Norilsk buys OMG’s nickel business

Cleveland-based OM Group (OMG-N) has decided to sell its nickel business for US$408 million to Russia’s Norilsk Nickel (NILSY-O, MNOD-L) so it can focus on the specialty chemicals and advanced materials end of the business.

And with nickel prices upwards of US$13 per lb. compared to the US$6 range a year ago, the time for getting out of the nickel business is ideal, OMG officials admitted.

"While our intent was not to try to time the market, we believe this is an ideal time in the base metals cycle to exit the nickel business," said Joe Scaminace, chair and CEO. "In our estimation, the current value of the business is greater than its future value as it’s a capital intensive business for us where we have faced raw material feed constraints and significant price volatility."

With the deal comes a five-year agreement where Norilsk, one of the world’s largest nickel and palladium producers, will supply OMG with up to 2,500 tonnes cobalt metal per year, up to 2,500 tonnes crude cobalt hydroxide and up to 1,500 tonnes crude cobalt sulfate along with various nickel-based raw materials to be used in OMG’s electronic chemicals business.

Despite the supply plan, OMG will continue to source and produce cobalt at Big Hill mine in the Democratic Republic of Congo where production has reached an all-time high.

The deal is in line with OMG’s business objective to expand as a specialty products company with a more stable, predictable cash flow. OMG supplies all kinds of producers that make everything from paints, inks and televisions to memory disks, batteries and parts for the automotive and aircraft industries.

Norilsk will acquire nickel refining operations in Harjavalta, Finland, with annual production capacity for 60,000 tonnes of nickel, the Cawse nickel mining and leaching operations in Western Australia, OMG’s 20% stake in MPI Nickel Property, which operates the Black Swan and Silver Swan nickel mines and is developing the Honeymoon Well, all in Western Australia and up to 11.1% of OMG’s holding of the common shares and convertible debt in Talvivaaran Kaivososakeyhti, Finland.

Norilsk has no immediate plans to send any nickel from Russia to Harjavalta because the refinery will be full for the next couple of years.

The transaction is expected to close by the end of the first quarter in 2007.

OMG reported a net income of US$88 million, or US$2.97 per diluted share, for the third quarter in 2006 compared with US$3.4 million, or US12 per diluted share, last year.

For the first nine months of the year OMG’s net income was US$159 million, or US$5.40 per diluted share, a significant gain from 2005’s net income of US$27 million, or US95 per diluted share.

OMG directors attributed part of the net income increase to the rising price of nickel. The average price of nickel for the third quarter of 2006 was US$13.22 per lb., up from US$6.61 per lb. in the third quarter of 2005.

Despite the recent success of the nickel segment, Scaminace said unloading the nickel business is in the best interest of shareholders because the company’s nickel hedging program can cause short-term fluctuations in profitability, both positive and negative.

This nickel hedging program resulted in gains of US$13 million in the third quarter of 2006 compared to a loss of US$2 million in 2005.

During the third quarter this year, nets sales for the specialties segment increased to US$172 million, compared with US$146 million in the third quarter last year and operating profit was US$39 million compared with US$11 million in 2005.

Sales volumes in the company’s inorganics and electronic chemicals segments increased significantly from a year ago due to strong demand in battery and memory disk markets.

A Sony recall for laptop batteries in October was one contributing factor, though company directors said it was hard to quantify sales of replacement batteries. About 9.6 million lithium-ion batteries were recalled worldwide after reports that some computers using the batteries had overheated and burst into flames.