by Simon Pirani
Russian metals financing is breaking new ground. The consolidated aluminium producers are treading the path opened by Norilsk Nickel to mid-term structured deals, gold project loans are becoming a reality, and in the ferrous sector second-tier producers are at last finding sources of funds via local banks.
Non-ferrous: tenors go out
Sual, Russia’s second aluminium company, has mandated Standard Bank to arrange a $40 million, four-year structured financing to upgrade its Uralsk smelter. The deal is split into two portions, one at Libor + 4.5% and one at Libor + 5%. It is secured on trade receivables, following the pattern long established for Russian oil producers.
The Sual financing follows the oversubscription of a three-year deal to Rusal, the no.1 aluminium company, arranged by BNP Paribas, Glencore International and Natexis Banque Populaire. Rusal announced that by the close of syndication early last month the deal size increased to $190 million, from an initial $150 million. The loan has a seven-month grace period and the joint mandated arrangers have underwritten $150 million.
The two deals mean that both aluminium companies have now unquestionably joined the first rank of Russian corporate borrowers, bankers in Moscow believe. Both companies are also confidently pushing forward project finance plans.
Sual has attracted the French aluminium company Pechiney to partner its Komi Aluminium project. On 9 April the two companies announced jointly that they will together carry out technical, environmental and financial studies on the project to develop a 1.4 million tonnes per year alumina refinery and a 500,000 tonnes per year aluminium smelter.
Under the agreement, Pechiney will acquire up to 40% of the project company, currently wholly owned by Sual. But in any case more than half of the total $2.1 billion project cost is expected to be debt financed, and it is understood that two institutions have been short-listed for an advisory mandate.
Sual is owned by the Alfa-Access-Renova group, which earlier this year brought the biggest piece of foreign direct investment yet into Russia, by agreeing to put its other main industrial asset, TNK oil company, into a joint venture with BP. Aleksei Goncharov, spokesman for Sual, said the ownership link with TNK could “make the Komi project more attractive”.
Meanwhile Rusal has retained BNP Paribas to advise it on a $700 million project financing to upgrade its Sayansk smelter to 670,000 tonnes per year capacity from 400,000 tonnes per year. The company intends to set up an off-balance sheet SPV for the project, and may obtain bridge financing from Sberbank in the early stages. But it is understood that, unlike Sual, Rusal is not seeking a foreign equity investor.
The project is just one part of an overall financing strategy in which a 5 billion ruble domestic bond – jointly, along with last year’s issue by Gazprom, the largest-volume issue in the local market – also plays a key role. The four-year bond is expected to be issued this month. The structured financiers are not being left out, though: Rusal hopes to come back to that market this year for a further three-year deal.
Oleg Mukhamedshin, Rusal’s head of corporate finance, told Trade Finance: “We hope to do a further three-year deal this year, and we think the appetite is good from European banks. But we always hope to bring pricing down. There is a widespread expectation that after next year’s presidential election Russia’s credit rating will improve, possibly to investment grade. So we will wait and see.”
The most promising second-tier borrower in the non-ferrous sector, the copper producer Uraleketromed, has last month negotiated a $50 million syndicated deal with Standard Bank. It is understood that five banks have joined the financing.
The two-year pre-export finance facility, with an extension option, is collateralised on export contracts with Glencore. There is added comfort in the form of guarantees from UGMK, the holding company that controls Uralelektromed, securing supplies of copper blister and concentrate.
Standard Bank’s Russian subsidiary, ZAO Standard Bank, has now received a banking licence and Andrei Batiukov, head of structured and trade finance, says this will enable it to continuing its pioneering role on structured deals. “We are still in the process of elaborating strategy. But we will certainly continue our focus on self-liquidating trade finance deals and on financing production cycles. We will be developing trade finance structures domestically as well as internationally.”
The market for structured loans, Russian bank deals, export and leasing finance to Russian gold producers is set to grow rapidly on the back of the revival of the industry. In 2002 Russia produced 170.8 tonnes of gold valued at about $1.7 billion, up 10.6% year on year.
Vladimir Rybkin, head of the state precious metals fund Gokhran, said at the Zoloto-2003 conference in Moscow last month that 62% of all sales went through the top five gold-buying banks: Sberbank, Vneshtorgbank, Bank of Moscow, Alfa and Nomos. These last two, together with MDM, Avangard, Nikoil and Ural-Sib, are seen as targets for loans from western banks that are then on-lent to precious metals producers.
Until last year, most loans were for seasonal production cycle financing for small miners. Now project finance or quasi-project finance for larger hard-rock mining operations is underway.
Although a change in the law means that Russian gold producers are now able to export directly, instead of via licenced banks, the western institutions are expected to continue working with Russian banks. One financier at a western bank said: “The relationships between ourselves and the Russian banks, and their relationships with client companies, have been built up over a period and this is a very specialist business. We intend to build on those relationships.”
Polimetall, the St Petersburg-based company that controls Serebro Dukat in Magadan, the third-largest silver mine in the world, and two major gold deposits, is the most aggressive player in the market. It is understood to have received two project finance deals from MDM bank, for $30 million and $15 million, and Nomos Bank has a relationship with one of Polimetall’s gold producing subsidiaries, Zoloto Severnogo Urala.
Polimetall, which is linked to the well-connected Moscow industrial group Kaskol, has also gone to the domestic bond markets for the first time: it placed a 750 million ruble bond on 25 March with a 16.35% coupon.
Russia’s largest gold producer, Polius, which last year produced 25.8 tonnes, was in October bought by Norilsk Nickel. Its newly-appointed chairman, Valerii Rudakov, former head of the state precious metals agency Gokhran, said in a newspaper interview last month that the company intends to invest up to $1 billion in a comprehensive expansion programme that provides for the development of a range of deposits. He emphasised that “much of the investment will be financed from the company’s own profit”, and that final decisions would be made by the new owners. Bankers will be watching closely.
The presence of western investors in gold mining projects is also significant. Peter Hambro, which last year produced 2.6 tonnes at the Pokrovsky mine in the Amur region, on 16 April raised Ј15.7 million in a rights issue on the London stock exchange. It is preparing a joint bid with Susumanzoloto and Shkoloto, two Magadan-based companies, for the Matrosov project, which is due for privatisation this year.
Kinross of Canada will also be able to concentrate better on production issues at its Kubaka property, also in Magadan, after settling a long-running dispute by buying out minority shareholders in March. Bema Gold also moved forward December last year by buying a controlling stake of the Kukol deposit in Chukhotka.
Among Russian banks, MDM leads the way with silver financing and is aggressively developing relationships with gold producers. In March it took a one-year $18 million structured deal at Libor + 295bps from a syndicate headed by Dresdner Bank, specifically to finance precious metals producers. Hypo Vereinsbank, Bankgesellschaft Berlin, Landesbank Hessen-Thьringen Girozentrale and Donau Bank also joined the transaction.
MDM followed through quickly with a second, $50 million deal at the same tenor and pricing, arranged by Deutsche Bank and Standard Bank, and it is understood that these funds will also be used in large part for trade deals in the precious metals sector.
Alexandre Kocherguine, head of international business development, says that the bank intends to concentrate on developing relationships with about 100 Russian companies in the next tier from the biggest raw materials exporters, and that trade finance will play a key part.
“The margins are very competitive as far as the cost of capital is concerned. Trade finance is several times cheaper than equity for these companies,” he says. “We are diversifying our loans book and developing client relationships. Outside the top tier we can look for customer loyalty.” He added that the bank hopes to develop ECA business for its metals industry clients, in cases where problems with inflexible structures can be overcome.
Avangard Bank has come onto western banks’ radar screens for the first time with a $5 million loan from Standard Bank. A source close to the deal said “it is seen as the first step in a relationship”. Avangard stated last month that its total commitments in the gold industry are $20 million. Avangard-Leasing, the bank’s leasing subsidiary, has recently taken the total volume of leasing deals with Peter Hambro’s Pokrovsky mine to $4 million, including leases on mining equipment from Atlas Copco and explosives equipment from Trade Star of the US.
An indication of the market’s vitality is the fact that Nomos Bank’s $30 million facility, syndicated by Standard Bank in November last year for on-lending to gold producers, grew to $48 million in syndication. Nomos, like Avangard, has established a leasing subsidiary, which in July last year set up a three-cornered deal under which it guaranteed financing from Caterpillar Financial Services for the sale of heavy mining equipment to the diamond producer, Alrosa.
Standard and Moscow Narodny banks jointly arranged a $32 million deal at Libor + 3.5% to Ural-Sib bank in March, which will finance trading operations of the bank’s clients, including metals producers.
Relationship-building between Russian banks and second-tier producers is also the key to new financing opportunities in the ferrous metals sector. MDM Bank is active here, and is understood to have arranged in December last year a euro 70 million loan to Nizhny Tagil steel works, partly covered by the German ECA Hermes.
Nizhny Tagil, which was two years ago considered to be closed to bankruptcy, has made considerable steps towards recovery since coming under the control of the Evrazia group, and has issued ruble bonds as well as taking on syndicated debt. Evrazia’s next project is to revive the Zapsib steelworks where it has also taken control.
The top three steel producers – Severstal, MMK and Novolipetsk – are able to be as selective about their sources of financing as the oil companies and Norilsk Nickel. Both MMK and Norilsk, which tapped the syndicated loan market in the second half of this year, are considering eurobond issues this year.
Structured financiers will probably gain more by looking at the second- and third-tier companies being pushed on to the market by Russia’s oil-driven economic boom than by waiting for the big-name lenders to call.
|A version of this article appeared in Trade Finance magazine, May 2003.
Posted June 2003; © 2003 Simon Pirani