Unexpected peace turns Norilsk Nickel into milking cow: Year in Review

MOSCOW. Jan 9 (Interfax) – The multi-part drama known as the corporate dispute at Russian mining giant Norilsk Nickel (RTS: GMKN) came to a conclusion at the end of 2012 with an unexpected twist.

The distribution of forces that had emerged at Norilsk Nickel since the end of 2008 seemed fairly stable and safe. Vladimir Potanin’s Interros and Norilsk Nickel’s management had a majority on the board of directors and pushed through all the necessary decisions, while Oleg Deripaska’s Rusal was left to pursue lawsuits that usually ended badly for the aluminum company. A combination of pressure from above and the risk of losing hundreds of millions of dollars in a London courtroom was needed to turn the situation around 360 degrees and bring new players to the stage.

At first glance, the agreement, or rather those details that the principal shareholders disclosed, seems to satisfy all parties and insure against incidents such as those that made the feud between Interros and Rusal such a riveting spectacle. But the agreement will only be tested for the first time in 2013 – in the course of preparations of Norilsk Nickel’s budget. In light of the maneuvering that preceded past elections to the board of directors, particular attention will also focus on the extraordinary general meeting scheduled for March 11, when Norilsk Nickel shareholders will elect a new board.

Five oligarchs

The signal for the feuding shareholders to step up negotiations was a statement President Vladimir Putin made at the end of August at a meeting of mining industry representatives. “We hope that the disputes between the owners of Norilsk Nickel will end soon in the interests of the company’s development.” After this, Potanin and Deripaska met with Prime Minister Dmitry Medvedev. The authorities had previously also shown an interest in making peace between Interros and Rusal – recall the appointment of former Kremlin chief of staff Alexander Voloshin as chairmen of the company’s board – but now Potanin and Deripaska had an additional incentive. They were pushed to intensify talks by a looming case in London arbitration court.

Initially, Metalloinvest principal owner Alisher Usmanov was considered as an arbiter for Norilsk Nickel. Metalloinvest became a shareholder of Norilsk Nickel even before the crisis of 2008-2009, when Potanin and Usmanov were working on the idea of merging their companies and creating a new Russian mining and metals champion. The creation of a “Russian BHP Billiton” was derailed by the global financial crisis, and later Usmanov backed Rusal in the corporate feud. Usmanov was not involved in the final round of negotiations.

The role of guarantor was passed to Evraz co-owner Roman Abramovich, who created Russian Aluminum with Deripaska in the late 1990s. Abramovich’s Millhouse is buying 2.84% of Norilsk Nickel shares from Interros and 2.03% from Rusal, but he will vote with a 20% stake held by a trust to which Millhouse will contribute its stake, and Interros and Rusal will each contribute 7%. Millhouse could subsequently increase its stake to 7-10%, sources close to one of the major shareholders said, but Metalloinvest does not intend to sell its stake and does not rule out even increasing it.

There is still no clear answer to the question as to why Potanin agreed to such big concessions in the dispute over his main asset. There are various theories, including a link between the negotiations on Norilsk Nickel and the fate of the assets of Potanin’s real estate development company ProfEstate. While giving up the support of former Norilsk Nickel CEO Vladimir Strzhalkovsky, who was seen as a third force in the dispute, seems fairly logical for Potanin, the other points of the truce have been seen by analysts as a major victory for Rusal, and with good reason.

Norilsk Nickel’s will continue to have 13 members, and will include four representatives of both Interros and Rusal and one representative of Millhouse. Interros, Rusal and Millhouse will also each nominate one independent director to the board and give minority shareholders the opportunity to elect one director. Potanin has not ruled out that this role might be played by the representative of Metalloinvest.

The post of Norilsk Nickel board chairman could be filld by Alexander Abramov, one of Abramovich’s partners in Russian steelmaker Evraz. The agreement does not specify that the chairman must be a representative of Millhouse; an alternative to Abramov could be a respected independent foreigner, one board member said.

If one of the three parties to the agreement violate its terms, the other parties can, in proportion to their stakes, buy out 7.5% of shares in Norilsk Nickel from that party at a 25% discount. Another option would be for the violating party to sell 1.875% of Norilsk Nickel shares for a symbolic $1.

Symptoms of paralysis

The harsh sanctions cannot fully guarantee that the shareholders will comply with the agreement. Under the deal, Interros, Rusal and Millhouse are supposed to approve documents concerning Norilsk Nickel’s dividend policy, special dividends and other decisions on distributing profits; changes to the charter; deals with affiliated parties; deals outside of the company’s normal business; deals with foreign assets; transactions with securities; marketing strategy; and replacement of the CEO. But what will happen if Interros and Rusal disagree on one of these issues or over something else?

Under the agreement, Millhouse will vote against any issue on which the principal shareholders do not agree. Ultimately, the principle of unanimity in making key decisions could paralyse the process of approving vital issues for the company. If the agreement does not specify who in such a situation is considered to be the violating party and within what period the disagreements must be resolved, there is plenty of room for discussions. With all the sophistication of the lawyers of both parties, these discussions could quickly turn into court battles.

“The shareholder agreement at (oil company) TNK-BP (RTS: TNBP) did not save them from disputes. And if these documents are similar, there are no guarantees that everything will go smoothly at Norilsk Nickel,” Valentina Bogomolova of Uralsib (RTS: USBN) said. Disagreements could even arise over every-day issues such as the acquisition of licenses or the development of a new strategy, she said.

Norilsk Nickel’s sales could become a sticking point, particularly since the post of sales director has been vacant since the departure of Viktor Sprogis and Oleg Pivovarchuk. Rusal has always criticized Norilsk Nickel’s sales system, which is focused on direct long-term contracts with its biggest customers, steelmakers (about 70% of total sales) and has almost nothing to do with traders (about 3% with exchange sales). Rusal believes Norilsk Nickel’s sales would be far more effective by involving leading commodities trader Glencore, which is also a shareholder of Rusal and a majority shareholding in Norilsk Nickel’s competitor, Anglo-Swiss mining company Xstrata. Norilsk Nickel and Interros at one time managed to deflect the insistent calls to involve Glencore in the mining company’s sales, citing the difference in the interests of the producer who wants stability and the trader, who makes money on volatility. But there could be a new push. A possible indication of this are the increasingly frequent rumors that Rusal wants to set up a marketing committee under the board of directors. Furthermore, according to one conspiracy theory, Deripaska has been stubbornly reluctant to part with his stake in Norilsk Nickel because in that case Glencore would lose the last leverage in the battle for the leading nickel and palladium producer’s sales.

Capex + borrowing = dividends

There could also be disagreements over the amount of dividends. The figures of $8-9-10 billion over three years that have excited the market would involve not only paying out all net profits, but also the sale of assets and a drastic cut in capital expenditures. While the positions of the principal shareholders regarding foreign and noncore assets are similar, Deripaska’s and Potanin’s views on the scale of cost cuts might not coincide. For now, Interros and Rusal have agreed on a 35% cut to the investment program for 2013, to $2 billion, but the status of managing partner implies greater responsibility for operations than the status of principal shareholder. Potanin was also reminded of this responsibility by Usmanov, who has positioned himself as the defender of the interests of minority shareholders and an advocate of Norilsk Nickel’s sustainable growth.

A great deal will depend on the situation on the metals market, changes on which are difficult to spell out in an agreement. However, Potanin will be able to adjust the amount of dividends and defer payments in “pre-crisis and crisis periods.”

The situation with the license to Norilsk-1, the deposit in Norilsk Nickel’s traditional fiefdom that unexpectedly went to an ambitious rival, again demonstrated the need to update the company’s production facilities and introduce new technology. To what extent these challenges are compatible with the strategy of a milking cow is difficult to say. Perhaps Norilsk Nickel has already begun looking for additional sources of financing to satisfy the appetites of its principal shareholders. On the last working day of 2012, the company announced plans to issue Eurobonds, though it did not specify their amount or purpose.