Unused capacity puts Rusal in strong position, says deputy CEO

United Company Rusal, the Russian aluminium company currently in the process of listing in Hong Kong, says it is in a strong position to benefit from economic recovery and the resultant pickup in demand for aluminium as it has a lot of additional production capacity that can be put to work.

Based on its full aluminium production capacity of 4.6 million tonnes and a 2009 production of 3.9 million tonnes, the company can add close to 700,000 tonnes this year to meet growing demand, deputy CEO Artem Volynets told FinanceAsia in an interview yesterday. And its excess capacity of alumina -- an intermediate product from which aluminium is made -- is an even greater 4 million tonnes based on last year's production of 7.2 million tonnes and a total capacity of 11.4 million tonnes.

On top of this, Rusal also has two aluminium smelters in Siberia with a combined capacity of about 1 million tonnes that were about 25%-30% completed when the company put construction on hold in early 2009 at the height of the financial crisis. To restart those projects, the company will either need to reduce its debt/Ebitda level to below three times -- by which time it will be allowed to start paying dividends or invest in development projects again -- or obtain project finance without recourse back to the company.

Since the company's debt-to-Ebitda ratio stood at 47.2 times at the end of June last year, a reduction down to three times will take some time. However, at a press conference last night Volynets told the assembled Hong Kong press that it is wrong to say that Rusal is a company in financial difficulties. Having entered into a debt restructuring agreement with its domestic and international creditors a few months ago, the repayment of its $14.9 billion of debt is now linked to cash flows and the company has a lot of flexibility to continue to grow its business, he said.

"The company is in a stable financial position. We have reduced our costs and we have restructured our debt. We have no fixed amortisation schedule, so it is basically a 'pay as you can' situation," he said.

However, the company has committed to reduce its debt burden by $5 billion by the end of 2013, which, according to Volynets, it is "more than comfortable" that it will be able to do. For one, aluminium prices have risen much more strongly in recent months than the company and its creditors expected when the restructuring was agreed in the summer, which means that the company's cash flows and earnings towards the end of 2009 were also much better than expected.

Together with the IPO proceeds, that puts the company in a good position to fulfil its debt reduction targets, Volynets said.

He also revealed that Rusal is in discussion about potential project financing options for its two Siberian smelters, which would give it an opportunity to restart construction of these two projects before it reaches its debt reduction targets. Becoming a publicly listed company should help in those discussions, he said.

Rusal, which is starting to sell shares to institutional investors today, is looking to raise between HK$14.65 billion and HK$20.13 billion ($1.89 billion to $2.60 billion). The deal consists of 1.61 billion new shares, accounting for 10.6% of the company, which are offered at a price between HK$9.10 and HK$12.50 apiece. The range is quite wide and the company had the option to narrow it somewhat before today's launch of the formal roadshow, but after a week of premarketing, it decided to keep it unchanged.

Rusal had initially hoped to go public at the end of last year, but the plans were delayed as the listing approval from the Hong Kong stock exchange took longer to secure than it had hoped. In a move that suggested a certain urgency, the company then decided to issue a listing prospectus before they even started the pre-marketing so as to meet the December 31 deadline (any later and the June 30, 2009 financials would no longer have been accepted), so that it could still get the listing done in January.

Under the current timetable, the books will close and the final price will be determined on January 22 and the trading debut will follow on January 27.

Volynets said the rush was prompted by the fact that now is a perfect time for Rusal to approach investors.

"You sell on expectations and expectations are now pretty good," he said. "The global economy is coming out of recession. Growth has returned to places outside China -- Japan, Western Europe, North America are all showing very positive signs -- and demand for commodities are picking up based on the economy. On top of that, interest rates are low and the US has printed a lot of dollars so commodities as an investment class is performing very strongly."

Add to that Rusal's own emergence from financial and operational restructuring, which has left it at an inflection point.

Aluminium is one of the most rewarding commodities to invest in at the bottom of an economic cycle as it is more geared towards economic growth than most other commodities. According to Volynets, for every 1% economic growth, you get 2.4% growth in the demand for aluminium.

The reason is that the transport (including car manufacturing) and construction, which are the two key demand sectors with 50% of the global aluminium consumption, were the most hit in the recession. Thus, when the cycle turns, they are coming back strongly and Volynets said Rusal expects very strong demand as the global supply chain restocks. And despite the rally in recent months, aluminium prices are still only at the early part of an expected uptrend, he argued.  

BNP Paribas and Credit Suisse are joint sponsors and joint global coordinators for the listing as well as joint bookrunners together with Bank of America Merrill Lynch, BOC International, Nomura, Renaissance Capital, Sberbank and VTB Capital. N M Rothschild & Sons is acting as a financial adviser to the company.