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By John Helmer in Moscow

Russia’s leading mining company, and one of the leading suppliers of nickel to China’s stainless steelmills, may be facing further revenue and profit cuts in 2009, as the international nickel price continues to fall, and inventories of the metal grow.

However, political intervention by the Kremlin has ended a hostile takeover attempt aim,ed at Norilsk Nickel (ticker GKMN:RU) by Oleg Deripaska’s aluminium company, Rusal, allied with a former shareholder in Norilsk Nickel, Mikhail Prokhorov. A new 13-man board lineup, voted by Norilsk Nickel shareholders under Kremlin supervision last Friday, rejected Prokhorov’s bid for election, and limited Deripaska to 4 out of 13 seats.

An alliance between government nominees and controlling shareholder, Vladimir Potanin’s Interros group, provides a 7-man majority of votes on the new board, thereby ending months of uncertainty and conflict.

The Norilsk Nickel share price has responded this week, climbing 3% in Monday trading in Moscow and New York to $67; this is a gain of 9% on the week.

At the same time, the LME price of nickel has continued testing early-December lows; it is currently ranging between $9,755 and $9,925 per tonne. It is exceptional for Norilsk Nickel’s share price to move up when the nickel commodity price is coming down. The correlation between the two was suspended in the middle of the year when conflict between the three major shareholders of the Russian company, Potanin, Prokhorov, and Deripaska reached its peak.

Between August and October, the Kremlin put pressure on Deripaska to call off his attacks against Norilsk Nickel. On July 28, Deripaska was told by Deputy Prime Minister Igor Sechin that the government would not agree to his takeover of Norilsk Nickel. Deripaska then appealed to President Dmitry Medvedev at a Kremlin meeting on November 17. The veto message remained the same. Then on November 25, Deripaska and Potanin announced publicly that they had signed a cooperation agreement, while Deripaska conceded he was abandoning his takeover campaign.

President Medvedev and Prime Minister Putin now appear to have agreed that, in return for state bank loans to protect Norilsk Nickel’s shares from foreign bank takeover and cover potential loan defaults by Deripaska and Potanin, the 25% shareholding held by Rusal, and a 20% stake belonging to Potanin will be held as collateral by the state. The chairman of the newly elected company board will represent the state; he is Alexander Voloshin, who previously served as the Kremlin chief of staff before Putin became president; and then chairman of the state owned power utility, UES.

A former intelligence officer and state tourism administrator, Vladimir Strzhalkovsky, has also been appointed chief executive of Norilsk Nickel.

China has played a significant, if indirect role in the outcome. Rejection by Chinese investors of Deripaska’s last-ditch bid to raise up to $5 billion in cash for Rusal shares in September left him, as well as Rusal, on the verge of bankruptcy in the face of margin-calls by their bankers. They were forced to apply for a Kremlin bailout loan, and thereby lost control of their 25% stake in Norilsk Nickel.

Chinese mill demand for nickel to produce stainless steel continues to be a major factor in Norilsk Nickel’s production and sales planning. Nickel sales comprise the largest share, 54%, of the Russian company’s revenues. The company also reports that 96% of its Russian nickel output is exported. No breakdown is available of the proportion of Norilsk Nickel’s exports of nickel going to China. However, company reports acknowledge that China accounts for about one-quarter of global demand for nickel, and is thereby accepted by Norilsk Nickel executives to exert the biggest influence on prices for nickel next year.

A combination of Kremlin intervention to stabilize corporate governance, and Chinese demand to support nickel prices and import volumes will thus determine both profit and equity value for Norilsk Nickel in the coming months. According to a report just issued by the UBS Moscow office, without a pickup in the Chinese driven nickel price, Norilsk Nickel’s revenues may drop IN 2009 to $11.3 billion; that is 21% down on this year’s estimated revenue total of $14.4 billion. Net profit for Norilsk Nickel, according to the UBS forecast, may fall 75% from $3.6 billion to $910 million.

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