Billionaire Mikhail Prokhorov’s Onexim Group, a United Co. Rusal shareholder, is looking at buying debt issued by the world’s largest aluminum producer to boost its influence over management decisions.
Onexim, which holds 17 percent of Rusal, is “monitoring the opportunity” to buy debt alone or with partners, Onexim Chief Executive Officer Dmitry Razumov said. It may sell out if that plan doesn’t work, he said.
Prokhorov, flush with cash from selling out of Polyus Gold International Plc (PGIL) this year, and fellow minority shareholder billionaire Viktor Vekselberg have battled with Rusal CEO Oleg Deripaska for dividends and over his insistence on holding onto a 25 percent stake in OAO GMK Norilsk Nickel. The stake’s market value has fallen to about $6.8 billion, while the aluminum producer’s debt reached $10.8 billion at the end of last year.
“We, as a minority shareholder, have limited influence over the management and the main owner’s decisions,” Razumov said in an interview at the holding company’s Moscow headquarters on April 18. “We still think that Rusal should have sold the Norilsk Nickel stake when it had the opportunity, as now the company has huge debt amid low aluminum prices and high production cost.”
Onexim swapped a 25 percent stake in Norilsk for Rusal shares in 2008 and got about $5 billion in cash, setting off a more-than-four-year shareholder conflict at the nickel producer between billionaire Vladimir Potanin, now CEO of Norilsk, and Deripaska.
Rusal completed paying the debt it owed Onexim for the Norilsk stake in October 2011. The aluminum company declined to comment for this story.
By buying Rusal debt, Onexim could gain influence over the company’s ability to negotiate waivers from lenders on the terms of its borrowings, Barry Ehrlich, a Moscow-based analyst at Alfa Bank, said in a note.
“We find it difficult to imagine Onexim taking a large stake in low-yielding Rusal bank debt,” Ehrlich said. “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.”
Potanin and Deripaska signed an accord in December last year to end their feud and plan to sell a stake of about 6 percent in Norilsk to billionaire Roman Abramovich’s Millhouse as a part of an agreement reached after President Vladimir Putin urged them to settle the conflict.
As a part of the pact, Norilsk committed to pay as much as $9 billion in dividends for 2012 through 2014.
This agreement “will only allow Rusal to service its debt, but not to reduce it,” Razumov said. That is, he said, “if the Norilsk dividend arrangement works, which is not a given.”
Should buying Rusal debt fail, Onexim may consider selling its stake, according to the executive. “We don’t want to be in a company whose only mission is to pay creditors, not shareholders,” he said. The one thing that may help Rusal “to recover sooner rather than later is converting a part of its debt into equity,” he said.
Rusal has declined more than 60 percent since its January 2010 initial public offering in Hong Kong, cutting its market value to $7.8 billion and valuing Onexim’s stake in the company at about $1.3 billion. The stock rose for the first time in five days in Hong Kong today, advancing 0.5 percent to HK$4.02 by the close. Aluminum prices have dropped 15 percent since the start of 2010.
Rusal isn’t the first commodity investment that Prokhorov, who was CEO at Norilsk Nickel for about six years, may quit. Onexim completed the sale of 38 percent of Polyus Gold in February for $3.62 billion and is targeting a divestment of its Quadra utility holding to OAO Gazprom (GAZP)’s power unit.
Onexim’s strategy “has evolved in light of the challenges facing the world’s economies and the financial markets over the last few years,” according to Razumov.
“We decided that our investment portfolio should be lighter, liquid and more flexible,” he said. “We want assets that we can sell quickly to invest funds in other opportunities.”
That was among the reasons for selling Polyus, Razumov said. Onexim also doesn’t expect Polyus’s value to grow much as exchange-traded funds have essentially replaced mining companies’ stocks for those looking to hedge against the world’s financial and economic instability, he said.
“Gold multiples are gone and it’s likely that they won’t ever be back,” Razumov said. The precious metal may also be way off its historical peak now, with the U.S. economy showing signs of improvement, pressure from looming Cypriot bullion sales, among other factors, he said.
Gold fell to the lowest level since February 2011 last week amid outflows from exchange-traded products.
The decision to sell Polyus wasn’t linked to Prokhorov’s political ambitions, Razumov said. The billionaire, 69th-richest in the Bloomberg Billionaire’s Index, ran against Vladimir Putin in last year’s presidential election and has founded his own political party.
The Quadra investment now makes little sense, Razumov said. “The government didn’t deliver on promises it gave when we and other investors were buying into power and heat generation,” he said. He expects the antitrust watchdog to approve the sale to Gazprom by the end of April, with another two to three months needed to close the deal.
Onexim is seeking to develop a commodity project, Intergeo, a mining company that holds Siberian licenses to mine copper and nickel.
“It’s one of our priorities,” Razumov said. An initial public offering tentatively planned for May won’t happen until later, he said. “The company has funds for development and we will just wait until market conditions improve,” he said, denying earlier reports that Onexim may sell the asset to Ural Mining Metallurgical Co. or to the Russian Platinum.
Onexim placed the proceeds from selling Polyus in Russian state banks, among the safest options currently, Razumov said. Only state banks are able to offer “the proper yield-risk ratio,” he said. “Back in 2008 and 2009, bonds were offering fantastic opportunities in terms of yields. They are not there anymore.”
While some of the companies in the group are registered in Cyprus, Onexim had only “marginal funds” in the unit of Russia’s VTB Group based there, so it wasn’t affected when European Union demanded a levy on deposits in return for bailing out of the Mediterranean island country, Razumov said. Onexim didn’t consider redomiciling these companies, he said.
Onexim isn’t rushing to invest its Polyus proceeds, Razumov said.
“We don’t have a goal of investing the funds which we got from the Polyus stake sale quickly,” Razumov said. “The situation is still very unstable, and there are not that many assets that have certain scale and that we view as truly attractive. We don’t want to waste time on marginal things.”
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