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. Last Updated: 07/27/2016

Norilsk in $1.16Bln African Gold Buy

Norilsk Nickel announced Monday it has snapped up a 20 percent stake in South African gold miner Gold Fields Limited for $1.16 billion.

The deal, one of the largest single foreign investments by a Russian company, likely signals the start of Norilsk's expansion onto global gold markets, analysts said.

"These kinds of opportunities don't present themselves very often, if at all," said Christophe Charlier, Norilsk's head of strategic development and mergers and acquisitions Monday, explaining the company's decision to acquire the stake from gold giant Anglo American.

Norilsk's purchase is potentially bigger than Kazan-based Tatneft's share in a $1.3 billion acquisition of Turkey's Tupras oil refinery, made jointly last month with the Zorlu Group, a Turkish financial-industrial holding.

The acquisition dwarfs two deals completed in January -- LUKoil's $296 million investment into 800 gas stations in the United States from Conoco-Phillips, and the purchase by steelmaker Severstal of Dearborn, Michigan-based Rouge Industries for $286 million. Norilsk also trumped its own $132 million investment into the Montana-based platinum and palladium producer Stillwater Mining Co. last year.

Over the last two years, Norilsk has increased its share of the domestic gold market with the acquisition of four gold mines worth just under $500 million, making it Russia's top gold miner and a global top-10 producer.

The company has said it plans to increase its output of precious metals from 40 tons last year to 100 tons by 2007.

While to market watchers, Monday's purchase indicated a move by Norilsk onto global gold markets, the company itself would not say if it plans to purchase any additional stakes in the South African miner.

Norilsk was given just 10 days to confirm its purchase in Gold Fields, a company that has 4.3 million ounces of attributable annual gold production and 84 million ounces of mineral reserves.

Gold Fields' mining operations in South Africa, Australia and Ghana are projected to be operational for another 25 years, a Johannesburg-based metals analyst, who asked not to be named, said Monday.

The analyst said Norilsk was taking one of only a few options to gain a foothold in global gold production companies. Companies in the world's largest gold-producing nation, Australia, have already consolidated, while other South African miners, such as Harmony, are too South Africa-oriented for a company with global ambitions, the analyst said.

"There was little else around if they have a serious intention of becoming a global company," the analyst said.

Norilsk, the world's No. 1 platinum and palladium producer, said it financed the purchase from existing cash reserves and a bank loan. Charlier said Norilsk hoped to reveal the source of the loan in the near future.

Norilsk had bought the stake for a lower than average discount of 6 percent to market price at $11.79 per share, analysts said, noting that the timing was good, considering that Gold Fields' share price was at a 12-month low in rand terms, and at a 7-month low in dollar terms, on Monday.

Norilsk's share price was up 2.5 percent on the Russian Trading System at Monday's close. Gold Fields' price remained mostly static, falling 0.2 percent on the news of Norilsk's acquisition on the Johannesburg bourse.

Anglo American said Monday it had sold its Gold Fields stake, which it acquired in December 2000, to concentrate its gold interests in AngloGold Ltd., the world's No.2 gold producer, Reuters reported Monday.

The sale was expected to make Anglo American a gain of $480 million.

Gold Fields is coming out of a season of operational turmoil, in large part driven by a strong rand against the dollar, the Johannesburg-based analyst said. "They will have to work hard to widen margins if the rand stays strong," he said.

Charlier said Monday that Gold Fields is dealing with a high South African currency by revamping its strategy toward mining higher-quality ores -- which are cheaper to extract -- from the low-quality ores it had been mining up until now. Norilsk's purchase fits in with forecasts predicting the rand will slide later this year, Charlier said.

The deal is, however, likely to strengthen the rand, since Anglo American said it would use the sale proceeds, which totaled 7.631 billion rand, to pay off debt and finance capital expenditure inside South Africa.

Analysts in Moscow applauded Norilsk's further diversification into the gold sector, saying it would allow Norilsk, whose revenues are more than 50 percent based on nickel sales and under 10 percent on gold, to smooth cash flows.

"Gold prices are anti-cyclical compared to Norilsk's core metal groups," said Slava Smolyaninov, a metals analyst for the NIKoil brokerage, meaning in times of low nickel prices, gold prices are high.

Oligarch Vladimir Potanin and Norilsk CEO Nikolai Prokhorov own more than half of Norilsk Nickel through the Interros holding. Potanin and Prokhorov are ranked Russia's fourth- and fifth-richest men with personal assets worth $4.9 billion and $4.8 billion respectively.