Deripaska, Potanin Hurt Norilsk Value in Battle for $14 Billion

OAO GMK Norilsk Nickel’s billionaire owners, split over use of a $14.3 billion cash pile, are damaging the value of Russia’s biggest mining company as their quarrel distracts from growth.

The feud between Oleg Deripaska’s United Co. Rusal and Vladimir Potanin’s Interros Holding Co., each owning 25 percent of Norilsk, started in 2008. It reignited last month over a disputed board election, dragging the shares down 11 percent in the subsequent three days. The billionaires disagree on how to spend the cash Norilsk is likely to generate by 2012, with Deripaska wanting dividends and Potanin preferring buybacks, Russia’s Alfa Bank said in a July 14 report.

“Management focus is being distracted by ‘sideline’ issues,” said Charl Malan, a portfolio manager at New York- based Van Eck Global Hard Assets Fund who holds Norilsk shares. “What the outcome of the spat is I am not sure. Importantly, it needs to be resolved as it is hurting minority shareholders.”

Norilsk, the world’s biggest nickel producer, is 307th out of 352 traded mining and metals companies tracked by Bloomberg in terms of price-to-forecast-earnings for this year. Its enterprise value to trailing 12-month earnings before interest tax, depreciation and amortization is 6.37. Vale SA, the second- largest nickel company, has a price to trailing Ebitda ratio of 11.48. Anglo American Plc has 8.71 times and Rio Tinto Plc has 8.07 times.

Seeking Truce

Rusal is asking investor support for a rerun of the June 28 board election, where it won fewer seats than Interros in a vote that Rusal said was manipulated.

The two need a truce, said Ryan Dodd, a fund manager with Specialised Research & Investment Group in Moscow.

“Only through a resolution of the ownership conflict does Norilsk close a valuation gap with its global peers,” said Dodd, who invests in global mining stocks.

Without the conflict, Norilsk’s value would be as much as 30 percent higher, or $9 billion more, should metal prices hold, Dodd said. The fund manager, who prices Norilsk on an enterprise value to net asset value basis, said the dispute means he won’t buy the company’s shares.

As stockholders appeal for stability, the factions agree only that their positions are far apart.

“There are several layers of the problems,” said Andrei Bougrov, managing director at Interros and a Norilsk board member. The results of the board vote are “just what came to the surface,” he said.

Sacrifice Development

Interros and Rusal accuse each other of using Norilsk for their own ends. Rusal, with $12 billion of debt, will sacrifice long-term development for quick cash in the form of dividends, according to Bougrov.

Rusal said Interros used Norilsk in 2008 to buy energy assets it didn’t want and that later filed for bankruptcy, and is concerned similar actions may recur.

Interros “has been using the company as a cash machine,” Rusal Head of Strategy Maxim Sokov said by telephone July 21.

In 2008, Deripaska and Potanin clashed over Norilsk. Rusal sought more board seats and a merger with Norilsk, which Potanin opposed, instigating a share buyback in which Deripaska’s company couldn’t take part because its stake was held as collateral. As part of a truce, Potanin agreed to cut his Norilsk stake to 25 percent from almost 30 percent.

Stock Slump

Rusal purchased its Norilsk shares shortly before commodity markets tumbled amid the global recession. Within six months of the announcement of the acquisition on April 24, 2008, Norilsk’s stock fell 75 percent, compared with a 38 percent drop in the Bloomberg Europe 500 Metals & Mining Index. By the end of 2008, after the feud was settled at the close of November, Norilsk was down 70 percent.

The sparring this time may be milder than in 2008, according to Alexandre Starinsky, who helps manage $200 million with Kaltchuga Fund in Moscow, and Oleg Galkin, chief investment officer at UralSib Asset Management, who’s maintaining his stake as the dispute plays out.

“As a minority shareholder, we’re not anxious as yet,” Galkin said. “If things get worse, that’s another question.”

Erzhena Mintasova, a spokeswoman for Norilsk, said the company doesn’t comment on the actions of shareholders and that its operations are “almost unaffected” by the dispute.

The government, which owns no Norilsk stock, may prefer that the company spend its cash on mergers and acquisitions, Alfa Bank said. The government is an indirect stakeholder because Rusal’s shares are pledged as collateral for a $4.5 billion loan from state bank VEB.

Government View

Rusal requested $3 billion in dividend payments for 2009, when Norilsk’s profit was $2.6 billion. Rusal wants bigger dividends because management can’t be trusted to use the cash “properly,” Rusal’s Sokov said.

It was Rusal’s “opportunistic” attitude to getting hold of Norilsk’s cash that caused minority investors to side with management at the annual meeting, Interros’s Bougrov said.

Deripaska’s campaign for higher payouts and changes to the board didn’t convince all shareholders. For funds such as UralSib, dividends aren’t as important as share-price growth, Galkin said. JPMorgan Asset Management’s Ian Henderson said he feels the board has so far defended his interests.

“The major shareholders are dancing around each other,” said Chris Weafer, chief strategist with brokerage UralSib Capital. “The very top level of government is where the decision on the company will be made. Minority investors just hope they find themselves on the right side.”

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