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. Last Updated: 07/27/2016

Illogically, Norilsk is Weathering the Storm

Take an oil company -- cut the price of oil in half and it should not be hard to guess what happens to the stock. But when it comes to nickel, the same logic does not seem to apply.

On Friday, the brutal correction in nickel prices, which have fallen more than 40 percent since May, dipped another 2 percent to reach a 9-month low of $29,325 per ton. Meanwhile, Norilsk Nickel, the largest nickel producer in the world, has weathered the correction without flinching.

Its stock has gained nearly 12 percent during the three months that nickel prices have been tanking. In the same period, it has outperformed the hydrocarbon sector by nearly 10 percent, even though the oil price has been seeing record highs.

As with most market successes, analysts chalk this one up to good luck and good planning.

What brought the price up in the first place was certainly luck, mainly in the form of soaring demand for nickel, a hard, silvery metal used to make steel.

But collusion on the London Metal Exchange also seems to have played a role. Market rumors suggested that two unidentified brokerages were controlling 80 percent of the nickel trade on the exchange, and were manipulating prices. The exchange stepped in June 9 to tighten its regulations, but by then the price had already peaked.

The record high came on May 9, taking the price in London to $51,800 per ton, nearly four times more than long-term forecasts for fair nickel prices, which value one ton at around $13,000.

"To put that in perspective, it would be like the price of oil hitting $200 per barrel," said Vladimir Zhukov, metals analyst at Alfa Bank. "At that point, a correction was unavoidable and analysts were very careful to price it in as early as possible."

This kept the markets from reacting to the correction as a negative surprise, Zhukov said, and at the same time, Norilsk offset the news with some positive surprises for the market.

In July, it purchased Canadian nickel producer LionOre for $6.8 billion, extending its international reach into LionOre's African mines and helping immunize it from Russia's political risk, which has been sapping value from other local giants. It has also moved ahead with acquisitions in the power sector, and plans to spin off an electricity holding that will go pro rata to its shareholders.

Zhukov, who values the future holding at $9.4 billion, said this translates into $51 of new value for every Norilsk share, perhaps enough to make the nickel price correction seem irrelevant.

Some banks, however, are wary of the company. "We don't see anything in the market that's going to drive nickel prices back up," said Tom Mundy, vice president of equity strategy at Renaissance Capital. "So we would advise investors to stay away."

But whatever its future, Norilsk looks to have passed through the worst of the storm, and the country's oil and gas firms might do well to take a lesson.

Crude oil in New York hit another record high last week, reaching $78.77 per barrel. If a correction takes it down to around $50 per barrel, as is widely expected in the coming months, a well-timed spin-off or an acquisition may help cushion the damage.