Chinalco retreats from plan to buy stake in Rusal

Aluminum Corp of China (Chinalco), the mainland's largest producer of the metal, does not intend to take a stake in Rusal if the Russian aluminium company proceeds with an initial public offering this year. Rusal, the world's largest aluminium company, submitted recently an application to list its shares on the Hong Kong stock exchange. The firm, which is expected to offer 10 per cent of its stock, has reportedly been in talks with potential cornerstone investors Chinalco, sovereign wealth fund China Investment Corp and Singapore's Temasek Holdings. But Caijing magazine reported over the weekend that a Chinalco official said the firm had considered subscribing to the issue but decided not to proceed, without elaborating. Chinalco's reluctance comes at a time when Chinese state-owned firms have been scouring the world for energy and mineral resources and paying premium prices to buy them. It may be that Chinalco's view was coloured by the outlook for aluminium prices, which appears mildly positive. By the middle of August, the London Metal Exchange's three-month price had reached US$21,325 a tonne, almost double the levels at the end of last year. Chinalco's chairman said recently China had 20 per cent to 30 per cent excess production capacity of both primary aluminium and alumina. The company's reluctance to invest may also be because of other problems surrounding the company, which could make it a hard sell for listing sponsors Credit Suisse, BNP Paribas and BOCI and bookrunner Goldman Sachs. Rusal has about US$16.8 billion in debt and is in a standstill debt default position with 74 international bankers, to which it owed US$7.4 billion. Rusal aims to use the proceeds of any listing to repay some of the debt. Rusal owes about US$4.5 billion to Kremlin-controlled Vnesheconombank and US$2.1 billion to other Russian banks. Its deadline for its debt restructuring agreement with the foreign banks was originally on September 18 but this has been extended to the end of this month. Rusal will have to reach agreement with the international banks before it can be listed in Hong Kong. Rusal's debts soared in recent years when chief executive and key shareholder Oleg Deripaska went on a buying spree for assets ranging from aluminium-related concerns to stakes in car-part manufacturers. In addition to dealing with its debtors, Rusal is fighting off the attentions of the government of Guinea, which is in dispute with the firm over the Friguia bauxite refinery. The West African country - the world's biggest bauxite producer - has filed claims against the Russian company, including an 'inadequate' purchase price for the enterprise, insufficient tax payments and non-compliance with environmental safety standards. Rusal says it bought the company legitimately. The Russian government stepped in recently, saying it will defend the company's interests. Another problem is the likely start of a trial next year in which Michael Cherney - a long-standing partner of Deripaska - is demanding that Deripaska pay US$4.5 billion, which he says is the price of his stake in Rusal. He will either recover the funds or the 13.2 per cent stake in the firm, which would mean Deripaska would no longer be Rusal's majority shareholder. In July last year, Justice Christopher Clarke issued his first ruling on the case, requiring Deripaska to accept the jurisdiction of the London court for trial on the claims. Deripaska appealed but the court of appeal upheld the ruling earlier this year. Rusal will have to make contingency provisions for the US$4.5 billion that Cherney is claiming. Deripaska is not the only Rusal executive with legal problems. Victor Vekselberg, the chairman of the Rusal board of directors and a stakeholder in the company, is awaiting a ruling soon on charges of stock market manipulation and failure to disclose concerned-party arrangements when he acquired controlling stakes in two Swiss companies, Oerlikon and Sulzer. Two of his partners in the deals have already been found guilty of similar charges in Switzerland. Rusal's problems make valuing the company problematic. Analysts say a suggested valuation of US$30 billion is way too high given its debt and the aluminium price slump. Rusal says its main objective is to achieve the lowest production costs in the global aluminium industry. It has cut production by 11 per cent and expects to produce 3.9 million tonnes of primary aluminium this year. It has cut about 40 per cent of capacity at its smelters outside Russia, 4.5 per cent in Siberia and 30 per cent at smelters in western Russia. The main cuts are in the European part of Russia - the older potlines at the Urals smelters and the smelter in Ukraine where power costs are high. Troubled waters Rusal is facing a refinery dispute in Guinea as well as legal battles The firm plans to use offering proceeds to repay part of its debt of, in US$: $16.8b