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Posts Tagged ‘Rusal’

Mining Week 12/’12: Australian tax passed, but BHP warns for demand

March 24, 2012 Comments off

Top Stories of the Week:

  • Australian Minerals Resource Rent Tax finally approved
    • The tax on high profits for Australian iron ore and coal projects which led to a change of premier in the country was finally passed by the parliament last week.
    • Officials from the mineral rich states of Western Australia and Queensland argued that the taxation should be a state arrangement rather than a federal law
    • Many critics expect the MRRT not to bring in the amount of cash the governments expect because of tax management by the largest players and potentially because of lower profit margins as a result of increasing costs.
    • Sources: Economist; Wall Street Journal
  • Mixed signals on China’s iron ore demand
    • In the same week BHP warned that China’s demand for iron ore is slowing down and the Australian state of Western Australia increased its outlook for exports.
    • BHP still is bullish about long term demand in China and does not scale down its investment programs. However, in the short term the company ‘’gives caution” demand might drive down iron ore price to $120/t
    • Sources: Wall Street Journal; BHP Billiton presentation; Financial Times

  • Power struggle for Rusal amidst debt issues
    • A new chairman was appointed to the board of Rusal and his predecessor, mr. Vekselberg, made public that the company was struggling with large debt problems and said it had management problems.
    • Rusal announced that it would write down a large part of the value of its Norilsk stake in an attempt to restructure its balance sheet.
    • Sources: Financial Times 1; Financial Times 2; Lex Video

Trends & Implications:

  • Various of the large Russian miners are trying to diversify both in products and geographic presence. Key problems the companies appear to encounter are a clash of management and corporate governance styles between Russia and western investors and large debt burdens in combination with the need to reinvest most or all of free cash flow to modernize or expand.
  • Australia basically kicked off a wave of mining taxation overhauls in countries around the world. Given the very large output of coal and iron ore operations in the country the implementation of the MRRT will be the most impactful for the overall profitability of the industry. As many of the new tax regimes are based on progressive operating margin scales and operating margins of most companies are decreasing because of cost inflation, it is questionable if the new regimes will result in the income countries are hoping for in the short term.

©2012 | Wilfred Visser | thebusinessofmining.com

Russia: Silent Mining Giant

June 16, 2011 Comments off

Although Russia accounts for about 14% of global mining, most professionals in the industry know very little about Russian mining. Apart from a few large steel companies most large Russian mining firms are unknown in the market, and few people could name the most important Russian mines or mining districts. However, driven by the huge potential of its reserves and the modernization of its industry the country is slowly gaining a more prominent position on the international mining stage.
This article explores the current situation of the Russian mining industry and identifies two key trends that will shape it in the next decade: a struggle for competitiveness; and internationalization of the key players.

Russia’s Reserves & Production

Figure 1 - Russian mining production and reserves

Russia has been blessed with a large variety of mineral reserves across the country. The peninsulas in the northwest, the Ural mountains, Siberia, and the Far East all house important mining districts. Crucial inputs for economic development, like iron ore and coal, are abundant. The country holds 15-20% of the world’s reserves for these resources. The country’s position in reserves of gold and diamonds is very strong too. For a few minerals with only a small global market, like palladium and magnesium compounds, the country even has the potential of dominating the market. The most important observation when comparing the share of world reserves and the share of current global production is that for almost all key minerals the share of reserves exceeds the share of production (See Figure 1). In other words; it is likely that Russia will become more important in the global mining industry.

Current production in the country is more than sufficient to satisfy domestic demand, making Russia a net exporter of mineral goods. The country’s net export balance for ores, slag & ash was $1.3bln and for iron & steel over $14bln in 2010 (Source: ITC), with China being the largest trade partner for ores and Italy being the primary (initial) destination of Russian iron & steel.

Balancing domestic supply and demand

Russia is growing, and mining is needed to fuel this growth. Russian annual GDP growth varied from 4.7% to 8.1% in the period 2001-2008, outpacing growth in the western world (Figure 2). The economic crisis has hit Russia hard, making the economy shrink by almost 8% in 2009; recovering by 3.8% in 2010. However, growth is expected to outpace western growth in the coming years.

As a result of the high growth of the domestic economy, various industry development could take shape. If productivity increases, the potential of Russian reserves will enable a combination of exports and domestic sales, enabling rapid growth. However, if the Russian companies do not succeed in significantly increasing capacity, productivity will be too low to support both domestic and foreign growth. In this case export restrictions to protect the national growth could be instituted.

Corporate Landscape

The structure of Russia’s current mining production is largely shaped in the Soviet period. Mining districts were set up to provide the country with mineral self-sufficiency decades ago. After privatization in the ‘90s most of the state owned assets have been combined in the current private companies. The privatization and the poor financial situation of the Russian government at the time has led to a typical characteristic of the Russian mining industry: the importance of tycoons. Many private companies are owned and controlled by one or a few founders. These founders were at the right place at the right time and knew the right people at the time of privatization. Their position has further been strengthened by the government’s desperate need for funds, resulting in large amounts of debt being issued to the tycoons.

Figure 2 - Russian and global GDP growth

Whereas company owners in the rest of the world typically try to gain control over companies via the stock market, the large ownership stakes held by the tycoons in Russia lead to frequent power struggles among major shareholders. The struggle for control over Norilsk Nickel is the most recent example: Interros, controlled by Vladimir Potanin, and Rusal, controlled by Deripaska,both try to gain the majority in the board of Norilsk Nickel, one of the world’s largest suppliers of nickel and copper. In the last years the power struggles have led to the emergence of clear domestic champions for most of the key commodities: Rusal for aluminium; Norilsk Nickel for nickel and copper; Suek and Mechel for coal; Alrosa for diamonds; TVEL for uranium, etc. For steel and gold the landscape is (and probably will stay) more fragmented.

Attracting investment

Read more…

Potanin backs Norilsk’s role in Rusal fight

“Vladimir Potanin, the Russian tycoon, has defended controversial actions by the management of Norilsk Nickel during his bitter battle for control of the mining company with rival Oleg Deripaska, insisting that they have protected shareholder value. In his most extensive comments since the conflict flared up again last year, Mr Potanin told the Financial Times that his Interros holding company and Norilsk’s managers were not acting together against Mr Deripaska’s Rusal.

The dispute became public after Rusal ended up with three board directors at last June’s annual shareholder vote, against Interros’s four. The aluminium group accuses Norilsk’s management of manipulating the vote in favour of Mr Potanin’s group.

Mr Potanin said tensions had simmered for six months before June’s shareholder meeting, after Rusal representatives on the board voted against Norilsk’s 2010 budget, demanding it should include big dividend payments.”

Source: Financial Times, May 8 2011

Observations:

  • Despite holding 25% of the ownership of Norilsk Nickel and being on the company’s board, mr. Deripaska has not managed to exert control over the miner. Although Potanin’s Interros does not hold a majority in the board, it can count on the support of Norilsk’s management to control the course of the company.
  • Board composition is depicted below:

Implications:

  • Rusal’s ally Metalloinvest, which holds 4% of Norilsk, is seeking to merge with the company. By trying to increase its share in the open market it could change the voting dynamics in future shareholder meetings to bring control over the company to Rusal’s side, enabling a friendly merger.
  • Deripaska has announced not to sell Rusal’s 25% stake, but Interros will try anything to ensure he will not gain control. One of the current actions of the company to prevent Rusal from gaining control is a share buyback program via Norilsk’s subsidiary Corbiere Holdings. Together with Metalloinvest’s attempts to increase its stake this creates strong demand for the company’s shares.

©2011 | Wilfred Visser | thebusinessofmining.com

Rusal Net Profit More Than Triples

April 1, 2011 Comments off

“United Co. Rusal PLC said Thursday its net profit more than tripled last year on higher aluminum prices and a strong contribution from 25%-owned OAO Norilsk Nickel. The Russian aluminum giant plans to nearly double capital spending this year to boost capacity in the face of growing aluminum demand.

Rusal CEO Oleg Deripaska said in a statement the company’s strong net-profit growth was driven by significant increases in demand for aluminum and metal prices, and the company expects global demand for aluminium to grow 8% to 43.8 million metric tons this year. He also said aluminum prices will likely remain in a range of $2,500-$2,600 per ton until the end of the year, due to underlying demand and continuing weakness in the U.S. dollar. Prices were volatile last year, ranging from less than $2,000 per ton to as high as $2,500 per ton, he said.”

Source: Wall Street Journal, March 31 2011

Observations:

  • The largest part of annual profit ($2.44bln out of $2.87bln) comes from the share in Norilsk Nickel, a low-cost nickel producer.
  • Bauxite output of the company increased 4% to 11.8mln tons. Rusal operates 8 mines in Guinea and Guyana.

Implications:

  • Cost increase in both alumina and electricity has driven the industry’s break-even price to above $2,200/ton. Predicted demand increases faster than supply, potentially leading to further price increases. However, large trading stocks could supplement supply and keep the price relatively low for several years.
  • Increasing demand partly comes from copper substitution. Rusal benefits in the long term from the high copper price as manufacturers search for alternatives to copper wires.

©2011 | Wilfred Visser | thebusinessofmining.com

Rusal’s Deripaska forecasts smelter closures

June 10, 2010 Comments off

“Aluminium producers will shut down as much as 3m tonnes of capacity by the end of the third quarter if metal prices remain at current levels, according to Oleg Deripaska, chief executive of the world’s biggest aluminium producer.

Aluminium prices had tumbled to about $1,900 a tonne, and most producers were unable to cover the costs of powering smelters and distributing the metal, Mr Deripaska told the Financial Times.

‘If [the aluminium price] will be at this level at the end of the second and third quarters, we will see 2m to 3m tonnes shut down, all around the world,’ he said. That would represent about 8 per cent of global production, which stood at 37m tonnes in 2009, according to analyst estimates.”

Source: Financial Times, June 10 2010

Observations:

Cash Buyer Primary Aluminium price (www.lme.com)

  • Aluminium price peaked mid 2008 above $3,000 a tonne. After a dip early 2009 the price is fluctuating around $2,000 a tonne, with break-even price for many producers around $2,100-2,200.
  • Last month Vale sold its Aluminium assets to Norsk Hydro arguing the rising cost of electricity made the business too risky.

Implications:

  • Energy costs will play an increasingly important role in the smelting business. Production costs are increasing so much due to energy price increases, that some smelters will go out of business permanently.
  • When companies can choose where to process, the balance between transportation costs and energy costs is shifting slightly, making transportation of ore over greater distances feasible. However, as both smelting costs and transportation costs are mainly driven by fossil fuel prices, the change will not be disturbing.
  • Smelting in countries where energy prices are not so dependent on fossil fuel prices is becoming increasingly attractive.

©2010 – thebusinessofmining.com