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DwB_1690

By John Helmer, Moscow

Vladimir Potanin (right), control shareholder of Norilsk Nickel, loves Oleg Deripaska (left), control shareholder of Russian Aluminium (Rusal).

Potanin made his inamorata official on Monday. He even quoted Vladimir Lenin’s version of withdrawing before ejaculation, announcing that with Deripaska it has been necessary to “disconnect before combining…Time has shown that it was necessary to plunge into some negative, and only then move on to the positive. However, all this is in the past. The situation in comparison with 2012 has changed dramatically. There is not just a good, but a very high level of trust…” They call each other by their first names, and by the intimate you (“по имени и на ты”).

Let noone imagine, therefore, that Potanin’s former wife, Natalia Potanina, who is suing in courts all over the world for half of Potanin’s wealth, including his 30% of Norilsk Nickel shareholding, is Deripaska’s agent in a hostile takeover scheme.

The last time a gambit like that was attempted was in 2001, when Iskander Makhmudov financed the application to the Moscow courts by Yelena Mordashova, the first wife of Alexei Mordashov, to freeze, then take his control shares in the steel company Severstal, which Makhmudov wanted to take over himself. He failed, and so did Mordashova. The Russian press speculation of Deripaska’s hand (money) behind Natalia Potanina’s US lawyers and other signs have been dismissed by insiders as coincidences. Potanin’s announcement of how intimate he and Deripaska have become ought to be convincing.

When Potanina’s PR consultant and lawyer, Oksana Kosachenko and Philip Ryabchenko , arranged for her to plead her case in the London media late last month, Potanina went out of her way to claim that if she wins control of half of Potanin’s shares in Norilsk Nickel, she would put them under state control. The Sunday Times reported Potanina (below, left) was “elegantly dressed in black”; “sipped orange juice”, proofed the photographs being taken of her; and is too poor to take a holiday in Italy. The reporter omitted to ask what she meant by handing over her winnings to the state.

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Russian reporters have not been as careless. They note that the terms of the shareholder agreement between Potanin, Deripaska and Roman Abramovich (above, right), which ended their conflict in December 2012, would reopen Deripaska’s opportunity to capture control of Norilsk Nickel if Potanin’s shares were lost to him, or transferred to another, any other. For more on that deal, read this.

Potanin’s interview appears to have been timed to respond to his ex-wife’s. His declaration in Deripaska’s direction also intimates that their bosom relationship rules out Natalia’s embrace of Deripaska. But Deripaska has yet to reciprocate. According to a Rusal insider, “OD is a cunning person, so you can never be so sure.”

One thing is surer. When the Rusal shareholders met at the company’s annual general meeting on June 26, there was no love lost toward Deripaska on the part of the three men who know him just as intimately as Potanin — Victor Vekselberg, Len Blavatnik, and Mikhail Prokhorov. Together, they hold 32.82% of Rusal shares, compared to Deripaska’s 48.13%. In a vote of deep distrust, they blocked renewal of the mandate Deripaska has enjoyed for the past year to use Rusal cash to buy the company’s shares and manipulate its share price on the Hong Kong and Moscow stock exchanges.

Their vote has been followed by the drop in Rusal’s share to HK$ $3.11. This is its lowest level since last November, when the share price hit its lowest-ever value of HK$2.19. At that point, the market capitalization of Rusal was equivalent to US$4.3 billion. At this week’s low, the market cap is US$6.8 billion. Despite a profit on the bottom-line in the first quarter results, the market expectation today is for revenues and profits to drop; and for Rusal’s share price to follow downwards. In simple terms, the company is sinking into deeper hock than it is worth: Rusal’s net debt as of March 31 was $8.6 billion.

SHARE PRICE TRAJECTORY FOR RUSAL, 2010-2015

Bloomberg_chart

Source: http://www.bloomberg.com/quote/486:HK

There are market reasons for the latest loss of value. The London Metals Exchange (LME) price of aluminium is plummeting. At the same time, the warehouse premium for prompt delivery of the metal to physical buyers has been dropping, following an LME rule change, and under pressure from large volumes of ready-delivery Chinese export metal.

Aluminium price
Source: http://www.infomine.com

In the first quarter to March 31, Rusal reported it was receiving a premium of $424 per tonne. By the time Rusal releases its second-quarter trading results late in August, this premium is expected to have fallen by at least $300 to around $100 per tonne. Reuters’ aluminium analyst Andy Home calls this a meltdown.

GAP

As these factors have been driving down Rusal’s share price (Alcoa and Chalco, too), the lack of love between Deripaska and his shareholders has been on display in Hong Kong, making it impossible for Deripaska to brake the decline or steady his share price. Here is the company report on the voting for Resolutions 4, 5, and 6. This shows that 39.3% of votes were cast not to permit Deripaska and his allies on the board to issue new shares; the company voting rules allowed this motion to carry. But as a special resolution, Deripaska’s attempt to secure the authority to repurchase existing Rusal shares was opposed by 38.5% — and he didn’t have enough votes to carry. Because Resolution 5 was lost, the related Resolution 6 was also defeated.

ProkhorovVekselberg, Blavatnik and Prokhorov (right) voted to stop these share-dealing resolutions – combined, they can vote a total of 32.82%. The reason, insiders explain, is they want to exercise greater shareholder control of Deripaska’s actions. The remaining percentages of no-votes must have come from the 10% of free-floating shareholders. More than half of them were also unenamoured of Deripaska’s proposals.

The distrust of Deripaska ran deep. The circular presented to shareholders ahead of the vote suggested Deripaska was promising not to do what he was asking for authority to do – and wasn’t believed. “With reference to the proposed Issue Mandate, the Directors have no immediate plans to issue any Securities pursuant to the Issue Mandate. With reference to the proposed Repurchase Mandate, the Company does not have any immediate plans to repurchase Ordinary Shares pursuant to the Repurchase Mandate.” The reason, according to Deripaska’s notice, was that Rusal doesn’t have the cash. It also can’t borrow more money to buy shares in order to lift the price, improve the value of its loan collateral, and soften the terms agreed with the banks.

According to Appendix III of the circular, “the Directors consider that if the Repurchase Mandate were to be exercised in full at the currently prevailing market value, it may have a material adverse impact on the working capital position and gearing position of the Company. The Directors do not propose to exercise the Repurchase Mandate to such an extent as would, in the circumstances, have a material adverse effect on the working capital requirements of the Company as compared with the position disclosed in the latest published audited financial statements or the gearing levels which in the opinion of the Directors are from time to time appropriate for the Company.”

So why did Deripaska force the vote, miscalculating the level of shareholder support for his promise? According to a Rusal insider, “OD is obviously and finally out of cash… thanks to Potanin, too. It’s hard to predict whether their new friendship will withstand the 2nd quarter results.”

The impact on Rusal’s balance-sheet won’t be visible until late in August, when the June 30 results are scheduled for release. The reference to Potanin is to reports that he is trying to withhold payment of the Norilsk Nickel dividends which are sustaining Rusal’s bottom-line against losses. If that’s love between Potanin and Deripaska, it’s tough love.

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