Scanning numbers from the world's second largest aluminium company

by Simon Pirani

The first financial statements made available by Rusal show the merged Russian company leaving international rivals standing with a 25% rate of profit achieved by low costs.

The figures, in a research report by the Moscow-based investment company Renaissance Capital, show net sales for 2001 of $4.1 billion (2002 projection $4.3 billion), cost of goods sold of $2.9 billion (2002 projection $3.1 billion) and operating profits of $1 billion (2002 projection $0.9 billion).

A Rusal spokesman said the Renaissance report would be followed by GAAP accounts for 2001, audited by Pricewaterhousecoopers. These will be released by the middle of this year.

Moscow-based metals analysts greeted the appearance of the information on Rusal, whose unassailable dominance of the market has not been matched by a reputation for transparency. They also said questions about the deployment of Rusal’s cash pile remain unanswered.

On profitability, figures published by Vedomosti, Russia’s leading business newspaper, compared Rusal’s 25% rate of return (operating profit as a percentage of turnover for 2001) to 7.18% by Alcoa, 0.8% by Alcan and 3.88% by Pechiney.

Kaha Kiknavelidze, metals analyst at Troika Dialog investment company, said there was every reason to believe that Rusal will maintain its cost advantages over western producers. “Rusal's principle advantage is in energy costs, and these are likely to remain low since the group controls important suppliers. Low labour costs are also an important factor.”

Kiknavelidze estimates that Rusal pays less than 1 cent per kwh for electricity, compared to 1.3 cents paid by most Russian industrial consumers and 1.5-2 cents paid by Rusal's international competitors.

Crucial to Rusal's future was the use of its internal funds for expansion, Kiknavelidze said. “The company's investment programme is directed to those areas where they are weak: raw materials supply on one side, finished products output on the other.”

Some observers believe the figures leave too many questions unanswered about the deployment of Rusal’s cash pile.

Although Renaissance describes Rusal as “cash rich”, a balance sheet for 31 December 2000, i.e. shortly after the merger that created it, shows cash of only $33 million, and total current assets of $1,685 million. Total current liabilities are stated as $1,655 million, including $648 million short-term borrowings, $717 million accounts payable & advances received, and $137 million accrued liabilities.

Mikhail Seleznev, metals analyst at United Financial Group, said: “We are looking foward to seeing the 2001 balance sheet. Clearly the company was profitable in 2000, but had only $33 million cash at the year end. As a comparison, Norilsk Nickel had cash reserves of more than $600 million on a turnover of $4.9 billion.”

The Renaissance report offers no comment on the widely-held assumption that the acquisition of other industrial assets by Rusal’s shareholders are partly funded by proceeds from the aluminium business.

Apart from jointly owning Rusal, Siberian Aluminium and Millhouse Capital, the London-based holding company that manages Roman Abramovich’s assets, also control the Krasnoyarsk hydroelectric plant, the Irkutsk regional electricity company, the GAZ auto plant and a series of bus manufacturers.

On Rusal’s access to external financing, Renaissance states that “new and cheaper financing opportunities” are opening up, and that the company plans “to issue money market instruments some time this year, with a eurobond issue and IPO to follow thereafter”.

Western bankers who work closely with the company believe that corporate loans securitised by export receivables will remain the principal form of finance available to Rusal for now. The tenor of these is expected to increase from the one year term on which Rusal has made loans last year ($125 million from a syndicate headed by ING Barings and $47 million from a syndicate headed by Raiffeisen bank) and in 2000 ($100 million from West LB).

Rusal could also experiment in western markets with securitisation of export receivables, or  issue domestic bonds, now very popular among Russian corporates. Siobhan Walker, head of structured and general lending in Russia at ING, said: “Consolidated financials will be the key to unlocking both mid-term bank finance and the eurobond market for Rusal. Once these are produced the company will be a highly desirable borrower.” A Rusal spokesman said that eurobonds, which require three years of audited accounts, are a mid-term rather than short-term possibility. 

On consolidation of aluminium assets, the Renaissance report states that Rusal “will need cash to acquire the remaining stakes of minority shareholders”. Rusal does not disclose what the outstanding issues are, but Renaissances assumes that they include a dispute with Anatoly Bykov over a blocking stake (28% now under dilution) in the Krasnoyarsk aluminium smelter.

Renaissance’s review of Rusal’s operations concludes that mining and refining are both “bottlenecks”.

Rusal sources 50% of its bauxite from CBK of Guinea, which it controls, and 50% on the open market. CBK’s deposit is medium quality, and it targets 2.4 million tonnes of production in 2002 and 2.5 million tonnes in 2003. Rusal sources 100% of its nepheline ore internally, from the Kia-Shaltir deposit near Achinsk.

Rusal’s refineries provide it with half its total aluminal requirements. The rest is purchased, primarily from SUAL, the Pavlodar refinery in Kazakhstan, and from Australia, Ghana and Brazil.