Norilsk Nickel should cut spending before nickel drops below $15,000 - Interros
MOSCOW. June 28 (Interfax) - Norilsk Nickel should respond to the crisis with an adequate reduction of capital expenditures, not shrink from reconsidering low-margin projects, and provide for cuts in operating expenses in its 2013 budget without waiting for a dramatic deterioration of the situation, Vladimir Potanin, the owner of Interros, the Russian mining giant's largest shareholder, said.
The profitability threshold for Norilsk Nickel is a slump in nickel prices to below $15,000 per tonne for two months. In that case, Norilsk Nickel is prepared to cut operating expenses and investment. This issue will be discussed by the company's board of directors on June 28.
"I think that in working on the 2013 budget we will ask management, among other things, to work on reducing expenses of an operational nature. Management is proposing to begin such measures if the price of nickel falls below $15,000 per tonne, but we believe that it's better to begin such work ahead of time. Whether it falls or not, it wouldn't hurt to implement the cost cutting program now. Therefore, without any pressure on management in terms of dates or amounts, this is the task we will set. In the budget process for 2013, we will propose that management nonetheless make an effort to reduce operating expenses. This is the right thing to do," Potanin told reporters on Wednesday.
"Expenses related to capex, of course, need to be revised downward. The situation is becoming more difficult, the volatility is continuing. In these conditions one needs to be able to tighten belts. And not be lazy about reconsidering projects, even those that seemed promising a year or 18 months ago. There's no rush or panic here, but nonetheless we need to react to the crisis adequately, by reducing capex," Potanin said.
He said the issue of reducing investment was proposed by Rusal, Norilsk Nickel's second largest shareholder, but Interros sees the problem the same way. He said "management already intended to put forward such proposals in the near future."
Commenting on the possibility of revising Norilsk Nickel's development strategy for the period to 2025, Potanin said Interros believes changes are necessary but, unlike Rusal, it is proposing to work out this issue and return to it after the results of the first year of the strategy's implementation are reported in September 2012.
"That the strategy will have to be adjusted is obvious to me. But the schedule seems slightly less tight to me than Rusal proposes. The strategy was slated for a possible update in September, when the strategy committee was supposed to hear the progress of its implementation. I would first consider the results in September, look at whether the strategy corresponds to the current situation taking into account changing price forecasts. Shareholders will be able to formulate more clearly what their concerns are. Based on this September review, we can already move toward adjusting the whole strategy," Potanin said.
Rusal is proposing to reconsider the strategy within the next few weeks, while Norilsk Nickel management is proposing to consider this issue based on the results for 2012, Potanin said.
He said Norilsk Nickel's foreign projects, including possible coal mining projects in Indonesia announced this week, are work for the future, a search for growth possibilities, but the company's priority is still its business in Russia. "If the market expects growth or diversification from Norilsk Nickel, then its more in Russia and the former USSR. Norilsk Nickel can't currently brag about a successful history of expansion outside of this region. Therefore, investors don't believe this story. The priority is development of existing sites, particularly since they are far from having exhausted their growth potential. It is necessary to work on promising foreign projects, but the criteria for selection need to be tightened," Potanin said.
"The projects [in Indonesia] are of a very preliminary nature. [Norilsk Nickel CEO Vladimir] Strzhalkovsky is establishing international contacts and looking for potential sites for expansion for Norilsk Nickel. When this reserve might be realized is a question. But this work is certainly beneficial and creates potential for the future," Potanin said.
Norilsk Nickel has not disclosed the scale of its investment program for 2013. The company's 2012 investment program for its Russian assets is more than $3 billion, and it focuses on development of mining, enrichment and metallurgical facilities. The company planned to invest $10 million in foreign assets in 2012.
Norilsk Nickel's development strategy for the period to 2025 calls for investments of $37 billion, including $4 billion in gas assets to 2025, $1.1 billion for the Bystrinskoye deposit to 2016, and about 2 billion rubles in cobalt production to 2014. Norilsk Nickel also estimated that the development of nickel deposits in the Voronezh Region would cost 50 billion rubles, but the company lost a tender for the licenses to these deposits to Ural Mining and Metallurgical Company in May.
