OREANDA-NEWS. Fitch Ratings has revised the Outlook on Russia-based OJSC MMC Norilsk Nickel's (NN) Long-term Issuer Default Rating (IDR) to Negative from Stable and affirmed the IDR at 'BBB-'.

The revision of the Outlook follows the downgrade of Russia's Long-term foreign and local currency Issuer Default Ratings (IDR) to 'BBB-' from 'BBB'. The issue ratings on Russia's senior unsecured foreign and local currency bonds were also downgraded to 'BBB-' from 'BBB'. The Outlooks on the Long-term IDRs are Negative. The Country Ceiling was lowered to 'BBB-'from 'BBB'. The Short-term foreign currency IDR was affirmed at 'F3' (see 'Fitch Downgrades Russia to 'BBB-'; Outlook Negative' at www.fitchratings.com).

The rating actions reflect Fitch's view that NN's ratings are now constrained by the sovereign's rating and Outlook. This rating view is consistent with the lowering of the Russian Country Ceiling to 'BBB-'.

KEY RATING DRIVERS
Strong Reserve Base
NN possesses a best-in-class polymetallic mineral resource base containing nickel, copper and platinum group metals. Revaluation of deposits under Joint Ore Reserves Committee (JORC) -standards in 2014 resulted in over 50% growth in Proved & Probable reserves versus the last estimate made in 2008. The latest reserve estimate of nickel was 6.7Mt while that for copper was 12.2Mt, which implies more than 30 years of remaining operating life at current production levels. New green field exploration projects in the Taymir peninsular provide potential for further reserve base improvement.

Corporate Strategy with Focus on Delivery
In May 2014, the company presented its strategy update where its top managers, including Vladimir Potanin, the company's CEO and main shareholder, revealed the key points of NN's strategic development, results and mid-term expectations. The company will focus on the development of Tier 1 assets that should meet the following criteria: to be large scale, i.e. more than USD1bn revenue; high margin, i.e. an EBITDA margin of more than 40%; and to have a reserve life of more than 20 years. International and non-core assets that do not meet Tier 1 criteria will be divested. Capital allocation discipline is also a pillar of the new strategy.

Solid Financial Performance
During 1H14, NN's financial performance was strong and in line with Fitch's expectations. The company reported EBITDA of USD2.5bn in 1H14, up from USD2.2bn in 1H13. The EBITDA margin rose YoY due to better pricing reaching 43%, compared with 39% in 1H13. Over 2015-2017, we expect largely stable EBITDAR margins of around 40%, although the recent falls in the rouble, if sustained, should provide further margin uplift. Leverage could be lower if the company is flexible with its dividend levels or if is successful in maximising non-core asset sales proceeds.

Leading Market Positions
NN is the world's largest producer of nickel and palladium, providing approximately 14% and 41% of world total output, respectively. The company is also a leading producer of platinum and copper, with 11% and 2% of world output, respectively.

Country and Industry Risks
Key rating constraints include NN's exposure to the base metal demand cycle as well as legal, business and regulatory risks associated with Russia (BBB-/Negative), although NN's industry leading cost position provides some protection compared with peers. Following the company's positive track record of improving corporate governance, Fitch narrowed the notching of NN's IDR to two notches from its standalone rating in July 2014.

LIQUIDITY AND DEBT STRUCTURE
Fitch considers NN's liquidity position as strong as the company had around USD2.6bn of cash and equivalents on balance as of end-1H14, while short-term debt was USD0.4bn.

RATING SENSITIVITIES
Positive: Future developments that could lead to positive rating action include:
- A revision of the Outlook to Stable is subject to stabilisation of the Outlook on Russia's IDR or raising the Russian Country Ceiling.
- An upgrade of NN's standalone rating based upon its financial and operational characteristics is not considered likely.
- Further improvement in corporate governance practices commensurate with those of industry leaders could result in an upgrade by further narrowing of the corporate governance notching.

Negative: Future developments that could lead to negative rating action include:
- Further downgrade of Russia's IDR leading to a lower Country Ceiling.
- Recurrence of negative corporate governance events.
- Persistent negative FCF resulting in FFO gross leverage sustained in excess of 2.5x.