into nickel supply. And Slide 27 focus on the supply. The challenge of nickel is that it's not a uniform market. It comes in different forms and grades. Unlike many other metals, it's actually a subset of partially overlapping markets, but not a full substitute for each other. So if we'll look at the expected growth in nickel supply, there's around 600,000 tons coming to the market as incremental supply.

But most of it is low-grade nickel and with a high carbon footprint, which is not what the green economy and the automotive industry would expect. So looking into the future, we expect that this may become a challenge. Being able to source the quality and the greenhouse credentials that are suitable for the vetting most especially in Europe. The market balance has been extremely volatile in the last few years like 28, we had a few years of deficit. And in 2020 it turned to a surplus because of the pandemic and the downturn of industrial activity. This year, the swing again to rather sizable deficit of more than 160 thousand tonnes. For this year, we expect that the overall nickel unit balance would be in surplus of maybe 40 thousand tons, which is not meaningful given the size of the market in excess of 2 million tons. But if we'll look another step further, we believe that most of the surplus would be applicable to the low-grade nickel. And the high-grade nickel is still in shortage and the backwardation, which is based on the high-grade nickel price discovery is a good illustration of that. The supply is mostly coming off -- the new supply is mostly coming out of Indonesia. They are the world's biggest miner of nickel units. They have been producing mostly [Indiscernible]

They're looking into developing more sophisticate technologies and convert in this into Nickel compounds or other products. But it will take time to develop and to see -- to the expand it to go in bringing this new capacity on-stream. Moving to Copper Slide 29, it's fairly balanced market we have seen, increased in both in the supply and demand, very similar, the overall market stays Howard balance. If we look into ease of this market, it tends to have a surplus or deficit within 200,000 tons, which is unimportant for the market, which is 25 million tons. The market has become a bit tight last year in capacity in 2020, and we expect this tightness to continue into 2022. The -- there is a tightness in the physical market, if you're trying to source physical copper in the spot market, it might be challenging and may take a very sizable effort. But in the longer run, we believe that there are not reserves to keep copper in sufficient supply to the global economy.

Moving to PGMs, which are the biggest market share we have Slide 30, we're seeing recovery. The automotive market is extremely important. It does consume over 80% of palladium globally and more than third of platinum. This year, the chip shortage is still continuing. We're hoping that things would be resolved earlier, but we have seen statements from car companies, end of 2021, saying that they expect these challenges to continue still for the first few months of 2022. The reason for the chip shortage is many fold. There is a number of disconnected events, be the accidents in Texas, the fire in Japan, the effect of pandemic and lock downs in Southeast Asia. But all of them were hitting exactly the same weak spot, and that's chips for the automotive sector. This restricted the number of cars that car makers can produce and offer to the market.

There is new capacity being commissioned in chips. So hopefully, this will be resolved this year. And we should see the market go back to pre -crisis level as early as this year. But for the time being, it's kept and this is impacting to jam demand. Still we believe that the premium market is in fundamental deficit, Slide 33. Even with the lower demand, we see a statistical deficit, it has a decrease from level for million ounces a year to a marginal current troy ounces in 2020. We're kind of down last year, and we still expect the similar deficit to stay for 2022. Declining estimate is about the current ounces. So that's a marginal deficit. But because it's continuous and has been on for many years now, there is a tightness in this market. What's helpful to palladium is that it's natural substitute, rhodium, is at peak prices. So it doesn't really help to you replace palladium with this price differential. If we look at the what was happening on the demand side, the issues that [Indiscernible] nickel had last year were more than compensated by release of working progress from South Africa, the shared accumulated in 2020, and it's coming to the market this year as well as last year. This allowed to increase supplies despite the cutback in production that we've experienced. Platinum, the similarly important metal in the PGM basket, and at Slide 32, the majority of it is coming out South Africa. We are still work in progress, we have seen a very impressive increase 20% year-on-year 2021 supplies versus 2020, but obviously this work in progress has been accumulated, those being processed, we're moving, back to business as usual. On the demand side of the automotive was a bit disappointing. We had increase in our demand.

Most notably, it's the highest price and with the pandemic we do see a pickup from various electronic devices, including laptops, tablets, and smartphones as people have to spend a lot more time at home and the need to entertain themselves. If look at the overall platinum market balance, we still see a sizable surplus of about a million ounces, surplus meaning the gap between demand and production. However, we expect that a sizable part of the surplus would be accumulated by investment demand as it has happened in prior years. And given the [Indiscernible] low price levels of platinum, it makes perfect sense to enter this investment at current prices. We do believe that in the longer run, platinum as available material will have higher demand and will enjoy a better price environment that correlates for the cost of mining. So few -- to sum this up, Slide 33 looks into longer-term fundamentals. We understand that markets can be volatile, but fundamental drivers are fundamental and perhaps give a better view in the longer run than the trend developments we may experience.

We believe that the nickel market will continue to grow at 7% average rate for the next decade. And the supply will be slightly behind, especially if we're looking to the high-grade nickel that's required for the batteries. Batteries would become a very large sector in demand, second only to stainless. And this is the only viable solution for the green economy today. In the copper market, we shared as [Indiscernible] balance for the next decade. It might have its ups and downs. But fundamentally, there are enough reserves. And with the right price, they can be converted into capacity and delivery to the market.

For palladium in 10 years, we might end up in the surplus depending on how things developing ultimotive. Obviously the better electric vehicles are arrival for the combustion engine and the PGM bearing catalyst. The plans to do switch to battery electric are evolving in last few years. They can become more ambitious than the we're at the very start, but we have to see how this has implemented for Platinum, we expect that this market will turn into deficit by the end of the decade. It does have many industrial uses and on top of this is the hydrogen power and fuel cells are an important future technologies that may come to life. And this ends my section thank you and let me pass it forward to our Chief Financial Officer, Sergei Malyshev.

Sergey Malyshev

Thank you, Anton. Slide 45. Now, let me comment on our financial performance in a bit more detail. We start with revenue from metal sales. Those volumes of all our base metals decreased in 2021. This was primarily the result of the production loss caused by industrial incident in the first half of 2021, as well as shared work decline in production of nickel and copper. Low palladium production [Indiscernible] was partly compensated by sales from stocks we accumulated last year. Prices for entire metal basket significantly increased, driven by the post COVID recovery of the global markets. Until so our sales structure would like to highlight that the free PGMs, combined contributed about 50% to our metal sales. Shares of nickel and copper remains almost unchanged and amounted to 21% and 22% respectively. Next Slide, Signet metal revenue.

Consolidated metal revenue increased 40%, 14% to $17.1 billion with the main contribution from high prices of almost $4 billion and sales, inventories, from stock for over $6 million. These factors more than offset the negative impact of production volumes at $2.4 billion. In terms of geographical breakdown of sales, Europe remains our single largest market with its share increase, increasing to 53% of total sales. In terms of to Asia, decreased to 3% to 7% as the Chinese manufacturers, we are substituting class 1 nickel from Indonesia. Next Slide. Effect from the changes in installation in 2021 and this year. The recent change in taxation but we'll discuss this in a bit more details. As you know, the Russian government has recently announced several amendments to Russian tax legislation. First was the increase in mineral extraction tax rate by 3.5 times from January 2021. And in other words, introduction of export duties for the five months of 2021 starting from August. In 2022, expert duties have been canceled. However, mineral extraction tax become higher. As of now, we estimate, the overall level of tax bottom in 2021 to be brought in line with the 2021 level. Slide 48. Now let's look at EBITDA performance. Our EBITDA increased 47% to $10.5 billion. EBITDA margin increased to 59%. As we have already discussed, high realized metal prices made a significant $3.9 billion contribution to the growth of our EBITDA. Secondly, a small base effect of the first half of 2022 when we organized more than $2 billion environment provision, had a major impact on our EBITDA growth rate this year. Finally, the company has gained additional $460 million from the sale of refined metals, from stock. The overall negative EBITDA impact of low production volume were assessed at adjusted over $2 billion. The decrease production volumes relates to the suspension of underground mines in [Indiscernible] in the first half of 2021. And [Indiscernible] decline in production of nickel and copper. Both mines and the concentrator have now returned to their full operating capacity. In terms of macro factors, we would like to highlight the effect of change in tax legislation. The three and half times increase of minor accident [Indiscernible] rate from January sales and [Indiscernible] translated into our EBITDA loss of $745 million. The positive effects of Russian ruble depreciation against the US dollar partly offset the inflationary growth of expenses. Social expenses doubled in 2021 and amounted to more than $1 billion. This was driven primarily by the provisional related to the agreement of social economic development plannings. We expect to spend about $1.1 billion on this agreement and total for the full length 15 years. Slide 39 cash operation costs in 2021, our cash operating cost increased 25% to $4.9 billion primary open to changes in tax legislation.

Expediters and free in-house time increasing meter rate in print into divine resulted in cash costs increase in almost $900 million, adjusted cash costs increased by 11% labor cost growth exceeded the rate of inflation due to increase in the headcount for a one project. Total expenses increased primarily due to higher clean up, security, and industrial separate expenses. In terms of our construction, labor remained the largest item, accounting for 29% of total. Slide 14, let's discuss our networking capital. In 2021, networking capital increase to $1.3 billion.

This level is broadly generate in line with our previously announced targets. The increase was primarily driven by macro factors. Changes in income tax [Indiscernible] led to an increase in network and capital by more than $500 million. The second key growth driver is the increase in metal inventory caused by almost $500 million. This was primarily the result of high mineral exploration tax rate and export duties in 2021. Networking capital decreased by approximately $200 million falling to the [Indiscernible] of advances from customers. I would like to also mention a decrease in network and capital of $176 million due to increase in accounts, payable, and new investments -- investment cycle. We're increasing our 2022 working capital guidance to $2 billion. We expect [Indiscernible] increase in metal inventory as a result of shed water maintenance box in Felicia Torrance's of Nadezhda Smelter and high mineral exploration tax expenses. Slide 41 CapEx. In 2021 our capital expenses increased by 40, 57% to $2.8 billion owing to of high investment in both commercial and stay-in business projects, as well as environmental program. Move the key growth drivers. I would mention our Sulphur Program in a risk at Majestene Smelter. The projects is in exit stage. They have spent more than $500 million on it in 2021. How much growth projects such as South Cluster and Talnakh concentrate upgrade were on track for expansion and also contributed to the CapEx increase.

On this industry infrastructure increased by almost $100 million in 2021, mostly driven by investment in safety measures and equipment upgrade. Our commercial CapEx increased to $0.8 billion and our business CapEx amounted to $1.4 billion. Next Slide, free cash flow in 2021, our free cash flow decreased to $4.4 billion mainly as a result of cash reimbursement of environmental obligations in the amount of $2 billion and increase in capital expenses, as well as high income tax rate. These negative effects were partly compensated by an increase in cash inflows from operations related to high metal revenue. Though the shipments [Indiscernible] 40 to three. At the end of 2021, the company's net debt amounted to $4.9 billion. Net debt to EBITDA ratio slightly decreased to 0.5 times. The company maintained its strong liquidity position of $9 billion, including $5.5 billion of cash and $3.5 billion of committed credit lines and overdrafts. This level of liquidity covers the debt repayments for the next three years and 9 months, including the current year. Debt structure remained stable with the share of short-term debt increased to 16%.

Majority of this award will partly pre -funded during the course of 2021. The company continues with the portfolio optimization. In October 2021, the company placed $500 million in rubles with 2.8% coupon at this historically lowest spread to benchmark in the history of our public debt offerings. Also we have refinanced several bilateral loan facilities in the amount of over $700 million with new loans with tenors of three to five years and lower pricing. Slide 44 finance cost reduction. In terms of our balance sheet management, we're quite proud to highlight a major progress in reducing the cost of debt service to a record low level in our corporate history. In spite of an increase in the average amount of our gross debt [Indiscernible] by 30% since 2016, our debt portfolio effective interest rate decreased by 2.3 percentage points and totaled 2.8% at the end of previous year. This reduction of our effective interest rate was well ahead of the 0.7 percentage points reduction of base interest rate over the same period. We believe that this is a quite impressive result, and it's fully attributable to our constant focus on the proactive debt management and improvement of lending terms we sell main debt providers. Our traditional Slide sensitivity, number 45. Given the high leverage of our financial performance towards exchange rate, let me touch quickly on the latest sensitivity. The predominant portion of our operating and capital expenses is [Indiscernible]. In 2021, [Indiscernible].

The operating and capital expenses were at 91% and 87% respectively. As you can see from the chart, U.S. dollar to ruble rate of 74 at 1% business and change of the rate. [Indiscernible] it's $56 million of EBITDA change and $112 million of free cash flow change. And now let me pass the floor again to Sergey Stepanov

Sergey Stepanov

Thank you. Sergey. In the Slide 47, there are some update on our mines recovery. As you can see on the left side of the Slide, our Taimyrsky and Oktyabrsky mine are fully recovered. However, we keep special focus on hydrogeology. Through 2021, we have conducted additional drilling for a better understanding our underground water locations. And also, we have stopped some works on two mines for a long-term investment project until the moment when we will understand better how the roadways should be located. And beginning of 2022, we hope to get all these important information and with the understandings of hydro geology we will start or we'll continue all the roadways for investment projects. On the right side, you can see information on Norilsk Concentrator recovery. Norilsk Concentrator launched 100%. There are some changes. We have decided to exclude all the crushing facilities from alterations because besides [Indiscernible], we estimate that some buildings as not reliable and we exclude all suspicious buildings from operations forever. And we launched the Concentrator on the new scheme, which includes mobile crushers. And on these scheme, on the one hand, we arranging now on the plant on the, speed which was plant initiative for the end of 2021 and beginning of 2022, on the other hand we need to do some internal modernization in the plant, to adjust to just allow production license on these new scheme. And also last thing to mention here.

And that's we're conducting some supports and construction upgrade for noticed Concentrator because the building, the main building is quite old, but during 2021, [Indiscernible] support modernization program was fulfilled. And now, we are much more sure that we are operating a reliable concentrator. On the next Slide 48, there's brief information of soft [Indiscernible] ramping up. Basically, everything goes in accordance with our initial schedule, which allows us to confirm our production guidance. And here we can pass to the next flight, 49. So all production guidance for 2022, '23 and '24, basically would come from the numbers which we presented before. Two things to mention here, the production for 2022 and 2023 influenced by large lump [Indiscernible] maintenance on Majestene Smelter, so basically we are still one of Majestene the furnace for three months in 2002 and the second smelter will be stopped in 2003, also for three months. These maintenance is done approximately once in seven years, and so it's proper time to do it. From 2024, we will operate without these limitation on full capacity. And for the next two years, another important task is to complete important projects. For production, most important projects like building of new concentrator, building new furnace, and here is the right point to pass the turn Sergey Dubovitsky, who will inform you about this important tasks.

Sergey Dubovitsky

Thank you, Sergey. And good evening or good afternoon, ladies and gentlemen. So let me give you some highlights to our development program. We should remind is organic growth segment digitization program for Norilsk Nickel. And to start, let me remind that our environmental program is at the core of our strategy with the sulfur program being the most acute and material part of the environmental program for the next few years. So key highlights here. First let me once against stress that targets for Kola division already -- are already achieved in the previous year and that was already mentioned by my colleague Sergey Stepanov. Execution of Sulfur project at the Norilsk division is ongoing.

So construction is ongoing and key milestones to be achieved here are 2023 and 2025 when the software capturing facilities will be built for Nadezhda and Copa Smelters respectively. And again, to remind so the ultimate goal is to decrease Sulfur dioxide emissions around Norilsk by 10 times. So going further, Slide 51, some [Indiscernible] picture is how our flagship project that Nadezhda Smelter is progressing I mean, the building of software, capturing and [Indiscernible] utilization facilities. As you can see here, the photos construction is ongoing at full team, only the previous year, we spent some over $400 million only at this site. Next Slide, please. Let me also remind the landscape will forward downstream development program, this program aims at achieving three goals. One is expansion and now this modernization. Third one is actually environmental revamp of all the facilities. So going from the -- along the value chain from left to right, concentration by 2027. So it should be a 100% renewed and expanded by two times. So with two totally new concentrators at Talnakh and in Norilsk. And then for smelting, so one big pieces software program, as I said. But on the top of it we will be building new smelting line at Nadezhda Smelter, expanding the capacity of this smelter by 30%, and also building new converting facility for our Copa Smelters. For refining piece, so new copper refinery capacities to be built for Kola some of our major projects Nickel refinance color will be totally renewed at an upgraded and our operations in sealant will be expanded. So next Slide 53. Again.

To remind on our extensive infrastructure, energy infrastructure modernization program so we're going to spend $8 billion within the kits on energy infrastructure in yield. And it's relates to all pieces of the energy value chain from gas production and gas transportation in the generation of power grid facilities. Concluding Slide in this section is 54. Again, we reiterate the CapEx guidance for this decade as we presented it at Strategy Day in November. And as already mentioned by my colleague Sergey Malyshev so our 2021 CapEx grew almost 60% compared to 2020 level as well as the average of 2013 to 2020. And we expect the growth by over 40% to the level of ₽4 billion in the next -- in this year, sorry.

And our investment cycle is to peak in the 2023-2025 period when the CapEx level will reach up to $4.5 billion annually. And key contributors to this gross -- the gross and CapEx numbers are key elements, which are the environmental program, which again software program being the most substantial part our gross program. That includes the mining piece, the mine expansion at Talnakh, South Cluster projects that there was mentioned, and the downstream development program that I briefly outlined in the previous Slides. And our modernization program for all key facilities, the main production facilities, but as well in the energy infrastructure. And so to sum up, so we reiterate the cumulative 2023, 2030 CapEx program at the level of cumulative level of $32 to $35 billion. So thank you very much. I think that's the end of the presentation, Vladimir.

Vladimir Zhukov

Yes. Thank you, Sergey. Now we're happy to go into Q&A sessions. So please ask your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we will take the first question from Sylvain Brunet, from BNP Paribas, please go ahead, your line is open.

Sylvain Brunet

Good afternoon, gentlemen. My first question is to Anton. Could you share a bit your outlook on Rhodium, which is a very requested commodity as well. And we don't often talk about the outlook, so maybe a bit on the near-term and medium-term outlook. And I think one question is on cost that the CMD you had talked about, an additional catch-up in wages in 2022. So if you could just reiterate the guidance on that and any guidance for total cash costs, let's say, at today's input costs into 2022, please. Thank you.

Anton Berlin

The rhodium market is tiny and is assuming volatile because it's a byproduct. So every year, it's relative concerned whether in Russian mine or South African mine is fluctuating. So it's very difficult to give a firm forecast on supply side. Demand is even less predictable. And unlike platinum and palladium, where we have some visibility stockpiles. Rhodium stockpiles are almost non-existent and certainly extremely secretive. So I'm afraid it's difficult to give a similar quality of outlook as we do for other metals. Reduced this metal in [Indiscernible] currently and probably the big change will come in 2023 once there's RD regulation in China. And depend on how it's formulated, it might have a small or big impact on rhodium demand.

Sergey Malyshev

Public Joint Stock Company Mining and Metallurgical Company Norilsk Nickel (NILSY) Q4 2021 Results - Earnings Call Transcript

Second question. From Sergey Malyshev. We expected that the total cash costs will increase to 25% ruble [Indiscernible] in 2022, which is above expected through CPI for cost of approximately 4% in 2022 by the Bank of Russia. 2022 salaries increase across the group, including a 20% increase in Norilsk Division, increase in headcount, intrification of repairs and [Indiscernible], and ecological projects, such as cleanup for Legacy pollution with Norilsk. The main reason for why we're planning to increase our sellers rip-off expected. It has to do with the tightening labor markets. We're facing strong competition on just from other metal mining companies, but also from oil and gas [Indiscernible], which are expanding operation in the Arctic in our vicinity.

Vladimir Zhukov

Next question please.

Operator

Next question comes from Sergey Donskoy from Sberbank Bank. Please go ahead. Your line is open.

Sergey Donskoy

Yes. Hi. Thank you very much for taking my questions. I have a few but hopefully short ones. One for Anton to start, speaking of nickel demand outlook if I understand it correctly, you expect demand for nickel from stainless steel industry to actually accelerate this year. I think if I'm not mistaken that last year we saw extremely high pace of growth in stainless industry, which I would be surprised to see a repeat this year again. How realistic do you think in this context to expect nickel demand from stainless steel producers accelerating in '22?

Anton Berlin

We do expect sizable growth in stainless. But last year, you might recall it's coming from a lower base. So the numbers could be a bit misleading. We do expect to see growth in stainless. The sizable pickup in stainless manufacturing in Indonesia and the [Indiscernible] of nickel is predominantly coming from Indonesian NPI or Filipino ore that is converted into NPI in China. So this is what they called the pacific triangle. And the stainless development in Asia is not having a sizable impact on high-grade nickel. They're becoming rather independent markets, the stainless grade and the battery grade were high-grade.

Sergey Donskoy

Okay. I understand. Thank you. Then the second question is about new Norilsk Concentrator. You mentioned this project at the end of your Slide pack, but you haven't spoken about it much. When do you expect investment decision on this project to be made and when do you think you will start investing?

Sergey Dubovitsky

So this is Sergey Dubovitsky. So the project is ongoing on a planning stage. So we have a stage gate system when we -- for each phase of the project takes certain decisions. So the final investment decision is to be made in this year. So we are now at the early stage of design phase. But as we outlined earlier, so we now [Indiscernible] presentation, so we already defined the key parameters for these concentrator. So meaning that's going to be the new concentrator on different sites compared to the existing one and that's the productivity of these concentrator will actually double up to 18 million tons for processing. Again, this year, so we will pass certain gates going to, as I said, within this year to the final investment decision.

Sergey Donskoy

Understood. Thank you. And lastly, two questions on finance. One, this $2 billion working capital, should we think about it as your new normal going forward? Or there will be possibly some reduction in later periods. And second is there any update about your dividend policy going forward?

Sergey Malyshev

Regarding working capital, given where into supplies, economic capitalize to replace us and maintenance [Indiscernible] such us shared would maintain fresh furnaces [Indiscernible] and ecological projects leading to an increase in our working progress as well as expected fills increase in metal events due to high [Indiscernible] and high cost of sales due to seller distribution, where we bought a CPI, already mentioned, where decreasing 20% working capital guidance to total [Indiscernible] We expect that our capital, we will remain at this elevated level [Indiscernible] of course, to commodity price and FX [Indiscernible] for the next couple of years.

Sergey Donskoy

Thank you.

Vladimir Zhukov

Forgetting dividend services by the measure, speaking in terms of the final dividend for 2021, which I remind you is the last financial year that discovered by the current dividend policy. The final dividend will be calculated in line with the current dividend policy, which are 60% EBITDA, first less interim dividend that has been already paid. Regarding the dividend policy going forward, this is a matter of shareholder negotiations and basically we're not having any news there.

Sergey Donskoy

Understood. Thank you.

Operator

And then I'll take the next question from Nina Dergunova from Goldman Sachs. Please go ahead. Your line is open.

Nina Dergunova

Good day. Thank you very much for presentation and have a couple of questions from my side. The first one, can you please share your thoughts on recent performance of nickel and palladium, if you think that strong performance year-to-date was related to regional geopolitical tensions, specifically in case of palladium that has more fundamental reasons behind the recent performance? In the second question relates to social expenses. Last year, they were elevated by provisions related to this big renovation program in Norilsk, can we treat these as non-maturing and assume that social expenses should return to around $500 million in 2022 or the $1 billion spending is something that is a new normal for the company. Thank you

Anton Berlin

This is Anton Berlin. I think it's mostly driven by fundamentals, but there's always a dip of politics when you look at -- how sanctions being discussed. Many people are trying to sort of impose this on all the major trade flows of the confined. We don't think this would impact our ability to produce and supply metal, but this is probably part of the trend price you may see today.

Sergey Malyshev

Regarding our social expenses in 2022, we expect our social expenses at the level of 2021, but excluding the one off provision for the renovation of the city of Norilsk.

Nina Dergunova

That is clear. Thank you very much. And one follow-up from my side on the previous question. When can we hear on [Indiscernible] recommendations patients from '21 process?

Vladimir Zhukov

Well, in terms of the final dividend for 2021, this will be recommended by the Board of Directors in due course. I guess you can use the same timeline as we had last year of the same time in the second quarter.

Nina Dergunova

Thank you very much.

Operator

[Operator Instructions]. We will now take the next question from Anton Fedotov with Bank of America. Please go ahead your line is open.

Anton Fedotov

Hello and thank you very much for presentation I have a couple of questions with regards to your plan to rebuild the Norilsk Concentrator, what approximate budget for this project can we expect? And as I understand, this budget is not far from your current CapEx guidance. Am I correct.

Sergey Dubovitsky

So that sort of you [Indiscernible]. So for now, as I said, so that's not the right time actually, to give the executive guidance for the budget for this program, still we included some drilled into the provision in our CapEx guidance, whether we made it a not, I think we'll inform you in due course within this year and I said when we take the final investment decision.

Anton Fedotov

Thank you.

Operator

We will take the next question from Sergey Donskoy with Sberbank. Please go ahead. Your line is open.

Sergey Donskoy

Yes. Thank you. Which is maybe one more question. On a Bystrinsky guidance, you expect a noticeable decline in gold production in 2023. What is it related to? and if you could provide [Indiscernible] expectations for gold and copper production for this mine.

Sergey Dubovitsky

You placed life of mine gold production projects from will come back in service [Indiscernible] unless [Indiscernible] it might come back. And so in real, we see that growth production should be more or less the same through life of mine. And we also as you remember, we also have some ore which is not going to -- into to the meal, and to refine that right now, which contains mostly ore or gold. And we have the usual projects in mind to produce gold on surplus to, to what we're producing now. So in general, I think that for 2023 it's a question of great for life of mine. So let us come back to you with the life of mine because it's not great for 2023 I see basically no reason for coming down. I think that's it.

Sergey Donskoy

Thank you.

Operator

We will take the next question from Timothy Riminton from Barclays. Please go ahead. Your line is open.

Timothy Riminton

Hi there. Thanks for your time. I have a few questions. I think I'm starting with the new disclosures on your CO2 level kind of production. That's really interesting. Thanks for that. I'm just wondering if on the market side you're seeing any price premium or increased demand for lower-carbon production, especially nickel and copper. And on the nickel point, whether you're seeing any premiums for the high grade quality of your nickel, especially as you're seeing an increasing surface lower-grades metals there.

Anton Berlin

In the [Indiscernible] market as a consumer, you can't charge a premium for a little carbon, so the best we can get out of our customers is a tap on the shoulder. They are very keen to buy low carbon feed, but they're not willing to pay as they can't pass the cost further down the value chain. This will change when regulation comes into effect, and with a common tax in Europe, this will change, but as you probably know, this is a few years ahead. The first stage starts in 2026, and it doesn't include the metals we deal with.

Timothy Riminton

Thank you. And on the high grade versus surplus in.

Anton Berlin

On the high grade, the price discovery in the global market is based on high grade price. So what you see as LME contracts, this is high grade nickel. The MTI price discovery is different and you can see at the trading at a gap. The current gap is roughly $2,000 per ton of nickel contained and this has been up and down. At peak, it was actually a premium to the LME and at its lowest, it was more than $2,500 discount so it has a different price discovery and there's no premium percent that is listed or traded in this market.

Timothy Riminton

Thank you. My next question is on MET and the increased taxes we've seen this year. Your guidance was that the tax changes coming into effect in 2022 would see similar tax levels. Obviously, you're expecting production to be bound in 2022. So are you expecting a similar sort of dollar amount assuming prices they roughly the same level? Or should we expect that amount to increase given your increasing output?

Sergey Malyshev

As you recall, the [Indiscernible] of MET has changed from January 12 of this year. Now, the MET expenses are linked to commodity prices and calculated as approximately 6% of premium for our division mine [Indiscernible]. For the calculation, I can refer you to one Slide of our presentation. I don't remember number. However, export duties, which we introduced in [Indiscernible] five months duration despite [Indiscernible] the year. So in all taken into accounts, not export duties to be paid in 2022, but higher than we achieved. We estimate that the net impact on us will be it. And [Indiscernible] in 2021 combined energy [Indiscernible] due to the incurred amount up to approximately $1 billion and total of these two combined were up by about 0.8 from 2022.

Timothy Riminton

Okay. Thanks very much. And then my final question is on -- have you -- I see that you've got significant open credit lines about $3.5 billion. You've got two Eurobond maturing this year. Can you provide any comments on how you're thinking about the year-ago market at the moment, obviously spread a bit of geopolitical premium at the moment? But so would you -- with that then put you more towards refinancing those year bonds with bank debt? Any comments would be helpful. Thanks.

Sergey Malyshev

Thanks for the question. [Indiscernible] is a key principles from financial features such as constant improvement of the profile reduction of service costs and extension of maturities without compromising our FX position. In terms -- in 2022, two euro bond issues maturing for total of $1 billion. Of this we have already refunded 500 million redemption via euro bond placement first fall -- last fall. To the refinance the ratio options, including economic up on placement subject to the modernization of good spreads, International, local markets, as well as taping in charge reserve committed lines into most conservative scenario. I also pointed breakthrough, refinancing exercises, including refinancing bankrolls, board should prepare amortization dates, such as for one bid on indicated loan facility, and several valid loans. We intend to expand the pool of available committed credit lines, as well as the trade finance facilities to support growing gaps program.

Timothy Riminton

Thanks, that's very helpful. Thank you.

Operator

No further questions at this time. I would like to turn the conference back to our host for any additional or closing remarks.

Vladimir Zhukov

Well, this completes our session. Thank you everyone for dialing in and participating in the webcast. We hope that we have answered your questions. If you have still any questions outstanding, we - - please feel free to reach out directly to our IR team, and we'll respond in due time. And thank you and hope to see you again in the coming future.

Operator

This concludes today's call. Thank you for your participation. You may now disconnect.