Investors see asset grab in Russia potash mine probe

“This is an opportunistic move to gain a foothold in that industry.”

– Chris Weafer, Uralsib

A renewed probe of a two-year-old accident at potash miner Uralkali has landed a fresh blow on fragile confidence in Russian stocks and raised fears of a state asset grab, analysts and fund managers said Nov. 11.

London-listed shares in Uralkali, beloved of investors since an IPO last year, have fallen more than 70 per cent since Nov. 7 when Prime Minister Vladimir Putin’s influential deputy, Igor Sechin, ordered Russia’s mining safety watchdog to reopen the probe.

Uralkali, controlled by Russian billionaire Dmitry Rybolovlev, said its future could be in doubt if the government forces it to pay full damages for a 2006 mine flood for which it had earlier been cleared of blame.

“This is an opportunistic move to gain a foothold in that industry or take some assets,” Uralsib strategist Chris Weafer said of the renewed investigation.

Uralkali, through its Belarusbased export agent, accounts for about one-third of global potash exports and more than tripled first-half profits this year as prices for the soil nutrient rocketed to all-time highs.

Investors fear that influential figures near the top of the government, widely suspected of expansionist ambitions in the natural resources sector, have also noticed the fat profit margins that have made Uralkali a darling of fund managers.

Senior figures in the Kremlin and the government have been silent on Uralkali since the investigation was reopened.

Analysts point to a joint venture between state conglomerate Russian Technologies, led by Sergei Chemezov, another Putin ally, with Uralkali rival Silvinit as evidence of state interest in the fertilizer business.

The Kama Mining joint venture won the largest of three potash deposits in the Ural Mountains up for auction in March, outbidding Uralkali for a portion of the largest deposit of the mineral fertilizer oustide Canada’s Saskatchewan province.

Silvinit’s potash deliveries were disrupted by the sinkhole

that opened up as a result of the flood at Uralkali’s Mine-1, threatening a rail line and the nearby town of Berezniki.

Some investors see a parallel between the multibillion-dollar back-tax claims that destroyed the once mighty YUKOS oil company. They say Uralkali could face not only the cost of resettling some Berezniki residents and rebuilding a bypass rail line, but could also be penalized for lost potash supplies.

“Costs could potentially spiral if the government were to find Uralkali guilty of destroying potash ore,” Citigroup said in a note downgrading the share from “buy” to “speculative hold” and halving its price target on increased equity risk.

The company said it could face an “enormous financial burden” if forced to pay damages and that it believed there were no legal or moral grounds to make it responsible for the flood.


Investor sent iment had yet to fully recover from the YUKOS fiasco of 2004, much less Putin’s July lashing of another market darling, coking coal miner Mechel, when news broke that the flood investigation would resume.

A steep sell-off of Russian equity began in July, long before the global financial crisis sent investors fleeing from emerging markets, when Putin slammed Mechel’s coking coal-pricing policy on live television.

“The big problem is that Mechel and Uralkali were very widely owned by high-profile folks and recommended globally by many, many houses. This is another disaster,” said a Moscow-based hedge fund manager, who declined to be named.

Weafer said the Uralkali investigation would pit a group of politicians keen to see more state control of natural resources against Kremlin liberals, and that investors wanted to see President Dmitry Medvedev take sides.

“We are at an important point, not just for Uralkali, but for the investment climate overall,” Weafer said. “If this asset grab is successful, it will be seen as a victory for the statists and a defeat for the liberal agenda.”

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