May 14, 2019 / 12:14 AM / 8 days ago

Rusal's first quarter profits fall as sanctions impact lingers

(Reuters) - First quarter net profit halved at United Company Rusal year-on-year as the lingering effects of U.S. sanctions and depressed global prices hit the Russian aluminum giant.

FILE PHOTO: Aluminium ingot made at the Rusal Krasnoyarsk aluminium smelter are seen in this illustration picture taken January 28, 2019. REUTERS/Ilya Naymushin/File Photo

However the weak performance is likely to be a one-off event, analysts said, as Rusal continues on the road to recovery following 10 months under U.S. sanctions that severely limited its operations and sent shockwaves through global aluminum markets.

In late January Washington lifted the sanctions, imposed on Rusal and its co-owner Oleg Deripaska in April 2018, after intense negotiations and a series of organizational changes within Rusal.

Since then, investors have increasingly regained confidence in the company, the largest aluminum producer outside China. Before Tuesday’s announcement its stock had risen 21% this year on the Hong Kong exchange.

Tuesday’s results showed recurring net profits dropped to $300 million, from $531 million at the same time last year, sending Rusal’s Hong Kong-listed shares down by as much as 4.8% to HK$2.98.

In Moscow, its shares were also trading down 4.7% at 07:25 GMT.

“The first quarter of the year was significantly challenged by the past year’s events, including the (U.S. Treasury) sanctions which were only lifted on 27 January 2019,” Rusal chief executive Evgenii Nikitin said in a statement.

Sanctions dented sales of value-added products in the first quarter, he said, with revenues further depressed by a reduction in the aluminum price on the London Metal Exchange (LME).

The LME price fell to $1,859 per ton, Nikitin said, down 13.9% from $2,159 in the same period the previous year.

With lower prices in its aluminum sales over the quarter, revenue declined by about 21% to $2.17 billion.

In April, the firm had flagged weaker aluminum output and value added product sales for the quarter, due to the U.S. sanctions affecting several of its contracts.

In 2019 Rusal said it expected growth in global demand for aluminum to slow to 3% year-on-year, or 68 million tonnes, compared to the 3.6% growth seen the previous year.

RECOVERY INCOMING

Analysts at ATON said Rusal’s weak performance in the first quarter was a one-off event.

“2019 should be the year of a gradual recovery in Rusal’s sales: the second-quarter earnings can be expected to be noticeably better despite the aluminum price woes cited by the company,” analysts wrote in a note.

Rusal’s recovery from U.S. sanctions would become evident in its second quarter results, analysts at BCS Global Markets wrote.

In April, Rusal’s chief executive said the firm had resumed supplies to the U.S. market and aimed to win back customers by about September, when the sector signs supply contracts for 2020.

Rusal had missed the traditional window for contracting sales for this year as it was still negotiating with the U.S. Treasury Department about its removal from the sanctions list.

Also last month the company announced a major new investment in the United States - a joint project to produce flat-rolled aluminum products with U.S. manufacturer of aluminum alloys Braidy Industries.

“In the coming months Rusal will focus on restoring its market position, including the share of value added products, which will be vital due to ongoing price uncertainty in the global aluminum market and continued U.S.-China tensions,” Rusal’s Nikitin said on Tuesday.

Earlier in March, Rusal sales director Roman Andryushin said the firm expects to restore its Asia sales to levels seen before the sanctions by the second half of this year.

Reporting by Ambar Warrick in Bengaluru and Polina Ivanova and Anastasia Lyrchikova in Moscow; Editing by Joseph Radford and Jon Boyle

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