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By John Helmer in Moscow

Uralkali, Russia’s dominant potash exporter, has made an offer to compensate the costs of the state-owned Russian Railways Company (RZD) to build the bypass around the Berezinki sink-hole and mine subsidence. The offer was reported in a Moscow newspaper, and confirmed by a company source. The offer was contained in letters to Deputy Prime minister Igor Sechin, and the Minister for Natural Resources, Yury Trutnev.

Sources close to Uralkali told Fertilizer Week that Uralkali understands that the purpose of the newly appointed commission of inquiry into the Berezniki problems — ordered by Sechin October 29 — is to calculate how the rail costs should be apportioned between users of the new line. The commission has begun deliberations, and is due to issue its report next month. However, Uralkali believes it would be unfair for it to shoulder the rail costs alone, when several other major exporters, including potash producer Silvinit and titanium exporter VSMPO also use the rail-line. Other commercial users include ammonia and urea producer, Berezniki Azot, a unit of Uralchem.

RZD spokesman Dmitry Pertsev told FW 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]”.

According to Pertsev, “several proposals were discussed on how to finance this. 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.”
A Moscow newspaper claimed Friday that at the October 29 meeting, Sechin opted for a cash up-front option, estimating that the rail line costs will come to Rb13.4 billion ($496 million). Reportedly, he agreed that Rb3 billion ($111 million) would be contributed by the federal budget; Rb3 billion ($111 million) by RZD; with the balance of Rb7.4 billion ($274 million) to be contributed by the principal commercial users of the line. Potash exporters Silvinit and Uralkali reportedly offered Rb1 billion ($37 million) each. They were reluctant to contribute more, according to industry reports. The new commission has been instructed to decide the issue.

RZD acknowledges that the Sechin contribution formula is one of the options now being considered.
Media speculation that Uralkali has agreed in its letters to Sechin and Trutnev to pay the full Rb7.4 billion ($274 million) is denied by the company. VSMPO has been contacted by the Sechin commission, and is considering what contribution it may offer. It declined to speak on the record. Silvinit confirmed that iut had made an offer of Rb1 billion ($37 million) eighteen months ago, and is not proposing to add to it now.

Company sources, including Uralkali, believe it would be unfair for the government to demand payments for the rail line project disproportionate to the user’s’ shares of the line for its cargo transportation.

In an announcement to the market on Thursday, Uralkali management said that, as a result of output cuts and declining sales volumes, the company expects its cash revenue to decrease by $650 million by year’s end, leading to a December 31 balance of $300 million in cash, with $470 million in debt. This does not count the additional cost of the rail reconstruction. So long as the contribution the government decides remains within Uralkali’s financial capacity — substantially less than its forecast cash position — and so long as the commission imposes neither new fines nor penalties, Uralkali believes it will be able to manage the financial burden.

Alfa Bank analyst Roydel Stewart reports that “the decline in potash demand is temporary and will self-correct as farmers eventually get access to credit. Uralkali’s [share] value is more sensitive to potash prices than sales volumes….If the government were to accept this offer, we would view this as positive, as the market is pricing in a severe fine…”

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