Rusal Quarterly Net Slumps 84% on Weaker Aluminum Prices

United Co. Rusal CEO Oleg Deripaska
Oleg Deripaska, chief executive officer of United Co. Rusal. Photographer: Matt Lloyd/Bloomberg

United Co. Rusal, the world’s largest aluminum producer, reported an 84 percent slump in first-quarter earnings as prices of the lightweight metal declined.

Net income dropped to $74 million from a restated $451 million a year earlier, the Moscow-based company said today in a statement. Earnings before interest, tax, depreciation and amortization fell 65 percent to $237 million, missing the $261.8 million average estimate of six analysts surveyed by Bloomberg.

Global aluminum companies are seeing earnings squeezed as lower demand weighs on prices of the metal used in drink cans, cars and aircraft. Alcoa, the biggest U.S. aluminum producer, said in January it would shut older plants in North America and Europe amid lower consumption and rising costs, while Rusal is set to curtail high-cost smelting capacity in the second half.

“The first quarter of 2012 has proved to be a tough test for the aluminum industry with the global demand for the metal slowing down and the aluminum price weakening,” Chief Executive Officer Oleg Deripaska said in today’s statement.

The company is studying cutting 300,000 metric tons to 600,000 tons of smelting output next half, Deputy CEO Oleg Mukhamedshin said on a conference call. That equates to 6.4 percent to 13 percent of total capacity, which is 4.7 million tons, Rusal’s website shows.

Permanent Halt

The idled facilities won’t be restarted, according to a presentation today by the company, which said it may also curb output of alumina, the raw material used to produce the metal, to balance capacity.

Even as Rusal scales back high-cost production, it plans to open two more-efficient smelters in Siberia next year with a combined initial capacity of 600,000 tons of alumina. The plants will reduce output costs because they’ll use cheaper energy from hydropower stations, Mukhamedshin said in April.

Aluminum averaged $2,219 a ton on the London Metal Exchange in the first quarter, down 12 percent from a year earlier. Rusal’s sales declined 3.7 percent to $2.9 billion.

With negative trends including prices and costs “rolling over in April and May, we do not expect any meaningful improvements in the second quarter,” Mikhail Stiskin, an analyst at Troika Dialog in Moscow, said in a note. “Ebitda in first half could be around $500 million, or just 27 percent of the full-year consensus estimate, driving earnings downgrades.”

Shares Slide

Rusal dropped 1.4 percent to HK$4.96 in Hong Kong trading today, its lowest closing price in four months. The stock has 13 buy ratings, 12 hold and three sell, according to analysts tracked by Bloomberg.

Rusal forecast stronger auto sales in Germany, as well as demand growth in the U.S. and Japan.

“We’re optimistic because of the consumption figures,” Mukhamedshin said on the call. “Consumption of aluminum is going up all around the world except for Europe.”

Aluminum, which has declined 4.3 percent this quarter, may rise to $2,369 a ton by the fourth quarter, according to the average estimate of 23 analysts surveyed by Bloomberg.

Rusal elected Barry Cheung as chairman on March 16 to replace Victor Vekselberg, who quit amid a dispute with Deripaska over the CEO’s refusal to cash in its stake in OAO Norilsk Nickel. Vekselberg had supported a $12.8 billion buyback offer from Norilsk in February 2011 to help Rusal pay down debt.

Deripaska said on April 20 the 25 percent stake is a strategic investment and may increase in value to $20 billion. The market value of the holding fell 29 percent to $8.9 billion at the end of March from a year earlier, Rusal said today. The company’s net debt was $11.1 billion at the end of the quarter.

Vekselberg’s Sual Partners holding company is also seeking arbitration over an aluminum sales contract between Rusal and shareholder Glencore International Plc, saying the deal breaks a shareholder agreement and effectively turns Rusal into Glencore’s production unit.

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