UC Rusal followed the path of Norilsk Nickel

The Board of Directors of the only primary aluminum producer in Russia, UC Rusal, recommended that shareholders vote against the payment of final dividends for 2022. The company announced this on June 5. The annual general meeting of shareholders, which must approve this decision, will be held on June 28.

At the same time, UC Rusal has already paid interim dividends for the first half of 2022 at the rate of $0.02 per share, in the amount of $302 million the shareholders received. Prior to this, since 2017, UC Rusal has not paid dividends.

Quotations of UC Rusal on the Moscow Exchange reacted to the news, falling in price by 1% to 38.5 rubles. per share at 17.52 Moscow time.

“In the current unfavorable market conditions, the company’s debt burden is relatively high,” a representative of UC Rusal explained to Vedomosti about the decision of the board of directors. At the same time, the company maintains its plans for a large-scale investment program, including the environmental modernization of its plants, he added.

UC Rusal’s dividend policy, approved by the Board of Directors in 2015, provides for payments of up to 15% of adjusted EBITDA, which includes dividends from Norilsk Nickel (UC Rusal owns a 26.39% stake in this company). In 2022, UC Rusal’s IFRS revenue increased by 16.5% to $13.97 billion. But the company’s net profit fell by 44% to $1.79 billion, adjusted EBITDA decreased by 30% to $2.03 billion. The company also significantly increased its net debt, which increased by 32% over the year to $6.26 billion.

At the end of April 2023, the Board of Directors of Norilsk Nickel also recommended that shareholders at the annual meeting decide not to pay dividends for 2022 (Vedomosti wrote about this on April 28). The meeting of shareholders of the company is scheduled for June 6. Norilsk Nickel’s interim dividends for nine months were also not paid. At the end of 2021, Norilsk Nickel paid RUB 178.27 billion to shareholders. at the rate of 1166.22 rubles. per share.

The largest shareholders of UC Rusal are En + Group founded by Oleg Deripaska (56.88%) and Sual Partners of Viktor Vekselberg and his partners (25.52%). Vedomosti sent inquiries to these companies.

Sual Partners has repeatedly criticized UC Rusal’s policy of refusing to pay dividends. In particular, in September 2021, it issued a statement in which it stated the need to return to the practice of paying dividends, interrupted in 2017. It indicated that from 2019 to the first half of 2021, inclusive, according to Sual Partners, UC Rusal “had to pay shareholders $904.5 million in dividends” (Vedomosti wrote about this on September 10, 2021).

According to Dmitry Smolin, senior analyst at Sinara investment bank, the main reason for the recommendation of the UC Rusal board of directors to vote against paying dividends is the company’s high debt burden (net debt to EBITDA ratio of more than 3) and the likely absence of Norilsk Nickel dividends for 2022. net debt to EBITDA above 3 is already a “weighty reason” not to pay dividends, Finam analyst Alexey Kalachev agrees. “The recommendation of the board of directors of UC Rusal on dividends is quite justified and expected,” he says.

Kalachev recalls that UC Rusal’s financial results for the second half of 2022 were “frankly weak.” Revenue and production remained unchanged, but free cash flow (FCF) turned negative and production costs rose due to higher transportation costs and less availability of alumina (a raw material for aluminium). Prior to the start of the CBO in Ukraine, UC Rusal brought it to its Russian plants, including from Ukraine and Australia.

In the second half of 2022, UC Rusal’s revenue increased by 4% to $6.82 billion, production increased by 2.5% to 1.94 million tons of aluminum, while adjusted EBITDA fell by 86% to $221 million.

In addition, the decision of the board of directors of UC Rusal was also affected by the virtual absence of dividends from Norilsk Nickel for nine months, says Kalachev. “Aluminum prices are falling, the United States has introduced a protective duty not only on Russian aluminum, but also on products from it,” the analyst emphasizes.

The price of a three-month futures contract for aluminum on the London Metal Exchange (LME) has decreased by 5% since the beginning of the year and as of June 2 was $2,263.5/t. At the beginning of April 2023, a 200% duty began to apply to the import of aluminum products into the United States, which contain metal of Russian origin. A month earlier, a similar duty on the import of aluminum and aluminum products from Russia came into force.

Leading analyst at Veles Capital, Vasily Danilov, agrees with Kalachev. Considering that in the second half of 2022, the cost of aluminum production at UC Rusal was $2,325/t, at current metal prices, the company is “balancing on the verge of profitability,” he said. He calls the probability of the aluminum company paying dividends for the first half of 2023 “near zero”. “The symbolic dividends paid by UC Rusal for the first half of 2022 were rather an episodic surprise,” Kalachev concluded.