Norilsk Nickel, the world's largest nickel and palladium miner, posted a surprise 12 percent drop in 2007 net profit after writing off nearly $2 billion on the value of newly acquired mining and power assets.

Norilsk said on Tuesday 2007 net profit fell to $5.28 billion on writeoffs at LionOre Mining International, where it postponed a nickel refining project, and the power generating company at the core of a thwarted spin-off proposal.

The surprise was not that they booked losses, but the amount of these losses -- almost $2 billion, Lehman Brothers senior mining and metals analyst Vladimir Zhukov said.

Norilsk, a $53 billion company based on metals reserves in the Russian Arctic, is at the centre of negotiations to create a potential world mining giant in combination with aluminium firm United Company RUSAL and billionaire Alisher Usmanov.

High metals prices, including a spike in nickel to a record $51,800 a tonne in May 2007, boosted Norilsk's core profit and revenue close to or beyond analysts' forecasts. Earnings before interest, taxes, depreciation and amortisation (EBITDA) rose 32 percent to $10.2 billion, compared with an average $10.6 billion forecast of nine analysts polled by Reuters.

Revenue rose to 44 percent to a record $17.1 billion, beating the average forecast of $16.0 billion.

Norilsk's Moscow-traded stock closed down 1.0 percent at 6,455 roubles, performing slightly worse than the MICEX bourse's metals and mining exchange, which fell 0.8 percent.

Norilsk Chief Executive Denis Morozov said high commodity prices had supported record sales for the company, which has grown from a Stalin-era labour camp to a public firm supplying a fifth of the world's nickel and more than half of its palladium.

Its public listing, he said, would make Norilsk the obvious platform on which to build any potential merger with UC RUSAL or assets belonging to Usmanov, neither of which are listed.


The writeoffs, however, prompted strong criticism from UC RUSAL, which has called for a change in the company's board structure since buying a one-quarter stake in Norilsk in April.

One of the key priorities for a new board is to review the company's M&A strategy to make sure that every purchase creates additional value, a UC RUSAL spokeswoman said in an emailed statement.

Norilsk acquired Canada-based LionOre, which has assets in Australia and southern Africa, for 6.8 billion Canadian dollars ($6.6 billion) last year after outbidding Xstrata Plc.

Norilsk said mineral rights related to LionOre were impaired by $765 million after it decided to postpone a nickel refining project in Botswana using Activox technology due to a rise in expected costs and short-term energy supply constraints.

Goodwill recognised on Norilsk's acquisition of LionOre was impaired by a further $325 million, the company said.

By raising its stake in power firm OGK-3 to 65.2 percent last year, Norilsk incurred a further $529 million in impairment losses.

Norilsk had planned to include OGK-3, a wholesale power generating company serving parts of Siberia, the Ural mountains, northwest and central Russia, in a $7 billion energy firm to be spun off and listed in London.

The proposal was blocked, however, by the no-show at the vote of Mikhail Prokhorov, the billionaire former chief executive of Norilsk who later sold his stake to UC RUSAL.

Prokhorov is the partner-turned-rival of Norilsk's single largest shareholder, Vladimir Potanin. Norilsk's annual report revealed that Potanin held a 29.78 percent stake in the company as of May 26.

Potanin said last month he and Usmanov, founder and half-owner of iron and steel firm Metalloinvest, had agreed to swap assets and invited UC RUSAL to join them in creating a global mining giant.

Morozov said during a conference call Norilsk had approached UC RUSAL on further integration.

We approached RUSAL because RUSAL made public statements that the ultimate goal of their 25 percent stake acquisition in Norilsk was a full combination of the two entities, he said.

RUSAL has not replied yet. (Editing by David Holmes)

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