Page 1 of 2 Chalco in the wings as Rusal stumbles
By John Helmer
MOSCOW - In some cultures it is considered entertaining sport for a crowd to
watch roosters tear each other to death with specially-fitted steel talons. In
other cultures, the crowd prefers to watch a man in fancy-dress stab a bull
that has been specially bred to do nothing unpredictable with its horns. In yet
others, the crowd pays to watch naked women wrestling in mud.
For entertainment, the debt throes of Oleg Deripaska's United Company Rusal and
his Moscow holding, Basic Element, combine all three, though Deripaska himself
remains about as transparent as the mud wrestlers.
That's one of the reasons the Russian government made a little-noticed but
unprecedented announcement late on Friday. For the
first time, Deripaska's aluminum empire is to be investigated by auditors from
the Accounting Chamber, as the Russian state auditor is known. For years, the
Moscow-based chamber, headed by former prime minister Sergei Stepashin, has
tried to investigate the multi-billion dollar cashflows generated by Rusal,
mostly by export trading schemes employing dozens of companies around the
Not since two limited audits in 2004 - of an aluminum smelter in the
Krasnoyarsk region, and the use of trading firms registered in Chukotka - have
auditors got close to the big money.
Missing the footnote, the headlines got the story wrong. According to press
leaks orchestrated by Rusal, the Russian government has agreed to lend US$4.5
billion through Vnesheconombank (VEB), a state development bank, to rescue
Rusal from defaulting on a loan given last April by a syndicate of
international banks to finance Rusal's purchase of a 25% stake in Norilsk
Nickel, Russia's leading mining company.
The media were encouraged to believe that the Kremlin - both President Dmitry
Medvedev and Prime Minister Vladimir Putin - have been persuaded to rescue
Deripaska, the wealthiest man in Russia.
However, the VEB bailout, which is almost double the maximum amount of loan the
VEB had earlier announced it would consider granting, has not been confirmed by
any Russian government body or official, least of all by VEB. The announcement
from the Accounting Chamber refers to the VEB loan only to say that its
disbursement will be audited by two of the chamber's most senior investigators.
No amount was mentioned in the five-line chamber announcement.
Officials claim privately that the only rescue decided by VEB so far is of the
25% stake in Norilsk Nickel. That will not be forfeit to the bank syndicate,
which includes BNP-Paribas, Merrill Lynch, Credit Suisse and the Royal Bank of
Scotland. But far from decided is what will become of Deripaska and Rusal, and
who will now have control of the Norilsk Nickel shareholding.
What is about to happen is one of the largest changes in the global aluminum
business since Rio Tinto of the UK took over Canada's Alcan, and BHP Billiton
of Australia threatened to swallow Rio Tinto. In terms of output of bauxite,
alumina and aluminum, RioTinto Alcan leads the world, followed by Alcoa. Rusal
comes either second or third in the world, depending on how bauxite, alumina
and aluminum metal are counted. BHP Billiton (BHPB), Hydro of Norway and the
Aluminum Corporation of China (Chalco) comprise the top six.
Because China is the leading buyer of Rusal's metal, and because Chinese
partners have been courted to participate in Rusal plans for Chinese plants, as
well as mining ventures in Africa and Australia, the prospect of
renationalization of Rusal by the Kremlin arouses considerable interest in
Beijing. From the Chinese point of view, the sudden loss of Russian liquidity
is proving a boon for Chinese companies seeking long-term commodity supply and
equity stakes in the Russian energy sector, as well as the metals sector.
For if Deripaska is as insolvent as sources close to Putin say the prime
minister believes, and if Rusal is to be investigated by state auditors, then
Deripaska's global empire of bauxite mines, alumina refineries and metal
smelters extending from Queensland to Guyana, from Jamaica to Ukraine and from
China to Armenia, faces a Kremlin-ordered reorganization. A selloff of some of
the foreign assets that aren't required to feed Russian smelters is also being
considered by the Russian government.
Waiting in the wings for the cue to bid for the selloff are the most liquid of
Rusal's global rivals, BHPB and Chalco.
It isn't easy to say exactly what has happened to Rusal's fortune - except that
it's gone. Putin is reported to be furious that as the price of commodity
aluminum shot up to record highs of over US$3,200 per tonne, and Rusal's
revenues more than doubled, Deripaska took out huge personal dividends in cash
and left Rusal, along with his Basic Element holding company, heavily
leveraged. According to Rusal's annual summary for 2006 - the last summary
before Rusal merged with Russian competitor SUAL and the alumina units of
Swiss-based Glencore International in 2007 - the company recorded sales
revenues of $8.18 billion. That is virtually the only financial information the
company published for the year. However, according to a bond prospectus drafted
by co-shareholder Victor Vekselberg, Deripaska took $4.6 billion in dividends
for the same year. That is a highly unusual 56% of the revenue figure.
What Rusal's costs of production were for 2006, or any other year; what it paid
in taxes; and what it owed on what terms, are data of such sensitivity that
Rusal has warned banks that, if they are found to have released such data to
unauthorized personnel, they risk losing Rusal's business altogether. Rusal
spokesman Vera Kurochkina refuses to respond to questions or requests for
clarification of Rusal's financial condition.
The financial section of a Rusal roadshow presentation, prepared for London
equity analysts in mid-2007, claimed that in 2005, Rusal generated $6.5 billion
in sales revenues, and earnings before income tax, depreciation and
amortization (Ebitda) of $2.2 billion; that makes an Ebitda margin (the ratio
of pre-tax earnings to revenues) of 34%. Comparable data for 2006 were not
presented to the analysts. But supposing that Ebitda as a measure of Rusal's
cashflow grew at roughly the same rate as revenues, and the Ebitda margin was
constant, there can barely have been enough cash to cover the dividend
Deripaska reportedly took out of the company. Did Rusal borrow to pay
Deripaska's cash calls?
There is no explaining how it happened that Rusal's net debt doubled between
2007 and 2008. According to the roadshow document presented in London in June
2007, Rusal said it owed $7.7 billion, and had $200 million cash on hand,
making a net debt total of $7.5 billion. One year later, the debt aggregate is
reportedly $14 billion, including $4.5 billion borrowed for the Norilsk Nickel
acquisition. Since the seller of the Norilsk Nickel stake, Mikhail Prokhorov,
is also claiming that he has not received $700 million of that figure, due on
October 24, 2008, and is owed another $2.7 billion next April, the actual
indebtedness of Rusal appears to be significantly larger than $14 billion -
perhaps as much as $18 billion. Of that, about $10.5 billion is short-term
debt, and must be repaid by next April.
Where has all the cash gone? That is the Kremlin's question right now. It is
the reason Stepashin has been told to send in his auditors to find out, lest
VEB's bailout loan disappear.
One point is certain. Rusal has paid less tax than any of its Russian
metal-exporting peers and far less than Russia's oil exporters. This hasn't
gone unnoticed, although the only open investment bank report on Rusal to be
released - a Renaissance Capital report of February 2000 - omitted to mention
tax at all.
Then in September 2004, a report on tax payments by Russia's metal producers
was compiled by the then federal Tax Ministry and delivered to the prime
ministry in Moscow. The details were confirmed by prime ministry sources at the
time. This is the only known report of a government tax inquiry into Rusal.
According to the report, the company paid just 2% of its estimated $4.5 billion
in sales revenues in taxes for 2003. The comparable percentage