Tuesday, 18 of February of 2020

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Kremlin Oligarchs to Take Control in Norilsk Nickel

Russia auctioned its biggest mining company a decade ago when it was strapped for cash. It’s using the global credit crisis to regain control of OAO GMK Norilsk Nickel as economic turmoil forces U.S. and European governments to bail out their own corporations.

Without buying a single share, the government is to appoint its own man as Norilsk chairman this month, replacing the company’s largest owner, Vladimir Potanin. The move comes as the economic crisis saps oligarch funds and Kremlin bailouts help Prime Minister Vladimir Putin secure control of industries where Russia can compete globally, such as energy and arms. Norilsk is the Kremlin’s candidate in mining.

Potanin, 47, is handing over the keys after ending a feud with Oleg Deripaska, the billionaire owner of United Co. Rusal, that turned the world’s biggest nickel producer into a battleground of ambitions. The dispute “irritated” government officials, Potanin said Nov. 26 at a briefing with Deripaska, 40, in Moscow to mark the truce.

“The Kremlin wants to see global champions in the industries most important to the country and the feud lost track of that goal,” said Chris Weafer, chief strategist with Moscow- based investment bank UralSib Financial Corp.

Presiding over the only Russian metals maker among the top 200 companies in the MSCI Emerging Markets Index gives the Kremlin a close handle on the supplier of half the world’s palladium and a fifth of its nickel, key to the global auto and steel industries. It has also alienated investors.

Shares Fall

“From an investor standpoint, it’s basically a big mess,” said Kevin Dougherty, fund manager with Pharos Financial Group in Moscow, which doesn’t own Norilsk. A weak metals price outlook and the battle with Deripaska, coupled with “deteriorating corporate governance make investing in Norilsk like stepping into a casino.”

Norilsk shares are down 40 percent since Nov. 5, when the government approved a $4.5 billion loan to help refinance Rusal, Norilsk’s second-largest shareholder. The Micex Index, a measure of 30 large Russian companies, has dropped 17 percent.

The state took a 25 percent stake in Norilsk as collateral for that loan. When Norilsk shareholders meet Dec. 26 to elect a new board, the remaining intrigue is how many of the 13 seats the Kremlin will win. The bailout also means two government officials will join Norilsk as managers.

Putin, in a Dec. 4 address, said Russia’s role in Norilsk is about providing stability and isn’t much different from assistance other countries have provided to their troubled financial institutions. Without state aid Norilsk may be unable to support its production, company officials have said.

Yeltsin Era

“There’s no direct policy to de-privatize” Norilsk, said Dmitry Peskov, a spokesman for Putin, who opposed the state’s auctions of the country’s major industries and spent the last eight years reasserting government control. “How this situation will play out, only time will tell,” Peskov said.

Russia is “willing” to buy stakes in companies where owners request aid with the aim of later selling out on fair terms, Putin said on Dec. 4. “This is not a way to nationalize the economy,” he said.

The state sold Norilsk to Potanin’s bank in 1997. Putin’s predecessor as Russian president, Boris Yeltsin, auctioned stakes in the country’s biggest enterprises to help his cash-strapped administration. As then deputy prime minister, Potanin became a Norilsk board director in 1996 and helped organize the auctions.

Reasserting state control at Norilsk revives the potential for it to become a platform for mergers in Russia’s metals industry, with the aim of creating a rival to Melbourne-based BHP Billiton Ltd., the world’s largest miner. It would also assert state influence in an industry that lags behind only oil and gas in terms of export volumes and budget contributions.

Cuba, Venezuela

A state-run Norilsk may help Russia’s government expand ties with anti-U.S. states such as Venezuela and Cuba, which has one of the biggest nickel resources. Norilsk is ready to develop a nickel mine in Cuba should Russia lend the Caribbean island $1.5 billion for the project, Chief Executive Officer Vladimir Strzhalkovsky, a former officer in the KGB Soviet-era security agency, said Nov. 20.

Norilsk could operate the Cuban mine without taking an equity stake in the project, the CEO said. The company currently only manages mines it controls.

Stock Downgraded

“If Norilsk has aspirations of being in the same league as the likes of BHP Billiton, it should start behaving as such and show the necessary respect to capital markets,” UralSib metals analyst Michael Kavanagh said in a report today. UralSib cut the company’s 12-month price target to $58 from $285 per share on a lack of strategy, poor disclosure and weak metal demand. Norilsk traded in Moscow today at $64.

Uralkali, a potash miner controlled by billionaire Dmitry Rybolovlev, might also be folded into a state mining giant based on Norilsk after Putin’s deputy, Igor Sechin, reopened a probe into a 2006 flood at the company’s mine. Potanin said Aug. 8 that the arrival of Strzhalkovsky at Norilsk was likely to spur mergers with iron ore, potash, coal and copper assets.

Deripaska had opposed Norilsk combinations with companies other than Rusal. After Rusal acquired its Norilsk stake in April, the nickel company’s merger talks with billionaire Alisher Usmanov’s iron ore producer OAO Metalloinvest stopped.

‘Invisible Hand’

At the “truce” briefing with Potanin, Deripaska only shook his head when asked if he would block a Norilsk merger with Metalloinvest.

“The invisible hand of the state could have seriously contributed to such an idyllic agreement,” Mikhail Stiskin, an analyst at Troika Dialog, Russia’s oldest investment bank, said of the settlement between the billionaires. “The state is playing first violin” and will support Norilsk mergers, he said.

Russia’s upper hand, with $437 billion in international reserves built up during Putin’s presidency from high commodity prices, is reinforced by the global market turmoil. Deripaska, the country’s richest man according to Forbes magazine, ceded stakes in Canadian auto-parts maker Magna International Inc. and German builder Hochtief AG to banks in October after shares used as collateral to finance the acquisitions lost value.

When Rusal’s 25 percent stake in Norilsk, pledged against a $4.5 billion loan from foreign lenders, faced the same risk in October, Russia stepped in. Norilsk CEO Strzhalkovsky, 54, formerly the country’s tourism chief with no experience in the metals industry, said that he asked the state to buy Rusal’s shares. The Kremlin chose to refinance Rusal’s loan for one year and took Norilsk shares as collateral.

Loan Conditions

Among the loan conditions, the state has the right to at least one Norilsk board seat. One of two government nominees is Sergei Chemezov, who like Putin and Strzhalkovsky is a former KGB officer. Chemezov is now CEO of state holding company Russian Technologies Corp., which controls OAO VSMPO-Avisma, the world’s biggest producer of titanium, and has 49 percent of Erdenet, Mongolia’s largest copper miner.

Chemezov said Dec. 12 that he has already asked Potanin and Deripaska to consider a combination with the copper assets of Russian Technologies, which are jointly held with Metalloinvest. Meanwhile, Usmanov of Metalloinvest has acquired about 5 percent of Norilsk as a prelude to consolidation.

“Norilsk Nickel is creeping toward becoming a state-run entity, in practice if not formally so,” Stratfor, a U.S.-based risk advisory group, wrote clients last month.


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Market downgrades Evraz on cashflow concerns

Evraz shares fall 6.4 percent in London as it announces shareholders can receive part of div in new shares.

Shares in Evraz Group fell on Wednesday after the company said stockholders could receive part of their interim dividend in discounted shares to enable the Russian steel maker to preserve cash.

At 1453 GMT the London-listed GDRs were off 6.4 percent at $10.2 having earlier fallen as much as 18.9 percent as analysts voiced concerns about Evraz’s cash flow.

The new shares will be issued at $22.50 each, or $7.50 per GDR, about 31.2 percent below the closing prices on Dec. 16.

Michael Kavanagh, a metals and mining analyst with Uralsib, calculated that if all investors accept the shares the total number of GDRs could increase by 10 percent.

“On one hand, the part shares offer, saving $276 million in cash could imply that cash is in short supply and raise some concerns,” Kavanagh said.

“On the other, the fact that the company is paying a $750 million cash dividend in this environment is a very positive sign regarding the health of the balance sheet and cash position of the company.”

The original first half dividend, announced on Aug. 26, proposed a cash payout of $8.25 per share or $2.25 per GDR.

Under the new proposal, shareholders will still receive $6.00 per share or $2.00 per GDR in cash by Dec. 18 with the remaining $2.25 per share or $0.75 per global depository receipt (GDR) available in the new shares.

“The board believes that the proposal offers shareholders an attractive partial scrip dividend alternative,” Evraz said in a statement on Wednesday.

“Any resultant cash saving will further strengthen the company’s financial position in the current challenging economic and market environment.”

All shareholders of record as of Sept. 18 are eligible for the dividend. They will be asked to vote on the proposal at a Jan. 30, 2009 extraordinary general meeting (EGM).

The company did not say when shareholders will receive the remaining portion of the payout.

Evraz built up considerable debt in recent years through acquisitions in Africa, Europe and North America. Its $2.3 billion purchase of Canadian steel pipe maker IPSCO earlier this year has saddled the company with a sizeable short term debt load.

The group in November obtained $1.8 billion in credits from state-owned VEB to refinance debt.

VEB, or Vnesheconombank, has been entrusted by the Kremlin to distribute a $50 billion rescue package to help Russian companies refinance a total of $120 billion in Western loans by the end of 2009. (Reporting by Alfred Kueppers; Editing by David Cowell and Elaine Hardcastle)


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Russia Pharmaceuticals and Healthcare in Q4 2008

Despite a bruising a few months for the Russian economy as a whole, BMI broadly maintains an optimistic growth outlook for the Russian pharmaceutical market for the period 2008 to 2012. We have lowered our US dollar growth rate estimates based on updated exchange-rate forecasts. With the precipitous fall in oil and gas prices in recent months and foreign-investment outflows, both the ruble short- and longer-term position has weakened. Nonetheless, we see strong average annual US dollar growth of 10.6% for the period and 10.3% for the ruble. Market growth is forecast at 22.0% for 2008, in line with 2007 levels, with the market cooling from 2009.

We expect 2012 market value to reach US$23.6bn. It would be going too far to describe the pharmaceutical industry as immune to the current instability, in particular the lack of access to capital for expansion and worries about a weakening currency are substantial worries. Anecdotal evidence suggests that the damage to date from the broader crisis has been limited. Domestic producer Valenta (formerly Otechestvennye Lekarstva) has reportedly had problems refinancing existing debt. It has halted investment projects and has moved to sell its Krasfarma production subsidiary in Krasnodar Region.

Leading wholesaler Protek has announced and then shelved its latest initial public offering (IPO) plans in the face of tumbling stock markets. Unlike the banking or retail sectors, however, there have been no high-profile company defaults . yet. Arguably, the local sector is mired in a longer-term crisis.

Local research group Pharmexpert estimates that around 50% of the country.s 525 registered producers are unprofitable.

In July, Prime Minister Vladimir Putin described the sector as only capable of producing “last century’s drugs”. Hence the industry is closely watching the development of the Conception for the Development of the Russian Pharmaceutical Industry to 2020, a draft of which was submitted to the government in August 2008. Unsurprisingly the plan calls for the development of both modern generics and innovative drugs by the domestic industry in order to lead five-fold growth in the sector as whole by 2020. Like Brazil, Russia sees import substitution of vaccines “a traditional strength of the Soviet-era industry” and insulin as a vital first step. With the exception of a long-rumoured plant project by Nycomed, the bulk of new investments in recent months have come from domestic players, including new players intent on raising capital from domestic and foreign markets.

One example is Gerofarm, which is building a contract-research focused factory in Moscow Region using both Danish and UK expertise for a EUR15mn. Meanwhile, some attractive production assets are reportedly in play. A powerful shareholder in local market leader Pharmstandart is reportedly pursuing Verofarm, controlled by Pharmacy Chain 36.6 and a modern player in oncology generics.

The belated collapse of a 2007 deal by Gedeon Richter for Polpharma and its Russian subsidiary Akrikhin could see bids for the latter firm. The prices paid will be indicative, a study by PriceWaterhouseCoopers suggests that asset prices for mid-sized Russian companies may be off by between 10 and 20% from their peak.


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Russian Mining Sector in Q4 2008

The global credit crunch is having a significant impact on the Russian mining industry, particularly among the oligarchs who control many Russian miners. In late October 2008, Russia’s richest man, Oleg Deripaska, was the recipient of a US$4.5bn loan from state-owned Vnesheconombank, which enabled his company United Company RUSAL (UC RUSAL) to maintain its 25% stake in Norilsk Nickel. The money will be used to repay the syndicated loan from foreign lenders used by Deripaska to buy the Norilsk stake in April 2008, it was reported on Reuters.

The motivation behind the loan was arguably political, with Russia keen to maintain control of strategic mining assets. Deripaska has already lost control of other non-mining assets around the world as a result of the credit crunch and Russia would not have wanted to see the 25% stake in Norilsk fall into Western hands. Russia has already stated that is ready to lend up to US$50bn to any domestic company having trouble refinancing existing loans with the West.

Where this leaves the recent trend towards consolidation among Russian mining players remains unclear.

Earlier in 2008, there was a spate of M&A activity among Russian miners. This was tacitly encouraged by the Kremlin as it would strengthen the position of Russian companies on world markets. An asset swap deal in late May 2008 between Alisher Usmanov and Vladimir Potanin allowed Usmanov to acquire 10% of Russian palladium and nickel giant MMC Norilsk Nickel, while Vladimir Potanin gained a 25% stake plus one share of Russian iron ore and steel producer Metalloinvest. In April, Mikhail Prokhorov’s ONEXIM Group bought a 14% stake in aluminium local UC RUSAL, as part of a deal in which UC RUSAL, controlled by Oleg Deripaska, acquired 25% plus one share of Norilsk Nickel. A three-way merger of Norilsk Nickel, Metalloinvest and UC RUSAL had been seen as a possibility earlier in 2008, although short-term economic difficulties may now preclude this.

Looking at foreign players active in the Russian mining sector, Canadian miner High River Gold’s future was in severe jeopardy as this report went to press. The company has said that its Berezitovy Rudnik subsidiary does not currently have enough funding to make a scheduled US$15.2mn payment to Nomos Bank due on November 21.

In terms of both area as well as the sheer variety of endowments, Russia figures as a major mining nation of the world. It is home to an array of minerals and metals including nickel, platinum, bauxite, cobalt, coal and tin. Siberia hosts the bulk of Russia’s nickel, platinum and diamond deposits, and despite the harsh geography and weather conditions, it remains an attractive destination for mining players from around the world. Russia-based Norilsk Nickel, ALROSA, UC RUSAL and Polyus Gold are some of the major local mining players that have established a strong presence.

However, in order to leverage these opportunities fully, Russia needs to improve its stance on certain parameters. Topping the list are bureaucratic delays and instances of corruption that substantially escalate the costs of doing business. On the mining front, safety issues and environmental standards continue to challenge the industry, in spite of the government’s efforts to review mines for compliance with technological documentation, estimated project capacity and safety regulations.

The Russian state holds rights over all mineral endowments. Historically, mineral resources have been auctioned to mining companies for development. However, a new methodology is on the anvil, whereby the decision to grant licences will be based on the applicant’s processing capacity. As mentioned above, the government also plans to stiffen regulations concerning foreign participation in the mining industry.

Industry forecast owing to its large metal and mineral base, Russia can continue to derive benefits from the boom in the global metal prices. Diamond mining augers a healthy outlook for the Russian mining industry.

The domestic mining industry is forecast to register an average growth of 7.7% a year over 2008-2012, reaching a total value of US$216.1bn.


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