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Edited Transcript of GMKN.MZ earnings conference call or presentation 16-Mar-17 2:00pm GMT

Thomson Reuters StreetEvents

Full Year 2016 GMK Noril'skiy nikel' PAO Earnings Call (IFRS)

Moscow Oct 11, 2017 (Thomson StreetEvents) -- Edited Transcript of GMK Noril'skiy nikel' PAO earnings conference call or presentation Thursday, March 16, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Zhukov Vladimir

MMC NORILSK NICKEL - VP of IR

* Sergey Malyshev

MMC NORILSK NICKEL - SVP & CFO

* Sergey Dyachenko

MMC NORILSK NICKEL - First VP & COO

* Anton Berlin

MMC NORILSK NICKEL - Head of the Strategic Marketing

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Conference Call Participants

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* Daniel Major

UBS - Analyst

* Nitesh Agarwal

Citi - Analyst

* Denis Gabrielik

Otkritie Capital - Analyst

* Barry Ehrlich

Citigroup - Analyst

* Editor

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Presentation

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Operator [1]

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(interpreted) Ladies and gentlemen, very good to see you at the conference call for the investor dedicated to the Full Year 2016 Financial Result of Norilsk Nickel. This conference will be recorded. Now, I give floor to Zhukov Vladimir, Vice President for Investor Relations.

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Zhukov Vladimir, MMC NORILSK NICKEL - VP of IR [2]

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Good evening for those who are from Moscow and good morning to those from New York. Good to see you at the conference call dedicated to the full-year 2016 financial results. The speakers will be Sergey Malyshev, Senior Vice President, CFO; Sergey Dyachenko, First Vice President, Chief Operations Officer and Anton Berlin, Head of Strategic Marketing and [Alexey Bashkirov], Head of M&A. Let me give the floor to our COO, Sergey Dyachenko.

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Sergey Dyachenko, MMC NORILSK NICKEL - First VP & COO [3]

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Good afternoon. Let me start our presentation with the performance of Norilsk Nickel in terms of health and safety. There is declining trend in fatalities and injuries, you can see it on the slide that we are reducing the long-term frequency injury rate by 20%. Unfortunately facilities in this year were flat year-on-year, but we hope that this figure will go down in the next years given our efforts in when we invest in this area.

Slide 4 shows our efforts in for the third year in a row. We keep auditing health and safety of our Company by DuPont which increased our rating from 2.5% to 2.7%. So we are approaching international level three -- rating of three is our short-term target. And we should remember that we started our journey in [2013] and we had the rating of [0.8%] to 1.2%. Let's get back to page 4, in 2016 we continue internal audits and inspections at overall site. There were 37 audits and based on the audit results, we developed measures to improve safety. We brought our work places in line with the global standards. We continued to hold trainings for our staff and you can see that many people accomplished trainings in health and safety. And we continued to introduce Global Safety standards in our Company, and those standards, which we started to implement in 2016 -- in 2014 are at a very advanced stage and we are moving to the final stage of this implementation of these standards. Also, we held trainings for executives and line managers and started risk-focused approach implementation in our safety related operations. Our goal for 2017 is quite ambitious is to continue the trend of reducing the number of injuries. It was a challenging task part of our deliveries. And our ultimate goal is zero fatality rate. I give floor to the CFO, Sergey Malyshev.

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Sergey Malyshev, MMC NORILSK NICKEL - SVP & CFO [4]

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Good afternoon Dyachenko, thank you very much. Let me briefly present the key financial figures of 2016. The Company's revenue amounted to $8.3 billion, which is 3% lower than in the past year. The key reasons for the decrease were lower exchange prices for metals and one-off decrease in output due to the program of reconfiguration of our production capacities but these factors were partially offset by selling metals from our inventories.

EBITDA amounted to $3.9 billion, a decline of 9% mainly due to lower revenues. However, we managed to maintain EBITDA margin at 47%, one of the highest levels in industry. Our net profit grew by the same 47%, reaching $2.5 billion in 2016, this is the highest level for the last five years of the Company's operation. Capital expenditures remained almost flat at $1.7 billion which is the average level for the Company for the previous two years. We will review a breakdown of our capital expenditure on the relevant slide. Net working capital at the end of the year was $443 million, down 57% due to one-off effect of copper feedstock purchase and sale of metal stocks. Excluding one-off events, our net working capital went down to $739 million. Free cash flow amounted to $1.6 billion, which is 34% lower than in the previous year, mainly due to a drop in EBITDA and increase in the [customer] investment cost recognized in the balance sheet. Nevertheless, free cash flow to revenue ratio was 19%, which is one of the best indicators in the industry too sweeping a conservative approach to our financial stability, net debt to EBITDA of the Company remains at a comfortable level of [1.17]. At the end of the year, rating agencies confirmed the correctness of our approach according to Standard & Poor's and Fitch, our rating is still investment grade. Now that in general paid out interim dividends for nine months 2016 in the amount of $1.17 billion, thus we maintain the traditionally high level dividend yield driven in an adverse market environment.

The next page, we would like to tell you that the Company is still among industry leaders in terms of gross EBITDA margin at 47%. As I said it, this is result of increased sales in metals and favorable ruble exchange rate. As to our leverage is still conservative at the end of the year, net debt to EBITDA stood at [$1.17 billion] which is still one of the lowest metrics among our global peers.

These are the key statements in terms of our financial performance. So I would like to give floor to Anton Berlin, Head of Strategic Marketing, who will deliver presentation on our metal section.

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Anton Berlin, MMC NORILSK NICKEL - Head of the Strategic Marketing [5]

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Good afternoon. On slide 6, you can see our view of the metals markets, nickel and palladium are at a deficit. So we're looking at the markets in the mid-term, our copper and platinum markets are balanced. So we do not see any changes in terms of fundamental factors.

On slide number 9, illustrated our nickel stocks which influences the market balance and prices. Nickel stocks are fairly high, considerably above the average historical level. And compared to copper as well, that's about 86 days. Normally, it would be two to three weeks or so.

Slide 10 shows the changes in cost of nickel mining. Though cost was declining. We should consider the factors which enabled the decline and the most considerable factors are the national currencies of the mining countries, mining companies. We think in 2017, this trend will reverse, because the currencies are at the bottom and they are going to recover oil prices and relevant markets are also recovering. So, this factor will be relevant. And markets becomes more sensitive to price movements than it was two to three years ago.

If we look at slide 11, showing the structure of supplies, though a number of companies are loss making, they all respond differently to status of the market. There are only 8% of really price sensitive companies, they are exposed to risk, but over 20% of companies with cost above the market price for nickel, but they either state owned or state supported, so they are somehow protected from bankruptcy, although they are loss making.

Slide 12 shows data on supply cuts, the situation is negative for a number of years, but nevertheless the situation was sufficient [to this] inventory. The most considerable cuts were in China, and in our competition with China they are most likely the winner. The closing price in 2016 was about 6%. Some companies got financing and were able to stay afloat. The financing amounted to $1.6 billion. Speaking about nickel production, these are China, Philippines and Indonesia, which are key to the market.

And page 13 shows how nickel feedstock from Philippines the supply changed. The situation for 2017 is still unclear, Philippines introduced ban on nickel mining, but there is heated debate in the country about this ban, whether it will be removed or relieved somehow or made stricter during in view of the closures of the mines. We think that 130,000 tons is the equivalent of capacities which were suspended. It's now difficult to estimate outlook for the next year but we still have to wait for the completion of regulatory changes in the country.

Page [4] (sic - page 14) considers Indonesia the largest nickel feedstock exporter to China. Indonesia surprised everyone by revealing its industrial policy set to possess feedstock within the country and they decided to stop exports of ore with a number of restrictions though and it questions the smelting of ferronickel here in the country. And currently, the situation is uncertain, a number of investors who spend billions of dollars to build capacity in Indonesia. They are going to start lawsuits against the government, it's difficult to predict the outcome of those litigation. Anyway supplies from Indonesia will not exceed the cuts of supplies from Philippines as to demand for nickel.

Page 15 discusses growth in nickel consumption, which was fairly good. The key importer was China of course driven by stainless steel production, the 10% growth that we have seen is a fairly high figure. Globally, and nickel consumption growth was driven by stainless steel smelting and increase in average content of nickel in stainless steel, due to the selection of grades of stainless steel that China produces.

Page 16 shows the situation of changing inventory in China. For the past several years, imports of nickel exceeded consumption and there was some inventory and considerable part of the supplies of this inventories have been used, there is some inventory on the Shanghai Exchange, and you can see the whole market, both ore and ferronickel were stockpiled, and given the trends of consumption in the country, stock process is about (inaudible). If we consider the evolution of demand globally.

Page 17, you can see that the nickel market keeps growing in global terms. In 2017, it may be -- the growth rate will be a bit lower than 2016, and the key growth driver are Asia and China, definitely. In our view, 2016 were a transformation year and you can see the market balance, we got rid of proficit and there was some deficit. The figure is inconsiderable, but anyway, that was a global change in the trend.

In 2017, we expect 100,000 tons, there are some inventories, but nevertheless, it shows that production lags behind consumption, this is key. There are many uncertainties in the nickel market, and we summarize them on page 19 -- all the factors, not all of the factors are known now. And it's difficult to forecast the final figure, because the difference might be around 200,000 tons, which shows uncertainty in the market.

Let's move to palladium market, page 20, it shows structural deficit. For the sixth year in row, unlike nickel inventories, these stocks are not transparent. So it's difficult to estimate how much metal is left and when this deficit may turn into physical shortage.

Page 21, platinum market. The deficit which existed in the past is vanishing, so in [2016] the market was balanced, and this year, it's going to be balanced as well. In our opinion, and it's related to how platinum and palladium consumption changed.

Page 22, shows how platinum group metals supplies changed, we're based on our forecast on our assumptions not on open-sources, there always have been inventories, which help to cover deficit, but it's very difficult to predict because we don't know the actual amount of those inventories, supplies from South Africa are stable and for the latest years growth was 5% per year, but for last three years the growth stopped and we're not expecting any growth any longer.

Page [24], summarizes engine catalyst, being the key drivers. There is high growth rate of automotive industry in China, so China is the key market in of the metal basket. And palladium growth also stems from increase in the gasoline fuel engines.

As to electric vehicles page 24. For our Company, this is an interesting market for our Company. We would like to supply both nickel and cobalt for electric vehicle batteries, but we don't think that this will have a considerable impact on the metal market due to the low base effect even with the forecast growth rate by 2023, they may account for 10% of car production, while platinum group metals will be ahead of the automotive industry and due to some environmental standards implemented, platinum group metals will grow faster than the automotive industry growth. Page [24], copper market. Copper has low stocks globally, and the market is balanced, we do not expect any significant changes in this market at least some deficit which change into some minor proficit market growth at 2% per year, which is not much, but that's a stable trend anyway. Note that 2016 was not typical for the copper market, page 26 shows it. There are many mines operational in the market and statistically there are some disruptions in supplies due to emergencies, strikes, earthquakes and so on. And statistically, its about 5% in reporting period. This lack of supplies historically was not that high and the market is well balanced, it may turn to deficit this year, but the market is mature. So we're not expecting any systemic crisis. Thank you very much, over to Sergey Malyshev, our Senior Vice President.

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Sergey Malyshev, MMC NORILSK NICKEL - SVP & CFO [6]

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Anton, thank you very much. Page 26, I will start by reviewing our revenue from metal sales which Anton was describing, the impact on our revenue. In 2016, the sales of metals increase despite a temporary decline in output. This was possible due to the inventory accumulation strategy adopted in 2015 and the sale of inventory due the active phase of production capacity configuration. The chart show that nickel, palladium and platinum went up by [15%], while copper grew by modest 9%. Despite the recovery, metal prices in 2016 were significantly low than in 2015. And nickel declined in price most of all by 19%, copper and palladium prices fell by 12%, platinum went down by 8%. As a result, our revenue from metal sales fell by 3% and nickel share reduced from 38% to 34%. And the total platinum group metals equal to nickel revenues.

Page [24], revenue broken down by metals is consistent with the Company's general trends. So page 30, summarizes the factors that influenced our consolidated revenues, the most significant driver was the decline in market prices, which reduced our revenues by almost $1.1 billion. Sales growth was driven by higher volumes, amounted of $232 million that help us to compensate for the price drop, and the exchange prices for the basket fell by [13%], our revenue decreased only by 3%.

As to the sale geography, Europe remain the core market, it accounted for 57%. The share of sales to Asia slightly decreased and amounted to 23%, mainly driven by the sales growth in Russia, its share rose to 10%. And sales growth in the domestic market was driven by temporary changes in the market environment, it was more profitable to sell metals in Russia than to export them.

Page 31, EBITDA of the Company decreased by 9% and amounted to $3.9 billion. I'll explain the influence of the microeconomic environment, amid negative metal market environment, EBITDA went down by almost $1 billion, while favorable average exchange rate of the ruble offset inflatory pressures.

Internal operational factors such as a sale of metal inventory, and sale of Tati Nickel in Botswana brought the Company $525 million of additional EBITDA. This enabled us to partly compensate for [EBITDA] of the macroeconomic environment, and supported the high level of EBITDA margin of 47%. Now, that the fact that given if you don't factor in the sale of the metal inventory, our EBITDA is $3.6 billion which is an impressive result on the backdrop of extremely low exchange prices for metals in 2016.

Slide 32, our operating cash cost decreased by [53%] to $2.9 billion. The macroeconomic environment had -- but overall positive effect on our cost, the ruble depreciation and the decline in the purchase prices of semi-finished products were partly offset by inflationary growth in rubles. The main operational factor was the reduction of purchases of semi-finished products by $147 million, is due to our reconfiguration of capacities, refining capacities in Finland started [the overall] Russian feedstock.

In addition to our production objectives, this helped us to stabilize our metal sales in 2017, we expect a further decline in purchases of semi-finished products. Reduction of international operations mainly due to the sale of loss making African assets in 2015, brought about savings of $11 million, net of metals and foreign exchange differences, operating expenses in 2016 showed an increase of 3% which is below the inflation rate in Russia. So this is our ruble denominated expense trend.

Page 33, I'll focus on net working capital, which reduced [amount to] $443 million and the income tax lag was partly offset by the effect of ruble depreciation and the rise in metal prices during 2016.

Purchases of copper concentrate from Rostec company enabled us to reduce net working capital by $296 million and as I said earlier, regard this effect as one-off. Operational reasons were behind our net working capital reduction by $212 million, first of all, the sale of the metal inventory piled up in late 2015 [in hand]. If we include one-off operations, we consider net working capital within the range of $750 million to $1 billion as optimal, and then tentatively flow in the future. So we do not change our guidance.

On page 34, free cash flow amounted to $1.591 billion which is $814 million below last year, EBITDA performance account for almost half of this decline. Negative performance of cash flows from other investing activities results from a combination of three factors, the sale of stakes in energy companies, investment in both facilities in [4GM], the performance of deposits related to more efficient investment in 2016 for longer term and with a higher interest rate. Despite the decrease in free cash flow [and effecting] our free cash flow to revenue ratio amounted to an impressive 19%. This is among the best results in the industry.

Page 35 traditionally analysis of sensitivity to the exchange rate of our key metrics. As you know, the main portion of CapEx is denominated in rubles. The share of non-rubles was only 26% and at the exchange rate of RUB60.7 per dollar as of the end of the year, the change of the EBITDA will be $28.2 million, and free cash flow by $47.7 million. When the ruble depreciates, these indicators will decrease and when it appreciates the impact will grow respectively. CapEx amounted to $1.7 billion. Of this amount the investment in the construction of Bystrinsky Project amounted [$269 million]. As you know, the project is in the active phase of construction, and is to be commissioned in late 2017, a landmark event in reporting year with the closure of the nickel plant, which improved the environmental situation in the Norilsk industrial region, investment in the modernization of the Talnakh Concentrator amounted to [$260 million]. It is at the final stage, and it will increase the volume of ore processing and improve the quality of the concentrate.

We continue to develop mining projects to be put into operation in Talnakh and Oktyabrsky deposits. In 2017, CapEx budget is planned at the level of $2 billion of which $0.5 billion is to be invested in the construction of Bystrinsky project. In business project, it will total $1.2 billion in the 2017 budget and inventory projects will be $0.8 billion.

Page 37, at the end of 2016, the Company's net debt amounted to $4.6 billion while the net debt EBITDA ratio rose to [$1.2 billion], if you remember. I'll focus on a number of important steps to optimize the debt portfolio we made in 2016. First of all, in mid-2016, we reached an agreement with the number of global banks to reduce interest rates and extend the maturity of the short-term loan portfolio of nearly $1.4 billion, this allowed us to mitigate the pressure on our balance sheet, reducing the shareholder long-term debt by half. Second, we concluded the project financing deal with Sberbank for a total of $800 million. The borrower of the transaction was GRK Bystrinskoe.

Finally, we entered into two agreements on committed revolving credit lines with the syndicate of International Banks, including banks from the Asia Pacific region. The total amount was $1.2 billion, and the tenure is five years.

The Company continues to show a strong liquidity in the amount of [$5.3 billion] of which cash cost account for $3.3 billion, and $2.3 billion of available committed resources under the [credit] facilities, so this is enough to ensure payments on the debt obligations of the Company within the next four years. I touched upon the key projects and I will give floor to (inaudible) who will highlight the next part, highlight the key projects.

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Unidentified Company Representative [7]

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We can see the number of projects which related to both the configuration and environmental projects. Page 39 shows our Kola Peninsula project, we accomplished two of them; the first one is the closure of smelting shop. And the second shop -- let's say the second project related to reduction of our water discharge at Monchegorsk and we reduced our emissions of sulphur dioxide in the Polar Division by 23%. And as I said, we almost resolved the issue of our water discharge, the electrolysis -- nickel electrolysis production. Other projects refer to Norilsk, as you know, we closed the nickel plant and the [Norilskenergo] facilities and we keep working at our environmental projects of sulphur dioxide. So this is still underway, related both to Nadezhda plant.

The other chart shows our sulphur dioxide emission reduction and the reporting year for the considerable decline despite increased processing volumes of nickel feedstock and other feedstock types. Our further program will reduce sulphur dioxide emissions even more.

Page 40 shows the process in detail. These are the further steps on our pipes. In 2016, we completed the construction work by 95% to upgrade our Talnakh Concentrator. The smelting capacities will transfer it to the Nadezhda plant, which have already been mentioned and nickel plant was shut down. So the program planned for 2016 has been accomplished. I also mentioned one of our ambitious environmental project is the sulphur dioxide Nadezhda plant. We mentioned our continued project work and contract for the project documents, for the technology of elementary sulphur production on Nadezhda plant. And the company SNC Lavalin is on track to produce project documents and simultaneously, we are considering an alternative option that would enable us to produce sulphur [asset] and either to neutralize it or to produce some of available products.

And we decided in the fourth quarter of 2017, the key decision will be taken which option is to be accepted. On the standard technology of elementary sulphur production, so we completed the examination of the projects, stability status and obviously like [Concentrator] in our tender process, the construction of this plant might take up 4 or 4.5 years depending on the location of the site, one way decide on this at the end of 2017, based on the working documents and technological documents for sulphur asset, we will prepare the detailed schedule for this project.

Page 42, shows the upgrade of our Talnakh Concentrator. We completed the first stage, as you remember in 2015. We have the sustainable improvements in 2016 and at the same time, we made efforts to refurbish the factory and to increase output to 18 million tons per year. So some minor efforts are to be made and technology is to be refined to the installed parameters. Now the factory is at its installed capacity and so the pyrrotite and on March 1, nickel and copper production was at its installed capacity. And at the Concentrator, we'll work as it is designed, we have some strategy to improve the processing output to 18 million tons, which will help the process, the feedstock with additional extraction effect and it will help us to reduce cost. Now accomplishing the regulation of ore processing and the project stages. So until the end of the year, we will decide on the feasibility or construction stage.

Page 43 shows the factors of Nadezhda plant upgrade and it's reaching the installed capacity. And from the beginning of this year, the smelting capacity is at its full rate and the performance is stable and the content of sulfur enables stable performance of the plant. It's the largest nickel smelter is at its normal operating mode.

Page 44 shows another project in terms of reconfiguration, this is migration of ore production at Monchegorsk. As you know, we refurbished our refining capacity, number one in 2017, so work at its full-rate of 45,000 tons a year and we are also working to upgrade the technology and ramp up capacities of the refining facility number two, according to the new technology. Now, we are working at [Tank ] refining section and we are completing work at the [degassing] section, these are two major projects run in parallel. We keep working on 17 facilities of this site. And so we are refurbishing this over the technological facilities. Now the technology of leaching will be implemented and the output will be increased to 145,000 tons. So the total capacity on the Kola site will be 190,000 tons per year. The rest of the capacities will be used at the Harjavlata site.

This is our flagship project Skalisty Mine, which is on track. According to its key stages, this is a construction of ultra-deep, two ultra-deep shafts for Russia and for Europe as well. These shafts are on schedule and the ventilation shaft will be operational. And then, we will implement the relevant facilities. And this is the second, a skip-cage is to be completed in 2019. And also works will be on track. So this mine will operate at 2.4 million tons per year, is on schedule.

Chita project, page 46, as to financing, Sergey has already told you, that we use borrowings from Sberbank and also our own funds. There are two key infrastructural facilities with construction of high voltage line and the substation. The construction is almost completed. The sites will be connected at the beginning of the second quarter and after that we will work to transfer to FGC Federal Grid Company, the next property is our railway construction project. Norilsk Nickel part of this railway is almost accomplished and the state-owned part is to be finished soon as well. All works will be accomplished in May to June 2017 and documents are prepared at the same, the state-owned part will have additional audit and by the year end, we hope that the railway will be provided for free use to Norilsk Nickel. The rest of the works on Chita site are on schedule. It was influenced by [Flehnip] company's inability to perform it obligations. A few times this schedule was changed, now it's a very tight. We are negotiating with Flehnip company and the management of the company promised to complete equipment supplies until -- at the end of March this year. The company will be able to finish construction by the end of October and then there will be commissioning of the project. If this promise is broken, the situation will be more challenging. You can see this condition of those properties on the fourth address, and we don't have any concern for other projects yet.

Page 49, shows our metal production guidance. So for 2018, we will follow the previously announced metrics for all metal. And now, I give floor to Sergey Dyachenko, he just returned from the audit of Chita project. So we can update you on the status of the project.

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Sergey Dyachenko, MMC NORILSK NICKEL - First VP & COO [8]

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In conclusion, I would like to say a few words about our expectations and forecast. The key uncertainty for the year is the metal market. We are cautiously optimistic about the nickel markets, the deficit will be up 100,000 tons due to increase in demand in China and decrease in ore supplies from the Philippines. However, we don't exclude the number of significant risk that may affect our forecast. Above all, the risk of weaker demand and return of Indonesian ore to the market. At the same time, the boom of inventory held by the exchange market is at a high level, we believe that it's a stable reduction in nickel inventory that may become the trigger, which will revert investor sentiment to a positive view of the metal market, and fleet price growth. We are neutral about the copper market outlook, since we believe that those market as a whole is balanced and the price is at high level which encourages the users to invest in new projects. Additional support for the copper price may come from either from a stronger growth in the global demand or from fourth major disruptions at larger mines. We are optimistic about the palladium market as we've seen opportunities for the market to change structural deficit, consumption of metal in the automotive industry is growing by 2% to 3% per year while production is in general stagnant. At the same time, our forecast for platinum is changing to neutral as we believe that the consequences of the Volkswagen scandal will have a negative impact on the production of cars with diesel engines, while the likelihood of risks of strikes in South African mines has declined. We confirm the previously announced production output guidance for 2017 from domestic, so Nickel will be 206,000 to 211,000 tons; copper to 377,000 to 387,000 tons; palladium to 0.6 million to 2.7 million tons; platinum 585,000 to 645,000 tons. We also keep our guidance for investments in -- and expect capital expenditure of $2 billion in 2017 including $500 million for the Bystrinsky project in Chita.

Annual dividends for 2016 will be announced in April as net debt to EBITDA ratio remains at a comfortable level of [1.2]. We can use the dividend formula of 60% of EBITDA, less already paid interim dividend for 9 months. We're also continuing to sell assets with a primary -- this is primarily a 50% stake in Nkomati which was suspended due to the buyer end. Also we are going to sell 39% in the Chita project. This is all we wanted to announce, and we're now ready to take your questions, and I give floor to Vladimir Zhukov.

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Questions and Answers

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Zhukov Vladimir, MMC NORILSK NICKEL - VP of IR [1]

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And we are open to question now. And if you are on the Russian line, please ask questions in Russian and English line, please ask questions in English.

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Operator [2]

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(Operator Instructions) (inaudible)

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Unidentified Participant [3]

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Dear colleagues, thanks for your detailed presentation. A few questions, first, expected capacity utilization of [KGMC] and Harjavlata, what also the deterioration rate and what volume of metal is expected to process from third-party feedstock apart from your own feedstock?

And the next question is about expected working capital changes and release of your inventory, do you expect any changes either in money prices or in physical volumes?

And the next question is about potential volume of output from Rostec concentrate, can you give some indicative volume on copper and platinum group metals or nickel if it is in the concentrates, now what volume are you going to produce annually and how can it influence the profit of the Company compared to your own feedstock?

And the last question refers to the Chita project, you mentioned the fact that some uncertainty in terms of equipment price, so if schedule is breached, what penalties or fines will be imposed by you on the supplier? Thank you.

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Sergey Dyachenko, MMC NORILSK NICKEL - First VP & COO [4]

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Thank you for your questions. The first question about capacity utilization in 2017, we have a contractual obligations in terms of limited feedstock supplies to Harjavlata, so in 2017, Harjavlata will be fully utilized to 65,000 tons and 54,000 tons to 56,000 tons of Russian feedstock. The rest will come from Tank number 1 and number two, the first question. And the second one related to copper feedstock, if I remember, according to the agreement, and our program to process this feedstock within six years, as we mentioned earlier.

So, copper processing will vary because the concentrate is not uniform in quality. So it will fluctuate between 15,000 to 17,000 tons in copper. As to PGM group, we are not expecting anything. And nickel is quite limited in a few dozen tons. So it's insignificant in our scope.

So question three, as to the Chita project, it lags behind supplies by Flehnip is six months, but due to changes in the construction schedule, we managed to keep the construction under control and with the equipment we have. We raised claims against Flehnip company. They admit that it's their fault and anyway even if the construction will be finished on time, which we hope for, legal costs will be paid for by the contractor.

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Sergey Malyshev, MMC NORILSK NICKEL - SVP & CFO [5]

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Sergey Malyshev speaking, I'll explain about working capital. No, we have not announced net working capital due to varied influence of different components, especially to exchange rate then the cost, and then the changes in inventory settlement with the budget. So it's difficult to forecast everything, but we try to keep it under control. So we are comfortable within the range of $750 million to $1 billion, it would be comfortable for us and we will try to stick to this figure and we confirm this guidance today.

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Unidentified Participant [6]

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Thank you for your replies. I have a small clarification question about capacity utilization, Kolskaya -- KGMK so what is the utilization rate?

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Sergey Malyshev, MMC NORILSK NICKEL - SVP & CFO [7]

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Mathematically 65,000 on Harjavalta and so 125 -- and Tank-1 will be -- this will be the Kola site, so out of 211,000 tons of our guidance. Thank you.

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Operator [8]

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(inaudible)

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Unidentified Participant [9]

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Okay, do you expect any influence of reconfiguration program on EBITDA? This is the first question.

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Zhukov Vladimir, MMC NORILSK NICKEL - VP of IR [10]

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Could you please repeat the question?

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Unidentified Participant [11]

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What effect your reconfiguration program will have in 2017?

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Sergey Dyachenko, MMC NORILSK NICKEL - First VP & COO [12]

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The project is scheduled for many periods and not only 2017. But the most part -- most effect will come in 2018. So the key projects, we keep our guidance in terms of the general reconfiguration and general influence after all of the project and the program are completed and it's tough in 2018.

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Unidentified Participant [13]

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Okay. Second question, about the feedstock from Rostec of what copper content in the concentrate and what extraction rate do you expect in this concentrate?

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Sergey Dyachenko, MMC NORILSK NICKEL - First VP & COO [14]

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This is a commercial secret with a state company, so we cannot disclose this information, unfortunately.

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Unidentified Participant [15]

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In 2016, non-metallurgical segment displayed positive profitability for the first time. So do you expect this trend to continue or this was a one-off event or this -- all non-metallurgical operations will be zero profitability in the future?

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Unidentified Company Representative [16]

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(inaudible), good evening. The non-metallurgical segment reflects the performance of our subsidiary in Switzerland and comes from the prices inside the year. So it may be either profitable or loss making due to changes in production and supply timing. So, this is technical profit which was due to favorable price changes, so do relocation of profit to this entity responsible for supplies and sale.

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Unidentified Participant [17]

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inaudible), good evening. The non-metallurgical segment reflects the performance of our subsidiary in Switzerland and comes from the prices inside the year. So it may be either profitable or loss making due to changes in production and supply timing. So, this is technical profit which was due to favorable price changes, so do relocation of profit to this entity responsible for supplies and sale.

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Zhukov Vladimir, MMC NORILSK NICKEL - VP of IR [18]

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So, the question will be handled by Chief Accountant.

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Sergey Malyshev, MMC NORILSK NICKEL - SVP & CFO [19]

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Good afternoon. This was an investment in this Sochi project in 2016, the amount was $150 million.

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Daniel Major, UBS - Analyst [20]

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And what will be the figure in the next year?

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Sergey Malyshev, MMC NORILSK NICKEL - SVP & CFO [21]

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In 2017, it will be $100 million. I can add a few words, these silicone projects was approved in spring last year in the amount of $250 million, out of which, $150 million was paid last year and $100 million will be paid in the first quarter this year.

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Daniel Major, UBS - Analyst [22]

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Thank you and another question about changes in administrative costs, in ruble, there was some considerable inflation in the past years, so do you expect that this cost item will continue the growth rate ahead of the inflation in rubles for you?

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Unidentified Company Representative [23]

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We intend to keep this within the inflation rate.

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Operator [24]

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(Operator Instructions) Denis Gabrielik, Otkritie

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Denis Gabrielik, Otkritie Capital - Analyst [25]

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Thank you for you presentation. Excuse me, if I missed the information, I'm asking about the Sulfur project and the copper plants. Could you please give some more color on what decision is planned, if any? And as to the timing, please clarify when it is planned to commence.

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Sergey Dyachenko, MMC NORILSK NICKEL - First VP & COO [26]

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Thank you. As to the copper plant, the Elementary Sulphur production project has been completed, I mean the document stage. It passed the state examination stage, and at this moment, we are working on the alternative technology, and the project work will be clear at the end of the first quarter 2017.

The project assumes transfer of conversion processes to the Nadezhda plant, which was the key bottleneck in our Elementary Sulphur production, because as you know, very difficult to catch gas. So, debottlenecking here will help us to use the known technology plus clear technology and a possible use of good technology for us. So, we will transfer the technology to the Nadezhda Plant and gas conversion technology will be applied in the same system, which is planned for the whole Nadezhda Plant in general.

So, to remind you, there are two alternative options for Nadezhda Plant according to two scenarios, so we are working simultaneously and the decisions will be taken at the end of the year what option they will pursue. The programs will be completed between 2022 and 2023.

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Denis Gabrielik, Otkritie Capital - Analyst [27]

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And what CapEx to these changes? Is it in the figures which you announced?

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Sergey Dyachenko, MMC NORILSK NICKEL - First VP & COO [28]

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We have already provided indicative figures at all our environmental projects related to our copper plant and Nadezhda plant will be within $2 billion.

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Operator [29]

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Barry Ehrlich.

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Barry Ehrlich, Citigroup - Analyst [30]

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Hello, I'll try to speak Russian, in 2012, you [sold] but you less than you used, in 2016, it was vice versa, sales amount to [$374 million], so the difference was 35,000 tons. So I would like to understand, in 2017, sales will be equal to projection or will it lag behind output? What will be the correlation between these figures?

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Sergey Malyshev, MMC NORILSK NICKEL - SVP & CFO [31]

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In 2017, I can remind you that in 2015 and 2016, these were the two years when we accumulated our inventories because when you -- that we are entering the reconfiguration of capacity active stage of these projects. So we piled up inventories to be safe to our clients. So in 2015, sales were below production, while in the reporting period, the situation was the contrary one. So, sales were more than the production, so in this year, we expect normalization. So these two indicators will be equal.

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Sergey Dyachenko, MMC NORILSK NICKEL - First VP & COO [32]

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A small remark, this is always a tactical objective for the Company for 2017. It will be difficult yet challenging year, because in the Kola site Monchegorsk in terms of refining, technology-wise, it will be challenging. So the Company will make sure to provide sustainable supplies of metal.

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Barry Ehrlich, Citigroup - Analyst [33]

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And if possible, another question about palladium production, and you increased your production guidance, and you said that the part of the production is related to the processing of choosing a feedstock? So, it is probably a non-recurring item, so what part of production in 2017 will be non-recurring?

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Sergey Malyshev, MMC NORILSK NICKEL - SVP & CFO [34]

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Barry, could you clarify, you're talking about 2017 or 2016?

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Barry Ehrlich, Citigroup - Analyst [35]

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2017, thank you.

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Sergey Malyshev, MMC NORILSK NICKEL - SVP & CFO [36]

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In 2017, oil production guidance for next year assumes recurring volumes. So, PGM in 2016 was due to the closure of the nickel plant and liquidation of unfinished work in process on this plant.

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Zhukov Vladimir, MMC NORILSK NICKEL - VP of IR [37]

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There are no further questions in Russian line. We are switching to the English line.

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Operator [38]

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(Operator Instructions) Daniel major, UBS.

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Daniel Major, UBS - Analyst [39]

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First question is related to CapEx and the longer-term guidance. I believe there was some $13 billion to $14 billion talked about over a long period out to the mid-2020s. Can you tell us how much of that is committed? So how much CapEx you have committed within your current projects and how much would be additional CapEx approvals?

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Sergey Malyshev, MMC NORILSK NICKEL - SVP & CFO [40]

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Thank you for the question, our CapEx guidance. This is a general figure in the amount of $13 billion to $14 billion for a seven-year period. So if you recalculate it to average annual, yes it will be somewhat below $2 billion a year. So, it's a cap for our CapEx which includes also the project which are still not completed in terms of investments approval. We cannot give you the breakdown at the movement due to some of the projects didn't passed the investment approval stage.

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Daniel Major, UBS - Analyst [41]

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Okay, thank you very much. Perhaps one more question, do you provide or can you give us any specific guidance on how much copper volume you expect from the Bystrinsky project in 2017?

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Sergey Malyshev, MMC NORILSK NICKEL - SVP & CFO [42]

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In 2017, as we already mentioned, the project will be at the stage of technological installation and commissioning in October 2017. So all we produce will be just to fine-tune and the major part of production will start in 2018.

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Daniel Major, UBS - Analyst [43]

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Okay. So am I right to say that none of the production this year will be incorporated in your copper production guidance?

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Sergey Malyshev, MMC NORILSK NICKEL - SVP & CFO [44]

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Yes, definitely.

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Daniel Major, UBS - Analyst [45]

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Thank you very much.

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Operator [46]

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[Kevin Dougherty], Bank of America Merrill Lynch.

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Unidentified Participant [47]

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Good afternoon, thank you for taking my question. My question is about the cost structure. 40% of your cost structure is labor-related and you said a few months ago that you expect that this would increase to circa 50% going forward. Can you explain what is your current view on this labor inflation and do you have any labor negotiation plans? Thank you

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Sergey Malyshev, MMC NORILSK NICKEL - SVP & CFO [48]

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Hello again. When we said that our payable would go up to 50%, we meant that the costs would gradually go away after reconfiguration. So the total cost base will decline, but the share of labor will increase. So, we're not speaking about the inflation of salary, we're talking about some structural factors.

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Unidentified Participant [49]

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Okay, thank you.

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Sergey Dyachenko, MMC NORILSK NICKEL - First VP & COO [50]

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I would like to add a few words of salaries, the Company is reviewed, are reviewed according to the collective agreement, which is a long term agreement and is reviewed approximately at the rate of official inflation in Russia. So, given that we had inflation of 7% last year, and this year it should go down to 4% to 5%, we expect that ruble denominated inflation of labor cost will go down this year, together with the inflation rate.

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Unidentified Participant [51]

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Thank you.

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Operator [52]

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[Stella Cridge], Barclays.

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Unidentified Participant [53]

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Good afternoon. Many thanks for the presentation. I have two questions please. And the first is on your realized prices for platinum and palladium. It look to us that they deviated a little from some of the main benchmarks in the second half of 2016. And I was wondering is that the right observation, and if so, what would the reason be for that? Thanks

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Sergey Malyshev, MMC NORILSK NICKEL - SVP & CFO [54]

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No, we're not ready to comment on this matter. Could you send this question by email please? We will get back by email.

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Unidentified Participant [55]

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Yes, sure. No problem at all.

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Unidentified Company Representative [56]

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(Inaudible), they will be in line with the average market price for the year. So they are rather stable and our realized prices meet the average market prices. They might differ somehow during certain periods, but generally they are in line with the average annual prices.

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Unidentified Participant [57]

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Okay. Sure. Thanks. I'll follow up on that one. And the second question just relates to a couple of specific balance sheet items. So, the first is on the cash flow statement. In 2016 there was loans issued of a $103 million, of which $90 million was in the second half of the year. I was just wondering what was that loan used for?

And also saw that in the events after the reporting date, the Group increased the non-controlling interest in the related party for $100 million, does that relate to the Sochi spends that you mentioned before or would that be something different? Thanks.

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Unidentified Company Representative [58]

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[Olegovich] one of Chief Accountant, $100 million of non-controlling interest refers to share in the Bystrinsky project acquired by Chinese investors. As to the question about the loans made, they mainly refer to loans related to the construction of power facilities, also on the Bystrinsky project.

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Operator [59]

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[Kay Lee], Exane BNP Paribas.

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Unidentified Participant [60]

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Good afternoon, gentlemen. Thanks for taking my question. Would you mind giving me a medium guidance regarding your volume from your Russian division, excluding Chita projects?

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Sergey Dyachenko, MMC NORILSK NICKEL - First VP & COO [61]

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For 2017, the forecast is on page 49 of the presentation and it does not include Chita project. For 2018, we repeat our guidance provided in the Strategy Update in May last year and so 2015 to 2012; 1,000 tons of nickel and [400 tons] to 12,000 tons of copper and 95,000 to 100,000 tons of platinum and palladium. So, Chita project will be include on the copper part, up to 40,000 tons of copper production that will be the share of Chita project. So the delta will be produced from our own feedstock, from our Russian feedstock.

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Unidentified Participant [62]

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And my second question is following the copper concentrates purchase agreement with Rostec, what will be reasonable impact on the EBITDA margin in the next couple of years?

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Sergey Dyachenko, MMC NORILSK NICKEL - First VP & COO [63]

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We cannot disclose the details of this [agreement] with Rostec, as a state company, but the impacts will be minimal, according to our financial models.

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Unidentified Participant [64]

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Okay, thanks. That's my question.

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Operator [65]

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Nitesh Agarwal, Citi.

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Nitesh Agarwal, Citi - Analyst [66]

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Hi, thanks for the presentation. I have two questions. First is, what was the Skalisty mine volume in 2016, and what do you expect in 2017? And my second question is on the metal grades; are they at or around the mine averages disclosed previously? Thank you.

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Sergey Dyachenko, MMC NORILSK NICKEL - First VP & COO [67]

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In 2016, Skalisty mine was one million one hundred thousand - fifty thousand. Next year, it will be 1,700,000. Nickel content in ore was at 2.6%, copper within 2%.

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Nitesh Agarwal, Citi - Analyst [68]

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Thank you.

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Sergey Dyachenko, MMC NORILSK NICKEL - First VP & COO [69]

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As we see there are no further questions, thank you very much for participating in our conference call. Thank you for the questions. Next week, we are going to meet with investors in the key regions in the US, Europe and Asia. We hope to see some of you at the meetings, and the Strategy Day this year, which we traditionally hold in May. It will be held at the end of year, probably in November. We will notify you in advance. But thank you very much, again.

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Zhukov Vladimir, MMC NORILSK NICKEL - VP of IR [70]

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Dear ladies and gentlemen, we complete the conference call. Thank you for attention. You may now disconnect.

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Editor, [71]

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Statements in English on this transcript were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.