MOSCOW - A joint announcement May 6 by Russian Aluminium (Rusal) and Alcoa of a provisional sale and purchase agreement of Rusal's downstream aluminium-rolling mills concludes more than a year of negotiations.

Terming the deal "an agreement in principle under which Alcoa will purchase Rusal's controlling interests in two fabricating facilities in Samara and Belaya Kalitva", Alcoa and Rusal also announced that the transaction is subject to Russian government and regional approvals, which will be sought by June 30.

The sale price of the transaction has not been disclosed, industry sources believe Alcoa has achieved a bargain price of less than $500 million. Rusal doesn’t release financial results for its production units.

Alcoa is the world's largest aluminium producer; Rusal ranks third after Alcan-Pechiney.

Alcoa spokesman Kevin Lowery said that Alcoa will be indemnified in the event that the Russian tax authorities impose retrospective tax claims against Rusal. The Russian government has signaled that it is moving to recoup tax from major Russian companies which have used a variety of tax minimization schemes in the past; so far that action has been limited to oil companies.

Samara Metallurgical is one of the world's largest producers of aluminium semi-fabricates, sheet products, forgings and castings, with a design capacity of 800,000 tons per annum. Its output in 1998 stood at just 10 percent of that capacity [80,000 tons], which rose to 199,404 tons in 2002. But last year, Rusal admits, its production fell by 13 percent to just under 174,000 tons — or just 22 percent of capacity.

The Belaya Kalitva Metallurgical Plant is much smaller, with design capacity for 250,000 tons of rolled products. Production in 2003 was just 41,430 tons; that was up 8 percent on the 2002 result, but just 17 percent of capacity.

Alcoa has announced that it plans to invest in the plants to "serve not only the domestic Russian market but...also focus on global customers in Europe, Asia and the Americas."

The joint announcement also said Alcoa will ensure a continuing supply of primary metal from Rusal's four smelters to Samara. However, it is unclear how the Americans intend to protect themselves from transfer pricing pressures that may arise in future. The deal announcement suggests that each side is tying the other down on vital inputs, including Alcoa sourced alumina for Rusal's smelters. The press release reports "the parties are also entering into long-term arrangements for the supply of metal to the two plants and for Samara to continue its supply of can stock and other products to Rusal affiliates. Separately, the parties are also entering into a long-term alumina supply arrangement." Alumina supplies from Alcoa to Sibirsky Aluminy, predecessor of Rusal, were reported in 1998.

Alcoa's takeover will bring to an end an old conflict between Samara Metallurgical, Sibirsky Aluminy, and Reynolds Metals — now merged with Alcoa — over the outcome of an unsuccessful joint venture at Samara in the late 1990s. Reynolds had supplied production technology and export marketing, but the deal fell apart in recriminations and compensation claims exceeding $10 million. Reynolds then accepted a shareholding stake in Sibirsky Aluminy, which has since been diluted when Sibirsky Aluminy merged into Rusal in the year 2000.

According to Rusal's CEO, Alexander Boulygin, "this transaction arises from Rusal's strategy to focus on its strengths upstream, as a leading producer of primary aluminum and alloys."

The sale of the plant by Rusal is also a tacit admission by Rusal that it and the Russian aluminium industry have failed to meet the domestic growth targets Rusal was counting on, particularly in the automobile and aerospace sectors, when it first acquired the plant through Sibirsky Aluminy. The sale suggests that Rusal is no longer confident that domestic aluminium consumption in Russia will grow by the margin required to utilize Samara's idle production capacity.

This in turn casts doubt on the strategy pursued by Oleg Deripaska, controlling shareholder of Rusal, whose Basic Element holding has accumulated aluminium-consuming enterprises in the aerospace, auto manufacturing and other sectors.

Alcoa has been so averse to Russian risk over the past decade that it has been reluctant even to open a Moscow representative office. In late 1999 and early 2000 Rusal's shareholders beat Alcoa in a behind-the-scenes bidding contest for control of the Bratsk Aluminium Plant. Rusal executives were often sharply critical, publicly and privately, of Alcoa's competitive tactics worldwide. The two have been rivals in Guinea for the Dian-Dian bauxite concession.

The newly announced deal signals a significant shift in sentiment on the part of both companies. The proposed asset sale is the first cash-generating deal Rusal has been able to announce after requiring a series of heavy borrowings in recent months.

Alcoa has also been in publicly acknowledged talks with Siberian Ural Aluminum (SUAL) for an alliance to develop its upstream projects, including a proposed new aluminum smelter and alumina refinery for SUAL in the Komi region. Alcoa officials hint that the Rusal deal now takes priority, and may end Alcoa's interest in SUAL for the time being.