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By John Helmer in Moscow

Government officials refuse to provide details of the order to reopen an investigation into the two-year old collapse of Uralkali’s Mine-1 at Berezeniki.

Uralkali, meanwhile, fears that a scheme of renationalization may have been started, targeting a takeover of Uralkali from its current shareholders.

According to an Interfax wire service report, and an announcement last Friday by Uralkali, Deputy Prime Minister Igor Sechin has directed the Federal Service for Ecological, Technical and Atomic Supervision (Rostekhnadzor) to form a commission within the next two weeks to determine the causes of the accident at the Berezniki mine in October of 2006, the amount of damage inflicted on the state and on other companies, as well as the legal responsibility of the mine-owner, Uralkali. An initial Rostekhnadzor investigation, immediately after the mine collapse, ruled that “a very complicated, rare and abnormal geological condition” within the Verkhnekamsk deposit had caused the subsidence, and that this was force majeure, eliminating Uralkali’s liability.

Sechin’s office refused to respond to questions about the order, or the meeting of officials late last month, at which it was decided. First Deputy Prime Minister Victor Zubkov, the official who usually supervises the fertilizer sector, also refused comment on why Zubkov had not been involved. Both officials referred to the press spokesman of the Prime Ministry. He told FW he “cannot comment on anything”. There is no official notice of the meeting, reportedly on October 29, on the government website.

Uralkali says it did not receive any advance notice of theintention of officials to discuss the issue, and heard nothing of Sechin’s order until November 7, when the company posted an an announcement on its website. Asked what his agency had known, and when, Rostekhnadzor said through spokesman Yevgeny Anoshin that it had received the new order ät the beginning of the previous week”. He refused to give the exact date. The implication is that Rostekhnadzor had not attended the meeting on October 29, and did not learn of the outcome for several days, until November 3 or 4. Uralkali appears not to have been notified until later.

Investigators from the federal Prosecutor-General’s office have been reported at Berezniki, seeking documents; while tax inspectors have also begun an audit at Uralkali’s regional office. The extent of the investigative operation was likened by a source at the company as “close to Yukos in scale”. He is referring to the government indictments which brought down the Yukos oil company and its controlling shareholder, Mikhail Khodorkovsky, in October 2003.

In an announcement yesterday, Uralkali said its “future existence is in doubt”, and that itwas exposed to “an enormous financial strain if found culpable and made liable to the state and third parties for all damages.” Estimates of the size of the liabilities go as high as $50 billion, according to one Moscow report, if reserve losses, population resettlement, and indirect costs and losses are included.

The state-owned Russian Railways Company (RZD), headed by Vladimir Yakunin, appears to have been one of the prime movers behind Sechin’s order. DmitryPertsev, chief spokesman, told FW that RZD’s concern with the issue of who should pay for the associated damage is not new. “Already “two years ago, when the first hole appeared, we were saying that the reconstruction of this rail line is not only RZD’s business, but it is also the responsibility of the region, and of all users of the rail line. Our specialists participated in all investigating commissions since the beginning, and we will participate in the new one. Now our main task is to value the damage.”

He added that RZD has already financed on its own account the first 800-metre bypass built in 2006; then a 6-km line, costing Rb 450 million ($17 million); and “now we’ve planned a bypass line of 53-km.” He estimated that to date, the rail company has spent Rb50 million ($2 million) on the new bypass, and will require “another Rb9 to 11 billion [$333-$407 million]”.

“Severalproposals were discussed on how to finance this,” Pertsev said. “One was to separate it into three parts between RZD, the [Perm] regional budget, and the companies. Another one was that RZD will construct the line, and raise the tariff for another six years to recover the costs.

The aim of the current commission is to determine the best way of doing that, so there are no final decisions.” He was unable to say whether RZD has the money to complete the line.

The new financial stringency, and the curtailment of credit, may be one of the motives in the reopening of the Rostekhnadzor inquiry, which is due to present its findings in December.

However, Uralkali sources believe more is at stake. A company source told FW “one of the theories is that this is all about the railroad. But the other circumstances give us concern that other scenarios are possible.” Uralkali’s mining licence includes a standard proviso for reimbursement of environmental and collateral damage that may result from mining operations.

A company source said that Uralkali does not believe there can be legal or moral grounds for holding the company responsible for the mine flooding and subsidence, which is a phenomenon that has occurred many times before at potash mines elsewhere in the world. One company source said “the main problem is that in the Soviet period a city was built over the mine deposit, with a hundred thousand inhabitants. The rest of the world would try to avoid such a situation, but in the 1930’s this was accepted here. It’s also worth noting that the site of the incident was developed in the 1960s and 1970s, when there was strict compliance with the technical standards of the time. The standards changed only much later, in the 1990s, when most of the mine had already been worked out.”

Negative speculation about Uralkali’s future drove the company’s share price down by 26% in Monday trading, when the index as a whole climbed 6%. The share is now priced at $2.61. Word of the reopening of the Rostekhnadzor inquiry has wiped $2.7 billion off Uralkali’s market capitalization.
Industry analysts say that if nothing more is involved in the move than a reapportioning of railroad reconstruction costs, the cash-rich potash producer is not at risk. Uralkali and Silvinit, which also transports potash on the damaged rail line, have reportedly made proposals for contributing Rb1 billion ($37 million) each to the overall reconstruction cost.

Maria Alexeyenkova, analyst for Renaissance Capital in Moscow, reports that “Uralkali is on course to post net income in excess of $1.3bn this year, thus it can cover additional expenses. However, if the government includes damage from the loss of reserves, the amount of the liabilities could be large.” In 2006, at the time of the incident, Uralkali was estimated to have lost some 13% of reserves, or about 1.1 million tonnes of production at the mine, where depletion was at the 80% level.

Mikhail Stiskin, analyst at Troika Dialog, said that “the amount to be spent is unpleasant but not critical for Uralkali, which reaped USD 576 million in net profit in 1H 2008 alone. In our view, it is unlikely that the company will be forced to assume the entire cost of building the railway lines, put at RUB 13.5 billion, or USD 500 million.”

Stiskin reports that ” we believe that the new investigation is the result of the financial difficulties being experienced by Russian Railways, which was to have built the 53 km railroad, and expect the state to take a balanced viewpoint on the matter.”

Anton Subbotin, spokesman for Silvinit, told FW he cannot comment on the government’s latest decision. He added that his company”is interested in swift construction of the railroad and shipment of its output.”

A spokesman for Uralkali told FW that the potential financial liabilities Uralkali is now facing are so great, “all ïnvestment and production plans, and indeed, and the future existence of the company can be put into question. Everything depends on what concrete decisions are taken on estimating the damage and legal liability, and also on additional factors, such as the claims of third parties. ”

Uralkali and the government estimate that the company has already spent Rb2.7 billion ($100 million) on cleaning up the Mine-1 problem. “We have been surprised by the [October 29] decision, and we have no information on the reasons for it. We consider that the structure of the first commission included authoritative experts; the investigation was competent and determinative; and so we do not see any grounds to call into question its conclusions.”

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