Bloomberg News

Norilsk Seeks Iron, Copper to Curb ‘Dangerous’ Nickel Focus

June 10, 2011

(Updates with closing share price in ninth paragraph.)

June 10 (Bloomberg) -- OAO GMK Norilsk Nickel, Russia’s largest mining company, plans to add copper, coal and iron ore assets in Indonesia and Latin America as it seeks to overcome a reliance on nickel and triple its market value to $150 billion.

“It’s dangerous to depend on nickel, in which we already control a quarter of the global market,” Chief Executive Officer Vladimir Strzhalkovsky said in a June 8 interview in Moscow. “Copper, where Norilsk has just a 3 percent share in global production, provides more room to expand.”

While nickel output may rise about 68 percent by 2025, Strzhalkovsky is targeting an almost threefold jump in copper and a doubling in production of platinum-group metals. That’s intended to help the company, which produces 80 percent of its metals at Soviet-era Russian plants, triple its market value in 14 years as it pursues the diversification model of global competitors Vale SA, BHP Billiton Ltd. and Rio Tinto Group.

Norilsk is the world’s biggest producer of nickel, which accounts for two-fifths of its sales. Prices of the metal, used to make stainless steel, have fluctuated between $9,000 and $51,600 a metric ton in the past three years on the London Metal Exchange. As much as 80 percent of Norilsk’s profit has come from its polar division, which extracts ores from mines north of the Arctic Circle, as deep as 1.3 kilometers (4,300 feet).

Overseas Acquisitions

“Norilsk should diversify its business in terms of geography and products, as its nickel reserves in Russia are becoming poorer,” Dmitriy Kolomytsyn, a Moscow-based analyst at Morgan Stanley, said by telephone. “While the company generates good cash it should buy new nickel or other mining assets overseas.”

By 2025, Norilsk Nickel plans to increase nickel output to 500,000 tons a year and copper production to 1 million tons, Strzhalkovsky said. In 2010, Norilsk produced 297,329 tons of nickel, 388,872 tons of copper, 2.86 million ounces of palladium and 693,000 ounces of platinum, it said in a Jan. 31 filing.

Copper prices will rise to a record $12,000 a ton by the end of this year on import demand from China, Barclays Capital said June 8. Copper has almost tripled since the end of 2008, reaching an all-time high of $10,190 in February in London.

Indonesia is attractive to Norilsk because the country is rich in mineral resources and cheap labor, Strzhalkovsky said. Norilsk said May 6 it signed a memorandum of understanding to build a copper smelter in the Southeast Asian country with capacity of 400,000 tons of the metal a year.

Norilsk rose 1.1 percent to 7,113 rubles at the 6:45 p.m. close in Moscow trading, valuing the company at 1.36 trillion rubles ($48.5 billion).

African Opportunities

The company also seeks to expand in Africa, adding to existing projects in Botswana and South Africa, the CEO said. In Australia, Norilsk resumed output at the Lake Johnston nickel mine this month after halting production in 2009 because of high costs. Current nickel prices and cost-cutting make the venture profitable, Strzhalkovsky said. Nickel has risen 20 percent in the past year in London to $22,822 a ton.

“Africa gives Norilsk the best opportunities, as the reserves there are easily extracted and they are relatively inexpensive,” Kolomytsyn of Morgan Stanley said.

In Latin America, Norilsk is evaluating possible acquisitions in Brazil, Argentina, Peru, Mexico and Cuba. “We are analyzing this market very seriously, though there is no goal to expand abroad immediately without evaluating the long- term outcome,” Strzhalkovsky said. “We won’t necessarily strike any deals this year or in 2012.”

Spending Plan

Norilsk will study buying mining projects valued at $100 million as well as companies, Strzhalkovsky said. He declined to give any targets for iron-ore and coal production by 2025, or for foreign investment. Norilsk plans to spend $34 billion by 2025, he said.

While Norilsk will seek Russian iron-ore acquisitions and wants to expand in coal, it isn’t interested in purchasing OAO Raspadskaya or any other of the country’s coal producers, Strzhalkovsky said. Raspadskaya management and steel producer Evraz Group SA, which hold 40 percent each in the coal company, are seeking a buyer for their stakes.

Billionaire Alisher Usmanov, who controls Russia’s largest iron ore producer, OAO Metalloinvest, hasn’t ruled out a merger with Norilsk, Kommersant reported in April.

Profit Guidance

Norilsk’s net income this year will likely be similar to its 2010 profit of “more than $5 billion” because nickel prices have declined almost 8 percent this year, while copper, platinum and palladium have been “decent,” he said. Profit was $2.65 billion in 2009.

Norilsk’s $1.2 billion share buyback in the open market, announced by the company in April, is “on track,” and about half of the volumes have been purchased, Strzhalkovsky said.

He didn’t exclude a further round of buybacks later this year, a decision that’s up to the board of directors. “If the company accumulates significant cash and isn’t yet ready to expand capex, a buyback is justified,” Strzhalkovsky said.

--Editors: John Viljoen, Amanda Jordan

To contact the reporters on this story: Ilya Khrennikov in Moscow at ikhrennikov@bloomberg.net; Yuliya Fedorinova in Moscow at yfedorinova@bloomberg.net.

To contact the editor responsible for this story: Amanda Jordan at ajordan11@bloomberg.net.


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