Russia Metals Firms Seek Global Reach Via M&A

Russian metals firms are likely to merge or acquire rivals as they seek a bigger share of world markets, and the Kremlin will play a key role in any major deals, industry executives and investment bankers said.

Growing state influence over Russia's mineral assets would also restrict access for foreign investors keen to exploit low-cost mining, surplus power and vast reserves of gold, nickel and other metals, they said.

"Any Russian or CIS company that wants to count among the global leaders will pursue both size and diversification," said SUAL president Brian Gilbertson.

"We will see a stream of M&A activities over the next few decades as the vast mineral resources of the region are positioned to achieve maximum value in the financial markets," said Gilbertson, a former head of BHP Billiton.

A merger between SUAL and its larger rival Russian Aluminum, the world's third-largest aluminum producer, is one such possibility -- and one that neither company is ruling out.

Another would be an alliance between Norilsk Nickel and Alrosa, which mines one-quarter of the world's rough diamonds. In January, the governor of the Krasnoyarsk region said both firms had held talks about a possible union.

Analysts say such a merger would signal Moscow's intent to increase its participation in the minerals sector through the state diamond monopoly.

Gilbertson said the federal government would play a key role in the growth of the country's metals sector.

"Minerals are close to the heart of a nation. This is the case not only in Russia, but in most mineral-rich countries.

"Accommodating, indeed embracing, such government aspirations -- possibly in state and private-enterprise partnerships -- will be an essential part of future Russian and CIS mergers and acquisitions," he said.

But some analysts, citing similar circumstances in the oil and gas sector, said they doubted that key Russian assets would fall under the control of international firms.

"Western companies are very interested in Russian metals, but given current policies it's unlikely they would be able to acquire even 50 percent of a Russian company, let alone a higher stake," said Vladimir Tatarchuk, director of Alfa Bank's corporate sector.

Large Russian firms are themselves looking to expand abroad. RusAl signed a deal this year to acquire Nigeria's Alscon, while steel firms Severstal and Evraz Group have purchased assets in North America and Europe.

Peter Blight, director of RusAl's information research department, said consolidation was not a prerequisite for aluminum firms in Russia, which have a lower cost structure than rivals with assets in North America and Europe.

"While we cannot exclude the process of rationalization within the Russian aluminum industry because of the complementary nature of the asset bases the two producers have, I think greater opportunities lie outside of the country, in regions rich with bauxite," he said.

Investment banker Ilya Shcherbovich expected consolidation of Russian gold mining assets.

The main players would be Polyus, which is being spun off from Norilsk Nickel, and Polimetall, owned by investment firm Nafta-Moskva, she said.