Russia’s Rusal has a natural appetite for M&A. Created just five years ago after the merger of various aluminium smelters and alumina refineries belonging to two companies – Oleg Deripaska’s Basic Element, formerly known as Sibirsky Aluminium; and Sibneft, then belonging to Roman Abramovich and Boris Berezovsky – it has swiftly risen to become Russia’s largest aluminium company and the third largest globally.
Basic Element has gradually increased its ownership in Rusal ever since, taking full control of the company in 2004.
The company boasts at least one huge competitive advantage – access to the cheap hydropower supplies available in Siberia; its major drawback is a lack of self-sufficiency in raw materials, involving heavy costs transporting them to Russia from far-flung locations.
This has given it a voracious appetite for companies with access to supplies of the bauxite and alumina used to produce aluminium, and has led it to widen its vision beyond Russia to central Asia, Africa, south America, and lately even Australia as it goes in search of new sources.
Rusal’s most headline-grabbing acquisition to date took place in April 2005 when it completed a $401 million deal for a 20% stake in Australia’s Queensland Alumina, the world’s largest alumina refiner. In addition, it has assumed about $60 million of QAL’s debt.
The deal is Russia’s largest ever investment in Australia, and the first significant investment outside the former Soviet Union by a Russian aluminium company. QAL itself is a joint venture between Rusal, Alcan (with a 41.4% stake) and Comalco (38.6%). The three shareholders are evaluating the possibility of expanding the company further through extra investment.
The company’s decision to buy developed-market assets is part of a wider trend in Russia. “The good news is that the environment in Russia is starting to become somewhat workaday,” says Charles Ryan, chairman of UFG in Moscow. “The strategy of Russia’s companies is starting to become more normal, with the same drivers as in other countries.”
The initial move towards acquisitiveness among Russian companies began several years ago when they began buying assets in neighbouring countries — central Asia and other former Soviet republics. This has been expanded to take on board developed-market assets, as Russia’s largest companies flex their financial muscles.
“It is not surprising that it is taking place in and around the metals and mining sectors today,” says Ryan. “The aluminium market is dependent on sources outside Russia such as bauxite. In the steel industry, a global game is afoot for access to markets.”
For Rusal, Africa has historically been a particularly important destination. Guinea boasts one-third of the world’s recoverable bauxite reserves, making it an obvious target. The company set about forming partnerships with local bauxite miners, and in May 2001 took over the management of bauxite mining complex Compagnie des Bauxites de Kindia for 25 years. Rusal also took over the management of the Friguia Bauxite and Alumina Complex in 2002 for 22 years.
Rusal is also looking at the Dian-Dian bauxite deposit in Guinea, one of the world’s largest, as a possible site for a greenfield alumina refinery project.
In south America, Rusal established a joint venture with the government of Guyana in the Bauxite Company of Guyana at the end of 2004, involving plans to double bauxite production in the next few years.
Anything is possible More acquisitions are inevitable as Rusal strives for self-sufficiency. The company evaluates all opportunities for expansion, whether greenfield or brownfield, regardless of location.
“Anything is possible,” says Vladislav Solovyov, chief financial officer at Rusal in Moscow. “It does not matter to Rusal [which type of development takes place], what matters is the cost, plus the competitive advantages. In general, what is important for primary aluminium production is access to cheap power, whereas what is important for the alumina process is access to bauxite.”
But while Rusal will continue to evaluate opportunities regardless of location, Solovyov believes that the bulk of opportunities lie in emerging rather than developed markets. “Emerging markets give us a chance to compete, and find projects that might be closed to rivals that may not accept the risks [of investing in developing economies],” he says.
This means that even after the QAL purchase earlier this year, Rusal cannot afford to rest on its laurels. Today it is participating in Nigeria’s privatization of the Aluminium Smelter Company of Nigeria (Alscon).
Rusal is likely to be at the forefront of a wider trend in Russia of companies turning their attention abroad. “The trend is in favour of further overseas acquisitions,” Ryan says. “Traditionally Russia has played less of a role than it should, due to nervousness about regulatory environments, corporate culture and so on.”
There are several historical reasons why Russian companies have come to an understanding of cross-border M&A rather late. “On the supply side, there was a long period of time when the logic of limiting your acquisition strategy to the local market made sense,” says Ryan.
For starters, Russian companies had little experience internationally, so sticking to domestic acquisitions was an obvious choice. Secondly, success on the Russian market has traditionally been heavily dependent on having the right contacts rather than following processes of due diligence and so on. “As the local market stabilized, companies began to evaluate rationally local versus international strategies,” Ryan adds. “They also began to realize that they were at a strategic disadvantage if they didn’t look abroad.”
For Rusal, as with other Russian companies, securing a supply chain has become imperative. Foreign acquisitions and partnerships also lead to access to the latest technologies.
“Before, what drove acquisitions was more of an asset grab,” says Ryan. “Now that companies are paying real money for local assets, it means that foreign acquisitions are not so shocking.”
Russian companies have generally had little trouble acquiring assets in markets such as the US, in particular contrast to the experience of Chinese companies.
Norilsk Nickel bought US-based palladium producer Stillwater Mining in 2003, and a 20% stake in Gold Fields of South Africa in 2004. Steel producer Severstal bought 62% of Italian steel firm Lucchini earlier this year, following its 2003 acquisition of US company Rouge Steel.
“Norilsk, for example, handled the process [of buying Stillwater] very elegantly,” says Ryan. “It was a good example of a Russian company executing well. Most stakeholders seemed happy.”
Smooth negotiations Solovyov says that similarly Rusal experienced no difficulties in its Australian purchase. “There was a very good reaction,” he says. “We had been a bit jittery but the whole process was smooth.” Rusal has several senior Australian employees, as well as a representative office in Australia, which might have facilitated negotiations.
Russian owners are also rightly perceived as being cash-rich. “The good news, if you are an owner, is that Russian companies are capable of paying high prices,” says Ryan.
In addition, as the sovereign and its individual companies’ credit ratings improve, Russian companies will have access to the international capital markets on increasingly good terms.
But while high commodity prices have increased Russian companies’ ability to spend their cash wealth on overseas acquisitions, any downturn in prices will inevitably have an impact. “The trade surplus at the moment is around $10 billion a month,” Ryan says. “If that were to change, it would have an immediate effect.”
Rusal has been one of Russia’s more conservative companies when it comes to the capital markets. According to Solovyov, Rusal’s credit portfolio stands at about $3 billion, and the company has no interest at present in increasing its debt to equity ratio.
A low market profile This, he says, means that while it will refinance outstanding syndicated loans and rouble-denominated bonds, neither an equity listing nor a Eurobond issue are priorities. Solovyov is keen to expand the company’s project finance capacity, and has been working closely with the European Bank for Reconstruction and Development and the International Finance Corporation to achieve this.
The decision not to list in the immediate future did not rest on an assessment of valuations achievable, he says, but on a judgement of whether the company needed the proceeds to fund specific acquisitions. Rusal received a $200 million unsecured loan from Natexis Banques Populaires at the end of March to finance the QAL purchase, and continues to prefer the loan market when looking to raise finance, Solovyov says.
Mindful of the risks associated with relying solely on high commodity prices, Rusal is keen to diversify while remaining focused on its core aluminium production.
Recognizing that the company’s relatively cheap electricity supply gives it a competitive advantage, Solovyov plans to expand this area of its business. “In the future we see ourselves as a power and metals company,” he says. “We see serious promise in central Asia which today is not being utilized.”
This is an area in which international commodities companies, such as BHP Billiton, have been successful. “We are lucky to live in a country with such resources, plus central Asia on our doorstep,” Solovyov says.
Rusal has also looked at diversifying further into other metals, such as magnesium, although Solovyov concedes that this cannot be described as a genuine form of diversification.
Rusal has an ambitious strategy of seeking to overtake the top two global aluminium producers, Alcoa and Alcan, to become the world’s largest producer of aluminium within 10 years.
It plans to increase its aluminium production to 5 million tonnes over the next 10 years, having produced 2.7 million tonnes of primary aluminium and alloys in 2004.
To do this it is seeking to grow its alumina production capability from 3.2 million tonnes last year to 8 million tonnes a year. It also plans to increase the proportion of value-added products at smelters to 50% of its total production, boosting revenues further.
Russia’s aluminium market is highly consolidated, with Rusal (with 75% of the market for primary aluminium production) and Sual (with the other 25%) the only players. Prospects for consolidation in the sector globally look equally slim.
This means that for Rusal to meet its aim of becoming the world’s largest aluminium producer in the next 10 years it will have to continue in its strategy of acquisitions.
