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. Last Updated: 07/27/2016

RusAl Lands Deal With Norinco

HONG KONG — United Company RusAl has struck a contract to sell 1.68 million tons of aluminum to Chinese state conglomerate Norinco over seven years, the Russian firm said Monday.

The deal between a Chinese arms exporter and a company steered by a debt-laden Russian tycoon could help pave the way for RusAl’s planned $2 billion initial public offering.

“RusAl and Norinco have agreed on the price and all other terms and conditions of the aluminum delivery,” RusAl said in a statement.

A source at the Chinese firm said the deal meant RusAl would supply 20,000 tons of aluminum a month to Shanghai for sale on the spot market. The contract will run from 2010 to 2016.

That would add extra volume to an already well-supplied Chinese aluminum market. Until the start of this year, 20,000 tons a month would have more than doubled China’s average monthly imports of primary aluminum.

But imports have rocketed since March and stayed well over 100,000 tons for each of the last six months thanks to China’s relatively high demand.

RusAl is urgently trying to reach agreement with foreign creditors on $7.3 billion of debt by mid-November to pave the way for a Hong Kong share listing and to help pay off debt, senior bankers said last week.

The IPO, handled by Credit Suisse and Goldman Sachs, aims to raise $1.5 billion to $2.5 billion, which could make it the biggest this year.

The RusAl-Norinco deal was signed last Friday.

“The deal is a purely business deal between RusAl and Norinco,” the Norinco source said late Monday, without providing details. He added the details were confidential.

The Chinese company owns a range of interests including vehicles, real estate, finance and trade, but Norinco is best known as an arms manufacturer that has been criticized several times by Washington over the past decade for selling military technology to Iran.

RusAl’s main shareholder is Oleg Deripaska, once Russia’s richest man, but the financial crisis has saddled him with a host of debts that he is trying to negotiate.

RusAl expects to double its sales to China from 5 percent of its revenue in 2009 to 10 percent by 2015, it said in a statement.

The Norinco source said the payment to RusAl could involve trade finance, which could include a lump sum payment for the whole 1.68 million tons of primary aluminum in advance.

With $2.27 trillion of foreign exchange reserves at the last count, China has plenty of cash to spend on buying up resources.

It has struck many foreign supply deals this year, including a $25 billion loan for an oil deal with two Russian firms in April.

An advance lump-sum payment for the entire volume of aluminum, based on Monday’s aluminum prices at $1,911, would equal $3.21 billion, a Reuters calculation showed. But by buying in bulk, China may not pay the full market price.

“If there is to be an advance payment, then it will probably be at some kind of discount, so it’s hard to evaluate it without seeing the contract,” said Alexei Morozov, an analyst at UBS.

Alfa Bank analyst Maxim Semyonovykh agreed that without the price it was hard to judge how positive the deal was for RusAl.

“But this announcement about the contract was probably for exactly that — to create a positive image around the company ahead of its IPO,” he said.

RusAl still needs to agree on a debt restructuring deal with a club of more than 70 international banks before the IPO can proceed.

“It gives RusAl a breathing space with its creditor banks but does not solve the problem,” said Chris Weafer, chief strategist at UralSib in Moscow.

“This deal can help with the IPO, but only to the extent that it may make it easier for RusAl to attract government-linked investment institutions in the region.”

The IPO was still unlikely to appeal to other investors because of uncertainty over global industry trends and the company’s future, he said.

“The valuation that RusAl needs for the proposed IPO would also make the issue only of interest to very long-term investors rather than the usual portfolio investors.

They would have to sell with a discount to attract a broader audience.”