Management report
Potash

Potash segment

We report potash as a separate segment because of the significant capital expenditure costs dedicated to developing our potash mines in the Volgagrad (Gremyachinskoe deposit) and Perm (Verkhnekamskoe deposit) regions, and because we expect potash, over time, to become the most significant EBITDA contributor. We have already begun active shaft sinking the skip shaft for phase I of the Gremyachinskoe deposit, which, once completed, will have an initial annual capacity of 2.3 mt of KCl. Work on the social infrastructure to support the new enterprise is also well underway, and we are in discussions with the Russian Federation government regarding sharing the costs of development of items like schools and medical clinics for the district that will be home to the mine and beneficiation plant employees.

At the end of 2010, we calculate that 21% of currently estimated project costs for development of the Gremyachinskoe deposit and 10% of currently assumed expenses for development of the Verkhnekamskoe project had been spent.

Our exposure to the potash sector is also represented by our investment in the shares of the leading German potash producer K+S AG. During 2010 EuroChem slightly decreased its stake in K+S AG from 10.1% to 8.7%, taking advantage of the rising share price primarily driven by strong recovery in the demand for potash-based fertilizers. Our gains from sale of the shares in 2010 amounted to RUB 1.4bn.

While several potential new entrants in the potash segment, including international mining players like BHP Billiton and Vale, have announced plans to develop new capacity, EuroChem believes that phase I of the Gremyachinskoe project is the only greenfield capacity likely to come on line before 2015. New greenfield and brownfield capacities represent a threat to the current status quo. However, given that EuroChem expects to be one of the most cost-efficient potash producers, we believe that the Company will be well-positioned in the market even if a significant portion of the planned new capacity does come on line as currently scheduled.

Verkhnekamskoe cumulative capex

Sources: Fertecon, Fertilizer Week, FMB, The Market.

Gremyachinskoe cumulative capex