Rusal to restore mothballed capacity as demand grows

United Company Rusal said yesterday that it has decided to restart it alumina refinery in Jamaica, which was mothballed in 2009 as part of efforts to reduce costs during the credit crisis, as it expects to see "considerable growth" in demand for aluminium this year. The move will increase the company's alumina production by 321,000 tonnes in 2010 and boost its annual capacity by 650,000 tonnes.

Overall, Rusal plans to increase alumina production by 800,000 tonnes this year and add 100,000 tonnes of aluminium production to meet the increasing appetite for the metal. CRU Group, a London-based consultancy and analysis company focusing on the metals and mining, power, wire and cables, fertiliser and chemicals industries, expects aluminium consumption to increase by 12.6% in 2010 from last year, driven by continued urbanisation in China and India. Rusal said it believes aluminium consumption in Russia will grow by 26% this year.

The decision to bring the Jamaica plant back online, which is subject to approval from the company's international lenders, was announced as the Russian aluminium producer reported a net profit of $821 million for 2009 -- its first set of results since its $2.24 billion initial public offering and subsequent listings in Hong Kong and Paris in January. The bottom line compared to a loss of $5.98 billion in 2008 and was 89% above the guidance of a $434 million profit provided by the company at the time of its initial public offering.

Analysts noted that the net profit isn't particularly meaningful given a number of unusual and nonrecurring charges in 2009, but the fact that it is ahead of guidance is a positive signal and also indicates that the group's cost reduction programme is working. The cash operating cost per tonne fell by 23% to an average $1,471 per tonne in 2009 as expenses were cut across the board -- alumina costs, raw material costs, energy costs, transportation costs, repair and pot relining costs, overheads and salaries all fell on a per tonne basis.

Revenues fell by 48% to $8.165 billion, mainly because of lower aluminium prices and sales volumes, with the latter weighed down both by the drop in demand and the company's decision to idle part of its capacity. Adjusted Ebitda from its aluminium operations, excluding the 25% stake in Norilsk Nickel, fell 83% to $596 million, although analysts at Bank of America Merrill Lynch noted that Rusal distinguished itself from aluminium peers such as Norsk Hydro and Aluminum Corp of China, by returning to profitability in the second half of 2009.

Indeed, at a press conference in Hong Kong yesterday, the management led by CEO Oleg Deripaska stressed that profitability, operating margins, and the sustainability of its results is a key focus for the company and prided itself on its low production costs. Deripaska said Rusal expects to increase its sales to Asia (primarily China, Japan and South Korea) by about 50% this year to 30% of its total sales from 20% last year, taking advantage of its lower production costs to attract more customers. Sales to China alone accounted for about 6% of Rusal's total sales last year, but the country is seen as its key growth market.  

Deripaska noted that the first quarter will be challenging for a lot of its competitors with higher production costs as more capacity is put back on stream.

However, after the US close Monday, US-based aluminium producer Alcoa revealed that it had taken two alumina smelters off-line in the first quarter, leading to a decline in revenues and $295 million in restructuring and special charges. The move suggests that demand issues may still be affecting the industry. Excluding one-off charges, Alcoa's profit from continuing operations amounted to 10 cents per share, reversing a loss of 59 cents per share in the same period last year. The number was largely in line with expectations. Also on the positive side, Alcoa said that its realised aluminium prices were 8% higher in the first quarter versus the fourth quarter 2009, while realised alumina prices were up by 13%.

With Rusal's earnings release yesterday covering 2009 only, investors will have to wait for more concrete evidence of its performance in the first quarter. The Rusal management gave no more specific forecast than to say that it expects aluminium prices to remain above $2,000 per tonne throughout 2010. During 2009 prices fell to $1,668 from $2,571 per tonne, as per data provided by the London Metals Exchange, but since the beginning of this year they have improved to about $2,400.

Given the lag, it is questionable if the results will be considered strong enough to finally push Rusal's share price above the IPO price. In Hong Kong the stock listed at a price of HK$10.80 per share, but fell from the start and by mid-February hit a low-point of HK$7.47. Since then it has been gradually clawing its way back up, but as of yesterday's close it was still 12.2% below the IPO price. The share price gained 0.85% following the results announcement.

The company also noted, not without a certain amount of satisfaction, that its investment in Norilsk has continued to increase in value to close to $10 billion on Friday last week from $6.7 billion at the end of 2009 after more than doubling during the course of last year. The Norilsk acquisition, which was made in 2008 just before the credit crisis took hold and commodity prices collapsed across the board, contributed greatly to the sharp increase in Rusal's debt during the crisis. Prior to a debt restructuring with more than 70 domestic and international lenders in the fourth quarter of last year, the company was sitting on $16.6 billion of net debt. This was reduced to $13.6 billion by the end of 2009 and to $12.9 billion by February 1 after virtually all the IPO proceeds were used for debt repayment. This leaves the company ahead of its repayment schedule, which calls for another $3.3 billion to be repaid by the end of 2013.

The management said it is exploring other refinancing options, including a rouble-denominated bond, but declined to provide details about the potential size.

It is also in negotiations about project financing that would allow it to resume construction of two aluminium smelters in Siberia, which when completed will have a combined annual capacity of 1,338 tonnes. The two smelters require further capital expenditure of about $2.6 billion, the company said yesterday, noting that it has so far invested about 25%-30% of the equity in both projects. Meanwhile, the construction of the 3 gigawatt Boguchanskaya hydro power plant is on track to produce its first electricity by the end of this year. That plant will require a further investment of approximately $529 million to reach completion.

Also yesterday, Rusal said that Vladislav Soloviev has been appointed first deputy CEO of the company. In this newly created role, Soloviev will be responsible for the operational management of the company, and will focus on increasing business efficiency, improving production and financial performance, and increasing the labour productivity and product quality.

Soloviev, who is 36, has been CEO of EN+ Management, the holding company of Rusal and several other group companies, since January 2008. He is no stranger to Rusal, however, having worked in the company's finance department for seven year before he moved to EN+.

"Valdislav Soloviev knows Rusal in great detail and has impressive experience managing large-scale holding companies, which will allow him to ensure the effective management of the company's operations, and allow me to concentrate on the strategic development of Rusal as a global leader in the industry," Deripaska said in a written statement.