Wednesday, May 23, 2007

Business Update: Norilsk Nickel - Xstrata

Russian mining conglomerate Norilsk Nickel on Wednesday morning confirmed its decision to stay in the bidding for Canadian LionOre by trumping the recent bid for the company from Swiss-based Xstrata by 10%, now offering $6.3 billion (C$6.8billion), representing a 28% premium on its original offer in early May; the entire bidding process has been covered in this blog in greater detail in previous posts.

Norilsk Nickel, the world’s largest nickel miner and a leading producer of copper, platinum and palladium, is highly interested in its smaller Canadian counterpart as it feels an urgent need to expand into foreign markets and become competitive in the global commodity crunch amid the aggressive consolidation ventures from global players like BHP Billiton, Anglo American and Rio Tinto. As Canada's Globe and Mail reports:

Norilsk “sold some oil and gas assets in the Soviet Union in order to build up its bank account — it sorely wants to get a hold of [Lionore] strategically,” said David Rea, chairman of Toronto-based Davis-Rea Ltd. “I think Norilsk will get it.”

Earlier this month, Norilsk confirmed it plans to spin off its energy assets worth roughly $7-billion (U.S.), a move that could help it fund a bid for LionOre.

Analysts said acquisitions were crucial as declining ore grades mean Norilsk's mines in the Russian Arctic are processing more raw materials to produce the same amount of metal.

“This acquisition could potentially change investors' views of Norilsk over time,” Mr. Pukhayev said, adding a greater world presence would cut political risk attached to the company.

Financial Times in today's article reports of people close to Xstrata, saying that the valuation for LionOre has become too pricey for realization of much future value, and that Xstrata is less likely to continue the bidding. A factor that supports this notion is the guaranteed deal breakup fee Xstrata is to receive from LionOre if Norilsk Nickel prevails in the bidding of $305 million. Yet analysts from Troika Dialog polled by the Wall Street Journal admit that at such high valuations LionOre may still be a good strategic fit for Xstrata which is a "customer" of LionOre.

The Russian company just as Xstrata received the backing from German regulatory authorities, adding to an earlier agreement from the Canadian Competition Bureau. If LionOre confirms the bid by Russian nickel giant to be superior for the shareholders, Xstrata will have five days to decide on its participation in the auction, otherwise the offer stands until June 18th.

The deal comes in the midst of record-high nickel prices, up 45% this year on the base of very high capital spending worldwide, and high demand for stainless steel, a primary component of which is nickel. If Norilsk Nickel succeeds in this deal it would be the largest foreign acquisition by a Russian business to date and would open up the doors for more such expansions from the likes of Severstal, Basel, Evraz Group, and others.

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