Archive

Posts Tagged ‘Norilsk Nickel’

Russia: Silent Mining Giant

June 16, 2011 Comments off

Although Russia accounts for about 14% of global mining, most professionals in the industry know very little about Russian mining. Apart from a few large steel companies most large Russian mining firms are unknown in the market, and few people could name the most important Russian mines or mining districts. However, driven by the huge potential of its reserves and the modernization of its industry the country is slowly gaining a more prominent position on the international mining stage.
This article explores the current situation of the Russian mining industry and identifies two key trends that will shape it in the next decade: a struggle for competitiveness; and internationalization of the key players.

Russia’s Reserves & Production

Figure 1 - Russian mining production and reserves

Russia has been blessed with a large variety of mineral reserves across the country. The peninsulas in the northwest, the Ural mountains, Siberia, and the Far East all house important mining districts. Crucial inputs for economic development, like iron ore and coal, are abundant. The country holds 15-20% of the world’s reserves for these resources. The country’s position in reserves of gold and diamonds is very strong too. For a few minerals with only a small global market, like palladium and magnesium compounds, the country even has the potential of dominating the market. The most important observation when comparing the share of world reserves and the share of current global production is that for almost all key minerals the share of reserves exceeds the share of production (See Figure 1). In other words; it is likely that Russia will become more important in the global mining industry.

Current production in the country is more than sufficient to satisfy domestic demand, making Russia a net exporter of mineral goods. The country’s net export balance for ores, slag & ash was $1.3bln and for iron & steel over $14bln in 2010 (Source: ITC), with China being the largest trade partner for ores and Italy being the primary (initial) destination of Russian iron & steel.

Balancing domestic supply and demand

Russia is growing, and mining is needed to fuel this growth. Russian annual GDP growth varied from 4.7% to 8.1% in the period 2001-2008, outpacing growth in the western world (Figure 2). The economic crisis has hit Russia hard, making the economy shrink by almost 8% in 2009; recovering by 3.8% in 2010. However, growth is expected to outpace western growth in the coming years.

As a result of the high growth of the domestic economy, various industry development could take shape. If productivity increases, the potential of Russian reserves will enable a combination of exports and domestic sales, enabling rapid growth. However, if the Russian companies do not succeed in significantly increasing capacity, productivity will be too low to support both domestic and foreign growth. In this case export restrictions to protect the national growth could be instituted.

Corporate Landscape

The structure of Russia’s current mining production is largely shaped in the Soviet period. Mining districts were set up to provide the country with mineral self-sufficiency decades ago. After privatization in the ‘90s most of the state owned assets have been combined in the current private companies. The privatization and the poor financial situation of the Russian government at the time has led to a typical characteristic of the Russian mining industry: the importance of tycoons. Many private companies are owned and controlled by one or a few founders. These founders were at the right place at the right time and knew the right people at the time of privatization. Their position has further been strengthened by the government’s desperate need for funds, resulting in large amounts of debt being issued to the tycoons.

Figure 2 - Russian and global GDP growth

Whereas company owners in the rest of the world typically try to gain control over companies via the stock market, the large ownership stakes held by the tycoons in Russia lead to frequent power struggles among major shareholders. The struggle for control over Norilsk Nickel is the most recent example: Interros, controlled by Vladimir Potanin, and Rusal, controlled by Deripaska,both try to gain the majority in the board of Norilsk Nickel, one of the world’s largest suppliers of nickel and copper. In the last years the power struggles have led to the emergence of clear domestic champions for most of the key commodities: Rusal for aluminium; Norilsk Nickel for nickel and copper; Suek and Mechel for coal; Alrosa for diamonds; TVEL for uranium, etc. For steel and gold the landscape is (and probably will stay) more fragmented.

Attracting investment

Read more…

Advertisements

Potanin backs Norilsk’s role in Rusal fight

“Vladimir Potanin, the Russian tycoon, has defended controversial actions by the management of Norilsk Nickel during his bitter battle for control of the mining company with rival Oleg Deripaska, insisting that they have protected shareholder value. In his most extensive comments since the conflict flared up again last year, Mr Potanin told the Financial Times that his Interros holding company and Norilsk’s managers were not acting together against Mr Deripaska’s Rusal.

The dispute became public after Rusal ended up with three board directors at last June’s annual shareholder vote, against Interros’s four. The aluminium group accuses Norilsk’s management of manipulating the vote in favour of Mr Potanin’s group.

Mr Potanin said tensions had simmered for six months before June’s shareholder meeting, after Rusal representatives on the board voted against Norilsk’s 2010 budget, demanding it should include big dividend payments.”

Source: Financial Times, May 8 2011

Observations:

  • Despite holding 25% of the ownership of Norilsk Nickel and being on the company’s board, mr. Deripaska has not managed to exert control over the miner. Although Potanin’s Interros does not hold a majority in the board, it can count on the support of Norilsk’s management to control the course of the company.
  • Board composition is depicted below:

Implications:

  • Rusal’s ally Metalloinvest, which holds 4% of Norilsk, is seeking to merge with the company. By trying to increase its share in the open market it could change the voting dynamics in future shareholder meetings to bring control over the company to Rusal’s side, enabling a friendly merger.
  • Deripaska has announced not to sell Rusal’s 25% stake, but Interros will try anything to ensure he will not gain control. One of the current actions of the company to prevent Rusal from gaining control is a share buyback program via Norilsk’s subsidiary Corbiere Holdings. Together with Metalloinvest’s attempts to increase its stake this creates strong demand for the company’s shares.

©2011 | Wilfred Visser | thebusinessofmining.com

Rusal Net Profit More Than Triples

April 1, 2011 Comments off

“United Co. Rusal PLC said Thursday its net profit more than tripled last year on higher aluminum prices and a strong contribution from 25%-owned OAO Norilsk Nickel. The Russian aluminum giant plans to nearly double capital spending this year to boost capacity in the face of growing aluminum demand.

Rusal CEO Oleg Deripaska said in a statement the company’s strong net-profit growth was driven by significant increases in demand for aluminum and metal prices, and the company expects global demand for aluminium to grow 8% to 43.8 million metric tons this year. He also said aluminum prices will likely remain in a range of $2,500-$2,600 per ton until the end of the year, due to underlying demand and continuing weakness in the U.S. dollar. Prices were volatile last year, ranging from less than $2,000 per ton to as high as $2,500 per ton, he said.”

Source: Wall Street Journal, March 31 2011

Observations:

  • The largest part of annual profit ($2.44bln out of $2.87bln) comes from the share in Norilsk Nickel, a low-cost nickel producer.
  • Bauxite output of the company increased 4% to 11.8mln tons. Rusal operates 8 mines in Guinea and Guyana.

Implications:

  • Cost increase in both alumina and electricity has driven the industry’s break-even price to above $2,200/ton. Predicted demand increases faster than supply, potentially leading to further price increases. However, large trading stocks could supplement supply and keep the price relatively low for several years.
  • Increasing demand partly comes from copper substitution. Rusal benefits in the long term from the high copper price as manufacturers search for alternatives to copper wires.

©2011 | Wilfred Visser | thebusinessofmining.com

Norilsk Nickel back on to solid ground

May 24, 2010 Comments off

“When former KGB officer and state tourism chief Vladimir Strzhalkovsky was appointed chief executive of Norilsk Nickel more than a year ago, investors worried about his lack of experience in the mining industry.

But the tough cost- cutting he has embarked on is highlighting the potential advantages of his former career, as the world’s biggest nickel miner emerged from the crisis with a big lift in net profits that reached $2.65bn last year, far above forecasts.”

Source: Financial Times, May 24 2010

Observations:

  • Administrative & labor cost at Norilsk Nickel went down 36% in 2009.
  • Strzhalkovsky deems a merger with Rusal to add little value to Norilsk’s shareholders.
  • Norilsk will try to sell its majority stake in the American palladium & platinum miner Stillwater Mining.

Implications:

  • Rigorous cost cutting has reestablished Norilsk as a low cost producer. Nickel prices fell in 2007 and have only partly recovered last year. As revenues have decreased, the only option for the company to keep a health margin was to cut costs. With a positive outlook for nickel prices in the future, this is a lasting competitive advantage.
  • Few companies will be interested in buying the stake of Stillwater Mining. The company was making a loss last year and it is very hard to achieve operational synergies for most integrated miners as they don’t have a strong presence in the area of Montana.