Oleg Deripaska's African delight

31.01.2013 — Analysis

Within six years, UC RUSAL plans to develop the largest bauxite deposit in Guinea and to build an alumina refinery. These plans surprised the experts, since the company already has a plant there, the Friquia, which is sitting idle. Professionals in the field think alumina production in Russia, made from industrial waste and low-grade ores, has a more promising future. Those techniques were tested successfully back during the Soviet era, but UC RUSAL prefers to work with foreigners. This columnist for RusBusinessNews has learned that in the past, overseas projects have helped the company optimize its tax obligations and funnel profits offshore.

UC RUSAL has outlined a plan to develop the world's largest bauxite deposit, the Dian-Dian, in four stages. During the first phase, a mine will be built with a capacity of three million tons per year, during the second - bauxite production will be increased to nine million tons, then during the third and fourth stages there are plans to construct an alumina refinery and expand its production capacity. If those plans are realized, by 2019 UC RUSAL will be mining 12 million tons of bauxite and producing 2.4 million tons of alumina per year.

The agreement the company has signed with the African country has drawn a mixed response from experts. UC RUSAL's managers have repeatedly claimed that because of the economic crisis, it is cheaper to buy alumina on the market than to produce it at the company's own plants. The global oversupply of raw materials is keeping the company from reopening the Friquia alumina refinery that was shut down in April 2012 after a strike by the workers. New agreements with the Guinean authorities regarding an increase in the production of alumina were established at almost the same time that the Anglo-Australian firm BHP Billiton pulled out of an alumina project in Guinea, selling its stake in the venture for just one dollar.

In addition to their economic woes, mining and metallurgical companies face huge political risks in Guinea, as the government there quite often replaces the owners of mining firms. For example, Guinea dissolved a concession agreement for the production of iron ore with the British company Rio Tinto and resold the assets to a different organization.

The Russian firm might run into trouble as well: with their threats to nationalize the mines, the Guineans are keeping Oleg Deripaska's company hanging by a thread. Despite this, as well as a tightening of the mining regulations, UC RUSAL's management has faith in the common sense of the Guinean authorities.

The deputy prime minister of the Sverdlovsk region, Aleksandr Petrov advises the company to think twice before it expands its production of African bauxite: "There's a good Russian proverb that says, 'A cow costs a quarter of copeck across the sea, but it takes a ruble to get it home.' Of course bauxite is less expensive in Guinea, but you could lose everything in that volatile country. I hope the company's managers understand that."

This new agreement with Guinea seems somewhat at odds with the recent announcement by UC RUSAL's first deputy general director, Vladislav Solovyov, claiming that the development of Russian deposits was a top priority. In the spring of 2012, the aluminum manufacturers signed a memorandum with Canada's Orbite Aluminae, which is currently finalizing the testing of its technology to produce alumina by acid leaching kaolin clay deposits and other low-grade ores. Deripaska decided to purchase that technology and build a plant in Eastern Siberia where there are enough raw materials to produce alumina. Vladislav Solovyov promised that this project would make it possible to avoid the use of imported bauxite.

Paradoxically, however, the Russian National Aluminum-Magnesium Institute (VAMI), which is currently owned by UC RUSAL, was already acid leaching kaolin clay back in the Soviet era and claimed the technique had a bleak outlook. Employees of the institute told this columnist from RusBusinessNews that Orbite hasn't invented a new method at all, but merely reproduced the old Soviet process. The scientists claim that this agenda is being pushed by those with insufficient expertise, because it is not possible to extract millions of tons of metallurgical alumina from kaolin clay - only a small output of high-purity alumina is feasible, which would be suitable for the manufacture of synthetic semiprecious stones. It is no coincidence that the Canadian aluminum company Alcan (purchased by Rio Tinto in 2007) is not interested in the technology.

Nowadays, preference is given to bauxite with a higher aluminum-oxide content. But alumina can also be made from coal ash, alunite, nepheline concentrates, and ores, deposits of which are found in Russia. VAMI's experiments have shown that if you approach the processing of nepheline concentrates in a comprehensive manner and produce cement, gallium, and soda by-products, then alumina can be manufactured using the waste from chemical fertilizer production more cheaply than from bauxite.

A zero-waste production facility was built on the basis of the successful tests of this technique in Pikalevo. But in 2004, the production chain was broken there, and independent facilities manufacturing alumina, cement, and soda-potash were erected at the site of the unified complex. Four years later, all three of those businesses shut down, which, in the opinion of Vladimir Putin who was then prime minister, could be blamed on the owners' greed. Eurocement Group, CJSC, which owns Pikalevsky Cement, decided to replace its technology, and instead of alumina, Oleg Deripaska began manufacturing cement and forbade his "competitors" to use the access roads. After the closure of the alumina refinery, the production of soda obviously disappeared as well.

Experts deeply regret that this elegant, promising technology has been spoiled by reckless privatization - Russia has vast reserves of phosphate fertilizers and nepheline ores. But the resurrection of this zero-waste production is unlikely - entrepreneurs today have no need for so much cement, and nepheline concentrate produces ten times as much of that as alumina. Plus, no one wants to roll back the price for cement, or for alumina for that matter. And Oleg Deripaska's organizations have even less desire to pay taxes, which is how the projects to mine bauxite in Guinea originated.

In 2012, on the eve of the Chernoy vs. Deripaska trial in a British court, Western analysts told the media that the judges considered the tolling contracts being used by UC RUSAL to be illegal under Russian law. Those contracts were signed in order to avoid VAT taxes on the conversion of alumina to aluminum in Russia. Experts assume that Oleg Deripaska maintained alumina refineries overseas so that prices could be set for intra-corporate transactions that would allow profits from the production facilities to be sunk into offshore companies he owned personally.

So is the new project in Guinea the same thing all over again?

Vladimir Terletsky