eurochem-annual-report-2011

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Business review Risk management report continued Overview of main risks and trends in their assessment Internal risks Probability High Medium Each circle represents the estimated position of a key risk as at 31 December 2011. The dotted arrows illustrate changes to risk perception over the previous six-month period. The absence of an arrow implies a stable risk perception. The table below summarises the key factors behind the highlighted changes in the risk assessments shown: 64 EuroChem Annual Report and Accounts 2011 Preceding six months Following six months Direction Cause Direction Cause P3 Lack of own phosphate rock capacity Increasing Additional delays to the start of phosphate rock mining operations in Kazakhstan R2 Import duties and other trade barriers in key markets Decreasing Expected Russia WTO accession from second half of 2012 K1 Technical risks to potash projects Increasing Difficult subsoil conditions have led to production start-up delays N1 Narrowing of natural gas price differential between Russia and Europe L1 N2 P2 Low Impact Low Medium High N1 L1 N1 External risks Probability High Decreasing Acquisition of Severneft- Urengoy L1 Logistical bottlenecks Decreasing Operational debut of Tuapse and purchase of Panamax vessel K1 K1 Medium R2 P3 R2 K4,P2 P1 Low Impact Low Medium High N1 R1 D2 E1 N3 D1 P3 F1 Stable No further changes prior to the expected start-up of production in 2013 in Kazakhstan Decreasing Removal of anti-dumping duties Stable Significant changes are not expected until the completion of skip shaft #1 Decreasing Investment strategy targeting further integration in natural gas and other raw materials Decreasing Acquisition of second Panamax vessel in early 2012
Area Ref. code Nature Description Strategic response How do we measure up? K1 Technical Delays in the launch of potash production due to Involvement of experienced mining sub-contractors. Despite delays at the Gremyachinskoe cage shaft various issues surrounding logistics, geological Constant monitoring of project management systems and the acceleration of the skip shaft #2 sinking, conditions, shaft sinking and ore extraction and controls. overall capex spending remains as planned. More operations. Insurance taken out for shafts. details on potash are available on page 44 of this report. K4 Potash prices Decline in price for potash fertilizers may result Achieve the lowest cost-delivered-to-market globally Launched Tuapse transhipment terminal. in sub-optimal returns from the potash project. Increase own consumption of K by raising NPK We estimate the break-even potash price for our capacity. Secure own logistics and shipping VolgaKaliy project to be substantially lower than the channels. current USD 480/tonne FOB Baltic. Average FOB Baltic spot potash prices were USD 445/MT in 2011 (USD 473/MT over the last five years). N1 Gas cost Differential in natural gas cost between Russian Own natural gas production/buying gas producer. The purchase of Severneft-Urengoy potentially increase and European/US producers is decreasing. Deep modernisation of ammonia production, provides EuroChem with 25% of its annual natural improving ammonia gas efficiency. gas requirements at lower price. Launch production of higher-value-added and Launch of Russia’s first melamine production line premium products (LDAN, NPK, AdBlue). in March 2012. Investments in nitrogen fertilizer capacity See prilled urea delivered to Brazil/Europe cost in regions of lower gas costs (Saudi Arabia, North Africa). advantages on page 54 of this report. N2 Technical Technical/operational risks relating to the age and Full insurance coverage, including business 2011 capacity utilization at Novomoskovskiy Azot depreciation of equipment. interruptions. and Nevinnomysskiy Azot was 96% and 91% Unplanned stoppages cam significantly affect cash flows. respectively. N3 New supply New supply from low gas cost areas may cause Cost reduction, modernisation and efficiency As illustrated on page 38, Nevinnomysskiy unfavourable shift in EuroChem’s position on global of nitrogen production. Azot and Novomoskovskiy Azot remain comfortably cost curve. positioned on the global cost curve. P1 Iron ore Iron ore price levels are largely a factor of Chinese Adjust debt levels for potential volatility in Each 10 USD/tonne change in iron ore economic; risk to EuroChem cash flows. iron-ore-related cash flows; review hedging CFR China price translated into a USD 17m change on ongoing basis. in EBITDA in the nearest quarter and up to USD 40m in the nearest 12 months Own vessels for freight and use of Northern Sea Route to cut transportation costs. P2 New and more New supply from low cost areas (e.g. Saudi Arabia, Tight cost control; added flexibility at production Our Lifosa and Phosphorit facilities are among efficient Morocco) may cause unfavourable shift in plants; increase NPK production in line with own the lowest cost producers globally as illustrated capacity EuroChem’s position on global cost curve. potash ramp-up; increase foothold in the domestic and CIS markets. Target reductions in logistics costs. on page 42. P3 Deficit of own Reliance on third-party supplies may result in margin Increase phosphate rock resource base with We are 80% self-sufficient in phosphate rock. phosphate rock pressure as a result of our exposure to rising Kazakhstan operations; decrease rock consumption The start of mining at our Kazakhstan operations phosphate rock prices or its limited availability. by switching to NPK from MAP/DAP at phosphate is expected to gradually take us closer to full plants; increase phosphate rock storage capacity; alternate supply options. self-sufficiency. L1 Bottlenecks/ Limited fertilizer transhipment capacity in Russia. Build and operate own port terminals and With our investments in logistics infrastructure, increasing Growth in the cost of rail and port services. transhipment capacity (Tuapse, Ust Luga); EuroChem’s own or long-term-contracted costs Limited warehousing capacity within port warehousing and storage facilities, acquisition transhipment capacity covers 82% of our needs, infrastructure. of rolling stock and vessels. while our wholly-owned 7,000 rail cars and 45 locomotives represent 85% of our total rolling stock requirements. E1 Environmental/ Nature of production coupled with age of certain Measure and monitor environmental footprint and Since 2004: reputational assets dictate additional environmental precautions public perception. Effluent discharge: -41% and investments. Reputational risks. Commit funds to reduce the environmental impact Non-recycled water usage: -28% of operations. Emissions: -16% Rapid response to environmental emergencies – Energy consumption: -11% real and alleged. See page 59 for additional information on our Policy of openness to the public. environmental investments. F1 Cash flow/debt EuroChem may not be able to cover all its planned Maintain maximum readiness to tap all possible 2011: operating CF/capex = 1.51. capacity investments from operating cash flows and new sources of debt and/or equity finance; extend debt Over the next five years, capex is not expected shortage debt. maturity profile, implement effective hedging to exceed operating cash flows under base case strategy, IPO, study of alternative funding options, review financial covenants, strategic partner, and project financing. scenario. Potash Nitrogen Phosphate Logistics Environment Financial Annual Report and Accounts 2011 EuroChem 65 Business review
Page 1 and 2:
Enabling our future Annual Report a
Page 3 and 4:
...by supplying world markets Our s
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2011 Operational highlights > Succe
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Potash 912 MMT of proven and probab
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16 Estonia Lithuania 7 14 15 Belaru
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Raw materials Up to 80% self-suffic
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Ten years of performance Ten years
Page 15 and 16: A record RUB 131bn in revenues 66%
Page 17 and 18: 4. Global economy Emerging economie
Page 19 and 20: Ranking by nutrient capacity MMT p.
Page 21 and 22: Despite the significant breakthroug
Page 23 and 24: Business review Our strategy Our st
Page 25 and 26: Enabling our future... ...by supply
Page 27 and 28: 7billion World population in 2011 9
Page 29 and 30: Severneft-Urengoy Novy Urengoy, Yam
Page 31 and 32: Environmental footprint -16% decrea
Page 33 and 34: Our commitment We have committed US
Page 35 and 36: Vertical integration > 2.8 MMT p.a.
Page 37 and 38: Employee participation Our employee
Page 39 and 40: The following table highlights our
Page 41 and 42: Nitrogen segment RUBbn, or as indic
Page 43 and 44: Over the next five years (2012-2016
Page 45 and 46: Phosphate segment RUBbn or as indic
Page 47 and 48: EuroChem’s main planned investmen
Page 49 and 50: i Along with nitrogen and phosphate
Page 51 and 52: Distribution RUBbn, or as indicated
Page 53 and 54: i At Tuapse, one of our priorities
Page 55 and 56: Cost of sales and gross margin As i
Page 57 and 58: 2011 2010 2009 RUBm % of total % ch
Page 59 and 60: Balance sheet Working capital Worki
Page 61 and 62: Environment We’ve come a long way
Page 63 and 64: Occupational health and safety We s
Page 65: Strategic risks We classify as stra
Page 69 and 70: Richard Sheath Audit Committee Chai
Page 71 and 72: Nikolay Pilipenko Audit Committee Q
Page 73 and 74: Where did we focus in 2011? The Boa
Page 75 and 76: The Strategy Committee The Strategy
Page 77 and 78: 1 Andrey Melnichenko (39) Chairman
Page 79 and 80: Financial information Consolidated
Page 81 and 82: Financial information Consolidated
Page 83 and 84: Financial information Notes to the
Page 85 and 86: 2 Basis of presentation and signifi
Page 87 and 88: 2 Basis of presentation and signifi
Page 89 and 90: 3 Critical accounting estimates, an
Page 91 and 92: 4 Adoption of new or revised standa
Page 93 and 94: 6 Segment information continued The
Page 95 and 96: 8 Intangible assets Note Acquired s
Page 97 and 98: 10 Mineral rights continued As of 3
Page 99 and 100: 13 Cash and cash equivalents and fi
Page 101 and 102: 15 Bank borrowings continued Intere
Page 103 and 104: 17 Derivative financial assets and
Page 105 and 106: 22 Distribution costs Distribution
Page 107 and 108: 26 Income tax continued The movemen
Page 109 and 110: 29 Business combinations Acquisitio
Page 111 and 112: 31 Contingencies, commitments and o
Page 113 and 114: 32 Financial and capital risk manag
Page 115 and 116: 32 Financial and capital risk manag
Page 117 and 118:
32 Financial and capital risk manag
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Financial information Main producti
Page 121 and 122:
Q4 2010 Q3 2010 Q2 2010 Q1 2010 201
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Forward-looking statements This ann
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