Annual Report 2012
Alexander Popov
Chairman of the Board of Directors

Chairman’s statement

A significant year in the Group’s strategic development

“In 2012, Acron experienced one of the most significant years in its history. Our mining segment, which is the key element in the Group’s vertically integrated business model, is up and running with the commissioning of the Oleniy Ruchey mine.”

Markets

This year was a challenging one for the global mineral fertiliser market. Unfortunately, the volatility of the global economy is still affecting the industry and competition is fierce. I would like to underline several factors that support the sustainability of our market position. First of all, we operate in two different markets, the nitrogen fertiliser market and the complex fertiliser market. These two markets differ in their specific characteristics and cyclical nature, and that reduces our dependence on trends in any one particular product market. Secondly, we mitigate the effects of seasonal fluctuations through a distinct diversification of our sales markets, allocating the flow of goods year-round based on demand in different regions. Thirdly, we are making advances in the key sales markets that are experiencing growing fertiliser demand – Russia, China, the US, Brazil and Thailand – and focusing our marketing policy on these regions. At the same time, we continue searching for the new sales opportunities and discovering new promising markets, especially for complex fertilisers.

Strategic developement

This year was an important stage in the Group’s investment programme for 2005–2020. Already halfway there, we have demonstrated clearly that the Group possesses the financial, technological and human resources necessary to succeed in challenging investment projects. A new urea unit in Veliky Novgorod was put on stream in March and the Oleniy Ruchey mine started producing apatite concentrate in December. In addition, we are moving forward on two more important projects – construction of a new ammonia unit at the production facility in Veliky Novgorod and a potash mining and processing complex in Perm Krai. We also completed the exploration survey for several potash permits in Canada, which indicates that the Foam Lake project has a great deal of potential.

The Group is facing the ambitious task of significantly increasing its value by developing a vertically integrated business model that can hold its own against global market competition. Once our investment programme is complete, the Group will become one of the most cost-effective global fertiliser producers. As we proceed with our development strategy, we know exactly where we are going, what we have already achieved and what remains to accomplish. We want our shareholders and investors to feel equally confident about the Group’s sustainability and bright outlook. That confidence is based on the Group’s balanced financial policy, efficient management system and team of professionals with serious experience building mining and processing facilities.

In the long view, Acron Group will produce all types of nutrients: nitrogen, phosphate and potash. In addition to ensuring its raw material security, the Group now is researching opportunities to market its surplus of ammonia, apatite concentrate and potash, and we are interested in processing raw materials into fertilisers to increase the added value of our products. The Group was focused on potential synergies when it offered to buy a controlling stake in the major Polish fertiliser producer Azoty Tarnow. While the Group was unable to acquire a controlling stake, we are currently the second major shareholder of the merged Polish company with great potential.

Generating value

Despite the Group’s heavy capital expenditures, we are determined to ensure our shareholders their right to participate in the Group’s profit. In the period preceding the annual general meeting, the Group’s Russian production facilities had to partially suspend production due to a disagreement with a raw material supplier, and shareholders resolved to leave the Group’s profit undistributed until settlement of the issue. Once raw material supplies resumed, it was resolved to pay 9M 2012 dividends in the amount of RUB 46 per share. The Board of Directors approved the new Dividend Policy Provisions, which recommend making dividend payments at least twice a year in the amount of 30% of IFRS net profit.

Outlook

In 2013, we expect the global fertiliser market environment to improve in the context of stably high prices on agricultural products. The Oleniy Ruchey mine will reach design capacity, allowing the Group to mitigate risks associated with interrupted raw material supplies and keep production costs down even as the Russian phosphate market continues toward deregulation. Operating at a high utilisation rate, the Group will be able to generate the cash flow required to pursue its investment programme and secure its debt obligations and dividend payments.

On behalf of Acron’s Board of Directors, I would like to express our appreciation to shareholders for their trust and support of Acron Group’s ambitious investment plans and to our management team and employees for their hard and fair work making all these plans executed success.

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