Dmitry Mazepin's Uralchem is widely regarded as the most unpredictable company in the industry. In 2010, when the company's debt burden for the previous year exceeded 13 EBITDA, the holding attempted to hold an IPO and attract $600 mln to ease the burden. Fortunately, the offering did not take place and we managed to ease the debt burden on our own, Dmitry Konyaev said gladly. At that time, he was Commercial Director of Uralchem and now he is the CEO of the company. He believes that the key point is proper risk appraisal during acquisitions, which appear to be inconsiderate to onlookers.
A year ago, Uralchem shocked the market again by buying 19.99 % of the shares of Uralkali - the world's largest producer of potassium - having loaned roughly $3.8 billion from VTB. Note that analysts evaluated the holding itself at a maximum of $3.4 billion. On 18 November, one of Uralkali mines, accounting for roughly 18 % of the output, was stopped because of uncontrolled influx of brine. It's too early to speak of the consequences, Konyaev notes, but stresses that Uralkali is an excellent investment.
— What will the consequences of the accident at the Solikamsk-2 mine be?
— No one knows exactly yet. The situation is being monitored, and experts and a commission are working. More time is needed to understand and assess what happened.
— What could the cause of the accident be?
— We are awaiting the commission findings. In 1995, there was an earthquake in this area. After this event, the location was embedded in concrete and the area is being specially monitored. Probably, this is the result of those events, with which Uralkali is forced to cope today.
— After the accident, Uralkali's shares crashed. Did you face a margin call on VTB loans in view of pledging the entire equity stake?
— No, we didn't. As to Uralchem's loan, margin calls are not provided for by the bank agreement because this is not a repo transaction.
— With the most adverse developments, analysts are forecasting a decline of Uralkali's financial indicators by 15 % as soon as next year. Are you ready to cut dividend payouts?
— It is up to Uralkali's Board of Directors and the Meeting of stockholders to decide, though I believe that it's too early to speak of this.
— Why did you buy a share in Uralkali?
— By late 2013, the net debt / EBITDA ratio at Uralchem was far less than unit, and we were aware that we could start the year 2014 with a zero debt. It's wrong to keep from using the loan leverage and borrowed funds. Even more so if we see that we can manage them effectively and earn more than the borrowings cost. At that time, Uralkali was in a certain position in the market, and it was clear to everyone. We appraised the situation for a long while to see what it could yield. At some point, we decided that this could be a profitable investment for us. This could be an opportunity for the company to develop its fertilisers production capacity. Uralchem is a fertiliser producer interested in further development. Concerning the cost of the purchase, we could mention many things, for instance, how much did Uralkali cost in late 2013, its cost today and how much did it cost several years ago. But let us look into the last year. Uralkali's profitability by EBITDA topped 70 %, and this year, it exceeds 50 %. What other business can generate such a margin and profitability? Yes, it's a major investment with a pay-back horizon of no less than a year or two. With this investment, we moved into business for the long haul. In appraising investments, one should also account for the price of the potassium business "entry ticket". A variety of projects is being discussed, with a host of those who intended to build potassium mines! However, no newcomers with completed projects have come up yet. So I believe that this is our investment in the future and in the development of our company.
— And who in general dragged you into this affair with Uralkali? Wasn't it Onexim?
— No, the decisive role here belonged to Sberbank and VTB who drew us into this business. We started appraising the risks, building models and calculating. Finally, we decided that this business is interesting and the banks helped prepare and conclude the transaction.
— How do you see your withdrawal from the investment? Or will it be as the case with UC Rusal and NorNickel when the company bought a block several years ago and had no intention to withdraw because of no reason to do so. Is your case the same?
— I believe that Uralkali is very promising from the viewpoint of profitability. Its production costs are one of the lowest in the world.
— It's a cash-machine?
— In a sense, yes. So we take a positive view on this investment.
— In your opinion, is the change in Uralkali's sales strategy after all a benefit for the industry? Or is it a fatal mistake?
— It's very hard for me to assess this. Both Uralkali and Belaruskali experienced a certain economic effect of their joint activities. However, to judge, one has to be inside the situation that existed in mid-2013. So I will hold back from making estimates.
— Belstat has been reporting regularly that Belaruskali is increasing sales. In this situation, has the stage passed when collaboration could have been renewed? Or is it still possible? And the main point is how effective will this be?
— I believe that the point of no return has not been passed yet and there is a chance of joint cooperation. The only thing that matters is that it should be really effective for both companies. At BKK, a new young team is engaged in sales in international markets, and it has gained a lot of expertise. However, there is more to learn, including how to operate for a long time in the global potassium market, rather than load production capacities to 100 % for a short term.
— Could you, for instance, make an offer to Vladislav Baumgertner, former Director General of Uralkali, to take this job position again?
— The Director General is appointed by Uralkali's Board of Directors. I'm not intending yet to retire at Uralchem. I believe that Vlad will be OK and he won't have any problems with job offers in the market.
It's only fitting that we attract external financing for development
— Uralchem's history is that of acquisitions. The recent acquisitions in our own segment, apart from acquiring a stake in Uralkali, were Mineral Fertilisers (Perm) and a share in the Ventamonjaks terminal in Latvia. How will you develop further? The M&A limit has been reached, and what remains is achieving effectiveness?
— As you know, there is always room for perfection. However, any acquisition requires huge efforts and time to adjust this acquisition to the unified rules of the game and Uralchem's unified architecture. We are building a holding rather than a multitude of isolated enterprises living by their own rules, and we only change top management and look at the financial indicators. We really want to be involved in the business processes, and improve the indicators. We want to depend not only on external factors, and the prices of gas and fertilisers. We are trying to deal with effectiveness, and the results are promising. Over the past three years, our EBITDA profitability has been the highest among nitrogen and phosphorus producers. Only Uralkali's indicator is higher. Hence, our acquisitions, including a share in Uralkali, impose certain restrictions on entering the market immediately and buying something else. Presently, we are in a balanced position, and are developing our structure and streamlining in-house procedures.
— Why is the scheme of buying assets with borrowings topical for you in view of the past crisis and current problems? For example, the majority of metallurgical companies have dropped these ideas as very risky ones because all of them have got their fingers burnt seriously with such deals.
— Our margin is sufficiently high. This year, our EBITDA profitability will be at 35 %. If we can earn more than the cost of loans in the market, then obviously it's only fitting that we attract external financing for development and boosting production. Anyway, the situation is more stable in our market segment and we are optimistic about the future. The world population is growing and they need to eat. In case of a recession or economic downturn, fewer houses and plants can be built for some time; however, one can't stop applying fertilisers each year because crop yields will drop and food supplies will be in deficit.
—Voskresensk Mineral Fertilisers (VMU), definitely, can be called your worst acquisition…
— Among the big number of good acquisitions, certainly yes from the economic viewpoint. Only he who does nothing never errs, though there was yet an external factor…
— A supplier…
— Yes, a monopoly supplier (laughs).
— Is it clear what to do with the plant?
— The situation is a tangled one. In 2013, we worked at full capacity. By the end of the year, we understood that the enterprise is making no money. We decided to cut production two-fold. There are two production chains working to produce phosphate fertilisers. We contacted Phosagro and said that we always bought 850 000 tons, but give us 450 000 tons for 2014. We were willing to buy at a price recommended by Federal Antimonopoly Service (FAS). Our understanding was that in this case we at best would be close to "zero". In response, Phosagro refused, stating that, allegedly, all the volumes were contracted in a week between the two offers. In this situation, Acron filled the market with its own output of 650 000 tons (previously purchased from Phosagro) by launching production at Oleni Ruchei. Where did the apatite go? Obviously, for export. We were forced to stop the plant and close down the main production shops. At the same time, we are trying to execute several projects. One of them is recovering rare-earth metals from phosphogypsum dumping sites. There is even a state program for rare-earth metals because domestic production is insufficient for the Russian industry. We built a pilot shop with our own funds and produce rare-earth metals in pilot commercial volumes. Bayer confirmed that the technology is viable. We are considering what to do next because building a large-scale industrial plant requires major investments. But we are fertilisers producers, rather than producers of rare-earth metals. We have built from scratch a new shop at VMU for producing water-soluble monoammonium phosphate – a fertiliser with a slightly increased content of phosphorus, which is fully soluble and can be used in irrigation systems. In this case, profitability is higher than that for standard fertilisers. We also downsized the company. At the end of the year, we addressed Uralchem's Board of Directors once more on the matter of starting enterprise operation anew. At the same time, we started buying from Acron excess stock of apatite concentrate, which they cannot process at their own production facilities. Akron made advances and confirmed the bulk of the volume for 2015, though this doesn't mean full loading of the production chain. In response to our offer to Phosagro to deliver 450 000 tons in 2015, they declared their readiness to deliver to us excess stock on a monthly basis. Actually, this meant a refusal. So, we will work on projects related to producing niche products. We'll try involving VMU's granulation capacities to produce granulated potassium. We'll try somehow to obtain apatite concentrate to load at least one production chain.
— Did you try to negotiate with Rostec in the matter of rare-earth metals? They are very interested in this.
— Yes, we had talks with them. It's all about the sources of financing. We are moving in different directions on the matter of rare-earth metals. We are thinking where we can implement this. It's too early to talk about this because there are no fixed agreements yet.
— What do you intend to do with 9 % of Togliattiazot shares. Maybe you will sell them at last?
— What's the sense of selling when we are interested in increasing production volumes? No, we don't intend to sell. On the contrary, if possible, we intend to increase the share. But this is a tangled situation. You know, as the saying goes, there are two troubles in Russia — fools and roads. Though I believe that there is yet another challenge in Russia — mismanagement — the inability to manage assets effectively. Over the past three years, our five ammonia plants have produced the bulk of ammonia in Russia. We are very close to Eurochem also with five plants. But Togliattiazot has seven, and they produce far less than Uralchem.
— But half of their plants are idle.
— In such a way anything can be brought to ruin and stopped. This is a matter of financing and management. On the one hand, the owners have not been in person in Russia for many years. On the other hand, the goings there are beyond all law. The Investigation Committee has opened several criminal cases, and the Director General is missing. Among all other things, the sales schemes are like the Stone Age! Of course, the turbulent 90s were a witness to many things in Russia, for instance offshore schemes, and everything else. But life is always on the move and a lot has changed, though the feeling in Togliattiazot is that life has come to a standstill. Nothing has changed there. We want our rights as shareholders to be observed. We want back the assets that were withdrawn from the enterprise, and then we'll look at the developments.
— Did you offer the owner Vladimir Makhlai to sell the shares?
— There's no interest from that party so it's hard to find with whom to discuss the matter in general, and who can really be responsible for this process. There is some progress, obviously due to action initiated by the Investigation Committee. Dividend payouts have increased, whereas pennies were paid earlier, and the money vanished into thin air. In 2011, the payout was 2.9 billion rubles, and in 2013, it was already 3.9 billion rubles.
— Why are you interested in the project of building an ammonia production plant in Taman with a cost of $1 billion?
— There is a program for development of Black Sea basin ports, including the Taman hub. We see our project as an opportunity to participate in the program. Obviously, we'll be in the second echelon because the state program has to be implemented there first. Russia presently has no ammonia shipment terminal. Latvia has a terminal in Ventspils. Odessa has a terminal. The very idea of building a production facility in a location having a shipment terminal is economically sound.
— Do you really believe that it will work out? Somebody is constantly trying to withdraw funds from the project for Crimea.
— It's hard for me to judge this. For us it's a long-term project. We are not saying that we want to start executing it immediately.
— Earlier, Uralchem didn't build such major industrial facilities. Aren't you afraid to tackle such a challenging project as ammonia production all on your own?
— No, we're not.
— In your opinion, is there yet an opportunity of consolidation among fertiliser producers? Are some alliances possible?
— I believe that presently the opportunities of consolidation are shady. Some principal alliances between major producers are unlikely. More likely, separately standing enterprises will join holdings in time. For the time being, we are seeing this situation as a status quo one.
Port terminals and railway wagons — a guarantee of shipment
— Uralchem has two major terminals in Latvia. Are you planning to develop the port segment as a stand-alone business?
— Our core business is fertiliser production. The port business, as well as the railway one, is attendant for us. However, there are companies who are professionals in this business. Therefore, we work with port facilities jointly with stevedores in shipment locations, which we regard as the most proper and effective ones. We built the Riga terminal in Riga's Free port jointly with the major stevedore RTO. This year, the terminal has reached its design capacity and will tranship 1.8 mln tons. Next year, we will reach 2.2 - 2.3 mln tons. Jointly with our partner, we have set the following objective for management: find third-party cargo and increase the load. The investment component is paid back with our cargo. By attracting third-party cargo we'll yield additional income. Of course, we don't set a goal to earn in ports more than we do by producing fertilisers, but the port business should also generate an additional margin.
— You have your own railway operator – Uralchem-Trans. If we recall last year, many companies have started to sell captive operators. You saved yours. Does he really help you?
— One has to distinguish clearly the types of rolling stock. There are basic ones, such as open box cars, flat wagons and boxcars. Currently, we manage 6,000 wagons, of which 5,000 are our property, mainly, mineral wagons. We also have ammonia tank-cars. This is a specific kind of rolling stock. Russian Railways (RZD) have no such tank-cars in their network. Why did everyone set up their own fleet? Because the network could not provide a sufficient amount of rolling stock. Generally speaking, we would prefer working as American producers do. They file an order and the product is removed with a guarantee. For us, however, the operator is a guarantee of removing the product. Our production is a chemical one, which should be loaded 365 days a year. Turnaround maintenance takes out 20 to 30 days annually, and breakdowns and accidents can occur, but production should be uninterrupted all the remaining time, and products should also be removed continually. There is no sense in building big accumulation storage facilities at the enterprises. However, it would be practical to have port accumulation facilities for cargo consolidation. The buffer between the plant and the port is rolling stock. Ideally, setting up one major operator for managing mineral wagons and ammonia tank-cars for all fertilisers producers is a good idea. However, so far, it is being poorly implemented because failing to remove products and stopping production due to absence of rolling stock will be more expensive than maintaining one's own operator. That is why we are developing Uralchem-Trans, financing the purchase of wagons and believe that the situation will not change in the mid-term perspective.
— Is it costly to reach an agreement with RZD on timely removal of products? Is extra payment required?
— No, we simply need to submit our schedules to RZD, and if removal will run to schedule, there won't be any problems. Due to the overall economic situation, the network is underutilised. There were more challenging periods when it was necessary, so to say, to "pitch" our shipments. The second point is that we seek to make block train shipments when the entire train consists of only your own cargo and runs, for instance, from Berezniki Azot to the Riga terminal. This speeds up the process. By having big storage capacities in the port we can set up a reserve stock to account for network traffic. Hence, we see no serious problems here.
— In 2014, the rates of natural monopolies were frozen to help the industry. Did you feel a real effect? Or maybe a greater moral satisfaction?
— There was a real effect. The cost of gas has a dramatic impact on our production costs. Our logistics is expensive. As compared to many other producers, we are far from sea ports, and only Kemerovo is farther than we are. All other producers are in the European part, much closer to shipment ports. So, this is of key importance. Such state measures help us survive and be competitive as compared to Chinese producers and those in the Persian Gulf.
— What was the annual effect?
— The estimated savings for nine months of this year were roughly 850 mln rubles. This allowed allocating funds to the investment program for plant development and compensate for a probable investment drop as compared to 2013. Without freezing the rates under current economic conditions, we would have to reduce our investment program by 25 %. Besides, economy measures increased the income taxing base.
— What do you expect next year? The natural monopolies are asking to raise the rates and return the lost earnings. Do you participate in these discussions?
— Of course we do. A program for development of the chemical industry up to 2030 is being worked out presently. The rates of natural monopolies are the key factor for supporting and inciting the processing industry so that it remains competitive in the global market. We have reiterated this on many occasions and addressed the government. Of course, we're not enthusiastic about railway rates not being within inflation limits. They will probably be raised by 10 %. For us, this means substantial extra costs.
Daring solutions really work
— Are you ready to revert to the IPO idea?
— I see no sense in this. We had a bad experience. Thank God that in 2010 it didn't end with an IPO because at that time after the awful year of 2009 the company's market appraisal was terrible. The first Greek crisis also blocked our IPO.
— And the volcano. Remember?
— How can one forget that! We were forced to change the road show program because we had to start from London, but we couldn't fly there. We flew to America. Flights from Russia follow a route close to the North Pole so that they don't come into contact with the volcano action zone. Everything happened, first the volcano, then Greece, but the result was fine. We terminated the IPO and didn't sell at an inadequate price. By late 2013, actually due to our current activities, we repaid the bulk of our debts and achieved a debt burden indicator of 0.7 EBITDA.
— Do you feel yourself at home in a private company with all the ensuing risks?
— Yes, I do. What are the risks that you have in view?
— The position of the sole majority shareholder. Accordingly, the majority of decisions is the result of his volition.
— Well, if a shareholder is smart and participates in management of the company, understands the market and its movement vector, then this isn't a problem. A problem can arise when a shareholder is not involved in processes and doesn't know the business, but makes decisions. Then, yes, this is a risk, but in our case there is no risk.
— Simply many people call Dmitry Arkadievich a very venturous businessman. As a matter of fact, all his and Uralchem's history is that of risk deals. Often he guesses right, but sometimes, as in the case with VMU, he is wrong. Do you like such style of management?
— Well, I have been working here for over nine years.
— Does this mean that you are on one wavelength with him?
— I hope so. Well, what does it mean to be venturesome? This is always a matter of appraising risks. There is a correct appraisal, and in the long run life demonstrates that we appraise risks right. Maybe we make daring decisions, but they actually work. So it wouldn't be correct to say that Mazepin and Uralchem are ready to jump in feet first without a second thought.
— You have a share in Uralchem?
— Yes, a small one.
— Are you planning to increase it? Maybe you have some option programs?
— This depends on the owner's appraisal. To increase it, my performance should be good.
— The political situation is a challenging one, and in addition, the government has taken a course on de-offshoring. Will you somehow change the company ownership structure? The parent company of the holding — Uralchem Holding P.l.c. – is registered in Cyprus. Will this present any problems for you?
— I guess, no, because the profit centres are all our Russian enterprises and production assets. Uralchem Holding P.l.c. is exclusively a legal structure having no relation to payment of taxes or to creating any tax optimization schemes. That is why I am positive that state bodies will have no questions to us. Uralchem is an absolutely transparent company.
— Well, nowadays nobody can be sure of this.
— I know exactly that our finance people don't even mention such a notion as tax optimization. Paying taxes is a rule and we abide by it.
Flying in on Sunday, and turning out to work on Monday
— How did you start working with him? You've been long with Uralchem.
— Yes, over nine years. Life goes round in circles. Nine years ago I was Uralkali's representative in South-Eastern Asia and lived in Singapore. I was approached by a recruiting agency and it proposed to hold an interview. I met Dmitri Arkadievich in Moscow and in a couple of weeks he offered me the position of Chief Commercial Officer. I concluded a "divorce" with Uralkali and returned to Moscow with pleasure. I vividly remember flying in on Sunday and turning out for work on Monday.
— Are you free enough in decision-making at the company or is the management hierarchy very strict?
— I have sufficient freedom. As far as I remember, Dmitri Mazepin's management philosophy is to vest people with responsibilities and make them accountable for the final results. I'm pleased that I have plenary powers both in operational business and in real-time company management. So my work is interesting.
— Do you miss Asia? You probably go there for vacations?
— I go there from time to time, yet, you know, there is a small "but" in Asia. Chinese culture prevails there. And either you have to embrace it in full and become part of that culture, or you will always be an expat there. Their life is kind of artificial. Well, and here I have my friends and parents. That's why I came back to Russia with pleasure and have no regrets.
— You certainly know the Asian business mentality well. In your opinion, are the locals hard to understand and deal with when building business relations with them?
— Rules of the game exist everywhere. Dealing with Australians is probably easier. They are completely forthright, and it's like 15 to 20 minutes of negotiations, everything is discussed, an agreement is reached, and all go to the local pub. With Asians, dealing is different. There are many conventionalities, one has to observe a long preamble, and in the end, you won't necessarily achieve a result.
The options of reallocating shipments were not needed
— In September you said that you were investigating options in the event of restrictions imposed by sanctions. Did you have to use any?
— This hasn't affected us yet. There were talks that shipments of fertilisers to the European Union could be limited, and we took this into account. We considered the options of rerouting our commodity flows. However, this has not been needed yet.
— Were there any cases of European clients refusing Uralchem products because they were Russian?
— No, there were no such refusals. Our traditional buyers are taking the same volumes as they previously did. In particular, Norwegian Yara is buying the same volumes of ammonia, etc. No restrictions were imposed. We didn't witness any emotional cases of refusal of our products.
— Has the attitude toward you in the Baltic states changed after Crimea?
— No. There are different individuals who are making strong statements in our address and in that of Russia as a whole, but the business approach and business relations in Latvia are fairly reasonable.