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By John Helmer in Moscow

An unprecedented strike by Russian bauxite miners halts Rusal production in Urals

Richard the Lionheart (1157-99) was the greatest of English soldiers; the greatest artilleryman of all time. In laying siege to an enemy’s position, Richard applied the principle of concentrating force at the point of least resistance – bombarding a castle wall at its weakest point, at the same time as sappers dug under the foundation to bring the structure down.

The Independent Miners’ Union of Russia hasn’t read the playbook of Richard’s sieges. They are professional, however, when it comes to undermining a fortified position. Their down-tools strikes at coal pits and rail blockades in 1995 compelled then President Boris Yeltsin to make concessions to wage demands, which no other Russian workforce has been able to achieve since the end of Communist power. The independently unionized bauxite miners have now emerged to wage a week-old strike against Oleg Deripaska’s United Company Rusal in the Urals mining town of Severuralsk, in central Russia.

This is the first organized claim by miners against a Russian metals oligarch for a share in the wealth he has been accumulating in the current commodity boom. It is also the first break by an independent miners’ union to overwhelm resistance from the company-favoured union.

Publicly, Rusal is minimizing the impact of the strike by claiming to hold substantial bauxite in reserve to feed the alumina refinery at Bogoslovsk, which in turn feeds the aluminium smelter at Uralsk. But the early indications are that 20% of Rusal’s aggregate bauxite production has been halted.

That amounts to 9,500 tonnes of bauxite per day. Multiply this by the 14 to 30 days expected to delay the reopening of the mine, and the loss of production, expressed in terms of primary aluminium, ranges between 30,000 and 72,000 tonnes. At the current LME spot price, that represents loss of value of between $96 million and $207 million.

It is rare for a Russian to inflict that much damage on Deripaska, and get away with it; even though the total extra wage bill demanded by the strikers for the year would cost Rusal no more than $14 million.

The Severuralsk bauxite mine is referred to by its official corporate title in English as North Ural Bauxite Mining Company; the Russian acronym is SUBR; the shaft and pit on strike are called the Red Riding Hood mine.

Formerly the property of Vasily Anismov, then Victor Vekselberg’s SUAL, it was merged with Rusal last year. It produces bauxite for conversion into alumina, the feedstock for the electrolytic process that turns out aluminium. Severuralsk is an underground operation. Indeed, it is one of the last underground bauxite mines in the world.

The strike began on the evening of March 26, when, according to a local mine union source, 107 miners completing the night shift refused to leave the mine. Twenty-four hours later, they sent up their demands. Altogether, there are 11; they are signed by Valery Zolotarev of the Independent Miners Union unit at Red Riding Hood. There are four unions at the mine. Zolotarev’s represents 240 miners; the Mining and Metallurgical Union represents 2,300; there are two additional unionized groups with even smaller numbers. All four signed the collective agreement on work and pay last December.

The big union began by officially denouncing the smaller union’s strike as illegal, although it is helping to support the men underground with food and medical care. 96 miners remain underground today, according to Oksana Sgibneva, spokesman for the Mining and Metallurgical Union.

The main strike demands are for a 50% increase in salary over the current average of Rb18,300 per month ($760); for resumption of company financing of social welfare programmes which Rusal cancelled on January 1; increase in mine investment; halt to weekend work; and amnesty for the strikers.

Russian reporters at the scene say Rusal has halted work at the mine, and put all employees on reduced pay. Intended to split the striking miners from the non-strikers, this has boomeranged. Vera Kurochkina, Rusal’s spokesman in Moscow, speaking anonymously, has told the press the shutdown resulted from “provocative actions” and the “unwillingness of union leaders to enter constructive dialogue.” A local statement issued by Rusal said it was taking court action to obtain a ruling that the strike is illegal on the grounds that it is “not other than the capture of private property which is not excluding terrorist actions”. Rusal may then order police and marshals to use force.

A union source told Mineweb that “we’ve got law enforcement, the FSB [formerly KGB], Sverdlovsk regional government, even some deputies from the State Duma [federal parliament]. Everyone is trying to pressure the workers to stop striking.”

Sgibneva told Mineweb that Rusal told the major union to testify in support of the company at a court hearing today. She said: “we have refused to [testify for Rusal]. We will participate as an independent witness on the side of the [Independent] Union.”

Local press reports claim that the wildcatters are now backed by other miners, and most of the town’s population, who came out for a solidarity rally on Sunday.

Asked if strike breakers had been called in by Rusal to intimate the miners and their sympathizers, Sgibneva said: “We have had nothing like that here. At least, I don’t know about the facts of criminal actions, although Rusal is pressing very hard though economical levers. The Severuralsk problem is that the city is constructed around a mine. There are no other jobs here.”

The Rusal website in English has not yet acknowledged the strike, although the news of a miner’s strike always attracts national interest in Russia; and this one has been on the national television news for several days.

Rusal’s website is also two years out of date in reporting on Severuralsk’s operations. It reports that “the North Ural Mine Company [“Severuralask”] is located in Severuralsk, 450 kilometres from Yekaterinburg, the administrative centre of the Sverdlovsk region. The North Urals Bauxite Deposit has extensive reserves of high quality materials. Development of the mine started in 1938. The extracted ore is delivered to Bogoslovsk and Ural aluminium smelters. In 2006, bauxite output was 3.4 mln tonnes, 100.1% higher than in 2005.”

The town of 33,400, according to Rusal, largely depends on the mine, as was the Soviet planning practice, though there is also a construction materials plant and a sewing factory. Though the mine operation is now 70 years old, Rusal acquired from SUAL an investment in upgrade that came on stream in 2005. “The majority of bauxites,” according to a Rusal posting, “are extracted by the underground method at a depth of 800 metres. These extremely difficult mining and hydro-geological conditions require substantial annual investments to sustain existing capacities. The Novokalyinskaya pit was put into operation in 2005 to compensate for the reduction in bauxite output resulting from the depletion of ore reserves in Ivdelsk mines and pits 15-15 bis and 16-16 bis.”

The mine management refuses to answer questions about output since SUAL lost control last year to Rusal. SUAL’s archive of production and performance reports is no longer accessible. Mineweb’s Russia archive reveals that in January of 2002, SUAL announced that it was closing the neighbouring South Ural Bauxite Mine, also an underground operation, and abandoning at least one million tonnes of bauxite reserves underground. The reason was twofold – costs were rising, and SUAL had lower-cost alternative supplies of bauxite from Severuralsk, and from a new open-pit mine further north in the Komi region; this is the Middle Timan mine, now Russia’s largest bauxite source.

At peak, in the 1970s, South Ural was producing 700,000 tonnes per year. In 2002, it was down to 300,000 tonnes. But Severuralsk, by contrast, was operating then at capacity of 3.5 million tonnes. SUAL told Mineweb in 2002 that reserves at Severuralsk would support mining there for another fifty years.

Rusal has provided some mine information to reporters to demonstrate why it might not stay so long. Production per miner at Severuralsk, according to the company, is currently 480 tonnes per year. This contrasts with 3,522 tonnes in Guinea and 3,809 tonnes in Guyana. Rusal has been facing strikes in Guinea also.

Rusal avoids issuing public reports of its Russian mine, refinery, and smelter production figures. Instead, the highly secretive private company reports consolidated global numbers. For 2007, Rusal says, total bauxite production was 17.4 million tonnes, down 6,736 tonnes from 2006. Alumina output was 11.4 million tonnes, up 5% year on year. Aluminium grew in volume by 6% to 4.2 million tonnes. Galina Stelmakova, a leading aluminium consultant in Moscow, told Mineweb: “there are no Russian charts for [domestic output of] bauxite or aluminium”.

The union has provided Mineweb with production data for the Severuralsk mining company. In 2006, under SUAL management, this was 3.2 million tonnes. Last year, it was back to full capacity of 3.5 million tonnes. Company plans indicate that, with the right amount of investment, output could be lifted to 4.2 million tonnes. This is why the strikers are making investment part of their demands. They are skeptical that Rusal intends to implement the plan.

“We are Rusal’s hostages,” one newspaper quoted Igor Taroyev, a blaster who has worked at the pit for 19 years. “There is no [other] place to work around here. If Rusal leaves, Severouralsk will die.”

Sbigneva told Mineweb the unions understand the position. “Rusal is actively promoting their position here through the local press. The position is that ‘they can’t lift the salary by 50% because then the Severuralsk bauxite will become non-profitable. And then it would be cheaper to bring bauxite from Timan or even Guinea.’”’

Rusal’s Kurochkina is reported by a Moscow newspaper as claiming investment is on the way: “two years ago, we [SUAL]started the construction of a new mine, and it will be completed by 2010. But the resources of the existing [Little Red Riding Hood] mine are estimated [to last] until 2031, so there shouldn’t be any concern that there is no work at this mine.”

Rusal’s controlling shareholder Deripaska has alternatives elsewhere. If the cost of mining rises too fast, it eats into the profit margin he is exporting abroad through the Rusal chain of companies to cashboxes in Luxemburg – Altechnology Invest Holding SA; Almetaltrade Holding SA; Intermetal Investment Holding SA; and their parent, Alincor SA. The evidence on these companies is emerging from Mikhail Chernoy’s lawsuit against Deripaska in the UK High Court. According to the evidence that has spilled into the public realm, they are conduits between the Russian mines, refineries, smelters, and export trading units, and the strong-room, Deripaska’s Radom Foundation, apparently a Liechtenstein entity.

The revenues moving through this corporate chain have grown as the LME price for Russian aluminium has jumped by more than 200% over the past five years. Alumina pricing has been more volatile, moving both up and down in the period. Comparing the spot price in March 2008, with the price five years earlier, alumina has jumped 63%. Spot pricing for bauxite is difficult to track, but the trend for both long and short-term contracts is clear – steadily upwards.

By contrast, the Severuralsk miners claim they are suffering absolute and real wage cuts, and that the nominal increase agreed last December is not even keeping pace with local inflation of more than 15% per annum.

To dissuade them, Rusal has therefore disclosed that it may opt to mine bauxite at lower-cost per tonne sites in Guinea, West Africa; in India; and in Guyana, South America. Once established there, Rusal prefers to ship the ore to alumina refineries and aluminium plants much closer than Russia. Thus, Rusal’s parallel international chain of production is gradually exiting Russia, just as Deripaska’s profit stream has been doing all along.

Rusal is a private company, and its financial reports lack specificity. There is no publicly available breakdown of mine,refinery, and smelter costs, and apart from government regulated electricity tariffs, it is impossible to calculate input and production costs for units like Severuralsk.

The only person permitted by Deripaska and Rusal chief executive Alexander Bulygin to assess and publicly report costs and margins was Vladimir Titkov, in 2000 a metals analyst at Renaissance Capital. According to a report written by Titkov in February of that year, “46% of the [Rusal] group’s costs are associated with its mining and alumina refining operations, a figure much higher than the average of its international peers.”

Titkov conceded, however, that state fixed costs of electricity, the single biggest cost input in aluminium production, kept Rusal’s margin high. “On a cost per tonne of primary aluminium basis, Rusal Group is among the top 25% of all aluminium producers with the lowest production costs.” The rising cost of Russian electricity was a “considerable challenge” for Rusal, Titkov reported. The analyst went on to employment at the Rusal group, where he remains.

Documents on what happens to Rusal’s profit margin, reinvestment, and Deripaska’s dividend stream are not released. However, they have begun to appear in the wake of the High Court case, as Chernoy, Deripaska’s partner and sponsor in the aluminium industry, sues to recover his equity stake, plus profit and dividend share from Rusal and Deripaska’s holding, Basic Element.

Until recently Deripaska’s defence has been to argue that the UK court has no jurisdiction over him; that he has no business relationship with Chernoy, nor any contractual obligation. A new book by a pro-Deripaska reporter named Andrei Kalitin, and briefings Deripaska’s supporters have given to western reporters, claim that Deripaska was already well established in the Russian aluminium business before he met Chernoy. The High Court will shortly resume hearing these claims.

In the meantime, the miners’ strike at Severuralsk is barking at Deripaska’s rear, signaling that the 15-year cycle of his aluminium business in Russia may be approaching a rising-cost, contracting-margin crisis, made worse by the unpopularity of Rusal’s business strategy, and the unprecedented idea that the company is accountable.

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