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By John Helmer in Moscow

Norilsk/BHP Billiton “alliance for development of huge Russian nickel deposit raises some questions.

Norilsk Nickel, Russia’s leading mining company, has announced that it has won a regional auction for exploration and mining rights to Russia’s largest undeveloped nickel prospect. The Iisko-Tagulsk deposit, located in the Irkutsk region of southeastern Siberia, was won at an open-auction tender for $30.7million. Exploration and other preliminary prospecting and feasibility work is estimated to cost another Rb2.5 billion ($100 million).

While this task and the amount are clearly within Norilsk Nickel’s financial and technical capacity to manage, the company announcement, issued Thursday, said it has invited BHP Billiton to join in the first phase of the project. The language used was: “the geological [work] will be done in alliance with BHP Billiton.”

This carefully skirts legislative amendments now proceeding through the State Duma, backed by Norilsk Nickel, which would exclude foreign mining companies from the Russian nickel sector entirely. As Mineweb reported early in the week, the list of strategic minerals on the foreign exclusion list are diamonds, uranium, quartz, cobalt, nickel, beryllium, lithium, the platinum group metals (PGM), tantalum, and niobium.

Alrosa, the state owned Russian diamond miner now diversifying into gold and other minerals, was the second, and losing bidder in the Irkutsk auction.

The announcement of a limited prospecting partnership with BHPB, worth about $50 million, suggests that Norilsk Nickel wants to demonstrate its international credentials and support base in the face of the hostile takeover bid by former shareholder Mikhail Prokhorov and Russian aluminium proprietor, Oleg Deripaska. Norilsk Nickel is currently controlled by Vladimir Potanin’s Interros holding, which is also proposing to absorb iron-ore miner and steelmaker, Metalloinvest.

Prokhorov sold Deripaska a 25% plus 1 share stake last December, in exchange for cash and an 11% stake for Prokhorov in United Company Rusal. Recent disclosures in the Moscow money market indicate that Prokhorov and Deripaska have both provided themselves with unwinding arrangements for this deal. Prokhorov can withdraw from the transaction, it has been reported and confirmed, if Rusal fails to effect a promised, but delayed initial public offering of its shares, within two years. Deripaska, it appears, also has a withdrawal option, subject to payment of a break-fee of about $300 million.

Norilsk Nickel’s press release said that an affiliate, Vostochno-Sayanskaya nickel company, “won on Thursday an auction for the right of geological prospecting, exploration and mining of nickel, copper and metals of platinum group in the Iisko-Tagulskaya area of Irkutsk region. The Vostochno-Sayanskaya nickel company paid 726 million rubles ($30.7 million) for the license, with start payment of 110 million rubles. Auction step was 11 million rubles.

The Iisko-Tagulsk prospect is situated on the territory of the Nizhneudinski, Taishetski and Tulunski districts of Irkutsk, bordering Krasnoyarsk territory on the west and Buryatia in the east. The license covers 15,867 square kilometres. according to preliminary estimates by the state mineral resource licensing agency, Rosnedra, forecast resources are 7.5 million tonnes of nickel, 3.5 million tonnes of copper and 750 tonnes of platinum group metals.

The total nickel reserves and resources of the current Taymyr and Kola deposits being mined by Norilsk Nickel are about 22 million tonnes. If the resources for TheIysko-Tagulskaya field are confirmed, they should increase Norilsk’s nickel resources by one-third.

Norilsk Nickel says that it has been prospecting the area since 2003. “Norilsk Nickel is also involved in exploration of the neighboring Kingashskaya site in Krasnoyarsk region. In 2007 MMC Norilsk Nickel initiated agreements with the state on financing prospecting and estimation of Eastern Sayany resources. The corresponding agreements were signed and geological exploration, including drilling, started. Thus, the Company’s data on geological structure and prospects of Iisko-Tagulskaya area is more extensive than in the license particulars.”

The company press release refers to first-year plans to pursue “aero-geophysical works on scale 1:25000 with complex CAGC, with the purpose of searching of ore-bearing tracts and platinum-copper-nickel ores.” This phase of the exploration may be the one in which Norilsk Nickel is most interested to use BHP Billiton’s proprietary Falcon aerial survey technology — an application which has run into national security objections from the US State Department, which regulates the licensing of the technology, and also concerns from Russian security agencies in the past.

Rob Edwards, metal analyst for Renaissance Capital, said of the deposit “this is not only the largest in Russia but one of the largest in the world emphasising the superb endowment that Russia hosts and which Norilsk has access to. An asset of this nature within a separate listing would demand a valuation in excess of $2bn, we believe. The contained value of this deposit using longer-term price assumptions is $186bn.”

Edwards forecasts that the announcement will help lift Norilsk Nickel’s share price. “This news is clearly positive. Norilsk is undoubtedly cheap but uncertainty within the corporate landscape has hindered a strong upward move in our view.”

Alfa Bank warned, however, that “we consider the news as NEUTRAL as we think it will take at least 10-12 years to begin industrial development of the Iysko-Tagulskaya deposit.”

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