Presentation by V.I. Strzhalkovsky, General Director and Chairman of the Management Board of MMC Norilsk Nickel, at the Annual General Meeting of Shareholders

Presentation by V.I. Strzhalkovsky, General Director and Chairman of the Management Board of MMC Norilsk Nickel, at the Annual General Meeting of Shareholders

Мoscow         June 30, 2009

Dear Shareholders, 

Six months have passed since our Extraordinary General Meeting, and today I would like to inform you on the preliminary results of our work in the first half of 2009, and on future plans and targets set by the management.
 
In this difficult period of time when economists and analysts are debating over the probability of “the second bottom” in the current crisis, the management of MMC Norilsk Nickel has opted for a cautious conservative strategy aimed at the reduction of costs, optimization of administration processes and tightening of financial and labor discipline while maintaining social stability in the territories of the Company’s presence. Guarded pessimism is better, in our opinion, than groundless optimism.

The main problem facing the world’s base metals industry today is falling demand. Global nickel and copper production far outstrips consumption, and metal stocks are high. Market prices for our core products have dropped significantly over the year.

Declining revenues, lower profitability and other financial indicators directly affect the price of Norilsk Nickel shares. Opportunities for credit refinancing and new borrowings became scarce, forcing the Company to impose stringent austerity measures. It is to note that our present-day situation is further complicated by a heavy debt burden as from this year on we have to repay matured loans obtained by the previous management team in 2007 for purchasing overseas assets. The first major repayment amounting to USD867M is to be made this September, and we have sufficient money for this purpose. There will be no new borrowings in the nearest future. The Company will pay its own money for the construction of our Arctic-type ships. 
 
All of the above illustrates that MMC Norilsk Nickel has a sufficient safety margin and its position is indeed better than that of many other industrial enterprises. The cost of nickel production at our plants is among the lowest in the world, and another competitive advantage lies in our unparalleled ore reserves.
 
Current global problems coincided in time with a number of important in-house changes which included rearrangement of the ownership structure, formation of a new management team, and improvement of governmental contacts. This is always important for a national-level company, and becomes even more so in the depressive economic environment. That said, I would like to emphasize the following: we did not apply for any direct financial aid and do not intend to burden the government with problems that the Company may and should resolve all by itself.  We concentrated our efforts at the development of proposals that being approved may increase competitiveness of our products on the international markets. I feel satisfied that this approach was met with understanding at the top governmental level. The resolution passed by the government in January lifted export duties that covered a significant part of our production. Another decision eliminated Alamazyuvelirexport’s monopoly on PGM export.
 
Highly appreciating our cooperation with state authorities, we fully realize that the government will support only economically viable and promising businesses but it will not dole its money to those who are disinclined to confront the current crisis unassisted.

In the corporate budget developed for 2009, the management of the Company has actually outlined its anti-crisis action plan, which includes the following: 
- streamline operations and reduce the cost of metal production;
- diversify metal sales and decrease selling expenses;
- ensure higher return on investments and impose personal responsibility for the execution of investments programs;
- enhance management efficiency and integrate our overseas assets in the consolidated production circuit; 
- optimize logistics and tighten fiscal discipline;
- continue social responsibility programs for the Company employees.

Given the existing economic situation we had to curtail budget spending, thus lowering considerably our contributions into professional sports and truncating such cost items as third-party consulting services, advertising and public relations. Other cost-cutting measures included termination of expensive training programs for the Head Office managers, as well as payroll and rental fee reductions in the Head Office.  

Two ambitious projects – Arena-Norilsk and Zapolyarnik Stadium – were suspended as the financing provided for their construction was spent inefficiently, to say the least of it.

The basic approach to the Company’s non-core assets was revised, and a large number of facilities that were regarded in the past as planned money-losers requiring regular financing presently conduct business relying on their own internal resources. Zapolyarie Health Resort is one of such examples. The Company had no doubts in the social importance of this facility but its outdated infrastructure and inadequate level of services attracted a good deal of criticism and complaints. However, in less than six months after the appointment of the new Director we can see a lot of changes for the better including upgraded infrastructure, improved catering, progress in health and entertainment services. All these developments did not require any money infusions from the Company as the new Director successfully identified some internal resources, and currently applies a new business approach based on the personal responsibility for his task. The same may be said about the Bobrovy Log Fun-Park located in Krasnoyarsk: its new management team was instructed to reach at least break-even level.

Another similar development took place in the organization of air travel for Norilsk inhabitants. Seven months ago the management decided to engage Taimyr Air Company so as to ensure non-expensive air fares, and for this purpose the Company has took on lease a number of modern comfortable aircrafts. Today, these aircrafts fly from Norilsk to Moscow and Krasnoyarsk, and the cost of tickets is 30-40% lower than that of our rivals. Realization of this important social project did not mean any losses for MMC Norilsk Nickel as the Company just provided working capital and set a task to reach break-even level. 

Speaking about non-core assets, I would like to mention our understanding that MMC Norilsk Nickel is not a portfolio investor. With that in mind, the Board of Directors approved the disposal of non-core power assets so as the Company could focus on the metal production business, where its positions are really strong and where considerable upside potential exists. While discussing power-related issues, there is no way to avoid a question about OGK-3, where the Company is a major shareholder. OGK-3 was much criticized recently and a great deal of concern was raised over the risks of investment program failure.  I would like to emphasize that we regard implementation of OGK-3 investment plans as an important and studious line of work, and it is our understanding that the development of power capacities should take place where real demand exists and where our capital investments will be paid back. OGK-3 has enough finance resources for these purposes.   
 
Metal price forecasts made by the Company for the first quarter of this year proved to be almost 100% accurate, which confirms that we are on the right road. 

We also have to think about our further development, and here two major issues for consideration arise: investments and modernization. Our anti-crisis action plan provides for a substantial reduction of capital expenditures in the replacement of fixed assets.  Certainly this is a least-evil interim solution necessary for handling other strategic tasks in the difficult period of crisis, including accomplishment of social and operational programs that I mentioned earlier. However, our investment program is not put on hold and we intend to accomplish all measures that are important for the long-term development of MMC Norilsk Nickel.  Some terms, amounts or forms of investments may be revised, but those production and technological projects that are vital to the Company’s future will not be abandoned, and we shall execute these projects  with all due diligence.

It is to note, by the way, that after increasing personal responsibility for the relevancy of capital expenditures it was found out that our estimated investment requirements were largely overestimated. The practice of “funds disbursement” was replaced by making careful and weighted investment-related decisions. Higher degree of transparency in procurement/purchasing activities made possible substantial financial savings without any damage to production.

Other priority projects to be implemented in the nearest future involve broad modernization of Talnakh Concentrator and Nadezhda Metallurgical Plant. Development of Skalisty Mine in the Taimyr Peninsula is also of crucial importance as ore mining will remain our primary line of work ensuring long-term sustainable operation and achievement of production targets.   

We shall also continue ongoing efforts aimed at the improvement of industrial safety and mitigation of environmental problems at our production plants.

Diversification of sales is a very important issue for Norilsk Nickel today – in times of international crisis. European sales market, traditional market for our Company is lowering demand for our products not just because of the economic stagnation in Europe but also due to EU plans to rank nickel and its compounds as dangerous. That is why we put high hopes on Asian markets, especially China. A new NN sales office was opened this spring in Shanghai and since the Company opened its first sales office in Hong-Kong in 2004 the supplies to Chinese enterprises have tripled.  According to industry experts, China’s market will be able to recover ahead of other markets and will drive the demand for base metals in the post-crisis period.

Our strategic objective is to keep together the high-skilled professional team of Norilsk Nickel. As you know, job cuts only touched our head office, its staff cut by over 20%, without impairing the efficiency of management. I would say that staff reduction in the head office was impending for some time anyway, so in this particular case crisis actually helped us – as they say “every dark cloud has a silver lining”. We were able to avoid mass reductions of employees at our Russian enterprises. Not a single plant in Russia was laid off. Only our operations in Australia, where production costs are too high in light of today’s prices for our products, were shut.

Speaking about Australia one can not leave untouched the issue of great importance for our shareholders – the Company’s international assets, benefits of their acquisition and future plans. It is no secret today that LionOre was purchased with borrowed funds and at the price that was quite high even for the buoyant metal markets. In the current situation of poor demand, in order to create synergy much discussed during the acquisition of these assets it is crucial to improve management efficiency, reduce administrative costs and develop sound logistics systems. That is why we moved to Moscow the center of decision-making regarding our overseas assets. Now we have a clear and transparent administrative structure and may continue real integration of Norilsk Nickel International into MMC Norilsk Nickel.

Logistics is the area where the competitive advantages of Norilsk Nickel can and should be implemented in full. The Company has built a new cargo fleet of five ice-reinforced freighters to transport its final products as well as feed materials and supplies. The fleet has the potential to provide diverse transportation services in the Arctic territories.
Another important aspect of the anti-crisis strategy of Norilsk Nickel is the cooperation with local and regional authorities. The Company has always duly paid and continues to pay all required taxes into the budgets of all levels. We traditionally maintain constructive business relations with regional authorities in the areas where  the Company’s operations are located and  remain committed to close cooperation with the governors of Krasnoyarsk Territory and Murmansk area.

Dear shareholders,

It is my belief that the Company’s objective is not just to pass through the crisis, but to emerge renewed, ready to achieve improved levels of quality performance and meet future challenges.

In my speech I did not cover financial and economic aspects of our work in 2008 - this will be done by my Deputy Dmitry Kostoev. I just want to point out once again our top priority lies in new technology, cost reduction, high professional skills and labor efficiency, well-established industrial safety and environment protection as well as in the growth of shareholder value.

Thank you for your attention.