Standard & Poor's has revised its outlook from stable to negative for Russian metals and mining giant OJSC MMC Norilsk Nickel, citing notably very depressed nickel prices.

Nevertheless, S&P analysts  Elena Anankina and Alex Herbert reaffirmed Norilsk's ‘BBB-‘ long-term corporate credit rating and Russian national scale rating of ‘ruAA+'.

The analysts noted the rating on Norilsk continues to be underpinned by very healthy credit metrics before the industry downturn, a strong balance sheet with significant cash balances, and its low-cost position. This improves its resilience to the downturn and reduces external financing requirements in 2009, which is very important in today's tight capital markets.

Even at the current price level, with an average nickel production cost of about $7,000 per metric ton (compared with prevailing prices of $10,500 per metric ton), S&P advised, Norilsk remains profitable and does not need to cut production at its core operations. Norilsk will further benefit from the real-term ruble depreciation and ongoing cost-cutting efforts.

The rating on Norilsk continues to reflect its role as a global leader in nickel and palladium, as the No. 4 player in platinum, and from its large high-quality reserve base, the analysts said.

Nonetheless, the analysts explained their negative outlook on Norilsk reflects our view that its profits and credit metrics could drop severely in 2009. It also reflects the uncertain economic environment in Russia.

Although Norilsk may be able to weather the current downturn, thanks to its strong balance sheet and cost position, a downgrade could occur if the downturn proves to be even more severe, if free cash flow were to turn negative in 2009-2010, or if significant 2010 refinancings were to be more challenging than anticipated, Anankina and Herbert warned.

S&P also cautioned some of Norilsk's shareholders are reported to be facing liquidity squeezes, and although about a 42% stake in Norilsk appears to be pledged by those shareholders with Russian state-owned banks whose candidates have already been nominated to Norilsk's board, we believe that any implications for the company at this stage can only be indirect.

If any shareholding changes occur, we will need to evaluate the impact on Norilsk's strategy, financial policy, and access to financing, and analyze whether any state support may need to be factored in the rating, the analysts concluded.