Rusal and Berbice bauxite

Dec 02, 2008 Editorial

As we review the impact of the financial meltdown on the recent and expected foreign direct investment into Guyana, the Rusal takeover of the Berbice bauxite mining operations of Aroaima Mining Company (AMC) presents something of an anomaly.

The agreement was initialled in 2004, consummated by 2006, and the locally registered subsidiary of Rusal, Bauxite Company of Guyana Inc. (BCGI), proceeded quietly with the mining operations. The Government retained a 10 percent share of BCGI.

Last year, the President visited Russia and mentioned that he would discuss with the operators of Rusal the possibility of investing in an alumina plant in Berbice.

Since the first contacts with Rusal, the company had grown through mergers with other aluminium producers to become one of the three largest producers of that metal in the world.

With its aggressive expansion programme, and as one of the largest suppliers of aluminium to the Chinese juggernaut, it was not unreasonable to expect that Rusal may have been a prime candidate for upping the ante in its investment in Guyana, not just in the production of our high quality bauxite, but to move downstream to deliver value added products such as alumina.

The fly in the ointment for these hopes is the unique ownership structure of Rusal. The largest shareholder (and the one who calls all the shots for the company) is the 40-year-old flamboyant entrepreneur dubbed the richest man in Russia, Oleg Deripaska.

There are credible reports that right now he might have become insolvent. Long regarded as being close to President (now Prime Minister) Putin, Rusal has just been thrown a US$4.5 billion lifeline by the state development bank, Vnesheconombank (VEB).

This prevented Rusal from defaulting on a loan for the same amount from a consortium of foreign banks and used by Deripaska to purchase a 25 percent controlling share in Norilsk Nickel, Russia’s leading mining company.

But evidently Putin is calling in his bets with Deripaska, and he is not being given the leeway as in previous acquisitions.

According to a report in the Asian Times, as part of the deal for the state loan: “For the first time, Deripaska’s aluminium empire is to be investigated by auditors from the Accounting Chamber, as the Russian state auditor is known.

“For years, the Moscow-based chamber, headed by former Prime Minister Sergei Stepashin, has tried to investigate the multi-billion-dollar cash flows generated by Rusal, mostly by export trading schemes employing dozens of companies around the world.”

Even as aluminium prices climbed upwards, Deripaska’s Rusal continued to pay taxes to the state far below the rate assessed on other mining companies.

The company strong-armed financial institutions not to release its financial information, thus creating an opaque cover over its operations.

According to Rusal’s annual summary for 2006, the company recorded sales revenues of $8.18 billion. That is virtually the only financial information the company published for the year.

However, according to a bond prospectus drafted by co-shareholder Victor Vekselberg, Deripaska took $4.6 billion in dividends for the same year. That is a highly unusual 56 per cent of the revenue figure.

Papers submitted in a London court by Mikhail Chernoy, another former partner of Deripaska, who says that he owns some 11 percent of Rusal, claims to provide a link between Deripaska’s ownership of Russian production plants and the overseas chain of raw materials (including the Guyana operation) under which the profits of the company were being manipulated.

If these are proven, Russian investigators can tax the transfer price — that is, the difference between the declared value of aluminium when Rusal exported it from Russia, and the market value realized when it was sold.

Rusal could owe up to US$6 billion. Deripaska also has obligations coming due which he undertook to build Rusal to its present size of possibly another US$31 billion.

Unless he is willing to dip into the stash he probably has secreted somewhere, Rusal is certainly going to crash like Humpty Dumpty.

We can certainly expect no diversification of the Rusal operations in Berbice into alumina, and most likely we can expect to have it sold.

The anomaly with Rusal is that even though the fundamentals of the industry are sound, the credit crunch precipitated by the global crisis made the owner’s chickens come home to roost. Maybe Bosai may be interested in the Berbice operations.

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Rusal and Berbice bauxite

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