Rusal’s Norilsk Writedown Underlines Deripaska Board Tension

United Co. Rusal Chairman Barry Cheung
Barry Cheung, chairman of United Co. Rusal. Photographer: Jerome Favre/Bloomberg

United Co. Rusal, the world’s biggest aluminum producer, recognized a $1.4 billion drop in the book value of its OAO GMK Norilsk Nickel holding, the subject of a boardroom spat that led to the chairman quitting last week.

Its 25 percent shareholding in Norilsk had a market value of $7.4 billion at the end of last year, down from $11.2 billion, the Moscow-based company said today in a statement. The revaluation led to fourth-quarter loss of $974 million, according to Rusal’s financial report.

The slump in value came after billionaire Chief Executive Officer Oleg Deripaska had rejected Rusal shareholder and former chairman Victor Vekselberg’s efforts to sell the Norilsk stake for as much as $18 billion, saying it was a strategic long-term investment. Rusal shares plunged 8.9 percent in Hong Kong after the resignation last week, before rebounding today.

“From an analyst perspective, it’s better for Rusal to sell Norilsk shares, but the CEO has his goal to expand the business and become the biggest mining company in Russia,” Robin Tsui, a Hong Kong-based analyst with BOC International Holdings Ltd., said today by phone.

Barry Cheung took over as chairman on March 16, the day its Moscow-traded depositary receipts climbed 3.8 percent. Rusal’s Hong Kong-traded shares rose 4.4 percent today, the biggest gain since March 7, to close at HK$5.90. They have lost 45 percent of their value since an initial share sale in 2010.

Rusal depositary receipts fell 2.3 percent in Moscow today to 219.97 rubles.

‘Ghastly’ Results

Rusal’s earnings before interest, taxes, depreciation and amortization, or Ebitda, fell 46 percent in the fourth quarter to $382 million from a year earlier after aluminum prices slid 11 percent. The Ebitda margin contracted to 13.6 percent of sales in the fourth quarter from 24 percent.

The “ghastly” results show Ebitda at the worst quarterly level since the end of 2009, analysts at Moscow-based Troika Dialog, led by Mikhail Stiskin, said in a note.

Rusal posted the net loss of $974 million because of non-cash items, including the revaluation of its Norilsk stake following a share buyback by the nickel producer. When adjusted for such items, Rusal had net income of $111 million. Rusal’s effective stake in Norilsk rose to 30.3 percent from 25 percent under International Financial Reporting Standards because of a buyback that Rusal didn’t participate in. Norilsk hasn’t canceled the shares.

‘Comfortable’ Servicing Debt

Net debt rose to $11.05 billion as of Dec. 31 from $10.92 billion on Sept. 30, which compares with a reduction of more than $500 million during the third quarter. The deleveraging at Rusal may be halted because of a higher inventory position in combination with weak operating flows, Erik Danemar, a Moscow-based analyst at Deutsche Bank, said March 16.

“If the company generates enough cash that we don’t need for investments, we can continue deleveraging,” Oleg Mukhamedshin, head of capital markets at Rusal, said on a conference call. The market price of aluminum “should exceed $2,400 per ton this year, and we’re quite comfortable to service our debt.”

Vekselberg and Mikhail Prokhorov, another of the billionaire shareholders in Rusal, have urged Deripaska, the company’s biggest owner, to sell the Norilsk stake to help cut debt and resume dividend payments. Deripaska instead has fought for influence over Norilsk’s board and cash flows.

Output Cut Consideration

Rusal said Jan. 18 it may introduce covenant holidays on a $4.75 billion loan during this year and pay a so-called supplemental margin to lenders should the ratio of its net debt to covenant Ebitda exceed 4. “By the end of last year we did not use this opportunity,” Mukhamedshin said. The ratio was 3.5 as of Dec. 31 and Rusal paid Libor plus 235 points, he said. No decision has been made yet to take covenant holidays, he said.

Rusal cut its average debt interest rates to 4.7 percent, with a maturity of 4 years after refinancing last year, Mukhamedshin said. This reduced interest expenses by 24 percent last year, or more than $200 million, he said.

Management will present a plan to cut output by as much as 6 percent to the board for approval this a month, First Deputy CEO Vladislav Soloviev said on the conference call. Rusal kept fourth-quarter production steady and shifted sales of about 100,000 metric tons of aluminum produced last year to the first quarter of 2012 after prices declined. Rusal said last month it may cut aluminum production by 6 percent in the next 18 months in reaction to the metal prices.

‘Almost Balanced’

“Global aluminum capacity utilization rate may drop to 78 percent to 80 percent this year to support the aluminum price,” Mukhamedshin said.

The aluminum market may be “almost balanced” this year if as much as 3 percent of global supply is mothballed as expected, Rusal said. China will be the biggest growth market with demand expected to rise 11 percent this year, it said.

Tatiana Soina, a Rusal executive director, also tendered her resignation from the board as of March 16 and Maxim Sokov, the head of strategy took her place, Rusal said today. Maksim Goldman took the place of Vekselberg on the board, representing the 15.8 percent stake in Rusal owned by the billionaire and his partner Len Blavatnik.

Rusal took out a full-page advertisement in the Financial Times today, asking shareholders of Norilsk Nickel to support its proposal to set up a trust that would pay the nickel company’s independent directors. The independents on Norilsk’s board have not been paid for last year, Rusal said in the advertisement.

Rusal “has been a laggard against both the broader market and aluminum peers recently, driven by the negative corporate news flow,” VTB Capital said in a note. “The stock could find a floor now, given that the results brought no further negative surprises, and the appointment of an independent as chairman of the board somewhat improves sentiment.”

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