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Msg  8850 of 65647  at  5/24/2007 9:29:30 AM  by


WSJ - Couldnt find article, but found this on A8

May 24, 2007


How Russia Is Going Heavy Metal
Norilsk's $6.28 Billion LionOre Bid Raises
Ante in Race to Scoop Up Commodities
May 24, 2007; Page A8

OAO Norilsk Nickel is making one of the biggest moves yet by a Russian company to challenge Western mining and metals giants -- a competition increasingly unfolding on the latter group's home turf.

The Russian miner raised its bid for Canadian rival LionOre Mining International Ltd. to 6.82 billion Canadian dollars (US$6.28 billion), intensifying a three-week bidding war. The offer, at C$27.50 (US$25.32) a share, was 10% higher than the most recent offer from Xstrata PLC, which LionOre's board recommended to shareholders last week. Norilsk's bid was 28% higher than its initial offer, made earlier this month.

A deal would give Norilsk "greater scale in key commodities, enhanced geographic diversification and an exciting pipeline of growth projects," said its general director, Denis Morozov.

"We're reviewing the revised offer from Norilsk and will be making a formal announcement in due course," LionOre spokeswoman Alex Buck said. If LionOre deems the Norilsk bid superior, Xstrata has five working days to match it, Xstrata spokeswoman Claire Divver said. The deal between LionOre and Xstrata, based in Switzerland, includes a C$305 million breakup fee.

LionOre shares rose 4.1% to C$28.37 in Toronto Stock Exchange trading, indicating some investors hope for a higher bid. Norilsk shares fell 3.7% to 184.13 rubles (US$7.11) in Moscow, while Xstrata shares rose 1.8% to 28.25 (US$55.80) in London.

LionOre is the world's 10th-largest producer of nickel, the price of which has soared in recent years. Nickel is used to make stainless steel, which has applications ranging from industrial uses to high-end kitchen appliances. LionOre also sells copper, gold and other minerals, and owns mines in South Africa, Botswana and Australia.

Russian companies are adding urgency to the global race to secure metals, oil and other raw materials amid a three-year commodity boom. Norilsk and its Russian peers -- which in many cases have access to cheap and abundant energy and ore at home -- are flush with cash from high prices and eager to increase their global footprint. But some analysts question if prices for many minerals will remain high enough to justify the recent flurry of multibillion-dollar mining deals.

In March, Russia's OAO Rusal and Sual Group merged with Switzerland's Glencore International AG, creating United Company Rusal, which aims to rival Alcoa Inc. as the world's largest aluminum producer by output. Steelmaker Evraz Group SA recently snapped up Oregon Steel Mills Inc. for $2.3 billion.

Not all deals pan out. Russian steelmaker OAO Severstal was thwarted in its efforts to buy Arcelor SA of Luxembourg, which eventually was bought by Mittal Steel Co. Still, Severstal has made headway elsewhere, joining a group of investors building an $880 million mill in Mississippi to make high-grade steel for auto makers and, in 2003, buying a steel plant in Michigan from Rouge Industries Inc.

The moves come amid concern over the Kremlin's tightening grip over Russia's natural resources. Speculation has swirled that Moscow could move to take a greater role in Norilsk. But billionaires Vladimir Potanin and Mikhail Prokhorov, who control the company, appear to be in the Kremlin's good graces. Norilsk, which trades publicly, is widely held by foreign investors and has a market capitalization of about $35 billion.

Norilsk, based on giant Arctic nickel mines developed under Soviet dictator Josef Stalin, was an early participant in westward expansion. It agreed in 2002 to acquire a majority stake in Stillwater Mining Co. of Columbus, Mont., in a deal valued at $341 million. In 2005 Norilsk, which held a 20% shareholder stake in Gold Fields Ltd., backed a hostile takeover bid by South Africa's Harmony Gold Mining Co. that ultimately failed.

Norilsk reported net profit for the first half of last year of $2.37 billion, up from $974 million. The latest figure was boosted by a $993 million gain from the sale of its gold-mining assets. Norilsk reports under international financial reporting standards, which differ from U.S. generally accepted accounting principles.

The bidding for LionOre is spurred in part by technological advances that will allow it to become a fully integrated nickel producer, from mine to metal. LionOre has been developing a technology called Activox to treat a wide variety of metal-sulfide concentrates. The Toronto company has to smelt the concentrates produced before it can refine them. But the new technology will remove the smelting step.

John Tumazos, metals and mining analyst at Prudential in New York, said he still sees room for higher bids. "The biggest curiosity that I see is that the LionOre management was willing to sell on the first deal they struck with Xstrata, because the price was so low," he said.

For suitors, the question is whether nickel prices will remain high. Norilsk is at the forefront of a stampede to increase nickel production world-wide. It recently commissioned a new production complex at its big underground nickel mine on the Kola Peninsula and is expected to soon unveil joint exploration projects elsewhere in Russia with BHP Billiton Ltd and Rio Tinto Ltd.

Charles Bradford, a metals and mining analyst in New York with Bradford Research/Soleil, expects demand for the metal to ease as manufacturers find ways to curtail its use. While widely used in stainless steel, nickel isn't the component that gives the metal its sought-after corrosion resistance. Rather, nickel is used to make stainless steel look better and more pliable.

Still, the rush to develop new mines has hit barriers -- including scarce mining equipment and a dearth of trained geologists and mining engineers, causing delays and huge cost overruns. "Even if you can get trucks from Caterpillar, you can't get tires," says Mr. Bradford. "So the people who have nickel coming out of the ground are riding high at the moment, including Norilsk."

--Andrea Hotter contributed to this article.

Write to Timothy Aeppel at timothy.aeppel@wsj.com1 and Gregory L. White at greg.white@wsj.com2

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