MMC Norilsk Nickel (“Norilsk Nickel”) December 2011 Board Meetings Outcomes

Independent Non-executive Directors’ Blog January 2011

Re : MMC Norilsk Nickel (“Norilsk Nickel”) December 2011 Board Meetings

Dear Shareholders,

                Norilsk Nickel held two board meetings in December - on December 16th and again on December 28^th.  The primary topics of discussion at these board meetings were:

1. Proposed sale of shareholding in OGK-3
2. Proposal of Norilsk Nickel to buy the Rusal shareholding in Norilsk Nickel
3. Long Term Shareholder Value Program (Share-buybacks)..
4. Preliminary review of the long term production strategy for the company.
5. Review and approval of the 2011 budget.

 1) As many of you know, OGK-3 is the majority owned power production subsidiary of Norilsk Nickel that was purchased a number of years ago during the privatisation of state owned power assets. This investment has not performed particularly well, especially in the post 2008 climate of reduced demand for power generation in Russia. As a consequence of this, and the lack of any operational synergies with our core mining assets, OGK-3 was deemed a non-core asset and buyers have been sought that would be willing to purchase the asset.  After some time, a bid emerged for OGK-3 from InterRAO as part of a relatively complex consolidation project that involves existing public and private power production, generation and sales. This project, fully endorsed by the Russian Government, would create a new, partially state owned large integrated power producer that would be competitive with other large Integrated Power Producers in Europe and elsewhere. 

The bid was an all stock share exchange offer with Norilsk Nickel receiving “New InterRAO” shares in exchange for the company’s shareholdings in OGK-3.  In the absence of any other bid, due diligence and documentation was started by both parties.  Late in the process, as it neared completion, a second, cash proposal to acquire the company was received from Eurosibenergo, a company associated with Rusal. Both the existing proposal and the new proposal were reviewed at the December 16^th meeting of the Board and instructions given to management to attempt to resolve various issues with both bids and present them by the December 28^th meeting. 

This work resulted in an improved, perfected bid from InterRAO  and, while the Eurosibenergo bid was also improved there were a number of issues and preconditions with this bid that raised significant concerns about completion. Based on these issues and the inflexibility of the time lines associated with the InterRAO process, the majority of the Board determined that the InterRAO offer provided the most value with the least risk and approved this transaction.

This is the second major non-core asset disposal of Norilsk this year and continues the process of the company focussing on its core mining and metal processing assets.

2) During December, the company made a proposal to Rusal to acquire its shareholdings in the company for US$12 billion in cash. This offer was made at a significant premium to the market and represented what the company believes was a fair offer.  The offer requires Norilsk Nickel to incur significant leverage but is unlikely to jeopardise the company’s ability to complete it’s ambitious environmental and modernisation program at its core assets.  After a period of negotiations, this offer was turned down even after the offer to include the OGK-3 shares as a sweetener.  Both the management and the majority of the Board felt it was not prudent to increase the offer any further and this proposal has now lapsed. The management of the company is still prepared to discuss this issue with Rusal at any time.

3) Once it was clear that the offer to acquire the Rusal shares by the company was not likely to proceed, at least in the short term, the board discussed various alternatives for long term shareholder value creation including dividend policy, share buybacks (both on market and via tender), special dividends etc... At this time, the company is essentially debt free and through a combination of the proceeds of asset sales, operational cash flow and moderate borrowing can easily afford to return capital in some form to its shareholders.. The Board has been advised by Citibank and UBS that Norilsk shares are undervalued compared to large international competitors and closing this gap is desirable. Given various sensitivities to the absolute level of cash dividends paid in any period of time, it makes sense to consider share buybacks, that all shareholders can participate in equally, as an efficient way of returning capital to shareholders. The majority of the board approved a program that will involve share buybacks at it Dec 28^th meeting. Gerard and I believed it would have been preferable to delay this decision somewhat until a complete financial review of the long term strategic production plan and full assessment of the capital requirements of this plan has been complete. This information can be used to determine the risked NPV of the company. This process would insure that the best use of capital is, in fact, to purchase the company’s shares.

4) As previously mentioned, a major agenda item was a preliminary review of the long term production profile of the company’s core assets which included a complete assessment of the environmental technologies and requirements to meet Norilsk’s obligations to significantly reduce sulphur emissions over the coming years.  This was a very detailed piece of work and will help set a base line for production, capital requirements and operating costs that can be converted into a clear understanding of the NPVs of the core assets. This is a major step forward and will help significantly in making future corporate finance dividend and capital investment decisions. Additional work is still required to incorporate this into a full strategic plan for the company which is planned over the next several months. The Strategy Committee of the Board has been charged with working with management to complete this work over the next several months.

5) The 2011 budget for the Russian assets of the company was presented as is customary in the Company.  This work gives a detailed picture of the production, costs and capital requirements of the Russian assets and expected financial results of this portion of the business. A majority of the board approved this budget, while a minority, including ourselves, felt that, in the future, the budget should be approved as a fully consolidated budget including all international assets, planned asset sales and other, non production related issues such as dividends and corporate financing plans.  While the CFO explained the issues that occur, especially with joint venture that have different budget time periods, this is nothing new for large corporate and most find ways to work around these issues in presenting an approving budgets.The Budget Committee of the Board has been instructed to work with management to complete this work over the next several months.

This would not be a complete report to shareholders without a comment on two additional items; the sale of cira. 8% treasury shares to Trafigura and Rusal’s request for yet another EGM.

On the sale of treasury shares to Trafigura, shareholders should be aware that the Board has never reviewed or approved this transaction and is still not aware of its terms. Under Russian corporate law, offshore subsidiaries are wholly controlled by the management of the company and management appoints directors of those companies.  While this practice is completely alien to those of us that operates with a background of English or US corporate governance, Russian corporate practice is completely different with regards to the management of assets held by subsidiaries. In fairness to the management, the board has been pushing to for the disposal of non core holdings and these treasury shares are certainly one of those.  We would however, have preferred that this disposal had been discussed and the terms outlined to the board. This will be a future topic of discussion between the Norilsk Nickel Board and the management of the company.  Needless to say, Gerard and I were unhappy with the way this transaction was conducted and believe it should have been fully reviewed by the Board regardless of the legal niceties.

The Rusal request for yet another EGM is regrettable in that, while they have a legitimate dissatisfaction with some of the corporate governance aspects of Norilsk Nickel (such as the Trafigura treasury share sale noted above), it is my opinion that the most productive way forward is for a united board to work with management to resolve these types of issues.  Given the almost certain outcome of the EGM, this action becomes nothing more than a major distraction for management.

                In reality, 2010 has been a highly successful year for Norilsk Nickel. The production targets have been fully met at below budget spending. The balance sheet has been fully repaired, the dividend restored and the company enters the new year with essentially no debt. Two large non-core asset sales have been completed (Stillwater and OGK-3) and the company is clearly focussed on value optimisation of its core assets while improving its environmental and social performance.  For the first time, a long term strategic production plan that starts to look at the life of assets and clearly demonstrates to the market the core strength of the business has been published. The share price has responded and improved from US$143 on December 31 2009 to US$241 a year later.  Let’s hope for more of the same in 2011.

                Happy New Year, Gerard Holden and Brad Mills