Potash Sinkhole Or Kremlin Plot? - Uralkali Undermined
By John Helmer in Moscow
minesite.com
The failure of high Russian government officials to decide whether to create a powerful new potash and phosphate mining monopoly continues to delay the release of the results of a commission of inquiry into the collapse of a potash mine in the central Urals region town of Berezniki two years ago. The longer the delay, the firmer potash prices are likely to become in the bellwether Asian markets, and the less likely Uralkali's majority shareholder, Dmitry Rybolovlev, will keep his control.
Mine-1, owned and operated by Uralkali, was forced to halt operations, and was abandoned, after a massive sinkhole opened at the surface in October 2006. Initial government investigations ruled that the loss of the mine and its potash reserves was force majeure. In the geology of potash deposits, such events are not unusual, and have occurred elsewhere in the potash mining world. However, over the past ten weeks, the incident has been exploited by officials in Moscow seeking to engineer a takeover of the Moscow and London-listed Uralkali.
Uralkali and Silvinit are the two principal producers of Russian potash for export. Although linked by a minority cross-shareholding, the two companies trade independently of one another. Uralkali is the joint owner of Belarusian Potash Corporation (BPC) with Belaruskali, the Belarus potash exporter. Together, they control 25 per cent of the world's potash production, supplying about 12 million tonnes of potash to the international market per annum. As a result, BPC has become the swing producer and market-setter for the global potash fertilizer trade, taking over from Canpotec, which trades for the North American potash producers, principally, Potash Corporation, Mosaic, and Agrium.
According to Uralkali 40 per cent of its exports went to China in 2007. But in 2008, this was cut to 15 per cent as the company sought to take advantage of higher spot and short-term contract prices in the south-east Asian, Indian, and US markets. For 2009, Chinese importers have been delaying contract commitments on imports of potash, as they hold out for lower prices. Uralkali has responded by reducing supply, cutting about 500,000 tonnes from production in the fourth quarter of 2008, and planning for a first-quarter cut of between 20 per cent and 30 per cent from an annual capacity of about 5.5 million tonnes.
Meanwhile, Uralkali is coming under pressure of a different sort. Rumours in Moscow of a takeover of the company, which is tightly controlled by Geneva-based Rybolovlev, has added to the downward pressure on Uralkali's share price. At peak, in June 2008, Uralkali was valued at US$34.3 billion. It ended the year's trading on 31st December with a market capitalization of US$3.8 billion, but has edged modestly upward since then. The free-float in Uralkali's shares amounts to about 30 per cent.
As at the start of the two-week Russian New Year holiday on 31st December, there had been no announcement from the Ministry of Natural Resources of any ruling from the special commission which was ordered on 29th October to reassess Uralkali's liability for the subsidence at Mine-1, and the loss of the associated potash reserves. The ruling had been promised before the month closed.
The government also remains silent on whether the commission’s decision will be a preliminary to a state order for a reorganization of the fertilizer sector, and the consolidation of Uralkali and Silvinit, the two potash producers, with PhosAgro's Apatit, a phosphate producer in which the government took 20 per cent stake after a court ruling in early December. Apatit is Russia's dominant producer and exporter of apatite concentrate (phosphate). According to the federal government's position in the courts, Apatit was illegally privatized in the mid-1990s by Mikhail Khodorkovsky and Platon Lebedev, both of whom were convicted and sent to prison in 2004, principally for offences relating to the oil company Yukos and their Menatep banking group. Uralkali itself has not commented on the takeover speculation; the company has been officially silent since 25th December.
But the following day, on 26th December, Russian industry reports indicated that at a meeting at the Ministry of Natural Resources in Moscow Uralkali indicated that it is ready to cover Rb3 billion (US$103 million) of state budget expenses associated with the flooding of Mine 1, at Berezniki, in Perm region, incurred since October 2006. It‘s also been reported that at the same meeting Rosteknadzor reported its preliminary conclusions into the reasons behind the mine subsidence and flooding. No word of these conclusions has so far leaked, but industry analysts judged at the time that the signals from the meeting were positive for Uralkali. But the failure of the Russian government to announce anything definitive before the Russian holiday commenced on 31st December is anything but positive, at least for Rybolovlev.
In this context it’s worth remembering that both Uralkali and Silvinit had announced earlier that they are each ready to contribute Rb1billion (US$34 million) to the cost of a 53-km rail line that needs to be constructed to skirt the area of subsidence and ground risk. Negotiations with the Russian railway company, RZD, have been ongoing since the meeting on 29th October when Deputy Prime Minister Igor Sechin initiated the new commission of inquiry. Sechin reportedly said at that meeting that the cost of the new rail line would be Rb13.4 billion (US$447 million). An RZD source says that the estimate of cost by RZD ranges between Rb9 billion and Rb11 billion (US$300-$367 million). The difference in estimates, he explains, is that the larger one includes what RZD has already spent on bypassing Uralkali's Mine-1 sink-hole, after the subsidence began two years ago.
Sechin is the most powerful figure in the Russian government, after Prime Minister Vladimir Putin, and the key official responsible for supervision of the major mining and metal concessions. In 2003 he led the government's attack on Khodorkovsky. He now chairs the board of the Rosneft oil company, the state-controlled company which took over Yukos's oilfields after it was broken up following Khodorkovsky's conviction. After that manoeuvre, Sechin's interests move on to the transportation of oil to Russia's export markets. He backed the ousting of chief executives of Russia's two largest tanker fleets, reorganized the management of the state oil pipeline company, Transneft, and promoted a costly new oil terminal on the Baltic Sea shore, plus a new pipeline to load it.
In expanding his supervision of the Russian oil sector, Sechin has clashed with Gazprom's chief executive, Alexei Miller, and his prominent Kremlin supporter, President Dmitry Medvedev. Sechin's interest in restructuring the Russian potash sector had been limited until the meeting in late October. Before that time, though he did have an interest in the conflicts over Apatit, and also in claims against Russia's leading ammonia producer and exporter, Togliatti Azot (ToAZ), which is controlled by Vladimir Makhlai. Makhlai was able to fight off a challenge from the Renova group, which is controlled by Victor Vekselberg. Vekselberg is an oligarch with interests in the TNK-BP oil company and its gasfields. But Makhlai was able to outwit him, winning a recent appeal against lower court rulings to annul the privatization of a six per cent stake in ToAZ that dated from 1996. The pressure on Makhlai then intensified from other directions, and under threat of prosecution and arrest, he reportedly fled to London, where, according to London sources, he is currently seeking political asylum.
So to get back to Uralkali, not a word has been said officially, or even speculated in print in Moscow for that matter, to suggest there is a link between Makhlai's predicament, and Rybolovev's future. The only evidence that a link might be suspected is in the dramatic fall in Uralkali's share price that took place across October and November. Since then, however, the share price has drifted modestly upwards on reassurances issued from the Ministry of Natural Resources.
If the new government commission rules to limit the financial exposure of Uralkali, and other companies using the new Berezniki rail line, then Rybolovlev's shareholding ought to be unaffected and Uralkali's share price and market capitalization should rise sharply. The company is being supported by the Minister of Natural Resources, Yury Trutnev, who was mayor of Perm city, and then governor of Perm region, before taking his federal post in 2004. However, opposition to Uralkali surfaced just before the December break, in a Russian wire service report attributed to unnamed government officials. This claimed that the government is considering the formation of a single fertilizer holding, by buying Rybolovlev out, and combining Uralkali, Silvinit and Apatit. Uralkali and Silvinit appear to be unaware of the proposal, while industry sources believe that the publication may have been prompted by the efforts of domestic fertilizer consumer groups to persuade the government to take a stronger role in regulating sector output, supply, and pricing.
In a report by Troika Dialog analyst Mikhail Stiskin, it was noted that the idea of forming a state-owned company in the fertilizer industry has been discussed by the government many times over in recent years. The relatively small size of the sector and the recent high market capitalization of the listed companies, have also deterred state action. According to Stiskin, this "has markedly changed recently, warranting increased interest from the state. A merger between Uralkali and Silvinit would make perfect economic sense, as both entities mine the same ore body and used to be a single company in Soviet times. A merger with Apatit is a less straightforward idea, though one that is also reasonable, as it would enable the creation of a diversified fertilizer holding with exposure to potash and phosphates, an essential emulation of the strategy implemented by Canada’s PotashCorp and Mosaic”.
Since the shareholders of the three companies are rivals, they are unlikely to agree to merge along the lines that the government is reported to be considering. For this reason, the market speculation has focused on Sechin, and on the outcome of the commission of inquiry into Mine-1, to determine what will happen next. If the Moscow market is right in suspecting Sechin of ulterior motive, then it is near-certain he will run into opposition from Medvedev and the Gazprom group, to whom, it is likely, Rybolovlev has applied for help. There has been just one public sign of this. This came in a press conference by Medvedev's front-man, Deputy Prime Minister Igor Shuvalov, who claimed in November that the government was interested in having “strong business”, and no-one wanted to bankrupt Uralkali. But Shuvalov, who has so far not dared to challenge Sechin directly, equivocated. He pointed out that Rybolovlev and Uralkali had been exonerated by the first government commission. However, if the second commission ruled differently, he said that “a new proprietor will be found". The longer the suspense, the further Sechin's shadow is cast. |
