The world’s top nickel and palladium miner, Norilsk Nickel [OTC:NILSY; LSE:MNOD], announced disappointing first quarter financial results on May 4, in the wake of its major deal with Russia’s aluminium giant United Co. Rusal. Amid analysts’ warnings of value dilutive repercussions stemming from the deal, Norilsk’s unexpected first quarter losses appeared to raise some doubts about the company’s share value.

In January-March 2008, Norilsk reported 21.836 billion rubles ($925 million) in net losses, according to Russian accountancy standards. Norilsk explained its first quarter losses were due to what it described as negative value reassessment of its financial investments, but did not elaborate.

In contrast, Norilsk reported net profits of 34.679 billion rubles ($1.47 billion) in the January-March quarter in 2007, while in the fourth quarter of 2007 its net profits amounted to 49.224 billion rubles ($2.09 billion).

Norilsk’s significant first quarter losses came in the immediate aftermath of a major corporate transaction. On April 24, United Co. Rusal completed the purchase of a one-quarter stake in Norilsk Nickel. UC Rusal and Norilsk co-owner Mikhail Prokhorov’s investment vehicle, Onexim Group, said in a joint statement that Onexim would receive an undisclosed cash payment plus a 14% stake in Rusal in exchange for its stake in Norilsk.

The cash payment was rumoured at $7-7.5 billion. Norilsk’s valuation was assumed at $60 billion, while Rusal was reportedly valued at $50 billion. The deal was reportedly funded by a $4.5 billion syndicated loan from ABN Amro, Barclays Capital, BNP Paribas, Calyon, Credit Suisse, Goldman Sachs, ING, Merrill Lynch, Morgan Stanley, Natixis and UniCredit Group.

When Prokhorov agreed to sell to Oleg Deripaska, chairman of Rusal, last November, Onexim was supposed to receive an 11% stake in Rusal, as well as cash payment; Norilsk valuation was assumed at $50 billion at the time. Just a few weeks ago, Rusal’s share swap and cash offer for a 25% stake owned by Prokhorov was seen as dead in the water.

In recent weeks, the shareholders of the iron-ore and steel group Metalloinvest reportedly offered $10 billion in cash for 15%-16% in Norilsk. Hence, Rusal was forced to raise its offer. But following the announcement of the Norilsk-Rusal deal, Metalloinvest insisted that company was still interested in a merger with Norilsk.

In the wake of the recent deal, however, Norilsk Nickel shares have remained flat on Russian and international bourses. While Norilsk Nickel is largely seen as undervalued on fundamentals, some market analysts have warned of the risks of what they described as a value dilutive merger between Norilsk Nickel and UC Rusal.

Incidentally, Norilsk Nickel also announced mixed first quarter production results. On April 30, Norilsk said its first-quarter 2008 nickel output reached 74,572 metric tonnes, up 22% year-on-year, while copper production was 3% higher at 104,000 tonnes year-on-year. But Norilsk Nickel produced 597,000 ounces of palladium, down 17% from Q1 2007, and 138,000 ounces of platinum, 18.4% lower.

In 2007, Norilsk Nickel increased its nickel production by 21% to 295,209 tonnes on acquisitions. Meanwhile, palladium output amounted to 3.113 million ounces, 14.8% lower y-o-y. The company also produced 425,000 tonnes of copper, down 0.54%, and 740,000 ounces of platinum, down 1.2%.

In 2008, Norilsk Nickel anticipates production of 300,000-305,000 tonnes of nickel, 3-3.050 million ounces of palladium, 415,000-420,000 tonnes of copper and 710,000-720,000 ounces of platinum, the company said.

Nonetheless, Norilsk Nickel is now seen moving towards consolidating its positions as Russia’s largest copper miner. On April 29, Norilsk Nickel’s board decided that the company would bid for a license to develop Russia’s giant Udokan copper deposit.

The starting price for the bidding contest is 4.5 billion roubles ($190.7 million) and all bidders must register their interest by May 14. Udokan is estimated to contain 13.4 million tonnes of copper.