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Edited Transcript of GMKN.MZ earnings conference call or presentation 20-Aug-19 2:00pm GMT

Half Year 2019 GMK Noril'skiy Nikel' PAO Earnings Call (IFRS)

Moscow Aug 26, 2019 (Thomson StreetEvents) -- Edited Transcript of GMK Noril'skiy nikel' PAO earnings conference call or presentation Tuesday, August 20, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alexey Vladimirovich Bashkirov

Public Joint Stock Company Mining and Metallurgical Company Norilsk Nickel - Non-Executive Director

* Anton Berlin

Public Joint Stock Company Mining and Metallurgical Company Norilsk Nickel - Marketing Director

* Sergey Alexandrovich Dubovitsky

Public Joint Stock Company Mining and Metallurgical Company Norilsk Nickel - VP for Strategy & Strategic Projects and Member of the Management Board

* Sergey G. Malyshev

Public Joint Stock Company Mining and Metallurgical Company Norilsk Nickel - Senior VP, CFO & Member of Management Board

* Sergey Nikolaevich Dyachenko

Public Joint Stock Company Mining and Metallurgical Company Norilsk Nickel - First VP, COO & Member of Management Board

* Vladimir Zhukov

Public Joint Stock Company Mining and Metallurgical Company Norilsk Nickel - VP of IR Department

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Conference Call Participants

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* Andrew Ian Jones

Wood & Company Financial Services, a.s., Research Division - Equity Analyst

* Anna Antonova

JP Morgan Chase & Co, Research Division - Analyst

* Anton Fedotov

BofA Merrill Lynch, Research Division - Analyst

* Barry Lee Ehrlich

Citigroup Inc, Research Division - Director

* Boris Sinitsyn

VTB Capital, Research Division - Equities Analyst

* Daniel Edward Major

UBS Investment Bank, Research Division - Director and Analyst

* Daniel Harry David Shaw

Morgan Stanley, Research Division - Research Analyst

* Nikolay Sosnovskiy

Prosperity Capital Management Ltd - Director of Metals, Mining & Chemicals

* Sylvain Brunet

Exane BNP Paribas, Research Division - Head of Metals and Mining Equity Research

* Timothy William Riminton

Barclays Bank PLC, Research Division - Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to Norilsk Nickel First Half 2019 Results Conference Call and Webcast. I now hand over to your host, Vladimir Zhukov. Sir, you may begin.

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Vladimir Zhukov, Public Joint Stock Company Mining and Metallurgical Company Norilsk Nickel - VP of IR Department [2]

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Good evening, everyone, and good morning, for those who are calling us from Americas. Let me welcome you at Norilsk Nickel First Half IFRS Financial Results Conference Call.

Let me introduce the speakers, the key speakers today: Sergey Malyshev, Senior Vice President and Chief Financial Officer; Sergey Dyachenko, First Vice President, Chief Operating Officer; Sergey Dyachenko is having us remotely, he's currently visiting our operations in Chita region. So if there will be any issues with the connection please excuse us for that. And also Anton Berlin, Director of Marketing Department; and myself, Vice President for Investor Relations. Now it's my pleasure to pass the floor to our Chief Financial Officer, Sergey Malyshev.

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Sergey G. Malyshev, Public Joint Stock Company Mining and Metallurgical Company Norilsk Nickel - Senior VP, CFO & Member of Management Board [3]

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Good afternoon, colleagues. Let me start with key financial highlights of the first half of 2019. Consolidated revenue increased 8% year-on-year to $6.3 billion on the back of metals production growth and high palladium price. EBITDA expanded 21% year-on-year to $3.7 billion, owing to higher metal revenue, ramp up of the Bystrinsky project and weakening of Russian ruble. EBITDA margin amounted to 59%, the highest level among the global diversified metal and mining majors.

Net working capital amounted to $1.3 billion. CapEx was almost flat year-on-year at $0.5 billion. Free cash flow decreased 15% year-on-year to $2.2 billion, driven by working capital dynamics and high income tax payments due to higher taxable income.

I would like to note that the effective tax rate remains unchanged. Net debt/EBITDA ratio decreased to 0.8x as of June. In June 2019, the company continues to maintain investment grade rating from all 3 major agencies. In July 2019, we paid final dividend for 2018 -- for -- of the total amount of approximately $2 billion. Today, our Board of Directors recommended for shareholders the approval interim dividend for the first half of 2019 in the amount of $2.1 billion.

And I pass the floor to Mr. Dyachenko.

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Sergey Nikolaevich Dyachenko, Public Joint Stock Company Mining and Metallurgical Company Norilsk Nickel - First VP, COO & Member of Management Board [4]

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Good day to everyone. I will start with health and safety results for the first half of 2019. And we continue to recon our safety culture and production culture within the entire organization. And you can see on the Slide #4, so over the last 4 years, we achieved the some results, 63% in the lost time injury frequency rate reduction, and we also managed to reduce our total injuries number by 60%. Yes, regrettably, we tell you that we sustained the 4 fatal injuries in the first half of the year and we recognize that we're still doing not enough, but the entire company is focused on improving these results.

As usually, we actually are being assessed by independent assessment, and this time we used Bain Company and we used -- you know, the fresh view on our safety culture, on our production performance and our working places and the training of our employees. So in other words, the all phases of our organizational culture. And we invited the practitioners for the operations from Rio Tinto and from BHP Billiton, and as a result, we've been actually rated on the Bradley Curve at 2.8, and which is section of the improvement since last year, when we had the number 2.6. And if you remember, our first result from -- in 2014 was 1.4. And that's actually now shows that, you know, the company is moving in the right direction and we appreciate that the further we move along this curve, the harder will be actually work for all our organization to improve the figures, but we are quite committed in doing that.

The next slide. Slide #5 is a new slide for us. And we show that our commitment towards the principles set out in the UN Sustainable Development Goals. And we actually serving our greenhouse gas emissions at 10 million tonnes of total CO2 emissions, and it's in fact you know the lowest level of emissions among global diversified peers. We inform you that we use the 44% energy out of renewable sources and out of our hydro power stations, and we in fact -- we committed more than USD 800 million investments in the next 5 years to improve our performance in the energy division.

With regards to water reuse, we using -- reusing 86% of water currently that's been used in the different processes. And in time, we believe that this figure could be increased up to 90%, 92%, and all our products in fact you know the focus towards reaching our goal.

Slide #6 showing our performance in the view from different ranking agencies on the ESG performance. And here as well you can see the improved position for our company and we have been rated by Sustainalytics out of 100, we scored 69 points, which shows that we are currently average performer. And if you look at the MSCI ESG score, we have been rated B since 2017.

And now, I'm passing the floor to Mr. Berlin, who is going to take you through the markets update.

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Anton Berlin, Public Joint Stock Company Mining and Metallurgical Company Norilsk Nickel - Marketing Director [5]

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Our market section starts Slide 8. When we look at the macro environment for the commodities market, it's not as complete as it should be. The dollar is rather strong in relative terms. The trade war sentiment is obviously a negative drive for the commodities market and the sentiment is stronger than the actual impact on the physical market.

If we look at what is going to happen to the metals market. Slide 9, we have a flattish outlook in the midterm for the base metals, nickel and copper. We are bullish, platinum and palladium. In the long run, we are bullish all of our metals basket, except that copper, which has a flattish outlook.

And if we move into the details of the specific metals, Slide 10 gives a chart on the evolution of the nickel exchange stocks. They have reached a 7-year low. If you look at the peak level, these stocks are down by more than 70%. The historical average of nickel stock with LME was 37 days of global consumption. At peak, it was more than 3 months. The current level is an equivalent of 26 days of consumption, which is just on the border of what we'd consider a normal level 15 to 25 days of global consumption for any metal commodity.

If we look at what's happening to the supply side in nickel, Slide 11. Obviously, NPI is a major change in this market in the 21st century. It has developed from an experimental high-cost technology to a major source of nickel units designated for the stainless steel industry. There are 2 large countries that supply either the ore or the nickel pig iron to the Chinese economy, it's Indonesia and the Philippines. The changes in regulation, Indonesia have created a bit of volatility in the supply. There was a ban introduced then the ban was temporarily canceled. The ban is supposed to be reinstalled by 2022. However, there are rumors that the ban may be reinstalled as early as this year. This does leave a lot of question marks on the future supply. In our projections, we are not looking at the earlier reintroduction of this ban. So if it does happen, it's a benefit to our market output and improvement for the nickel price. But per se, the ban is putting at risk about 10% of the global supply if you look at the nickel units at 40% of the current Indonesian feed.

If we would look at what would happen to the market once the ban is reintroduced, that's Slide 12, there are stocks that reach us from the Chinese ports and there are exports from the Philippines, the ore that has been converted into the nickel pig iron, so this industry would not disappear, but it would become less than it is. And there are projects in nickel area that can be turned back to the market providing there is an attractive economic incentive, meaning the nickel price. We can look at the cost curve, but of course it's always only an assumption what price levels would stimulate the owners of the assets to put them back online.

The Chinese stainless sector remains the biggest consumer of nickel. Slide 13. The dynamics are rather volatile. We still see some growth, perhaps it is having its ups and downs, but the aggregated level tends to go up. And the first half of this year, we have seen an impressive 10% pickup in production of 200 series stainless steel, which is nickel heavy, and certainly, this is a benefit to the nickel market and consumption of nickel metal.

Another big development in this market is the growth of stainless steel production Indonesia. It has become a meaningful supplier of stainless steel, mostly designated for exports. The domestic consumption is not huge, but we tend to look at it together with the Chinese production as it's run and operated by Chinese company.

The great development in nickel markets are the batteries, especially the batteries for electric vehicle. This has become a major focus for many of the market participants. It's a very promising, huge application. We believe that in the next few years, it will grow to become the second biggest use of nickel. Next only to stainless. It is rather young and still a developing industry. There are chance that they are building up. There is quite a lot of mergers and acquisitions that are going on in this area. The technology is evolving rather quickly, at least, it's evolving quicker than anticipated. We are moving to different chemical formulas in the space and the trend is in favor of increasing nickel content, which again is favorable for us and for the nickel market.

If we look at the current structure of the batteries. The alloy technology was the nickel, cobalt, manganese 1:1:1 that's the relative phase of the metals in the composition. And it evolved through a number of stages and the current state of technology would be nickel, cobalt, manganese 8:1:1. So the relative content of nickel went up 8x, decrease in the use of other metals. The electric vehicle market is expected to grow to incredible numbers. There are very different assessments that exist in the market, but in any case they're looking towards very substantial growth for the next 10 years and beyond.

If we look at the market balance, Slide 15, we are in a deficit market. We expect this deficit to continue into next year, although the size of deficit would be lower than it is, again, subject to whether or not Indonesia introduces a ban on exports of ore. We think this is a great positive development for the nickel market. The stocks are running low. So it would be complicated to sustain a substantial deficit in the next few years. There is a healthy growth on the demand side. And we think it's very beneficial for the market that is coming to more balanced state, almost perfect match between supply and demand.

If we look into the copper market, Slide 16, the copper market is substantially more mature and developed in comparison to nickel. There are more players. There are more financial instruments. So it typically has less volatility and a lot more stability. Typically the biggest wildcard any given year is the disruption rate, meaning production lost due to strikes, accidents and other reasons in comparison to the initial plans of the mining companies. And over a long period of time, the average will be 5%. There are only a couple years when the number would be very different from that. And this year, we have seen so far a rather low disruptions rate of only 2%. Of course, it's impossible to predict what will happen through the rest of the year.

Copper is a great engineering metal, so its use is very diverse and not very price elastic. And we have seen a very long term continuous growth in copper consumption averaging about 1% per annum, and we expect this to continue into next year. Copper imports into China decreased, but this is not a reflection of the copper demand as they've brought in more intermediates to produce refined copper domestically.

If we look at the market balance on Slide 17, we have a bit of deficit in this market, but given the size of the market, this is not a devastating shortage of the metal. It's still available and we expect this deficit to soften next year.

Moving on to the PGM market, Slide 18. The palladium market remains a structural deficit and this has been continuing for quite a while. We see substantial deficit this year and next year. It's partially covered from the metal coming out of the stockpiles, but the greatest challenge for this market that the stockpiles are not transparent. It's very difficult to predict an exact date when they would run out, but we know that they're drying up.

If you look at the supply side, there was a bit of a incremental supply, one of two supplies from the work-in-progress inventories and improving those inventories. On the demand side, we see the number of cars being produced and the emission standards pushing demand higher. So that's a very long-term systemic driver for high consumption of palladium and precious metals in the automotive space.

If we move to platinum market, Slide 19. The platinum market is not doing as great currently. There is a surplus in the market. Likely, it was absorbed by the ETFs by investment into physical platinum. The lower share of diesel cars has changed the ratio of consumptions in palladium and platinum in this sector and reverse their price ratio. So palladium has been above platinum for quite a while now. This is something that happened only once, but the circumstances are very different now. It's not just a market volatility, it's a price ratio that is actually sustainable and is acceptable to the automotive sector.

If we look at the developments in the spot market, Slide 20. The outflows from the palladium ETFs have been very substantial and those ETFs are running at rather low numbers. The lease rates for palladium have been extremely volatile. And at peak, they've reached almost 30% and that's a very good indication of the scarcity of physical metal availability in the market. And this is probably the biggest concern for the consumers in the market as they need to secure future supply of the metal. And this probably has higher priority for them than the actual spot price of the metal.

If we look at what's happening to the automotive sector, we have seen declines in the automotive sales this year, but because the PGM loadings per vehicle were increasing, that's Slide 21. The overall PGM consumption in the automotive sector has increased despite small car sales. If we look into the history of the car market, this is not very typical. Most of the time car sales and car consumptions do go up. So there are only a few years in the past 50 years when the sales would be down.

The reason for driving the amount of PGMs per vehicle is environmental sense and regulation and this has been improving and evolving globally, and it's one way to treat those standards always become only stricter, they never soften. There is always a concern with the electrification of the car fleet and whether or not it has an impact on the PGM market, Slide 22. It is important to clarify that when people speak about electric vehicles, it includes all kinds of cars equipped with a motor. So it's not necessarily a battery electric vehicle, and most of the times when the car company themselves speak about EVs, they actually assume hybrid cars, which combine both electric motor and the combustion engine.

On Slide 22, we have a chart that is based on the actual public statements made by the largest car companies and hybrids would dominate their space of electric vehicles. So from the PGM point of view, this means that consumption of PGMs will continue to exist. And actually will continue to grow over the next few years.

If we look into the long-term prospects of palladium demands. Slide 23, depending on how things would develop and what will -- the market would take, whether the electric vehicles will take a higher rate of growth or a lower rate of growth. In any case, we see growing consumptions for palladium, which is a benefit for our company and the PGM industry.

If we look at the premium of palladium to platinum on Slide 24, many people would look at the history of the market, but it's not really relevant, we have to look at the value-in-use and the current state of automotive technology. The biggest difference between today and the events of 20 years ago is that the technology has changed. The catalyst is working at very high temperatures, very close to the engine, which makes palladium a very efficient catalyst. If we would try and substitute palladium with platinum, this is certainly doable from the chemical point of view, but we need to reengineer the full exhaust system, moving the catalyst further away from the engine, have it front at lower temperatures, change the chemical formula for the catalyst and the most likely we will need higher PGM content to provide same efficiency at lower temperatures. So it's an expensive exercise that does take an effort though from the catalyst manufacturer and the car company. And when we look at the forward curves for platinum and palladium, this doesn't provide enough justification to whether it was at this kind of a research and do the substitution.

From the market balance point of view, it would make sense if there is limited substitution, but it will take time as we are certain that the car companies will not do this mid-cycle, possibly some reintroduction of platinum would happen once they have a new model year and they have to certify a new type of catalyst for that.

If we look at Slide 25, it describes the procedure in very simplified terms. And I think the important point that even if we start today, it still would take 18 to 24 months to do the substitution at best. The actual process could be even longer than that.

If we look at what the automotive market and the electric vehicles mean for our metals basket, Slide 26, we think it's a very positive development and it's a perfect match to the metals we use. The way the automotive market is developing, including the electric vehicles, we're still seeing increase in PGM consumption. And by 2025, that's a impressive number for 1.8 million ounces. We see substantial growth for nickel, an incremental growth of 400,000 tonnes. We see incremental growth for copper more than 1.5 million tonnes. And the automotive is giving a big push to the full metal basket that we have.

To run a comparison, we have Slide 27, which lists different technologies used in light vehicles and what is the implication for a specific metal that we produce, that will go into car.

May I pass the floor back to Mr. Sergey Malyshev, our CFO.

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Sergey G. Malyshev, Public Joint Stock Company Mining and Metallurgical Company Norilsk Nickel - Senior VP, CFO & Member of Management Board [6]

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Thank you, Anton. I would like to start overview of financial results with analysis of our revenue from metal sales. In the first half of 2019, sales volume of all our metals increased. Sales volume of nickel and copper increased by 13% and 11%, respectively. Nickel sales growth was driven by the increased production volumes, while copper sales were up owing to higher copper grade in processing ore. Palladium sales volumes was almost flat year-on-year as higher production volumes were offset by the absence of refined stock sales. Platinum revenue increased 12% due to revenues of work-in-progress PGM inventory.

In the first half of the year, market conditions were mixed for the company. Prices for 3 out of 4 key metals decreased roughly 10 percentage. Palladium was the only bright spot as its price increased by more than 13%, owing to the ongoing structural deficit on the global market.

Deficit price trends changed the structure of our sales basket. Palladium share increased to 14%, while nickel and copper dropped to 25% and 23%, respectively. Share of palladium remains unchanged that's 6%.

Revenue from metal sales, Slide #30. Revenue from the sale of nickel, copper and palladium and platinum was flat year-on-year as lower market prices were fully offset by higher sales volumes. Palladium added 22% owing to the higher realized prices.

Consolidated metal revenue. In the first half 2019, consolidated metal revenue increased 9% to $6 billion owing to higher sales volumes and one-off release of PGM inventory. I'd like to note that we reduced the sales from our Palladium Fund in the result -- as a result of own metals production growth. Price dynamics increased our revenue by almost $200 million. Stronger palladium prices mitigated the negative effect from lower prices for other key metals.

The geographic breakdown of our sales didn't change significantly. Europe remained our key market for 56% of market share. The share of sales in Asia fell to 25%, share of Americas increased to 13% -- 15% due to higher palladium sales.

Slide #32. Our EBITDA increased 21% to $3.7 billion, with EBITDA margin of 59%. Macro factors improved this key metric by slightly under $350 million. Higher palladium prices and weaker ruble were partly offset by the negative impact of inflation. Operating factors also had a positive impact in our EBITDA. Ramp up of Bystrinsky project brought us additional $155 million. Increased production and sales volumes of all key metals resulted in EBITDA growth of $173 million. Additionally, release of work-in-progress at PGM inventory resulted in higher sales and increased our EBITDA by $105 million.

Next slide. Cash operating costs. In the first half of 2019, operating cash costs decreased 5% to $1.8 billion, owing to weaker ruble and efficiency gains. Macro factors decreased our cash cost by $92 million. Depreciation of Russian ruble was partly offset by domestic inflation. Expenses driven by operating factors were almost flat year-on-year. Labor cost contained to be our main cost item totaling 35% of the cash costs. Cash cost is up for FX impact, purchases of refined metal and semi-products increased 4.5%, which is lower than Russia's CPI. Labor cost increased in line with Russia's inflation in accordance with the terms of collective bargaining agreement. Services temporarily increased 16%, primarily due to higher refining cost as a result of precious metals production growth. Other cost increase was driven mainly by inflation and higher mineral extraction tax payment due to increased volume of ore mining.

Slide #34, net working capital. In the first half of 2019, net working capital amounted to $1.3 billion. Macro factors increased our working capital by around $50 million. Strengthening of Russian ruble and seasonal growth of working capital were partly offset by increased balance of income tax payable. $366 million of the increase were driven by operating factors such as amortization of advance payments for delivered metals for the total amount of $325 million. Decrease in metal inventory of $111 million driven by lower cobalt inventory. Accounts receivable growth of $74 million due to higher sales volumes. By the end of the year, we expect net working capital to return to our -- for a constant level of approximately $1 billion.

Revenue CapEx. CapEx for the first half of 2019 amounted to $0.5 million and towards almost flat year-on-year. Breakdown by project dynamics was driven primarily by the completion of Bystrinsky project and number of mining projects of the Power Division as well as the weakening of Russian ruble. As a reported payout, we continue to invest in modernization of our energy facilities and upgrade of refining facilities of Kola MMC. As you know, we approved 2 growth projects, such as first stage of Talnakh concentrator upgrade and South Cluster. We initiated these projects in the first half of the year. We also started the active phase of our Sulfur project. As far as the direction of our capital expenditure is concerned, $223 million were allocated to commercial projects and $273 million to stay-in business projects, $4 million was spent on the Sulfur project in this year.

Sensitivity. Substantial part of our operation and capital expenses is ruble-denominated. This explains high sensitivity of our result to the exchange rate of the national currency. As you can see, from the chart, 1% change of the rate translated into $38 million of EBITDA change and $61 million of free cash flow change. In the first half of 2019, share of ruble-denominated operation and capital expenses stood at 88% and 86%, respectively. Change from previous period is insignificant.

Free cash flow decreased 15% year-on-year to $2.2 billion. Working capital dynamics and high income tax payments due to higher taxable income were partly offset by high EBITDA.

Balance sheet management, Slide #38. At the end of first half of 2019, the company's net debt amounted to $5.4 billion. Net debt-to-EBITDA ratio decreased to 0.8x, which is below mid-cycle level. The company continues debt portfolio optimization. We have revised terms and conditions for credit lines totaling more than $6 million, which allowed us to extend the duration of the debt portfolio, while keeping average cost of debt at the same level. The portfolio optimization activities resulted in reduction of cash interest rate by 23% year-on-year. In addition, the total amount of company's committed credit lines reached $4.6 billion, which is enough for debt repayment over the next 2.5 years. At the same time, maturity of major part of debt starts in 2020, providing for secured liquidity portion. The stability of our financial position is confirmed by the investment grade rating received from the 3 leading agencies. In addition, this year, the Moody's international rating agency increased our credit rating to Baa2 with a stable outlook.

Finance cost reduction, once again, I would like to mention that over the past 12 months, the company's debt portfolio effective rate amend is at a stable level of 4.6%, 4.7% per annum. Moreover, despite the increase of the company's gross debt over the past 2 years, we have managed to reduce cash interest payment by almost $200 million from $642 million in 2017, to $453 million anticipated by end of this year.

And now, I again, pass the floor to Mr. Dyachenko for delivering project update.

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Sergey Nikolaevich Dyachenko, Public Joint Stock Company Mining and Metallurgical Company Norilsk Nickel - First VP, COO & Member of Management Board [7]

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Thank you. I'll start now the project update with our Skalisty mine project. And for those who remember the objective is to build a new autonomous mine at the depth of 2 kilometers below surface with the production capacity of 2.4 million tonnes per annum by 2024. And the mine is going to mine -- reach ore reserve of approximately 66 million tonnes and overall CapEx for that project is approximately USD 2.2 billion. At this point in time, we've managed to complete construction of ventilation shaft #10. And in the beginning of October, we will start with lateral development at the depth of 2 kilometers. Our second shaft is on schedule. We will complete full construction and commission of that shaft in 2020, and we will start second lateral development from that shaft as well. The second project on Slide 42 is in line with our production configuration. We apply new technologies to electrowinning of nickel in the Kola Peninsula and that will allow us to increase Tankhouse #2 capacity by 20% from 120,000 tonnes per annum to 145,000 tonnes per annum of very high-grade nickel cathodes. And at this stage, the construction is 100% complete and we are in the process of hot-commission. 228 cells are in full production and we expect to get to the full commission by the end of this year.

The third project on Slide 43 is in line with our environmental obligations at Kola Peninsula to reduce our sulfur dioxide emissions by more than 50% by 2020, as compared to 2015. The total CapEx for that project is USD 90 million and, in essence, is to do reconstruction of our concentrator to produce 2 marketable products, high-grade nickel concentrate and low-grade nickel concentrate. And in line with our strategy, low-grade nickel concentrate is going to be sold to the market and that will allow us to stop one of the furnaces at nickel smelter in 2020, in fact, the end of 2019 and that will bring our emissions as I mentioned by 50%. Current status of this project is, construction is almost complete. We're in hot-commission stage, and we expect to get to the first 2 products, the 2 concentrates produced at the end of September. Slide 44 talks about the current progress on our sulfur dioxide capturing project at Polar Division. The overall CapEx requirement for that project is approximately $2.5 billion. Current status is that both projects are currently undergoing the government approvals and we're doing the site preparations and intentive tendering for long-term delivery equipment as well as the construction companies.

Going to Slide 45, that's our third stage of Talnakh concentrator upgrade. That's going to bring capacity of our Talnakh concentrator up to 18 million tonnes per annum. The investment decision was made and is going to cost company approximately USD 600 million. The timing for construction is from 2019 to 2022. Start of construction in 2019, fourth quarter 2019, and full production in 2023.

(technical difficulty)

We're doing the site preparation and the tendering process for the equipment and the construction company.

Slide 46 talks about the South Cluster development. We're in the process of doing feasibility study for underground mine and the open pit. In fact, it's a second life to our old asset, and we're going to mine additional ore reserve of 165 million tonnes of disseminated ore, which contains more than 20 million ounces of PGMs, more than 447,000 tonnes of copper and more than 365,000 tonnes of nickel. And that's going to give us approximately 20 tonnes of PGM annual -- additional annual production, is going to be mined at 9 million tonnes per annum, initially 7 million tonnes from the open pit and 2 million tonnes from underground. And going into 2035, it'll be underground separation with a capacity of 4.5 million tonnes per annum. That's the lowest, lowest operating cost operation on a curve -- global PGM cost curve. We expect to complete feasibility study in 2020 and get government approval and to start ramping up open pit in 2021, will get into full production capacity by 2027. At this stage, we are doing the site preparation and initial waste sweeping work.

Slide 47 talks about major infrastructure projects about our power supply. We mentioned that 44% of our power coming from the renewable sources, from hydropower, and we are going to maintain this capacity by investing more than USD 800 million in the period of 2018 to 2022 by replacing of turbines and introducing the new dispatch systems at hydropower plant. At the same time, we also will be replacing the power unit at the thermal plant in Norilsk. For 2019, we are going to spend approximately USD 200 million and if we talk about the current progress, we are on schedule.

Slide 48, that's Bystrinsky Project. The current stage, concentrator is fully commissioned. We're in the process of commissioning and getting government approval for the infrastructure units. The project is going to mine approximately 341 million tonnes of copper-gold ore, with copper content of 0.7% and gold approximately 0.9 gram per tonne. We provided jobs for 2,000 people and we started to hot-commission in 2017, reaching 4 million tonnes of ore treated through the concentrator in 2018. We're going to mine approximately -- and treat approximately 8 million tonnes in 2019, getting approximately 40,000 to 45,000 tonnes of copper in concentrate and up to 6.5 tonnes of gold. And going into full production, 10 million tonnes of ore mined and processed, producing up to 60,000 tonnes of copper in concentrate and up to 7.5 tonnes of gold and 2.1 million tonnes of iron concentrate, with iron content up to 65%.

And we talk about production guidance, we get into Slide 49. Production guidance in line with what we actually proposed at the strategy day. In 2019, we indicated up to 225,000 tonnes of nickel, up to 450,000 tonnes of copper, plus up to 46,000 tonnes coming from the Bystrinsky Project. And we maintain our indications for 2020 at 220,000 tonnes of nickel, and close to 450,000 tonnes of copper. The Bystrinsky Project as I mentioned before going up to 60,000 tonnes of copper. And we maintain our production of platinum, palladium at approximately the same level as in 2019. The small remark, we depleted our stock of copper concentrate purchased from Rostec and that's going to actually slightly reduce our production in copper in 2020. And as you can see, on Slide #50, in line with our strategic development, we are going to get back to more than 460,000 tonnes in copper by 2025, 2026. And at that stage, nickel production is going to be close to 240,000 tonnes and you will see as well, close to 25% increase in platinum, palladium production. And that mostly will come out of our new Skalisty mine. After going through mine, the quality, the high-grade ore, it will come out of Taimyr operation and as well as our South Cluster, which I mentioned before. And for the final slide, I'll pass this onto Mr. Malyshev.

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Sergey G. Malyshev, Public Joint Stock Company Mining and Metallurgical Company Norilsk Nickel - Senior VP, CFO & Member of Management Board [8]

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Thank you very much, Nikolaevich. And now moving to our traditional outlook, Slide #51. First let me provide you with brief comments on the metal market. We have neutral outlook for nickel and copper, positive outlook for palladium as emission regulations tighten in all major markets and there is no evidence of platinum substitution due to technical challenges, cautiously optimistically on palladium -- on platinum due to investment demand acceleration. We confirm our metal production guidance for 2019, that is already mentioned by Sergey Nikolaevich. By the end of the year, we expect net working capital to return to our forecast level of around $1 billion. And we expect CapEx of up to $2.2 billion in this year. Thanks very much. Ole?

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Vladimir Zhukov, Public Joint Stock Company Mining and Metallurgical Company Norilsk Nickel - VP of IR Department [9]

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Ole, now we are ready to take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Dan Shaw, Morgan Stanley.

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Daniel Harry David Shaw, Morgan Stanley, Research Division - Research Analyst [2]

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First one, just on CapEx. Your guidance is still for $2.2 billion for this year, clearly, you spent a lot less than that in the first half. Can you talk a bit about the risks around that number and perhaps, especially a bit more detail on specifically what that money will be spent on in the second half? And then the second question I had was just on Chita. In the past, there has been mention of possible IPO or some other transaction, is that something that's still on the agenda or not for the time being?

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Sergey G. Malyshev, Public Joint Stock Company Mining and Metallurgical Company Norilsk Nickel - Senior VP, CFO & Member of Management Board [3]

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With regards to our CapEx, yes, we reiterate our $2.2 billion CapEx guidance, we remind that an approval on a number of major investment projects, such as South Cluster development and Talnakh Phase III expansion was just made, those investment approvals we received in the first quarter. Therefore in the second half, we expect that the capital spending of this projects will accelerate. I will also mention that the tendering procedures of the contractor selection as well as equipment supplier selection occurring down the way for our environmental projects. We'll also anticipate that some of this tender procedures might be completed by year-end, and therefore, we'll start making cash advance payments under those contracts. So this really explains why we anticipate that we'll meet our CapEx guidance and why the second half CapEx will accelerate.

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Daniel Harry David Shaw, Morgan Stanley, Research Division - Research Analyst [4]

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And just on Chita.

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Alexey Vladimirovich Bashkirov, Public Joint Stock Company Mining and Metallurgical Company Norilsk Nickel - Non-Executive Director [5]

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On Chita here -- this is Alexey Bashkirov, VP for Financial Markets. Let me comment on that. We are indeed considering the possibility of IPO in 2020, all the concrete schedule and time frame will depend a lot on the pace of ramp-up of the mine. And as you know, we have shareholders in this project other than Norilsk, the private companies who may seek liquidity at some point of time, but at this stage, it's very early to tell when IPO will happen and what would be the parameters. We're still working on that and we may provide further update -- we hope to provide further update by end of this year.

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Operator [6]

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Our next question comes from Sylvain Brunet, BNP Paribas.

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Sylvain Brunet, Exane BNP Paribas, Research Division - Head of Metals and Mining Equity Research [7]

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Just going back to the CapEx profile. If you could please update us on the spending for next year, beyond this year? And if we should expect similar seasonality between H1 and H2 or if after you would have completed a number of tenders, the spend would be a bit more balanced between the first and the second half ? And my second question is on rhodium, you talked a bit more extensively about palladium and platinum, the rhodium price move has been quite spectacular as well, if you could give us or share with us maybe your analysis of the drivers there?

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Sergey G. Malyshev, Public Joint Stock Company Mining and Metallurgical Company Norilsk Nickel - Senior VP, CFO & Member of Management Board [8]

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Okay. Sylvain, the 2020 CapEx guidance, we will announce at our forthcoming strategy day, which has been preliminarily planned for November. We will announce the exact date as well as specifics in due course.

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Anton Berlin, Public Joint Stock Company Mining and Metallurgical Company Norilsk Nickel - Marketing Director [9]

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Rhodium shares are very modestly impacted in our final schedule and thus we see it as a byproduct, but as is price evolution, the rhodium market is very small, very volatile and typically most of the changes -- major changes to market have to do with its use in the automotive sector or their sort of refusal to use rhodium. So the development that we have seen recently is more rhodium being used in RCAP as China moved from China 5 standard to China 6. Amongst other things, it implies that you have to have an afterburner suite for the gasoline engine and this is typically done with rhodium catalyst. So once they have moved to the new stage of the regulation, they have to use more rhodium and this impact the global balance of the market and the price of rhodium.

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Sylvain Brunet, Exane BNP Paribas, Research Division - Head of Metals and Mining Equity Research [10]

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Okay. Just back on the comments you made on the environmental program. So if you have to make some cash advance payments, is it still fair to assume that the main amount to be spent to complete your upgrade program would be in 2020 and 2021?

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Sergey Nikolaevich Dyachenko, Public Joint Stock Company Mining and Metallurgical Company Norilsk Nickel - First VP, COO & Member of Management Board [11]

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Yes, most likely.

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Sergey G. Malyshev, Public Joint Stock Company Mining and Metallurgical Company Norilsk Nickel - Senior VP, CFO & Member of Management Board [12]

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Thank you, Sylvain. We will update -- Sylvain, we will make an update on our midterm CapEx outlook in November, but yes, roughly, we would expect that we'll have more CapEx on sulfur project spends in those years 2020, 2021, 2022.

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Operator [13]

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Our next question comes from Anton Fedotov, Bank of America Merrill Lynch.

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Anton Fedotov, BofA Merrill Lynch, Research Division - Analyst [14]

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Your cash finance costs decreased quite significantly over the past couple of years. Is there any further room for the cash finance cost decrease or this is fully done now?

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Sergey G. Malyshev, Public Joint Stock Company Mining and Metallurgical Company Norilsk Nickel - Senior VP, CFO & Member of Management Board [15]

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We have enough space for specialty sites, and we are going to have the same level in the near future.

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Operator [16]

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And our next question comes from Boris Sinitsyn, VTB Capital.

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Boris Sinitsyn, VTB Capital, Research Division - Equities Analyst [17]

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Congratulations with good results. Just one question from our side for Anton Berlin, please. In the press release, in the parts where you described the trends. In nickel market, you mentioned that you noticed substitution of Class 1 nickel feed by NPI in stainless steel production. So the question is how material is this for global nickel market? And why you think it is happening right now?

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Anton Berlin, Public Joint Stock Company Mining and Metallurgical Company Norilsk Nickel - Marketing Director [18]

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It is material, it has not happened right now, it has been happening for the past 10 years and we believe the trend will continue. If we look at the nickel uses in stainless, the NPI has grown to be a huge market from almost nothing 10 years ago. The current nickel -- Class 1 nickel usage in stainless is a bit less than 0.5 million tonnes. If we go back a decade ago, it was 700,000 tonnes and also total nickel consumption has grown since. Technology-wise, if we look at the mass market like 3 or 4, they could even do with a lesser amount of Class 1 nickel technically. So it's kind of a mixture between availability of NPI and ferronickel on one side and the rigs per use on the other side and geography. NPI is really a Chinese story. Companies outside China have tried using NPI, but their main challenges, cost of logistics, CO2 emissions, so it doesn't really work well outside the Chinese market. So we think the trend will continue subject that there is availability of NPI, but it's very slow and gradual and probably taking the same pace as growth of nickel usage in non-stainless applications, be it alloys or batteries or plating.

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Operator [19]

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And our next question comes from Daniel Major, UBS.

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Daniel Edward Major, UBS Investment Bank, Research Division - Director and Analyst [20]

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This is Dan from UBS. Two questions. Firstly on costs. Relative to the consensus, looks like costs were a little bit better in the first half of the year. Can you give us any indication commentary around the inflationary trends you're facing in your core Russian assets? That's the first question. Second one is around dividend. Last year you paid interim dividend in the fourth quarter of USD 1.8 billion, would it be fair from our side to assume that same structure of payment in 2019?

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Sergey G. Malyshev, Public Joint Stock Company Mining and Metallurgical Company Norilsk Nickel - Senior VP, CFO & Member of Management Board [21]

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Well, with regards to your dividend question, the company pays dividends, taking into consideration its current financial situation as well as the outlook, both the external outlook and the macro environment as well as capital investment needs, et cetera. As you may know, the decision with regards to the second interim dividend is normally an ad hoc decision made by our shareholders. We feel as a management that having announced the first half interim dividend of significant size, we have supported well our share price and as you may also know, the dividend that we announced for the first half is actually in excess of our minimum sort of commitment to pay 30%. So basically it's an ad hoc decision upon our shareholders.

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Operator [22]

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And our next question comes from Nikolay Sosnovskiy, Prosperity.

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Nikolay Sosnovskiy, Prosperity Capital Management Ltd - Director of Metals, Mining & Chemicals [23]

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We have a couple of questions. First one is on your JV with Russian Platinum. Can you please update on the current status and what's expected into the second half of this year and next year, what's the time line for this JV?

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Sergey G. Malyshev, Public Joint Stock Company Mining and Metallurgical Company Norilsk Nickel - Senior VP, CFO & Member of Management Board [24]

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Nikolay, we're planning to make some decisions with regards to this project this fall, basically by this year-end and hopefully will be able to give you a bit more color at the forthcoming strategy day in November.

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Nikolay Sosnovskiy, Prosperity Capital Management Ltd - Director of Metals, Mining & Chemicals [25]

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And my second question was on the potential M&A. And in the sector, we know that KAZ Minerals acquired Baimskaya sometime ago, and they started developing the project slowly. If by any chance they decide to attract some partner into this project, would Norilsk reconsider this investment opportunity once again?

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Sergey G. Malyshev, Public Joint Stock Company Mining and Metallurgical Company Norilsk Nickel - Senior VP, CFO & Member of Management Board [26]

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All we can say -- Nikolay, all we can say answering your question that as a management, we currently are not holding any negotiations with KAZ Minerals with regards to this project.

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Operator [27]

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Our next question comes from Barry Ehrlich, Citi.

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Barry Lee Ehrlich, Citigroup Inc, Research Division - Director [28]

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Yes, you disclosed USD 173 million

(technical difficulty)

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Operator [29]

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(Operator Instructions) Our next question comes from Anna Antonova, JPMorgan.

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Anna Antonova, JP Morgan Chase & Co, Research Division - Analyst [30]

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Just a question from our side on Chita. First what's your current estimate of EBITDA of Chita at what prices, when it ramps up to full capacity? That's the first question. And the second question is on the potential IPO of Bystrinsky, do you appreciate that you have already commented that the deal terms are yet to be finalized, but overall, do you view potential IPO as a means to change the ownership of your partners in the project? Or do you consider -- do you view the potential IPO as a means to change Norilsk's share in the project as well, or both?

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Sergey G. Malyshev, Public Joint Stock Company Mining and Metallurgical Company Norilsk Nickel - Senior VP, CFO & Member of Management Board [31]

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Let me start with the second part of the question. Currently, we're unable to say anything concrete on the options, everything is on the table with regard to potential capital structure. And all else will depend, of course, on what equity story will be put forward next year and depending on that, we will also decide on the mix of the shares being offered to the market. As for the first question, at full ramp-up, we expect Chita to produce depending on the year from $470 million to $520 million of EBITDA based on 10 million tonnes of ore processed.

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Operator [32]

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Our question comes from Barry Ehrlich.

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Barry Lee Ehrlich, Citigroup Inc, Research Division - Director [33]

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So on Slide 32, you disclosed a $173 million positive impact from productivity gains. What share of this if any is from high recoveries? And what are the other major components? And can you give us some idea or quantify what further potential you would have in the coming year or 2 on productivity gains?

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Vladimir Zhukov, Public Joint Stock Company Mining and Metallurgical Company Norilsk Nickel - VP of IR Department [34]

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We'll comment in a moment, just wait a moment.

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Sergey Alexandrovich Dubovitsky, Public Joint Stock Company Mining and Metallurgical Company Norilsk Nickel - VP for Strategy & Strategic Projects and Member of the Management Board [35]

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It's Sergey Dubovitsky. Let me comment first on the second half of the question. So the targets are still the same that we actually declared in our strategy presentation back in November last year. So basically, so we aim to keep our cost below inflation, while increasing production by 5% to 8%. As you see from the results, we are close actually to getting to these numbers, and so our actually aim is to keep the same result for the next year as well.

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Sergey Nikolaevich Dyachenko, Public Joint Stock Company Mining and Metallurgical Company Norilsk Nickel - First VP, COO & Member of Management Board [36]

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So let me give you a few comments about the -- our productivity gains. As Sergey Malyshev previously commented in the revenue slides, this was primarily driven by the increased production volume of all our major metals and especially palladium.

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Operator [37]

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Next question comes from Andrew Jones from Wood & Co.

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Andrew Ian Jones, Wood & Company Financial Services, a.s., Research Division - Equity Analyst [38]

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My question's on the production outlook after 2020. By the look of things, the Talnakh expansion will be complete before the full ramp-up of the South Cluster. I was wondering if you could give us any guidance for how that increase in production is going to be phased and how much of it will come from the South Cluster itself? And how much will come from improved recoveries and so forth in the core asset base around Talnakh? And secondly, on the outlook for copper, you were talking about still seeing this reduction in output in 2021, when the Rostec concentrate is depleted. How much are you producing from the Rostec concentrate this year and next? And so how much do you expect copper output to go down in 2021 when that finishes?

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Vladimir Zhukov, Public Joint Stock Company Mining and Metallurgical Company Norilsk Nickel - VP of IR Department [39]

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Sergey Nikolaevich?

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Sergey Nikolaevich Dyachenko, Public Joint Stock Company Mining and Metallurgical Company Norilsk Nickel - First VP, COO & Member of Management Board [40]

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Yes. Commenting with the second question, we normally don't disclose how much we produce out of the purchased concentrate, it's confidential information. So obviously, we see no reduction or depletion of the source. We're going to actually increase slightly our production out of the mines, right? And when all our new mining projects commence in 2024, '25, '26, we're going to get back to as I mentioned more than 460,000 tonnes of copper in products.

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Andrew Ian Jones, Wood & Company Financial Services, a.s., Research Division - Equity Analyst [41]

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Okay, but could you give us an idea of how that ramp-up might be phased given you will have a lot of excess concentrate processing capacity? But obviously, the ramp-up of South Cluster will take more time. I mean how -- could you give us any sort of numbers on how quickly that ramp-up will take place? Will it be a case of production being at these sort of levels until 2023? And then the ramp-up starts and how quick is that, could you give us any numbers on this sort of -- on this plan?

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Sergey Nikolaevich Dyachenko, Public Joint Stock Company Mining and Metallurgical Company Norilsk Nickel - First VP, COO & Member of Management Board [42]

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Look, we actually are in the process of finalizing and going through the feasibility study. And that's going to come with the more detailed planning and clear understanding of the figures. At this stage, we know exactly that the full production out of the South Cluster will be in 2026, 2027, obviously, we'll actually -- we'll be looking forward to find the options to bring it a little bit forward, but at this stage, that's the number. Okay, how it's going to be split between now and 2026? We might actually say the next year when the feasibility is complete.

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Operator [43]

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(Operator Instructions) We have a question from Timothy Riminton, Barclays.

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Timothy William Riminton, Barclays Bank PLC, Research Division - Research Analyst [44]

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I just have a question, the -- your dividend payments in -- concentrated in H2. And if we are looking around a dividend distribution of give or take $4 billion, on our estimates, it looks like you might need to raise some additional financing to make this payments. And I guess, I just wanted to get an idea of how you're thinking about approaching that. I mean we noticed that the Eurobond market is looking pretty favorable at the moment. And have you had a look at that, and really any details you can provide would be much appreciated?

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Sergey G. Malyshev, Public Joint Stock Company Mining and Metallurgical Company Norilsk Nickel - Senior VP, CFO & Member of Management Board [45]

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(technical difficulty)

We'll consider all possibilities in the markets and now have not current deal on the table.

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Vladimir Zhukov, Public Joint Stock Company Mining and Metallurgical Company Norilsk Nickel - VP of IR Department [46]

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Okay. If -- I suppose that was the final question. I understand there are no further questions on the line. Let me thank all the participants of this call and looking forward to seeing you or most of you at our forthcoming strategy day in November. We'll be updating you guys in due course with exact date and the venue. Thank you very much again for dialing in.

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Operator [47]

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Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you all for attending. You may now disconnect.