Norilsk Nickel back on to solid ground

“When former KGB officer and state tourism chief Vladimir Strzhalkovsky was appointed chief executive of Norilsk Nickel more than a year ago, investors worried about his lack of experience in the mining industry.

But the tough cost- cutting he has embarked on is highlighting the potential advantages of his former career, as the world’s biggest nickel miner emerged from the crisis with a big lift in net profits that reached $2.65bn last year, far above forecasts.”

Source: Financial Times, May 24 2010

Observations:

• Administrative & labor cost at Norilsk Nickel went down 36% in 2009.
• Strzhalkovsky deems a merger with Rusal to add little value to Norilsk’s shareholders.
• Norilsk will try to sell its majority stake in the American palladium & platinum miner Stillwater Mining.

Implications:

• Rigorous cost cutting has reestablished Norilsk as a low cost producer. Nickel prices fell in 2007 and have only partly recovered last year. As revenues have decreased, the only option for the company to keep a health margin was to cut costs. With a positive outlook for nickel prices in the future, this is a lasting competitive advantage.
• Few companies will be interested in buying the stake of Stillwater Mining. The company was making a loss last year and it is very hard to achieve operational synergies for most integrated miners as they don’t have a strong presence in the area of Montana.