Falling Nickel Prices Slash Norilsk's Profit

Norilsk Nickel's net profit fell by one-third in the first half of the year as the world's largest nickel miner succumbed to rampant inflation in Russia and a 40 percent decline in the price of the metal.

Norilsk's stock on the MICEX fell 17.7 percent Friday, falling further than the 6.1 percent decline on the MICEX mining and metals index. The shares have fallen more than 60 percent from their November 2007 high.

The consolidation of newly acquired mining and power assets also helped drag down half-year profit to $2.68 billion, while an accelerating slump in metals prices and a power struggle between Norilsk's billionaire shareholders promise a tough second half to 2008.

"In the falling commodity price environment, we don't expect Norilsk stock to recover to its previous high levels," said Dmitry Smolin, mining analyst at UralSib.

Norilsk, which produces one-fifth of the world's nickel, has suffered from its exposure to the underperforming metal, while global peers BHP Billiton and Vale maintained record profits because of wider exposure to other raw materials, especially iron ore and coal.

Nickel is trading 70 percent below its record $51,800 per ton peak of May 2007. Stainless steel mills have slashed orders as consumers, fearing a worldwide recession, reduce spending on household goods.

Norilsk's first-half profit came in just above the $2.63 billion average forecast by seven analysts polled. Revenue, at $8.31 billion, also beat the forecast $8.12 billion to climb 3 percent year on year.

The company said it earned $7.21 billion from metal sales alone, 6 percent less than a year ago. Nickel revenue dropped 25 percent but was partially offset by high prices for the other metals it produces: palladium, platinum and copper.

Norilsk booked nearly $2 billion in write-offs last year on the value of its LionOre acquisition and the OGK-3 power utility at the core of a thwarted spinoff proposal.

The write-offs prompted sharp criticism from one-quarter shareholder United Company RusAl, which is engaged in an acrimonious battle with billionaire Vladimir Potanin for a greater say in running Norilsk.

Norilsk said in a statement that its first-half profit was hit by the consolidation of OGK-3, the Harjavalta refinery in Finland and the Cawse nickel property in Australia, and analysts forecast more write-offs when the company reports full-year results.

In a move opposed by RusAl, Norilsk is also spending up to $2 billion buying back 4 percent of its shares at 6,167 rubles ($240.9) each -- an 87 percent premium to its Thursday close. "This is the last chance, in the midterm, to sell a stake at such a high premium," Smolin said.

Norilsk said nickel sales fell 25 percent to $3.92 billion in the first half of 2008. Copper sales rose 35 percent to $1.59 billion, palladium sales 21 percent to $796 million and platinum sales 63 percent to $837 million.

Revenue from nonmining operations increased by 357 percent to $1.1 billion, mainly because of the inclusion of OGK-3's results.