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Article Excerpt
IN BRIEF
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*** The global financial crisis that has been raging in the United States and Europe for more than a year has hit Russia and is gradually spilling over from the financial sector into the real economy, and with commodities prices falling under weakened demand many metals companies have begun to take steps to avoid damage and remain profitable. Even Russia's richest man, Oleg Deripaska, is not immune and his Basic Element holding is reviewing all its investments programs and will not implement the ones which banks cannot fund on acceptable conditions. Meanwhile, his aluminum giant RUSAL is not considering selling its blocking stake in Norilsk Nickel, despite the Arctic miner and smelter being one of the company's hardest hit on Russia's plummeting stock markets - the RTS and the MICEX. Many other producers across the board are also being hit hard and are scaling back production and revising bond issues and IPO plans.
*** MMC Norilsk Nickel posted an unaudited net profit of $2.682 billion in the first half of 2008 under International Financial Reporting Standards (IFRS), 33.2% less than in the same period last year, as commodities prices fell and it suffered from the depreciation of LionOre's assets. Shares in Norilsk, the world's biggest nickel and palladium producer as well as a large producer of copper, platinum and cobalt, headed in the same direction on the announcement, which did nothing to dent the sharp losses recorded throughout the week on both of Russia's trading floors.
*** Mikhail Prokhorov has told his former business partner Vladimir Potanin that execution of their agreement on division of jointly held assets has been suspended owing to force majeure circumstances, as a September 14 deal covering those assets whose fate had remained undecided stalled to again draw out the estranged former business partners lengthy divorce.
*** Titanium producer VSMPO-Avisma is to increase capacity for titanium and stampings in anticipation of robust growth by 2010. This comes in spite of the financial crisis and falling demand at Boeing and Airbus, where delays are impacting on VSMPO-Avisma's production. VSMPO maintains though that titanium use will rise as aircraft producers start to use titanium alloys more and more. VSMPO intends to boost titanium sponge production 20% and milled titanium 46% by 2012. The company is also planning to expand its participation in upstream projects in the Sverdlovsk region. The projects under discussion are a molybdenum project with UMMC, a vanadium project with Nizhny Tagil Iron & Steel Works and a magnesium project with Silvinit and/or Urasasbest.
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Russian metals companies feel heat from global crisis
MOSCOW. (Interfax) - The global financial crisis that has been raging in the United States and Europe for more than a year has hit Russia and is gradually spilling over from the financial sector into the real economy. Industrial companies have already begun to discuss and take steps to avoid or at least minimize the damage and remain profitable. Russian metals companies are no exception.
Deripaska
Oleg Deripaska, Russia's wealthiest individual according to Forbes, has always been considered a buyer of assets, not a seller. In his dizzying, aggressive career, he has very rarely pulled out of an investment, while the list of his acquisitions could fill pages of small print. But the global financial crisis is easily destroying old stereotypes.
Canadian automobile components producer Magna, in which Deripaska invested $1.5 billion last year, announced Friday that the tycoon's Russian Machines is pulling out of the company.
Magna was upbeat about the results of its unexpectedly short partnership with Russian Machines, saying the strategic alliance had helped it accelerate growth on the Russian market.
Basel, the holding for Deripaska's assets, issued a terse statement attributing the withdrawal from Magna to the global crisis, without explaining exactly how it affected this investment.
"The company supports this decision by Russian Machines, taken due to the current situation on global financial markets, which has decreased the prices of public companies amid limited market liquidity," a senior executive at Basel said.
Russian Machines general director Valery Lukin said the company has fully settled its debt on the acquisition of the stake in Magna. Asked if there was a debt to the bank after the Magna shares were handed over to it, Lukin said: "According to my information, no."
He added that "negotiations are underway with the bank [BNP Paribas], there are no claims."
Russian Machines' acquisition of the stake in Magna last year was the biggest foreign debt in Russia's automotive industry. The companies were full of ambitious plans, and expected to gain strong positions on the new markets the partnership would open up.
But the results of the partnership have been far from stellar.
"Following the collapse of Magna's projects with [top Russian carmaker] Avtovaz, although their were plans to secure orders to make components for 450,000 automobiles per year, as well as against the backdrop of the GAZ Group's stalling projects to build budget cars, the mass production of which could provide a high degree of localization of components manufacturing, the risks of the projects announced by the partners increased," Bank of Moscow senior analyst Mikhail Lyamin said.
While Russian Machine's GAZ still needs a strategic partner with technology, the fate of the plans to produce a budget car remains in question. Meanwhile, automobile sales are starting to drop due to the collapse of financial markets, and foreign interest in emerging markets is waning, another industry analyst said.
However, the "idea of developing component production in Russia amid the rapid growth of the Russian automobile market was quite attractive for both companies," Lyamin said.
An analyst at AntantaPioglobal, Igor Krayevsky said holding onto the shares in Magna would have been a bad idea. "If you consider that sales of trucks and SUVs fell 80% in America in the first half and sales of automobiles in general dropped 27%, investments in this area were not yielding the return that they might have expected," he said.
"In addition, the situation was exacerbated by difficulties with raising financial resources and their higher cost on world markets, which reduced the return on risky and long-term projects to a minimum," Lyamin said.
But Basel says it plans to continue working with the Canadian company despite the latest development. "The company plans to expand cooperation with Magna in Russia in all areas and develop a corresponding program that may be unveiled as early as next week," the Basel executive said.
Lukin said that the key factor in Russian Machines' relations with Magna is that joint projects are continuing.
"These are joint projects in engineering, the new GAZel-3 and GAZ Siber," Veles Capital analyst Marina Irkli said.
Analysts have been discussing the state of Basel's debt portfolio for months. Having completed several big foreign acquisitions financed by loans - stakes in Magna, Strabag and Hochtief totaling more than $3 billion - Deripaska at the start of 2008 made his most expensive purchase. The exact price of the deal to buy a blocking stake in Norilsk Nickel from billionaire Mikhail Prokhorov was not disclosed, but its cash portion reportedly may have been as much as $8 billion. The shares in Norilsk Nickel, the acquisition of which involved heavy borrowing, have since fallen steeply due to the crisis.
Discussions of this issue intensified Friday following a number of news reports about Basel companies.
Besides the news about Magna, Basel's Baikal Pulp-and-paper Mill announced Friday that it was shutting down production due to a lack of raw materials. In addition, construction giant Strabag, of which Basel is a partner and shareholder, announced the suspension of a number of Russian projects totaling 150 million euros.
However, Basel is not concerned about its debt portfolio, although it is taking steps to optimize it, the company executive said.
"The debt burden is acceptable for the group, but we are naturally working on optimizing the loan portfolio," he said.
As for the debt taken on for the purchase of the Norilsk Nickel stake, an official at Deripaska's Russian Aluminum, which in May borrowed $4.5 billion to finance the deal, said the company is not having any problems with this debt.
Basic Element
Deripaska's Basic Element is reviewing all its investments programs and will not implement the ones which banks cannot fund on acceptable conditions.
"The question whether the business will survive or die is not on the agenda. We are asking ourselves how we can increase the share on the markets, where we work at the expense of those who cannot secure soft landing," Gulzhan Moldazhanova, BasEl's chief executive told journalists on October 5.
Basic Element has no liquidity problems; however, the group is in consultations with banks in order to find out what investment programs that require loan funding can be implemented, she said.
"We continue implementing all projects that we started. We will continue investing in the improvement of existing assets. But the projects we were only planning and the banking funding for which was not secured will be suspended," Moldazhanova said.
The company introduced a ban on hiring new employees in October, she said. "We have been building the company for a long time, and we want people there feel well. We will not cut on social packages and benefits. But we will not hire new employees. Maybe this is for the better: the 'salary debauch' on the market will stop," she said.
Moldazhanova, however, said that the IPO of molybdenum producer SoyuzMetallResource will take place this year as it was planned.
"The thing is that the company produces the good which is absolutely attractive to metallurgists even in conditions of falling prices on metal. Moreover, there are few metallurgic companies listed in Hong Kong, and we are advised against giving up plans to place our shares. The point of no return was not passed. There is time to think and we are preparing for the IPO," she said.
Speaking about IPO of other Basic Element's companies, Moldazhanova said: "The situation is not favorable for large placing. However, we do not know what will happen in six months. I think we will find ourselves in a totally different financial world."
RUSAL & Norilsk
Deripaska's United Company RUSAL (UC RUSAL) is also apparently not having any problems servicing its debts. Rusal raised a $4.5 billion loan in May to finance the acquisition of a blocking stake in Norilsk Nickel.
"This is an exchange loan, and under the conditions of the loan agreement signed with the banks we intend to refinance it at the agreed time, possibly even sooner," RUSAL deputy general director for public relations Vera Kurochkina said.
RUSAL does not intend to sell its blocking stake in MMC Norilsk Nickel, despite the sharp fall in the latter's share price.
"Yesterday's drop in the value of Norilsk Nickel's share price in the Russian and international stock markets is in no way related to the shares owned by RUSAL," the aluminum company said on October 7.
"RUSAL considers its equity investment in Norilsk Nickel to be strategic and it does not intend to sell its shareholding," RUSAL said.
Norilsk Nickel plummeted 37.7% on the RTS and 30.2% on the MICEX stock exchange on Monday. The company's market capitalization, which exceeded $55 billion as recently as May, fell to $13.5 billion.
RUSAL bought the blocking stake in Norilsk Nickel from Mikhail Prokhorov's Onexim in April.
MMC Norilsk Nickel, the world's biggest producer of nickel and palladium, on October 3 announced a decline in first-half net profit, largely due to falling metal prices. The company said in a conference call that it might announce a revision of plans for 2008 when it releases production figures for the first nine months of the year. But the targets remain unchanged for the time being.
"Norilsk Nickel is not currently changing its production and investment plans, or programs concerning the development of production and the environment. However, in light of the difficult situation on the markets, company management will take a more serious and balanced approach to issues concerning the adjustment of these plans and programs in future," a source at the mining giant told Interfax.
Not all companies have felt the crisis yet first hand, or simply do not want to admit their vulnerability amid the global financial turmoil.
Titanium
The crisis has not adversely affected Russia's titanium giant VSMPO-Avisma. "Of course there is a liquidity crisis now, so big banks that have given us investment money are being very careful now: they are asking to more carefully set the schedule for drawing on credit lines and interest rates are getting higher," company general director Yevgeny Romanov said.
VSMPO-Avisma Corporation, the world's biggest supplier of titanium products for the aircraft industry, is sustaining production levels, despite the financial crisis, Artem Kislichenko, the corporation's PR manager, told Interfax on October 8.
The corporation does not intend to reduce its planned production volumes, Kislichenko said.
"Of course the financial crisis is affecting our business and we're in close dialog with our main clients to assess their demand for our products in the short- and medium terms," he said.
Long-term contracts, which stipulate minimum supply volumes, have been signed with customers, who include Boeing and Airbus, he said.
VSMPO has had to start supplying Boeing and Airbus with the minimum volumes over the delays with the Boeing-787 Dreamliner and Airbus A380 and A350. However this has not affected operations as the aircraft makers honored their commitments to buy a minimum volume of titanium products, which they have stockpiled, VSMPO said in its financial statement for the first half of 2008.
Kislichenko also said the Russian corporation was implementing a strategy to increase production volumes and was not planning to review it due to the current circumstances.
The corporation has said it expects the situation to improve as early as 2010-2010. It thinks the problems with the new Boeing and Airbus planes will be resolved before long that titanium demand will recover to forecast levels.
Vnesheconombank (VEB) recently approved plans to co-fund VSMPO-Avisma's investment program. The bank said the whole program would cost 26 billion rubles, and that its contribution would be 9.388 billion rubles. The loan term is five years.
VSMPO-Avisma intends to boost titanium sponge production 20% to 44,000 tonnes and milled titanium products 46% to 46,000 tonnes per year by 2012 and is targeting sales revenue of $1.7 billion-$2 billion by then.
A syndicated loan of $400 million, to be arranged by Barclays, Calyon, Societe Generale and UniCredit, should also go towards funding the program.
"We plan to raise these funds by the end of the year," Kislichenko said.
VSMPO-Avisma is the world's biggest titanium producer, and supplies the world's leading aircraft corporations with the metal. It exports 70% of its titanium and sells 30% in Russia.
Steel
There is a true deadlock in the metallurgical sector.
Magnitogorsk Iron and Steel Works (MMK) recently announced that it is reducing production and optimizing personnel. The company's top managers say the October production program has been reduced by 850,000 tonnes of rolled steel. This is mainly the result of a drop in purchasing power, especially from the construction companies that are key consumers of metal production.
If the situation worsens there is not just the threat of a non-payment crisis, but, even worse, a considerable slow down in the rate of industrial production.
A spokesman for Profit, a major scrap supplier affiliated with MMK, said MMK planned to revise its production plans downward.
MMK is reducing work shifts by...
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