OREANDA-NEWS. Fitch Ratings has upgraded Russia-based OJSC MMC Norilsk Nickel's (NN) Long-term Issuer Default Rating (IDR) to 'BBB-'from 'BB+'. The Outlook is Stable.

The upgrade reflects a positive track record of improvement in specific corporate governance factors, which were the reason for a three-notch reduction of NN's IDR from its standalone ratings.

In December 2012, NN's main shareholders, Rusal and Interros, and Millhouse (a company affiliated with Mr Roman Abramovich, which was introduced as a new shareholder of NN) signed a shareholder agreement. The shareholder agreement is designed to improve the corporate governance and transparency of NN, to maximize profitability and shareholder value and to settle all disagreements between Interros and Rusal in relation to the company. After a visible improvement in corporate governance, Fitch have narrowed the notching of NN's IDR to two notches from three. A discount of two notches from their standalone IDR is average for Russian companies rated at a similar level to NN.

In May 2014, the company presented its strategy update where its top managers, including Vladimir Potanin, the company's CEO and main shareholder, revealed the key points of NN's strategic development, results and mid-term expectations. The company will focus on the development of Tier 1 assets that should meet the following criteria: to be large scale, i.e. more than USD1bn revenue; high margin, i.e. an EBITDA margin of more than 40%; and to have a reserve life of more than 20 years. International and non-core assets that do not meet Tier 1 criteria will be divested. Capital allocation discipline has also been mentioned as a pillar of the new strategy.

The company possesses a best-in-class polymetallic mineral resource base containing nickel, copper and PGMs. Revaluation of deposits under JORC standards in 2014 resulted in over 50% growth in Proved & Probable reserves vs the last estimate made in 2008. The latest reserve estimate of nickel was 6.7Mt while that for copper was 12.2Mt, which implies more than 30 years of remaining operating life at current production levels. New green field exploration projects in the Taymir peninsular provide potential for further reserve base improvement.

Key rating constraints include NN's exposure to the base metal demand cycle as well as legal, business and regulatory risks associated with Russia (BBB/Negative), although NN's industry leading cost position provides some protection compared with peers. Following the positive track record of improving corporate governance, Fitch has narrowed the notching of NN's IDR to two notches from its standalone rating.

Fitch considers NN's liquidity position as strong as the company had around USD1.6bn of cash and equivalents on balance as of end-2H13, while short-term debt was USD1bn. The company had available committed lines of USD2.4bn.

RATING SENSITIVITIES
Positive: Future developments that could lead to positive rating action include:
- An upgrade of NN's standalone rating based upon its financial and operational characteristics is not considered likely.
- Further improvement in corporate governance practices commensurate with those of industry leaders could result in an upgrade by further narrowing of the corporate governance notching.

Negative: Future developments that could lead to negative rating action include:
- Reccurrence of negative corporate governance events.
- Persistent negative FCF resulting in FFO gross leverage sustained in excess of 2.5x.