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. Last Updated: 07/27/2016

RusAl Wants Chinese As IPO Cornerstones

Billionaire Oleg Deripaska’s aluminum producer United Company RusAl may offer stakes in smelters and mines to Chinese companies to ensure the success of its initial public offering in Hong Kong and Paris, analysts said.

The world’s largest maker of the metal plans to sell a 10 percent stake to help repay more than $14 billion of debt. RusAl is seeking a primary listing in Hong Kong and a secondary listing in Paris, with investors’ meetings starting as early as Nov. 30.

RusAl may seek to win Chinese state-owned companies as investors by offering production joint ventures and access to raw materials, said Chris Weafer, chief strategist at UralSib, and Eric Kraus at Otkritie.

“The only way that RusAl can get a high valuation is if it gets a couple of big, state-backed anchor investors,” Weafer said. “Chinese companies usually only buy if they can leverage it by getting access to projects or strategic assets.”

Access to RusAl’s output would help China, the world’s largest aluminum user, secure supplies as its own production is limited by comparatively higher costs. A deal may also cement the deepening trade relationship between the countries. Prime Minister Vladimir Putin, with a delegation including Deripaska, visited China last month to clinch oil, gas and nuclear deals that totaled more than $100 billion this year.

RusAl needs to agree on the debt restructuring with foreign creditors before the IPO, according to two people familiar with the situation who declined to be identified because the debt talks are private. A delay now means that the IPO would not go ahead before March because of the Chinese New Year, one of the two said.

But the company is close to a deal to restructure $7.4 billion in debt to foreign banks, The Wall Street Journal reported Saturday. The debt deal is likely to be announced as early as this week after being approved by creditor banks, the paper reported, quoting people familiar with the deal.

A RusAl spokesman declined to comment.

“RusAl has been talking with possible cornerstones for its IPO for several months already. Three to four Chinese companies have shown their interest,” a source told Reuters.

Another source familiar with the deal confirmed that RusAl would be ready to start meeting investors as early as Nov. 30.

RusAl plans to win over seven or eight major customers in China to secure long-term aluminum deliveries, head of strategy Artyom Volynets said in an e-mailed response to questions.

“We will secure contracts with large consumers or provide our potential partners access to the raw material resource to jointly develop them,” he said.

RusAl’s debt almost doubled last year after it bought 25 percent of Norilsk Nickel for $7 billion in cash and a 14 percent RusAl stake. Commodity prices subsequently collapsed, and RusAl had a net loss of $6 billion last year, Vedomosti reported last month.

“It would be naive to conceive RusAl’s IPO as a purely financial transaction with no political interests,” said Kraus, an adviser who helps Asian clients invest in Russia. “It would make sense that the Chinese would be looking for an entry in a more energy-efficient aluminum smelting project via RusAl.”

RusAl hired Bank of America Merrill Lynch, the biggest U.S. bank by assets, to replace Goldman Sachs in marketing the IPO, slated for December, said two people familiar with its plans. The IPO will be led by Credit Suisse Group and BNP Paribas, with banks including BOC International Holdings and VTB Group helping to manage the sale, the people said.

Smelting aluminum in Siberia, where RusAl has plants, would offer China a chance to “get serious about closing down its own production,” said Lochlann Toolin, a partner with Balor Capital Management, a commodity-trading fund in New York. “China has been talking for years about closing down smelters, and they should as it’s a very uneconomic use of resources.”

(Bloomberg, Reuters)