Massive Metals Merger On the Table in Russia

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Photo: Oleg Daripaska, CEO of Rusal and a stakeholder of Norilsk, is considering state-backed mergers, including one that goes six ways.
Credit: Russia Today.

The latest mining merger rumors in Russia aren’t the first consolidation proposals from the nation this year — and most analysts insist that the most recent and most major proposal certainly isn’t the last, since the Russian government hopes more “merger mania” might calm foreign debt. But recent discussion among six major companies is enough to interest tycoons across Russia.

Metals tycoons Vladimir Potanin and Oleg Deripaska recently spoke with other Russian leaders to discuss a six-way merger, combining Potanin’s holding company Interros and “Norilsk Nickel with steel miners Metalloinvest Holding, Evraz Group and OAO Mechel, as well as fertilizer producer OAO Uralkali and titanium producer VSMPO-Avisma,” according to the Wall Street Journal. We previously reviewed the dangers ahead for Norilsk, since the company plans to maintain current levels of production while facing 12-year lows for palladium and rocky roads for nickel prices. The other companies considered for the merger also have to face plunging commodity prices and, even worse, massive debts that they still need to repay. Combined, the companies owe a collective $30 billion to foreign debtors.

“Under the tycoons’ scheme — which was outlined in Russian business daily Vedomosti — the state would take a 25% stake in the mining giant through industrial conglomerate Rostekhnologii. In exchange, the state would write off its $4.5 billion loan to Rusal — which was secured against a 25% Norilsk stake — and pool its ownership of VSMPO-Avisma,” the Wall Street Journal explains.

As with many fluctuating currencies at this troubling economic time, rouble devaluations occur on a regular basis in Russia, particularly as the drop in oil prices affects Russia’s dominant export and leads to slides in multiple markets.  Bloomberg recently reported that the sixth rouble devaluation this year took the currency to “pre-1998 crisis low,” according to Bloomberg reporters. Stuart wisely opined last month that precious metals were far preferable to roubles in the Russian state, and Bloomberg supports the position: “Prime Minister Vladimir Putin pledged last month to use the nation’s foreign-exchange reserves to avoid Ëœsharp’ currency swings, after a 71 percent decline against the dollar in 1998 caused investors to flee and savers to pull bank deposits.” Bloomberg adds that investors worldwide withdrew $245 billion from Russia since August last August, due to a wide range of turbulent economic events. These economic events, such as the drastic downfall for oil, provided even more incentives to worry Russian companies and push them towards mergers.

In fact, Russia’s bailout program can count five of the merger-motivated companies among the organizations included in the nation’s recent bailout program, which would repay foreign loans through low- to no-interest loans from state-controlled banks. MetalMiner predicted such actions last fall, when we shared that Rusal planned to seek state aid from the Russian government to meet debts to western banks due to be rolled over before the end of 2009 … Rusal is believed to have borrowed $14b to finance upgrades to existing facilities and the building of new ones.” Although Rusal is not listed as one of the six companies in the latest merger rumors, Metalloinvest has suggested a merger with Norilsk and Rusal, once Rusal’s debt is recapitalized. While a massive merger will create a mining giant, how much could it really help? Some might consider such a merger out-of-control. But the major tycoons think such a merger could be profitable… or, at least, they feel the need to take action before the state decides to implement another merger instead.

–Amy Edwards

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