Q&A with the Management Board


Q. How has EuroChem’s strategy evolved since you became CEO? What are the priorities over the next five years?

Dmitry Strezhnev Chief Executive Officer

Our initial strategy was rather simple use our cash flow to overhaul equipment and improve the efficiency of our production units. Phase two involved the expansion of our product range to provide us with added stability and resilience throughout the business cycle. This included the launch of granular urea and melamine units and marked the beginning of our path to potash. With encouraging progress at our two potash projects and following the successful integration of newly acquired assets, the time has come to look even further ahead. Accordingly our strategic horizon has grown from five to eight years. Over this period, we will continue working hard to further minimize our environmental footprint across our business. Our potash projects are the major catalysts of our next growth phase and we remain deeply aware of the importance of retaining and attracting key talent. We are driven by growth and it has positioned us to capture the next emerging opportunities in our industry.


Q. EuroChem’s debt levels and leverage ratio have moved up over the past year – has this impacted your investment programme?

Andrey Ilyin Chief Financial Officer

The cyclicality of the fertilizer sector, and its effects on cash flows, requires us to manage debt levels prudently. This necessity is further boosted by our ambitious investment program. We are now in our peak potash capex years and are potentially starting work on other large-scale projects, including an ammonia plant in Russia. We currently forecast total potential capex of around US$3.5bn over the next three years. EuroChem generates strong operating cash flows and we expect these to cover the bulk of our investment requirements. Our maintenance capex requirements are quite modest and account for 15% of our expected spending over the next three years. That said, while we don’t envisage delaying our potash plans, some minor projects could always be postponed should we feel the need to reduce debt. Our policy has been to maintain a net debt/ 12-month rolling EBITDA ratio of between 1.5x and 2.0x across the cycle. And while the market volatility may make it challenging to attain at times, this ratio should not exceed 2.5x.


Q. Have the recent changes in the potash landscape altered EuroChem’s development plans?

Clark Dillon Bailey Mining Director

Despite the market taking a breather, we ran various scenarios, and given our timeframe, we remain very confident in our potash projects and view the timing of our entry as potentially ideal. Sensitivity analyses have confirmed EuroChem remains on firm ground to continue. At either one of our sites, once fully operational our cash costs to produce are on the lower end, allowing us to move our products into the market with considerable flexibility. We currently expect first raw ore and production to start in 2017 and recognize that EuroChem will absorb most of its initial output to meet the requirements of internal potassium-based fertilizer production. We are aware and anticipate our operations to require two to three years of ramping-up before reaching their designated capacity, making our market entry very gradual and soft.


Q. How competitive are EuroChem’s ammonia production facilities?

Alexander Tugolukov Mineral Fertilizer Director

The key input for ammonia is natural gas and while it is fairly abundant in the world, its price and proximity to fertilizer markets varies considerably. Fortunately for EuroChem, our ammonia assets are located in Russia, which is blessed with natural gas. Despite certain price increases, our cost per mmBtu of gas remains among the lowest in the world. As for distance to market, Russia happens to be the fastest growing large agriculture market in the world. On the export side, our ammonia facilities are strategically located in Western Russia and benefit from our own logistics chain which unlocks inefficiencies and bottlenecks on both the raw material and finished product streams. Additionally, our partial upstream integration into natural gas has strengthened our position on the cost curve. As well, we look to further improve our competitiveness with the launch of up to 1.0 MMT of new state-of-the-art ammonia capacity in Russia by 2017. This will not only improve our gas to ammonia consumption ratio but also bring us to full self-sufficiency in ammonia production.


Q. EuroChem completed the overhaul of its production units and launched new capacity. Where is it now with regards to Health, Safety and Environment functions?

Igor Schelkunov Administrative Director

EuroChem has made the strategic decision to become an HSE exemplar by 2018. In 2013 the Board approved our new HSE Policy and Framework which underpin our commitment to HSE leadership and the continuous improvement of our performance. These apply to all of EuroChem’s production plants and are monitored by the Board of Directors and the Executive Board. Also in 2013 we established a dedicated HSE Department. Based in Moscow, it heads up and integrates the work of more than 120 HSE professionals who ensure the effective and consistent execution of the HSE Policy and Framework across the Group’s assets.

We also launched a company-wide project aimed at strengthening our HSE culture and systems. It is the result of a detailed baseline review of our health and safety performance conducted by DuPont Sustainability Solutions in 2012, and is being piloted at Novomoskovskiy Azot, one of our largest operations, throughout 2014. The project draws on recognized HSE best practices and focuses upon HSE leadership and operational excellence, over and above compliance with statutory requirements. The outcomes from this pilot programme will be fed into all our operations from 2015.


Q. What are the major themes emerging in the fertilizer industry?

Valery Rogalskiy Sales Director

The name of the game remains proximity. How close you are to rawmaterials and markets have always been and will continue to define competitiveness in the fertilizer spaceBut we are also seeing gradual changes in application patterns. In both developed and emerging markets we have been seeing good demand growth for specialised fertilizer products. So while favourablegeographical positioning is imperativeyour ability to specifically match your customers’ field and crop requirements is an added dimension to the notion of proximity and increasing crucial to sustain market share. We see EuroChem’s ability to tailor products to specific crops and soil conditions as both cost effective for our customers and better for the environment as it provides optimal nutrition with minimal application. We provide the nutrients needed for healthy plant growth in the right balance and at the right time.


Q. With more than eight million tonnes of annual production after ramp-up, do you expect any logistical constraints once EuroChem potash production comes on stream?

Igor Nechaev Logistics Director

A first consideration is that any new capacity comes online gradually and mining operations the size of VolgaKaliy or Usolskiy will typically require two years to reach their nameplate annual production capacity. We have constructed trunk lines and stations at both of our sites. At our Usolskiy facility in the Perm region, the majority of the Perm-Ust Luga (Baltic) line is not an issue as it is comprised of multiple routes which together account for approximately half of the country’s rail capacity. The current capacity on that line is around 35-37 million tonnes per year and Russian Railways have announced that this will be raised to 57 million tonnes by 2015, which is well ahead of the first shipments by Usolskiy in 2017.

As for VolgaKaliy, with less than 500km to port and our NPK facilities, the transportation issue is not as complex. The capacity in the area is quite enough to accommodate shipments of potash from VolgaKaliy. As well, whether at our Baltic Sea or Black Sea terminals, we plan to have sufficient storage capacity to ensure good railcar turnaround times.