Young Russian giant ponders the nuclear option

Tuesday, October 9, 2007

By Rebecca Bream

Published: Oct 09, 2007

Almost exactly a year ago, a deal was announced that shook up the well-established pecking order in the global aluminium industry.

Rusal, Russia's largest aluminium producer, unveiled the takeover of Sual, its smaller compatriot, and the aluminium assets of Glencore, the Swiss commodities trader. The deal meant that the new entity, United Company Rusal, would leapfrog Alcan of Canada and Alcoa of the US to become the world's biggest aluminium producer.

The creation of UC Rusal reflected how the geography of the aluminium industry was shifting east, away from North America and western Europe to Russia and Asia, because of access to cheap energy supplies.

A year later, chief executive Alexander Bulygin says the integration of the businesses has gone relatively smoothly. "It is much easier to integrate companies in the same industry." A combination of Rusal and Sual had been discussed on and off by Oleg Deripaska, Rusal's owner, and Viktor Vekselberg, the leading shareholder in Sual, for two years, and Rusal had done plenty of due diligence on Sual's assets.

"We had a clear picture of what we had to do," says Mr Bulygin.

"Now all of the operations have been integrated and the [expansion] projects have been approved. We have already started implementing the next phase of our growth."

As well as working on integration, UC Rusal's management team started preparing to list the company on the London Stock Exchange. Mr Deripaska had pledged to Mr Vekselberg and Len Blavatnik, Sual's other big shareholder, that he would take the company public within three years of the deal's completion, in April this year. This would allow them to sell their 22 per cent stake in UC Rusal more easily than if the group remained private.

The company selected six investment banks to work on preparations for the float, and Mr Bulygin and other executives held meetings with London fund managers. They also courted potential independent board members, including Simon Thompson, former head of base metals at Anglo American. But equity market conditions worsened during August as the aftershocks from the US sub-prime mortgage crisis hit share prices around the world. Last month the UC Rusal board decided not to push ahead with the float this year.

Some analysts have noted that next year might be a difficult time to float because of Russia's presidential and parliamentary elections, which could cause political uncertainty. But Mr Bulygin says he does not share this view.

He also says that UC Rusal is in no rush to go public. "Our shareholders do not view an IPO as a goal in itself, but as a way of financing expansion." At the moment the company is generating good cash flows and has access to project finance, so even if the IPO were pushed back by a year or more it would not affect the company's ability to pay for its new mining, refining and smelting projects.

UC Rusal is planning to spend $11bn on expansion projects by 2014, $3.5bn on brownfield expansion of existing sites and $7.5bn on new greenfield projects. Mr Bulygin says the company aims to increase its alumina and aluminium production by 66 per cent, and that UC Rusal will become more than self-sufficient in raw materials. Projects such as the construction of a 600,000 tonnes/yr smelter and 3,000MW hydro-electric power station at Boguchansk in Siberia are well under way. Mr Bulygin says the group is now looking at its longer-term direction. "Our current projects will provide growth for the next 10 years, but we also have lots of ideas for how to create growth for the next 30 years."

One option is to build smelters linked to Russian nuclear power projects. UC Rusal has signed a memorandum of co-operation with Rosatom, Russia's state-owned nuclear group, to look into building a 1,000MW nuclear reactor and aluminium smelter complex in Russia's Far East region.

The reactor and smelter would be jointly owned by Rosatom and UC Rusal, Mr Bulygin adds, and a feasibility report on the project will be published next year. If the plan goes ahead, UC Rusal could benefit from long-term fixed electricity tariffs for its smelter. The idea of a combined nuclear power and aluminium smelting project is not new, says Mr Bulygin.

"This project has been considered by Rosatom for a long time, so we have had access to very detailed information. Most importantly, this complex will be located very close to the Asian markets, and will supply aluminium for export via the ports."

Normally Russian nuclear reactors take at least seven years to plan and construct, but UC Rusal aims to have both the reactor and the smelter up and running within five years, according to Mr Bulygin.

The next phase of expansion could also see UC Rusal building smelters outside Russia. "One of our strategies is to diversify smelter location, not to only be in Russia," says Mr Bulygin. "We are considering a few ideas. But what is very important in choosing the right place to build an aluminium smelter is to find the right sources of energy." Vietnam is a very promising market for energy production and for aluminium production as it has big bauxite reserves and hydroelectric dams, he says.

Mr Bulygin says that UC Rusal is more willing to take on political risk and enter countries that make other metals companies nervous. "Rio Tinto and BHP Billiton have built themselves up by making lots of acquisitions in the best locations. We can expand by buying assets in challenging locations. In today's world, with very limited resources, we need to find ways to co-operate with every country and every partner."

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