Thank you, operator. Good day, everyone, and thank you for dialing to today's call. My name is Yulia, and on behalf of UC RUSAL, I would like to welcome you. Let me introduce the RUSAL team that is going to be presenting today. It's Vladislav Soloviev , our CEO, Oleg Mukhamedshin, Deputy CEO, Alexandra Buriko , CFO, Steve Hodgson, Director of Sales and Marketing, and Denis Nushtaev , Head of Research Department. This team is going to cover the major presentation, but then for the Q&A, we also have other management representatives. With this, I would like to pass over the word to Vladislav to kick off our today's presentation for the full year 2017 results with key highlights and developments. Vladislav, over to you.
Thank you, Yulia, and good day, everyone. Thank you again for attending this call. Today we have a fourth quarter and 2017 year results presentation. As usually, traditionally, we start with the key numbers. First of all, in terms of operating results, RUSAL continues to deliver a strong and stable performance. Our total aluminum sales last year increased by 3.6% or 3,995,000 tons. At the same time, we preserved positive momentum in increasing share of our value-added product sales. It's our strategy. Last year, the sales of value-added product reached 1,869,000 tons. The company, as per strategy, continues to grow the value-added product share in total sales, which now stands at 47%, compared with 44% in 2016. In this year, in 2018, we expect we would be able to reach 50%, even 52%, as we already mentioned in our operating update earlier this year.
Turning to the financial performance, we demonstrate another year of strong results. The continuous rise in aluminum price over 2017 demonstrated on this slide has translated into increase of RUSAL's revenue by 25%, up to $9.7 billion. At the same time, EBITDA increased by 42% to $2.12 billion, which is much stronger than top line growth, and as such, we delivered on EBITDA margin expansion, which now stand at 21.3% in comparison 18.7% in 2016. As at the end of 2017, net debt has declined by 9%, down to $7.6 billion, and we further reduced cost of debt to 5% on the whole portfolio. This achievement was recognized by credit rating agencies. Moody's Investors Service changed outlook to positive and Fitch Ratings upgraded us to BB-. We further paid our $300 million as dividends in November last year. Next slide.
You know, we already, I think, seen in the press our changes in the management. I would like to confirm that yesterday, the board has approved changes in the management that becomes effective from March 15. Yet we will preserve all our key strategic priorities and will make sure the transition is smooth. I personally have been appointed by the board as the president of the company and will cease to be the chief executive officer of the company will effect from 15th of March. I will remain an executive director of the company, and as the president of the company, I will be responsible for strategy and corporate development, external communication, public government relation, supervision of the investment and risk, succession planning, investor relations, research and development, and coordination of initiative on development and internal market.
And of course, also pleased to announce that Ms. Alexandra Buriko will become a CEO of RUSAL, effective also from March 15. As a CEO of the company, she will be responsible for the management of the production and supply chain across all divisions and financial management, corporate finance, supervising legal, human resource, and public relations function, and implementation of production system in the members of the group. Now let me switch on to the health and safety, slide six, and traditionally would like to give an update on the company's performance in the health and safety area, as it continues to be one of our strategic priorities.
In overall lost time accident frequency rate of RUSAL, what is shown on the chart, remains one of the lowest in the industry, and you can see with a further decline on the back of the 12 months last year performance. We keep implementing all of the early announced initiatives, which has allow us to further improve and standing under those metrics. Environmental achievements. Next slide, please. We would like to draw your attention to our strong commitment to the leading role we have taken in the fight to reduce greenhouse gas emissions in the aluminum industry and on the strategic goals to this end is to reduce direct specific greenhouse gas emissions by 15% as compared to the level of 2014 at our aluminum smelters. As you can see on the chart on this slide, we are making very good progress to achieve this target.
We have reduced emissions year-to-year in 2016 and throughout all fourth quarters of last year. We continue delivering on emission reductions. On the next slide, I already told you last time on our very important achievement, the launch of our lower carbon aluminum product brand, ALLOW, which we launched end of last year. RUSAL's aluminum has one of the lowest CO2 footprint in the industry, 3.1 ton of CO2 emissions per ton of aluminum versus 13.4 ton of CO2 emissions on average for the whole industry. Our target is to have those not higher than 2.7 tons of CO2 by ton of aluminum by 2025. That's our long-term target. Low CO2 aluminum is a key element of our value proposition to customers to achieve our growth strategy.
We engage with the entire value chain of all application sectors, automotive, consumer product packaging, buildings, to stimulate the demand for product with a low environmental footprint. We at the same time, offer new sales contracts with a letter of verification of carbon footprint for the smelter to origin of the metal delivered and the brand launch of our low CO2 aluminum ALLOW will accelerate the development and awareness among customers to support our development. RUSAL targets 25% global market share of the estimated 4 million-5 million tons certified sustainable and low carbon aluminum demand in 2021. Now, we are moving to the review of operating financial results, and I would like to pass word to Steve, who is going to open the section with sales dynamic and our value-added product progress. Over to you, Steve, please.
Thank you, Vladislav, and welcome everyone. Let me just start the operational results with an overview of the sales and price performance. Total aluminum sales in the fourth quarter increased by 3.3% quarter-on-quarter to 1 million tons. This incorporates value-added sales of 462,000 tons, which is a small decrease quarter-on-quarter, largely reflecting consumer stock adjustments at the end of the year. The fourth quarter average realized price increased to $2,263 a ton, an increase of 6.5%, with the alloy components of that reaching $2,102. That is very much supported by fundamentals in the market, which we will discuss later in the market segment. Regional premiums were very firm during the period, and they contributed to a commodity-grade premium of $82 a ton in the overall pricing, and our value-added product mix contributed an additional $169 a ton in the fourth quarter of the year.
In terms of sales distribution, our mix geographically remained largely unchanged, with Europe, including Turkey, taking around 45% of total sales. The remaining sales volume was sold equally between Russia and CIS, Asia, and America. Moving on to slide 11 and just continuing briefly the theme around value-added products. We have grown steadily over the years to 47% of total sales in 2017, and we have a target internally to extend that to 60% of total sales by 2021. To achieve this goal, we are investing in our cast house processes and this year, towards the end of last year, I beg your pardon, we did bring on some new capacity for products at both the Krasnoyarsk smelter that was launched to billet, and the Khakas smelter introduced a new casting alloy line for production to the automotive sector.
We also included some enhancements of wire rod production capacity at our Kandalaksha smelter. The value-added bridge on slide 11 just shows the specifics of the growth for 2017 versus 2016. Overall, a very positive picture on price and sales. With that, I will pass back to Alexandra Buriko who will comment on the other company financials.
Thank you, Steve, and good day, everybody. We are now on slide number 12, where we will briefly touch our revenue mix and dynamics. As you can see on this slide, our total revenue in the fourth quarter of 2017 was $2.7 billion. Revenue from aluminum sales increased over 10% quarter-on-quarter to $2.3 billion. Remaining revenues totaled to $482 million. The largest part, represented by revenue from alumina sales to third parties, was $233 million, which is an increase of 35% quarter-on-quarter, primarily due to an increase in the average sales price by 38% quarter-on-quarter. Revenues from sales of foil and other aluminum products was $91 million, and revenues from other sales increased by 12% to $158 million due to the higher sales of other materials. Let us look our segmented cash costs now on slide number 13.
I would like to remind you that in the beginning of 2017, we changed the presentation of aluminum segment cash costs to differentiate the performance of RUSAL own operations and sales of the third-party products. We keep on improving this methodology, and we are now reporting our aluminum cash costs, excluding the impact of aluminum resales. In the fourth quarter of 2017, the production cash cost of aluminum increased quarter-on-quarter to $1,602 per ton, largely as a result of an increase in raw material costs, ruble appreciation, and seasonal uptick in energy costs. Let's talk about energy cost dynamics on slide number 14, please. In the fourth quarter of 2017, the average energy purchase price for UC RUSAL stood at $0.034 kilowatt hour.
Both the appreciation in day-ahead market pricing and capacity component increases, which were observed during the fourth quarter, were driven by seasonal factors. Also, the Federal Agency for Water Resources maintained dam water flow level close to the minimal level during the fourth quarter 2017, which resulted in an increase in the share of electricity supplied by CHP versus hydropower stations and subsequent energy price appreciation, which was seen in the day-ahead market pricing. Let's now look at slide number 15, EBITDA. On this slide, we traditionally summarize the factors that contribute to EBITDA dynamics. As you can see from the top chart, the aluminum component growth in aluminum price quarter-on-quarter, on the back of favorable aluminum market momentum and aluminum sales volume increase, are offsetting change in cash costs and other components.
All in all, you can see that the fourth quarter EBITDA increased to $586 million, +6.7% quarter-on-quarter. Our EBITDA margin stood at the level of 21%, which is one of the highest in the industry. In terms of the segment impact, aluminum segment remains the largest contributor to the group EBITDA. Let's now look at slide number 16, where we present the result. The positive free cash flow remains the key priority of our financial policy. You can see from the left bridge that in 2017, RUSAL generated a record of $993 million of free cash flow. As part of our core business strong cash generation in 2017, we received $806 million of dividends from long-term investments. Among one of the major factors that influenced free cash flow generation throughout 2017 was capital expenditures. Next two slides will help us better understand the numbers behind RUSAL's CapEx.
Let's move to slide number 17. On this slide, we provided an overview of our existing CapEx projects. In the fourth quarter of 2017, our total CapEx was $295 million, including maintenance of $163 million. Our focus in terms of the projects remained relatively unchanged since the beginning of the year, and all projects are progressing very well. However, on the next slide, we would like to give you more context regarding our spending in 2017 and increase in our capital expenditures. Let's move to slide number 18, please. In 2017, the company directed cash flow from operations to its core strategic goals. Firstly, sustaining the first quartile cash costs via operational improvements and increase of self-sufficiency in anode production capacity.
That includes the first stage of Taishet Anode Plant and Volgograd Aluminium Smelter , upgrade of existing alumina facilities, and expansion of bauxite operations with investment into Dian-Dian. Secondly, priority construction works for the first line of Taishet Aluminum Smelter took place in 2017. Finally, product development and increase in our value-added product portfolio. New large diameter billet line at Krasnoyarsk Smelter and new foundry alloys property line at Khakass Smelter. We would keep investing in those strategic priorities through 2018. With this, I would like to pass the word to Oleg Mukhamedshin, please. Oleg? Okay. Thank you. Let's continue with the presentation. Elena Ivanova will take you through to slide number 20.
Thank you, Alexandra. Good afternoon, everyone. Good morning. At the end of 2017, gross debt declined to $8.5 billion, including settlements during the last year totaled to around $400 million. RUSAL made settlements of the PXF facility, roughly about $2.6 billion, $626 million under the bilateral facilities with various Russian banks, and then that deal repo facility of roughly $140 million, and ruble bonds of about $100 million, and others. In addition, RUSAL raised $1.1 billion through two tranches of Eurobonds, about $200 million through Panda bond issuance, and $1.7 billion via new PXF refinancing facility, and others. The reduction of gross debt translated into reduction of the net debt year-on-year from $8.4 billion down to $7.6 billion. Our achievements were recognized by credit rating agencies, as already been mentioned. Moody's Investors Service changed their outlook to positive. Fitch Ratings upgraded us to BB-.
On slide 21. On this slide, you can see the updated maturity profile and key stats for the debt portfolio. As a reminder, we have achieved multiple improvements to our debt portfolio by actively pursuing capital markets opportunities and engaging with our strategic financial partners. Among the 2017 versus 2016, we can list the following. The more diversified capital structure. The company has established its name on Eurobond markets, including the Chinese domestic bond markets. Public debt increased from 2% to 17%, and was represented by wide international investor universe. The final maturity was extended to 2024 versus 2021, and the average cost of debt was changed from around 5.7% down to roughly 5%. The expected total annual savings amounted to about $55 million.
Lastly, last stringent covenant package with the application of new methodology of leverage calculation to factor Norilsk Nickel stake value, which is applicable to all facilities, including public debt. In December 2017, the margin, PXF, was reduced from 3% down to 2.5%, and cash and cash equivalents grew to roughly $800 million at the end of 2017, up from $500 million in the beginning of the year. The decrease of interest expense and optimization of capital structure remain the key objective for 2018. In the end of January, beginning of February, the company successfully executed placement of the third tranche of Eurobond with the following parameters: $500 million, five years, unsecured, with a coupon rate of 4.85% annual. The proceeds were applied for partial refinancing of the existing debt.
In January 2018, the company entered into bilateral facility agreement with Nordea Bank, with total amount of $ 200 million, maturity of three years, unsecured, and an interest rate of 2.4% over one month LIBOR. The proceeds are applied for the partial prepayment of the existing debt similar to the proceeds of Eurobond. As at the end of December last year, the leverage ratio on the Eurobonds stands at the level of 2.9x in current test only, just would like to remind you. It differs from the leverage ratio introduced by PXF and other bilateral facility, which stands at the level of 1.6x. Let's move to the next slide.
Elena, it's Oleg here.
I'll pass it on to Oleg Mukhamedshin, please.
Yes. Thank you for your presentation. I think we will have a separate discussion on Norilsk Nickel, so I suggest we better pass over to Steve Hodgson to speak about the market developments, and then we'll come back on Norilsk Nickel during the Q&A session.
Oleg, thanks very much. Let me just walk through some of the features of the market as we see those features today on slide 24. We estimate that global aluminum demand rose by approximately 6% in 2017 to 64 million tons, resulting in a deficit in the market of around 650,000 tons. Looking forward, we anticipate that deficit to increase to around 2 million tons out to 2021. This is based on our assessment of global aluminum demand growth of that period of around 4%-5%, and an assessment that we'll see relatively modest additions to production capacity linked largely to known projects outside China and possible restarts of capacity that was not idled, it was disrupted last year in the Middle East. So relatively modest supply growth, very strong demand growth.
Looking at China, which Denis will comment on in more detail, we anticipate the surplus in China will reduce and therefore have limited ability to cover the deficit in non-China markets. Just looking very quickly at the demand growth that we see and the features of the regional markets, just starting with North America. Primary aluminum demand in North America rose by approximately 2.6% in 2017, driven largely by very positive market sentiment, equity markets, and low unemployment. The U.S. manufacturing activity enjoyed a very good period, accelerating through 2017, with PMIs hitting several multi-year peaks. Construction had a great year with housing starts rising 2.4% in the period. Despite a contraction of 3.9% in motor vehicle production, aluminum demand from the sector did still rise strongly as a consequence of higher aluminum content of vehicles.
We see evidence of that in flat roll product shipments to the sector growing by 14% in 2017. Just looking at Europe next, and as was flagged in previous presentations throughout 2017, the demand growth in Europe continues to pick up a pace. We estimate demand in 2017 to have grown by approximately 3.2%, with very strong support coming through from residential construction in the building sheet and extrusion sectors. European manufacturing activity reported a very sharp increase in new orders. Motor vehicle activity, although relatively flat, had the same features as North America in that a rising aluminum content is continuing to drive aluminum consumption in the sector, despite the relatively flat production figures of vehicles. Slide 27, looking at Asia now. The demand growth in Asia was very healthy through 2017, reaching 3.4% year-on-year.
We estimate that all of the economies in Asia performed extremely well. Japan in particular is worth a mention because its demand is relatively high compared to the rest. Very good demand in flat roll products and extrusions, and likewise, demand for industrial machinery growing very strongly through to the end of the year. Automotive production throughout the region grew around about 2%, led by Japan, Thailand, and Indonesia. We're starting to see a little bit of pickup in demand in Japan, stimulated by the Tokyo Olympics as well. We just finish on this section by reflecting on Russia and CIS, where the Russian market is developing extremely well. We've seen aluminum demand in Russia and CIS growing by approximately 11% year-on-year in 2017.
This is backed up by some very solid PMI results with indices above 50 points, growing to 52 points in December, which is backed up by very good segment demand across all the main areas. The light vehicle market grew 14% in December and by 12% in total for the 12 months to 2017. The construction side is lagging a little, however, we expect to see that improve during 2018 as programs are introduced to stimulate renovation and also decrease mortgage rates. Aluminum cable production is also growing in Russia, which is adding considerably to the demand profile. With that, I will pass the floor to Denis Nushtaev, who will spend a bit of time discussing developments in China.
Thank you, Steve, and hello, everyone. Just very briefly discussing situation in China. China is still very crucial on global balancing, and what we want to say is that China is very strongly committed to all supply side reforms, which was started earlier. As you see that at the end of 2007, operating capacity in China dropped to 35.9 million tons. Roughly 2.7 million tons was closed. The government has identified 4.5 million tons of illegal capacity, which was closed, and we don't expect this capacity to be on stream again. As a result of this, Chinese annualized production of aluminum dropped below 35 million tons by end of this year from its peak of roughly 38 million tons, which is extremely positive for balancing global supply-demand balance. As a result, we're expecting Chinese balance to turn into balancing situation this year from surplus last year.
This mainly as a result, as I mentioned, lower supply in China and high demand. At the same time, we're also expecting lower Chinese semis exports as a result of this and also as a result of anti-dumping campaign, which also can be discussed later on. Going forward, we definitely seeing Chinese market to be more balanced, which is strongly positive for strong deficit markets outside of China. Moving on the next slide. As a result of very high cost pressure in China still persisting, we're seeing that not only carbon products, which we were discussing still in uplifting mode, we also see that strong growth in thermal coal prices in China, which is today extremely high due to cap on coal burning in many provinces and anti-pollution campaign.
As a result of still lower shipment prices in China and with the current move up of production cost in China, roughly 50% of Chinese production is loss-making today, which is extremely hard pressure on further supply growth in China. Even given still high inventories in China, we're definitely expecting these inventories to drop in traditionally strong demand season for second and third quarters as also as a matter of pressure from supply cuts in China. This is briefly discussion on China, and by this, I'm passing back to Steve.
Thank you, Denis. I will just complete my summary with our views on the impact of electric vehicles on the demand for aluminum. A question we get quite a lot, so we thought we would include a couple of slides just to finish the market segment. We forecast global battery, electric and plug-in hybrids and full hybrid vehicle sales to reach 15% of total new car sales by 2025 and to approximately 33% by 2030. That accounts for around 41 million cars by 2030, quite a significant growth. What is driving that growth? It is very much a consequence of the tighter emissions regulations in all regions, driven to an extent by California and European countries. This is resulting in the necessity for all OEMs to include electric vehicles in their fleets as a means of driving down overall fleet emissions to meet the targets.
In general, we expect overall aluminum demand across all automotive segments to grow from around 17 million tons at the present time to 39 million tons by 2030. You can see on the chart in slide 31 that electric vehicles account for around 12 million tons of growth over that period, so quite significant. Then just completing this analysis on slide 32, my main message that I would like to leave you with is that the EV development is largely positive for aluminum demand. However, results are resulting in different outcomes for each class of vehicle. In general, aluminum usage will rise in electric vehicles with utilization of primary aluminum extrusions and rolled products significantly higher than we see in the internal combustion engine vehicles of today.
However, to counter that, we do anticipate lower usage of scrap and secondary applications as there is a shift away from secondary metal required for engines and vehicle powertrains. So there is a lot of detail on those two slides. I will not go into it any more than that, other than to say that we do see an overwhelmingly positive development for primary aluminum demand. With that, I will give the word back to Vladislav for the management outlook.
Yeah. Thank you very much, Steve. Thank you, team. To conclude our presentation, I would like to give you a few guidelines for 2018 and looking beyond. As you can see that our core priorities and strategic objectives have not changed, and we see 2018 as one of the steps to achieving our longer-term plans. In this year, we plan to maintain stable production from own operation assets of 3.8 million tons. At the same time, we anticipate production to reach up to 4.4 million tons in 2021, including the asset from the BEMO and Taishet smelter. As for our VAP strategy, we forecast to maintain share of value-added product production at the level of approximately 50% of product mix and expect to reach up to 2.5 million tons in 2020.
We recognize what some of the macro factors indicate for soda cost inflation, yet we feel confident that in this environment of aluminum prices and predominantly a big softening of ruble fixed rate, we would be able to maintain our industry-leading margins. Talking about capital allocation, we would like to note that RUSAL will strive to maintain capital discipline, continuing funding of strategic projects and pay regular dividends to shareholders. As for 2018, it is important to mention that we expect CapEx on core operation approximately $800 million-$900 million. Finally, also our plans that by 2025, our aluminum smelters purchase at least 95% of electricity from hydroelectric power plants and other carbon-free power sources. With this, thank you very much for your attention, and now we are happy to address all your questions, please.
Operator, it's Yulia Chekunaeva speaking. Can you once again remind the participants of the call how to ask a question, and then as soon as the queue is formed, we would be happy to take the questions.
We can take our first question from Daniel Major from UBS. Please go ahead.
Hi, Dan from UBS. Few questions. I guess firstly on the core business and cost outlook, I think a number of your competitors have highlighted, obviously, rising cost pressures from things like carbon anodes and caustic soda, particularly in the fourth quarter. Can you give us a sense of where you expect costs to progress, particularly in the first quarter? We're starting to see some of those pressures on cost ease, a sense of time lags when you realize those costs and where we expect unit costs to progress in the first quarter of the year. Second question, I guess slightly related to the shareholding changes, but I won't go into too much detail on it because I assume you won't be able to comment too much. But can you give us a reminder of your available debt facilities?
Should you or RUSAL be required to acquire the additional stake from Crispian, can you give us a sense of the debt facilities available? The third question, just a bit of clarity on the fourth quarter CapEx you reported. I think you, looking at the divisional information, reported $131 million from aluminum, $44 million in alumina, but $295 million across the group. Can you just explain where that additional CapEx went if it was not included in those two divisions? Thanks.
Let me start with the discussion about raw material market and how we see the raw material market in the first quarter. Then the other questions maybe Alexandra and Oleg will address. You are totally right. The last year was quite difficult in terms of the pressure from the raw materials side. We saw some increase in the carbon materials and also in the caustic soda, mainly from China. But I could say that in December and January, we see that the trend is over, and now we see even some softening in price. We see some declining, especially for the caustic soda and also in the carbon materials. That is why we see with the first quarter and further, we will have a low pressure in our cost and even some small reduction. That is how we see the market now. Sasha, you can comment more about unit cost.
Thanks, Vladislav. I think it pretty much covers it. The spike and the pressure we felt since pretty much the second quarter of 2017 and the spike towards the end of the year, but we do not expect any further increase of pressures on the cost side. So we expect rather some stabilization on that front. I think the third question was on capital expenditures and what was not included in the allocation was some capitalized interest and similar costs that were not allocated to a specific segment. We will do it more precisely next time to avoid any confusion. Finally, the second question on available credit facilities. In short, basically, we have sufficient credit facilities and sufficient capacity should we need to indeed proceed with the acquisition of Crispian's stake. I don't know if Oleg wants to make any further comments on that.
No, I think that's it.
Mm-hmm.
Okay. Thank you. Can I just follow just to be sure now? What is the actual amount of available credit facilities you have currently?
Well, it's up to $500 million.
Okay. So you got $500 million of available lines. If you were to acquire the Crispian stake, it's about $700 million, you would acquire and need some additional debt facilities. Is that correct?
No, I think we have—
Don't forget that we have cash available as well. Our cash at the end of the year was $831 million. So we have internal resources as well as available credit facilities.
Okay. The $500 is the credit facility.
Thank you, Dan. I think in the interest of time, we need to move to the next question.
Sure.
Thank you. Operator, can we get the next question, please?
We can now take our next question from Sergey Donskoy, from Société Générale . Please go ahead.
Yes, thank you. I have several questions. I will start with two on Norilsk Nickel. One is regarding today's announcement about a mandate that you are requesting from shareholders. I have not seen any mention in it of a potential buyout of minorities in case if the shootout is started. What are your thoughts about it? Suppose that you go ahead and you buy Interros' stake, you do not think that you will have also be required to offer same terms to minorities? That is my first question. Second question, have you already had any discussions with banks about financing? Again, what are your thoughts about it, where you will stand in terms of your credit metrics? What implications this may have for your dividend policy? Thank you. I have also two other questions on other areas. Thank you.
I think on the minority, I will address the MTO question from Sergey. Sergey, we will definitely strictly follow the law, and if an offer is required, that is required. We may be considering structuring the deal in a way that no offer may be required. I will put it this way.
Okay.
We will definitely follow law strictly.
Uh-huh. You do not think that out of precaution, it may be wiser to include those minorities in the mandate?
For the minorities, we would have more time. The mandate is required for the flexibility issue, right? If shootout is triggered, we have to be flexible because the terms under the shootout provisions is very tight, right? Whenever we know the exact structure of this transaction, we would be able to assess the necessity of the mandatory offer, and we would have sufficient time to seek the approval of the shareholders to approve such an offer. Because that would basically be in our hands, right? We will control the time and that situation. The mandate is necessary for the flexibility because of the very tight terms of the shootout provision.
Understood. The second part of my question, if possible.
Well, Sergey, I think obviously we do have discussions with our financing partners, but we are not in a position to disclose any details at this stage.
Okay, understood. Thank you for that then. If possible, I have two other questions on current operations. CapEx, your guidance for 2018, I think I may be not the only person a bit surprised to see such a high number. Is this the new normal that we should expect to see in 2019 and onwards? Why has actually CapEx increased so much, if it is so, over the last couple of years? I think in ruble terms, it is now roughly three times higher than it was in 2011, whereas ruble inflation over this period was roughly 50%-60% only. Second question, just if you could remind me, those increases in capacity costs that you incurred in Q3 and Q4 What they were related to. I think that in a day-a head market, volatility is normal, but capacity prices, in my understanding, they are set once for a year. Thank you.
Thank you, Sergey. Let me start. Firstly, on capital expenditures. I think we mentioned several times before that we are looking to expedite some of our core development projects. That includes the second stage of Taishet factory, first of all, it is a very capital-intensive project. Also Dian-Dian, as well as several other projects that are included in the development CapEx. If you compare it to several years back, for example, 2012- 2013, we did very little in terms of development CapEx. We were limited by a very high level of debt and by the existing covenants, whereas now we are focusing on further development of the company and self-sufficiency in raw materials, as well as increasing the share of value-added products. While the absolute numbers have increased, we have not diverted it to any other streams other than what we have previously discussed with you.
The only reason really is expedition of the project so we can actually start getting the benefit of lower costs earlier than in 2020- 2021. Is it the new normal? We expect that there will be slightly elevated levels of CapEx in 2018 and 2019 before we complete the key projects. Further on, it will return to normalized levels of $500 million-$600 million. I hope that covers it on the CapEx front. On your question on—
Sasha, let me add a little bit about this. You covered absolutely right. I just try to remind you, if you look retrospectively on RUSAL CapEx, not just 2011, but 2006- 2007 in dollar terms, the normal current level of the CapEx was $700 million-$800 million, without or with a small number of developing projects. That is why Alexandra is absolutely right saying because in 2018- 2019, we have number of developing projects like the Friguia, Dian-Dian, et cetera. We are having some short, small increase, but normal for RUSAL was always the $700 million-$800 million. It is normal if you look retrospectively for 20 years, for example. Thank you.
Okay. I suggest we move to the next question.
The second part of the question was on capacity cost. Just a brief explanation on capacity cost. The price per se remains the same as it is set, but the regulator may increase or decrease the coefficient for reservation. So the quantity, the amount of capacity that our smelters have to pay for may fluctuate from period to period, depending on the regulator. So the cost per one unit remains the same, but effectively in the tariff, it increases from period to period. It is a seasonal measure. Okay?
We now for next question from Nina Dergunova from Goldman Sachs. Please go ahead.
Good afternoon. Thank you for the presentation. I have two short questions. One relates to the Norilsk Nickel situation. What would be your target cash use in case of monetization of Norilsk Nickel stake? The second question is a follow-up on the CapEx discussion that you had previously with Sergey. In your CapEx guidance, you mentioned growth projects that come on top of that $800 million-$900 million range. Could you please give examples of these projects and any indication of timelines for making decisions on this? Thank you.
Well, I can address the first question. I think it's for our shareholders to decide how to use the proceeds in case of monetization. Obviously, the company have two options, to reduce the overall debt and to pay dividends. But again, it's just a theoretical discussion at this stage. In terms of CapEx, I think Alexandra can comment.
Yeah. Thanks, Oleg. Nina, I think you're talking about perhaps the projects that are off balance sheet, and this includes BEMO project, and it will include Taishet project after the financial arrangements and the shareholding arrangements are put in place with RusHydro. So those are the projects that will be off balance sheet on top of the current CapEx guidance.
Mm-hmm. Understood. Thank you, Alexandra. As a follow-up on your Taishet comment, is there any timeline when you expect the decision to happen?
We expect to complete everything and sign all the documentation in the first half of 2018.
Mm-hmm. Understood. Thank you.
We can now take the next question—
Next question, please.
—from Boris [Samsonov] from VTB Capital. Please go ahead.
Hello. It's Boris from VTB Capital. Thank you for the presentation and congratulations for the management team on your appointments. Actually, I have three questions, please. First, a follow-up on CapEx guidance for 2018. Could you please remind what is the maintenance CapEx guidance and what is sort of a long-term average maintenance CapEx? Which the management sees. Second question is a follow-up, actually, on debt capacity. What is actually your ceiling and maximum leverage ratio at which you could attract new debt? Third question is on the mandate for the board of directors for potential shootouts. Just to understand the mechanics, does it require board of directors approval, or it would require only EGM approval? Thanks.
Maybe we can start from your last question and ask [Maxim] to address it.
Okay, sure. The mechanics is very simple. We have requested for an EGM approval to issue a mandate to the board to react quickly if the shootout is triggered, or to trigger a shootout if the board decides to trigger a shootout. Basically, in terms of the decision-making, we had a board of director yesterday, which convened the EGM. We still need the circular to be approved first by the regulator and then by the board of the directors again. Then we see the EGM in another 21 days. If the shareholders approve and issue the mandate, then it would be up for the board of directors to decide. But effectively, because this decision is a disposal or substantial acquisition, we otherwise have this roughly five weeks for the EGM, which we converted into essentially five days to call the board of directors and to react promptly.
Did I address the question?
Yeah, thanks. Very clear.
Shall we then take a question from Irina Lapshina from Sberbank?
Operator, wait a second because I think that we have two more questions from Boris that were related to operational.
Yeah. So the maintenance CapEx for 2018, the guidance, please, and the long-term target for the maintenance CapEx beyond 2018 and the maximum leverage ratio.
Yeah. Okay, let's start with the maintenance CapEx. Maintenance CapEx will be between $400 million and $450 million on an ongoing basis. That's our general guidance for the next couple of years. On the leverage ratio, maybe Oleg or Elena can pick up that.
Well, I think you are all quite aware of our covenants, so I would not go further.
Okay, thanks.
It was another question from Irina, I think.
Shall we go to the next question, operator?
Please unmute your line, sir.
[Dominic], please unmute your line.
Oh, hello. Quick question again, coming back to CapEx. Could you just maybe give us a bit more of a breakdown of the components of the development CapEx? So maintenance $400 million-$450 million. Could you just help us understand a little bit better what the additional development CapEx will be?
I think you can use slide 18 of the presentation for the guidance. It provides you with quite a lot of detail. As we said, a very significant project is Dian-Dian. Dian-Dian is very capital intensive. in 2017, we've also completed a number of projects on alumina capacities expansion in Russia and Ukraine. Those projects will be finalized early this year. Anode factories are the most significant project for the next couple of years. In particular, Taishet Anode Plant and Volgograd Aluminium Smelter we are completing in 2018. Of course, value-added product capacities expansions at various smelters. Of course, it's important to remember that in 2017, we financed the construction of Taishet aluminum smelter to a certain extent from our own balance sheet.
Just to remind you, we expect that we will put together arrangements in the first half of 2018, and the continuation of construction will be financed off balance sheet through project finance.
Thanks.
Thank you. Operator, shall we move to the next question, please?
Next question is from Irina Lapshina from Sberbank. Please go ahead.
Hello. Thank you very much for this opportunity to ask the question. I have a few on the risk. First of all, on the mandate which was published today. On page eight, you provide some explanation of how you determine the maximum purchase price, which is $32 per GDR. There are a few points, and I would like you to ask any kind of explanation on points C, D, and E. Basically, you mentioned that you have your own view on the proper development of Norilsk Nickel, and you see some synergies. Could you explain to us what would you change, and what sort of upside can we see if you buy this stake and consolidate control over Norilsk Nickel? I will have a few other questions. If I may, I will ask them after.
Yeah. Thank you, Irina. I think it is a bit premature at this stage to go in some substantive details. In brief, we do have quite different views on the operational management and CapEx with the current president and managing partner. We believe that there is a substantial value in further cost controls in the company, in implementing production systems, as well as I said, certain CapEx projects which we believe, the company is planning to pursue are not that value creative as the current managing partner views it. Right? I would say it is more in operational issues. We have discussed at the board yesterday that if at any point the board makes a decision to pursue the purchase track, we would have, together with this decision, to table at least a high level strategy to the board together with a proposal of such a decision.
We would report then. I think that's a bit integrated detail. It's a bit premature at this point.
Okay. Understood. Thank you very much. One more question. On page four, you described the parties that could acquire the stake and say that it could be the company or any other person designated by the company. Do I understand correctly that you may invite partners, so the stake can be split between different parties? If it is the case, who is going to borrow the money? Do you understand correctly that if it is the case, you may consider sustaining high dividend payouts in Norilsk Nickel after the acquisition? Sorry, the question is pretty direct. I understand that it may be difficult to answer.
It is. But I would say that we are considering different options as I answered Sergey 15 minutes ago. We are considering different options, and that's why mandate is quite broad to allow us to structure the deal in the most efficient way. Yes, we may consider inviting partners. That's why we are referring to another persons which may be designated. Again, this is all relevant for the purchase transaction, because for the disposal, it's just a straight sale. But for a purchase transaction, we will come back to that when and if we pursue this purchase track. I think, again, it's a bit too premature. But your indication or what you derive from that language is correct.
Okay. Understood. My last question will be on the final dividends for 2017 of Norilsk Nickel. As I understand, the court hearings are still on the way, but at the same time, the dividends were supposed to be announced probably in March, April, and there is an annual general meeting coming where they should be approved. What is your view on the court timelines and the final dividends for Norilsk Nickel? How do you think they will be defined based on the current shareholder agreement or in other ways?
[Maxim], are you still with us?
Oh, sorry. I didn't unmute. We expect that the dividends will be defined in accordance with the current agreement and in accordance with the dividend formula in the agreement, with reference to the net debt ratio at the end of the year. We believe that this net debt ratio was inflated, artificially inflated, but at least the agreement provides for the formula, and we would be discussing with the managing partner the correctness of the net debt ratio separately.
Okay. And just follow up on the timelines. Do you think that the court hearing can affect the timelines of dividend announcements? Can it be delayed or not really?
Sorry. No, I don't think it affects that in any way. Because the dividends have to be approved on the annual shareholders meeting, and the annual shareholders meeting is strictly regulated in terms of its timing.
Okay, thank you very much. Thank you. Bye.
Thank you, Irina. Operator, we are ready for our next question.
Next question is from Boris [Ziltser] from VTB Capital.
Hello. Thanks. I have a question on your ALSCON smelter in Nigeria. Referring to your agreement with the government, when do you expect the smelter to be commissioned, whether the commission CapEx is included into your capital guidance for 2018, and what would be the target capacity? Thanks.
Hello. I will address this question. First of all, we do not have a target or any predicted time when we are going to start to commission. Now we are doing some technological audit. It takes at least three, four months this year, then we will consider. It depends on the situation on the market. That is why we do not have any urgent plans for 2018 to start production anything on this smelter. When we consider the economic situation and results of technological audit, we will make a decision. We are going to the full board, and we will see whether it is economically viable or not. I think we will start first with supplying the electricity only, not the aluminum, to the grid, and we will start to earn money and then maybe using this money, we will start making the pot relining, and it takes one or two years.
That is not urgent, definitely, and we definitely need the board approval for that. That is why it is not a 2018 issue. Thank you.
Okay, thank you.
Thank you. We are ready for our next question, operator.
Next question is from Sergey Donskoy from Société Générale .
Yes. Thank you. I have actually one more question on Norilsk Nickel. I wonder if the shareholder agreement restricts you in any way in your ability to invite partners for a buyout. I wonder if, for instance, Interros can challenge any consortium, depending on how it is structured. Second question, just to clarify on CapEx for 2018. You are saying it doesn't include CapEx for growth projects. Does it mean that the actual number can be higher than that? What growth projects actually do you mean? Thank you.
Yeah, let me address the first question on Norilsk. I would put it this way, that, Sergey, of course, we are very carefully considering our options, and we believe that the structure, if we pursue a purchase option, would be strictly in conformance with the agreement.
Understood. Thank you.
On your CapEx question, the short answer is no. This guidance that we provide is inclusive of all the growth projects that we've planned to finance from our balance sheet.
Okay. When you answered my previous question on CapEx, you mentioned in passing Taishet, but I understand that, as you say, you are not going to finance Taishet from your balance sheet this year. Is this correct?
There are two Taishet projects, Sergey. Yes.
Oh, I see. Yeah. Of course. Sure.
One is the anode factory that we do finance from our balance sheet, and the smelter that is a part of the joint venture, or will be part of the joint venture with RusHydro and [RUSAL] . Thank you.
Yeah. My error. Thank you.
Operator, next question, please.
Next question comes from Alex Collins from Barclays. Please go ahead.
Hi. Thanks for the presentation, and congratulations on the operational performance. I just want to follow up again on the points of the shootout, as I am not really sure that I follow. From my understanding, if you intend to initiate this shootout option, in the transaction, you need to be prepared to be both a buyer and a seller of a 30% stake in Norilsk. If you are required to acquire, this could cost $10 billion or more. It seems that the financing needs to be in place prior to the shootout, as you need to respond quickly if you are the ones that need to purchase. At the same time, if you are above your incurrence covenants on your Eurobond debt, you will not be able to issue new debt without paying back old debt.
I'm just finding it difficult to understand how you can participate in this shootout transaction.
I think I've answered that question when I was answering Sergey Donskoy question, is that we are considering our options and we are considering different structures, which may include inviting partners. I'm afraid that at this stage, I can't go in any further detail. But does that answer your question? At least, you know, partially.
Will it be some sort of off-balance sheet transaction?
It can be some sort of a consortium, I can put it this way.
Okay, understood. I have one small follow-up. That is one potential scenario. Another scenario is, in some permutation, Crispian sells down their stake, but the remaining shareholders stay. Would the shareholder agreement remain in this case?
Yes. The shareholder agreement will only terminate with respect to Crispian if Crispian sells down below 1%, but the shareholder between RUSAL and Whiteleave, which is the [Interros] entity, would remain intact until 1st of January 2023.
Okay, understood. Many thanks.
Maybe we can pick up—
Next question, please.
—one last question.
Next question comes from Daniel Major from UBS. Please go ahead.
Hi there. Very quick follow-up for me. How much debt, what's the current debt balance at RUSAL that's secured against a stake in Norilsk?
Currently, $4.2 billion.
Thank you.
Okay, thank you very much for this conference call. We are happy to address all other questions you may have. Please contact our IR department, and we are happy to provide more information.