Annual Report 2011   English  |  Russian

Q&A with the
Chief Executive Officer

Vladimir Kunitsky

The reporting year was a period of Acron Group’s production and financial records.

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Q: Acron’s 2011 operating and financial results were a historical best. What are the Group’s growth prospects in the context of such results?

A: The Group produced 5.8 million tonnes of commercial products, up almost 5% year-on-year. Acron Group’s revenue in 2011 totalled RUB 65.43 billion, which was 52% up from the previous peak of 2008. Net profit was also a record at RUB 20.33 billion.

We managed to take full advantage of the favourable environment in the global mineral fertiliser market. In 2011, nitrogen fertiliser prices demonstrated the sharpest rise, with AN prices up 35%, UAN prices up 50%, and NPK prices up 37%. While we saw a small price adjustment in late 2011 and early 2012, demand for nitrogen fertilisers obviously remains the industry’s major driver, and we do not expect any deterioration in the economic environment in 2012. The global fertiliser market remains well-balanced; prices for agricultural products are high, which stimulates farmers to purchase fertilisers.

In terms of our growth perspective, the Company is actively moving in several directions.

First, Acron Group is constructing new production facilities and expanding output. Existing facilities operate at maximum capacity, so a further increase in output is only possible through new construction. In 2008, we started construction of a new urea unit with a capacity of 335,000 tonnes at our Veliky Novgorod site. Urea is a strategic product for this facility, since 60% of the output is designated for further processing (making UAN and UFR). Commissioning a new production unit in 2012 will allow us to increase output and sales of urea, as well as of products with higher added value. In the reporting year, the Group also commenced preparation for construction of Russia’s largest ammonia unit (Ammonia-4) at Veliky Novgorod site, with a capacity of 700,000 tpa. By 2015, total investments in the project will reach approximately USD 400 million. The construction cost is relatively low for such plant, because construction of ammonia unit at a new production site would require twice as much investment.

Second, Acron Group is strengthening its position in strategic sales markets and in other growing and promising markets. Both the Group’s production output and its marketing strategy contribute to excellent financial results. We seek to win the leading position in the key premium fertiliser markets, so we pursue a flexible marketing policy in response to fluctuations in the global fertiliser market. For example, our share in Brazil’s import has already reached 30%, and Brazil has become one of the world’s largest consumers of AN over the past several years. Thailand is the fastest-developing premium NPK market, and the Group’s share in this market amounts to 40%. The Group’s UAN sales to the U.S. total 20% of that market. Meanwhile, we continuously monitor the situation on new and promising markets, reacting to price behaviour and changes in delivery terms with flexibility.

Q: Having an in-house source of raw materials creates significant potential for the Group, but are investments in raw material projects justified given that producers of all input types are available in Russia?

A: Russia is a unique country with all the resources needed for fertiliser production: gas, phosphates and potash. However, the sources of all these raw materials are controlled by monopolists, and unfortunately that creates opportunities for price manipulation. Acron Group and other fertiliser producers have come into conflict with phosphate and potash suppliers on supply volume and prices. Regrettably, such conflicts serve as a significant deterrent to development in the industry.

Developing raw material projects entails a huge financial outlay, but such expenses are justified by the promise of raw material security. With its own raw materials, the Group will become more competitive in the global market and will be protected from the declining output of its suppliers and possible price manipulations. It will mitigate the risks of unscheduled production halts caused by raw material shortages. Moreover, with a guaranteed raw material source the Group will be able to reduce its inventory and free up some working capital.

Once Acron Group’s raw material base is established, the Group will reach a new level of evolution. The global trend is clear: in many industries vertical integration is the foundation for sustainable growth and successful recovery from the recession.

Q: Extensive capital expenditures can lead to decreased financial stability. What measures is the Group taking to prevent an uncontrolled increase in debt load?

A: Acron Group is implementing an ambitious investment programme that requires significant expenditures. However, maintaining the Group’s financial stability is our priority and we will never take on an excessive increase in the debt burden. Taking into account the scope of our investment programme, we consider net debt below 3 EBITDA to be comfortable. At present, the Group’s net debt totals 1.6 EBITDA. We are confident that Acron Group is capable of generating sufficient cash flow to finance its investment projects.

First of all, when we developed our investment programme we created a project time schedule so that the expenditures are allocated evenly year by year, considerably mitigating the threat of financial instability. Secondly, we use a variety of debt finance instruments, including bonds and loans from major banks under export credit terms. And finally, Acron Group has significant financial investments on its books that could be monetised if needed to reduce the debt burden. In 2009-2011, we sold some of these assets – Sibneftegaz and Nordic Rus Holding stakes and several potash permits in Canada. The Company’s 2.73% stake in Uralkali is another major financial asset that the Group plans to sell within the next few years.

Q: Construction of the first stage of the Oleniy Ruchey mine is close to completion. When will Acron start producing its own phosphates?

A: A huge amount of work was completed in 2010-2011. Acron has built the processing facility, open pit, roads and the entire infrastructure. In November 2011, open pit construction was finalised and the pilot batch of apatite-nepheline ore was produced. We plan to conduct a test launch of the plant in May 2012, upon which the commissioning will start. We expect to reach design capacity progressively after obtaining all required approvals and qualifications, probably in the second half of 2012 or early 2013. Our key task is to meet all of the Group’s demand for apatite concentrate in 2013. Acron Group’s investments in this project currently total USD 400 million.

In 2011, the Group commenced construction of the underground mine. Extensive work on the underground shaft is required and is expected to be finalised by 2017.

Q:The Company is implementing two potash projects. The major project is development of the Talitsky area of the Verkhnekamsk potassium-magnesium salt deposit. What is the status of both projects and what funds will be used for their financing?

A: The Talitsky potash project is our priority. The engineering design is being prepared for state expert review, and the exploration survey and drilling of test holes are completed.

Any company that embarks on a complicated project like development of a new deposit and construction of a mine has to spend several years on design and preparation and also on obtaining mandatory permits. In 2011, Acron Group selected Belgorkhimprom (Belarus) as the general designer. Belgorkhimprom has extensive experience in the mining industry, primarily in the potash segment.

We are adhering closely to the deadlines set out by the licence agreement. In 2012, the draft engineering design will be finalised and submitted for state expert review and shaft sinking will commence. We expect to start construction of above-ground complex in 2013 and start production in 2016.

As for implementation of the Canadian projects, we are proceeding in two directions. First, we incorporated a joint venture with global mining leader Rio Tinto to explore the deposits and research the feasibility of their development. Secondly, as an alternative, we are also conducting our own exploration survey on the remaining permits that belong to Acron Group.

Financing of the potash projects is vital. Starting in 2013, the Company will need to make significant investments in construction of the Talitsky mine, so we are starting our fundraising in advance. Our core principle is to bring in strategic investors. In December 2011, Vnesheconombank of Russia resolved to participate in the authorised capital of the Verkhnekamsk Potash Company and provide the Group with a credit facility of USD 1.1 billion.

Q: In future, Russian nitrogen fertiliser producers will have a harder time competing against producers from North Africa and the Middle East as natural gas prices continue to rise, but the Group is not working on any natural gas projects yet. How does Acron Group expect to sustain its competitive strength in this market?

A: In terms of production of our key product, NPK, we are enhancing our competitive power through vertical integration and we have very few competitors in the global markets. As for nitrogen products, gas price is in fact a key issue.

Unfortunately, there is a trend of gradual increases in gas prices for Russian companies each year. Russian nitrogen fertiliser producers will be less and less able to compete with their peers from North Africa and Middle East, as well as from North America.

Nevertheless, we consider our competitive positions in the nitrogen segment to be quite strong due to several reasons.

The Group is revamping its existing ammonia units in order to gradually decrease gas consumption. At present, Acron’s two ammonia units are the most resource-efficient in Russia. Our raw material consumption level is still high in comparison with modern operations launched in various countries in recent years, but reducing power consumption has created significant savings in raw material costs. The design level of gas consumption for Acron’s new ammonia unit is 916,000 cubic meters per tonne of ammonia, which is going to be an all-time record in Russia.

But Acron Group’s most important competitive advantage is that we diversified our product portfolio to occupy the most profitable market niches, not just producing large volumes of the basic products. Thus, we process 89% of produced ammonia into AN and urea. Some volumes of these products are further used as an input for UAN. Urea also is processed into resins, and in addition to the fertiliser grade AN we manufacture technical grade and low density AN required in the mining industry.

Marketing and logistics are similarly important. Because of our favourable location and the fact that we operate our own logistics and distribution companies, Acron Group is able to target its nitrogen products sales both at nearby consumers in Russia, the CIS and Europe, and at regions with the highest demand for such products, such as North and South America.

Q: Which major risks does the Group perceive in the fertiliser industry?

A: We believe that the key risks are related to changes in government policy in India and China related to fertiliser market. As the major importer, India subsidises most of the cost of fertiliser on the domestic market. The subsidy system is currently being reformed, and there is a risk that the volume of these subsidies could be considerably reduced. That could trigger a significant decline in the global market, since it would be hard to find a substitute for the Indian market.

Another risk is related to China, one the largest exporters of urea and phosphate fertilisers. China restricts fertiliser exports by imposing seasonal export duties. If those duties are removed or reduced, the market would be swamped by Chinese products.

Although both those scenarios are plausible, we think they are unlikely.

There is risk inherent in actively commissioning new production facilities, but since demand for fertilisers is constantly growing we believe this risk is exaggerated. Producers have no choice but to construct new capacity. Moreover, in reality not all of the projects that get announced ever reach completion, and most of them are launched with delay. There will be always market demand for new capacity.

Q: The Group is a major employer in the regions where it has operations, and construction of mines and new production facilities requires several thousand new employees. How is the Group going to cope with this issue?

A: In 2011, the number of the Group’s employees exceeded 14,000 people. That is an all-time record for our Company. In addition to existing production facilities that need personnel for new production operations, we have also created a new major employer in the Murmansk region. As of the end of March 2012, the number of employees at North-Western Phosphorous Company, which is now conducting the construction of the Oleniy Ruchey mine, was more than 1,200; by the time the mine is commissioned, 1,500 people will be working there. That is a huge number for a region where unemployment is quite acute. At the present stage of construction, more than 1,100 employees from contracting organisations are involved in the project. The Oleniy Ruchey mine is now the major construction project in the Murmansk region and a potential place of employment for a lot of young specialists.

In order to apply a comprehensive approach to social issues, in 2011 Acron Group adopted the Fair Work Programme, which regulates the Company’s sustainable development policy. This programme is aimed at creating an efficient system for maintaining social responsibility, forming a highly-skilled and strongly motivated workforce and creating a promising and vigorous human resource pool. We not only pay competitive salaries in the regions where the Group has a presence, but also provide employees with a comprehensive social benefits package. The Group is aimed at engagement of promising young specialists, and we are prepared to make significant investments in advanced professional training and development within the Group.

Vladimir Kunitsky
Chief Executive Officer
2011 sales by product
(in monetary terms)
Sales by product
2011 sales by region
(in monetary terms)
2011 sales by region