Research Notes

We have revised our model of Norilsk Nickel's share valuation in light of FY06 financials and adjusted our forecast of metal prices in the mid and long term. As a result, we upgraded the fair price of Norilsk Nickel to $240 per share, which implies 10% upside potential and corresponds to our Hold recommendation.

Norilsk Nickel is the largest nickel and palladium producer in Russia and worldwide. In 2007, the company plans to produce around 270,000-275,000 tons of nickel, which will make it possible to raise its share on the international nickel market from 18% in recent years to 20%.

Recently, the company has become more active on the M&A market. In spring, the Russian metal maker acquired OM Group's nickel assets and in early summer NorNickel outbidded Xstrata and snapped up LionOre's assets. To date, NorNickel has bought out around 90% of shares from LionOre's shareholders. In 2007, the Russian company could manage to acquire some more assets (which will enable the metal maker to raise its share in global metal output) due to metal prices which remain high and entitle the company to additional earnings. NorNickel could also raise loans for these M&As. In addition, the company could raise significant amounts at a rather low interest rate due to low leverage and positive credit history.

The company scheduled considerable capex in construction and upgrade of its assets. Investments are projected at $4 bln on the Kola Peninsula and Zapolyarny branch which will produce a positive impact on the company's operations in the future.

The fact that the metal maker's utilities are to be spun off as a standalone company in late 2007 (as was the case with Polyus Gold) will exert a positive impact on NorNickel share price.

We found the fair price of Norilsk Nickel to be $240 per share, which implies about 10% to the current market price. We assign them a Hold recommendation.

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Denis Gorev

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