World’s largest aluminum producer takes $1.4 billion writedown

RUSAL, the world’s top aluminium maker, took a $1.4 US billion hit in its 2011 financials on Monday on the value of its stake in Norilsk Nickel, whose fate is at the centre of a row between two Russian billionaire shareholders.

The writedown, and a qualified opinion by RUSAL’s auditor on the valuation of its stake in the Arctic miner, are likely to add to friction between RUSAL’s CEO and main owner Oleg Deripaska and disgruntled minority investors led by Viktor Vekselberg.

The charge, resulting from a series of share buybacks by Norilsk last year, pushed RUSAL’s net profit down by 92 percent to $237 US million for the year.

The Norilsk purchase, made at the top of the market in 2008, has caused RUSAL’s shareholders to fall out over Deripaska’s refusal to accept offers from Norilsk to buy back the stake.

Vekselberg resigned as chairman last week, saying the company was in “deep crisis,” threatening legal action and criticising the choice of his successor.

RUSAL responded on Sunday by threatening to sue Vekselberg, who with partner Len Blavatnik owns 15.8 percent RUSAL, saying his comments had damaged its reputation and shareholder value. Its board on Friday elected Hong Kong Mercantile Exchange Chairman Barry Cheung as its new chairman.

The boardroom row has highlighted a bitter dispute over how to relieve the company of an $11 US billion debt burden inherited from its purchase of the Norilsk stake.

QUALIFIED OPINION

RUSAL said fourth-quarter earnings before interest, tax, depreciation and amortisation (EBITDA), stripping out Norilsk, fell 46 percent to $382 US million.

Its full-year core earnings fell slightly to $2.5 US billion, with both EBITDA numbers in line with expectations in a Reuters poll.

Despite the writedown, RUSAL reported a carrying value for the Norilsk stake of $9.2 US billion as of Dec. 31 - higher than a market value of $7.4 US billion at the time and far below the estimated $14 US billion it paid for it in 2008.

Auditor KPMG gave a qualified opinion on the accounts, saying it lacked reports from Norilsk - which has yet to announce 2011 financials - to take a view on RUSAL’s valuation of the Norilsk stake.

Analysts noted, however, that RUSAL’s bottom line was typically heavily distorted by non-cash items and that they focused instead on the top line and core profits as key to its ability to service its debts.

“Nobody can forecast this company’s performance at the bottom line because of all the one-offs,” said Vadim Astapovich, an analyst at VTB Capital in Moscow. “People are looking at the top line and EBITDA.”

RUSAL shares added 4 percent in Hong Kong after tumbling 14 percent last week, when they fell by as much as 65 percent from their 2011 high. Norilsk shares fell 1.5 percent to 5,719 roubles.

DEBT BURDEN

RUSAL faces no significant principal repayments until 2016 and analysts doubt that Deripaska, who holds a 47.4 percent stake in the company, will part with the Norilsk stake.

“We do not have any scheduled repayments in 2012,” Deputy CEO Oleg Mukhamedshin said on a conference call after the company’s results. “The company is comfortable with existing debt requirements.”

The company’s priority was to continue reducing debt but it was not considering a refinancing, Mukhamedshin said.

“Based on current spot aluminium prices, RUSAL will continue an uphill battle to de-leverage,” said analysts at Citi in a research note, adding it was unlikely to produce any “meaningful” free cash flow in 2012.

RUSAL forecast near-term pressure on aluminium prices, which fell sharply in late 2011 due to global volatility and excessive stocks, but expected growth in developing countries to keep demand robust through 2012.

Its aluminium output edged up 1 percent to 4.12 million tonnes in 2011 and output of alumina, the key material for the production of the lightweight metal, rose 4 percent to 8.15 million tonnes.

RUSAL shares, correlated to the aluminium price, are trading around half their 2010 Hong Kong IPO price of HK$10.80 in January 2010. The Hang Seng Index has gained 6.1 percent in the same period.

Many high-cost producers suffered losses in the last quarter of 2011 as increasing uncertainties in the global economy depressed demand, while production continued to be in surplus.

RUSAL’s competitor in China, Aluminium Corp of China Ltd 2600.HK, on Friday posted a bigger-than-expected quarterly net loss of 729.6 million yuan ($115 US million)and warned of losses in the first quarter of 2012.

RUSAL said it planned to cut aluminium production by 6 percent, but did not give a time frame. The company said in February it may introduce a 6 percent cut over 18 months.

It has forecast 6 to 8 percent of global capacity will be shut in the first half of 2012 and that could help make the market more balanced this year, it said.

Global consumption of aluminium, widely used in aerospace, construction, auto, packaging and other industries, would rise 7 percent this year with the largest growth from China and India while Europe is likely to be flat, RUSAL said.