Norilsk Nickel Seen Best-Placed as Ukraine Crisis Unfolds

OAO GMK Norilsk Nickel, Russia’s largest mining company, may be the least affected among its peers by the Ukraine crisis because of its dominant position in global nickel and palladium supplies and financial strength.

Norilsk’s position is fortified by its 17 percent share of worldwide nickel output and 41 percent of palladium, Dmitry Kolomytsyn, a Moscow-based analyst at Morgan Stanley, said by phone. The metals are priced in dollars, which reached a record high against the ruble today.

“Norilsk is too large a company to be seriously affected by any possible trading sanctions,” said Kolomytsyn. “It has the strongest financial balance, especially after the ruble weakened, with almost all of its revenue coming from exports.”

The U.S. is weighing sanctions against Russia after President Vladimir Putin got lawmakers to rubber-stamp troop deployments. The move prompted U.S. President Barack Obama to protest Putin’s “clear violation” of Ukraine’s sovereignty in a 90-minute call.

Ukraine yesterday mobilized its army as gunmen surrounded military installations in Crimea. The Black Sea region, where Russian speakers comprise the majority, has become the focal point of Ukraine’s crisis after an uprising that triggered last month’s overthrow of President Viktor Yanukovych.

Norilsk dropped 4.6 percent to 5,715 rubles by the close in Moscow, while the benchmark Micex Index fell 11 percent. The ruble, which has weakened 9.6 percent against the dollar this year, was at 36.49 per dollar at 6:52 p.m.

Steelmakers Vulnerable

While OAO Alrosa, the world’s largest diamond company by production, is in a similar position to Norilsk, Russian steelmakers could be “hurt by possible sanctions, involving European and U.S. bans on Russian steel exports,” Kolomytsyn said.

OAO Novolipetsk Steel, known as NLMK, fell 8.7 percent to close at the lowest since July. OAO Magnitogorsk Iron & Steel fell 15 percent to the lowest since November 2008. OAO Mechel fell 23 percent.

Norilsk is always able to find a market for its products because it is “too large to fail,” said Sergey Donskoy, an analyst at Societe Generale SA. The situation is different for steelmakers, he said.

“Any kind of trading ban is seen as a higher risk for them as they also may be hurt by a decline in domestic demand if the economy slows should tensions between Russia and Ukraine lead to sanctions,” Donskoy said.

Ukraine Assets

NLMK’s position would be weakest among Russian steelmakers in the event of a European and U.S. ban on exports of the metal, as it ships steel slabs to its own mills in Europe, Kirill Chuyko, head of equity research at BCS Financial Group, said by phone today. Sergey Babichenko, a spokesman for NLMK, declined to comment.

Russian metal companies face limited direct threats to their operations from events in Ukraine because they have few assets there, said Morgan Stanley’s Kolomytsyn.

“Those assets are quite marginal and should anything happen to them, it wouldn’t affect the companies’ businesses seriously,” he said.

Mechel has a steel smelter in Donetsk, in Ukraine’s east, which is idled because it was losing money.

Abramovich, Deripaska

Evraz Plc, partly owned by billionaire Roman Abramovich, and Oleg Deripaska’s United Co. Rusal, said their Ukraine plants were operating normally. Evraz has a steel smelter and two raw-material producers in central Ukraine’s Dnepropetrovsk region, which are struggling to break even, according to BCS.

Rusal has two assets in Ukraine’s south -- an alumina smelter in Nikolaev, and the Zaporozhsk aluminum plant, which has an idled smelter.

Rusal may face additional, debt-related risk arising from the situation in Ukraine, according to BCS Financial’s Chuyko. The world’s largest aluminum producer is in talks with international banks to refinance a $4.75 billion loan, people familiar with the matter said in October. The situation in Ukraine may complicate the talks, Chuyko said.

Rusal will comment on refinancing once it has reached an agreement with banks, it said in e-mailed comments.

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