Research Notes

We have revised our valuation model for Norilsk Nickel shares after the metal maker’s H107 financials. We also priced in changes related to consolidation of LionOre and other assets acquired in 2007, which made it possible to significantly upgrade short-term production targets for nickel and copper. Based on the new valuation, the fair price for Norilsk Nickel is upgraded from $240 to $309.

Norilsk Nickel is the largest nickel and palladium producer in Russia and worldwide. The company’s metal output remained flat in H107 compared to 2006. We believe that in 2007 NorNickel will be able to reach the announced target of 295,000-300,000 tons of nickel, which will enable the company to raise its share on the global nickel market from 18% in recent years to 20%, and 404,000-409,000 tons of copper. We are also hopeful that the Group’s companies will sell its entire metal output, although sales were slightly lower than production in H107.

On October 5, Norilsk Nickel released H107 financials, which reflected a 61% y-o-y surge in IAS net profit to record high $3.81 bln. The metal maker’s sales soared 82% to $7.645 bln in the reporting period. We expected more impressive results, since metal prices climbed in the period under analysis (especially, nickel and copper). However, lower metal sales prevented the company from posting stronger financials. However, the company’s efficiency is underscored by strong margins in H107: operating profit margin was 66% and net profit margin 50%.

We would like to point to NorNickel’s foreign assets, acquired in 2007 (LionOre, OM Group’s nickel assets) which were spun off into standalone company Norilsk Nickel International. Moving forward, the Group plans to considerably ramp up nickel, copper and PGM output on the strength of higher metal production margins generated by these assets,.

According to our estimates, the fair price of NorNickel is $309 per common share, up 7% on the current market valuations. We assign a Hold recommendation to NorNickel shares.

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Denis Gorev

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