Skip navigation
Newswire

UPDATE 1-Shareholder OK of Norilsk/Stillwater deal in doubt

(Recasts throughout, adds bylines)

By Gary Hill and David Sinkman

NEW YORK, Nov 26 (Reuters) - The chief executive of Stillwater Mining Co. said on Tuesday it is too early to say whether shareholders will approve the sale of a majority stake in the palladium producer to Russia's Norilsk Nickel, a deal criticized by analysts as diluting shareholder value.

"I believe once we've had a chance of discussing with the shareholders what it is the transaction involves I would hope they would see the merits of the transaction," Stillwater Chairman and Chief Executive Officer Francis McAllister said. He would not comment on the deal's chances of approval.

Last week, Stillwater said it was selling a majority stake to Norilsk Nickel, the world's leading producer of palladium, for $341 million -- $100 million in cash and $241 million in palladium, a metal used in automobile catalytic converters for pollution control. Stillwater would issue 45.5 million new shares as part of the planned deal.

Analysts expressed doubts over the outlook for Stillwater's palladium production, called Norilsk's purchase price too low, and worried the deal would dilute Stillwater share value.

"There is a real risk that shareholders will not approve the deal," said Ron Coll, an analyst at Jennings Capital in Toronto. "Investors are ticked off by the price. It is not a foregone conclusion the deal will go through."

McAllister noted the deal faced several regulatory hurdles including Securities and Exchange Commission approval before a shareholder vote could be held, estimating it could be as early as March or as late as June of next year.

DILUTED EARNINGS

Merrill Lynch on Tuesday said it downgraded its rating on Stillwater to "neutral" from buy," citing in a research report "increased uncertainty" over its future mining production and questions about the palladium component of the purchase price.

"We view the transaction as significantly dilutive to existing shareholders on an earnings, cash flow and net asset value basis," Merrill Lynch analyst Mike Curran wrote.

But McAllister said the deal would stabilize the global palladium market, create new markets for the metal, and help his company increase production.

"It depends on what our production ultimately can be, given the injection of funds into the company," the Stillwater chief executive said. "I'm not sure there's a dilution, I believe there's actually an accretion in value."

The fact that Stillwater would even entertain Norilsk's offer may have been a warning sign, HSBC analyst Victor Flores said. "If things were going well why would they do such a dilutive deal?"

Flores said the company admitted in a conference call last week it was unlikely to meet fourth-quarter guidance on production.

Stillwater's shares have lost around 75 percent in value in the last two years.

Palladium prices on the spot market have fallen well off their record highs of January 2001 as automobile companies built stockpiles and developed technologies using less palladium and more platinum and other metals in their catalytic converters.

Norilsk stopped selling on the spot market last year and has said it will not sell on the spot market next year.

Said McAllister: "If the opportunity avails itself to enter into long-term contracts, our customers then should be able to depend on getting the metal and thereby have greater certainty in its use as well as in researching new uses for it."

He said Stillwater would remain a producer and not simply become a marketing arm for Norilsk to win long-term contracts.

Shares in Montana-based Stillwater rose 5 cents to end at $5.76 on the New York Stock Exchange after dropping as low as $5.10 in morning trade. Stillwater's low for the year was $4.60 on Oct. 10 and its high of $20.40 was in early January.

Neither Flores nor Coll nor their companies own shares in Stillwater or have done investment banking work for it.