Rusal Output Cuts Intensify Shareholder Strife

Pressed by a downturn in metal prices, Russian aluminum giant United Co. Rusal PLC said Monday it will cut production at its less effective smelters, causing renewed strife between shareholders but gaining support from analysts.

As Rusal reported a 95% drop in its first-half net profit, the EuroNext- and Hong Kong-listed aluminum company said it will cut production capacity by about 6%, or by up to 275,00 metric tons, by 2018, including 150,000 tons by the end of 2012. The company said the cut is due to the ongoing uncertainty in the global economy, high power tariffs and downturn in metal prices.

The four smelters where the curtailment is planned are smaller, older and less effective than Rusal's flagship giant ones in Siberia. The company hopes to replace the mothballed capacities in the long run.

Analysts praised the long-awaited decision, which may reduce Rusal's production to below 4 million tons a year. "This should have a positive impact on the company's profitability," said Moscow-based brokerage Troika Dialog.

However, the move caused an outcry from Sual Partners, the owner of a 15.8% stake in Rusal.

"This decision was badly prepared and ill-conceived, and may cause negative socio-economic effects," Sual said. Sual also questioned the decision to close production at the Russia-based smelters, but not at Nigeria-based Alscon, which "hasn't brought any profit to the company since 2007 and is the cause of an endless string of lawsuits."

Sual, which merged its assets with that of billionaire Oleg Deripaska in 2007 to form Rusal, said the plan to cut production has been put up for voting by the board, but hadn't been discussed with the shareholders, Russian authorities and regulators.

Sual also blamed Rusal management, controlled by Mr. Deripaska, of failing to invest in renovation in the old smelters.

Sual's co-owner, billionaire Viktor Vekselberg, abruptly quit as chairman of Rusal's board in March, accusing the management of pushing the company into a deep crisis.

However, the markets remained almost deaf to the renewed strife between the billionaires and the sharp drop in the net profit. Shares were down 0.8% in Moscow amid a 0.4% drop in a wider Micex index.

Analysts hailed a 6% quarter-on-quarter decline in sales costs, only partly caused by the ruble depreciation, and praised a strong cash flow, which has helped to reduce the company's interest payment on a multi-billion dollars debt.

The company has lost almost 60% of its market value since its initial public offering in 2010, but analysts hope Rusal will claw back some of its losses when the aluminum prices recuperate.

"Rusal remains an ultimate play on aluminum price improvements, which we anticipate to occur later this year and into 2013," said VTB Capital.