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By John Helmer, Moscow

Winston Churchill likened his inability to know what happens in Moscow to a case of bulldogs fighting under a rug. Ivan Glasenberg (right), chief executive of GlencoreXstrata, and Oleg Deripaska (left), chief executive of United Company Rusal — secretive though they are — are too fond of each other to fight. What they do under the rug is something else.

So when Glencore announced last week that it is marking its shareholding in United Company Rusal for sale at $394 million, 53% less than the year before, it’s clear that for Glencore the Rusal stake is a pup. Less obvious is it that when Glencore says it is selling Rusal, it means to do what it says.

The March 4 statement in Glencore’s earnings release says: “Glencore accounts for its interest in United Company Rusal…as an available for sale investment at fair value with mark to market movements recognised in other comprehensive income (“OCI”). As a result of the continuing challenging macro-economic environment impacting the global aluminium market, in December 2012, it was determined that previously negative fair value adjustments were of a prolonged nature and therefore reclassified from OCI to the consolidated statement of income.” From a value of the Rusal stake of $840 million, released in Glencore’s annual report for 2012, the new value at the end of 2013 is $394 million.


Source: Bloomberg

Glencore has held an 8.75% shareholding in Rusal since Rusal’s initial public offering ((IPO) on the Hong Kong Stock Exchange in January 2010. The latest calculation follows the collapse of Rusal’s share price from HK$4.99 at the start of trading in January 2013, to HK$2.30 on December 31, 2013. But does the wording by auditor Ernst & Young signal Glencore’s decision to sell out of Rusal, if it can?

The instant answer is that it won’t because it is hoping the value of Rusal will recover. Today’s Rusal share price is HK2.51, so Glencore’s 8.75% is now worth $430 million.

When Glencore first merged its alumina assets and took a shareholding in Rusal in October 2006, the stake amounted to 12%, according to an internal valuation of assets which hasn’t been made public. The Deripaska stakeholder, his EN+ holding, held 66% of the unlisted company, while the SUAL partners, Victor Vekselberg and Len Blavatnik, held 22%. In the European Commission’s assessment of the original transaction, the largest part of Glencore’s production and trading business in alumina was absorbed in the Rusal merger, leaving Glencore with less than a million tonnes per annum of the alumina it had been producing for the European market: “given that the rationale of the entire transaction is to provide Rusal with alumina supplies, the sales of the merged entity on the merchant market will decrease considerably.”

Rusal and Glencore documents show that following Mikhail Prokhorov’s buy into Rusal in April 2008, Glencore’s stake was diluted to 10.32%. By December 2009, when Rusal managed to arrange its IPO, Glencore held 9.7%. After the IPO Glencore retained a shareholding of 8.75% (page 89). The company’s 2010 report reveals that it valued its stake at $2.003 billion in 2009, and increased the value by the end of 2010 to $2.048 billion. The auditor’s notes say the Rusal stake was the primary asset in Glencore’s “other investments”. There is nothing about Glencore holding the stake for sale.

This changed in the report for 2011. There, for the first time, Glencore claimed Rusal was an investment “available for sale”. At Note 7 of the auditor’s notes it was acknowledged that from a value of $2.048 billion in 2010, the stake had dropped to $842 million by the end of 2011.

The following year Ernst & Young tried explaining (to the public shareholders Glencore acquired in May of 2011) what the Glencore management were doing. “Non-current assets and disposal groups are classified as held-for-sale if their carrying amounts will be recovered through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the assets or disposal groups are available for immediate sale in their present condition. The Group must be committed to the sale which should be expected to qualify for recognition as a completed sale within one year of the date of classification.” It isn’t made clear in the report whether Rusal is one of these.

The 2012 report also identified “available-for-sale financial assets…those non-derivative financial assets that are designated as available-for-sale or are not classified in any of the other three stated categories. After initial recognition, available-for-sale financial assets are measured at fair value with gains or losses being recognised as a separate component of equity until the investment is derecognised or until the investment is determined to be impaired, at which time the cumulative gain or loss previously reported in equity is included in the income statement. Listed share investments are carried at fair value based on stock exchange quoted prices at the balance sheet date…If an available-for-sale financial asset is impaired, an amount comprising the difference between its cost (net of any principal payment and amortisation) and its current fair value, less any impairment loss previously recognised in profit or loss, is transferred from equity to the income statement.”

Glencore’s report for 2011 didn’t identify its Rusal stake as one of these. Its list of “principal operating, finance and industrial subsidiaries and investments” doesn’t mention Rusal at all. By contrast, Rusal is included in the identically titled list for 2012. The 2012 report also called Rusal a “listed associate” as well as “[an]other investment”; marked it as “available for sale”; and reduced its value from $842 million at the start of 2012 to $840 million at the close of the year. The write-down corresponds to the change in the share price over the 12-month period.

Rusal was also subject to a different accounting calculation called “fair value through profit and loss – held for trading”. According to Glencore, Rusal was worth even less on this count, $749 million, than its stock market valuation.


Glencore management give the impression to their shareholders that as the aluminium price has dropped, Rusal’s debt bill has grown, and the share value has evaporated, they have changed their mind about holding on to the Rusal shares. “Financial assets are classified as either financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments or available-for-sale financial assets, as appropriate. The Group determines the classification of its financial assets at initial recognition. Where, as a result of a change in intention or ability [emphasis added], it is no longer appropriate to classify an investment as held-to-maturity, the investment is reclassified into the available-for-sale category.”

So Glencore was asked this morning how to interpret the terminology of the financial reports, and what the present intention is of the management towards Rusal. Since the management have kept an asset which has dropped to a fifth of its value since January in 2010, while instructing the accountants to say the stake was for immediate sale, why hang on? Paul Smith, the investor relations spokesman for Glencore, and Charles Watenphul, the press spokesman, declined to answer.

A source close to Glencore said “there is no real will or attempt to sell Rusal’s shares by Glencore. Besides, there are no buyers… It’s a deep crisis in the aluminium industry indeed.” A second source, also in Switzerland, claims Glasenberg and his board don’t want to sell out of Rusal because it is more lucrative as a trading operation than the bookkeeping reports allow to be seen. The first source adds: “I’ve been told that Glencore is financing Rusal on its privileged contracts, buying for stocks rather than making any big profit.”

Details of the contracts Glasenberg agreed with Deripaska in late 2011 were reported here. They have been the subject of a damages claim by Vekselberg and Blavatnik at the London Court of International Arbitration, following Vekselberg’s resignation as chairman of the Rusal board in March 2012. Vekselberg protested against the Glencore contracts, saying he had “disagreed with a number of decisions in relation to the company’s strategic development… some of which were adopted by management without Board approval and in breach of shareholder agreements.” The London court proceeding continues but in January of this year, Rusal announced a partial settlement with Glencore.

Until Glencore became a publicly listed company itself in May 2011, it kept secret the tonnage of alumina and aluminium it produced or traded and sold for Rusal, along with Glencore’s two small associated companies in the US, Sherwin (aka Allied Alumina Inc.) and Century Aluminium. In Glencore’s report for 2012, it is disclosed that Glencore “marketed” and “sold” a total of 11.5 million tonnes of alumina and aluminium counted together. (The comparable volume revealed for 2011 was 11.4 million tonnes.)

The volume of alumina produced at Sherwin for 2012, according to Glencore, was 1.4 million tonnes (in 2013 1.6 million tonnes). In the same interval the volume of shipments (sales) from Century – of which Glencore owns a 46.4% stake – was 646,529 tonnes. Supposing that Glencore traded all Century’s metal, that would leave a balance of 9,474,471 tonnes whose origin on Glencore’s sales sheets isn’t clear.

In 2012, according to Rusal’s report for that year, it produced 4,173,000 tonnes of aluminium, plus 7,477,000 tonnes of alumina, making a grand total of 11.65 million tonnes. But Rusal claims it sold only 4.2 million tonnes of aluminium, 1.6 million tonnes of alumina — page 32. Thus, Rusal says it sold 5.8 million tonnes of both aluminium and alumina that year. So even if Glencore sold every tonne, Glencore managed to sell another 3.7 million tonnes from sources which are unidentified and unaccounted for.

The average price of alumina in 2012 was $319 per tonne; the average price for aluminium $2,022 per tonne, plus a warehouse premium. So the missing 3.7 million tonnes Glencore sold without identifying the source are likely to have been worth between $2 billion and $3 billion to Glencore’s revenue line. Much more, in short, than all the value written off the Rusal shareholding. Is that value what Glasenberg and Deripaska are hiding under the rug?

Asked what sources account for the 11.5 million tonne aggregate, or the 3.7 million tonne difference, Glencore won’t say.


In all likelihood, Glencore is selling out of what it calls “marketing inventories”. These are defined in Note 12 of the March 4 report for 2013 as “saleable commodities held primarily by the marketing entities as well as finished goods and certain other readily saleable materials held by the industrial assets.” Glencore gives its shareholders no inventory breakdown by metal, and no disclosure of the tonnage of alumina and aluminium in stock. Whatever that figure is, it is almost certain to have come from Rusal, in an elaborate scheme of warehousing and market manipulation reported here. In 2012 Glencore estimated its inventory value at $16 billion; in 2013, $13 billion. These numbers are reportedly calculated “at fair value less costs to sell”.

Inside that number is a figure for Rusal stocks whose book value is several magnitudes larger the $394 million price Glencore put on its Rusal shareholding last week. That’s the bulldog under the rug.

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