Norilsk Nickel returns 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.

"Everything is absolutely under our control,” Mr Strzhalkovsky told the Financial Times. “No one can move without agreement with us.”

The close ally of Vladimir Putin moved in where previous chief executives had feared to tread, cutting out middlemen and reviewing supply contracts, clamping down on the infighting between its oligarch owners that had beleaguered the company in 2008. His campaign drove administrative and labour costs down by 36 per cent last year, a factor in the boost in profits as commodity prices recovered too.

"We issued a special order that limited decision making on finance for a whole series of units in the company. Power was concentrated under the financial leadership of the company – and we checked every agreement and reduced their cost.”

Mr Strzhalkovsky, who served 11 years in the Leningrad KGB, admits that under normal circumstances such zealous reviewing of each and every supply contract and agreement would “reduce flexibility and lead to overbureaucratisation”. But in this case, he says, it was necessary.

At the start of 2009 the company was struggling to overcome the crisis that had sent commodity prices tumbling as well as its own share price, while borrowing costs soared. The control system in place means the company has shored up its position to get through further volatility – while the debt burden has been lowered to about $3bn.

Mr Strzhalkovsky was named chief executive in August 2008 amid a battle between the company’s two main oligarch owners, Vladimir Potanin and Oleg Deripaska, who was bidding to lead Norilsk in a merger with his UC Rusal aluminium group. Four months after his appointment, the two sides had signed a truce. Mr Strzhalkovsky says peace came not just because of his “active participation and support” but also because the crisis forces “people to see more soberly their potential and ambitions”.

Mr Strzhalkovsky insists he was invited to the position by Mr Potanin and not by the Kremlin as some investors suspected in an effort to stop the infighting and tighten control over the nickel miner. But he says he also agreed the move with the Russian leadership first.

Now any talk of a merger between Norilsk and Rusal is given short shrift by Mr Strzhalkovsky, who says he fails to see how any such deal would bring any value to Norilsk shareholders while Rusal is so burdened with debt.

While Norilsk has been able to lower its gross debt burden to just over $3bn, Rusal is still saddled with more than $12bn in debts, while Norilsk’s market cap of $29bn compared with Rusal’s market capitalisation of $14.4bn means Rusal’s 25 per cent stake in Norilsk provides half of Rusal’s value.

"We have an ebitda margin [earnings before interest, tax, depreciation and amortisation] of 43 per cent while Rusal has less than 16 per cent – and this is only when they have tolling [a transfer pricing system that provides tax breaks on raw materials supplies] and special tariffs for electrical energy and transportation.

What if all this was brought to a normal situation? What would be the sense of such a merger?” he asks. “I understand that often in business the processes of mergers and acquisitions give a certain boost to the initiator of the process but I don’t see any need for their bid for success to lead to a loss for normal shareholders.”

But he said the state had no interest in taking a direct participation in the miner should continued volatility in metals prices eventually force Rusal to sell its stake in Norilsk in order to meet payment deadlines to creditors.

"As far as I understand the position of the state, it does not plan to enter. It would go against the stated principle that there should not be a sharp increase in state influence over the economy . . . Even in bad conditions [of the crisis] such a decision was not taken and I know there are no such plans.”

In keeping with the moves to tighten control at home, Mr Strzhalkovsky is also seeking a streamlining over the company’s foreign operations, where, he complains, his company does not have enough control. Norilsk is looking at selling its 51.3 per cent stake in Stillwater Mining, the only US producer of palladium and platinum, which is also produced by Norilsk, he said.

“Stillwater was bought?with?the expectation that it would bring strong synergies. There were a lot of nuances in the sales agreement that limited us to being a portfolio investor. Therefore we are dependent on how effective the management of Stillwater is. Last year they worked badly. This year the situation is better but?not as we would want.”

Norilsk’s stake in the company is worth about $750m compared with the $341m in cash and palladium it paid when the stake was acquired in 2003. But the company is reporting losses, notching up a loss of 7 cents per share in the fourth quarter of last year.

Mr Strzhalkovsky said the company was to hold talks with the Stillwater management, and said Norilsk was also reviewing a possible sale of some underperforming nickel assets in Australia, which have been idle for a year. “We need to understand how effective these investments are.”

With such success in cutting costs notched up already – even as strong emphasis has been given to social stability with workers granted a 10 per cent rise in wages even as costs were cut elsewhere, Mr Strzhalkovsky smiles when asked whether his background was exactly what was needed at Norilsk. “In companies like this that are strategically important, where there are explosives and precious metals, there should be tight control,” he said.