Yuri Adno

T

he special meeting of shareholders of MMC Norilsk Nickel that was held on the eve of 2004 decided to approve the size of interim dividends in the amount of 42.1 ruble ($1.46) a share. Dividend payments were proposed by the board of directors, which, as was officially stated, "has taken into account exceptionally successful results of the company’s activity" during nine months of 2003 and supported the adopted course "to raise revenues of its shareholders". The total amount of dividends will equal 9 billion rubles ($312.5 million).

o far Norilsk Nickel still remains Russia’s only metallurgical company, whose shares on the stock market are considered ’blue chips’ and are quoted along with securities of leading oil and gas corporations. Owners of these shares also have more other reasons to feel optimistic. According to the Russian Trading System and Moscow Interbank Foreign Currency Exchange, just from March to October 2003 the capitalization of Norilsk Nickel increased 2.5 times or from $5.165 million to $12.834 million. It is quite possible, of course, to trace the influence of growing world prices for nickel, cobalt, copper, platinum and gold, which are produced by this company. However, high rates of the capitalization also took place during those time periods, when price situation was unfavorable. So, these impressive results can be realistically considered a success of good management.
It is worth to recall that in 2002 there were quite a few serious challenges for the leader of the Russian metallurgy. Due to the downfall of world prices for palladium the return on sales of one of the base metals at Norilsk Nickel decreased from $1.300 million to $180 million. "In fact, we lost more than a billion dollars", says Sergei Polykarpov, the chief of investors’ department at Norilsk Nickel. "At the same time I cannot cite any company in the world as an example of having been able to successfully overcome such a situation", he points out.
In Polykarpov’s words, the management of Norilsk Nickel succeeded in doing this by significantly reducing costs and concentrating on operations with liquid assets as much as possible. More efficient ways were found to manage not only payables but receivables as well. The system of controlling expenditures, above all, the management ones, became tighter and more demanding. Open tenders for purchasing raw materials, supplies, equipment and, as a consequence, a stronger competition among purveyors allowed to reduce one of the biggest expense items. As a result, the financial indexes went up by several hundred million dollars. The company received a profit that in principle refuted even the most optimistic forecasts by market analysts. With the total decrease of proceeds by $1.200 million the net profit went down by $100 million only.
Chairman of the board of directors at Norilsk Nickel Andrei Klishas notes that the last two years turned out to be the period of the company qualitative growth. It managed to significantly move forward in several strategic directions: large assets were acquired, the corporate management structure was brought closer to international standards, the management was strengthened and renewed. Observers link these successes to the arrival of a new team headed by Mikhail Prokhorov, who in the middle of 2001 was appointed general director and chairman of the company’s management board. At the same time the role of the board of directors was significantly increased and the number of its independent directors was up as well.
The main event during this period was, undoubtedly, the completion of a large-scale restructuring of the share capital and transfer of the capitalization center to the newly formed business structure Mining & Metallurgical Company Norilsk Nickel JSC, which owns all assets and acts as a profit center. By results of the restructuring in 2001, 98.3% of shares of Russian Norilsk Nickel JSC were exchanged for shares of MMC Norilsk Nickel.
In 2002 the new management team brought the sensational news not only to the company’s shareholders but, probably, to all business community: Norilsk Nickel acquired the Stillwater Mining Company. This was the first case (if not to consider the acquisition of the gas station network by LUKOIL in Texas) of buying major assets in the U.S. by a Russian company. "This deal demonstrated to the whole world all the seriousness of intentions on the part of Norilsk Nickel", notes Sergei Polykarpov. "It also proved the capability of our team to achieve results regardless of the most complicated obstacles: we should have received an approval by numerous international trade councils, anti-monopoly committees and commissions", he adds.
Following the acquisition of the Stillwater Mining Company, which accounts for 7.5% of the palladium world production, Norilsk Nickel began controlling more than half the market. The company used its special status in such a way as to stabilize the market of this metal as much as possible. The exceptional marketing potential of Stillwater in the U.S. (as is known, the company has long-term agreements with American automobile firms) was considerably increased by Russians, who conducted many successful negotiations with palladium consumers. At present, about 80% of the company-produced metal is sold under contracts. Against this background the intention of managers from Norilsk Nickel to level off the imbalance of demand and supply in the palladium market and to prevent shocks in the future seems to be well-grounded. As general director of Norilsk Nickel Mikhail Prokhorov said, "the first investment" of funds in North America would be successful. He pointed out that "this deal meets interests of the company’s shareholders and its products’ consumers in the best way".
One more major acquisition by Norilsk Nickel was Russia’s largest gold-mining enterprise ZAO Polyus. In the opinion of Mikhail Prokhorov, "gold and metals of platinum group are in a kind of opposition to each other" but the availability of them all in the company means having "a universal insurance against market surprises". Thus, it is possible "to plan the company’s development for many years in advance" with more confidence. Its management intends to actively develop "the gold-mining direction" and it has already declared the intention to participate in a bidding for the right to develop one of the most promising gold ore fields Sukhoy Log in Eastern Siberia. According to the available information, this bidding may take place in the first half of 2004.
Simultaneously, it has been decided that in the process of optimizing the investment portfolio the participation of Norilsk Nickel in nonspecialized and ineffective projects should be reduced. Following this line the company has withdrawn from the project to develop a nickel field in New Caledonia and sold its stakes in the Lipetsk Iron & Steel Works JSC as well as in the Cherepovetsky Steel-Rolling Mill.
The CEOs of Norilsk Nickel believe that one of the main conditions of effective corporate management is to achieve such a degree of business transparency, which will correspond to the world standards. The major obstacle in this respect exists in the sphere of the state policy: Russian legal restrictions on releasing information about production of non-ferrous metals and their subsoil reserves are still in effect. And only recently some measures have been taken to gradually remove the regime of secrecy. This allowed the leaders of Norilsk Nickel to make a number of important decisions and, in particular, on publishing the company’s quarterly accounts of producing base metals, conducting an international audit of polymetallic ores at the Talnakhskoye and Oktyabrskoye fields on the Taymyr Peninsular (Polar Division), releasing data on reserves and production of platinoids. There is no doubt that making such an information public will lead to a further growth of the capitalization of Norilsk Nickel that possesses the unique and richest raw material base: not a single producer in the world does have such an assortment of base and precious metals.
One of the key provisions of the production development strategy of Norilsk Nickel till 2015 is to ensure the growth of ore extraction and increase metals production dependent on market conditions. The company’s management is also about to try to raise efficiency indexes, including increasing the ratio of metals extraction, reducing consumption of resources and production costs. By the preliminary estimates the annual capital investments in implementing this strategy will average between $300 million and $450 million (about $400 million in 2003 to 2005). The company plans to accomplish all investment tasks by using, mainly, its own financial flows.
Under the depository agreement with the Bank of New York the issue of American depository receipts of the first level (ADR-1) for shares of Norilsk Nickel has been started. Entering foreign trading sites has considerably increased these shares’ liquidity as well as the interest of foreign investors. This has significantly improved the company’s financial image and contributed to a further growth of its share value in the Russian stock market.
Mikhail Prokhorov.
General director, chairman of the management board, president of Mining & Metallurgical Company Norilsk Nickel JSC. Born on May 3, 1965. Graduated with honors from the Moscow State Financial Institute specializing in international economic relations. From 1989 to 1992 headed one of the departments at the International Bank of Economic Cooperation. From 1992 to 1993 was the chairman of the management board at the commercial bank International Financial Company. In 1993 became the chairman of the management board at the Onexim Bank. From 1998 to 2000 was the president and chairman of the management board at the Onexim Bank. From 2000 to 2001 was the president of the joint-stock commercial bank Rosbank. Since July 2001 has been the head of Norilsk Nickel.
Norilsk Nickel is one of the world’s largest producers of non-ferrous metals.
The company’s competitive advantages are explained by its unique raw material base. Over 35% of the world reserves of nickel contained in the extremely rich ores is concentrated just at two fields, Oktyabrskoye and Talnakhskoye, on the Taymyr Peninsular.