Kantor's zugzwang

Akron Chemical Group is in a difficult and interesting position: no matter what development strategy the company chooses, financial losses and business problems are looming. 
The main owner of the group, the businessman Vyacheslav Kantor, prefers to engage in social and political activities, and therefore it is possible that the company may be sold to the competitors in the coming years.

Honorary Citizen of Veliky Novgorod and the owner of Akron Group, Vyacheslav Kantor (he owns 84.5% of shares) in late January, visited Rome, where he held a fruitful meeting with the Pope. Officially it was reported that the Pontifex Maximus and the head of the European Jewish Congress, discussed the problem of terrorism and agreed that it was necessary "to protest strongly against violence, hatred and extremism."

In the cold, dirty and unsettled Russian Novgorod, which is so far away from the warm Mediterranean, there's the basic company of Kantor's group under the same name of Akron. Meanwhile,a monstrous budget crisis broke out in the city. The city treasury is burdened with a debt of 1.8 billion rubles (91% of them are bank loans), and Akron Group (the main tax payer in the municipal budget) is in the zugzwang because of the failure to develop the area of the Verkhnekamsk-Talitsky potassium and magnesium salts deposits in the Perm region. For the company it doesn't really matter anymore whether the Talitsky mining and processing plant will be built: it will suffer serious financial losses in any case.

Commodities problems of Akron

Of the half-dozen producers of mineral fertilizers in Russia, Arkon Group (apart from the Novgorod plant Akron also includes Dorogobuzh plant in the Smolensk region, a number of facilities and logistics infrastructure, the North-Western Phosphorous Company in the Murmansk region and Verkhnekamsk Potash Company in Perm region) has always been marked by the paucity of their resources base (except sphere of production of nitrogen fertilizers). Production capacity of the group over the past 10 years, however, has increased significantly: in 2015-2016 Arkon Group has produced more than 6 million tons of fertilizers (25.5% of Russia's total), and the results in 2006-2007 were at the level of 2 million tons. At the same time the amount of nitrogen fertilizers in the production make up to 2.5 million tons, and the same share belongs to "complex" fertilizers with potassium and phosphates.

This means that Arkon with its poor commodity base will have to fight for raw material with other market participants, which also increase the production of ready-made fertilizers (including complex ones): Fosagro and Uralkali. In order to somehow secure the necessary raw materials, Kantor's company first time in post-Soviet history opened a new MPP in the Murmansk region in 2012, which will use the local apatite ore. The license to develop the field was obtained in 2006. However, so far the mine has not been working at full capacity" 2 million tons of apatite concentrate per year, its real power is twice as less. It is expected that targets will be reached only after 2018, when there will be built an underground mine, laid railway from the production site to the station Titan having a length of 39 kilometers and commissioned production facilities. The total value of the MPP will be more than $ 1billion. How much is it?

For comparison: gross profit of Akron in 2015 was "only" 106 billion rubles, and net profit was 16.7 billion rubles. At the same time the Group's debt is already 55 billion rubles. This means that even with the leverage the company will have difficulties in the implementation of the second stage of the aforementioned MPP. But this is a strategically important project: by purchasing apatite concentrate from Fosagro,  Kantor's company is in a permanently vulnerable position and there have already been cases of supply interruptions (to say nothing about legal troubles). So there's nowhere to retreat.

Inaccessible potassium

If there's a chance to solve the problem with the material for phosphate powder, potassium things are much harder. In 2008, Akron bought for 16.8 billion rubles (about $700 million at the then exchange rate) the Talitsky site in the Verkhnekamsk potassium-magnesium salts (VMKMS) deposit in the Perm region. Initially it was assumed that by 2012 there will be built a mine with capacity up to 2 million tons of rich ore per year. However, calculations show that the cost of such an enterprise infrastructure surpasses $1.5 - $1.7 billion and Kantor's company frantically started looking for partners for this project, for which Verkhnekamsk Potash Company (WCC) was established.

But the best the "fighter for peace in the world" has managed to do is just to "share" the financial risks of the deposit. At the end of 2012, 38% of WCC was bought the VEB (20% minus 1 share), EDB (9,1%) and Raiffeisenbank (8.95%, and then increased its stake to 10.95%) for 12.8 billion rubles. The agreement originally provided for repurchase of shares by Akron, and in 2016 the company purchased a package of the Eurasian Development Bank and conducts similar negotiations with VEB. The failure with the banks is simple: they offer the standard lending, while Kantor was interested in a joint financial responsibility and co-investment.

As a result, in 2013, Akron shifted the term to launch Talitsky from 2016 to 2021, mining output at full capacity - from 2018 to 2023. At the end of December 2016 business media issued a statement of General Director of Akron Alexander Popov, in which he complained of the adverse market conditions (the price of potash fertilizer in China amounted to about 220-230 dollars in 2016 per ton, which is quite a low level), and said that the implementation of the project is postponed again:

- The company is getting the approval of Glavgosexpertiza with regard to the development project of the Talitsky area, according to which it will be launched in 2023 with running at full capacity in 2025, he said in an interview to Interfax. This is despite the fact that the original license provided the launch of the MPP until 2016! A competitor of Akron, EuroChem, through its Usolsky potash plant at a rapid pace has been developing the new sites in Verkhnekamsky. So why did Kantor lost his pace and what is he waiting for?


The idea of Akron to wait for the recovery of "favorable" fertilizer prices to start investing in Talitsky mine, can seem "intelligent" only to questionable Moscow analysts, who never imagined an investment cycle. After all, even if a year or two later the fertilizer prices will rise (and they are very volatile), how it will help Akron to start the construction of the MPP, which, by the way, takes a minimum of 3-4 years (ie a couple of cycles of higher-lower prices)? Akron, as well as its Russian competitors: Uralkali, EuroChem and FosAgro exports up to 70-75% of its production, and thus a decisive influence on the prices of the contracts can not always be seen.

Meanwhile, in 2017, Akron will be obliged to buy back its WCC shares from banks. Or to accept their conditions for financing that pool of shareholders of banks WCC must submit by the end of March 2017. Both options lead to solid financial expenses, and most importantl it is not known which strategic plan is worse.

To use the standard bank loans without the joint financial responsibility in a wild corner of the Perm Territory for the project worth $1-1.5 billion with grim prospects for the pay-off (10-15 years, at least) and burden the company with the financial debt, or even to end up with a blank section in the Ural taiga, wasted $700 million for its purchase and a deficit of own raw material? And what is a producer of mineral fertilizers without its resource base? That's right: a candidate for the banrkuptcy or an acquisition target.

Kantor's competitors, Uralkali in the first place, are on the alert and increase the production of mineral fertilizers. In 2012, the company produced 9.1 million tons of potash, and in 2014 - 12.1 million tons (there was a slight decline to 11.5 million tons in 2015). By 2020, Uralkali plans to increase its production to 14.5 million tons. This means that Akron's competitor will be able to get even more influence on the world market, and with the already discussed cartel with Belaruskali to maintain profitable, but unacceptable for Kantor prices. For Uralkali, price fluctuations are not so terrible - thanks to its own raw material base and low-cost production, the EBITDA margin in recent years stood at 60-72%!

For comparison: EBITDA margin of Fosagro" varied between 23-38% in 2013-2015, and Akron stood even lower: 23-30%.

No hope for Akron in its deposits in Canada. There, an Akron's entity, North Atlantic Potash Inc. (NAP), owns a permit for production at 11 sites potash deposit in Saskatchewan Prairie Evaporite. In 2014, NAP and the division of Rio Tinto formed a joint venture Can Pacific Potash Inc., in possession of the eight sites in southern Saskatchewan. But the development of these deposits is still far ahead, plus Akron simply has no money for it.

Thus, in the next 5-7 years it will become clear whether Kantor's group wiil be "eaten"  by competitors, or it will somehow miraculously manage to attract abundant billion loan to complete the mine in the Murmansk region, build Talitsky mine in the Perm region and to secure the necessary raw materials, because one can't expect much having only nitrogen fertilizers (although simple survival is possible).