Fitch Changes Norilsk Nickel Outlook to Stable; Affirms ‘BBB-’

Fitch Ratings-London- 5 November 2009: Fitch Ratings has today revised Russia-based OJSC MMC Norilsk Nickel’s (NN) Outlook to Stable from Negative. The company’s ratings are affirmed at Long-term Issuer Default (IDR) and senior unsecured ‘BBB-’ and Short-term IDR ‘F3’.

The Outlook change reflects the stronger-than-anticipated base metals pricing environment so far in 2009 which has allowed NN to materially improve its liquidity profile and maintain credit metrics commensurate with the ‘BBB-’ rating level. Over the next two to three years the company is now expected to maintain a comfortable level of rating headroom, including under downside scenarios involving a material retracement of metals prices from current levels. Fitch’s core rating case reflects its macroeconomic view of an anaemic recovery in global growth over the course of 2010-2011 with only limited increases in nickel, copper and platinum group metals (PGM’s) prices over this period.

The Outlook change also reflects the agency’s confidence that NN would be able to refinance a significant portion of its debt maturities due in 2010 (in aggregate approximately USD3bn), if required. Plausible options in this regard would include a rouble bond or eurobond issue, or a combination of the two. Also incorporated in the Stable Outlook is the expectation that NN will maintain a conservative stance in respect of cash outgoings (dividends, capex) over at least 2010 and remain cash flow-positive, allowing for further reductions in absolute debt levels.

Fitch’s current base case for FY09 is for an approximate 35% reduction in revenues to around USD8.8bn-9bn with EBITDAR of USD3bn-3.5bn. This compares to the agency’s March 2009 forecast of an approximate 50% reduction in revenues and EBITDAR of around USD1.7bn. For FY10 Fitch expects revenues of around USD11bn-11.5bn and EBITDAR of USD4.3bn-4.5bn. NN has been able to achieve significant year-on-year reductions in operating costs (H109 total operating costs were USD1.4bn lower than in 2008), although this also reflects the benefit of the depreciation of the Russian rouble (average RUB/USD rate in H109 of 33 versus 24 in 2008). Over the next three years ongoing higher inflation in Russia is likely to see costs trend upwards, limiting the company’s ability to return to historical profitability margins.

Fitch views NN’s liquidity profile as sound. FYE09 unrestricted cash is estimated at approximately USD2.1bn-2.3bn (excluding cash held at NN’s electricity generation subsidiary OGK-3), which together with expected FY2010 free cash flow of around USD1bn compares to an aggregate of USD3bn of debt due in FY2010. For FY09, Fitch estimates gross leverage (gross debt/EBITDAR) of around 1.5x-1.7x before falling to 0.7x-0.9x in 2010.

The ratings continue to reflect NN’s core strengths, including its position as the world’s leading producer of nickel and palladium, as well as being a significant producer of copper/platinum, and the strong operational profile of its core Russian assets on the Taimyr Peninsula which benefit from low operating costs, a uniquely rich ore body and long-life reserves.

However, NN’s predominantly Russian asset base exposes the company to higher-than-average political, business and regulatory risks. Also, NN’s status as a strategically important Russian asset exposes it to potential actions involving key shareholders and/or the Russian state. These factors remain key constraints on NN’s ratings although Fitch believes that the potential for adverse action in this regard has lessened over the past year.