BREAKINGVIEWS-RUSAL pricing a triumph of hope over worry

-- The author is a Reuters Breakingviews columnist. The opinions expressed are his own --

By Jason Bush

LONDON, Jan 22 (Reuters Breakingviews) - The aluminium price has hardly budged in the last month and it is well below its pre-credit crunch peak. But that has not held back RUSAL, the Russian aluminium producer controlled by oligarch Oleg Deripaska. Neither have the many legal, political and financial doubts which surround the company. Investors have taken up RUSAL's Hong Kong IPO at a generous price.

True, at HK$10.8 ($1.39) per share, the price is only the mid-point of the underwriters' suggested range. But a market capitalisation of $21.1 billion looks high for a company which still has $15 billion of debts -- and so many risks the Hong Kong exchange barred retail investors from the IPO.

Syndicate sources say the company is valued at 11.7 times its expected 2010 EBITDA. Alcoa, a U.S. rival trades at a multiple of 7.6. The multiple of Chalco, the Chinese producer which already trades in bubbly Hong Kong, is 10.2 -- so RUSAL has been priced at a 15 percent premium.

Generous political support has helped the IPO. Russia's state-owned VEB has alone subscribed to one third of the issue. Yet the IPO also appears to have attracted significant demand from institutional investors. An 80 percent rebound in aluminium prices since last February has buoyed spirits.

Asian investors might think of RUSAL as a hedge against higher material costs. And in the long term, RUSAL should be well placed to satisfy Chinese demand for aluminium, forecast to double by 2020. In any case, Russia's cheap hydro-electricity make RUSAL's costs one third cheaper than the global average.

But right now China accounts for just 10 percent of RUSAL's revenues. The world aluminium market remains fragile, RUSAL's debts are still onerous and owner Deripaska still faces a $2 billion London lawsuit. If the global recovery stutters, investors' bullish expectations could easily be confounded.

CONTEXT NEWS

-- According to sources in the IPO syndicate, RUSAL's shares have been priced at HK$10.8 ($1.39) per share. RUSAL had previously indicated a price range of HK$9.1 HK$12.5 per share ($1.17 to $1.55). A formal announcement is due on Jan. 22.

-- The pricing means that the IPO will raise $2.24 billion, implying a total market capitalization for RUSAL of $21.1 billion. RUSAL is selling 10.6 percent of its equity, with a primary listing in Hong Kong and a secondary listing in Paris, due to take place on Jan. 27.

-- In its 1,141-page prospectus, RUSAL outlines "significant" risks, including unstable aluminium prices, large debt repayments, and a legal action against RUSAL's largest shareholder, Oleg Deripaska. The listing committee of the Hong Kong Stock Exchange has barred retail investors from buying shares in the IPO.

(Editing by Edward Hadas and David Evans)