Potash giant digs deep for plan to make it a fixture of the FTSE 100

Russia's leading fertiliser producer, Uralkali, seeks sector domination through mergers and stricter governance, says Mark Leftly
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The Independent Online

An icy, salty wind chills the air to 10C (50F) – though it feels considerably colder – at Berezniki 4, a vast mine 440m below the Siberian surface. At any one time there are 500 miners working in this 900km maze of grey clay, white salt and red potassium-lined tunnels.

Every eight hours a huge beast of an extraction vehicle, the combine machine, carves out another seven metres of raw minerals at this site, some 1,200km to the east of Moscow.

Back above ground, in a massive corrugated-roofed warehouse, is the prize: potash. The white powder is piled 20ft and higher in ski slope-like blocks and will eventually be shipped out as far as the US and China.

Potash is used to make fertiliser, hugely in demand as fast-growing economies such as Brazil and India look to feed their ever-increasing populations. The little-known commodity will sell 58-59m tonnes in 2011, yet only really made the headlines last year when the mining giant, BHP Billiton, failed in a $39bn (£25bn) play for the sector's biggest company, Potash Corporation of Saskatchewan.

Uralkali, owner of the Berezniki mines, is poised to take that top spot and is plotting an acquisition that could see the group become a fixture of the FTSE 100. Already the company is number one for production, but remains behind Potash Corp in terms of capacity.

On Thursday, the sheer scale of this business was demonstrated by Uralkali's interim results: nearly $800m profit off $2bn revenue. This left a lot of very happy shareholders – most notably the billionaire oligarch Suleiman Kerimov with a 17 per cent stake – who will receive half of net profit in dividends.

Uralkali wants to buy Belaruskali, the Belarus champion that is not far behind the industry's two big boys. "The merger of Belaruskali is one of our highest priorities," says Vladislav Baumgertner, Uralkali's tall, sharply dressed chief executive. "But the chances are not high in the short term. For the time being, I don't see the Belarus government taking any decision on privatising the company."

This gives Uralkali the time it needs to improve its corporate governance, which will be vital if it is to secure a premium listing on the London Stock Exchange. This listing is, in turn, vital for a deal to go-ahead, as Uralkali will need access to the London market in order to raise a big chunk of the tens of billions of dollars it will take to buy Belaruskali.

At the moment, Uralkali only trades global depository receipts (GDRs), a secondary form of share ownership, in London. Mr Baumgertner, speaking at Uralkali's minimalist, white-walled offices in Moscow, says: "If we see an opportunity to have a deal for Belaruskali we will come to London and raise additional capital. We have asked our main targeted investors whether they would like us to go to Asia or the US but all of them said London."

At present, Mr Baumgertner says there would be "no additional value for shareholders" to seek a full listing, so investment bankers have yet to be appointed. However, preparations are well under way with a series of governance changes.

The group has introduced international accounting standards and appointed two new independent directors, the former Legal & General chairman Sir Rob Margetts and the former Ernst & Young global chief operating officer Paul Ostling.

However, Mr Baumgertner concedes that over the next year or so Uralkali needs "at least" three more independents and will also have to improve the way its board committees operate.

With a market capitalisation of $22.6bn, Uralkali would already be a top 30 FTSE company, ahead of Royal Bank of Scotland, Prudential and Centrica. However, the mega-merger would make Uralkali one of the biggest listed companies, and therefore one of the most significant and talked-about in the City.

A risk to any deal is the growing interest of the more traditional, richer metal miners. However, BHP's failure last year shows how hard it is for them to buy into the sector, while Rio Tinto found little success trying to develop a potash site in Argentina.

"All the potash projects are very difficult from a technical point of view," says Mr Baumgertner. "They are usually in remote areas and a lot of additional infrastructure [such as railways] is required."

The result is that the industry remains hugely concentrated in the hands of just a few big companies. If and when the very biggest hits London, major investors will have to brush up on one of the world's best kept commodity secrets.

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