United Company RUSAL Plc: Annual Results Announcement for the Year Ended 31 December 2016

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United Company RUSAL Plc (Paris:RUSAL) (Paris:RUAL):

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UNITED COMPANY RUSAL PLC

(Incorporated under the laws of Jersey with limited liability)

(Stock Code: 486)

ANNUAL RESULTS ANNOUNCEMENT

FOR THE YEAR ENDED 31 DECEMBER 2016

Key highlights

  • United Company RUSAL Plc (“UC RUSAL” or the “Company”, together with its subsidiaries, the “Group”) continued to see challenging environment in the aluminium industry during 2016. The Company’s revenue for the year ended 31 December 2016 decreased by 8.0% to USD 7,983 million as compared to USD8,680 million for 2015 following a 3.5% decrease in the average London Metals Exchange (“LME”) aluminium price from USD1,663 per tonne in 2015 to USD1,604 per tonne in 2016 and a 43.4% drop in the average realized premiums to the LME price.
  • At the same time, the LME aluminium price increased by 14.4% to USD1,710 in the fourth quarter of 2016 as compared to USD1,495 in the same quarter of 2015, which together with the 5.3% growth in aluminium sales volumes between the comparable periods resulted in the increase in revenue by 9.2% to USD2,027 million in the last quarter of 2016 as compared to USD1,857 million in the same period of 2015 with the average realized price increasing by 4.0% to USD1,799 per tonne for the last quarter of 2016 as compared to USD1,729 per tonne in the same period of 2015.
  • Aluminium segment cost per tonne decreased by 4.7% to USD1,344 in the fourth quarter of 2016 in comparison with USD1,410 in the same period of 2015 resulting from continuous cost control measures and the decrease in raw material price. This, along with improvement in average sales price and sales volume, allowed the Company to increase Adjusted EBITDA to USD412 million with an Adjusted EBITDA margin of 20.3% in the fourth quarter of 2016 as compared to USD306 million with Adjusted EBITDA margin of 16.5% in the same quarter of 2015. Aluminium segment cost per tonne decreased by 8.4% to USD1,333 in 2016 in comparison with USD1,455 in 2015. The Company achieved Adjusted Net Profit and Recurring Net Profit of USD590 million and USD1,257 million, respectively, for the year ended 31 December 2016 as compared to USD671 million and USD1,097 million for the prior year. In the fourth quarter of 2016, the Company achieved Adjusted Net Profit of USD342 million and Recurring Net Profit of USD505 million.
  • In July 2016 the Group entered into an agreement to sell its 100% stake in the Alumina Partners of Jamaica (“Alpart”) to the Chinese state industrial group, JIUQUAN IRON & STEEL (GROUP) Co. Ltd. (“JISCO”) for a consideration of USD299 million. In November 2016 the Group completed the sale of Alpart and received the full consideration in cash.

Statement of the Chief Executive Officer

Despite a challenging start of the year, with aluminium prices reaching multi-year lows, RUSAL achieved a solid financial performance in 2016. On the one hand, we saw improved market conditions in the second half of the year, supporting our key performance metrics and on the other, our solid results were down to our dedication to cost management, production discipline, and a stronger focus on innovation and value added products (VAP) development.

RUSAL recorded a net profit of USD1.18 billion and recurring net profit of USD1.26 billion, both higher than our 2015 results. Cash cost per tonne decreased to USD1,333, 8.4% below last year’s average with a healthy Adjusted EBITDA margin of 18.65%. In order to expand our VAP proposition, we invested into new casthouse projects at our Krasnoyarsk and Khakas smelters, with new alloys expected to be shipped to customers already in 2017.

Another milestone achievement the previous year was the launch of the superpower RA-550 cell running at over 550 kA at our Sayanogorsk smelter. RUSAL’s proprietary technology counters a major drawback of superpower cells which, in most cases, lose efficiency or increase energy consumption as amperage increases. RUSAL’s commitment to improve its energy efficiency across its production chain will work alongside achieving its climate change goals of aiming to be among the most efficient low carbon aluminium producers worldwide.

I would also highlight that post the reporting period, RUSAL completed its debut offering of a 5-year Eurobond with a principal amount of USD600 million. While the bond proceeds were used to refinance some of RUSAL’s existing pre-export finance facility and improved the Company’s debt maturity profile, the successful debut placement is a testament to RUSAL’s credit strength and its name recognition in the investor community.

Looking ahead into 2017, we expect the aluminium market to remain in a good shape with demand increasing by 5% and global market deficit widening to 1.1mn tonnes.”

Vladislav Soloviev
Chief Executive Officer

17 March 2017

Financial and Operating Highlights

  Quarter ended

31 December

 

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

 

Quarter
ended 30
September

 

Change,
quarter on
quarter,
(4Q to 3Q)

2016

  Year ended 31 December  

Change,
year-on-
year

2016   2015 2016 2015  
unaudited unaudited unaudited
 
Key operating data
(’000 tonnes)
Aluminium 930 921 1.0% 920 1.1% 3,685 3,645 1.1%
Alumina 1,939 1,906 1.7% 1,865 4.0% 7,528 7,402 1.7%
Bauxite 2,841 2,850 (0.3%) 3,211 (11.5%) 12,187 12,112 0.6%
 
(’000 tonnes)
Sales of primary aluminium and alloys 922 876 5.3% 981 (6.0%) 3,818 3,638 4.9%
 
(USD per tonne)
Aluminium segment cost per tonne1 1,344 1,410 (4.7%) 1,330 1.1% 1,333 1,455 (8.4%)
Aluminium price per tonne quoted on the LME2 1,710 1,495 14.4% 1,621 5.5% 1,604 1,663 (3.5%)
Average premiums over LME price3 151 179 (15.6%) 150 0.7% 159 281 (43.4%)
Average sales price 1,799 1,729 4.0% 1,754 2.6% 1,732 2,001 (13.4%)
Alumina price per tonne4 307 234 31.2% 234 31.2% 253 303 (16.5%)
 
Key selected data from the consolidated statement of income
(USD million)
Revenue 2,027 1,857 9.2% 2,060 (1.6%) 7,983 8,680 (8.0%)
Adjusted EBITDA 412 306 34.6% 421 (2.1%) 1,489 2,015 (26.1%)
margin (% of revenue) 20.3% 16.5% NA 20.4% NA 18.7% 23.2% NA
Profit /(Loss) for the period 645 (267) NA 273 136.3% 1,179 558 111.3%
margin (% of revenue) 31.8% (14.4%) NA 13.3% NA 14.8% 6.4% NA
Adjusted Net Profit for the period 342 55 521.8% 181 89.0% 590 671 (12.1%)
margin (% of revenue) 16.9% 3.0% NA 8.8% NA 7.4% 7.7% NA
Recurring Net Profit /(Loss) for the period 505 (40) NA 327 54.4% 1,257 1,097 14.6%
margin (% of revenue) 24.9% (2.2%) NA 15.9% NA 15.7% 12.6% NA

______________
1 For any period, “Aluminium segment cost per tonne” is calculated as aluminium segment revenue less aluminium segment results less amortisation and depreciation divided by sales volume of the aluminium segment.
2 Aluminium price per tonne quoted on the LME representing the average of the daily closing official 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.

Key selected data from consolidated statement of financial position

  As at  

Change
year-on-year

31 December
2016

 

31 December
2015

 
(USD million)
Total assets 14,452 12,809 12.8%
Total working capital5 1,691 1,596 6.0%
Net Debt6 8,421 8,372 0.6%

Key selected data from consolidated statement of cash flows

  Year ended  

31 December
2016

 

31 December
2015

Change
year-on-year

 
(USD million)
Net cash flows generated from operating activities 1,244 1,568 (20.7%)
Net cash flows generated from investing activities 104 261 (60.2%)
of which dividends from associates and joint ventures 336 755 (55.5%)
of which CAPEX7 (575) (522) 10.2%
Interest paid (452) (516) (12.4%)

Overview of Trends in the Aluminium Industry and Business Environment

Highlights for the full year 2016

  • Global aluminium demand grew by 5.5% in 2016 year-on-year (YoY), as a result of strong demand in China, Europe, Asia and North America. Aluminium demand in 2017 is estimated to grow at approximately 5% YoY

______________
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 CAPEX is defined as payment for the acquisition of property, plant and equipment and intangible assets.

  • Global aluminium supply grew at a slower pace in 2016, increasing by 3.6% to 59 mln tonnes, compared to 6% growth in 2015 due to Chinese supply slowdown
  • In 2017, Chinese supply will be challenged by significant cost inflation, environmental regulation as well as the continuation of supply side reform. In 2016, Chinese semis export declined by 3.2% YoY with a further downside risk in 2017 due to anti-dumping tensions and the ongoing WTO case
  • In 2016, the global aluminum market reached a deficit of 0.7 mln tonnes which is set to widen to approximately 1.1 mln tonnes in 2017
  • Aluminum premiums in key consuming regions started to improve at the end of 4Q16 with a 20% rise in October-December compared to the beginning of this year. This was supported by strong demand and reduced supply in key regions after smelting capacity reduction/closures (NA, Australia).

The LME aluminium price reached USD1,934/t in March 2017 and has remained stable around USD1,900/t since mid-February-March. This was attributable to a growing global metal deficit (0.7 mln tonnes) driven by the US, EU and continued supply moderation in China coupled with significant production cost inflation. Global manufacturing activity in the beginning of 2017 expanded to its highest level since 2011 underpinning strong metal demand for the rest of the year.

Aluminium demand

Global aluminium demand grew by 5.5% in 2016 to 59.7 million tonnes. Demand rose in the world (excluding China) by 3.4% to 28.3 million tonnes, while China’s growth alone increased 7.6% to 31.4 million tonnes.

China’s economy hit its growth target last year accelerating towards the end of the year. China’s economic growth remained stable in 3Q, ensuring the government achieved its full-year growth target. Gross domestic product expanded 6.7% in 2016 YoY, above the official target of 6.5%. The China Caixin Manufacturing PMI rose to 51.9 in December from 50.9 in November, avoiding contractionary territory for the sixth month straight.

China´s industrial output rose 6% YoY with retail sales increasing 10.9% in 2016. Fixed-asset investment for the whole year grew 8.1% YoY. China produced 28.19 million units of vehicles in 2016, up 14.5% YoY, according to monthly data released by the China Association of Automobile Manufacturers (CAAM). Sales of commercial buildings rose 35% in 2016, and residential sales climbed 36% for the same period. As prices continued to increase in 2016, this led to healthy property restocking and growth in construction activity.

In North America, Donald Trump’s win in the US Presidential elections saw a surge in economic optimism. His proposed infrastructure spending plan increased most indicators by the end of the year. The US manufacturing sector ended 2016 on a buoyant note, with promising signs of further growth in 2017. The pace of growth signaled by the PMI in December (54.7) was at its strongest for almost two years, driven almost entirely by rising demand from domestic customers, with exports hindered by the dollar’s recent surge. Construction was relatively strong with the number of new housing growing by nearly 5% in 2016 YoY. Automotive production increased by 1.2% in North America.

The Eurozone manufacturing sector also ended 2016 on a high note; the PMI climbed up to 54.9 in December. Alongside the improved performance of the Eurozone manufacturing sector, production and new orders witnessed its fastest growth. Rates of expansion in both were either at, or close to, the steepest increase since early 2011. Car production in Europe increased in 2016 on the back of EUR/USD depreciation in 2H16, as well as increased demand in exporting countries such as the US and China, where demand is supported by tax reduction for lower-powered light vehicles. Preliminary data for the first eleven months of 2016 showed a rise by 3.7% YoY.

The final months of 2016 saw Japan’s economy expand with exports rebounding meaningfully along with production backed by the sharp depreciation of the yen and improving global demand. The PMI posted 52.4 in December, up from 51.3 in November, signaling a sharper improvement in manufacturing conditions in Japan and this contributed to the strongest quarterly average since 4Q 2015. In 2016, Japanese new house building increased by over 5% according to the latest data for the January-November period.

Growth in the ASEAN economy remained on track with annual growth at 4.7% in 2016, a slight pick-up from 4.5% in 2015. Car production growth gained momentum at the end of 2016, largely in Thailand (2.7%), Indonesia (5.6%), and Vietnam (38.4%) where domestic demand and exports uptick boosted manufacturing. According to preliminary data for the January-November period, automotive production grew by 3% in the region.

In 2016, Russia’s key economic indicators continued to decrease. According to preliminary data, the GDP index was -0.7%, industrial production index for processing industries was -0.7%, and fixed assets investments decreased by -3.3%.

However, by the end of the year there were signs of stabilization. Current forecasts for 2017 predict that indicators will be positive. In the second half of 2016, PMI demonstrated steady growth, peaking in November/December at 53.7, which is the highest it has been for 69 months. Cheap ruble currency make domestic producers more competitive for both domestic and export markets. Passenger car production continued to decline due to a lower automotive market demand, but commercial vehicles (trucks, light commercial vehicles, buses) production increased by +8.2% in 2016 compared to 2015.

Against the backdrop of a weak ruble, in 2016 the volume of aluminium semis imports significantly decreased while exports increased. As a result, the volume of exports of aluminum products exceeded imports for the first time. That has allowed domestic enterprises to retain production volume in terms of reducing domestic demand.

Supply

Overall global aluminum supply rose by 3.6% to 59 mln tonnes in 2016 YoY.

IAI and CRU data show that during 2016, primary aluminium production in the world excluding China rose 2.2% to 26.7 million tonnes mostly due to growth in Asia, Malaysia and Eastern Europe. According to the Aladdiny agency, aluminum production in China increased by 5.5% to 32.3 mln tonnes. This was as a result of new capacity ramping up in Q4 2016.

Despite 4 mln tonnes of new Chinese capacity in 2016 and some restarted capacity, we believe that the Chinese market will become more balanced due to its adoption of the new antipollution plan. In addition, the country may still have a high risk of supply tightness due to the new environmental measures against pollution including outlined capacity closures (below 300KA) and a significant decline in new capacity additions. This is similar to what we have witnessed and was implemented in the steel sector.

The Chinese Ministry of Environmental Protection (MEP) is tightening control over pollution due to an increase in heavy smog during December-January. Four provinces near Beijing 2+26 cities (namely, Hebei, Shandong, Henan, Shanxi) occupy just 7% of the territory of China but produce 340 Mt of steel (43% of China`s total), 47% of coke, 12 Mt of energy intensive aluminium (38%), 460 Mt of cement (19%) and 27% of coal-fired power. This scale of pollution producing facilities within a relatively small area creates enormous pressure on both the environment and on the civilian`s health. According to the new antipollution plan developed by the MEP with other authorized bodies and approved by the Chinese Government, 30% of approximately 10Mtpy of aluminium smelting capacity in these provinces is due to close between November to March in 2017-2018. This would result in a 1.2Mt impact in the first full year of the policy. It would also make greenfield and brownfield expansions in these key producing provinces unlikely. In addition, 30% of alumina and 50% of anode/cathode production in 2+26 cities could potentially affect further key raw materials prices appreciation used for aluminum production. Since January last year, the average weighted production cash cost for China’s aluminum industry climbed by 40% and according to February 2017 cash cost data and SHFE average price in February (RMB13,800/t), there were 14% (or 5Mt) of loss making capacities in China based on the estimation current cost curve which has a strong support at RMB14,000/t level.

Forecast for 2017

Strong market and regional fundamentals will contribute to a widening deficit of 1.1 mln tonnes.

  • Global aluminum demand to grow by 5.0% to 62.7 mln tonnes. Chinese demand to grow by 6.7% to 33.5 mln tonnes and ex.China by 3.3% to 29.2 mln tonnes driven by growth in EMEA, North America and Asian economies
  • Global aluminum supply will grow by 4.3% to 61.6 mln tonnes vs 3.7% growth in 2016 and will be affected by a tight supply in China due to the new antipollution plan. Chinese supply will grow by 6% to 34.3 mln tonnes. Ex.China supply will grow by 2.4% to 27.3 mln tonnes
  • Global aluminum market deficit to widen to 1.1 mln tonnes in 2017 vs 0.7 mln tonnes in 2016

Business review

Aluminium

  • Aluminium production in 4Q2016 totaled 930 thousand tons (+1.1% quarter-on-quarter), with Siberian smelters representing 94% of total aluminium output. Smelters utilization remained on average at a high of 95%.
  • In 4Q2016 aluminium sales totaled 922 thousand tons (-6.0% quarter-on-quarter), including value added product (VAP ) sales of 405 thousand tons. Aluminium sales dynamics are largely explained by the previous period high base effect and seasonal increase of goods in transit (to be realized in the next period).
  • In 4Q2016 the average aluminium realized price increased 2.6% quarter-on-quarter to USD1,799/t. The increase was largely driven by the London Metal Exchange (“LME”) QP component growth which increased by 2.7% quarter-on-quarter to USD1,648/t in 4Q2016. The average realised aluminium premium was USD151/t in the period.
  • In 2016 aluminium production totaled 3,685 thousand tons (+1.1% YoY).
  • In 2016 aluminium sales volumes totaled 3,818 thousand tons (+4.9% YoY). The increase was largely attributable to the additional volumes of the Boguchansky smelter. In 2016 VAP sales grew to 1,677 thousand tons (+6.7% YoY). The average realized price in 2016 was USD1,732/t (-13.4% YoY). The average price reduction is explained by the structurally different market environment in 2015 versus 2016 and lower aluminium LME prices and premiums YoY.

Alumina

  • In 4Q2016, total alumina production increased 4.0% quarter-on-quarter, totaling 1,939 thousand tons. Russian operations accounted for 34% of the total output. The production growth at Nikolaev (+12.3% quarter-on-quarter) refinery was attributable to the capacity upgrade. The rest of the Group alumina assets performance was largely in line with the production plan.
  • In 2016 alumina output totaled 7,528 thousand tons (+1.7% YoY). The production increase largely came from the Russian (namely Urals, Bogoslovsk) and Ukrainian (Nikolaev) refineries as a result of modernization and debottlenecking of the capacities.

Bauxites

  • In 4Q2016, bauxite output totaled 2,841 thousand tons (-11.5% quarter-on-quarter). The Timan mine bauxite output reduced by 26.6% quarter-on-quarter from 911 thousand tons due to higher volumes of waste mined in 4Q2016. In the next quarter the output at the facility is expected to normalize. The bauxite and nepheline ore output dynamics at the rest of the Group’s assets are largely explained by the mining works schedule.
  • In 2016, bauxite output totaled 12,187 thousand tons (+0.6% YoY). Nepheline ore output increased by 7.8% YoY to 4,432 thousand tons.

Financial Overview

Revenue

  Year ended

31 December 2016

  Year ended

31 December 2015

USD million   kt   Average sales price (USD/tonne) USD million   kt   Average sales price (USD/tonne)
 
Sales of primary aluminium and alloys 6,614 3,818 1,732 7,279 3,638 2,001
Sales of alumina 622 2,267 274 595 1,722 346
Sales of foil 240 77 3,117 270 81 3,333
Other revenue 507 536
------- -------
Total revenue 7,983 8,680
============= =============

Total revenue decreased by USD697 million or by 8.0% to USD7,983 million in 2016 compared to USD8,680 million in 2015. The decrease in total revenue was primarily due to the lower sales of primary aluminium and alloys, which accounted for 82.9% and 83.9% of UC RUSAL’s revenue for 2016 and 2015, respectively.

 

Quarter ended
31 December

 

 

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

 

Quarter
ended 30
September

 

Change,
quarter on
quarter,
(4Q to 3Q)

  Year ended

31 December

 

Change,
year-on- year

2016   2015 2016 2016   2015
unaudited unaudited unaudited
 
(USD million)
Sales of primary aluminium and alloys
USD million 1,659 1,515 9.5% 1,721 (3.6%) 6,614 7,279 (9.1%)
kt 922 876 5.3% 981 (6.0%) 3,818 3,638 4.9%
Average sales price (USD/t) 1,799 1,729 4.0% 1,754 2.6% 1,732 2,001 (13.4%)
Sales of alumina
USD million 164 144 13.9% 157 4.5% 622 595 4.5%
kt 570 485 17.5% 566 0.7% 2,267 1,722 31.6%
Average sales price (USD/t) 288 297 (3.0%) 277 4.0% 274 346 (20.8%)
Sales of foil (USD million) 65 63 3.2% 62 4.8% 240 270 (11.1%)
Other revenue (USD million) 139 135 3.0% 120 15.8% 507 536 (5.4%)
------- ------- ------- ------- -------
 
Total revenue (USD million) 2,027 1,857 9.2% 2,060 (1.6%) 7,983 8,680 (8.0%)
============= ============= ============= ============= =============

Revenue from sales of primary aluminium and alloys decreased by USD665 million, or by 9.1%, to USD6,614 million in 2016, as compared to USD7,279 million in 2015, primarily due to 13.4% decrease in the weighted-average realized aluminium price per tonne driven by a decrease in the LME aluminium price (to an average of USD1,604 per tonne in 2016 from USD1,663 per tonne in 2015), as well as a decrease in premiums above the LME prices in the different geographical segments (to an average of USD159 per tonne from USD281 per tonne in 2016 and 2015, respectively).

Revenue from sales of alumina increased by USD27 million or by 4.5% to USD622 million for the year ended 31 December 2016 as compared to USD595 million for the previous year. The increase was mostly attributable to 31.6% growth in alumina sales volume partially offset by a 20.8% decrease in the average sales price.

Revenue from sales of foil decreased by 11.1% to USD240 million in 2016, as compared to USD270 million in 2015, primarily due to a 6.5% decrease in the weighted average sales price and 4.9% decrease in sales volumes.

Revenue from other sales, including sales of other products, bauxite and energy services decreased by 5.4% to USD507 million for the year ended 31 December 2016 as compared to USD536 million for the previous year, due to a 22.0% decrease in sales of other materials (such as silicon by 16.2%, soda by 12.2%, potassium sulfate by 48.9%).

Cost of sales

The following table shows the breakdown of UC RUSAL’s cost of sales for the years ended 31 December 2016 and 2015, respectively:

 

Year ended
31 December

 

 

Change,
year-on-year

 

Share of
costs

2016   2015
 
(USD million)
Cost of alumina 716 733 (2.3%) 11.8%
Cost of bauxite 427 538 (20.6%) 7.0%
Cost of other raw materials and other costs 2,131 2,189 (2.6%) 35.1%
Purchases of primary aluminium from JV 229 58 294.8% 3.8%
Energy costs 1,568 1,680 (6.7%) 25.8%
Depreciation and amortisation 434 434 0.0% 7.2%
Personnel expenses 520 505 3.0% 8.6%
Repairs and maintenance 56 58 (3.4%) 0.9%
Net change in provisions for inventories (11) 20 NA (0.2%)
------- ------- -------
 
Total cost of sales 6,070 6,215 (2.3%) 100.0%
============= ============= =============

Total cost of sales decreased by USD145 million, or by 2.3%, to USD6,070 million in 2016, as compared to USD6,215 million in 2015. The decrease was primarily driven by the continuing depreciation of the Russian Ruble and the Ukrainian Hryvnia against the US Dollar by 10.0% and 17.0%, respectively, between the reporting periods which was partially offset by the increase in volumes of primary aluminium and alloys sold.

Cost of alumina decreased in the reporting period (as compared to 2015) by USD17 million, or by 2.3%, primarily as a result of a decrease in alumina transportation costs following significant Russian Ruble depreciation and a slight decrease in tariff.

Cost of bauxite decreased by 20.6% for the year ended 31 December 2016 as compared to the same period of prior year, primarily as a result of a decrease in the purchase price.

Cost of raw materials (other than alumina and bauxite) and other costs decreased by 2.6% due to the lower raw materials purchase price in 2016 as compared to the previous year (such as raw petroleum coke by 30.0%, calcined petroleum coke by 20.9%, pitch by 6.2%, raw pitch coke by 2.5%).

Increase in purchases of primary aluminium and alloys were mainly caused by start of aluminium production at BoAZ and further increase of its production capacity. The Group purchases aluminium from BoAZ under long-term purchase commitment for further export.

Energy cost decreased in 2016 by 6.7% to USD1,568 million compared to USD1,680 million in 2015 primarily due to the continuing depreciation of the Russian Ruble against the US Dollar and 5.5% decrease in the average electricity tariff.

Distribution, administrative and other expenses

Distribution expenses decreased by 1.5% to USD331 million in 2016, compared to USD336 million in 2015, primarily due to the decrease in transportation tariffs as well as the continuing depreciation of the Russian Ruble against the US Dollar between the periods.

Administrative expenses, which include personnel costs, decreased by 2.3% to USD521 million in 2016, compared to USD533 million in 2015 and primarily resulted from the depreciation of the Russian Ruble to the US Dollar within the comparable periods.

Gross profit

As a result of the foregoing factors, UC RUSAL reported a gross profit of USD1,913 million for the year ended 31 December 2016 as compared to USD2,465 million for the previous period, representing gross margins of the periods of 24.0% and 28.4%, respectively.

Adjusted EBITDA and results from operating activities

  Year ended 31 December  

Change
year-on-year

2016   2015
 
(USD million)
Reconciliation of Adjusted EBITDA
Results from operating activities 1,068 1,409 (24.2%)
Add:
Amortisation and depreciation 453 457 (0.9%)
(Reversal of)/ impairment of non-current assets (44) 132 NA
Loss on disposal of property, plant and equipment 12 17 (29.4%)
------- -------
Adjusted EBITDA 1,489 2,015 (26.1%)
============= =============

Adjusted EBITDA, defined as results from operating activities adjusted for amortisation and depreciation, impairment charges and loss on disposal of property, plant and equipment, decreased to USD1,489 million for the year ended 31 December 2016, as compared to USD2,015 million for the previous year. The factors that contributed to the decrease in Adjusted EBITDA margin were the same that influenced the operating results of the Company.

Results from operating activities decreased by 24.2% to USD1,068 million for the year ended 31 December 2016, as compared to USD1,409 million for the previous year, representing operating margins of 13.4% and 16.2%, respectively.

Finance income and expenses

  Year ended 31 December  

Change
year-on-year

2016   2015
 
(USD million)
Finance income
Interest income on third party loans and deposits 18 21 (14.3%)
Interest income on loans to related party — companies under common control 1 2 (50.0%)
------- -------
19 23 (17.4%)
============= =============
 
Finance expenses
Interest expense on bank loans, company loans, bonds and other bank charges, including (610) (627) (2.7%)
Interest expense (537) (571) (6.0%)
Bank charges (73) (56) 30.4%
Interest expense on provisions (7) (13) (46.2%)
Net foreign exchange loss (105) (140) (25.0%)
Change in fair value of derivative financial instruments, including (157) (352) (55.4%)
Change in fair value of embedded derivatives (77) 47 NA
Change in other derivatives instruments (80) (399) (79.9%)
------- -------
(879) (1,132) (22.3%)
============= =============

Finance income decreased by USD4 million to USD19 million in 2016 as compared to USD23 million in 2015, due to the decrease in the interest income on time deposit at several subsidiaries of the Group.

Financial expenses decreased by 22.3% to USD879 million in 2016 as compared to USD1,132 million in 2015 primarily due to a decrease in interest expenses, the foreign exchange loss and the net loss from the change in fair value of derivative financial instruments, slightly offset by an increase in bank charges.

Interest expenses on bank and company loans in 2016 decreased by USD17 million to USD610 million from USD627 million in 2015 due to the reduction of the principal amount payable to international and Russian lenders and the decrease of the overall interest margin between the periods.

The decrease of the net foreign exchange loss to USD105 million in 2016 from USD140 million for the same period of 2015 was driven by the revaluation of working capital items of several Group companies denominated in foreign currencies.

The net loss from the change in fair value of derivative financial instruments decreased to USD157 million for the years ended 31 December 2016 from USD352 million for the same period of 2015 as a result of the Russian Ruble’s fluctuations which led to the revaluation of certain cross-currency instruments.

Share of profits of associates and joint ventures

  Year ended

31 December

 

Change
year-on-year

2016   2015
 
(USD million)
Share of profits of Norilsk Nickel, with 688 486 41.6%
Effective shareholding of 27.82% 28.05%
Share of losses of other associates (293) NA
------- -------
 
Share of profits of associates 688 193 256.5%
============= =============
 
Share of profits of joint ventures 160 175 8.6%
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The Company’s share in profits of associates for the years ended 31 December 2016 and 2015 comprised USD688 million and USD193 million, respectively. Share in results of associates in both periods resulted primarily from the profit from the Company’s investment in Norilsk Nickel, which amounted to USD688 million and USD486 million for 2016 and 2015, respectively, due to the better performance of Norilsk Nickel between periods.

The market value of the investment in Norilsk Nickel at 31 December 2016 was USD7,348 million as compared to USD5,542 million as at 31 December 2015.

Share of profits of joint ventures was USD160 million for the year ended 31 December 2016 as compared to USD175 million for the same period in 2015. This represents the Company’s share of profits in joint ventures, namely BEMO, LLP Bogatyr Komir, Mega Business and Alliance (transportation business in Kazakhstan) and North United Aluminium Shenzhen Co., Ltd.

Result from disposal of a subsidiary

In July 2016 the Company entered into an agreement to sell 100% stake in the Alumina Partners of Jamaica (“Alpart”) to the Chinese state industrial group, JIUQUAN IRON & STEEL (GROUP) Co. Ltd. (“JISCO”).

In November 2016 the Company completed the sale for a consideration of USD299 million received in cash.

Profit before income tax

UC RUSAL earned a profit before income tax in an amount of USD1,354 million for the year ended 31 December 2016, as compared to a profit before income tax in an amount of USD763 million for the year ended 31 December 2015 due to reasons set out above.

Income tax

Income tax expense decreased by USD30 million to USD175 million in 2016, as compared to USD205 million in 2015.

Current tax expenses decreased by USD51 million, or 29.5%, to USD122 million for the year ended 31 December 2016, as compared to USD173 million for the previous year primarily due to the reduction withholding tax on dividends received from Norilsk Nickel.

Deferred tax increased by USD21 million, or 65.6%, to USD53 million for the year ended 31 December 2016, as compared to USD32 million for the previous year primarily due to reversal of impairment non-current assets of several subsidiaries.

Profit for the period

As a result of the above, the Company recorded a profit of USD1,179 million in 2016, as compared to USD558 million in 2015.

Adjusted and Recurring Net Profit

  Year ended 31 December  

Change,
year-on-year

2016   2015
 
(USD million)
Reconciliation of Adjusted Net Profit
Net Profit for the period 1,179 558 111.3%
Adjusted for:
Share of profits and other gains and losses attributable to Norilsk Nickel, net of tax effect (667) (426) 56.6%
Change in derivative financial instruments, net of tax (20.0%) 122 342 (64.3%)
Foreign currency translation gain recycled from other comprehensive income on deconsolidation of subsidiaries (95) (100.0%)
Impairment of non-current assets, net of tax (44) 132 NA
Net impairment of underlying net assets of joint ventures and associates 160 (100.0%)
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Adjusted Net Profit 590 671 (12.1%)
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Add back:
Share of profits of Norilsk Nickel, net of tax 667 426 56.6%
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Recurring Net Profit 1,257 1,097 14.6%
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Adjusted Net Profit for any period is defined as the profit adjusted for the net effect of the Company’s investment in Norilsk Nickel, the net effect of derivative financial instruments, gains and losses recycled from other reserves and the net effect of non-current assets impairment and restructuring costs. Recurring Net Profit for any period is defined as Adjusted Net Profit plus the Company’s net effective share in Norilsk Nickel results.

Assets and liabilities

UC RUSAL’s total assets increased by USD1,643 million, or 12.8% to USD14,452 million as at 31 December 2016 as compared to USD12,809 million as at 31 December 2015. The increase in total assets is mainly resulted from the increase in the carrying value of the investment in Norilsk Nickel.

Total liabilities decreased by USD265 million, or 2.3%, to USD11,153 million as at 31 December 2016 as compared to USD11,418 million as at 31 December 2015. The decrease was mainly due to the decrease in the Company’s provisions and financial liabilities.

Cash flows

The Company generated net cash from operating activities of USD1,244 million for the year ended 31 December 2016 as compared to USD1,568 for the previous year. Net increase in working capital and provisions comprised USD178 million for 2016 as compared to USD281 million for the previous year.

Net cash generated from the investing activities for 2016 decreased to USD104 million as compared to USD261 million for 2015 primarily due to a decrease in dividends received from associates and joint ventures in amount USD336 million for 2016 as compared to USD755 million for the prior year.

The above mentioned factors allowed the Company to assign USD143 million of its own cash flows for the debt repayment that together with the interest payments of USD452 million, dividends paid in amount of USD250 million and settlement of derivative financial instruments of USD446 million represent the main components of the cash used in the financing activities with the total amount of USD1,305 million for 2016.

Segment reporting

The Group has four reportable segments, as described in the annual report of the Company, which are the Group’s strategic business units: Aluminium, Alumina, Energy, 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.

  Year ended 31 December
  2016     2015
Aluminium Alumina Aluminium Alumina
 
(USD million)
Segment revenue
kt 3,891 8,165 3,749 6,901
USD million 6,708 2,071 7,426 2,094
Segment result 1,157 2 1,607 212
Segment EBITDA8 1,519 90 1,971 298
Segment EBITDA margin 22.6% 4.3% 26.5% 14.2%
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Total capital expenditure 336 146 303 164
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The segment result margin (calculated as a percentage of segment profit to total segment revenue per respective segment) for aluminium segment decreased to 17.2% for the year ended 31 December 2016 from 21.6% for the year ended 31 December 2015, and decreased to 0.1% compared to 10.1%, respectively, for the alumina segment. Key drivers for the decrease 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 financial statements for the year ended 31 December 2016.

____________
8 Segment EBITDA for any period is defined as segment result adjusted for amortisation and depreciation for the segment.

Capital expenditure

UC RUSAL recorded a total capital expenditure of USD575 million for the year ended 31 December 2016. UC RUSAL’s capital expenditure in 2016 was aimed at maintaining existing production facilities.

  Year ended 31 December
2016   2015
 
(USD million)
Development capex 192 158
 
Maintenance
Pot rebuilds costs 89 106
Re-equipment 294 258
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Total capital expenditure 575 522
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The BEMO project companies utilise the project financing proceeds to make necessary contributions to the ongoing construction projects and do not require contributions from the joint ventures partners at this time.

Consolidated financial statements

The following section contains the audited consolidated financial statements of UC RUSAL for the year ended 31 December 2016 which were approved by the directors of UC RUSAL (the “Directors”) on 16 March 2017, and reviewed by the Audit Committee.

The full set of audited consolidated financial statements of UC RUSAL, together with the report of the independent auditor is available on UC RUSAL’s website at http://www.rusal.ru/en/investors/financial_stat.aspx.

Purchase, sale or redemption of UC RUSAL’s listed securities

There has been no purchase, sale or redemption of UC RUSAL’s listed securities during 2016 by UC RUSAL or any of its subsidiaries.

Code of Corporate Governance Practices

UC RUSAL adopted a corporate code of ethics on 7 February 2005. Based on the recommendations of the European Bank for Reconstruction and Development and the International Finance Corporation, UC RUSAL further amended the corporate code of ethics in July 2007. The corporate code of ethics sets out UC RUSAL’s values and principles for many of its areas of operations.

The Directors adopted a corporate governance code which is based on the Code on Corporate Governance Practices as set out in Appendix 14 to the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (“Hong Kong Listing Rules”) then in force on 11 November 2010. The Directors consider that save for code provisions A.1.7 (physical board meetings at which Directors have material interests), A.4.1 (specific term of non-executive directors) and A.4.2 (specific term of directors) for reasons set out below and also on pages 97-98 of UC RUSAL’s interim report for the six months ended 30 June 2016, UC RUSAL has complied with the code provisions as set out in the Corporate Governance Code and Corporate Governance Report in Appendix 14 to the Hong Kong Listing Rules during the period from 1 January 2016 to 31 December 2016.

The Board generally endeavored throughout the twelve-month period ended 31 December 2016 to ensure that it did not deal with business by way of written resolution where a substantial shareholder of UC RUSAL or a Director had disclosed an interest in a matter to be considered by the Board which the Board determined to be material. As a result, there was only 3 occurrences (out of the 27 written resolutions the Board passed during the period) when urgent business was dealt with by the Board by way of written resolution where a material interest of a Director was stated to have been disclosed. In that instance, the interest of the Director was a potential conflict of interest by virtue of the fact that:

(1) a Director was also a member of the supervisory council for the parent company of the entity contracting with UC RUSAL;

(2) a Director was also a member of the supervisory council for the parent company of the entity contracting with the UC RUSAL. Additionally, another Director was the chairman of the supervisory board of the parent company of the entity contracting with the UC RUSAL; and

(3) a Director was also a member of the supervisory council for the parent company of the entity contracting with the UC RUSAL.

On those occurrences, the written resolutions were passed by the requisite majority excluding the materially interested Director.

Of the 9 Board meetings held in the twelve-month period ended 31 December 2016 where one or more Director(s) had disclosed a material interest, all the independent non-executive Directors were present at 9 of the Board meetings held.

Of the 9 board meetings held, there were 5 occasions where an independent non-executive Director had a material interest in the transaction. On such occurrences, the independent non-executive Director abstained from voting and the resolutions approving entry into such transactions were passed by the requisite majority excluding the materially interested independent non-executive Director.

Audit Committee

The Board established an audit committee (the “Audit Committee”) to assist it in providing an independent view of the effectiveness of the Company’s financial reporting process, risk management and internal control systems, and internal audit function, to oversee the audit process and to perform other duties and responsibilities as are assigned to the Audit Committee by the Board. The Audit Committee is assisted by the Company’s internal audit function which undertakes both regular and ad hoc reviews of risk management, internal controls and procedures, the results of which are reported to the Audit Committee. The Audit Committee consists of a majority of independent non-executive Directors. The members are as follows: Mr. Bernard Zonneveld (chairman of the committee, independent non-executive Director, with relevant professional qualifications and knowledge related to accounting and financial management) (with effect from 24 June 2016) Mr. Philip Lader (independent non-executive Director); Ms. Elsie Leung Oi-sie (independent non-executive Director); Mr. Daniel Lesin Wolfe (non-executive Director), Ms. Olga Mashkovskaya (non-executive Director) and Mr. Dmitry Vasiliev (independent non-executive Director).

Declaration of Dividend

In September 2016 the Board of Directors of the Company approved an interim dividend in the aggregate amount of USD250 million (USD0.01645 per ordinary share) for the financial year ending 31 December 2016. Payment of the interim dividend was subject to the Company obtaining prior consents from certain lenders of the Company. On 25 October 2016, the required consents have been obtained by the Company. The interim dividend was paid on 31 October 2016.

Material events since the end of the year

26 January 2017   RUSAL published inside information about potential offering of U.S. dollar-denominated fixed rate notes.
 
2 February 2017 RUSAL announced that the Company had completed the debut offering of Eurobonds with the following key terms: principal amount of USD600 million, tenor 5 years, coupon rate 5.125% per annum.
 
16 February 2017 RUSAL announced its operating results for the fourth quarter 2016 and full year 2016.

Forward-looking statements

This announcement 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.

By Order of the board of directors of
United Company RUSAL Plc
Vladislav Soloviev
Director

17 March 2017

As at the date of this announcement, the executive Directors are Mr. Oleg Deripaska, Mr. Vladislav Soloviev and Mr. Siegfried Wolf, the non-executive Directors are Mr. Maxim Sokov, Mr. Dmitry Afanasiev, Mr. Ivan Glasenberg, Mr. Maksim Goldman, Ms. Gulzhan Moldazhanova, Mr. Daniel Lesin Wolfe, Ms. Olga Mashkovskaya, Ms. Ekaterina Nikitina and Mr.Marco Musetti, and the independent non-executive Directors are Mr. Matthias Warnig (Chairman), Mr. Philip Lader, Dr. Elsie Leung Oi-sie, Mr. Mark Garber, Mr. Bernard Zonneveld and Mr. Dmitry Vasiliev.

All announcements and press releases published by the Company are available on its website under the links http://www.rusal.ru/en/investors/info.aspx, http://rusal.ru/investors/info/moex/ and http://www.rusal.ru/en/press-center/press-releases.aspx, respectively.

Contacts

United Company RUSAL Plc

Contacts

United Company RUSAL Plc