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MOSCOW – Either way you look at it, Norilsk Nickel’s decision to spend $1.16 billion to buy 20 percent of the South African goldminer Gold Fields, much of it in borrowed funds, is a wager on President Vladimir Putin having too much to do right now to notice.

If Vladimir Potanin and Mikhail Prokhorov, the two controlling shareholders of Norilsk Nickel, imagine that, after the Kremlin vetoed their cashout projects last month, they will be permitted to leverage the Russian asset base of the company as they reverse its shares into South African ones, they are taking a risk as enormous as the one that landed Mikhail Khodorkovsky in prison last October.

If Leonid Rozhetskin, the management board’s finance strategist, imagines that he is enlarging the assets of the company before the shareholding arrangements are changed by the Kremlin, the better to keep management under his control, he should be hoping that the banks which are financing the deal don’t get cold feet. And cold feet is the symptom that, until now, has accompanied most bank lending negotiations with both Norilsk Nickel and Interros, the Potanin holding.

Lest anyone be in any doubt, whichever wager Norilsk Nickel is betting, their deal could be reversed by just two telephone calls -one from Dmitri Kozak, the chief of the government staff, to President Vladimir Putin; and a second from Kozak to Sergei Ignatyev, chairman of the Central Bank. As Potanin and Rozhetskin understand, but haven’t admitted in public, Central Bank permission must be granted for any of the transfers of funds that have supposedly been agreed for this transaction. That permission was granted, but not hastily, when Norilsk Nickel spent a fraction of the price to take control last year of Stillwater Mining Company of Colorado. But for a billion-dollar purchase of a minority stake, secured by as much as half a billion dollars in metal and other Russian assets, Central Bank permission is likely to be methodical, and to require Putin’s permission.

Anglo American has an inkling of just how uncertain this may. Sources in that company have been saying that, until the money arrives from Norilsk Nickel – and it hasn’t yet – the deal is not done. Exactly what the deadline and schedule of payments may be is also top-secret at this point. From South Africa, it is reported that Norilsk Nickel has at least a week to arrange its first instalment of cash.

For the moment, starting with the Financial Times of London, the jolly propagandist for the oligarchs, the size of the money being spent has blinded reporting of the way it has been financed, the security Norilsk Nickel has put on the table, and the justification for the deal. Since Potanin is the controlling shareholder of the Moscow Times, and together, the two newspapers control their Russian broadsheet, Vedomosti, blindfolds and rose-tinted spectacles are to be expected.

Moscow’s investment banks, for whom trading in Norilsk Nickel shares is a blue-chip revenue earner, have also been blind-sided. The acquisition has surprised analysts close to Rozhetskin, one of whom reported in February that Norilsk Nickel is “not seriously considering any offshore acquisitions, but will consider diversification within Russia.” Sources inside Norilsk Nickel have been reporting that apprehension about possible Kremlin moves against Potanin, the oligarch who controls the company, have dampened all initiative, and blocked almost all new business projects.

Christophe Charlier, who has headed mergers and acquisitions at Norilsk Nickel, but who is leaving the company at the end of this week, admits the Gold Fields deal was negotiated in just two weeks, prior to the March 29 announcement. The speed and secrecy may also explain why the borrowing has yet to be finalized, and thus remains secret; and why the payment has yet to be lodged, another secret. Norilsk Nickel executives were in South Africa last week, explaining themselves to fund managers and institutional investors. Why they did so was a puzzle to their audience then; now the intention is clear. Anglo American, Charlier confirms, is “satisfied” with the financial terms of the deal, according to which Norilsk Nickel will pay part of the purchase price in cash from what Charlier termed “working capital”; and part from the proceeds of a new bank loan. Charlier refuses to estimate these amounts, or to give precise details of the bank loan, noting only that the loan terms “are already in place. As soon as we can make the loan details public, we will.”

Sergei Polikarpov, head of investment relations at Norilsk Nickel, was asked to clarify whether payment for the Gold Fields purchase has already been made, and if not, when it is scheduled to occur. He was also asked to identify the cash and loan portions of the deal, the lenders, and the security of the loan. He has not responded. He too is leaving Norilsk Nickel shortly.

Norilsk Nickel is controlled through the Interros holding company by two shareholders, Potanin, CEO of Interros, and Mikhail Prokhorov, CEO of Norilsk Nickel. The company has made two international forays before. The first, a joint venture with an Australian junior miner to develop a nickel deposit in the South Pacific, was abandoned quickly. The second, a takeover of the Stillwater Mining Company, the leading palladium producer of the United States, was completed last year, after the US Government approved the deal. The acquisition of about 56 percent of Stillwater cost Norilsk Nickel about $150 million in cash, plus 876,000 oz. of stockpiled palladium.

The purchase from Anglo American of 98.5 million shares of Gold Fields, at an estimated share price of Rand77.60 per share, is the most costly offshore deal in Norilsk Nickel’s history. Balance-sheet details for 2003 are still the subject of estimates by investment bankers and industry analysts, who presume that until now, Potanin and Prokhorov have gathered most of the company’s after¬tax earnings in the form of dividends. According to Renaissance Capital’s Rob Edwards, gross metal sales for last year at Norilsk Nickel were $4.8 billion, while net earnings are estimated at around $910 million. Edwards has been forecasting sale revenues will rise to $6.8 billion this year, and earnings to $1.9 billion.

Sources close to the company believe that neither Norimet, the UK-registered subsidiary through which the Gold Fields transaction has been nominally executed, nor the parent company, has the ready cash to make more than a 10 percent down-payment on the purchase. But even if Anglo American has agreed to wait a week for $160 million, and then a longer period for the billion-dollar balance, the Russian government may be less than accommodating, especially if Rozhetskin is obliged to explain that Norilsk Nickel is securing the terms of its borrowing by placing up metals worth up to half a billion dollars in a foreign warehouse for the duration of the loan. The Central Bank gave its permission for Norilsk Nickel to do that once before, in 2001-2002, when 60,000 tons of nickel were pledged to secure a $320 million loan. The new transaction dwarfs that one, and it lacks a comparable justification.

Bankers are quite clear that noone is likely to lend a billion dollars to Norilsk Nickel on the security of the Gold Fields shares alone. Anglo American has sold them at a 6 percent discount to last week’s prevailing South African market price. After news of the deal hit the Johannesburg market, the share price dropped fractionally the first day. Should doubts about Norilsk Nickel persist, they may continue to decline. At best, one international banker says, Norilsk Nickel could secure between 40 and 50 percent of the transaction value with Gold Fields shares. The balance represents about $500 million, which will have to be secured by metals, either stockpiled or in current production; as well as payment guarantees. The consensus of the bankers is that Norimet’s guarantees aren’t good enough. Norilsk Nickel will have to back them. That cannot happen without the Central Bank’s say-so. And Chairman Ignatyev wasn’t picked for his job by President Putin if he was the sort of fellow who, over the dining table with Potanin or Rozhetskin, would assure him of all the permissions he needed, in advance.

Perhaps Norilsk Nickel intends to pledge a stock of palladium for the loan, just as it did with the Stillwater transaction. But stockpiles only goes so far. If another palladium stockpile deal were to materialize, that would make a liar of Norilsk Nickel’s senior managers. Since late last year they have been emphatic that the company has no palladium stockpile left unsold. Securing a loan of the required size with palladium would be almost impossible, as it would require, at palladium’s current price, about 1.8 million ounces. That is two-thirds the 2.7 million ounces which Norilsk Nickel mined last year, and which it can be expected to produce again this year. If nickel or copper stocks are to be used to collateralize the transaction, the volume required will be less. But the impact on the supply-starved international markets in those metals should be dramatic. For the time being though, the metal markets haven’t woken up.

Little wonder then that Norilsk Nickel has been so reticent on the terms of the biggest offshore transaction it has ever conducted; and why Anglo American is still crossing its fingers, waiting for the cheque to arrive.

Most international lenders have been aware of the shadow the newly reelected Putin Administration is casting over natural resources policy, and specifically over oligarchs, like Potanin, who acquired their, assets through controversial privatization schemes in the 1990s. Norilsk Nickel’s senior executive in charge of finance, Leonid Rozhetskin, had been telling associates after the completion of the Stillwater deal last year, that he would not remain in the company after his contract ran out in December. He changed his mind in January. As an independent contractor to Norilsk Nickel, his compensation is linked to deal-making and to the Norilsk Nickel share price.

The Gold Fields acquisition comes at an awkward time for the controlling shareholders, who are increasingly under Kremlin pressure, Kremlin and company sources say. A month ago, the Krermlin blocked implementation of a new law declassifying data on Norilsk Nickel’s production, sales and stocks of platinum group metals (pgm). This prevents the company listing or swapping its shares on the London or New York stock exchanges, where it already controls listings of subsidiaries, Norimet and Stillwater.

An attempt in February by Potanin and Prokhorov to raise about $1 billion in a convertible bond, issued by Interros but tied to Norilsk Nickel shares, was aborted soon after the Kremlin veto of declassification. The bond issue, which technically preserved Potanin’s and Prokhorov’s ownership of the shares, but gave them a huge cash payment, was an attempt at cashing out of Norilsk Nickel by Potanin, Moscow sources acknowledge. They also concede that Potanin was afraid of challenging the Kremlin, as the oil oligarch Mikhail Khodorkovsky had done last year with his attempt to sell a Yukos stake to an American oil company. Khodorkovsky has been in prison since last October on charges relating to his shareholding in Yukos. The management of Yukos is currently trying to save the company and themselves by dissociating Yukos from its shareholders, and placating Kremlin policy demands.

Rozhetskin’s Gold Fields deal appears to follow the Yukos precedent. The Norilsk Nickel management understands that Potanin’s convertible bond was a cashout intended for himself, and the proceeds were not intended to pay Anglo American for the Gold Fields acquisition. According to a source close to Norilsk Nickel, “the Interros bond was for Interros purposes. This Gold Fields acquisition is for Norilsk Nickel’s purposes.”

Rozhetskin, whose official title is Vice Chairman of the Management Board, has announced publicly that “Norilsk Nickel believes the purchase of a 20% stake in Gold Fields, with its world-class gold mining assets, to be an excellent investment. We think particularly highly of Gold Fields’ management. This share acquisition is wholly consistent with Norilsk Nickel’s strategy to increase our position in the gold mining industry.” Until now, sources close to Rozhetskin had been telling me that they expected his game plan was to build up gold assets and then spin them off as a separate gold mining company on a foreign exchange. For that, the sources believed, it was first of all necessary for Norilsk Nickel to win the Sukhoi Log gold deposit.

However, the Kremlin may not see the deal to Norilsk Nickel’s ^ advantage in the bidding for Sukhoi Log, which is expected to be put up for tender in a few weeks’ time. Senior Russian officials have already indicated that they are opposed to foreign mining companies participating in the tender. In addition, Vladimir Litvinenko, President Vladimir Putin’s advisor on mining policy, told Mineweb last week that he believes the government should exercise added control of resources companies through holding a “golden share”. Litvinenko, who is Rector of the St.Petersburg State Mining Institute, said he regarded this as a limit on divestment in the cases of “Gazprom, United Energy Systems, important petroleum companies, Norilsk Nickel, and many other companies.”

Several Russian goldminers have also declared themselves in the running for Sukhoi Log. The best placed of these to challenge Norilsk Nickel for the Kremlin’s support is Polymetal of St.Petersburg.

Norilsk Nickel is the world’s largest producer of nickel and palladium, and a major producer of platinum, copper and cobalt. Following a number of acquisitions in Russia in the past two years, Norilsk Nickel is the leading domestic goldminer, and one of the ten largest gold producers in the world. Gold production by Norilsk Nickel totaled 1.2 million oz. in 2003. Gold Fields produces about 4.3 million oz of gold per annum.

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