Companies mining in Russia are working to make themselves more palatable to investors by spinning off non-Russian assets, an option available to a select few.

Russian companies' stock value plummeted as investors fled in the wake of the country's invasion of Ukraine, and they have been scrambling to find new ways to attract investor cash. Gold miner Polymetal International PLC and aluminum giant Rusal are both considering spinning off certain assets outside of Russia in a bid to appeal to more risk-wary investors. But the two companies may be among a select few with valuable non-Russian assets to unload, analysts and investors said.

"There is no company that wants bragging rights to being in support of the Putin war machine, whether it's from metals or energy directly, helping the war effort, or indirectly, propping up a totalitarian leader," said Jeffrey Sonnenfeld, senior associate dean of the Yale School of Management. "The reputation side of this is really bad."

Russia's invasion of Ukraine has led to an exodus of companies looking to cut ties with Russian operations and investments. In an April 28 analysis of about 600 companies, Sonnenfeld showed that the share price of companies that shed their Russian assets performed better than companies that maintained exposure. Between February 23 and April 8, the average market capitalization-weighted stock price of companies that completely withdrew from Russian operations rose 4%, but it fell 5.5% for those that maintained operations.

"We're finding that it has a crushing impact on shareholder value," Sonnenfeld said, noting that regulators in places such as the U.S. are increasingly scrutinizing companies with Russian investments. "This is considered a genuine financial risk."

Attracting investment

For Russian miners with international assets, carving out domestic and non-domestic operations into separate companies could make holding the latter assets acceptable again for wary investors, investment experts said.

"The situation in Ukraine has undoubtedly changed the risk profile of conducting business in Russia for Western firms who now face the uncertainty of sanctions, reprisals and potential reputational damage," Gianluca Ferrari said in an email. "We believe that companies who conduct business or own assets in Russia must work to address such risks, and one solution could theoretically be to spin off Russian operations or assets, distributing them directly to shareholders."

Ferrari is a founding partner of activist investor Clearway Capital, which has urged multinational oil and gas company TotalEnergies SE to exit Russia.

For environmental, social and governance-minded investors, spinoffs are a strategy "worth exploring," Ferrari said. The spinoff companies could become palatable for larger investment and sovereign wealth funds, many of which have sought to minimize exposure to Russian assets.

"This type of measure will help ease analysis on Russian companies with global exposure, reducing domestic risks," Javier Capapé said in an email. Capapé is director of the Sovereign Wealth Lab at IE University in Madrid, Spain.

Otherwise, only funds with deep ties to Russia and its market, such as Chinese and Qatari sovereign wealth funds, would maintain Russian partnerships, Capapé said. "We do not expect new [sovereign wealth funds to invest in] the Russian economy," Capapé said.

Rare option

Still, analysts said remarkably few Russian miners have significant international assets, suggesting that asset spinoffs will not become a broader trend.

"Looking at the Russian commodities companies, very few of them have substantive, major exposure outside of Russia," said Steven Tian, director of the Yale Chief Executive Leadership Institute, which is tracking companies cutting ties with Russia.

The spinoff of Polymetal assets makes the most sense, given how much of its profits come from operations in Kazakhstan, said John Tumazos, an analyst at John Tumazos Very Independent Research, who closely follows the country's gold and base metal sectors.

The gold miner said March 9 that 48% of its net earnings come from Kazakhstan-based gold mining operations, including the Kyzyl gold mine, and that Kazakhstan accounts for 40% of its gold-equivalent reserves. The Cyprus-based company also has headquarters in Russia, Kazakhstan and the U.K., and it is listed on the London and Moscow stock exchanges.

Among other Russian metal and mining companies, Rusal has also said it is weighing the possibility of carving out its non-Russian assets. The company is considering unloading the Aughinish alumina refinery in Ireland, The Irish Times said April 9. But the move would have less impact on the company than in the case of Polymetal, given that most of its revenue and core operations are located in Russia, analysts said.

"It's important not to lose sight of this fact," said Tian.

Russian companies mostly in Russia

Rusal's operations in Siberia account for 93% of its aluminum output, the main source of its revenue and profits, which are booming industrywide amid strong metal prices. The hydro-powered facilities are fed by Rusal-owned bauxite mines and alumina processing plants, many of which are located outside of Russia. These would likely be the target of any spinoff, though the Russian company would still depend on bauxite and alumina imports, presumably from these operations, to fuel its aluminum-making production centers in the country.

"Rusal's primary value involves about 4.25 million tonnes of hydro-based smelter capacity" that revolves around Russian operations, Tumazos said. The analyst also noted the push to spin off assets would likely lose momentum if "somehow the war and sanctions end."

Still, Russia could remain a tough sell to the mining sector in the longer term.

"Unless there is a change of government, there's not going to be a lot of smart investors taking on the risk of expropriation of assets, the risk of later-stage embargoes, the risk of employee well-being and the risk of reputations," Sonnenfeld said.

Tian pointed to Kinross Gold Corp.'s quick $680 million sale of its Russian assets after the invasion of Ukraine as a sign that few miners from outside Russia would take the chance to build mines in Russia in the near future. The deal included Kinross' Kupol gold mine, which accounted for a significant portion of its revenue.

"That tells you a lot about how companies are thinking about the reputational risk," Tian said. "It's a one-way exodus."

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