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By John Helmer in Moscow

Never complain, never explain — that was the advice of the worst loser in
modern American politics, Richard Nixon.

Norilsk Nickel, the lead mining company of Russia and biggest nickel
producer in the world, appears not to understand how to lose, now that its
bid for LionOre has been topped by Xstrata, and the LionOre board has agreed
on terms that appear to lock in acceptance of the Swiss bid.

A statement issued by the newly named chief executive at NorNick, Denis
Morozov, commits both of the Nixon faults — first complaining at Xstrata’s
tactics, and then explaining why NorNick’s losing bid might be better — if
the world were different, and shareholdings didn’t cost money that
shareholders want.

The NorNick press release, issued Wednesday afternoon,

OJSC MMC Norilsk Nickel (“Norilsk Nickel” or the “Company”) has noted the
announcement by Swiss-based Xstrata plc that it will increase its offer to
Cdn$25.00 per common share for the shares of LionOre Mining International
Ltd. (“LionOre”) (Toronto Stock Exchange and Australian Securities Exchange
symbol: “LIM”; London Stock Exchange symbol: “LOR”; Botswana Stock
Exchange symbol: “LIONORE”).

“We are surprised and disappointed that the announcement includes an
unreasonably high break fee payable to Xstrata of approximately 4.9 percent
of the bid’s value, which is over Cdn$300 million and well above the
previous 2.8% break fee,” said Norilsk Nickel’s General Director, Denis
Morozov. “This high level of break fee is clearly inconsistent with
corporate governance trends aimed at encouraging a healthy bidding process
to maximize shareholder value, and does not encourage a level playing field
for all participants.”

Norilsk Nickel has received the necessary clearances in relation to Canada’s
Competition Act and continues to advance the regulatory approval process
which is running according to schedule in all relevant jurisdictions
including South Africa, Switzerland and Norway (outside the EU). Norilsk
Nickel expects to receive the necessary approvals before the June 18 expiry
date of its original offer.

Together with its financial and legal advisors, Norilsk Nickel is examining
the information released yesterday in Xstrata’s announced offer and will
evaluate its alternatives. It expects to announce shortly its next steps.”

The Moscow stock market was impressed by NorNick’s bid for LionOre, when it
was first announced. On the first day of trading after the May 3 bid,
NorNick’s share rose 4.2% to $199.50. The Russian brokerages issued positive
buy recommendations, based on calculations that the aditional nickel
production LionOre has brought, and would bring, to the NorNick
balance-sheet should, at current nickel prices, be “value-accretive” for
NorNick’s share price. Andrei Litvin of MDM Bank exposed his hand, arguing
that “a value-accretive acquisition combined with further support from
earnings uypgrades on the back of strong commodity prices should support
Norilsk shares, in our view.”

Watch that back! The Moscow market understood that Xstrata was bound to come
back with a higher offer. So, concern that NorNick’s controlling
shareholders, Vladimir Potanin and Mikhail Prokhorov, might be tempted to
risk more debt and shareholder value in matching that, plus skepticism about
the sustainability of nickel prices, reversed the momentum of NorNick’s
share price. The day before Xstrata tabled its counter offer, NorNick’s
share had fallen to $192.10, down 5% on the week. This was despite the
seesawing of the nickel price around $50,000 per tonne.

The Xstrata counter-bid is 16% over the NorNick offer, and expires on May
25, leaving Morozov, his principals, and their bankers just seven working
days to respond. Renaissance Capital, the closest of the Moscow brokerages
to Potanin, announced “we are placing Norilsk UNDER REVIEW, subject to the
outcome of the bidding process.” That’s broker talk for crossing one’s
fingers. The bank also reported that Norilsk Nickel “may come back with an
increased bid; however, the current deal EV/EBITDA of 3.8x could only be
justified by the unusually high nickel price the market witnessed from the
end of 4Q06.” Read: that’s a foolish bet.

Alfa Bank’s metals analyst Vladimir Zhukov reports a counter opinion: “We
believe that Norilsk is likely to stay in the game and, as the company
itself indicated yesterday, is likely to make a higher bid.” According to
Zhukov, NorNick may put another 20% premium on the table. “Assuming a 20%
increase in Norilsk’s offer over Xstrata’s, LionOre’s price still remains at
a reasonable 6.5x 2007E EV/EBITDA as compared to 7.1x paid by Xstrata for
Falconbridge and 7.0-x that CVRD paid for Inco.” In short, Zhukov is betting
Nornick may bid higher, and that Xstrata could go higher still.

In the circumstances, why should Morozov complain about the increased
break-fee which Xstrata included its counter-bid? Zhukov responded that
Morozov should either put up, or shut up. “I view Norilsk’s point about
Xstrata’s increasing breakup fee as a weak argument (but not calling the bid
off), because, in a bidding contest, Norilsk should appeal to selling
shareholders, and selling shareholders should not care much about how much
a corporate bidder gets (in the form of break fee), or corporate governance
issues for that matter, but about how much money they are offered.
Currently, Norilsk offer is weaker.”

The last occasion when a break-fee was an issue in the Russian metals market
was a year ago, during Severstal’s losing bid to merge with, and take over,
the European steelmaker, Arcelor. In that case, in June 2006, Severstal’s
controlling shareholder Alexei Mordashov wrote in a Euro140 million
break-fee, in the event Arcelor broke its word, and accepted a counter
offer. When that happened, and Lakshmi Mittal emerged the owner of Arcelor
by offering more money to shareholders, Mordashov pocketed the entire
Euro140 million for himself. Not a word of complaint came from othjer
Severstal shareholders that the company, or they, were entitled to a share.

Complaining about Xstrata’s break-fee is a sign that Nornick’s shareholders
have already reached their betting limit, and don’t want to be pushed
higher. Since Potanin and Prokhorov have yet to settle their own terms for
dividing up their assets, they have neither the incentive, nor the patience,
to wait for LionOre’s projected nickel expansion to pay for the takeover.

The next week will tell whether Potanin and Prokhorov have the gumption to
risk their own cash on the current standing of the nickel price.

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