Ignore the perennial distraction of Russian oligarch turf battles that have defined Rusal's life as a listed company. Consider instead the investment case for the world's biggest producer of aluminum. Subdued industry demand for the white metal has depressed the London Metal Exchange price by a 10th during the past year. But the market is distorted by two things. Low interest rates have meant that financial demand accounts for nearly three-quarters of trading volume, Rusal estimates. And China, accounting for two-fifths of global demand, has also skewed the market by increasing output from new and once-idled plants kept alive only by government grants.
Oleg Deripaska's company, like its peers, has worries of its own, such as rising energy and alumina costs. Nor is it easy to ignore the $10.7-billion net debt legacy from its acquisition of a quarter of Norilsk Nickel. Welcome to Rusal's world.
It is not pretty. Rusal's earnings before interest, tax, depreciation and amortization fell four-fifths to $130-million in the third quarter from a year ago, their lowest since its 2010 listing. At least the aluminum business's EBITDA margin held up at 8 per cent, in line with peers. As EBITDA slumps, however, the Norilsk conundrum weighs more heavily on investors: Net debt is over 20 times annualized third-quarter EBITDA. Just as well that Rusal has wiggle room under its covenants and better working capital management has helped free enough cash to prepay most debt falling due in the first half of 2013. Cost control is critical. Rusal's cost per tonne of $1,936 is fine while it can achieve above-LME prices.
Rusal hopes for renewed Chinese demand as infrastructure spending and stockpiling are resumed. For that to happen, Beijing's new leadership will need to prioritize supply from energy-efficient plants, shut loss-making ones, and buy the current 400,000 tonne surplus. That is a big assumption. And aluminum-loving institutions that have lost 55 per cent since Rusal listed will not benefit fully because of having to service the Norilsk-related debt pile.