UPDATE 3-Norilsk net profit falls by a third, shares drop

(Adds capex plan, updates share price)

By Robin Paxton and Aleksandras Budrys

MOSCOW, Oct 3 (Reuters) - Norilsk Nickel's (GMKN.MM) net profit fell by a third in the first half of the year as the world's largest nickel miner succumbed to rampant Russian inflation and a 40 percent decline in the price of the metal.

The news sent Norilsk's shares plummeting more than 14 per cent in mid afternoon trade.

The company said consolidation of newly acquired mining and power assets helped drag down half-year profit to $2.68 billion, while an accelerating slump in metals prices and a power struggle between Norilsk's billionaire shareholders promised a tough second half to 2008.

"In the falling commodity price environment, we don't expect Norilsk stock to recover to its previous high levels," said Dmitry Smolin, mining analyst at UralSib Financial Corp.

Norilsk, which produces a fifth of the world's nickel at its Arctic mines and smelters, has suffered from its exposure to the underperforming metal while global peers BHP Billiton (BHP.AX) and Vale (VALE5.SA) maintained record profits due to wider exposure to other raw materials, especially iron ore and coal.

Nickel, a pacesetter in the first half of 2007, is trading 70 percent below its record $51,800 a tonne peak of May 2007. Stainless steel mills have slashed orders as consumers, fearing a worldwide recession, reduce spending on household goods.

The decline in Norilsk's earnings was expected by the market, coming in just above the $2.63 billion average forecast by seven analysts polled by Reuters. Revenue, at $8.31 billion, also beat the forecast $8.12 billion to climb 3 percent year-on-year.

The company said it earned $7.21 billion from metal sales, 6 percent less than a year ago. Nickel revenue dropped 25 percent but was partially offset by high prices for the other metals it produces: palladium, platinum and copper.

Palladium hit a seven-year high of $590 an ounce in March 2008, up nearly 75 percent year on year.Platinum hit a record $2,290 an ounce in March, doubling year-on-year, while copper prices were consistently higher in the first half of 2008.

MORE WRITEOFFS?

Norilsk booked nearly $2 billion in writeoffs last year on the value of its LionOre acquisition and the OGK-3 (OGKC.MM) power utility at the core of a thwarted spin-off proposal.

The writeoffs prompted sharp criticism from one-quarter shareholder United Company RUSAL, which is engaged in an acrimonious battle with billionaire Vladimir Potanin for a greater say in running the largest mining company in Russia.

Norilsk said in a statement its first-half profit was hit by the consolidation of OGK-3, the Harjavalta refinery in Finland and the Cawse nickel property in Australia and analysts forecast more writeoffs when the company reports full-year 2008 results.

In a move opposed by RUSAL, Norilsk is also spending up to $2 billion buying back 4 percent of its shares at 6,167 roubles ($240.9) each -- an 87 percent premium to its Thursday close. "This is the last chance, in the mid-term, to sell a stake at such a high premium," said UralSib's Smolin.

Norilsk's Moscow-traded stock plunged 14.4 percent to 2,825 roubles by 1420 GMT on the news, trading at its lowest since Sept. 10. The shares have fallen over 60 percent from a November 2007 high.

Norilsk Chief Financial Officer Oleg Lobanov told a conference call the company's capital expenditure this year would be around $2 billion, almost double its previous plan.

The global financial crisis, which has made borrowing more expensive, has put the brakes on a consolidation boom in the mining sector and made short-term acquisitions less likely.

Xstrata Plc (XTA.L), the world's fifth-largest miner by market value and Norilsk's rival in last year's battle for LionOre, this week dropped its $10 billion bid for No. 3 platinum producer Lonmin Plc (LMI.L).

Norilsk said it sold nickel in the first half at an average price 38 percent below the first six months of 2007. Smolin said average global nickel prices had declined by a further 28 percent in the third quarter compared with the first half.

While other metals supported revenue in the first half, copper has dropped 30 percent in the third quarter, while palladium was down 58 percent and platinum prices have halved.

Revenue from non-mining operations increased by 357 percent to $1.1 billion, due mainly to the inclusion of OGK-3's results. (Writing by Robin Paxton; Editing by David Holmes and Jon Loades-Carter)