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. Last Updated: 07/27/2016

Norilsk Looks to Clean Up Its Image

For MTLeonid Rozhetskin says Norilsk stock should trade at prices similar to foreign metal majors.
He may not know much about mining, but sharply dressed banker Leonid Rozhetskin says he does understand investors.

Rozhetskin was hired by Norilsk Nickel, the world's largest producer of nickel and palladium, to fix the company's image troubles and boost its share price in December. Norilsk is hoping to get rid of the discounts at which its stock is traded by convincing investors the company is committed to good corporate governance and that its management can be trusted.

"In terms of production, we stand shoulder to shoulder with many of the leading mining companies in the world, and we deserve to be valued at the same level as our competitors," Rozhetskin, deputy chairman of Norilsk's executive board and adviser to the CEO, says in his cozy downtown Moscow office.

To help drive that point home, Norilsk hopes to get its first independent director appointed to its board at its annual shareholders meeting Sunday. The company has nominated Guy de Selliers, a former senior official at the European Bank for Reconstruction and Development, for the post, and his candidacy is widely expected to be approved.

"I think it is clear that there is a strong desire among Norilsk Nickel and leading Russian companies to improve corporate governance," de Selliers said by telephone from London.

"The drive for better corporate governance is the result of a realization that if you convince investors you are applying high standards such as full transparency and protection for minority shareholders and that the company is run in the interests of all shareholders then the results on share value can be dramatic," de Selliers said.

Rozhetskin blames part of Norilsk's problem on investor caution toward the country itself. "Russia as a market has a big discount attached to it."

But he acknowledges that Norilsk itself is largely responsible for its predicament. "We have not been effective at talking to shareholders and have not taken the necessary steps to assure them that all company profits will flow back to them. We are working on that now," Rozhetskin said.

A number of controversies have caused investors to look askance at Norilsk, the most recent being a complicated company restructuring in January after which minority shareholders saw the value of their shares diluted by 11 percent. A lawsuit brought by the Federal Securities Commission against the plan -- in which Norilsk Nickel acquired London-based metals trader Norimet in exchange for shares in the company's core unit, Mining and Metals Co. Norilsk Nickel -- was upheld in April by the Supreme Arbitration Court.

Norilsk Nickel, based North of the Arctic circle, is owned by Vladimir Potanin, whose reputation has yet to fully recover since the collapse of his Uneximbank in 1998. The bank's debt restructuring left shareholders and creditors with cents on the dollar.

Potanin gained management control of Norilsk Nickel during the notorious loans for shares deals of the 1990s in which many of the nation's most valuable industrial assets were off-loaded at rock bottom prices. He gave the government a loan for $170 million and then won control of the company in November 1995 when the government failed to pay him back.

Norilsk's current market capitalization is $4.9 billion.

Rozhetskin, who previously ran Moscow-based investment company LV Finance, said the corporate governance campaign will take time. "It is a step-by-step process. The market needs to acquire confidence in the actions and words of the company," he said.

Without the Russia and company-specific discount that investors attach to Norilsk Nickel, analysts said the company's market capitalization would soar.

At $19.85, Norilsk's share price is currently down more than $5 off its 52-week high, but has seen strong share value growth over the year from a little under $10.

Brian Chipman of Aton brokerage believes the company could triple in value. "Its peer group has a P/E [price to earnings ratio] of around 15, whereas Norilsk's is about five [for this year's expected earnings]. This implies that if the company were valued as its peers are, it could be worth $60 to $70 per share," he said.

Norilsk will become more transparent later this year by releasing financials audited to international accounting standards by Deloitte & Touche, Rozhetskin said. By fall, the company will start releasing quarterly nonaudited results as well. This summer, it plans to release restated IAS accounts for 1999 to 2001.

Better late than never, analysts said. Poor financial disclosure has long frustrated attempts to gain a better understanding of the company's true profitability, they said.

"The company has yet to release audited IAS accounts in a timely manner. Those which they released for 2000 were not audited and were 13 months late - that is not entirely helpful," Chipman said.

"Everything is still a secret at the moment," he said. "We know nothing about the costs of production. There are all kinds of unknowns concerning the company, which is why it trades at such a discount."

The government is partly to blame for the lack of transparency since the company's metal reserves are classified as a state secret.

Norilsk last month announced dividends of 73 cents per share. The move was in line with expectations, but was also calculated to spur market interest and prove to investors that company profits will be shared among all investors and not siphoned off to core shareholders instead.

"We are a mature industry and we generate cash and therefore a substantial proportion of the cash will be paid back to the shareholders," Rozhetskin said.

Analysts and shareholders welcomed the dividend.

"There is no better way for managers to show that they respect their shareholders than to write them a check," Aton's Chipman said.

Operational changes are also under way at Norilsk. In January 2001, the company introduced an open tender system for purchases of raw materials, which account for 40 percent of production costs, in order to secure the best prices for goods and eliminate related-party transactions.

Analysts said Norilsk appears to be on the right path toward righting its image -- now it just needs to make sure it follows through on its plans.

"Rozhetskin is there to represent the interests of Interros," said Tom Adshead, an analyst at Troika Dialog. "They seem to have decided that it is in their interests to make the company more transparent and hopefully raise the share price."