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Norilsk Nickel, a company with a bloody history, is one of the world's
great metals producers, and its stock looks like a screaming buy.
Situated 200 miles north of the Arctic Circle, the Siberian city of Norilsk feels like the end of the world. To get from airport to town, you bump for an hour along a deserted road flanked to the horizon by tundra grass bending in the wind. But Yura, a local metal worker moonlighting as a taxi driver, displays a certain grim pride. "Yakutsk in central Siberia says it is the coldest place in the world, but Norilsk is colder," he declares. "The temperature here only gets down to 40 degrees below zero, but we also have very strong winds blowing every day from the Arctic." From December to February the region sinks into perpetual night,"People get rather sleepy and disoriented during those months," comments Yura. When I visited Norilsk last month, the sun was still up. What brought us here? So far as natural resources go, this desolate corner of the Eurasian landmass is one of the richest places on earth. Just this small part of the Arctic tundra contains an estimated 35% of the world's known nickel reserves, 10% of the copper, 14% of the cobalt, 55% of the palladium and 20% of the platinum. The town is the home of Norilsk Nickel, a metals and mining conglomerate that produces enormous quantities of nickel, copper and cobalt, as well as cartloads of precious metals like platinum, gold silver and palladium. Last year, Norilsk made an estimated $2.4 billion in sales (half in exports to the West) and about $160 million in aftertax earnings. The company mines what is probably the richest ore base in the world, with an exceptionally high content of nickel, copper and precious metals. The mines are so enormous that Western analysts say Norilsk can produce at current levels for about 40 years, even without new discoveries. Norilsk is the monopoly producer of these metals inside Russia and a power in world markets. In the summer of 1993, during one particularly big wave of Norilsk sales to the West, the nickel price on the London Metal Exchange plunged from $3.50 a pound to $1.72 in a few months. When Forbes asked Michael Spoko, chairman of Canadian metals giant Inco Ltd., about the Russian company, he answered: "I've got to be careful what I say; I've got to deal with these guys." A year ago, when a gas turbine blew up at the Norilsk power station, the explosion was felt as far away as London. Nickel prices jumped 24% in just five days, as traders speculated that Norilsk would have to reduce its output. But, in good old-fashioned Soviet style, the company's management decreed that production levels had to be maintained no matter what. While the mine kept going, many of the 300,000 local residents had to go without heat, but that's the way things can be in Russia. how did they survive? Yura the taxi driver notes laconically: "They suffered." This is a place of suffering. The town was established in 1935 as one of the worst of the Soviet gulags. The first directors of the Norilsk conglomerate were generals on the NKVD, Stalin's infamous secret police. In the 20 years it was in operation, the Norilsk concentration camp had a prison population of over 100,000. As hordes of prisoners died of starvation or exposure, new boatloads were constantly brought in. Anything to keep the production growing. It is impossible to know exactly how many people died here - probably several hundred thousand. In 1955 the gulag was disbanded and the town was turned into a communist showpiece. Ambitious engineers clamored to work there. So did Komosomol types, who wanted to build communism. Ordinary workers flocked there to earn wages many times the Soviet average. The effort didn't succeed in building communism, but it did turn this company town into a rather pleasant place by Soviet standards. It is attractively laid out, apparently by architects from Leningrad who were imprisoned here. Most of the buildings are well maintained, the stores well stocked, the young people fashionably dressed. There are excellent schools and even a good theater. There's also a brand-new 1,000-bed hospital. Thus, far from having trouble getting people to work here, the company is trying to persuade some to leave as it cuts its labor costs and social outlays. But as a business, though Norilsk Nickel is one of the crown jewels of the Russian economy, it is a mess by Western standards: huge, dilapidated factories; autocratic managers; virtually no financial accounts; and only rudimentary marketing skills. In the city of Norilsk, where almost all the mining and most of the smelting takes place, the company operates three gigantic smelters. Two are rusting dinosaurs, spewing out noxious fumes. The other - the Nadezhda smelter - is a relatively modern facility, built by Finnish engineers in 1983. Further afield, Norilsk Nickel also owns mines and smelters on the Kola Peninsula, near the border with Finland, and a precious metals refinery in Krasnoyarsk in central Siberia. After they are separated and smelted, the nickel and copper are shipped out of Norilsk along the north coast of Siberia; in the winter, the ships call on the help of ten nuclear-powered icebreakers. The precious metal concentrate - a fine gray powder containing platinum, silver and other valuable metals - is airlifted to the Krasnoyarsk refinery and then sold to the Russian government. Because of aging technology and a shortage of capital, Norilsk currently operates at 61% of its factories' installed capacity. Another result of this technological backwardness is that the city of Norilsk is an environmental disaster. Last year the company spewed some 2.8 million metric tons of sulfur dioxide into the atmosphere, six times the emissions of the entire U.S. nonferrous metals industry. the few trees that grow in the surrounding tundra have all been withered by the fumes. "This is our famous metals combine." says Yura sourly, pointing to the smokestacks. "They say our smoke drifts all the way to Canada." To bring the Norilsk operation anywhere close to Western standards of cleanliness would require $2 billion, but neither the management nor the government seems to care about careful use of natural resources. The tundra around Norilsk is a sprawling industrial wasteland, with piles of scrap metal, including titanium and copper producer, Falconbridge Ltd. The Russian government is not about to let this golden goose get away unplucked. Last year Norilsk paid 36% of its revenues in taxes, regional taxes and local social payments, the latter taking the form of subsidized consumer goods, housing and medical care. The company continues to be a typical Soviet-era operation. Norilsk Nickel is responsible for the welfare of all its 155,000 employees and their families. Besides its metal and mining operations, the company owns and manages housing estates, supermarkets, hospitals, sports complexes, retirement homes, even a local dairy farm and a pig farm. Management maintains a grim Leonid Brezhnev-style demeanor. Telephones are answered with a cursory,"Waddya want?" The dictatorial chairman of Norilsk is Anatoli Filatov, 60, an engineer who has worked at Norilsk since the 1950s. Filatov refused to talk to me, and his subordinates, in typical Soviet cover-your-behind fashion, would answer questions only with bromides. The boss spends much of his time in Moscow these days, serving as a member of parliament and hobnobbing with President Yeltsin. Filatov is in Moscow for a good reason. He wants to persuade the government to give him a better price for his platinum; last year he is said to have received only about 65% of the world market price. He also wants to limit his tax liability and to get subsidies for Norilsk's social expenditures and environmental cleanup projects. Filatov is no dumbbell. "Norilsk is probably on of the best-run companies in Russia," says Frank Pickard, chief executive of Falconbridge, which has been selling Norilsk some of its smelting technology. "They're technically very competent and they're very good business partners." Pickard adds: "They are also very ethical. We've never been asked to make any payments under the table to anyone." When Norilsk was privatized last June, management and workers got half the company's stock, the government held on to 38%, while 12% went to outside investors, including Oneximbank(Russia's second largest commercial bank) and CS First Boston (buying for its own account and for Western hedge funds). For all their Soviet-era bloody-mindedness, the Norilsk managers have begun to consider the interests of Western investors. This year Norilsk paid dividends of 23 cents a share, giving a yield of about 5% on its common stock. The company has also hired Coopers & Lybrand to audit its accounts. And there's even talk of launching an American Depositary Receipt next year. Is the stock a good buy? At a recent $4.30 on the Russian OTC market, it sells at three times last year's earnings and 20 cents on the revenue dollar. Total market capitalization: $542 million. Let's put that price in perspective. Canadian rivals Inco and Falconbridge sell at 1.5 times sales and 2 times sales, respectively. Assuming the company continues to treat its shareholders honorably, the stock is clearly undervalued.
Too bad the gulag prisoners aren't around to share in the wealth of the
enterprise they built. Norilsk, as the local people say, is a city built on
bones. In recognition, company managers have recently dedicated part of
their profits to the construction of a church and mosque in the center of
town.
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