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FY'15 dividend payouts soar in Russian metals, steel sector

The Russian metals sector defied a sinking Russian economyby paying out 72% of net earnings as dividends in 2015 — more than twice theaverage for non-financial companies — as a weaker ruble made steelmakers' andminers' products more competitive, and more cash was available due to CapExcuts and completed capital projects.

The Analytical Credit Ratings Agency, or ACRA, in Moscowsaid July 25 that the average ratio for non-financial companies was 31% in2015, with higher payouts in the mining and steelmaking sector indicative ofhigher free cash flow levels.

Russian non-financial companies paid out 1.35 trillionrubles in dividends in 2015, 8% more than in 2014, while mining and metalsgroups paid out 330 billion rubles — 135% more than in 2013.

The report, authored by analysts Alexander Gushchin andNatalia Porokhova, showed that, unlike companies in most other sectors, Russianmining and metals groups are still demonstrating financial strength, despitethe contraction in the country's economy last year, and the global metals andsteel price rout.

Sector CapEx "peaked during 2000-2014," asSoviet-era plant and equipment was substantially updated, according to ACRA.

"Open-hearth furnaces at large [steelmaking] companieshave practically disappeared, while the share of continuous-casting of steelhas reached approximately 90%," the report read.

Evidence from the steel sector seems to bear out ACRA'sconclusions — spending at OJSCNovolipetsk Steel averaged US$1.45 billion per annum in 2011 to2013, but should average US$550 million per year until 2018, according tocompany figures.

At PAOSeverstal, cash CapEx fell from US$1.08 billion in 2013, to US$779million in 2014 and US$440 million last year.

"Future investment programs will focus on maintaininguptime of operating capacities, limiting the impact on the companies' cashflows," the report read.

While international miners and steelmakers have cutdividends and defaultedon debt in order to survive the fall in metals prices, Russian exporters havethrived, amid the ruble roughly halving in value since 2014.

The currency rate swing made Russian products much morecompetitive on the world stage.

Metals companies paid out 330 billion rubles in 2015, whichwas a 13.15% fall compared to 2014 payments. But this fall was primarily due to(Norilsk Nickel) PJSC Mining andMetallurgical Company Norilsk Nickel, which payout this year. Thecompany accounts for approximately 50% of all Russian metals-sector dividendpayments, according to ACRA. Sector dividends otherwise would have grown 27%,according to the agency.

ACRA also warned that the idea of boosting minimum dividendpayments of state-owned companies to 50% could have far-reaching implicationsfor companies, including state-owned PJSCALROSA, the world's biggest diamond miner.

A proposal to force state companies to distribute a minimumof 50% of earnings is beingdiscussed by officials in the Kremlin and Ministry of Finance as away of plugging the holes in the federal budget caused by low crude oil prices.

If implemented, it could boost dividend payments by 500billion rubles, but it might also leave the companies short of funds for theirinvestment programs, according to the report.

As of July 22, US$1was equivalent to 64.79 Russian rubles.