Catch-up potential. Medium- to long-term Aluminium case intact

Betting on a steeper cost curve and de-leveraging

We continue to view UC Rusal as a play on the medium-term appreciation ofaluminium prices, as we expect the industry cost curve to steepen in the future.

Higher coal prices worldwide should drive power costs up. UC Rusal’s maincompetitive advantage is its sustainably low energy costs thanks to Russia’s strandedenergy supplies in Siberia, at a time when coal-fired smelters across the world arewitnessing an increase in cash costs. UC Rusal’s cash operating costs wereUSD1,402/t in H1 09 and stand at USD1,485/t currently on our numbers. This is in thefirst quartile of the cost curve and in line with Rio Tinto’s aluminium upstream cashcost, compared with the current aluminium price of USD2,115/t.

 Medium- and long-term potential for the aluminium market

With capital costs rising, we put the incentive price for future projects aboveUSD2,400/t. Longer term, China could struggle to keep production at levels allowing itto maintain its domestic market balance, driving prices higher. Since the IPO,aluminium prices have proven resistant to both macro uncertainties and a strongerUSD exchange rate. Our central case scenario has now been raised to USD2,100/t inFY10e and USD2,200/t in FY11e (from USD2,000/t and USD2,100/t respectively).

 Revised earnings on higher aluminium price assumptions

We have raised our FY11e EBITDA by 7%, from USD2.7bn to USD2.9bn. OurEBITDA for FY10e is unchanged at USD2.2bn.

Valuation: target price of HKD11 per share / EUR21 per GDS

The timing of the IPO was unfortunate as it coincided with macro woes related tosovereign risks in Greece and policy changes in China. The average of ourRoCE/WACC FY10-11e and DCF is HKD10.7. Our DCF central case stands atHKD11.4. We initiate coverage with an outperform rating.