BREAKINGVIEWS-RUSAL's $36bn price tag doesn't reflect its quirks

-- The author is a Reuters Breakingviews columnist. The opinions expressed are his own -- By John Foley HONG KONG, Jan 6 (Reuters Breakingviews) - RUSAL has accomplished two of its three Herculean tasks -- restructuring its huge debts and getting Hong Kong to approve an initial public offering at the end of January. Now the Russian aluminium producer must convince investors to buy in at a rather optimistic price. Were aluminium all that mattered, RUSAL would deserve its targeted enterprise value of $36 billion or 12 times EBITDA, a shade above global peers. The world's biggest producer, it gets most of its ore from its own mines, and cheap Siberian hydro-power keeps RUSAL's production costs 10 percent below the world average. Add in a multiplicity of risks that have nothing to do with mining, and the investment case changes. Consider RUSAL's still-heavy debts of $14.9 billion. If aluminium prices don't rise over the next three years, creditors could drive RUSAL into bankruptcy. Finance expenses were equivalent to 20 percent of the company's cost of sales in the first half of 2009. Political risk is outsized too. Most of RUSAL's inferred resources of bauxite are in Guinea, an unstable country that has already attempted to seize back some key RUSAL assets. Rivals like China's Chalco and India's Hindalco are smaller and less profitable, but their ore bases are at least in their own back yard. Finally, there's the legal risk. Chief executive Oleg Deripaska remains mired in a dispute over the ownership of part of his 48 percent stake. The company itself has 57 civil claims outstanding -- five times 2008's figure. Its prospectus outlines $5 billion of claims against which it has made no provision. Investors may be prepared to overlook these risks because of China's hunger for commodities. It's no accident that RUSAL picked Hong Kong for its debut. Yet only a sliver of RUSAL's revenues come from China today. Beijing may not welcome a strong foreign player in its home market. Even if it does, it may not be RUSAL. At the indicated price, RUSAL at least carries a 15-20 percent discount to Chalco, the Chinese state champion. But that gap barely covers the usual "IPO discount". While RUSAL may one day deserve credit as the world's leanest and largest aluminium producer, it is still, like the ore it digs out, mixed with too many unwanted elements. CONTEXT NEWS -- UC RUSAL, the Russian aluminium company, is set to price its initial public offering on the Hong Kong and Euronext markets around Jan. 22. -- The range indicated for the sale was HK$9.10-HK$12.50 ($1.17-$1.61) per share, indicating a market capitalisation of $17.8-$24 billion. Of that, some $2.6 billion would be new funds. Including net debt, the company's enterprise value would be $36 billion at the mid-point of the range. -- RUSAL recently completed a debt restructuring with more than 70 lenders, in which it reduced its borrowings from $16.8 billion to $14.9 billion. A $4.5 billion loan to VEB, a Russian state-owned lender, must be repaid in full or refinanced by the end of October 2010, and RUSAL has promised other lenders to repay $3 billion of debt by 2011. -- RUSAL is the world's largest aluminium producer, accounting for 13 percent of alumina production and 11 percent of aluminium in 2008. Chief executive Oleg Deripaska would own 48 percent of the company's shares following the IPO, with 10.9 percent in public hands. (Editing by Hugo Dixon and David Evans)