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By John Helmer, Moscow

Insiders at the Russian aluminium monopoly Rusal say that chief executive and control shareholder Oleg Deripaska has been miscalculating the effect of share price surges Rusal has enjoyed on the Hong Kong Stock Exchange in recent weeks. That’s because the share price gains have been quickly reversed – and because Rusal’s most important lender, state owned Sberbank, is unpersuaded that the value of the company is gaining.

Sources on the Hong Kong exchange acknowledge a case officer has been assigned to monitor share trading of Rusal, and that he has been aware of abnormal trade volumes on several days in February and March, along with seesawing in the price of the share. But the Exchange chief executive, Charles Li, is reluctant to confirm what the exchange has done to uncover what happened and enforce exchange trading rules. The exchange is also afraid of being accused of covering up irregular trading practice and inside information. According to Li’s spokesman, Scott Sapp, “HKEx does not comment on individual companies or its regulatory actions.” Sapp then asked not to be named.

In recent days Rusal has briefed the Russian media to support its case for better terms for its Sberbank loans of $4.6 billion, $453 million, and Rb20.7 billion. Roughly half of Rusal’s $9 billion debt is owed to Sberbank. Its first loan was arranged in September 2010, when Sberbank took over from state-owned Vnesheconombank (VEB), which two years earlier had saved Rusal from foreclosure when it could not repay a group of foreign banks for Deripaska’s purchase of a stake in Norilsk Nickel from Mikhail Prokhorov. That stake is now 27.82%.

The original tenor of the Sberbank loan was for three years to September 2013, with an interest rate of Libor plus 5%. This was revised, Rusal documents indicate, to lengthen the term to 2017 for the large loan, 2018 for the smaller one.

Rusal documents also report that the interest rate for most of the loan amount was cut to 1-year Libor plus 4.5% until September 2016, when the interest rate is re-fixed at 3-month Libor plus 4.7%. Interest repayments in Rusal’s balance-sheets have grown from $682 million in 2012 to $775 million in 2013 and $847 million in 2014.

In press leaks, Rusal has claimed that a rising aluminium price, and falling rouble, should mean more profit this year, so greater capacity to meet its interest bill.

Source: http://www.infomine.com

There is a hitch in the argument. As the aluminium chart above, and the rouble chart below indicate, the price of aluminium has been dropping this year, and the value of the rouble gaining.


Source: http://www.xe.com

Sberbank should be prepared to extend its loan maturity and reduce its interest rate, Rusal officials and their consultants have been telling the bank, so as to allow Rusal more cash to spend for other purposes. For more on the Rusal performance in 2014, read this.

To convince Sberbank, Rusal insiders claim Deripaska (below left) tried to show German Gref (right), Sberbank’s chief executive, that the international market agrees with him.


A source close to Rusal says that “a few top guys in the company” arranged a sharp upward spike in the share price with an exaggerated trading volume. “It’s being done by Deripaska using very discreet methods. There is no commercial basis for such a sudden increase of Rusal’s share price, while aluminium is still fluctuating between $1,750 and $1,800.” The rationale, adds the company source, is “because Rusal desperately needs to restructure its debt to Sberbank now.”

A senior Rusal source says the share price rigging was related, not to the Sberbank loans, but rather to VTB. Also state-owned, in December of 2013 VTB issued a loan of up to Rb15 billion ($456 million) to Rusal for a five-year term; interest started at 3-month Mosprime plus 4%. On December 17, 2013, the company reported drawing $307 million of the credit. EN+, Deripaska’s holding, has also borrowed heavily from VTB, securing its loan in part by shares which EN+ holds in Rusal. For the details of that loan at commencement, click. VTB continues to hold a seat on the EN+ board. A Rusal source explains: “Oleg periodically intensifies trading to push up the price of the [Rusal] shares to avoid margin calls on VTB’s loan to EN+ to keep up the value of the collateral stake in Rusal.”

The Rusal share price trajectory so far this year looks like this:


And here’s the daily trading volume over the same period:

Source: Hong Kong Stock Exchange

According to the Bloomberg calculation, the 30-day average for Rusal share trading volume is 3.5 million. So it is evident there was unusual trading activity around February 6, and then again on March 12 and the days following. The precise figures are that on February 6 and 9, shares traded totalled 5.4 and 5.7 million, respectively. On March 12 the number shot up to 9.7 million; on March 16, 6.4 million; on March 24, 6.9 million; and on March 25, 6.6 million.

It’s also obvious that the February trading pushed the share price up, while a month later the turnover drove the share price down again. The current share price of HK4.69 (61 US cents) is lower than the level at which Rusal started the year. If this is a measure of market sentiment, confidence it isn’t.

Gref replied to the Rusal loan restructuring pitch by telling the Moscow papers last week: “We are not ready to restructure the debt . [There is] nothing new, unfortunately. We have not been given suitable proposals. We have held talks with consultants, there is nothing.” When asked to confirm Rusal’s proposed new terms and Sberbank’s assessment of them, the bank adds that it will not confirm or deny the press reports. As for Gref’s reported remarks, the bank spokesman said on Monday: “we will leave this subject with no comments.”

Unconvincing as Rusal has proved to be, what has been the significance of the share price movement? Most market sources believe the share demand is very small and easy to manipulate, so even speculative share traders and short bettors are discouraged. But is the record what the Hong Kong Stock Exchange rules call a “false market”?

Rusal ‘s responses have been contradictory. Twice in February, as the share price rose, the company issued notices to the Exchange claiming that “having made such enquiry with respect to the Company as is reasonable in the circumstances, the Board confirms that it is not aware of any reasons for these price and trading volume movements of the shares of the Company or of any information which must be announced to avoid a false market in the Company’s securities or of any inside information that needs to be disclosed under Part XIVA of the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong).”

Hong Kong’s Securities and Futures Commission (SFC), a government organ, has published detailed guidelines on inside information, and what listed companies like Rusal must do to comply with the rules against it. These can be read in full here. “The information about the particular corporation must be specific; the information must not be generally known to that segment of the market which deals or which would likely deal in the corporation‟s securities; and the information would, if so known be likely to have a material effect on the price of the corporation’s securities… For information to constitute inside information, there must be likelihood that the information would cause a change in the price of sufficient degree to amount to a material change.” Cited as examples are “changes in performance, or the expectation of the performance, of the business; changes in financial condition, e.g. cashflow crisis, credit crunch…changes in expected earnings or losses.” Once Deripaska knew the Norilsk Nickel dividend number was going to turn Rusal’s bottom-line from profit to loss, the SFC and the Exchange required him “as soon as reasonably practicable…disclose the information to the public.” Before that, the rules required Rusal to “ensure that the information is kept strictly confidential.” Once the Exchange analyst responsible for Rusal was alerted to the trading irregularities and the possibility of inside information, the rules required him to report to chief executive Li, and Li was required by Hong Kong law to prepare a dossier for the Insider Trading Tribunal.

In March, when the volume of trades jumped to a record high for the year, significantly greater than had been noted the month before, Rusal said nothing at all publicly except to record that in addition to its listing in Hong Kong, Rusal was opening the trade in its shares on the Moscow exchange (Micex). The share price fell by more in the March episode than it had risen in the February episode, and the share price has remained down. The company has remained silent.

In parallel Rusal’s US peer Alcoa has been going steadily down in market estimation, except for a blip early this month:

Source: http://www.alcoa.com

The Aluminium Company of China (Chalco), also listed on the Hong Kong exchange, declined until February 9, but it has been climbing more or less consistently since then:


Source: http://www.bloomberg.com/quote/2600:HK

The share trade volumes of Alcoa and Chalco dwarf Rusal’s. Alcoa has been averaging 30.4 million per day by the month, while Chalco has averaged 28.2 million. Rusal’s normal volume is roughly one-tenth this much; its peak, abnormal volume is still a one-third fraction of its peers.

Charles LiSo has the Hong Kong Stock Exchange judged there have been abnormalities in Rusal’s share trading, and if so, have there been insider trading infractions of the SFC rules? An exchange source said on Tuesday morning that as part of his regular routine the case officer assigned to Rusal has been following the share price and trade volume movements, and taken account of Rusal’s notices. Asked to say if there had been findings of a false market or insider trading, and to whom the investigation results have been reported, Scott Sapp replied: “HKEx does not comment on individual companies or its regulatory actions.” Sapp is spokesman for the exchange chief executive, Charles Li (right).

If the movement of the aluminium price and of the share prices of Alcoa and Chalco did not warrant Rusal’s February price spike and then price collapse in March, is it true, as Rusal told the stock exchange in February, that it was “not aware of any reasons for these price and trading volume movements of the shares of the Company or of any information which must be announced to avoid a false market”?

The stock exchange would prefer not to say. But the evidence of Rusal’s financial reports suggests that insiders may have been privy to early information which the market didn’t learn until later. According to the company’s financial report for 2014, released on February 25, Rusal recorded a profit of $253 million for the year – its first profit since 2011. This was in large measure the result of Rusal’s dividend from Norilsk Nickel of $884 million. On February 25, Andrei Shvetsov, KPMG’s auditor for Rusal, said in his introductory note to the financials that he had only been able to estimate Rusal’s share of the Norilsk Nickel proceeds because “we were unable to obtain sufficient appropriate audit evidence in relation to the [Rusal] group’s estimate of the share of [Norilsk Nickel] profit”.

A month and a half later, on April 13 Rusal issued this warning to the stock exchange. “As mentioned in the Update Announcement, on 31 March 2015, Norilsk Nickel published the Norilsk Nickel Financial Statements on its own website. Accordingly, the management of the Company has reviewed the Norilsk Nickel Financial Statements and is of the view that it has material adverse impact on the Company’s published consolidated financial statements for the year ended 31 December 2014.”

The bad news was that Rusal had received only half the cash from Norilsk Nickel which it had announced in February. “Share of profits of Norilsk Nickel (net of tax) should be USD469 million, rather than USD853 million as set out on page 20 of the Annual Results Announcement.” This then meant “a loss of USD91 million, rather than a profit USD293 million.” In leaks to the Moscow business media, the sharp correction in Norilsk Nickel dividend, which is denominated in roubles, was due to the rouble devaluation of the December quarter.

The restatement of income and the revision of the bottom line from black to red ought to have pushed the share price down. However, that had already happened — according to the chart above, starting on or about February 16. The effect of the April 13 disclosure was to move the share price back to where it had been at the start of April. The daily trading volume was close to normal.

Rusal entitled its April 13 notice “UPDATE ONTHE ANNUAL RESULTS ANNOUNCEMENTFOR THE YEAR ENDED 31 DECEMBER 2014 AND INSIDE INFORMATION”. The word “inside” isn’t referred to again in the notice, and there’s no disclaimer from Rusal’s board members regarding “inside information”. But that’s exactly what looks to have been pushing the course of the Rusal share price in February and March – upwards, when the value of the Norilsk Nickel dividend payment was being reported to be $884 million and Rusal’s profit $293 million; and then downwards, when it turned out the Norilsk Nickel dividend (before tax) was $500 million, and Rusal’s loss, $91 million.

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