How Potanin and Bazhaev planned to mine palladium
On plans for the joint development of palladium deposits in Taimyr, the owner of Russian Platinum Bazhaev told at a meeting with President Vladimir Putin at the end of 2019. He then mentioned that the project would require significant investments – $ 15 billion, and “today it has become harder to work with borrowings, in fact, there are none in the foreign market.” “But we are not discouraged, we are actively launching work with our financial institutions, and they support us,” he said.
In this project, according to the agreements of Potanin (owns 34.6% of Norilsk Nickel) with Bazhaev, was supposed invest 250 billion rubles. The aim of the project was to create one of the world’s largest producers of platinum group metals with a target production volume of 70-100 tons of this product per year.
In February 2018, the parties entered into an agreement on the creation of a joint venture, in June Norilsk Nickel registered company Arctic Palladium. It was planned that Norilsk Nickel will transfer a license for the development of the Maslovskoye field to this company, and Russkaya Platinum – a license for the development of the southern part of the Norilsk-1 field and the Chernogorskoye field. The reserves of this cluster, potentially the largest undeveloped in the world, are estimated at 724 million tons.
According to presentations Norilsk Nickel, the investment decision on the project was planned to be taken in 2020, and to begin mining 7 million tons of metals (platinoids, nickel and copper) per year – in 2029–2031 (the first stage). Arctic Palladium was expected to generate more than $ 1 billion in revenue annually with EBITDA margin of more than 40%.
Interfax, citing a source, reported earlier that the authorities are discussing the possibility of providing NWF funds for the implementation of the Arctic Palladium project. The project, according to the agency, could receive $ 1 billion from the NWF in 2021–2034. Norilsk Nickel planned to invest the same amount for ten years. The parties also wanted to attract credit financing in the amount of $ 3.5 billion.
What are the plans for Norilsk Nickel now
Norilsk Nickel’s management plans to provide the Russian Platinum project and its potential partners with the necessary services and resources, and is also discussing potential market buybacks of products that will be produced at the Chernogorskoye and Yuzhny section of Norilsk-1. Alliance Bazhaeva, a representative of the group, confirmed that in the long term both Norilsk Nickel and Russian Platinum are still focused on partnership in the Norilsk industrial region, the format of which is being discussed.
Cooperation in this format will make it possible, in a strategic perspective, to provide the scarce platinoid market with the necessary volume of metals, despite the decrease in the project’s profitability directly for Norilsk Nickel, reported company.
First of all, Russian Platinum needs access to the energy and transport infrastructures of the company in the Norilsk industrial region, owned by Norilsk Nickel. Earlier, Bazhaev’s company, while trying to independently implement the project, faced obstacles in obtaining permission from the Norilsk authorities and from Norilsk Nickel to allow access to the road and the GOK under construction, as well as access to the infrastructure of the port of Dudinka (it is a division of Norilsk Nickel). The southern part of Norilsk-1 went to Russian Platinum as a result of an auction in 2013. Then Norilsk Nickel, which owns the northern part of this deposit, challenged the outcome of the auction in court. Russian Platinum has repeatedly offered to buy processing capacities from Norilsk Nickel – the Norilsk Concentrating Plant and a nickel plant (mothballed).
Why UC Rusal did not support
UC Rusal, founded by Oleg Deripaska, as a shareholder of Norilsk Nickel, has always advocated maintaining high dividends, while Potanin has advocated increasing capex. “His [Дерипаски] dividend expectations are overstated. His [Дерипаске] we need funds for our own projects, ”- said Potanin, adding that he himself spends dividends on the purchase of shares in the company.
UC Rusal has always criticized Potanin’s desire to increase capex, calling Norilsk Nickel’s resource projects very risky. The development of two large projects (the Baimskoye field and a joint venture with Russian Platinum) will require $ 8 billion in investment over five to six years, according to UC Rusal court documents. Instead, UC Rusal proposes to develop the production of high value-added products that are designed for electric cars.
It is possible that UC Rusal could slow down the project amid the crisis: the company now needs dividends very much, and the capex for the development of the Arctic Palladium is huge, suggested the head of the ACRA Sustainability Risk Assessment Group Maxim Khudalov. In addition, palladium prices fell by 30%, and nickel – by 10%, the attractiveness of project development has worsened, the expert added. In his opinion, the ability of Russian Platinum to independently develop a project without the participation of Norilsk Nickel is in doubt, and it will be quite difficult to find another investor who is ready to develop the project.
The reasons for this step are understandable in principle: Norilsk Nickel has two large shareholders who have historically had different views on the development of the company, says S&P analyst Sergey Gorin. UC Rusal, of course, is more interested in increasing dividend payments, while Potanin’s Interros is in increasing investments in new large projects. This has repeatedly led to shareholder conflicts more than once or twice, but each time the parties found a compromise that suits them, sometimes with the help of third-party arbitration, the expert recalls. “The next key point is the end of the current shareholder agreement on January 1, 2023. I think the issue of the distribution of Nornickel’s cash flows on investments and dividends will arise fully again – we consider shareholder risk one of the key to the company’s credit rating, ”concludes Gorin.
The timing of the exit from the project, according to him, is explained by the fall in palladium prices, which showed a fantastic increase of 80%, to $ 2,700 an ounce per year by February 2020, and then rapidly fell to $ 1,600 an ounce in the last couple of weeks. “On the other hand, it is not very clear why the project has not been postponed (at least until commodity prices stabilize or until clarity regarding the next phase of relations between Norilsk Nickel shareholders), but will be developed without the participation of the latter, given the company’s strong competencies and extensive experience in mining of platinum group metals, ”the expert notes.