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By John Helmer in Moscow

Eurochem, Russia’s diversified fertilizerproducer owned by Andrei Melnichenko, and still unlisted, has unveiled a series of ambitious plans to challenge Russia’s two largest potash miners, Uralkali (URKA:RU) and Silvinit (SILV:RU).

According to Eurochem sources, the company will move from zero now to planned production of 2.3 million tonnes of potash (potassium chloride) by 2012; and 4.6 million tonnes by 2015; with resource capacity of more than 6 million tonnes of potash by then.

Uralkali has announced that by 2011 it will be producing 7 million tonnes — with additional capacity potential from its Mine-5 still under study. Silvinit is currently producing at 5.5million tonnes of potash per annum. In May, Silvinit told shareholders it is planning an increase of output to 6 million tonnes by next year. A combination of Silvinit with Acron, a producer of complex fertilizers (NPK), at a planned new mine at Verkhnekamskoye, would add an unmeasured volume to their combined potash capacity; the number has yet to be defined by feasibility studies now under way.

In March Eurochem, sometimes known by its Russian name Evrokhim, paid 4.1 billion roubles ($171.5 million) for its new mine project atthe Palashersky and Balakhontsevsky areas of Verkhnekamskoye, in the Perm region of central Russia. These areas contain an estimated 1.2 billion tonnes of potash reserves, but would require between 5 and 8 years of development before mining can start.

At a sitevisit last week, Mineweb was shown Eurochem’s 2.3 million tonne-capacity potash mine project at the Gremyachinskoye deposit, in the southwestern region of Volgograd. Production is expected to come on stream at the mine in four years’ time.

Eurochem chief executive Dmitry Strezhnev told Mineweb the mine will startin 2012, and reach full capacity one year later. “There are plans to introduce the second phase of the mine to reach production capacity of 4.6 million tonnes by 2015,” he added. Total investment required for the project comes to Rb50 billion ($2.16 billion). This, he and other company sources acknowledge, has been doubled over the past year by inflation in the cost of construction and equipment.

The capital expenditure estimate includes $100 million for the mine license; $50 million for preparatory works; $600 million for the processing plant to be designed and built by Hatch(Canada); $300 million for infrastruture works by Belgorkhimprom (Belarus); and more than $600 million for the two principal shaft contractors, Thyssen Schachtbau (Germany) and Shaft Sinkers (South Africa).

“When we studied the profitability of this project,” Strezhnev said, “it was profitable even at a potash price of $500. We do not expect prices to go lower than $700-$800, so our investments carry almost no financial risks.”

He was responding to a market warning, issued a few weeks ago, by Bill Doyle, chief executive of Potash Corporation, the Canadian and world leader in potash production. According to Doyle, the price for taking delivery of potash at the minehead needs to increase to $560 to $570 per tonne to stimulate development of undeveloped deposits. In the first quarter, he noted, Potash Corp says it achieved a so-called manufactured price of $285 a ton in the first quarter.

“With a new mine, you’re waiting seven years for cash flow and you have to bet now on what the market’s going to be like in May 2015,” Doyle also said. He estimated that thecost of bringing on line a 2 million-tonne-a-year mine has risen to $2.8 billion, at least in North America. That increases to more than $5 billion when supporting infrastructure such as roads and power lines is included, he added.

Mineweb asked Strezhnev whether Eurochem will be joint-venturing with an established potash miner at Gremyachinskoye. “There will be no joint venture fordeveloping this mine,” he replied. “We reviewed this issue back in 2006, and then we realized that nobody in the world constructs these mines by itself. Everyone hires project companies.”

He also said there will be some cooperation with the Europeanfertilizer giant, K + S, in which Melnichenko holds an estimated 14% stake. According to Strezhnev, there may be “synergy or strategic cooperation in the field of production sales or processing.”

Since May 2007, Strezhnev holds a 5% stake in the Eurochem group; Melnichenko, 95%.

Asked about Eurochem’s sales strategy for potash, Strezhnev said: “We think we will be selling on the spot market, although it is stillpremature to speak about sales. Access to markets can be done through the Baltic and Black Seas and by railroad. We are interested in sales to the east – Kazakhstan, Iran, Iraq — sales on Russian territory, plus the traditional markets for potash. It’s important to mention that we can use potash both as raw material for the manufacture of NPK, and as primary product as well.”

Nikolay Pilipenko, thechief financial officer, was asked if Eurochem is planning an initial placement offering (IPO) for its shares once the company will become an established potash and NPK producer. Uralkali successfully listed in London in 2007, while Acron’s intentions for a London IPO this year are not yet firm.

“We were ready for an IPO already last year,” Pilipenko said of Eurochem. “The Eurobond was a very good disclosure exercise that we’ve now passed. If [the IPO] will be decided by the management we can prepare very quickly. Bear in mind that Fitch has upgraded the rating of the company to BB.”

The mining plan callsfor innovations on the standard potash mine approach. Alexander Tugolukov, the technical director at Eurochem, said two different contractors have been selected to construct two separate shafts, “with a kind of socialist emulation between them to determine who will do the job better, quicker and cheaper. These tactics may also be used on our Verkhnekamskoye deposit to cut the timing of mine development and construction from the conservative 7-8 years to about 5-6 years.”

The skip shaft for production is to be built by Thyssen Schachtbau using the standard technology of freezing soils to a depth of 350 metres. An opening contract for this element of the project has been signed for Eur205 million. Thyssen was the first company to build a Russian potash mine in 1932.

Shaft Sinkers is to build a latticed shaft for movement of miners. This will use cement. It is only the second such shaft to be used at a potash mine in the world; the other is at Boulby in the UK. Eurochem has contracted to pay the SA firm $270 million for this shaft. Construction is scheduled to commence this September. The Eurochem contract is a big break into the Russian market for Shaft Sinkers’ chief executive, Rob Schroder.

Eurochem is a diversified fertilizer producer, with nitrogen, phosphate, and NPK products in its portfolio. The group’s Kovdorsky mine, in the northwestern Kola region, is currently producing about 5 million tonnes of iron-ore concentrate per annum; 2.5 million tonnes of phosphates (apatite); and over 8,000 tonnes of baddeleyite (zirconium oxide). Eurochem’s turnover for last year was almost $3 billion.

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