Norilsk's Profit Falls 12% Over Write-Offs

Norilsk Nickel, the world's largest nickel and palladium miner, posted a surprise 12 percent drop in 2007 net profit after writing off nearly $2 billion on the value of newly acquired mining and power assets.

Norilsk said Tuesday that 2007 net profit fell to $5.28 billion on write-offs at LionOre Mining International, where it postponed a nickel refining project, and the power generating company at the core of a thwarted spinoff proposal.

"The surprise was not that they booked losses, but the amount of these losses — almost $2 billion," said Vladimir Zhukov, mining and metals analyst at Lehman Brothers.

High metals prices, including a spike in nickel to a record $51,800 a ton in May 2007, boosted Norilsk's core profit and revenue close to or beyond analysts' forecasts. Earnings before interest, taxes, depreciation and amortization rose 32 percent to $10.2 billion. Revenue rose to 44 percent to a record $17.1 billion.

Norilsk CEO Denis Morozov said high commodity prices had supported record sales for the company. A public listing, he said, would make Norilsk the obvious platform on which to build any potential merger with United Company RusAl or assets belonging to billionaire Alisher Usmanov.

The write-offs, however, prompted strong criticism from RusAl, which has called for a change in the company's board structure since buying a one-quarter stake in Norilsk in April. "One of the key priorities for a new board is to review the company's M&A strategy to make sure that every purchase creates additional value," a RusAl spokeswoman said in a statement.

Norilsk acquired Canada-based LionOre, which has assets in Australia and southern Africa, for 6.8 billion Canadian dollars ($6.6 billion) last year after outbidding Xstrata.

Norilsk said mineral rights related to LionOre were impaired by $765 million after it decided to postpone a nickel refining project in Botswana using Activox technology because of a rise in expected costs and short-term energy supply constraints.

Goodwill recognized on Norilsk's acquisition of LionOre was impaired by a further $325 million, the company said.

By raising its stake in power firm OGK-3 to 65.2 percent last year, Norilsk incurred a further $529 million in impairment losses.

Norilsk had planned to include OGK-3 in a $7 billion energy firm to be spun off and listed in London.

The proposal was blocked, however, by the no-show at the vote of Mikhail Prokhorov, the billionaire former chief executive of Norilsk who later sold his stake to RusAl.

Prokhorov is the partner-turned-rival of Norilsk's single largest shareholder, Vladimir Potanin. Norilsk's annual report revealed that Potanin held a 29.78 percent stake in the company as of May 26.

Potanin said last month that he and Usmanov had agreed to swap assets and invited RusAl to join them in creating a global mining giant.

Morozov said during a conference call Norilsk had approached RusAl on further integration.

"We approached RusAl because Rusal made public statements that the ultimate goal of their 25 percent stake acquisition in Norilsk was a full combination of the two entities," he said.

"RusAl has not replied yet."