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. Last Updated: 07/27/2016

Norilsk Shares Plunge On Share Swap News

Shares in metals giant Norilsk Nickel fell 3.99 percent Tuesday to $7.83 after it said it intended to ask shareholders to swap for shares of subsidiary Norilsk Mining Co., or NGK, which would be listed locally and then abroad.

Late Monday the Norilsk Nickel press service said the center of capitalization of Norilsk Nickel will be transferred to the Norilsk Mining Co. All Norilsk Nickel assets will be transferred to NGK under the condition that the value and liquidity of the company shares will be maintained and increased for all of its shareholders.

Analysts said that with no further information coming from Norilsk on Monday, investors got nervous and sold.

Late Tuesday, Norilsk issued a five-page press statement detailing its restructuring plan which in addition to the share swap calls for the acquisition of Norimet Ltd., Norilsk Nickels exclusive partner for nickel and copper sales on the foreign market.

Norimets net profits rose from $10.1 million in 1998 to $75.6 million last year.

The statement said that NGK shares would be included in the Russian Trading System and shares of Norilsk Nickel will be exchanged for those of NGK, after which Norilsk Nickel will become a subsidiary of NGK.

The company said it plans to complete the restructuring in four stages.

Stage one calls for a closed subscription of the new shares at a ratio of 1,322 NGK shares for every 1,000 Norilsk Nickel shares.

Stage two calls for the increase in NGKs charter capital and the placing of the newly issued shares among shareholders according to their share.

Stage three is the planned inclusion of NGK in the RTS trading system.

And stage four is that a proposal will be made to exchange Norilsk Nickel shares for NGK shares.

Norilsk Nickel has already conducted one restructuring: All valuable company assets located in the Krasnoyarsk region and on the Kolsky peninsula were transferred to NGK and the Kolsky mining company, respectively, and workers were moved to the new enterprises. As a result, analysts were puzzled by another restructuring. Kakha Kiknavelidze, a metals analyst at Troika Dialogue, offered three possible explanations for the new initiative:

The first possibility is that it is an attempt to avoid paying social obligations on its employees, though it is true that they have remained at the old factories that could be simply bankrupted to get rid of the inconvenience.

The second suggestion is that restructuring is being used as an attempt to dilute the share of outside shareholders. Earlier this year Norilsk Nickel concluded a repossession deal with MFK bank, which is part of the Interros group, Kiknavelidze said. The bank extended a credit to Norilsk Nickel in exchange for NGK shares in pledge. The bank therefore held 37.9 percent of the shares in pledge while Norilsk held 62.1 percent. Norilsks press service Monday told Vedomosti that NGK is not 100 percent owned by Norilsk Nickel.

Hypothetically, Norilsk could propose that there has been a default and the shares have gone to MFK. By swapping the shares, therefore, the Norilsk Nickel shareholders will not receive 100 percent of NGK in exchange for their shares, but rather what remains after pledge. Thus the Interros group, via the bank, can increase its presence in the metals complex, Kiknavelidze said.

Kiknavelidze added that under this scenario, Norilsk Nickel can defend itself against accusations of share dilution by saying that while shareholders will not receive 100 percent of the new shares, they will be getting shares in an enriched company.

The third version proposed by the analyst is that Vladimir Potanins group is trying to insure themselves against political risks. This year other major Russian structures showed an interest in Interros metals properties. This may cause the Moscow prosecutors office to examine Norilsk Nickel, which tried unsuccessfully to turn the shares of the metals giant into state property in June.