JSC MMC Norilsk Nickel

JSC MMC Norilsk Nickel

22 Voznesensky Pereulok
Moscow, 103009
Russia
Telephone: ( + 7) 095 787 7667
Fax: ( + 7)095 915 8385
Web site: http://www.nornik.ru

Public Company
Incorporated: 1935
Employees: 96,013
Sales: Ru 106.97 billion ($3.43 billion) (2001)
Stock Exchanges: Moscow (MICEX) Russian (RTS)
Ticker Symbol: R.GMK
NAIC: 212234 Copper Ore and Nickel Ore Mining; 212234 Copper Ore and Nickel Ore Mining; 212299 Other Metal Ore Mining; 213114 Support Activities for Metal Mining; 421510 Metals Service Centers and Offices

With headquarters in Moscow, holding company JSC MMC Norilsk Nickel (Norilsk Nickel Mining and Metallurgical Company) oversees the mining of nickel, copper, cobalt, platinum group metals (PGMs), and other metals in isolated arctic towns on Russia’s Kola and Tamyr peninsulas. The company is the largest producer of nonferrous and precious metals in Russia, accounting for 20 percent of all nickel produced in the world. Nickel is used mainly in the production of stainless steel and in coinage. Norilsk claimed 70 percent of the world’s supply of palladium, a PGM used in automotive catalytic converters. Among its producing subsidiaries are the Severonickel Combine, in the Murmansk region, and the Pechenganickel MMC in the Pechenga region. Half a million people in the remote region rely on an economy driven by Norilsk Nickel. The settlement or “company town” of Norilsk is separated from the Russian highway system by 700 miles (470 versts). As a legacy of its communist past, Norilsk maintains extensive social services for area residents, a burden its owners would like to lift by transferring these obligations to the regional government, which itself would prefer to spend any surplus on relocating up to one-third of the population. In late 2001, the Norilsk community was declared off-limits to foreigners, whom local authorities blamed for bringing drugs, crime, and AIDS to the city.

Origins

According to Norilsk Nickel’s official history, copper-nickel ore was discovered in the Taimyr Peninsula of northwestern Siberia in the 1600s. It lay undisturbed in the frozen earth for another 300 years. Though estimates vary, Russia consumption of nickel remained small through the 1920s. Most of Russia’s industrial efforts were suspended during the Bolshevik Revolution and the following civil war, which lasted until 1921. By 1937, the country was using 9,750 metric tons a year, and much more would be needed to bolster its armed forces. Russia was rich in manganese and chromium, which could be used as substitutes in such wartime uses as electrical wire, armor plating, and armor-piercing ammunition.

Production of nickel was initiated in the Second Five Year Plan. On June 23, 1935, the Council of Peoples’ Commissars of the U.S.S.R. passed a resolution to build what would become the Soviet Union’s largest mining and metallurgical company (MMC), located 2,000 kilometers north of Krasnoyarsk. The NKVD, or Commissariat of Home Affairs (Soviet security services), was responsible for Stalin’s Gulag project; possibly more than 100,000 prisoners died during its construction.

Norilsk was not Russia’s first source of indigenous nickel production; in 1934, a plant was established at Verkhnii Ufalei in the Urals, where nickel had been discovered in the last half of the 19th century. The Norilsk combine produced its first copper-nickel matte on March 10, 1939; however, due to its remoteness, it did not truly have operations in force until 1942.

Two more copper and nickel mines, which would be combined with the Norilsk organization during the Gorbachev administration, were located further east, on the Kola Peninsula of European Russia. The Severonickel combine was constructed near Murmansk in 1935. Pechenganickel MMC (formerly Petsamo) was built in 1940 by The International Nickel Company, Inc. (Inco) on territory then held by Finland. Russia took over the land after World War II, paying International Nickel $20 million for the Pechenganickel operation. Pechenganickel produced about 15,500 metric tons of nickel in 1947.

Self-Sufficient in the Cold War

Russia did not become self-sufficient in nickel until after World War II, when a large copper-nickel area was discovered near Norilsk through extensive exploration. Russia became a major world producer overnight. By 1953, Norilsk accounted for 35 percent of the Soviet Union’s nickel production, 12 percent of its copper, 30 percent of its cobalt, and 90 percent of its platinum group metals (PGM’s). The Soviet Union as a whole produced an estimated 33,000 tons of nickel in 1950.

Western sources placed total Soviet nickel production at 64,000 tons in 1960. By 1970, the Soviet Union was producing an estimated 110,000 tons of nickel a year, making it second only to Canada. The Soviets were investing more than $1 billion in developing new mines and increasing production capacity. A pipeline was being built to bring natural gas across the Yenisei River from western Siberia.

Norilsk was also a rich source of platinum group metals, particularly palladium. According to one estimate, the region supplied 75 percent of Russia’s total PGM output of 2.5 million ounces in 1972.

Reorganized 1989

The Severonickel, Pechenganickel, and Norilsk combines were brought together during perestroika into the State Concern for Non-Ferrous Metals Production Norilsk Nickel, created on November 4, 1989 by a resolution of the Council of Ministers. Also included with the Norilsk, Pechenganickel, and Severonickel combines were the Olenegorsk mechanical works, the Krasnoyarsk nonferrous metal processing works, and the Gipronickel Institute in St. Petersburg (then Leningrad)—the Russian nickel industry’s leading research center.

A few years later, the company was privatized. The Russian State Concern for Non-Ferrous Metals Production Norilsk Nickel became a Russian Joint Stock Company (RAO) by presidential decree on June 30, 1993. Its new English name: RAO Norilsk Nickel for the Production of Non-Ferrous and Precious Metals, or RAO Norilsk Nickel for short. Shares were distributed to employees and investors in 1994; the state retained control with 38 percent of equity and 51 percent of the voting shares. After a mortgaging auction, Uneximbank became the nominal holder of these shares.

Norilsk had annual sales of $2 billion a year in the mid-1990s, when it employed about 160,000 workers. A project was being planned to refurbish the Pechenga plant in cooperation with Scandinavian companies (Kvaemer A/S, Elkem A/S and Boliden AB), partly with the aim of reducing Pechenganickel’s notorious sulfur dioxide emissions by 95 percent.

Privatized in the Late 1990s

In the last half of the 1990s, Russian businessman Vladimir Potanin, president of the Interros holding company and Uneximbank, acquired control of Norilsk Nickel in what was called a “loans for shares” deal with the Russian government. Uneximbank became nominal (managing) holder of a 38 percent controlling interest in Norilsk Nickel in a government auction in November 1995.

The Swift investment group, representing Uneximbank, bought this controlling interest in August 1997, with a bid of more than $270 million. (It and associated companies built up a 42 percent interest within a few years.) The bank promptly installed a new set of managers at the company led by Uneximbank board member Alexander Khloponin. Swift also invested $300 million to develop the Pelyatka condensed gas field near Norilsk, and another Ru 400 billion for social costs.

Net profits fell 32 percent to Ru 826 billion in 1997, though production at the three combines was up 23 percent. Norilsk exported 214,000 tons of nickel that year. Nickel prices plummeted in 1998. This was attributed to the Asian financial crisis as well as Norilsk’s own massive export drive. Norilsk Nickel posted a loss of Ru 3.5 billion in the fiscal year ending March 1, 1998. Norilsk faced new low-cost, high-tech competition from Australia in 1999.

Norilsk was considered a high cost producer due to its aging plant and huge 130,000-strong workforce—fewer than half of whom were directly involved in production. The company was paying for medical and social services, housing, and heating for the residents of the community. At the same time, Norilsk was considered Russia’s largest tax debtor, owing $2 billion to the federal government. Financial observers and union representatives agreed that up to 80,000 area residents should ideally be relocated to wanner, more economically robust climes. The potential cost for such a relocation project was estimated at $1 billion.

2000 and Beyond

The federal government filed a lawsuit to overturn Norilsk Nickel’s privatization in June 2000. Supporters claimed it was rigged to exclude other bidders. Others criticized the efforts to undo the privatization as merely an attempt by politicians to cash in. Revenues were Ru 152.99 billion in 2000, producing a gross profit of Ru 84.4 billion; both figures were up roughly 50 percent from 1999.

Company Perspectives:

The main principle of the MMC Norilsk Nickel’s social policy is to maintain reasonable balance between the interests of the shareholders, the employees, and the state, which would be capable to provide for steady and efficient functioning of the company. Social expenses are considered by the company as investments in its people, which are no less profitable than investments in the production development. In 2000, for example, expenses on the social sphere and the social programs amounted to over 15 billion rubles.

During 2001, Norilsk acquired Interros-Prom, including its Norimet Limited metals marketing subsidiary, for shares of Norilsk worth 8.23 billion in indexed rubles. Norilsk reported a net profit of Ru 32.9 billion ($1 billion) on revenues of Ru 106.97 billion ($3.4 billion) for 2001, based on Russian Accounting Standards. Around the turn of the millennium, Norilsk officials were developing a plan to use retired Typhoon-class nuclear submarines (called Akula —“Shark”—by the Russians) to ship 12,000 tons of nickel each under the arctic ice.

Principal Subsidiaries

Monchebank (54.95%); Baikal Hotel (65.65%); Gornometal-lurgichesky Kombinat Pechenganickel; Institut Gipronickel; Kolskaya Gornaya Kompaniya; Kombinat Severonickel; Norilsky Kombinat (99.86%); NTPO (99.99%); Olengorsky Mekhanichesky Zavod; Torginvest (90.09%); Interros-Prom; Norilskinvest (Interrosprom); ZAO “Interrosimpex” ; Renons.

Principal Operating Units

Arkhangelsk; Intersectoral Industrial Association Zapoliarye; Kolsky; Krasnoyarsk; Sanatorium Complex Beloye Lake; Zapaliarny.

Principal Competitors

Falconbridge Ltd.; Inco Ltd.

Key Dates:

1935:

Norilsk Nickel MMC is established.

1970:

Russia is producing 110,000 metric tons of nickel a year.

1989:

Severonickel and Pechenganickel combined into Norilsk organization.

1994:

Uneximbank obtains nominal control of company.

1997:

Uneximbank buys controlling interest in Norilsk.

2001:

Norilsk corporate structure is streamlined; Norimet is acquired.

Further Reading

Dixon, Robyn, “Arctic City Turning Cold Shoulder to All,” Seattle Times, November 9, 2001, p. A14.

Fineberg, Seth, “New Managers Aid Norilsk,” American Metal Market, August 6, 1996, p. 16.

——, “Normaco Wins Norilsk’s Trust; Russian Nickel Giant to Give Sales Agent a Bigger Role,” American Metal Market, August 27, 1996, p. 16.

Forster, Harriet, “Harsh Climate: Norilsk Confronts Nickel Bears,” American Metal Market, September 1, 1998, p. 7A.

——, “Norilsk Nickel Makes Appeal to Government, Again,” American Metal Market, February 8, 1999, p. 6.

Franchetti, Mark,” Red October Subs Put to Work as Freighters,” Sunday Times, September 10, 2000, p. 24.

Fung, Shirley, “The End of the Road,” Across the Board, May 1999, p. 72.

Goodwin, Scott, “Investor Group Rattles Legal Saber Over Norilsk Reorg.,” Emerging Markets Week, December 25, 2000, p. 1.

Kaiser, Robert G., “Norilsk, Stalin’s Siberian Hell, Thrives in Spite of Hideous Legacy,” Washington Post, August 29, 2001, p. C1.

Kaiser, Robert G., “Thriving Citizens Swear by Polluted Siberian Outpost,” Pittsburgh Post-Gazette, September 10, 2001, p. A1.

Kotov, Vladimir, and Elena Nikitina, “Norilsk Nickel,” Environment, November 1996, pp. 6ff.

Pala, Christopher, “And Now for the Really Big One,” Bulletin of the Atomic Scientists, March/April 2001, pp. 20 +.

“Putin Descends Into Mine in Siberia,” Daily News Bulletin (Moscow), March 24, 2002, p. 1.

Shimkin, Demitri B., Minerals: A Key to Soviet Power, Cambridge, Mass.: Harvard University Press, 1953.

Smith, A.P., “Investors Get Norilsk Role as ADR Shares Go Public,” American Metal Market, June 21, 2001, p. 1.

“Socialism in One Company,” Economist, January 10, 1998, pp. 58–59.

Sutulov, Alexander, Mineral Resources and the Economy of the USSR, New York: Engineering & Mining Journal, McGraw-Hill, 1973.

——, The Soviet Challenge in Base Metals, Salt Lake City: University of Utah, 1971.

“Top Court Deals Blow to Norilsk,” Moscow Times, April 30, 2002, p. 5.

White, Gregory, and Alan S. Cullison, “Norilsk Appears Frozen in Soviet Past; Russia Taps New Managers to Force Thaw,” Wall Street Journal Europe, April 16, 1996, p. 4.

Whittell, Giles, “Mining Giant Digs in for Kremlin Battle,” Times (London), July 14, 2000, p. 14.

—Frederick C. Ingram