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By John Helmer in Moscow

Oleg Deripaska, controlling shareholder of United Company Rusal, the world’s largest producer of primary aluminium, has reason to be an unhappy man. On Thursday evening, he called in a group of sympathetic reporters to explain how unhappy.

“You can sit a cat and dog next to each other,”he said, “but it’s unlikely you will get a family.” He is referring to Vladimir Potanin, the controlling shareholder of Norilsk Nickel, which Deripaska’s Rusal says it has been trying to take over for several months, only to be defeated by shareholder vote and the board of directors. According to the wire service text, Derripaska went on: “We have come to understand that Potanin has taken control of the company. If we find a basis to our claims our rights have been violated, we don’t rule out legal action.” Rejecting Potanin’s alliance with Metalloinvest, an iron-ore and steel group, controlled by Alisher Usmanov, Deripaska said: “A triple merger will never happen. It’s of no interest to us. We don’t see a future for ourselves in the steel business.”

In parallel, Rusal issued a public statement calling on the Russian regulatory authorities to intervene, and charge Potanin with concealing the extent of his shareholding in Norilsk Nickel. As evidence, Rusal repeated detail from an offer issued publicly early this week by Deripaska’s ally, and 14% stakeholder in Rusal, Mikhail Prokhorov. According to Rusal: “Vladimir Potanin’s Interros plans to buy a 16.66% stake in Norilsk Nickel from ONEXIM Group [Prokhorov]. When this deal is completed, Vladimir Potanin’s Interros could get control over a stake exceeding 30% and, according to Russian Federation legislation, will be obliged to make an offer and purchase the shares of the other shareholders of Norilsk Nickel.

Moreover, there are a number of factors, including the results of the voting at the Annual General Meeting of Norilsk Nickel’s shareholders, that indicate that Interros already controls a stake in Norilsk Nickel exceeding 30% and yet has not made a mandatory offer to minority shareholders to buy out their shares. This is a breach of Russian legislation and minority shareholders’ rights. We believe it is necessary that the Federal Financial Markets Service holds a detailed inspection of the shareholding structure of Norilsk Nickel to investigate the above-mentioned violations of the legislation and to protect the rights of minority shareholders.”

Mineweb reported early in the week that Prokhorov has made an offer to sell, but hasn’t delivered it to Interros, Potanin’s holding. There is no evidence that Potanin plans to accept the offer, or buy the shares; there is some evidence that the shares are not Prokhorov’s at the moment, but Deripaska’s.
Whether Prokhorov’s or Deripaska’s, these shares are losing value by the hour. Norilsk Nickel (GMKN:RU) closed yesterday in Moscow at $201, down 6% on the week. In Friday trading, it is down 5% to $191.

There are other reasons for Deripaska to be unhappy.

The UK High Court ordered him last month to face trial in London on a claim that he cheated his own signature for a share in his assets now worth up to $10 billion. The man who alleges he was cheated, Mikhail Chernoy (Michael Cherney) , has provided the most complete documentary evidence ever made public of how Siberian Aluminium (Sibal), Russian Aluminium (Rusal), then UC Rusal, were formed, and how they have operated production plants, trading units, and offshore profit centres. For the Russian tax authorities, the Accounting Chamber, and the Federal Antimonopoly Service (FAS) — all currently acknowledged to be in pursuit of transfer pricing schemes — this is a goldmine never available before. Deripaska is appealing against trial; but the evidence is already in the public record. There was no response from Chernoy’s office, when his spokesman was asked if he is prepared to assist the Russian investigations.

Last month, Mineweb has also reported, Deripaska met Deputy Prime Minister Igor Sechin, and learned that Prime Minister Vladimir Putin and the government do not approve Deripaska’s takeover of Rusal. Deripaska did not deny the meeting. Rusal issued a statement claiming only that he and Potanin were “not holding any talks with Vladimir Potanin about a possible merger of UC RUSAL and Norilsk Nickel. No confidentiality agreement has been discussed or signed between them.”

The terms of Sechin’s undertaking with Potanin, Deripaska has also unhappily learned, include the appointment of Vladimir Strzhalkovsky as the new chief executive of Norilsk Nickel. Strzhalkovsky then met with the Rusal management. His appointment is expected to be approved at the Norilsk Nickel board of directors’ meeting in Moscow today. Rusal announced yesterday that Strzhalkovsky lacks the experience to run the company, and will vote against him at the board meeting.

Is Deripaska daring to challenge Sechin and Putin over their veto of his takeover plan? Deripaska told the Financial Times a year ago that he has no intention of that. Regarding his own stake in Rusal, he said: “If the state says we need to give it up, we’ll give it up.”

This past May, when Deripaska acquired 25% of Norilsk Nickel from Prokhorov for Rusal – on the way to a takeover that Sechin appears to have ordered to drop – the price Deripaska paid was $12.4 billion; he borrowed from Merrill Lynch and others to fund part of this price, and Rusal is thus accumulating a sizeable interest obligation. That stake is now worth just $9.1 billion, and it continues to dwindle. Deripaska and Rusal are looking at a 27% decline in value; that’s about $1 billion per month.

What must a man in this unhappy predicament do?

The only major Russian figure to fly in the face of a veto by Putin and Sechin was Mikhail Khodorkovsky, owner of the Yukos oil company. He is now in prison, and Yukos has been broken up. Is Deripaska a kamikaze pilot flying on the same course? Unlikely.

So, why did Rusal announce, and Deripaska call in the press to say, that they reject Strzhalkovsky? Deripaska’s favourite reporter explained in the morning FT: “But UC Rusal said the company was in no need of state support and instead needed an expert to look after production which, it said, was in a “catastrophic” state.””

For Rusal, which is unlisted and issues no audited financials, it might be thought presumptuous to attack Norilsk Nickel, which is listed internationally, regulated (inter alia) by the US Securities and Exchange Commission, and issues publicly audited results.

On July 16, Rusal posted a press release indicating that its worldwide production of bauxite in the first half of this year rose by 6.5%; its alumina output grew by 1.4%, and its primary aluminium volume was up 7.4%. On a like for like basis, it appears that there has been almost no growth at the Rusal smelters which Deripaska has managed, since before his takeover in 2006 of Victor Vekselberg’s Siberian Ural Aluminium (SUAL). The volume of additional aluminium noted by Rusal in its growth rate – 159,032 tonnes out of aggregate output of 2.2 million tonnes – is accounted for by the start-up of the new Khakas smelter (monthly capacity of 25,000 tonnes); the opening of a new potline at the SUAL smelter at Irkutsk (additional production of 14,000 tonnes per month); and the launch of output at the Nigerian ALSCON smelter (new capacity of 16,000 tonnes per month by 2010), which is the subject of litigation over alleged privatization fraud in Nigeria.

In response to the Rusal statement, and Prokhorov’s offer, here is what Norilsk Nickel says (translated from Russian):
“As of today MMC Norilsk Nickel is Russia’s largest public diversified mining and metals company, whose informational openness, transparency and corporate governance standards were repeatedly and highly esteemed by independent experts in Russia, and abroad.

Over the past years the Company has become a global manufacturer of nonferrous and precious metals, showing stable volumes of manufacture and guaranteed deliveries of production to consumers….In this connection the Company considers it to be an incorrect statement by UC Rusal that the industrial and financial indicators of MMC Norilsk Nickel have worsened. According to the confirmed strategy of technological development, Russian enterprise Norilsk Nickel is generating stable volumes of manufacture, and counting foreign acquisitions in 2007, the Company has increased manufacture of commodity nickel to 276,339 tonnes… That exceeds the volume of manufacture of commodity nickel in 2006 by 13 %. MMC Norilsk Nickel confirms the 2008 plan of growth in the volume of manufacture of commodity nickel to 300-305,000 tonnes, copper to 415-420,000 tonnes. Palladium manufacture in 2008 is expected at a level of 3 to 3.5 million ounces, and platinum, 710-720,000 ounces.”

Interros, the Potanin holding, has also issued a statement:
“In April and May of 2008, Mr. M. Prokhorov failed to fulfill his obligations to Mr. V. Potanin to close a number of transactions in relation to shares of Norilsk Nickel and Polyus Gold. In this context, Mr. V. Potanin and Interros are currently neither preparing nor performing any transactions with him. We consider public announcements made by the Onexim group to be misleading to the market; they are aimed at manipulating the share price. Therefore, Interros, as a shareholder of Norilsk Nickel, has proposed that the Company makes a request to the regulatory authorities in order to obtain a formal evaluation of Mr. M. Prokhorov’s actions in his capacity as a member of the Board of Directors of Norilsk Nickel. We regard Rusal’s statements in relation Norilsk Nickel and Interros as unacceptable for a shareholder of a public company. Rusal, which has yet to sign a Confidentiality Agreement that was sent to it a few months ago by Norilsk Nickel, has now resorted to the tactic of publicly discrediting the company. Such actions lead to an erosion in value of Norilsk Nickel and, ultimately, harm its shareholders.”

Few brokerage analysts of Moscow’s big houses are close enough to the principals to know what they are thinking. Those who are, are trading shares for them, and helping them to borrow. For them, naturally, mum’s the word. Rob Edwards, the Renaissance Capital metals analyst, reports that “UC Rusal is unhappy with its 25% investment into Norilsk Nickel which cost them in the region of $12.4bn in late 2007, with over half of the acquisition underwritten by debt.” In a client report, he adds: “Noprilsk nickel is a HOLD at current level… Our conclusion is that Interros needs to present a strategy to minorities.”

James Lewis at MDM Bank in Moscow concludes that “RusAl is abandoning its attempt to merge with Norilsk if it is indeed pursuing a sale of its share back to Interros through Onexim. We believe such a scenario is plausible… With prospects for a mega-merger to produce a national metals champion seeming increasingly precarious, we believe Deripaska may see a scenario where Potanin is pressured to buy shares at a premium as a convenient way out of his investment in Norilsk.””

If Deripaska is not a suicide mission against Putin, is he trying to bomb Potanin into raising the price for the 25% bloc of shares? In the short history of modern Russian corporate warfare, it is not unprecedented for a hostile takeover to be settled after a display of explosives and firecrackers.

In this case, however, Norilsk Nickel does not believe Deripaska and Rusal have kept their gunpowder dry enough to use. If they were serious about mounting a challenge for the votes of the free floating institutional shareholders to switch allegiances away from the Potanin-led management to Deripaska, they should have formally called for an extraordinary shareholder meeting (EGM), and tried to mobilize votes for a more supportive 13-man board. Instead, Victor Borodin, spokesman for Norilsk Nickel, told Mineweb: “I can confirm to you that as of now, Rusal has not used its right to call for an EGM, although, as became clear from yesterday’s announcement, they seem still to have this idea – to reelect an expanded board with an independent chairman.”

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