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By John Helmer, Moscow

Rusal’s share price collapsed through the four-dollar threshold today, as the release of results at Friday’s Annual General Meeting (AGM) of Rusal shareholders revealed that the company is planning to use its shrinking cash reserves to try to prop up its share price.

In a dramatic warning issued in Moscow at the same time, Otkritie Capital warned current shareholders to sell. Rusal, according to Otkritie, is now “too illiquid and expensive to short given the lack of real catalysts, but we would avoid the stock on valuation grounds.” A Citi source has reiterated the US bank’s forecast of HK$1.80 as Rusal’s target share price, adding that since Citi’s April 18 assessment of Rusal “nothing has changed”.

According to a release to the Hong Kong Exchange today, Rusal’s controlling shareholders ran into significant opposition when they proposed two resolutions allowing the board to direct, and the company to pay for new share issues and repurchase of existing ones. Twenty-five percent of Rusal’s shareholders voted against the new issue authority, and 24% against the buy-back.

Even more sustained opposition by Rusal shareholders was voted against continuation on the board of Hong Kong lawyer and politician, Elsie Leung Oi-sie whose independent performance has been criticized by the minorities. For that story, read here. A total of 33.9% of shareholder votes were cast against Leung. They include Mikhail Prokhorov’s Onexim holding (17.02%), as well as Victor Vekselberg and Len Blavatnik (15.8%); the latter are suing the company and its chief executive in London for violations of the shareholder charter and for cash-stripping from the company.

The vote against Leung was the largest opposition count so far in Rusal’s 3-year history as a publicly listed company. The vote tabulations also reveal that the Russian state banks, which control at least 10% of Rusal’s shares, voted to keep Chief Executive Oleg Deripaska’s control scheme in place and prevent further board challenges.

The AGM and new board are also reported by today’s company release to have appointed “Mr. Artem Volynets, a non-executive Director, …as a member of the Audit Committee of the Company with effect from 14 June 2013.” Last week Volynets announced he is leaving Deripaska, and opting not to renew his contract as chief executive of EN+, the holding through which Rusal is controlled.

Two schemes for the survival of United Company Rusal have now emerged in Moscow to compete head to head for President Vladimir Putin’s approval. Neither is assessed by Rusal’s bank creditors as potent enough to staunch forecasts of steadily eroding asset and share value, on which the company’s $10.4 billion in loans is secured.

In April Citibank, one of Rusal’s syndicate of international lenders, predicted a decline of Rusal’s market capitalization to the equivalent of $3.5 billion. That represents the loss of five-sixths of the market capitalization which Putin ordered the state banks to support at Rusal’s initial public offering in January of 2010.

In effect, the banks are saying Rusal is already worthless. According to Otkritie analyst Andy Jones, Rusal’s real market value is zero, because its $6.74 billion capitalization on the Hong Kong exchange is entirely accounted for by Rusal’s 27.8% stake in Norilsk Nickel; at today’s price that is worth $6.92 billion. If Rusal hits Citi’s price target, its market capitalization would be half the value of its Norilsk Nickel shareholding.

“RUSAL remains a high cost call on the aluminium price”, reports Jones of Otkritie, “due to high leverage and sub-10% EBITDA margins. When aluminium does see a sustainable recovery, RUSAL’s share price could make big gains, but we do not expect this in the near/medium term…Around 100% of RUSAL’s market cap is accounted for by its 27.8% stake in Norilsk at present, but there is no reason that this should act as a floor price for the stock given the $6.3bn stake is part collateral for some of the $11bn net debt. Net debt less the Norilsk stake value is currently $4.6bn and RUSAL generates close to zero EBITDA at spot aluminium prices, implying there is little equity value in the core aluminium business.” The full text of the Otkritie report can be read (with permission) here.

The Otkritie forecast is for sale revenues to remain below the 2011 level through 2015; for earnings to fall far short of the 2012 level; and for the bottom-line to remain loss-making this year. “RUSAL has cash costs of c. $1,970/t. In addition to cash costs, it needs to pay maintenance capex of c. $500-600mn pa, and interest payments of c. $650-700mn pa. This requires a price realisation of $2,280-90/t which equates to an LME price of $2,020-30/t at current levels of premiums, c. $2,190/t under an average 2005-2009 c. $100/t premium. Given spot is now $1,850/t, the aluminium business does not generate enough cash flow to reduce leverage.”

Only by a steady increase in dividends from Norilsk Nickel can Rusal escape loss-making.

Chief executive Deripaska has stopped trying to talk down the supply and talk up the price of aluminium in his public relations campaigning. In the London Daily Telegraph, for instance, he didn’t mention aluminium at all, and promoted instead his car business. “For us, it’s important to have an industrial policy that will promote more components manufacture, more new material development and help us to receive better resources into the Russian market, not raw material resources but industrial resources that will help us to compete and reach our goals.”

One day later, Dmitry Razumov, a former Rusal board director and manager of Prokhorov’s stake in Rusal, described Rusal corporate strategy in an interview with Kommersant and Bloomberg as little more than debt service. “The [Rusal-owned 27.8% share] package of Norilsk Nickel [currently equivalent to $7.8 billion] is worth more than most of Rusal [currently $7.9 billion]. The settlement agreement, signed by the shareholders with Millhouse, is perhaps positive for Rusal, but it does not solve all the problems. Even if Norilsk Nickel will be able to pay these [$9 billion in total] dividends, for Rusal they will only serve the interest payments on the debt. Dividends will not solve the debt issue. And can Norilsk Nickel pay them in such volumes? That’s another issue. The conditions in the nickel market are also not very favourable. In fact, I do not see any other way than that Norilsk Nickel will strongly increase its debt burden. This will lead slowly but surely to [Norilsk Nickel] becoming the second Rusal case. From my point of view, this is a multiplication of problems.”

Razumov was making the first public attack by a Rusal shareholder on the scheme of last December in which Roman Abramovich was drafted to buy into Norilsk Nickel; keep the peace between control shareholder Vladimir Potanin and Deripaska; and ensure that dividends paid to Rusal by Norilsk Nickel would be large enough to prevent Rusal sinking into loan default. Before Razumov’s attack, the only significant stakeholder to criticize the deal was Alisher Usmanov, a minor Norilsk Nickel shareholder, who was unhappy that the terms were negotiated without his knowing or benefitting.

The involvement of Valentin Yumashev and other members of the family of ex-President Boris Yeltsin in that scheme, and its approval by Putin, have exposed the role of hidden shareholders of Rusal, whose power is spelled out in the corporate records of RTI, an entity registered in Jersey the day after Rusal itself. The RTI shareholders are the inner circle at Rusal: they control Deripaska, not the other way round.

Though he knows the names intimately, Razumov doesn’t identify this group. Instead, he is proposing an option for Rusal which would eliminate their control over cashflow, pay them out, and reorganize the Rusal shareholding with new management, new strategy, and minimal debt. In the context, Razumov’s attack – and thus of Onexim — on the scheme of arrangement between Rusal, Norilsk Nickel and Abramovich is an attempt to build Kremlin support for an alternative future for Rusal. This would start, Razumov has proposed, with a buy-up of the foreign bank debt of Rusal by a combination of Prokhorov, Vekselberg and his SUAL partners. “In the current structure of corporate governance of Rusal”, Razumov has said, “I do not see an effective way to deal with it. The Onexim package and even that share together with the package of Viktor Vekselberg, who basically shares our views, are not sufficient to effectively influence the process.”
In the same interview reported separately by Bloomberg, Razumov added: “We don’t want to be in a company [Rusal] whose only mission is to pay creditors, not shareholders.” The one thing that may help Rusal “to recover sooner rather than later is converting a part of its debt into equity.”

Just how big a part of Rusal’s debt this plan could take over isn’t clear from Rusal’s debt reports. Nor are Moscow analysts who follow the company sure of the precise figures. In Rusal’s IPO prospectus, issued on December 31, 2009, “international lenders” were identified as holding $7.4 billion; “Russian and Kazakh lenders”, $2.1 billion; the state bailout bank VEB, $4.5 billion; and Prokhorov’s Onexim holding, $895 million; for a total of $14.9 billion.

The latest Rusal financial report confirms that the VEB debt is now Sberbank debt at $4.58 billion. The “Russian and international lenders” appear to be owed $4.75 billion, but because this aggregate includes state-directed loans from VTB and Gazprombank, it is impossible to pin down what amount is owed to the non-state, non-Russian banks. According to the Rusal report, the gross amount of the loans as of December 31, 2012, was $10.4 billion. Natixis, the French bank, was reported as having been fully paid out, while liabilities to Onexim were reported as having been refinanced.

A rough estimate by Moscow experts is that about 33% to 40% of Rusal’s current loans are foreign-owned. So if the Razumov plan materializes, that’s his initial target – between $3.4 billion and $4.2 billion, equal to or greater than Citi’s target for Rusal’s market cap. The worse Rusal’s financial condition appears to grow, and the more negatively Otkritie and other banks assess the future prospects, the bigger the discount at which the foreign loans may be sold.

However, lowering the price at which the foreign banks might agree to dispose of their loans also depends on what signals the Kremlin sends through the state banks. In holding the majority of Rusal’s loans, they are in a position to guarantee the nominal value of this debt and prevent discounting. They can also persuade the foreign banks to resist the buyout offer, and effectively veto the buyout and debt-for-equity reorganization plan for Rusal.

Unless Razumov’s plan can convert enough debt to equity giving a sizeable majority of Rusal shares to Prokhorov and Vekselberg, and unless the new plan wins Kremlin approval, it’s a non-starter. According to one Moscow banking source, this is already obvious. “If they were serious about this, it would not be advertised. They would simply start negotiating to buy up debt. He’s sending out feelers. He probably wants to force something out of Deripaska.”

Bloomberg quotes from another source, a report from Alfa bank metals analyst Barry Ehrlich. “We find it difficult to imagine Onexim taking a large stake in low-yielding Rusal bank debt. However, the threat needs to be monitored. By threatening and then potentially moving ahead to acquire the bank debt, Onexim can strengthen its negotiating position by refusing to give Rusal a covenant extension at the end of 2013 when the current covenant holiday expires.” That looks like a threat to trigger insolvency.

According to another source, the threat of another Rusal default comparable to the one in October 2008 which triggered the first VEB bailout and then the state anchor for the Hong Kong IPO, is a wakeup call intended for Putin himself. What Razumov is advertising is a plan to dislodge the control shareholders before the arrangement between them, the Kremlin, and the state banks puts Rusal in a worse position than it was in 2008.

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