Rusal’s $43 Billion Seven-Year Glencore Deal Feeds Fued

Rusal’s $43 Billion 7-Year Glencore Deal Feeds Investor Feud
A newly-moulded aluminum block displays a Rusal logo at the company's Khakassia factory in Sayanogorsk, Russia. Photographer: Andrey Rudakov/Bloomberg

United Co. Rusal, the world’s biggest aluminum supplier, is locked in to selling $43 billion of the metal to Glencore International Plc over seven years in a contract that’s fueling a feud among billionaire investors, four people familiar with the accord said.

Glencore agreed to the deal in the fourth quarter as premiums paid by buyers reached near-record highs, according to the people, who declined to be identified as the terms aren’t public. Buyers in Europe paid an average $130 a metric ton more than the London Metal Exchange price in the final three months of 2011. Rusal will sell about 1.4 million tons this year as part of the accord, the people said.

Investor Victor Vekselberg’s Sual Partners Ltd. is seeking arbitration, saying the contract, which accounts for a third of Rusal’s annual output, breached a shareholder agreement. The deal turns the aluminum company into “Glencore’s production unit,” Sual told Bloomberg News last week. The spat has stoked a dispute over strategy, centered on owner Oleg Deripaska’s refusal to give up nickel holdings to pay down debt, leading Vekselberg to quit as chairman in March saying Rusal faced a “deep crisis.”

Rusal will sell about 14.5 million tons to Glencore over the duration of the agreement, which will protect the company against future price declines, the people said. Glencore pays the LME price plus a fixed premium, and can resell the metal or stockpile it in anticipation of higher prices.

Higher Premium

Spokesmen for Glencore and Rusal declined to comment on the details of the contract.

Rusal and Glencore, which holds about 8.75 percent of the aluminum producer, struck the agreement when premiums were near “multi-decade highs,” Jorge Vazquez, managing director of the Harbor Aluminum Intelligence Unit, said by e-mail. Premiums are currently about $140 a ton. That compares with $83 at the start of 2010, according to a Rusal presentation in March.

The contract will give Rusal “stable” cash flow to service its debt and finance working capital, said Kirill Chuyko, an analyst at UBS AG. Net debt totaled $11.05 billion as of Dec. 31.

The accord also helps Glencore, the biggest publicly traded commodities supplier, to increase its influence in the market, Vladimir Zhukov, HSBC Holdings Plc’s head of research in Moscow, said by telephone.

“Glencore will increase its market power, which should help to reduce price volatility and could be positive for the market balance via inventory management,” Zhukov said.

Netherlands Warehouses

Glencore holds aluminum at warehouses in Vlissingen in the Netherlands, which has the second-largest stockpiles globally after Detroit, according to data compiled by Bloomberg.

Glencore accounted for about 45 percent of Rusal’s aluminum sales in 2010, the Russian company said in its annual report. The Baar, Switzerland-based trader sold 3.9 million tons of aluminum in 2010, 9 percent of total world production, Glencore said in a prospectus for its 2011 initial public offering.

Rusal, based in Moscow, also awarded Glencore a contract to sell its alumina through to 2019, raising the value of the companies’ agreement to about $47 billion, the people said.

The accords prompted Vekselberg’s Sual Partners, a 15.8 percent stockholder in Rusal, to file for arbitration in London on April 4. Vekselberg claims Deripaska’s En+ Group, Rusal’s biggest holder, and Glencore breached a 2007 shareholder agreement that stipulated that a veto from just one of the four major holders should block any deal.

‘Too Dependent’

The contracts make Rusal too dependent on Glencore, “turning the company into Glencore’s production unit,” Sual Partners’ press office said by e-mail. Rusal should have held a competitive tender among international traders including Trafigura Beheer BV, Noble Group Ltd. and Mitsubishi Corp., it said.

The seven-year contract also diverges from Rusal’s marketing strategy, which as recently as last year targeted 80 percent of direct sales to clients by 2015, Sual Partners said.

The aluminum company had “informal discussions” with other traders before choosing Glencore, three people with knowledge of the matter said.

Rusal’s marketing strategy needs to be flexible to respond to changing “market conditions,” said Vera Kurochkina, a spokeswoman for the aluminum producer. Rusal’s direct sales to aluminum customers remain at 60 percent, and the company will seek to increase those volumes when the market strengthens, she said in e-mailed comments today.

Vekselberg Resignation

Vekselberg quit in March saying Rusal’s refusal to sell its shares in OAO GMK Norilsk Nickel, Russia’s largest miner, was hurting the company. The aluminum producer has been unable to start any large investment projects after lenders imposed limits on spending amid escalating debt.

Rusal’s 25 percent stake in Norilsk had a market value of $7.4 billion at the end of last year, down from $11.2 billion, it said last month. The revaluation led to a fourth-quarter loss of $974 million, according to Rusal’s financial report.

The drop in value came after Deripaska blocked several bids for the stake, saying it was a strategic long-term investment. Among those offers was a $12.8 billion bid to buy back a 20 percent interest in February 2011, which was supported by Vekselberg and fellow billionaire shareholder Mikhail Prokhorov. Rusal hasn’t paid dividends since 2008 when it bought the stake.

The company’s future investment and dividend strategy is “locked” by its insistence on holding on to the Norilsk shares amid “large” debts, UBS’s Chuyko said.

Diversifying Mining

The nickel holding allows Rusal to diversify its business, just as other global mining companies have added other metals to protect them in a volatile market, First Deputy Chief Executive Officer Vladislav Soloviev said in an interview in Moscow.

While Rusal could sell the stake, pay down some of its debt and seek alternative metals and mining assets, those would “surely be of poorer quality and smaller,” he said.

Once two new aluminum smelters in eastern Russia come on stream next year, Rusal doesn’t plan more “large” investments, according to Deputy CEO Oleg Mukhamedshin.

“We are spending about $500 million to $600 million a year on capital expenditure and don’t plan large investments in new projects,” Mukhamedshin said in an interview. The new smelters will reduce production costs because they’ll use cheaper energy from hydropower stations, he said.

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