Q&A with the CEO

With sales of RUB 97.8bn and and EBITDA of RUB 29.9bn, we demonstrated our resilience following a challenging 2009 that affected the whole industry. Fertilizers remain a key part of the global food supply system, and demand will continue to grow in the long-term, regardless of economic cycles like the one we just went through.

More importantly, we have continued to deliver on our strategy, achieving important milestones on our priority investment projects. In nitrogen, we launched additional granulated urea production, making Novomoskovskiy Azot the largest granulated urea production facility in Europe. We remain the only granulated urea producer in Russia to date. In phosphates, we completed the installation of heat recapture systems to generate electricity from heat produced during the production stage. Two important logistics milestones were achieved in 2010: we completed the construction of the Tuapse bulk terminal, and began building an additional bulk terminal in Ust-Luga. Finally, in potash, we began the active shaft sinking stage at our Gremyachinskoe deposit.

Q. How will new capacity additions by low-cost producers outside Russia in Nitrogen and Phosphates affect EuroChem’s profitability?

A. Creation of new, low-cost capacity is a risk that every global fertilizer producer faces. For today’s potash producers, EuroChem’s own Gremyachinskoe deposit potash project is probably considered the most real and near-term threat, as we expect to come in at the bottom of the cost curve once we launch production.

In the N and P segments, we understand that we must continuously seek new ways to improve the efficiency and cost of our operations. In addition to investing in modernization and upgrades, we are exploring more strategic options, like producing our own natural gas to lower ammonia production costs and make investing in new ammonia synthesis lines in Russia economically viable; or investing in new sources of phosphate rock in Kazakhstan to achieve greater economies of scale in our phosphate operations. Also, one should not forget that cost of production is not everything – one can have a high cost of production but be competitive on cost of delivery to the final customer. Transportation and transhipment costs are very important, too. Therefore, strong roots in local markets help secure competitiveness at least on a regional/local basis – hence our investment in distribution in Russia and CIS.

Q. How do you address the mismatch between financing needed for your capex plans from 2011-2015 and the operating cash flows EuroChem is likely to have during that period?

A. We expect to have strong operating cash flows in 2011-13. In 2014 we should already have a meaningful contribution from our own potash production, and in 2015 this contribution should already be significant. Should we fall short on operating cash flows, the strength of our balance sheet would definitely allow raising sizable amounts of cash in several ways. Long-term debt financing, be it in capital markets or bank markets, would be one of them. During 2010 we were quite active in securing new long-term debt in the form of rouble bonds, bilateral loans and ECA-backed trade finance facilities. At the same time, our net debt to EBITDA ratio declined throughout 2010, reaching 1.13x at year end.

Q. How has consolidation in the fertilizer sector influenced EuroChem?

A. We view consolidation as a net positive for the supply side of the market. As a producer of fertilizers that competes on pricing globally, we generally view greater concentration of capacity as a positive trend. We also see ourselves as potential participants in further consolidation, should such an opportunity arise, but we will be looking for industrial logic and strategic benefits for ourselves, as well as value.

Q. What steps is EuroChem taking to mitigate the rising cost of natural gas in Russia?

A. This is one of the core issues facing our Nitrogen segment. While we will always be competitive in our regional markets (Russia, CIS, Central and Northern Europe), our aim is to also remain a competitive exporter of nitrogen fertilizers in the USA and Latin America.

To achieve this, we are pursuing a number of paths that will help us remain a low-cost producer and, hopefully, secure our position in the long term. The first two represent incremental improvements in production costs and margins: we are continually investing in upgrading and modernizing equipment to reduce gas, electricity and heat consumption. Along the same lines, we are investing in new products at our nitrogen plants that have a lower gas content per unit: we plan on launching our new melamine line later this year, we will build low-density ammonium nitrate production over the next two to three years, and we are considering several other new high-margin products.

These incremental improvements have helped us maintain our spot as one of the most efficient N producers in Russia, but we want to achieve more to ensure that we remain globally competitive as domestic gas prices rise. We are reviewing options for building or buying our own natural gas production, as well as setting up nitrogen production in regions with low-cost gas.

Q. What steps has the Company taken to work with local communities and avoid further situations such as the one with the launch of the Tuapse port terminal?

A. We took great care to design and build our Black Sea bulk terminal in Tuapse using the world’s best industrial and environmental safety standards and practices. However, part of the Tuapse community has indeed expressed its concerns regarding the potential environmental impact of EuroChem’s shipping activity. In particular, these concerns were raised following operational testing carried out in March 2010. During loading procedures, a dust collector had to be turned off in accordance with testing parameters and this operation resulted in some fertilizer dust becoming airborne; the dust later settling on the vessel being loaded. The ensuing public concern clearly showed us that we should have been more proactive in our dialogue with the local community and provided more information eliminating any doubt that the terminal poses any threat to public safety, health or the environment. This is indeed a key lesson learned for the future.

We have now opened a public viewing facility in Tuapse where anyone can learn more about the terminal and review relevant technical and legal documentation. EuroChem is committed to funding the creation of a European-standard environmental monitoring system in Tuapse, where the results of key environmental tests will be continuously displayed in real time. In 2010, we spent a total of RUB 154m on social and environmental projects in the town.

We believe that our transparency and willingness to listen and engage in an open dialogue was a decisive factor in the acceptance of EuroChem’s Tuapse terminal by the local community.