Deripaska’s En+ Wants Montenegrin Plant Debt-for-Stock Swap

Russian billionaire Oleg Deripaska’s En+ Group asked Montenegro to allow their Kombinat Aluminijuma Podgorica AD joint venture to convert debt it owes, including 86 million euros ($113 million) to En+, into equity as the government seeks to take control to save the company.

En+ “would be prepared to fully convert that debt into KAP’s equity if the government agrees to a similar conversion” for other lenders, the Russian holding company said today in a statement. The government and En+ each hold 29.3 percent stakes in the unprofitable Montenegro aluminum producer.

Montenegro, the last former Yugoslav republic to break from Serbia’s dominance, is seeking to turn around the biggest industrial producer in the nation of about 620,000 people. The state backed KAP’s loans totaling 132 million euros and wants to avoid destabilizing public finances in case guarantees are activated, Deputy Prime Minister Vujica Lazovic said.

“The government will take over KAP and end the contract,” Lazovic said in a telephone interview. Subsidies for the electricity consumed by KAP are “unsustainable,” and there are “gloomy predictions that no aluminum producer in Europe can survive the competition from Asia and other places.”

KAP may sign a long-term power supply deal with a state-owned utility as a part of a rescue plan, En+ said. KAP’s production costs equal $2,150 a metric ton, En+ said, while Lazovic put them at the equivalent of $3,257 per ton.

Falling Commodity Prices

That compares with aluminum prices that have fallen 23 percent from a peak in May last year to $2,166 a ton by 1:15 p.m. in London trading.

KAP last year produced 92,800 metric tons of primary aluminum. It reported a net loss of 22.5 million euros in the first nine months of 2011, down from 39.7 million euros a year earlier.

Montenegro assumed KAP’s 22 million-euro loan from Deutsche Bank AG last week and may soon do the same for the remaining 110 million euros of state-backed debt, Lazovic said. He called the Russian investor an “unreliable partner.”

By assuming the liabilities, the government will be able to initiate receivership at KAP and take control while trying to avoid a shutdown.

“Once you wind it down, it’s very difficult and very costly to restart the operation” and “we have to be careful not to reduce our economy to only services and agriculture,” Lazovic said.

Raw-Material Costs

Nominally, KAP accounts for 15 percent of Montenegro’s economic output “but considering all the raw materials it imports and the energy it consumes, the actual share is between 2.4 percent and 4.7 percent,” of gross domestic production, Lazovic said.

Deripaska acquired a majority stake in KAP in 2005 for 48.5 million euros and later accused Montenegro of misrepresenting its value in the asset stale.

Under a settlement reached in 2010, EN+ gave Montenegro half of its 58 percent stake, as the government agreed to back the loans, including 26 million euros from Russia’s VTB Bank OJSC. Part of that helped repay other debt and cover the cost of job cuts. KAP now employs 1,200, down from almost 4,000.

The aluminum plant consumes 2,000 gigawatt hours a year, or 42 percent of the nation’s total consumption, and the state can no longer afford to ensure that KAP pays 30 euros per megawatt hour when rates in the region are often higher than 60 euros per megawatt-hour, Lazovic said.

A “survival scenario” for KAP may include finding an investor to develop a new, 500 megawatt coal-fired plant in Maoce, in northern Montenegro, to provide the smelter with electricity based on 110 million tons of local coal deposits, Lazovic said.

“Another concern is labor, it’s not exactly cheap,” with KAP’s average monthly salary at 1,100 euros, he said. Dismissing the entire workforce in case of closure would cost about 20 million euros, while 25 million euros to 30 million euros would be saved annually on the electricity, the deputy premier said.

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