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. Last Updated: 07/27/2016

RusAl to Start Work on Smelter in 2006

VedomostiAlexander Bulygin
Russian Aluminum plans to start building the Boguchansky smelter later this year, part of a $6 billion combined metals and energy complex to be jointly owned and operated with HydroOGK, a unit of Unified Energy Systems.

The two companies will put up a combined $1.2 billion in funding for the complex, they said, adding that at least half the financing was to come from the state investment fund and loans from foreign banks.

The project, located in the Krasnoyarsk region, will be the world's biggest tie-up between a metals producer and an energy producer and is penciled in for a 2010 launch, HydroOGK managing director Vyachaslav Sinyugin said Thursday.

The complex, comprising a 600,000-ton capacity smelter and 3,000-megawatt hydroelectric power plant, is on the site of a half-completed power facility, which was started by the authorities 20 years ago.

"We have five greenfield smelter projects, averaging $800 million in cost, and more than 10 brownfield projects at $200 million average cost. But this is the priority project for RusAl," said Alexander Bulygin, CEO of RusAl.

Electricity accounts for about one-third of aluminum production costs, with sites for new aluminum plants traditionally chosen on the basis of cheap power sources being nearby.

Once fully up and running, the smelter will use only half of the plant's electricity.

The two companies, together with Krasnoyarsk authorities, Economic Development and Trade Ministry and Russian Railways, have worked on hammering out a final deal for more than 18 months. The board of state power utility UES, which fully owns HydroOGK, is set to give its final approval of the project Friday.

Over the past 20 years, Russia has pumped $500 million into the construction of the Boguchansky station, billed as Russia's largest hydroelectric station.

In terms of financing, loans from foreign banks are to bring in $2.5 billion, RusAl chief financial officer Vladislav Soloviyov said.

The loans would be repaid before 2020, based on the smelter reaching profitability by 2011 and the power plant by 2013, Soloviyov said.

The future profits of both the smelting facility and power plant will be split evenly between RusAl and HydroOGK, Soloviyov said.

In addition, $340 million is to come from the federal budget to create a flood zone for the station.

A total of $700 million is expected from the state investment fund for the energy network infrastructure and an additional $50 million for road building, Bulygin said.

The government has not yet announced who the beneficiaries of the investment fund will be.

"Boguchansky will in many ways resolve the energy deficits in the region," Sinyugin said.

"In any case, the state will retain ownership of all the infrastructure," Bulygin added.

"The completion of Boguchansky will be a boost for the energy utility and give them a guaranteed major client," said Dmitry Bulgakov, an energy analyst with Deutsche UFG.

"Essentially, if the energy market was liberalized, there'd be no need for such a partnership. They could raise the money themselves. As it stands, this works as a hybrid compromise," he said.

Although the Boguchansky project's ownership will be registered in Cyprus, all the project's taxes will be paid in Russia.

Cyprus was chosen due to inadequate property protection laws in Russia, the parties said. "We wanted the 200-page partnership document to be legally binding. Our advisers said the Russian laws would not be able to support this document," Bulygin said.