31 august 2010

Prime Minister Vladimir Putin chairs a meeting to discuss development plans for the Norilsk Nickel mining and smelting company and the economic and social development challenges facing the city of Norilsk

“The government insists that Norilsk Nickel prioritise the management of environmental issues facing the Norilsk industrial zone.”

Prime Minister Vladimir Putin's introductory remarks:

Good afternoon, ladies and gentlemen,

As you know, I scheduled a visit to this city a week earlier, but my plane was unable to land here due to bad weather. But it's all right - I asked officials, Norilsk Nickel shareholders and executives to take advantage of this delay and come together and work on the problems the company is facing, and I think they've made some progress on these issues.

I'd like to start with a profile of the Norilsk Nickel mining and smelting company. Norilsk Nickel is the world's largest producer of nickel and palladium and a major producer of platinum and copper. We've just toured its copper mill to look at operations on-site. In addition to this, Norilsk Nickel produces cobalt, rhodium, silver, gold, iridium, ruthenium, selenium, tellurium and sulphur.

The company is based in six countries on four continents: Russia, Australia, Botswana, Finland, the Republic of South Africa and the United States.

Financial reports show that Norilsk Nickel is a very strong company. An anti-recessionary programme for 2009, funded partly by the government, allowed Norilsk Nickel to reduce production costs keeping the operating margin at 44% - not bad, especially during an economic crisis. They also reduced administrative expenses by 34%, which is also very good.

In 2009, the company's revenues, estimated in accordance with international standards, exceeded $10 billion. Norilsk Nickel made a decision to pay out dividends, which totaled - now pay attention to this - 50% of its revenues. For reference, the dividends paid by Xstrata totaled 7.6% of its revenues, 18% for Rio Tinto, 38.2% for BHP and 6.6% for Kazakhmys, while Norilsk Nickel paid out a sum worth 50% of its revenues.

In 2009 and 2010, Norilsk Nickel stocks were quoted higher than the stocks of most other international mining and smelting companies and even higher than average global market rates. In the past 52 weeks, its stock value increased by 57%, while the industry grew by anywhere between 25% and 35% globally. Norilsk Nickel's stock has risen by 25% since the beginning of this year.

As of August this year, the company's capitalisation exceeded $32 billion, as far as I know. Am I correct, Mr Strzhalkovsky?

Vladimir Strzhalkovsky (Norilsk Nickel Director General): Yes.

Vladimir Putin: Norilsk Nickel has reduced its debt burden, which is also gratifying. As of June 30, borrowed capital in its portfolio totaled $3 billion. I'd like to remind you that at the beginning of 2009 its debt stood at almost $6.5 billion, $6.4 billion.

The government has done its best to back the company. As you know, we made a decision to cancel export customs duties to respond to tougher competition on global markets. The northern location of Norilsk Nickel production facilities causes additional problems with transport and logistics, which is why we decided to cancel duties on nickel and copper.

More to the point, I instructed the Vnesheconombank to buy 3% of Norilsk Nickel stock to stabilise the stock market. Our purpose was to support you through the challenges of the recession. We made the market more stable and so accomplished our objective.  Moreover Vnesheconombank did not show loses but rather made a gain on this.  As the market revived, the bank sold almost all these shares leaving itself 0.12%. It racked up 15 billion roubles, gaining about 200% in revenue.

I'd like to remind you that we also supported the company's major shareholders. One of them received $4.5 billion, and another shareholder, the leading shareholder, was given an opportunity to take out a $2.8 billion loan, and then two more loans, worth 30 billion roubles and $1 billion. The latter shareholder didn't have to borrow this whole amount, but still I'd like to emphasise that substantial support was offered.  And the former shareholder's loan was refinanced. Vnesheconombank has already received all the payments due on the loan and returned this money to the Central Bank, which managed those funds. We've done a good job on this.

Yevgeny Muravyov (manager of Norilsk Nickel facilities beyond the Arctic Circle) has just mentioned one more problem, the natural depletion of nickel and copper ore. This problem can be resolved through issuing new licences - this is what you should work on. As I understand, you addressed this issue while preparing for this meeting. The company can increase copper production using the reserves of copper concentrate accumulated in the late 1980s. The share of copper in these reserves is estimated to reach 250,000 metric tons.

Norilsk Nickel deserves praise for its efforts to modernise existing facilities and build new ones. I have a copy of the plans - it looks impressive...

I also have the company's geological prospecting reports. Unfortunately, Norilsk Nickel has cut investment in geological prospecting. I don't think this was a good decision.

On a positive note, the infrastructure network is being expanded. I'd like to say a few words of praise for the company's transport policy. Mr Muravyov has just spoken about the orders the company made for new vessels. It has ordered one more vessel, a tanker, which it will receive in 2011, as far as I remember. Five vessels have been launched so far. Therefore, Norilsk Nickel is close to meeting its main transportation challenges.

At the same time, the company is facing quite a few other problems. The production of non-ferrous metals has been detrimental to the environment, which can be explained by the composition of ores and the use of conventional technology.

Mining, enrichment and other production operations generate waste, release emissions into the atmosphere and discharge industrial waste into the water. Obviously, Norilsk Nickel has produced a very large amount of waste over 75 years of operation.

The company is implementing environmental programmes to reduce the amount of industrial waste in the Norilsk area. But they are not enough, to put it bluntly. They claim that the situation was even worse 20 years ago. Perhaps it was. But Norilsk still remains on the list of cities with hazardous environmental conditions. It is also among the cities with the most polluted atmosphere, primarily because of massive emissions of sulphur dioxide.

I know that while preparing for this meeting the Federal Service for Supervision of Natural Resources and Norilsk Nickel committed themselves to signing a bilateral agreement, which will detail Norilsk Nickel's obligations to reduce the amount of waste it generates within the next three years and its plans to modernise specific production facilities. The federal service will supervise the implementation of this agreement.

The government insists that Norilsk Nickel prioritise the management of environmental issues facing the Norilsk industrial zone. You either modernise or we'll have to raise the fines for breaking environmental legislation.

Another challenge is providing the elderly with the opportunity to move from Norilsk to regions with milder climates. Over 11,000 Norilsk residents are on the waiting list for housing allowances for relocation, while quotas for these purposes allow for no more than 150 such people to receive these allowances annually. There's been hardly any progress here.

Clearly, the state must fulfill its commitments on the provision of housing for every veteran of the Great Patriotic War and every service member. As you know, we'll resolve this issue soon. We'll also attend to the problems facing other social groups, including the people living in northern territories. They have worked hard and have deserved the right to live in comfort.

We're considering ways of providing housing to more people that would like to move from the Far North. We'll do our best to help every such person. We'll develop a specific programme for Norilsk to relocate its residents to other areas of the Krasnoyarsk Territory, where the climate is milder. To the best of my knowledge, the programme is expected to relocate between 1,120 and 1,126 families annually. It will span about 10 years. An agreement for this programme will be signed today.

The third challenge is dilapidated housing and utilities. Norilsk is involved in several projects implemented through the Housing and Utilities Reform Fund. About 22,000 people have already benefitted from them - in the past four years over 90 blocks of flats have been repaired here.  However, the funding for this programme was low, less than 0.5 billion roubles, 350 million roubles as far as I remember.

There's still more to be done. Norilsk is a very specific city. It needs a comprehensive plan to replace its entire infrastructure, not just repair separate facilities. This is why we have arranged to develop and implement a programme to improve living conditions in Norilsk.

Today the Ministry of Regional Development, the government of the Krasnoyarsk Region, the administration of Norilsk and Norilsk Nickel will sign an agreement for this programme. It envisions the construction of three kindergartens here - as you know the city is short of kindergartens now. I looked through background information to find there were about 100 kindergartens here in the late 1990s and now there are less than 40, if I remember it correctly. This is a serious problem. Norilsk Nickel has committed itself to constructing two kindergartens, and one more will be provided by the local authorities.

The relocation and modernisation programmes are very costly. Experts say they will require some 27 billion roubles. But given that these programmes will span 10 years, I think we'll be able to invest here as much as needed. These programmes will be funded by the federal budget, the government of the Krasnoyarsk Region and Norilsk Nickel, each of which will make equal contributions.

I expect Norilsk Nickel to fully meet its commitments with the urban development programme.  As we can see, the company has the funds necessary for it.

In closing, during the crisis, when prices on global markets fell sharply, the government backed Norilsk Nickel by canceling export duties on nickel, copper and copper cathodes. I have mentioned this already today.

But now that the situation has stabilised, world prices are quite high and production here is profitable again, duties could be reconsidered. Each party, the company and the government, has its own opinion on this. To tell you the truth, there is no consensus in the government on this issue.

So let's discuss this in detail today. There's a proposal to develop a flexible formula - similar to what we have in the oil industry. It suggests that the tax and fiscal burden may be adjusted as global prices for nickel or copper rise and fall.

It's important to review such proposals as soon as possible. We need a fair formula. Unless we develop it, I'll have to support my colleagues who suggest solutions that may not appeal to company executives and shareholders.

Let's move on to the discussion.