Russian United Company #Rusal, the world’s second largest aluminium producer, has started production at Guinean Dian-Dian bauxite deposit with the capacity of 3 million tons a year, the company announced on 19 June.

Dian-Dian is one of the largest bauxite deposits in the world with proven reserves of 564 million tons. The development license for the deposit belongs to UC Rusal since 2001. According to an agreement with the Guinean government, investments in the project will reach $1.7bn by 2019. The project includes construction of an alumina plant with the capacity of 1.2m tons a year, 25 kilometres of roads, a railroad and port infrastructure. In 2014, UC Rusal announced it would launch the first stage of the project – production of 3 million tons of bauxites – in 2016.

ACRA analyst Maxim Khudalov believes the company did not start this field development earlier due to surplus raw materials it had. “Now, the situation has changed. The company faces the risk of [raw material] deficit”, he said. On 6 April, U.S. Treasury introduced sanctions against Oleg #Deripaska and eight companies under his control, including UC Rusal. U.S. residents are not allowed to have business with sanctioned entities or own their securities. This ban does not apply to non-U.S. residents but they can come under sanctions for such deals. As a result, since April a lot of foreign companies one by one started to stop working with UC Rusal. For instance, RioTinto warned investors about force majeure risk for alumina supplies and announced uncertainties around further development of its Australian JV QueenslandAlumina with UC Rusal (Rusal owns 20% in this JV).

In 2017, UC Rusal produced 3.893 million tons of aluminum including 3.741 million tons (96%) at domestic sites. Aluminum is produced from alumina, and alumina is produced from bauxite, an ore mined from topsoil in various tropical and subtropical regions. On average, you can produce 1 ton of aluminum from 2 tons of alumina, Khudalov explained. Alumina production would also require 2 tons of bauxite. This mean the company needs about 7.5 million tons of alumina and nearly 15 million tons of bauxite to maintain its current production at Russian plants.

Meanwhile, there are no large bauxite deposits in Russia and UC Rusal has to get a lion’ share of raw materials from abroad.

Dian-Dian is a long-term project planned long ago, according to an investment banker who works with UC Rusal counterparties. “If it were in the initial stage, it would be difficult to say whether the company would be able to complete the project in the current situation”, he said. Now it appears that Dian-Dian guarantees security in terms of raw materials to UC Rusal, but Guinean investments started long time before sanctions and these are strategic investments targeting 100-percent self-sufficiency in raw materials for aluminum plants, he noted. He comments the situation around UC Rusal is too unstable. It is not clear yet how the U.S. Treasury will look at the Guinean project launch. But now the company cannot leave this project with all the investments already made.

Good deposits are very rare nowadays, says Andrey Tretelnikov, TKC Partners investment director. The company has to buy raw materials or mine them on its own. For sanction-hit UC Rusal, buying raw materials in the global market would be very expensive if possible at all, he stressed.

If we look at this news from the angle of geopolitics, this means a serious message to the market, adds Alexey Panin, a partner at UrusAdvisory consulting company. The company demonstrates it is ready to work despite the current environment.