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Norilsk Nickel’s latest acquisition disappoints
Russian wholesale power generating company OGK-3 reported a RUR 341 million (approx. $13.1m) net loss for the first three quarters of last year. This is half of last year’s loss but still the result disappointed analysts. But they think the poor financial performance was no surprise for Norilsk Nickel, which purchased OGK-3’s new share issue late last month. Russia’s Norilsk Nickel is the largest nickel and palladium miner in the world.
OGK-3 has published its interim combined and consolidated financial report for January-September 2006. Revenue is reported at RUR 14.86 billion (approx. $571.5m), core profit stands at RUR 274 million (approx. $10.5m), and net loss is RUR 341 million (approx. $13.1m), under the International Financial Reporting Standards (IFRS). The company blamed the poor performance on the fact that its profit and loss report did not show a tariff imbalance of RUR 868.86 million (approx. $26.4m) for 2005 and RUR 404.36 million (approx. $15.55m) for the nine months of 2006, as well as on early payment of tax debt.
The results disappointed analysts. “They are somewhat worse than we expected,” Semen Birg, at FINAM investment consultants, told RBC Daily. “It is not incidental that they were published after the company’s new share issue. They could have frightened off some of the potential investors,” he stressed. Birg said the revenue was lower than expected. “Earlier we projected OGK-3’s revenue for 2006 at $865 million. Now we have to revise our estimates,” he said (FINAM expected OGK-3 shares to cost $0.174 by the end of this year).
Meanwhile, experts say generating companies’ financial results do not show their potential. Irina Filatova, at BrokerCreditService, said the financial reports of generating companies in accordance with IFRS reflected their activities not quite correctly. “This is due to their young age,” she said, noting that the market was looking at the cost per 1 KW of installed capacity, due to positive expectations connected with the liberalization of the gas and electricity markets.
“We don’t expect any negative dynamics for the OGK-3 shares in the short term because the main factor for them is Norilsk Nickel’s mandatory offer to OGK-3 shareholders, which suggest a premium to the current share price,” says Alexander Kornilov, senior utility analyst at Alfa Bank. “Financial performance has no effect on the company’s stock,” agrees Dmitry Skvortsov, at the Bank of Moscow. “As an example take OGK-5, which published not very strong reports preparing for an IPO,” he said.
Filatova says things will change soon, and investors will start paying more attention to the financial performance of power generating companies, which is often far from perfect. “Moreover, we think that the situation could deteriorate this year, due to rising fuel prices, state regulation of utility tariffs, and a small free electricity market,” she told RBC Daily.
Yet analysts think Norilsk Nickel was aware of the problems. “I don’t think Norilsk Nickel made a mistake. The market is in a state of the primary division of industrial assets, and a lot depends on the speed of the electricity market liberalization,” Birg believes.
OGK-3 includes the Kostroma, Pechora, Cherepetsk, Kharanorskaya, Gusinoozerskaya and Yuzhnouralskaya state-owned district power plants with combined capacity of 8,500 MW. The company issued new shares (18 billion shares, 61 percent of the current and 37.9 percent of the increased authorized capital) on 13 March 2007. Norilsk Nickel, which offered RUR 4.54 (approx. $0.17) per share, won the auction. The whole issue was valued at RUR 81.7 billion ($3.1 billion). RAO UES’s stake in OGK-3 has reduced from 59.7 to 37.08 percent. According to the Russian law on joint-stock companies, the purchaser of more than 30 percent in a company’s authorized capital shall offer minority shareholders to buy their stakes.
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