The Group’s strategy concentrates on organic growth with a focus on capital discipline and deleveraging
Taking into account the forecasted demand for power in Siberia (based on the development plans of the Metals segment, which is the principal driver of demand in the region), the Energy Segment is capable of increasing its power output without any material capital expenditures.
The Group does not plan to implement any large-scale capital intensive programmes that would otherwise require significant capital expenditures, focusing instead on the maintenance and modernisation of its generating assets, including HPPs. In order to achieve these objectives, the Company is focused on the following strategic objectives:
Deleverage and support solid dividend payments through strong free cash flow generation
The Group operates a conservative capital allocation policy, focusing on operating efficiencies, cash preservation, deleveraging and value creation for its shareholders. One of the Group’s key financial priorities in the near and medium term is to continue to reduce the Group’s leverage, in particular to decrease the Energy segment’s Net Debt to EBITDA ratio from 5.5x to 3.5x within three years. The capital discipline and deleveraging activities undertaken by the Group in recent years have enabled UC RUSAL to commence dividend payments to its shareholders, which amounted to USD 250 million in each of 2015 and 2016.
Optimise the electricity supply-demand balance through the integration of the Metals and Energy segments
The Group has highly integrated and interdependent businesses. In 2016, the Metals segment consumed a total of 59.4 TWh of electricity, while the Energy segment produced 67.4 TWh of electricity (56.3 TWh of which by HPPs) in Siberia. The Group believes that its key competitive advantage in terms of creating value through vertical integration lies in the close match of the electricity needs of the Metals segment and the electricity production of the Energy segment. Long-term power supply contracts secure a stable source of supply of electricity for the Metals segment’s aluminium smelters, while providing a benefit for the Energy segment through securing a base load of electricity demand. The Energy segment is the leading electricity generator in Siberia based on both installed electricity capacity and production output. Thus, the Metals and Energy segments are key players in the Siberian electricity market and are capable of influencing the balance of electricity supply and demand in the region. The Group’s strategies include the reinforcement of the synergies between its power and aluminium businesses, primarily through the coordination of long-term capital expenditures for core operations in Siberia.
Focus on cost control below inflation
The Group emphasises a cost discipline throughout the Energy and Metals segments’ operations. In addition to natural low cost base for the Group’s power generation business, due to the significant share of HPPs in its portfolio of generation assets, the Energy segment intends to continue to control cost increases by keeping them at a level below inflation in Russia, primarily by using a cost-allocation priority system, as well as implementing various cost optimisation measures such as ensuring a lean production system, reducing personnel costs, establishing a consolidated procurement service and centralising back-office functions (accounting, legal and IT). Historically, our Metals segment has been one of the lowest cost aluminium producers globally. The Metals segment seeks to maintain and improve its historical cost efficiency levels by reducing costs across all divisions, and optimising raw-materials sourcing, transport and logistics. To achieve this, the Metals segment intends to focus on customer demand, secure long-term power and transportation contracts and achieve full bauxite and nepheline self-sufficiency in the medium term.
Ensure continuous improvement of the Group's environmental performance
Currently, the Group’s power generation and aluminium production facilities have one of the lowest carbon footprints in the world. In 2016 the Metals segment had carbon emissions of primary aluminium production of 3.4 tonnes of CO2 equivalent per tonne of aluminium (internally verified calculation) as compared to 17.1 tonnes of CO2 equivalent per tonne of aluminium in India (the highest number) and 3.6 tonnes of CO2 equivalent per tonne of aluminium in South America (the lowest number). The Group continues to implement state-of-the-art environmental techniques and practices to further decrease its impact on environment. Energy segment’s companies constantly focus on efficiency to decrease the heat transmission losses. The Group aims to reduce greenhouse gas emissions by its CHPs in Siberia by 15% by 2020 as compared to 2014 level. In addition to implementing new technologies, while implementing modernisation programmes, the Metals segment introduces new developments to decrease emissions (such as closed water cycle). Going forward, the Group aims to comply with strict environmental targets relating to energy consumption, energy sources, greenhouse gas emissions, waste management and land rehabilitation. The Metals segment aims to cover 95% of aluminium production energy needs by using hydro power sources by 2025.
Reinforce the Group's leadership in the global aluminium industry by raising production efficiency and operating margins
The Metals segment’s business is focused on the production of primary aluminium in the form of standard LME tradable specification of commodity ingots and aluminium VAPs, including billets, rolling ingots, foundry alloys, wire rods and high-grade aluminium. VAPs typically generate additional margins as compared to standard aluminium commodity ingots. Aluminium VAPs constitute a significant share of the Metals segment’s portfolio (contributing 44% of the Metals segment’s total aluminium sales volumes, 47% of revenue from primary aluminium and alloys, and 39% of revenue from total sales in 2016). To further benefit from the higher margins generally available to businesses selling VAPs to end-customers and distributors (as compared to commodity businesses that provide primary aluminium to global traders), and to provide a better service to and technical support to customers, the Metals segment seeks to increase the share of VAPs in its production and sales mix to 60% by 2021, in particular, through increasing the VAP capacity and improving the effectiveness of its Siberian smelters.
In addition to increasing VAP sales, the Metals segment intends to increase sales in all of its key markets by purchasing and selling primary aluminium and aluminium alloys from producers and third parties seeking to achieve access to new end users, markets and geographies. In the particular context of the Russian market, the Metals segment seeks to cooperate with strategic partners and to take advantage of the Metals segment’s existing infrastructure and workforce (particularly at smelters where primary aluminium production has been discontinued) in order to develop downstream facilities, to stimulate local aluminium markets and to promote new applications of aluminium products.
Actively explore power industry development opportunities
The Group’s long-term strategy includes the development and implementation of support for new power generation and supply opportunities and projects. In this regard, the Group has participated in several pilot development projects, such as a pilot solar plant in Abakan (the Khakassia Region) and a solar panel development project with Moscow State University.
The Group’s strategy includes participating in diversified, low capital expenditure research and development projects with potential industrial and environmental applications. As an example, in 2013 the Group initiated a greenfield project for building a solar plant in Abakan, which was put into operation in December 2015, with installed capacity of 5.2 MW and annual electricity production of 6.5 MWh.
The Group also seeks to keep pace with certain initiatives that are expected to fundamentally change the power industry. For example, the Group intends to implement smart grid systems through distributed generation projects aimed at securing synergies in electricity supply and grid efficiency. The smart grids are modernised power grids that use communication systems and technologies to generate information on power production and consumption, which will allow the Group to increase the efficiency, reliability and sustainability of its power production and supply. In addition, certain distributed generation projects may be implemented in isolated zones. In contrast with the current unified electricity systems, which require the transmission of electricity over long distances, the distributed generation systems are decentralised, modular and flexible technologies, which are located close to the load they serve and have an installed electricity capacity of less than 10 MW. These systems can comprise multiple generation and storage components. Distributed generation and storage systems enable the collection of energy from many sources and can, therefore, improve security of supply.