12 May 2017

UC RUSAL ANNOUNCES RESULTS FOR THE THREE MONTHS ENDED 31 MARCH 2017

Key highlights

  • Recovery in the London Metals Exchange (“LME”) aluminium price in the first quarter of 2017 by 8.2% to an average of USD1,850 per tonne as compared to USD1,710 per tonne in the fourth quarter of 2016 as well as an increase in volumes of primary aluminium and alloys sold by 6.8% between the same periods resulted in the growth of RUSAL revenue in the first quarter of 2017 by 13.3% to USD2,297 million as compared to USD2,027 million in the preceding quarter.

  • RUSAL reported robust financial results thanks to the Company’s commitments to operational efficiency and cost discipline, supported by stronger LME prices. Aluminium segment EBITDA per tonne demonstrates continuous growth for the 5th consecutive quarter (in the first quarter of 2017 EBITDA per tonne increased 13.5% in comparison with preceding quarter to USD505/t). The Group total Adjusted EBITDA in the first quarter of 2017 increased by 15.3% to USD475 million as compared to the fourth quarter of 2016. The Adjusted Net Profit and Recurring Net Profit was at USD263 million and USD434 million, respectively, in the first quarter of 2017 as compared to USD44 million and USD207 million for the preceding quarter; and USD27 million and USD149 million for the first quarter of 2016.

  • Aluminium segment cost per tonne was under pressure following significant increase in electricity prices, railway transportation tariffs and other raw material costs in the first quarter of 2017 as a result of appreciation of Russian Rouble by 6.7% as compared to the previous quarter as well as significant increase in commodity prices across the board. As a result of the foregoing factors aluminium segment cost per tonne increased by 6.0% to USD1,425 in the first quarter of 2017 in comparison with USD1,344 per tonne in the preceding quarter and by 7.5% compared to USD1,326 per tonne in the same period of 2016. Despite an increase in cost per tonne the Company managed to maintain steady Adjusted EBITDA margin at 20.7% and leverage ratio below 3.5.

  • In February 2017 the Company completed the debut offering of 5 years USD600 million Eurobonds with coupon rate of 5.125% per annum. The bonds proceeds were applied for partial refinancing of RUSAL’s existing pre-export finance facility extending the Group’s debt maturity profile and decreasing exposure to interest rate risk.

  • In March 2017 the first tranche of 3 years RMB1 billion Panda Bonds were placed at the Shanghai Stock Exchange with put option after 2 years and the coupon rate of 5.5% per annum. The funds were used for working capital needs and refinancing of existing debt.

Commenting on the first quarter 2017 results, Vladislav Soloviev, CEO of RUSAL, said:

“The first quarter of the year marked another strong period for RUSAL. Revenue increased by 13.3% quarter-on-quarter (“QoQ”) to USD2.3 bn, with VAP sales growing +7.8% QoQ supporting our topline. Adjusted EBITDA grew by 15.3% QoQ to USD475 mln, while Adjusted EBITDA margin remained healthy at 20.7% despite the negative impact of local currency appreciation on RUR-denominated costs. As a result the Company posted a strong Recurring Net Profit of USD434 mln, almost 3-fold increase year-on-year (“YoY”).”

“In the period, the Company significantly improved its debt profile through the successful placing of a debut Eurobond tranche and Panda bond tranche. Our first Panda bond placing meant that RUSAL became the first overseas company with global operations outside of China to enter the Chinese bond market. Post the period end, the Company also placed its second Eurobond issue. Our success in the debt markets demonstrates the confidence the financial community has in RUSAL and further reinforces the investment case and growth strategy underpinning the Company.”

“The aluminium market remained in robust health in the first quarter, with ex-China aluminium demand growing by 3.4% in 1Q 2017 YoY. Demand in China grew by 7.5% in 1Q 2017 YoY. Aluminium demand is on track to grow by 5.0% to 62.7 mln tonnes in 2017, supported by positive economic developments globally, all of which leaves RUSAL well placed for the year ahead.”


Financial and operating highlights

Quarter ended
31 March

Change, quarter on quarter, % (1Q to 1Q)

Quarter ended 31 December

Change, quarter on quarter, % (1Q to 4Q)

2017

2016

2016

unaudited

unaudited

unaudited

Key operating data

(‘000 tonnes)

Aluminium

910

916

(0.7%)

930

(2.1%)

Alumina

1,889

1,873

0.9%

1,939

(2.6%)

Bauxite

2,869

3,009

(4.7%)

2,841

1.0%

(‘000 tonnes)

Sales of primary aluminium and alloys

985

957

2.9%

922

6.8%

(USD per tonne)

Aluminium segment cost per tonne[1]

1,425

1,326

7.5%

1,344

6.0%

Aluminium price per tonne quoted on the LME[2]

1,850

1,515

22.1%

1,710

8.2%

Average premiums over LME price[3]

153

172

(11.0%)

151

1.3%

Average sales price

1,949

1,666

17.0%

1,799

8.3%

Alumina price per tonne[4]

340

220

54.5%

307

10.7%

Key selected data from the consolidated interim condensed statement of income

(USD million)

Revenue

2,297

1,914

20.0%

2,027

13.3%

Adjusted EBITDA

475

312

52.2%

412

15.3%

margin (% of revenue)

20.7%

16.3%

NA

20.3%

NA

Adjusted Profit for the period

263

27

874.1%

44

497.7%

margin (% of revenue)

11.4%

1.4%

NA

2.2%

NA

Recurring Profit for the period

434

149

191.3%

207

109.7%

margin (% of revenue)

18.9%

7.8%

NA

10.2%

NA


Key selected data from consolidated interim condensed statement of financial position

As at

Change, quarter on year end

31 March

2017

31 December 2016

(USD million)

(unaudited)

Total assets

14,851

14,452

2.8%

Total working capital[5]

1,805

1,691

6.7%

Net Debt[6]

8,221

8,421

(2.4%)

Key selected data from consolidated interim condensed statement of cash flows

Quarter ended

Change quarter on quarter, (1Q to 1Q)

31 March

2017

31 March

2016

(USD million)

(unaudited)

(unaudited)

Net cash flows generated from operating activities

215

320

(32.8%)

Net cash flows generated from investing activities

192

91

111.0%

Interest paid

(132)

(97)

36.1%

Other finance expenses

(105)

(16)

556.3%

Overview of trends in the aluminium industry

Global demand for aluminium continued to grow in the first quarter of 2017 (“1Q 2017”) led by the transportation sector, followed by construction, packaging and electrical sectors. All regions witnessed an increase in demand driven by spending for cars and durable goods and increased investment in fixed assets. A common and growing theme across all sectors and regions, adding to demand, is the intensification of light weighting, and focus on reduced emissions in transport, and building and construction applications for aluminium.

In 1Q 2017 global aluminium demand grew by 5.5% YoY to 15 mln tonnes. Global supply in 1Q 2017 was up by 7.8% to 14.9 mln tonnes, as the aluminium market remained roughly balanced.

Based on CRU estimates, aluminium demand excluding China rose by a strong 3.4% in 1Q 2017 YoY to 7.1 mln tonnes while production (including eight non-reporting countries) increased by 1.2% YoY to 6.7 mln tonnes. This left the ROW (rest of the world) aluminium market with an approximate 0.4 mln tonnes deficit in 1Q 2017.

The ROW reported that inventories have approached to pre-crisis levels of 3.6 mln tonnes in March 2017 and the days of consumption decreased to 46 days from 110 days in 2014-2015 and continue to decline at rapid pace.

Primary aluminium demand in Europe grew 2.1% in 1Q 2017 YoY, led by robust improvement and growth across the manufacturing base.

Automotive production in Europe remains on substantial upward trend. Cars and CV output in the leading producing countries (Germany, Spain, UK, Turkey, Czech, Italy and Poland) grew 5.9% in 1Q 2017 (+210 thousand of new cars), driving a healthy increase in demand for flat rolled products (3.1%), and a 1.8% increase in extrusions. Demand for extrusions was also aided by the return to growth of the EU construction industry, as the sector grew 7.1% in February 2017, compared with February 2016 and 6.9% compared with January 2017. Although no significant increase in aluminium wire rod was witnessed in Q1 2017, there is an expectation of significant improvement in demand as infrastructure spending is expected to increase dramatically in the next 18 months. The European Commission has estimated that around EUR200 billion is needed during the current decade for improvements in transmission grids and gas pipelines.

The transportation, construction and electrical segments in US & Canada drove an increase in aluminium Flat Rolled, Extrusions and Wire Rods shipments by 2.5%, 0.7% and 10.2% accordingly, underpinning a 3.3% increase in primary aluminium demand across North America. Transport and construction sectors were led by US housing starts, and motor vehicle production. Housing starts have built on the strong momentum from the end of last year, climbing up 9% YoY in March. North American motor vehicle production was strong in Mexico with a surge in output at 18.4% in the January-March period, while overall production in US, Canada and Mexico grew by 1.5% accordantly.

In the US, fixed asset investments are expected to grow by 3.5% in 2017 YoY, boosted by the possibility of approval of a USD1 trillion investment plan, thus creating a good base for further aluminium demand growth for all major products.

Japan, as the biggest aluminium consumer in Asia ex-China, got off to a good start of 2017 as a weaker yen drove an improvement in the competitiveness of exports, notably capital goods, across most of South East Asia. The transportation sector is the biggest end-user of aluminium out of all consuming segments, and posted strong performance in the first quarter of 2017 and is the main reason why unwrought aluminium import to Japan grew 23% in 1Q 2017. Automotive production grew 6.5%, resulting in aluminium shipments (flat rolled products, extrusions, and castings) to this segment rising by 4.4% over January-February 2017. Housing starts in Japan in fiscal year 2016 rose 5.8% from the previous year to 974,137 units, driven by sharp growth in construction of houses for rent. Overall housing starts in the year that ended in March were slightly under the 987,254 units marked in fiscal year 2013, when demand surged prior to the consumption tax hike on April 1, 2014. The improved housing starts led to an increase in aluminium shipments to the construction industry by 0.9% over the period of January-February 2017.

ASEAN auto production posted a robust 2% growth rate in 1Q 2017. On top of this, ASEAN’s largest economy, Indonesia, is set to benefit from stronger commodity prices and rising public spending this year as the new budget takes effect. Motor vehicles production showed a sharp rise up 12% in the January-March period as rollers producing flat rolled products are running at full capacity.

The Chinese economy showed strong growth at the beginning of the year. The official PMI reached 51.8 in March 2017, while industrial production grew 7.6% YoY in March and GDP in 1Q 2017 went up 6.9% YoY vs a 6.8% estimated growth. However the more interesting news that will certainly spur demand is the recent announcement from Beijing that automakers in China will be required to ensure that at least 8% of all vehicles they manufacture are electric. It creates a new platform for significant increase in aluminium demand in the automotive segment in China and will certainly have a global impact on demand.

According to the CNIA’s production figures, in 1Q 2017 China’s primary aluminium production rose 14.2% YoY to 8.191 mln tonnes. However, the annualized production fell in February by 4.9% MoM and by 3.5% MoM in March, which may witness the beginning of the supply matching process, in line with China’s policy to strictly control overproduction.

According to RUSAL’s estimates, Chinese demand grew by 7.5% in 1Q 2017 YoY to 7.8 mln tonnes thus the Chinese market was in excess of supply by 0.4K tonnes during this period as a result of new capacity additions in 4Q 2016 as well as production restarts. Chinese semis exports have declined by 1% in 1Q 2017 YOY. Particularly, the export of Chinese extrusion significantly fell by 33% in 1Q 2017 YoY amid falling exports of “fake” semis.

At the same time, the continuation of Supply Side reforms now targeting aluminium overcapacity in aluminium sector, and the implementation and enforcement of strict environmental regulation for the 26+2 cities near Beijing, plus the closure of unregistered/ illegal capacity as well as further strict control over new projects, will lead to significant supply tightening in the second half of 2017 and beyond.

In terms of additional regulatory measures on 12 April, 2017, a joint regulation was issued by the NDRC, MIIT, Ministry of lands and resources, MEP “On the word to streamline the situation with illegal projects in the primary aluminium industry”. The regulation states the necessity to take measures to standardize investment in the construction of aluminium projects and to strictly control overproduction. The government of Changji county (Xinjang) subsequently issued a notice that the construction of three aluminium smelters with the total capacity of 2 mln tonnes per annum is illegal and should be suspended immediately. Other projects and capacities are potentially under risk of termination.

In addition, a significant aluminium cost push in China by more than 40% in 1Q 2017 and continued cost pressure mainly in carbon raw materials prices has had a significant impact on high cost non-integrated Chinese smelters operating on thin margins or losses.

The LME aluminium price reached its highest level of USD1,955/t in March 2017 and has, on average remained stable above USD1,900/t in 1Q 2017. This was attributable to a growing global metal deficit driven by the US, EU and the expectation of supply disruptions in China coupled with significant production cost inflation.

Aluminium premiums in key consuming regions continued to improve in 1Q 2017 with, on average, a 27.8% rise compared to 4Q 2016. This was due to strong demand and a reduced supply in key regions after various smelting capacity reduction/closures in North America, Australia.

Industry watchers will be following the WTO case filed by the USA on Chinese aluminium imports, as it unfolds over the remainder of 2017.


Financial overview

Revenue

Quarter ended

31 March

Change quarter on quarter, % (1Q to 1Q)

Quarter ended 31 December

2016

Change quarter on quarter, % (1Q to 4Q)

2017

2016

(unaudited)

(unaudited)

(unaudited)

Sales of primary aluminium and alloys

USD million

1,920

1,594

20.5%

1,659

15.7%

kt

985

957

2.9%

922

6.8%

Average sales price (USD/t)

1,949

1,666

17.0%

1,799

8.3%

Sales of alumina

USD million

189

150

26.0%

164

15.2%

kt

509

606

(16.0%)

570

(10.7%)

Average sales price (USD/t)

371

248

49.6%

288

28.8%

Sales of foil (USD million)

59

51

15.7%

65

(9.2%)

Other revenue (USD million)

129

119

8.4%

139

(7.2%)

Total revenue (USD million)

2,297

1,914

20.0%

2,027

13.3%

Total revenue increased by USD383 million, or by 20.0%, to USD2,297 million in the first quarter of 2017, as compared to USD1,914 million for the corresponding period of 2016.

Revenue from sales of primary aluminium and alloys increased by USD326 million, or by 20.5%, to USD1,920 million in the first quarter of 2017, as compared to USD1,594 million in the first quarter of 2016, primarily due to 17.0% increase in the weighted-average realized aluminium price per tonne (to an average of USD1,949 per tonne in the first quarter of 2017 from USD1,666 per tonne in the first quarter of 2016) driven by an increase in the LME aluminium price (to an average of USD1,850 per tonne in the first quarter of 2017 from USD1,515 per tonne in the first quarter of 2016), as well as growth in primary aluminium sales volume by 2.9% partially offset by a 11.0% decrease in premiums above the LME prices in the different geographical segments (to an average of USD153 per tonne from USD172 per tonne in the first quarter of 2017 and 2016, respectively).

Revenue from sales of primary aluminium and alloys increased by USD261 million, or by 15.7% in the first quarter of 2017, as compared to the fourth quarter of 2016 due to an increase in sales volumes and an increase in the weighted-average realized aluminium price per tonne.

Revenue from sales of alumina increased by USD39 million, or by 26.0%, to USD189 million in the first quarter of 2017 from USD150 million in the same period of 2016 and increased by USD25 million, or by 15.2%, compared to USD164 million for the fourth quarter of 2016. The increase in revenue over the comparable periods was driven by a significant increase in the average sales price of alumina which was partially offset by a decrease in the sales volume.

Revenue from sales of foil increased by USD8 million, or by 15.7%, to USD59 million in the first quarter of 2017, as compared to USD51 million for the corresponding period in 2016, primarily due to a 12.5% increase in sales volumes and 2.8% increase in the weighted average sales price.

Revenue from other sales, including sales of bauxite and energy services increased by 8.4% to USD129 million for the first three months of 2017 from USD119 million in the same period of 2016, due to a 8.1% increase in sales of other materials (soda, corundum, and building materials).


Cost of sales

The following table demonstrates the breakdown of RUSAL’s cost of sales for the first quarter of 2017 and 2016:

Quarter ended
31 March

Change, quarter on quarter, %

Share of costs, %

2017

2016

(USD million)

(unaudited)

(unaudited)

Cost of alumina

230

215

7.0%

13.6%

Cost of bauxite

86

64

34.4%

5.1%

Cost of other raw materials and other costs

580

465

24.7%

34.4%

Purchases of primary aluminium from JV

63

55

14.5%

3.7%

Energy costs

535

395

35.4%

31.7%

Depreciation and amortization

109

115

(5.2%)

6.5%

Personnel expenses

140

123

13.8%

8.3%

Repairs and maintenance

11

14

(21.4%)

0.7%

Net change in provisions for inventories

-

(2)

(100.0%)

0.0%

Change in finished goods

(66)

102

NA

(4.0%)

Total cost of sales

1,688

1,546

9.2%

100.0%

Total cost of sales increased by USD142 million, or 9.2%, to USD1,688 million for the first quarter of 2017, as compared to USD1,546 million for the corresponding period in 2016. The increase was primarily driven by a significant increase in electricity prices, railway transportation tariffs and other raw material costs in Russian Rouble terms in the first quarter of 2017.

Cost of alumina increased to USD230 million in the first quarter of 2017 by USD15 million from USD215 million as compared to the same period of 2016 primarily as a result of an increase by 10.0% in alumina purchase price as well as an increase in the aggregate volumes of primary aluminium and alloys sold by 2.9% (or 28 thousand tonnes).

Cost of bauxite increased by 34.4% in the first quarter of 2017 as compared to the same period of prior year, due to an increase in purchase volume and a slight increase in the purchase prices.

Cost of raw materials (other than alumina and bauxite) and other costs increased by 24.7% in the first quarter of 2017 compared to the same period of previous year, due to a rising raw materials purchase price (such as raw pitch coke by 127.0%, raw petroleum coke by 25.3%, pitch by 13.4%, soda by 54.3%).

Energy cost increased by 35.4% to USD535 million for the first quarter of 2017 as compared to USD395 million for the first quarter of 2016 primarily due to 21.2% appreciation of Russian Rouble against US dollar between the comparable periods. Increase was also a result of change in terms of long-term electricity contracts and overall market price growth.

The finish goods mainly consist of primary aluminium and alloys (app.92%). The dynamic of change between the reporting periods was driven by the fluctuations of primary aluminium and alloys physical inventory between the reporting dates: 7.8% increase for the first quarter of 2017 as compared to 10.7% decrease for the same period of 2016.


Adjusted EBITDA and results from operating activities

Quarter ended

31 March

Change, quarter on quarter, % (1Q to 1Q)

2017

2016

(USD million)

(unaudited)

(unaudited)

Reconciliation of Adjusted EBITDA

Results from operating activities

343

170

101.8%

Add:

Amortisation and depreciation

114

120

(5.0%)

Impairment of non-current assets

17

19

(10.5%)

Loss on disposal of property, plant and equipment

1

3

(66.7%)

Adjusted EBITDA

475

312

52.2%

Adjusted EBITDA, defined as results from operating activities adjusted for amortisation and depreciation, impairment charges and loss on disposal of property, plant and equipment, increased to USD475 million for the first quarter of 2017, as compared to USD312 million for the corresponding period of 2016.

Results from operating activities increased for the first quarter of 2017 by 101.8% to USD343 million, as compared to USD170 million for the corresponding period of 2016, representing operating margins of 14.9% and 8.9%, respectively.


Profit for the period

As a result of the above, the Company recorded a profit of USD187 million for the quarter ended 31 March 2017, as compared to USD126 million for the same period of 2016.


Adjusted and Recurring Net Profit

Quarter ended 31 March

Change, quarter on quarter, %
(1Q to 1Q)

2017

2016

(USD million)

(unaudited)

(unaudited)

Reconciliation of Adjusted Net Profit

Profit for the period

187

126

48.4%

Adjusted for:

Share of profits and other gains and losses attributable to Norilsk Nickel, net of tax effect, with

(171)

(122)

40.2%

Change in derivative financial instruments, net of tax (20.0%)

230

4

5,650.0%

Impairment of non-current assets, net of tax

17

19

(10.5%)

Adjusted Net Profit

263

27

874.1%

Add back:

Share of profits of Norilsk Nickel, net of tax

171

122

40.2%

Recurring Net Profit

434

149

191.3%

Adjusted Net Profit for any period is defined as the Net Profit adjusted for the net effect of the Company’s investment in Norilsk Nickel, the net effect of derivative financial instruments and the net effect of impairment of non-current assets. Recurring Net Profit for any period is defined as Adjusted Net Profit plus the Company’s net effective share in Norilsk Nickel’s results.


Segment reporting

The Group has four reportable segments, which are the Group’s strategic business units: Aluminium, Alumina, Energy and Mining and Metals. These business units are managed separately and results of their operations are reviewed by the CEO on a regular basis. The core segments are Aluminium and Alumina[7].

Quarter ended 31 March

2017

2016

Aluminium

Alumina

Aluminium

Alumina

(USD million)

(unaudited)

(unaudited)

(unaudited)

(unaudited)

Segment revenue

kt

945

2,714

970

2,033

USD million

1,824

758

1,613

451

Segment result

397

45

230

(12)

Segment EBITDA[8]

477

72

328

9

Segment EBITDA margin

26.2%

9.5%

20.3%

2.0%

Total capital expenditure

57

45

75

3

For the quarters ended 31 March 2017 and 2016, respectively, segment result margins (calculated as the percentage of segment result to total segment revenue) from continuing operations were positive 21.8% and 14.3% for the aluminium segment, and positive 12.9% and negative 2.7% for the alumina segment. Key drivers for the increase in margin in the aluminium segment are disclosed in “Revenue”, “Cost of sales” and “Adjusted EBITDA and results from operating activities” sections above. Detailed segment reporting can be found in the consolidated interim condensed financial information as at and for the three-month period ended 31 March 2017.


Forward-looking statements

This press-release contains statements about future events, projections, forecasts and expectations that are forward-looking statements. Any statement in this announcement that is not a statement of historical fact is a forward-looking statement that involves known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These risk and uncertainties include those discussed or identified in the prospectus for UC RUSAL. In addition, past performance of UC RUSAL cannot be relied on as a guide to future performance. UC RUSAL makes no representation on the accuracy and completeness of any of the forward-looking statements, and, except as may be required by applicable law, assumes no obligations to supplement, amend, update or revise any such statements or any opinion expressed to reflect actual results, changes in assumptions or in UC RUSAL’s expectations, or changes in factors affecting these statements. Accordingly, any reliance you place on such forward-looking statements will be at your sole risk.



[1] For any period, “Aluminium segment cost per tonne” is calculated as aluminium segment revenue (excluding sales of third parties’ metal) less aluminium segment results less amortisation and depreciation (excluding margin on sales of third parties’ metal and alumina intersegment margin) divided by sales volume of the aluminium segment. (excluding volumes of third parties’ aluminium sold).


[2] Aluminium price per tonne quoted on the LME represents the average of the daily closing official LME prices for each period.


[3] Average premiums over LME realized by the company based on management accounts.


[4] The average alumina price per tonne provided in this table is based on the daily closing spot prices of alumina according to Non-ferrous Metal Alumina Index FOB Australia USD per tonne.


[5] Total working capital is defined as inventories plus trade and other receivables minus trade and other payables.


[6] Net Debt is calculated as Total Debt less cash and cash equivalents as at the end of any period. Total Debt refers to UC RUSAL’s loans and borrowings and bonds outstanding at the end of any period.


[7] Segment information presented below excludes margin on sales of third parties’ metal and alumina intersegment margin.


[8] Segment EBITDA for any period is defined as segment result adjusted for amortization and depreciation for the segment.



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