Friday, September 3, 2010

OLEG Deripaska on US mission....

OLEG Deripaska on US mission....
By John Helmer

MOSCOW - Oleg Deripaska, chief executive of Rusal, the Russian aluminum monopoly, is preparing a series of presentations to institutional investors next week in Boston and New York, chaperoned by one of his largest creditor banks, BNP Paribas.

Rarely has such an odd couple asked to be believed for the sincerity of their hand-holding.

The share-sale prospectus released by Rusal to the Hong Kong Stock Exchange on December 31 reveals that BNP Paribas' affiliated banks are owed more than US$415 million by Rusal; no other international bank appears to be owed a larger sum by Rusal.

In addition, BNP claims more than $80 million from another of Deripaska's companies, about which there has been a "dispute" and a "repayment shortfall" in connection with Deripaska's abortive effort to take a stake in the North American auto parts firm, Magna.

BNP chairs and coordinates a syndicate of international lenders in connection with Rusal's billion-dollar debts. BNP is listed as the bank in charge of enforcing the security of Rusal's loan agreements with the syndicate. It is one of the principals in the "cornerstone placing agreements", according to which the first listing of Rusal shares on January 27 was guaranteed.

The purpose of BNP's exercise in the US is to convince US investment fund managers and analysts of institutions holding Norilsk Nickel shares that they should vote in favor of Deripaska's hostile takeover attempt against Norilsk Nickel, Russia's largest mining company and a world leader in nickel, copper, palladium and cobalt.

On October 21, at a planned extraordinary shareholder meeting called by Rusal, they are being asked to reverse their near-unanimous vote against this scheme when the annual general shareholders' meeting of Norilsk Nickel was held on June 29.

Additional presentations for the same purpose are planned by Rusal, BNP and another of its creditor banks and promoters, Credit Suisse, in London. The proposition that the Norilsk Nickel minority shareholders should embrace Deripaska's hostile takeover effort has already been rejected in the open marketplace, and by none other than Rusal shareholders, since the company first sold shares in Hong Kong seven months ago. The vote of no-confidence is reflected in the share price chart, which illustrates Rusal bouncing between 38% below the initial fix to 24% below at the moment.

What interviews with fund managers in London, Hong Kong and the US reveal is the churn rate, which isn't disclosed in this highly volatile price line - that is, the amount of short-term share buying and selling that is driven by wagers on the movement of the price of commodity aluminum.

The unusually high churn rate for Rusal reported by these market experts suggests that few, if any, of the original January and February shareholders remain committed to the company and its chief executive, apart from those who have no choice - the Russian government bank VEB, which is securing the state monopoly of aluminum from bankruptcy; Nathaniel Rothschild and his father Jacob; and the other cornerstone investors - tycoons Robert Kuok and Li Ka-shing, hedge-fund boss John Paulson, and the Libyan Investment Authority.

Deripaska faces troubles in Russia, put on open display this week by the two most powerful decision-makers in Russia, Prime Minister Vladimir Putin and Deputy Prime Minister in charge of resource concessions, Igor Sechin. The occasion was their state visit to the plant, town, workers, and management of Norilsk Nickel.

When Deripaska's aircraft had trouble getting airport clearance to land for this meeting, he decried his rival Norilsk Nickel shareholder, Vladimir Potanin, for a dirty trick. Land Deripaska eventually did - with this advance signal for all to see that it is the Kremlin that is running Norilsk Nickel, and that even local air-controllers aren't afraid that Deripaska may become their boss.

For those fund managers who are about to receive visits from BNP and Rusal, it is no novelty to understand that in the management of Russia's natural resource, mining and metal companies, the oligarchs with shareholding control are temporary concessionaires, with limited operating, earnings, tax and capital gains rights; and that it is the state which dictates terms and the sharing-out of rewards.

Exactly how the sharing of these concession rewards has been arranged, including the debt bailouts Rusal and Norilsk Nickel received during the 2008 crisis, is widely understood in oligarch circles but unprintable in a family newspaper. The operative rule, however, is that those officials who supervise the concessionaires swear to have no purpose but the welfare of the market, the workforce, and the Russian commonwealth - and no desire to intervene when the concessionaires fight each other. That is why Sechin, seated to Putin's right during their meeting with shareholders and management, said: "The main shareholders will reconcile their positions. We don't interfere in corporate processes. That's the shareholders' business."

Understanding why the no-intervention disclaimers must be made, it follows that the methods of Kremlinology are required to decipher the real meaning of the intervention which Putin and Sechin have decided towards Deripaska and Potanin. Accordingly, Tuesday's display indicates that timing and circumstance are not going as well for Deripaska as he will claim next week in North America.

At his session with Norilsk Nickel workers, Putin was peppered with concerns about the Pikalevo analogy. This refers to June last year when residents of the Leningrad region town of Pikalevo protested at the collapse of their livelihoods at the hands of the Deripaska group, which dominates the town's alumina refinery. The trouble was settled by Putin appearing on national television to give Deripaska his marching orders. Since then, Deripaska has clawed back much larger financial favors from the prime ministry, and dismissed the affair as a show for television.

This time round, Putin has been at pains to distinguish Deripaska's conduct and the problems at Pikalevo from the takeover conflict at Norilsk Nickel. But the insistence of the questioning on the Pikalevo point was a round-one win for the state official running Norilsk Nickel, Vladimir Strzhalkovsky, who for months has been publicly attacking Deripaska's competence and ethics.

According to the transcript published by the prime ministry, the question for Putin was that since shareholders such as Deripaska (explicitly named) have as their main purpose "to fill their own pockets, many people in Norilsk are worried about the current conflict between the main shareholders of Norilsk Nickel. I would like to ask you: Do you think how our employees are protected from the possible adverse effects of this conflict? And I hope that it will not be a Pikalevo scenario - I hope, and am confident in this. But can we count on the support of the government of the country?"

Putin's reply started with an explanation of how the conflict at Pikalevo was not comparable with the shareholder fight at Norilsk, then added, "With regard to the [shareholder] conflict - yes, we see that it's there. I tell you frankly: today it has not even been discussed. And in accordance with the law, we would not be there to intervene. But I'm on to something that has drawn attention."

At this point, Putin referred to the proportion of profit Norilsk Nickel and its international peers had distributed as dividends to shareholders. "Kazakhmys", he said, "distributed 6.6%, Rio Tinto in my opinion, 18%; BHP, 38% plus something. The shareholders of Norilsk Nickel distributed as dividends 50% of the profits - the largest allocation [in the peer group]. I think that's enough. You see, an order of magnitude greater than all the rest!"

Implicit in this remark was condemnation by the prime minister of the attempt by Deripaska to get Norilsk Nickel to pay out in dividends more than it had earned last year - a payout rate of about 115%. That had been blocked by the unanimous opposition of the minority shareholders, Potanin, the management, and the board elected in June.

In short, Putin told the workers he expected to see reinvestment of profits for social purposes and would not allow Rusal to extract cash from Norilsk Nickel if that would work to "the detriment of the company". He also assured the workers that he had made his will plain to the shareholders. "Today we talked to them and about the resettlement program, and about environmental issues, and so on. I must give credit to shareholders; they are not greedy, not mean, not argumentative - all at once they agreed."

Remarks by Putin during the management and shareholder session also suggested a win on points for Strzhalkovsky against Deripaska. Discussing the proposals from government ministries to raise more tax from Norilsk Nickel through a duty on nickel and copper exports, greater spending on environmental protection measures, and higher social benefits, Putin implied that the state wanted to curb its payouts to the oligarchs' profit line, and to increase budget revenues at their expense.

Some Moscow brokerage analysts reacted that this might be negative for the share price. Others noted that the proposed tax would amount to less than 6% of prospective earnings - insignificant for the company's financial performance.

But Putin's emphasis on fiscal probity also implies his reluctance to endorse the large state bank loans Deripaska would require if he were to make good on his takeover bid for Norilsk Nickel; or the cash-stripping from Norilsk Nickel to pay down Rusal's debts if Deripaska were to be allowed to take control. A Troika Dialog analyst, who has championed Rusal in recent reports, expressed his disappointment that "nothing groundbreaking was said during the meetings"; by that he meant "that UC RUSAL would lose more than others should the current status quo be maintained."

The London news in the run-up to the October 21 shareholder vote at Norilsk Nickel isn't going to Deripaska's benefit either. The UK High Court will resume for the Michaelmas term on October 1, and a hearing has been scheduled a few days later to decide when Deripaska goes on trial to defend the shareholding that currently gives him control of Rusal.

The accumulation of new evidence files in court, and the judge's ruling on the trial schedule, mark the progress Mikhail Chernoy (Michael Cherney), Deripaska's former patron and shareholding partner, is making to adjudicate the suit for his share of Rusal, and of the dividends and profits Deripaska has taken for himself since the two men signed a trustee and shareholding agreement in March 2001. The sum of Chernoy's claim is more than $4 billion. That's more than half the value of Deripaska's stake in the company.

John Helmer has been a Moscow-based correspondent since 1989, specializing in the coverage of Russian business....

Rusal tries serving up yuan bonds
By John Helmer

MOSCOW - The promoters of United Company Rusal have kicked off a new marketing campaign for oligarch Oleg Deripaska's heavily indebted aluminum company, disclosing this week that "Rusal is planning Russia's first offering of bonds in China, spurred by McDonald's Corp's debut sale in yuan". A roadshow to test whether the Chinese taste for McDonald's will carry over to an appetite for Deripaska is planned with investors and banks in about a fortnight's time.

Sergey Dergachev, a fund manager in Germany, believes that "for Hong Kong-based investors, this issue will be a great diversification play with significant yield pick-up compared to the
majority of local bonds," according to Bloomberg.

Perhaps - and perhaps not. McDonald's has a market capitalization of US$80 billion and net debt of $10.6 billion. Rusal's market cap is $16 billion, and its net debt is $12.2 billion. McDonald's revenues, earnings and profits dwarf Rusal's by magnitudes of two to three.

An influential European investment fund manager, who has been a target of Rusal pitches in past roadshows, suggests that, although there was Russian government backing for Rusal's restricted share sale in Hong Kong last January, the politics in Beijing of supporting a yuan-denominated bond on Deripaska's behalf have yet to be tested.

"I am puzzled that they are issuing yuan bonds, and they are unlikely to be cheap," the source said. "The bonds will have to be priced attractively to attract sufficient demand."

That's market talk for raising the interest rate or coupon cost of the proposed Rusal bonds, so that they may end up costing the company as much, if not more, than its current bank loans.

The charge to Rusal, according to the source, "will depend on the structure of the bonds, and particularly where the bonds will rank relative to the bank debt. But the bonds will almost certainly be lower ranking in the event of default than the bank debt. Therefore, the bond holders would demand a high yield to compensate. One mitigating factor may be that Rusal's bank debt was restructured at the height of the financial crisis and market bank and bond debt yields have generally fallen since then."

As he approaches the Forbidden City, the big test facing Deripaska is whether he can afford the price of admission. "If I were lending money to Rusal," says the European fund source, "I would demand a junk bond type of yield because of where it would rank among creditors, that is, just above equity holders."

Even if that price is unusually high, there may be a reward for Deripaska if he pulls this off. "I don't think this issue is just about the yield which Rusal might have to pay on these bonds," said the source familiar with the matter. "If the issue is $500 million, it would still be small relative to the size of Rusal's debt. It is more about the high profile Rusal expects to obtain by being one of the first issuers of yuan-denominated bonds."

With arranging by Standard Chartered Bank, McDonald's sold 200 million yuan (US$29.5 million) of 3% notes, with a three-year term, on August 20. The Hong Kong market bond sale was the first by an international non-financial corporation to raise Chinese money since Beijing allowed such foreign debt issues in February. McDonald's said the purpose of the money-raising was to pay for another 170 or so restaurants in China, to add to the 1,100 it already operates.

Rusal has already had a signal failure with Chinese investors when it sought strategic equity investment from them in 2008. The subsequent approval of the Hong Kong market regulator and the stock exchange listing committee was a close-run thing: the small share listing in January came with unusual restrictions on the marketing of the shares; special waivers and qualifiers attached to the prospectus; and the guarantees of several anchor share-buyers, who included Russian state banks and Nathaniel Rothschild. Wall Street Journal reporter Patience Wheatcroft called the share offer "about as enticing as an invitation to invest in Bernie Madoff's boys' latest venture".

If Deripaska's success in selling unsecured Rusal equity since January is measured by the downward share price trajectory - minus 25% at the close of Hong Kong trading on Tuesday - the risk of a bond sale to a bigger market will be gauged by the price to be offered in the weeks to come.

While Hong Kong institutions are at their counting-frames on that one, there have been mixed political signals from other parts of the world on the creditworthiness of Rusal risk.

The good news is in Jamaica, where Mining Minister James Robertson in July presided at a ceremony to reopen Rusal's Ewarton alumina refinery at half capacity. This followed two years of close-down and the loss of 2,000 jobs. Robertson said publicly he was looking to Rusal to produce new investments in Jamaica. "With the restart, the re-tooling of these plants, we are looking at at least half a billion dollars worth of investments," he was reported as saying in the Jamaican press.

A few days later, according to a Jamaican source, Robertson flew on a private visit to Australia, where he was given a tour of the Queensland Alumina Refinery (QAL), which is part-owned by Rusal. He was hosted there by John Hannagan, the Rusal Australia chairman and a well-known lobbyist for the aluminum industry in that country.

Robertson hasn't responded to questions about the purpose of his Australian trip. Queensland Alumina confirms that Robertson was taken to the refinery on August 10 "by two members of Rusal, John Hannagan and Geoff Blatch". Blatch, QAL said, is general manager of Rusal Australia, based in Brisbane.

Hannagan, who is the principal of a small publications relations firm in Melbourne, said he would not respond to questions about the purpose of Robertson's trip, who had paid for it, and what Australian government or Queensland state officials Robertson may have met. "Sorry, the questioning is quite odd. I've got nothing to add," he said by telephone.

The position of Rusal in Australia has been threatened by the results of the national parliamentary elections that returned a hung parliament on August 20; no party holds a majority of seats to wield power. In subsequent negotiations with several independent members of the new parliament and with the Australian Greens party, outgoing prime minister Julia Gillard has secured a one-vote majority in parliament to continue governing.

The future of Rusal in Queensland, which had been discussed with the Australians when Deripaska visited the country in April, before the election was called, now depends on the leader of the Greens, Senator Bob Brown. His attempts to question Gillard and her ministers on their contacts with Deripaska have so far been rebuffed by Gillard's ministers.

One of the issues Deripaska is believed to have discussed with the Australian government, and its lead mining company, BHP Billiton, is their backing for a new system of pricing global alumina trades, particularly to China. For Rusal, the hope is that with backing from Canberra, it can extract a higher sales price out of Chinese buyers. According to a financial report and commentary issued by Rusal on August 31, "We anticipate that the market will introduce an alumina index, which will track spot price sales, and we expect this could happen next year. Currently, other global aluminum and alumina producers support a new pricing index for alumina."

As told to Bloomberg by Rusal's investment director, Oleg Mukhamedshin, China is "going to be one of the largest markets for Rusal. We need to grow our presence on this market." Again, the price at which Rusal may conduct its business with China is in the balance.

In the west African republic of Guinea, where about 20% of Rusal's bauxite assets are located, including the biggest bauxite reserve in Rusal's current portfolio, the news has not been positive. There the Chinese have their own ambitions to mine bauxite and produce alumina for shipment back to their aluminum smelters.

According to Guinean sources, Guinea's Mining Minister Mahmoud Thiam has led his government's efforts to revoke Rusal's operating concession for the Friguia alumina refinery and to claim up to $1 billion in proposed fines and compensation for alleged violations of the company's concession agreements. Thiam has allegedly also warned Rusal that it faces revocation of the Dian-Dian bauxite mining concession. Rusal's Hong Kong Stock Exchange prospectus reported Dian Dian's importance to the company. "The Dian Dian deposit is located 350 km north of Conakry in the Boke province, and is a unique deposit containing around 1 billion tonnes of bauxite ore with a high aluminum content and insignificant amounts of hazardous impurities."

Negotiations between Thiam and Rusal have been going on for more than a year without resolution of these conflicts. In June, following a flying visit to Guinea himself, Deripaska announced that "our negotiations were held in a friendly and constructive atmosphere, which enabled us to reach a number of specific decisions".

The election of a new Guinean president and of a new parliament are still pending....

Deripaska loses Norilsk Nickel fight
By John Helmer

MOSCOW - Deripaska versus Potanin et al: it was billed as the biggest shareholder showdown in Russia since the oligarchs took over the country's principal mining and metal companies - with a deciding vote to be cast by Western investors. And so it turned out.

As the votes were counted late on Thursday, it was clear that United Kingdom and United States investment
funds holding shares in Norilsk Nickel, Russia's largest mining company, voted overwhelmingly to defeat Rusal's first-ballot motion to terminate the powers of the Norilsk Nickel board of directors.

Norilsk Nickel is one of the world's dominant producers of nickel, copper, palladium, and cobalt; oligarchs Oleg Deripaska and Vladimir Potanin control 25% stakes in the company, while management and international investors share the other 50%.

Rusal is the Russian aluminum monopoly, controlled by Deripaska and several other oligarchs, with a 10% shareholding listed on the Hong Kong
Stock Exchange.

Norilsk Nickel is rolling in cash; Rusal is desperately short. The lure of takeover has been obvious to Deripaska - and to everyone else.

The 13-man Norilsk Nickel
board of directors had been elected at the annual general shareholders meeting on June 28. Deripaska won just three seats on the board, and failed to get his choice of board chairman elected. For the past three months, he's been trying to revoke the results, get a new board elected, and pave the way to a merger on Rusal's terms.

Vasily Titov, the Norilsk Nickel board chairman, announced that in Thursday's balloting, 47% of votes were cast against dismissing the old board, and against electing a new one. Just 38% of share votes were cast in favor of Rusal’s motion; 0.4% of shareholders abstained. Titov, elected over Rusal's opposition on June 28, is also deputy chairman of the management board of VTB; this is the state
bank which had been one of the anchor shareholders and state guarantors of the ill-fated Rusal share listing on the Hong Kong Stock Exchange on January 27.

At close of Hong Kong trading on Thursday, before the result of the Norilsk Nickel vote was known, Rusal's share broke a two-month long ascent, and moved down to HK$9.70; that is 10% below its Kremlin and Rothschild-backed listing price of HK$10.80. During the past eight months of
share trading, Rusal has slipped to as low as HK$6.75, 38% below the listing price.

Despite the steady rise of the aluminum metal price in the past three months, Rusal's share price gain has failed to recover to the listing level , while US and Chinese peers, Alcoa and Chalco, have performed more stably in line with the aluminum price.

Allowing that Rusal controlled 25% of Thursday's Norilsk Nickel vote in line with its stake in the company, the most Deripaska has been able to recruit in his three-month, multi-million dollar campaign was 13% - one vote in eight; less than one-third of the free floating shares.

Rusal's official statement to media following the defeat was: "The fact that we were not able to secure enough votes will not distract us from the positive agenda which was outlined earlier." A website posting from Vera Kurochkina, head of press for Rusal, declares: "The voting pattern at the EGM indicates that under Interros' influence the executive management voted with Treasury shares to prevent minority investors from electing new, independent non-executive directors. This contravenes all established principles of corporate governance."

Interros is Potanin's holding company.

Rusal is the last institution left standing outside the Kremlin wall unable to see that it was not commercial rival Potanin who scored the ballot victory, but rather the
government, VTB bank, and the prime minister himself, Vladimir Putin, who summoned both Potanin and Deripaska to private meetings in Sochi last week; both understood then what the outcome of Thursday's vote was likely to be.

The reality of Deripaska's situation is that he now faces a behind-the-scenes decision by Putin and Deputy Prime Minister Igor Sechin, to compel him to sell out of Norilsk Nickel and allow the Norilsk Nickel share price to recover from the damage inflicted on it by Deripaska's takeover efforts.

Institutional shareholders in London, Boston, and elsewhere say they were courted by a Rusal roadshow, but concluded that Deripaska is not a credible chief executive or figurehead for the company. They also point to the rulings of the UK High Court in which four of the highest-ranking judges in the British judiciary have ruled that they do not believe Deripaska.

Norilsk Nickel chief executive Vladimir Strzhalkovsky, whose leadership of the defense against Rusal's takeover succeeded on Thursday, signaled that Deripaska's time is up. The company will support a buy-out of the Rusal stake, he said after the vote result was announced in Moscow.

That is the first shot to be fired in a campaign that is set to go even further, backed by state officials who believe new measures must be taken to protect the future value of Rusal itself.

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