26 January, 2016

Norilsk Nickel mines portfolio offer better returns instead of expansion

Russian Norilsk company is surely one of the self sustainable mining companies able to live up current global commodities market disturbances and recent announcement on focusing on development of its own mines does not seems as a surprise.

Norilsk Nickel Russian company would look at opportunities shaken loose by a weak global commodities market, but its own portfolio of mines and internal prospects offer much better returns, says chairman Gareth Penny.

Mr Penny, who was MD of diamond giant De Beers and also sits on Norilsk’s subcommittee formulating strategies, said the world’s largest nickel producer had shrunk its focus to mines in Russia, selling out of assets in Australia and Botswana, and was in the process of selling its stake in Nkomati Nickel in SA.

“Given where Norilsk is on the nickel cost curve, we produce about 20% of the world’s nickel, and we are by far the lowest cost producer of the metal in the world,” Mr Penny said.

“Even at these prices, Norilsk can make money from its nickel,” he said. “Between 60% and 70% of the world’s producers have costs higher than these prices. There has to be a correction coming.

“There are many companies unable to sustain themselves in business. In mining, it takes a while to shed supply. The mining business is notoriously slow in its time to react because there are so many vested interests in continuing production,” he said.

However, while it would look for assets only where it felt it could make a difference, Norilsk’s focus would remain on its internal opportunities, he said.

“A lesson learnt in the up part of the supercycle in the commodity market was the danger of running off and making acquisitions that were not on strategy. As wrong as that was when things were going up, it will be equally wrong to make that decision on the way down, even when things are so cheap,” Mr Penny said. Norilsk was a better miner in Arctic conditions than other mining companies, he said.

“Looking at things elsewhere in the world, even if they’re cheap, if we can’t add value or where we have competitive advantage or unique expertise, it’s not something we’d consider,” he said.

Mr Penny, who was appointed as an independent chairman in March 2013, won an award in Moscow last month, naming him “director of the year” for his role in the development of corporate governance at Norilsk.

“The board in Norilsk has made tremendous progress and the governance has improved enormously and that’s what’s being recognised in this award,” he said.

During his tenure at De Beers, Cape Town-born Mr Penny dealt closely with Russia’s diamond group Alrosa, making him comfortable with Russian corporate culture, he said.