Norilsk Nickel's Global Commodity Appetite

Thursday, Norilsk Nickel, accounting for 20% of the world's nickel output announced its entry into the bidding for Canada's LionOre by trumping a previous bid by Swiss Xstrata by 16%. The total amount of money Norilsk Nickel is planning to lay out is $4.8 billion dollars, a 23% premium over the closing price of LionOre before the bid by Xstrata.

Norilsk Nickel is the world's largest producer of nickel and palladium run by Vladimir Potanin. LionOre, despite its Canadian origin owns nickel mines in Botswana, Australia, and South Africa. Xstrata, Swiss-based, owns both nickel mines and refinery plants, and is very diversified into other commodities, such as copper, gold, and coal.

The consolidation processes in the nickel industry comes in the midst of record-high nickel prices. You would think oil is expensive; nickel has surged 67% since the start of the year. The Wall Street Journal reports that there are very limited amounts of new mining projects, in contrast to record demand for stainless steel products in emerging markets. Analysts, interviewed by Gazeta.ru have expressed surprise that the bid comes at such high prices, as the company would have cost Norilsk Nickel several times less at the end of last year. Yet the bidding is most likely explained by the urgent need for the Russian nickel monopoly to control a larger share of one of the world's hottest commodities in anticipation for high demand over the next several years.

The acquisition attempt has been viewed positively by Norilsk Nickel investors, with its stock jumping almost 3% on the announcement (the usual practice is for the acquirer's stock to fall due to the expected cash outflows, debt undertakings).

Norilsk Nickel has been very active to gain a greater foothold in international markets. It has made several major acquisitions in the past few years, including US miners Stillwater Mining Co, and nickel producer OM Group Inc. If the deal goes through it would be the largest acquisition of Russian-based companies overseas. Yet hurdles remain as Xstrata will most likely attempt to trump Norilsk Nickel's offer, the analysts questioned by Wall Street Journal report. The Financial Times, citing Simon Toyne of Numis Securities in London, reports that:

"there is greater industrial logic in the combination of Xstrata and LionOre than [in] Norilsk and LionOre. Xstrata already owned the Nikkelverk refinery in Norway, where LionOre’s African production is processed, and LionOre’s skills would help Xstrata to develop its Kabanga and Koniambo nickel projects, said another analyst."

NOTE: Last year, Russian corporations spent more than $11bn on foreign acquisitions, according to Ernst & Young. Most recently, Russian steelmaker Evraz bought Oregon Steel in the US for $2.3bn. In April, Russia's biggest airline Aeroflot announced its intention to participate in the acquisition of a stake in Italian airline operator Alitalia. Earlier this year, Hungarian airline operator Malev was sold to Russian AirUnion.