Annual Report 2012

Potash

Potash - the final element in our resource base development

Overview

USD 400m

In 2012, the Group raised over USD 400m required to start construction

 

In November 2012, Vnesheconombank, Eurasian Development Bank and Raiffeisenbank acquired 20%, 9.1% and 8.95% shareholdings in VPC’s authorised capital, respectively. Acron Group’s shareholding in VPC’s authorised capital decreased to 61.95%.

In November 2012, VPC obtained approval and commenced construction of skip and cage shafts. The general constructor is FGUP US-30.

Additional exploration findings added another 6.5% of mineral salts to the balance reserves of the deposit (A+B+C1), and 8.1% to K2O reserves.

In October 2012, Alexander Pupov was appointed as VPC’s CEO.

Key trends in the potash fertiliser market

Total potash fertiliser consumption in 2012 was down 2% to 28.4 million tonnes of K2O due to reduced imports by major customers, India, China and the US. In order to support prices, the largest potash fertiliser producers decreased utilisation of capacity several times over the year.

Growing demand in Brazil supported the weakening potash market in the reporting year. New potash fertiliser supply contracts were negotiated with India and China over the course of the year and were signed in December 2012 – February 2013. Given the considerable potash fertiliser underconsumption in the reporting year, major importers are expected to replenish reserves in 2013, which will improve potash sales.

Development plans

Construction of the Talitsky mine in compliance with subsoil use conditions (commissioning timeline: 2016, with design capacity reached in 2018).

Uninterrupted financing of capex for mine construction in 2013–2018: roughly USD 2 billion.

  • In 2012, USD 400 million of equity financing was raised from Vnesheconombank, Eurasian Development Bank and Raiffeisenbank.
  • Vnesheconombank’s Supervisory Board approved the provision to VPC of a USD 1.1 billion targeted loan facility. VPC expects to use these funds as capital investment starting in 2014.
  • Other funds will be raised by Acron Group and secured with VPC’s cash flows and intra-group loans.

Operating performance and investments

Talitsky mine

In 2012, Verkhnekamsk Potash Company commenced construction of a mine in the Talitsky area of the Verkhnekamsk potassium-magnesium salt deposit in Perm Krai.

Key features of the Talitsky area of VPMSD

Sylvinite reserves according to State Reserves Committee (Rosnedra) (2012)

Balance reserves of (A+B+C1) K2O: 163 million tonnes, KCl: 258 million tonnes.

Off-balance reserves of (A+B+C1) K2O: 143 million tonnes, KCl: 226 million tonnes.

JORC resources (2011)

K2O measured and indicated resources: 157 million tonnes, KCl: 249 million tonnes.

K2O inferred resources: 156 million tonnes, KCl: 247 million tonnes.

Start of implementation

Obtaining subsoil licence for the Talitsky area of VPMSD development

2008

Start of construction

First stage: shaft construction

2012

Main goal: mine commissioning

Raw material independence + market sales

2018

2008–2012: Geological exploration, preparations for the Talitsky mine construction project.

Principal achievements in 2012

  • VPC obtained Glavgosexpertiza approval for the designs of the shafts, surface technological complexes, auxiliary facilities and buildings. Creation of the 416.9-m skip and 364.6-m cage shafts is the most difficult and labourintensive stage of the potash mine construction. Shaft excavation will be performed by artificial freezing, which is the safest of existing methods.
  • In autumn 2012, the Company started construction preparations for freezing to subsequently excavate the shafts.
  • Funds raised from investors were allocated to finance construction.

Principal plans for 2013

  • Ground freezing and start of shafts excavation, completion of necessary infrastructure.
  • Completion of preparations and approval of design for the mining and processing facility.

Principal upcoming stages

2013–2015: Shafts construction.

2014–2016: Construction of the mine, surface complex and infrastructure.

2016–2018: Mine commissioning, start of potash production and shipments.

op-review-potash.jpg

North Atlantic Potash Inc.

North Atlantic Potash holds 18 promising potash exploration permits for the Saskatchewan deposit in Canada. The primary strategy for the asset is to analyse the prospects of each permit and choose the best means of utilisation: establishing JVs with investors for further permit development, or sale of the permit.

Operating performance

In 2012, the Company continued exploration of nine permits under the Albany project, a JV with Rio Tinto. Seismic studies and drilling were carried out on 482,000 hectares. The Company plans to complete its vast geological exploration programme for these permits in May 2013.

In 2011–2012, exploration was completed on four permits with an aggregate area of 128,000 hectares combined into the Foam Lake project.

Eleven wells were drilled: three on KP 382, five on KP 508, two on KP 509 and one on KP 383. Three major potash members of Saskatchewan deposit, Patience Lake, Belle Plaine and Esterhazy, were intersected and sampled. Moreover, 2D seismic exploration results for 330 km of area were obtained. Based on the research findings, North Rim Exploration Ltd prepared NI 43-101 report on Foam Lake resources. According to the report, 942 million tonnes of mineral resources (measured, indicated and inferred) were recorded, which is equivalent to 178 million tonnes of K2O or 283 million tonnes of KCl.

In 2012, the Company started to explore KP 421 (Stockholm project). In the course of preliminary exploration, two high-grade potash members were intersected: Belle Plaine (42% KCL) and Esterhazy (36% KCL). This is a highly promising permit and the Company will continue to explore it.

Development plans

Exploration of permits under the Albany project is scheduled for completion in 2013. Based on the findings of the completed survey, the Company will decide how to further implement the project for the mining and processing complex construction. Under the JV agreement, North Atlantic Potash Inc. holds 60% and Rio Tinto holds 40%. Rio Tinto holds a call option for another 40% of the JV.

The Company will continue to look into opportunities to benefit from the Foam Lake and Stockholm projects, as well as the four other permits.

Market overview

Global potash consumption was down 2% in 2012 to 28.4 million tonnes of K2O. Global exports shrank 10% to 40.5 million tonnes, peaking in Canada and Russia. Major potash importers, China, the US and India, reduced purchases 10% to 33 million tonnes of K2O by year-end. The IFA forecasts that in 2013 global consumption will increase 1.8% to 28.9 million tonnes of K2O.

Negative factors affecting the market in 2012

Due to India’s national currency depreciation, higher potash prices resulted in reduced demand and lower imports. US imports were also down 17% due to considerable potash stock accumulated in late 2011. Protracted price negotiations with Chinese and Indian importers resulted in lower capacity utilisation at major potash fertiliser producers.

Positive factors driving the market in 2012

In the reporting year, Brazil was the only country that increased its imports: up 7% to 7.8 million tonnes of K2O. Growing Brazilian demand supported the potash market as a whole.

Lower overall demand in 2012 resulted in stock reduction with major importers, and as a result the market anticipates revitalisation in 2013. The prices in contracts executed in December 2012 – February 2013 with India and China are roughly 17% lower year-on-year (USD 400, CFR). The signed contracts will ensure capacity utilisation for potash fertiliser producers.

Potash global prices (USD/t)

700
600
500
400
300
200
04/02/2010 01/07/2010 02/12/2010 05/05/2011 06/10/2011 01/03/2012 02/08/2012 03/01/2013

.Potash, FOB FSU (spot).Potash, FOB FSU (spot)

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