Jan. 19 (Bloomberg) -- Billionaires Oleg Deripaska and Vladimir Potanin proposed merging OAO GMK Norilsk Nickel with five other Russian metals producers including Evraz Group SA to create the world’s second-largest mining company.

The plan would also involve state-owned titanium maker OAO VSMPO-Avisma, iron ore producer OAO Metalloinvest, potash miner OAO Uralkali and steelmaker OAO Mechel, said Nina Dementsova, spokeswoman for Potanin’s Interros Holding Co., by telephone in Moscow today, confirming a Vedomosti report. Norilsk and Mechel fell in Moscow trading while Evraz and Uralkali plunged in London.

President Dmitry Medvedev last week asked Deripaska, Potanin and other billionaire investors to consider a merger. The government handed out more than $13.5 billion in bailouts to Russian companies since October after commodity and stock prices plunged. It may swap debt owed by metal producers to state-owned banks for 25 percent of the new company.

“The idea of creating a national champion in mining is opportune both from economic and political standpoints,” Troika Dialog analysts Sergei Donskoy and Mikhail Stiskin wrote in a report. Weakened balance sheets “will now make the companies much more willing to engage in discussions.”

Shares Drop

Norilsk, the nation’s biggest mining company, dropped 5.7 percent to close at 1,470.55 rubles in Moscow, valuing the company at 280.3 billion rubles ($8.5 billion). Mechel slid 6.8 percent in Moscow, while Evraz fell 17 percent and Uralkali 26 percent in London.

Deripaska and Potanin’s proposal would create a company with sales of $60 billion and earnings before interest, tax, depreciation and amortization of $23 billion, according to Interros. It would inherit debt of more than $28 billion and have a market capitalization of $70 billion to $100 billion. Melbourne-based BHP Billiton Ltd., the world’s largest mining company, has a market value of about $105 billion.

United Co. Rusal, Russia’s biggest aluminum producer and controlled by Deripaska, won’t initially participate in the merger as its $17 billion in liabilities would overburden the company, Vedomosti said. Rusal spokeswoman Vera Kurochkina declined to comment on the report. Deripaska and Potanin are also shareholders in Norilsk.

‘Heavy Burden’

“Rusal is under a heavy debt burden, so it’s unlikely that it would be an interesting merger partner for someone right now,” Norilsk Chief Executive Officer Vladimir Strzhalkovsky told reporters in Krasnoyarsk, in comments confirmed by company spokeswoman Erzhena Mintasova today.

A merger between Norilsk, Metalloinvest and Rusal was first proposed last year. In December, Russian Technologies Corp., a state holding company for assets including VSMPO, the world’s biggest titanium producer, offered to combine some metals assets with Norilsk.

“We are skeptical that all the named companies would actually participate, as we see little strategic fit in creating a global diversified mining leader,” Marat Gabitov and George Buzhenitsa, UniCredit SpA analysts in Moscow, wrote in a note. “We don’t rule out the deal not going through given its complexity.”

Minority shareholders in Mechel, Norilsk, Evraz and Uralkali would hold as much as 24 percent of the new company’s shares, according to Interros.

Deripaska Move

Global economic turmoil led Deripaska to take over as Rusal’s CEO from Alexander Bulygin, the Moscow-based company said yesterday. Rusal asked the government for $4.5 billion in October to refinance debt and retain its 25 percent stake in Norilsk. The ruble today fell below the weakest level during the 1998 Russian crisis after the central bank devalued the currency for the sixth time in seven days to protect reserves.

Alisher Usmanov, the largest shareholder in Metalloinvest and owner of 5 percent in Norilsk, said Jan. 15 that he also backed mergers in principle as an effective way to cope with the global economic crisis. Any talk of how the transaction could be done or the state’s involvement is “premature,” he added.

Potanin, Norilsk’s biggest owner with a 30 percent stake, said last August that he wanted the company to pursue mergers with iron ore, potash, coal, uranium and copper assets.

Representatives of Deripaska, Evraz, Metalloinvest, Uralkali, Norilsk and Mechel declined to comment on the plans.

To contact the reporter on this story: Yuriy Humber in Moscow at yhumber@bloomberg.net.

Last Updated: January 19, 2009 11:44 EST