Chinalco on radar as Rusal investor

PUBLISHED : Friday, 09 October, 2009, 12:00am
UPDATED : Friday, 09 October, 2009, 12:00am

Aluminum Corp of China (Chinalco), the mainland's largest aluminium producer, has emerged as a potential investor in debt-laden Russian rival Rusal, which has applied to list in Hong Kong.

Rusal, the largest aluminium producer in the world, is thought to be looking to raise up to US$3 billion by selling 10 per cent of its shares in an attempt to reduce its US$16.8 billion debt burden.

According to Russian business newspaper Vedomosti, Chinalco was a possible investor in Rusal.

Spokesmen for Rusal, its listing sponsors Credit Suisse and BNP Paribas, and bookrunner Goldman Sachs declined to comment. Chinalco's spokesman could not be reached because of the public holiday on the mainland.

Rusal is said to be in talks with potential cornerstone investors, including sovereign wealth fund China Investment Corp and Singapore's Temasek Holdings.

Russian Prime Minister Vladimir Putin is due to visit China next week and is expected to sign business deals worth US$5.5 billion.

The Russian government has an interest in helping Rusal secure investors since it has an outstanding loan of US$4.5 billion to state bank Vnesheconombank.

Commenting on the prospects of a Chinalco investment in Rusal, Hong Kong analysts said yesterday one area of possible co-operation between the two companies could be for Rusal to offer Chinalco access to its bauxite resources, the ultimate raw material for aluminium.

This could come in the form of joint investment in bauxite mining projects or a long-term contract for Rusal to supply Chinalco at preferential prices.

A banker at one of the three investment banks working on the deal said he believed any such talks would be exploratory.

'But it should not come as a surprise, given the potential synergy between the two companies,' he said.

But not all analysts agreed that the companies made a good fit, with one observing that apart from co-operation over bauxite, there was little reason for Chinalco to invest in Rusal as the mainland did not lack technology and funds.

'Unless Rusal has a lot of bauxite resources to supply Chinalco or will allow joint-venture mining, I don't know what's the advantage [for Chinalco to support Rusal's share offering],' said UOB Kay Hian Securities analyst Foo Choy Peng. 'At the end of the day, China is flooded with aluminium.'

Another analyst at a European brokerage said Chinalco's interest could be purely financial rather than a fully fledged strategic alliance.

Rusal appears to be only 85 per cent self-sufficient in bauxite. It produces 53,000 tonnes of bauxite and 31,000 tonnes of alumina a day on average, according to its website.

Still, political factors may play a role in state-owned Chinalco's interest in Rusal.

China would benefit from closer economic relations with resources and energy-rich Russia.

China, the world's largest aluminium market, bought 200,000 tonnes of the metal from Rusal, or 4.5 per cent of its total sales of 4.4 million tonnes.

The company aims to raise the ratio to 10 per cent by 2015, by raising sales from its Siberia plants close to northeast China.

Since the recession caused metal prices to plunge and dried up credit worldwide, Rusal chairman Oleg Deripaska has been struggling to restructure billions of dollars worth of debt that he took on during Russia's boom years.

Deripaska has seen his fortune drop 88 per cent to US$3.5 billion in the past year, according to Forbes magazine, and he no longer holds the title of Russia's richest man.

He was forced to cede stakes in Hochtief, Germany's biggest construction company, and Canadian car-parts maker Magna International.

According to a Merrill Lynch research report, global capacity utilisation of smelters dropped to 85 per cent this year from 96 per cent last year.

The investment bank forecast the cash market price for aluminium on the London Metal Exchange would fall 36.7 per cent this year to US$1,660 a tonne from last year's US$2,621, before rebounding to US$1,750 next year.

Rusal is in a standstill debt default position with 74 international lenders, with more than US$8 billion in foreign bank debts and about US$5 billion in Russian bank debts.

On the block

Russian firm may sell 10 per cent of its shares in a Hong Kong offering

Rusal needs to raise funds to reduce its debt amounting to, in US$: $16.8b

Pedal to the metal

Rusal - the world's largest producer of aluminium - has more than US$16 billion in debt and has relaunched plans to list in Hong Kong and raise up to US$3 billion

Rusal in numbers

Last year's aluminium output: 4.4m tonnes

Last year's alumina output: 11.3m tonnes

Share of global aluminium output: 12%

Share of global alumina output: 15%

Number of aluminium smelters owned: 15

Number of alumina refineries owned: 12

Number of countries where products are sold: 70