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RUSAL goes East:entering the debt market of China

Tuesday, Feb 14, 2017

UC RUSAL, a leading global aluminium producer, has registered its prospectus for Panda bonds issue - a Renminbi denominated bonds totalling up to 10 billion yuan (USD1.5 billion) with a tenor of up to 7 years. The offering is registered on the Shanghai Stock Exchange.

RUSAL Panda bonds enter the market as an unprecedented investment instrument offered by top efficient company in global aluminium industry. Panda bonds that RUSAL is seeking to offer in the next 12 months are virtually a risk free instrument according to ratings assigned both to the issuer and to the instrument.

In 2016, RUSAL was assigned an AA+ corporate credit rating with Stable outlook by CCXR, China Chengxin Securities Rating Co., the largest credit rating agency in China. Tranches of up to RMB2.4bln are fully guaranteed by one of the largest guarantee agencies that allows for the highest AAA credit rating assigned by CCXR to the first up to RMB2.4bln tranche.

RUSAL is a unique company in the global aluminium industry in terms of assets favourable location, vertically integrated full production chain, diversified and secured resource base, cost efficiency, proximity to key markets and last but not least – one of the lowest carbon footprints in the industry.

In 2015, RUSAL accounted approximately for 6.7% of the world’s aluminium output and 6.9% of the world’s alumina production.

UC RUSAL’s current capacity is 3.9 million tonnes of aluminium per year, 10.4 million tonnes of alumina per year, and 17.4 million tonnes of bauxite per year. RUSAL’s operations cover over 100% of the Company’s total alumina needs and the company’s existing bauxite resource base can support over 100 years of further operation.

UC RUSAL is a global company in terms of resources and assets locations, as well as sales operations. It has its mineral resource bases located in Guinea, Jamaica, Guyana, and Russia; its aluminium smelters are located in Siberia, Russia, and benefit from access to clean renewable hydro power; its alumina plants are broadly distributed in Guinea, Jamaica, Italy, Ireland, Russia, Ukraine, and Australia; and its sales locations span over Europe, the Americas, and Asia.

Due to unique cost advantages and efficient cost management UC RUSAL sits in the first quartile of the global cost curve.

RUSAL’s core aluminium producing facilities are located in Siberia, benefiting from access to clean hydro power. 95% of RUSAL’s aluminium is produced through the use of clean, renewable hydro energy. Further, RUSAL is targeting a 100% non-carbon energy mix for its smelting facilities located in Russia.

On top of that, UC RUSAL holds 28% of shares in Norilsk Nickel Company, producer of the world’s best quality nickel. Shareholding in quality asset Norilsk Nickel Company which holds S&P BBB- rating of investment grade provides additional guarantee to UC RUSAL solvency. In the last three years, dividends close to USD800m on average have been distributed to UC RUSAL each year, and the steady dividend distribution is expected to continue.

RUSAL compares favourably with the most reputable and strong Chinese industry leaders.

While RUSAL has its fully secured resource base, - the Chinese industry leader China Hongqiao has to purchase 90+% of its bauxite requirement externally. Hongqiao power demand is basically met by using coal power versus cost efficient and environmentally friendly hydro power used by RUSAL.

Comparing RUSAL to China Hongqiao and Zijin Mining Group (gold and non-ferrous metals), one can see overall rating is similar: UC RUSAL and China Hongqiao are both rated AA+ within China. UC RUSAL is rated Ba3 by Moody’s, equivalent to China Hongqiao’s S&P rating of BB-. Zijin’s domestic rating is AAA, but does not have any overseas ratings yet. At that, credit rating for RUSAL’s planned Panda bonds tranche has already been raised to AAA within China.

Compared to Chinese market peers’ strategy of using active borrowing to fund expansion, UC RUSAL is more cautious in its investments, controlling its capital expenditures, and possessing adequate free cash flow. It has remained in the black during 2014 and 2015.

RUSAL has positive credit profile and proven track record as a reliable borrower both on the Russian market, and importantly on the international debt markets.

UC RUSAL is the first Russian company to hold successful IPO as of the year of 2010 in Hong Kong. Now having three listing platforms for its various instruments and high overseas bond ratings, UC RUSAL has easy access to diverse financing channels for the company when necessary.

Earlier this month, UC RUSAL completed the debut offering of Eurobonds of the principal amount of USD600 million, tenor 5 years, coupon rate 5.125% per annum. RUSAL’s Eurobonds offer received strong demand from international investors, with nearly 20% of the demand coming from the Asian market.

With this high recognition of RUSAL by international investment community, the planned issue of Panda bonds comes as another attractive opportunity for Chinese investors. Also, it is to strengthen RUSAL’s presence in the Asian market and further facilitate RUSAL’s longstanding collaboration with its partners in the region.

RUSAL has been for a long time present in the market of China, and is widely known in the country and in the Asian region overall. When choosing the exchange floor to go for with the IPO in 2010, RUSAL decided for the Hong Kong Stock Exchange, and the choice turned very successful.

The Asian market and China in particular has always been an important strategic location for RUSAL. The company continues to develop its business in the region, both directly and in partnership with the largest Chinese companies.

UC RUSAL’s office in Beijing has been in operation since early 2000-ies. Starting from 2015, RUSAL is invited to participate in China Development Forum. UC RUSAL President Mr Oleg Deripaska speaks to CDF delegates every year. At CDF 2016, Mr Deripaska met Head of the National Development and Reform Commission of the People's Republic of China Mr Xu Shaoshi. RUSAL attends all China-Russian intergovernmental cooperation meetings for investment, industrial and energy sector cooperation.

The Company has strong local links and it collaborates with the leading companies of China.

In 2013, a strategic partnership agreement was signed between RUSAL and Chalco, the largest aluminium company in China. RUSAL also holds 33% charter capital in Shenzhen North Investments, daughter company of NORINCO, which has a longstanding background of selling aluminum, alloys and other non-ferrous metals in the Chinese market. In June 2016, RUSAL and Hebei Joy Sense Cable Co., a leading manufacturer of cables production from aluminium alloys in China, signed an agreement to set up a joint venture RUSAL-HEBEI JOY SENSE CABLE Special Aluminium Products Co. Ltd.

RUSAL actively collaborates with Chinese metallurgy industry and the professional community through its membership in China Non-ferrous Metals Industry Association, CNIA, and China Nonferrous Industries Fabrication Association, CNFA.

RUSAL’s total purchases of materials from the Chinese market made 399,4 thousand tonnes for the year of 2016. Purchases ranged from prebaked anodes, pitch, calcined petroleum coke, aluminium fluoride, through alloying materials, electrodes, and cryolite. RUSAL looks into new opportunities to diversify procurement options.

Proceeds raised from the Chinese market via renminbi bonds placement will be mainly allocated on the Chinese market, primarily for the procurement needs.

Since 2016 global aluminium market has demonstrated improvement of conjuncture and supply-demand balance, resulting in a growth trend and market positive prospects.

Aluminium has been one of the solidly performing commodities during 2016 price-wise demonstrating steady upward trend.

The demand has grown while the market remains in deficit, retaining the improved market conjuncture. Market analysts expect the price growth to continue as supply and demand dynamics are likely to retain the trend into 2017.

The market is expected to remain in deficit, providing for the new opportunities for growth and development.

In 2016 the global aluminum market was in a deficit of 0.7 mln tonnes which is set to widen to 1.1 mln tonnes in 2017 vs 0.7 mln tonnes in 2016. Along with that global aluminium demand grew by 5.5% in 2016 year-on-year, as a result of strong demand in China, Europe, Asia and North America. In 2017, aluminium demand is estimated to grow at 5% YoY.

The demand is strongly driven by growth in EMEA, North America and Asian economies. Global manufacturing activity in the beginning of 2017 expanded to highest level since 2011 underpinning strong metal demand this year. Analysts expect strong demand growth to continue in transportation sector, due both to growing number of vehicles produced and increasing range of aluminium applications. Car production in Europe increased in 2016, as well as the demand has been improving in exporting countries such as the US and China.

The LME aluminium price touched USD1870/t in January 2017 and has remained stable above USD1800/t since mid-January. This was attributable to a growing global metal deficit to 0.7 mln tonnes?driven by the US, EU and continued supply moderation in China coupled with significant production cost inflation.

The improved global balance will continue to support the aluminium market prices and positive market conjuncture.

Growth trend observed in the aluminium market adds up to the investment choice for RUSAL Panda bonds - an instrument unique both by its qualities and by favourable BUY moment at the market.

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