Deripaska, Potanin Proffer Deal on Metals Champion

Two metals billionaires have proposed the creation of a mining giant part-owned by the Kremlin that would wipe out existing debts and rival the world's top miners, a spokeswoman for Vladimir Potanin said Monday.

Potanin and Oleg Deripaska, who both own stakes in Norilsk Nickel, plan to invite other companies to swap some of their debt to the state for a stake in a much larger firm. Analysts were skeptical that such a scheme could work.

"We are preparing proposals on swapping debt for a stake in a big company — a Russian BHP Billiton," said Larisa Zelkova, spokeswoman for Potanin's company, Interros. She declined to give more details. Russia's steel and mining giants, which enjoyed record profits as commodity prices boomed, were left exposed to massive debt repayments as the global financial crisis reversed demand. Many have refinanced their loans with state-owned banks.

"The impetus for this deal is that some of these companies want state support servicing their debt and see this mega-merger as an easier path than undergoing individual restructuring," said Kevin Dougherty, co-manager of the Pharos Russia Fund.

"The state is also keen to form such a national champion, so this fits in with their interests as well," he said.

The proposed national company, in which the state could take a blocking stake of at least 25 percent plus one share, would be formed by merging Norilsk with several steelmakers, Vedomosti reported.

The newspaper said Metalloinvest, Evraz Group and Mechel were included in a draft proposal to be sent on Monday to Deputy Prime Minister Igor Sechin. Potash miner Uralkali could also join the group, it reported.

Zelkova declined to identify the companies involved. Deripaska's firm, Basic Element, declined to comment.

The state, in exchange for a stake in the company, could write off the debts of each company's owners and contribute its 60 percent stake in the world's largest titanium maker, VSMPO-Avisma.

The group's market capitalization could reach between $70 billion and $100 billion, Vedomosti said, placing it among the biggest mining companies in the world. BHP Billiton has a market capitalization of $125 billion.

Potanin and United Company RusAl are the largest shareholders in Norilsk Nickel. Alisher Usmanov, founder of Metalloinvest, has already expressed interest in uniting his assets with those of Norilsk.

RusAl itself would not be part of the original group, Vedomosti reported

Analysts were skeptical that the merger would find favor among the owners of Evraz, Mechel and Uralkali, who were not mentioned as signatories to the proposal.

"The motivation behind the proposal may be to build support or create a broader dialogue and then switch to other, more favorable structures or proposals for Potanin and Usmanov," Alfa Bank said in a research note.