Norilsk Nickel-Rusal merger talk driven more by personalities than economics

Vladimir Potanin's July 5 trial balloon for a merger between Russian mining giants PJSC MMC Norilsk Nickel and UC Rusal IPJSC may have less to do with efforts to duck international sanctions than with personal grudges and maneuvering to reorganize control of the companies.

Potanin, CEO of Norilsk Nickel, or Nornickel, told Russia's RBC TV channel that he is ready to discuss a possible merger to create a "national champion" capable of fending off sanctions against Moscow amid its war in Ukraine. The move temporarily shook up stock prices for both companies and left observers wondering why Potanin would suggest the merger of two companies with few obvious synergies.

But analysts told S&P Global Commodity Insights that sanctions are unlikely to be the real reason for a merger. Neither company is under sanctions by governments opposing Russia's war in Ukraine, and any penalty stemming from the flow of aluminum or nickel from Russia would only trigger economic pain in Europe and North America while creating new obstacles for the shift to a low-carbon economy.

Instead, Potanin is more likely taking a pot shot at long-time rival Oleg Deripaska, the founder of Rusal, or trying to create leverage for changing the ownership structure of Nornickel. The combined company would have a market capitalization of about $53.94 billion and become a mammoth producer of metals needed for the clean energy transition.

Nornickel accounts for about 5% of the world's annual nickel output and about 40% of yearly global palladium production. The company also produces copper, silver, gold and other products. Rusal, on the other hand, is the world's largest aluminum producer outside China.

"Perhaps the argument is that Nornickel's share of global nickel and copper markets is not as decisive, so being linked to Rusal and aluminum could provide some protection," Stephen Fortescue, an associate professor at the University of New South Wales, Australia, who specializes in Russian policy and the Russian metals and mining industry, told Commodity Insights.

"But even if the West felt that it had no choice but to allow Rusal to operate, couldn't it still sanction the nickel and copper side of the combined business? My guess is that ... the real purpose of [Potanin's] suggestion is not to avoid sanctions."

Neither Nornickel nor Rusal responded to Commodity Insights' requests for comment.

A new deal?

The 10-year shareholder agreement between the two miners will expire Jan. 1, 2023. Curiously, Potanin backtracked on his merger stance just a few months before the deal ends.

Potanin may be using the merger talk as an "opening shot" for "difficult negotiations" over a new shareholder agreement, according to Fortescue.

"It could well be simply Potanin stirring. In the past, it's been Deripaska who's suggested a merger, and it's Potanin who rejected it. They have a long history of stirring each other up," Fortescue said.

Veles Capital analyst Vasiliy Danilov said one of Potanin's possible motives is to remove Rusal's power to block any decision at Nornickel. According to the latest information, Rusal, a 56.88%-owned subsidiary of En+ Group IPJSC, owns a 26.25% stake in Nornickel. Potanin's Interros holds a 35.95% stake in Nornickel, and other shareholders own 37.3%.

Deripaska has left Rusal, but the company's large block of stock in Nornickel gives it near veto power over major Nornickel decisions.

"The new stakes would depend on exchange coefficients for the merger, and it's possible that En+ would not agree on lowering its share of Nornickel below 25%," Danilov said in an email to Commodity Insights.

Potanin vs. Deripaska

The rivalry between the two billionaires started back in 2008 when Deripaska bought a 25% stake in Nornickel. The transaction ignited merger rumors, but Potanin did not support it, citing the lack of synergies.

Potanin and Deripaska then tussled over board control and shareholder payouts at Nornickel before fellow Russian tycoon Roman Abramovich helped negotiate a truce in 2012. A shareholder agreement between the two men allowed Abramovich to acquire a 7.3% interest in Nornickel as well as the largest voting stake in the company, acting as a buffer between the feuding oligarchs.

As part of the deal, Potanin's International LLC Interros Capital and Deripaska's Rusal reduced their voting powers. In return, Deripaska would receive higher dividends and Potanin took over as CEO.

They renewed their rivalry in 2018 when Deripaska's Rusal challenged Potanin's purchase of a 4% stake from Abramovich, saying that the transaction violated the shareholder agreement. A London court granted Rusal's request, forcing Potanin to return a 2% stake to Abramovich.

Too big to be sanctioned?

Neither Nornickel nor Rusal are under sanctions, and a merger would only make it harder for foreign governments to impose penalties, Danilov said.

In 2018, the U.S. sanctioned Rusal and En+ and their top executive, Deripaska, as part of a broader response to Russia's alleged meddling in the 2016 U.S. presidential elections. As the move triggered a spike in aluminum prices, the U.S. lifted the sanctions after Deripaska agreed to relinquish control of Rusal, but Deripaska himself remains under sanctions.

Potanin only became the target of personal sanctions June 29, when the U.K. imposed penalties on him.

"There should not be any severe consequences [from the merger] as Western economies deeply depend on Russian nonferrous metal and sanctions against such a giant would do lots of damage to European and American industrial companies," Danilov said. However, the analyst added, "A merged company would be more protected against personal sanctions."

S&P Global Commodity Insights produces content for distribution on S&P Capital IQ Pro.