ANDREI KOZITSYN, UMMC

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n previous years prices for copper nearly doubled. What impact have the favorable market conditions had on your company’s activity?

- The results are reflected in the main indexes. Objectively speaking, the growth of prices by more than $1,000 a ton ensures a significant hike of the total sales proceeds. Last year our profit on sales increased 50% and the net profit went up as much as 4.5 times amounting to $73 million. However, prices started changing considerably in November and there has not been enough time for this trend to influence much the year’s results. That is why the first quarter of 2004 has become more successful for us.
We are reinvesting ‘dividends’ drawn on market conditions in a further development. Investments are made to expand our own raw material base, reconstruct enterprises and build new production facilities.

- What are the components of the total sum of the UMMC profit?

- If our business efficiency is appraised by kinds of metals, then, today copper brings us from 60% to 65% of the profit, noble metals give from 10% to 15% and ferrous metals provide between 20% and 25%.

- What is the cause of some decrease in making copper cathodes as compared with the previous level?

- The explanation is simple. Copper cathodes stopped being the main commercial commodity of ours. We reprocess them and get products with high added value that already accounts for over 60% of the company’s aggregate turnover. Our products are various kinds of sections and rounds, pipes, finished items and, of course, copper rods. If the existing market trend remains, the copper rod production will reach the level of the design output equaling 230,000 tons. As for copper cathodes, the current year is the last one, when our obligations to ship them abroad are still in effect. Starting in 2005 we will be selling copper only as a finished product.

- Six months ago UMMC has acquired the plant Electrozinc, although its technical and financial status was assessed as bad. How is this move substantiated? Why has the company decided to make investments in a plant that is far from being new?

- There are two zinc plants in Russia and last year both of them were put up for sale. Since it happened so that the Chelyabinsk zinc plant was sold to the ChTPZ group, we started negotiations on Electrozinc and bought out a controlling stake. It is true that the financial situation there is not simple due to accumulated liabilities to creditors. But I would not dramatize it because all problems are solvable. And I would also dispute the assertion that the plant is old. The state of the electrolysis production facilities is quite decent. As for the sulfuric production facilities, which were constructed in the late 1980s with imported equipment, only recently it was considered an advanced project. The problem is that in previous years spare parts were not bought and part of the equipment was out of action. Because of it ecological problems popped up and the plant’s production capacities went down.
The design capacity of the zinc production facilities equals 110,000 tons. I think that after the reconstruction, which we will finish this year, precisely this amount will be reached. Besides, the plant is also producing lead, cadmium, indium.

- How has the transfer of this enterprise to UMMC influenced the Russian zinc market and your chief rivals?

- Thanks to this plant, we are selling not only zinc concentrate but the metal itself as well. We, of course, are competing with zinc from Chelyabinsk but its consumption in Russia is on the increase rising between 15% and 20% a year. So, I think that there will be enough room in the market.
As far as its raw materials are concerned, because they are reprocessed at Electrozinc, we have, naturally, cut down the volume of selling marketable concentrate in the open market. The Chelyabinsk plant is trying to make up for the existing raw material deficit by import purchases but, anyway, it has to reduce production volumes: last year the plant produced 178,000 tons of zinc but this year its output is expected to reach 140,000 to 150,000 tons.
In the forthcoming years we expect a significant increase in volumes of zinc-containing raw materials. By the end of 2006 we are planning to produce about 190,000 tons of zinc concentrate and that exceeds the available capacities to process it. That is why there is an idea to build a new zinc plant. But such a decision will be taken within the framework of a wider program of our cooperation with the government of Bashkiria.

- What, in your opinion, are the long-term prospects for the Russian zinc industry?

- The prospects are very good because the Russian market is just at the beginning of the road. Only two small plants in Russia are engaged in hot-dip galvanizing while in Europe such production facilities are all over the place and they are located no more than 400 to 500 km from each other. We have galvanized structures, such as lighting supports, road and sidewalk fences, but they are being installed now at roads under construction only as an experiment. And what about the already functioning highways and trunk railroads?! So, I think that Russia’s zinc industry should expect a real boom, especially so, if there are legal norms making obligatory to use galvanized structures only.

- Just recently there have been reports about the impending large investments in extending copper mining by the Gaisky Mine & Concentrator. Reports have mentioned the ‘second line’ project. Will a new mine be constructed?

- No, it has to do with extending the underground part of the existing mine. But the project itself might be called the ‘second line’. Investments will amount to no less than $120 million. Enormous volumes of work are expected because it will be necessary to develop new underground territories about 1 km deep. All this will allow to ensure a significant gain in raw materials. Today, the Gaisky Mine & Concentrator produces 75,000 tons of copper concentrate, from 10,000 to 12,000 tons of which fall on the deposit that is developed by the open method. Under our plans it should produce 105,000 tons of copper concentrate. Besides, we intend to reconstruct the concentrating mill and raise its production capacity.

- How does the company’s investment program as a whole look like? What projects are being financed this year?

- Our investment range is constantly extending. Last year the company invested $113 million in developing its enterprises. Switching to the international standards of the financial accounting with the participation of auditors from KPMG has opened our access to long-term investment credits. This year the investment portfolio of UMMC will increase up to $170 to $180 million.
Right now there are two credit lines available. One of them –17 million euros – is credits by Vneshtorgbank to finance reconstructing the A.K. Serov Steel Works. Another large investment credit is provided by the Standard Bank to reconstruct the concentrating mill of Svyatogor JSC: ore from several deposits, including the new one in the northern Urals, will be coming there.

- The start of building a new copper electrolysis complex in Verkhnyaya Pyshma has been put off several times. What hinders it?

- There are no objective reasons. But an enormous work that requires large expenses is underway in the company so as to draw up a completely balanced production scheme: from mining ore to getting products at final process stages. In our business everything depends on fine processing of metal and raw materials. And that is exactly what we are doing. In the first place, we are investing funds in developing mining enterprises, in obtaining licenses for ore deposits. It does not make sense to start implementing any project without a reliable raw material base.

- Can changes in the Russian government accelerate a decision on selling the Udokan copper deposit or, to be more precise, on determining a licensing procedure that would be advantageous to Russian companies?

- At the recent session on this question officials from the Ministry of Economic Development let it be known that an auction will be held. But the final decision should be made by the country’s prime minister. Nobody knows yet, when it will happen. If really an auction, not a bidding contest, is to be held, then, foreign companies will automatically get the right to participate in the bidding so as to obtain licenses. There are no legal grounds to turn them down.

- Will UMMC participate in an auction? How do you assess your own chances and who, in your opinion, will be a winner?

- We will be participating in any case, be it a contest or an auction. Besides us, the corporation Kazakhmys repeatedly stated its intent to obtain a license for developing the Udokan copper deposit. But, from my point of view, if foreign participants are allowed to take part, then, the main contender for a victory will be not Kazakhmys but Chinese companies. First, this deposit is closer to China geographically. Second, the metallurgy in China is subsidized by the government and it will be extremely difficult to compete with Chinese participants: in fact, these are state companies representing interests of one of the world’s most powerful states. Chinese understand quite well the potential value of Udokan for their economy. Today, the developing Chinese market is already consuming almost 4 million tons of copper. But at home they can mine and process into concentrate only 300,000 tons of copper. Figuratively speaking, they have to pick up the rest all over the world. That is why the country has the severest deficit of primary raw materials. So, I think that they will not care about prices.

- Do you think that under the influence of the ‘Chinese factor’ the trend favorable to producers will remain in world market of copper henceforth?

- My forecast is positive, not only taking into account the ‘Chinese factor’. The increase in demand is obvious now all over the world. The U.S. economy is growing, there is an economic revival in Europe, countries of Southeast Asia are developing dynamically, positive trends are also beginning to show in Russia. The copper consumption in the Russian market is increasing 15% to 20% a year. If these rates remain, then, in 5 to 6 years we ourselves will become importers. Russia’s annual copper production amounts to approximately 850,000 tons while last year the consumption reached about 350,000 tons.

- What positions does your company intend to take in this market?

- I have already said that we are going to stop export shipments of cathode copper. But we are not going to sell it in Russia either. In order to win the Russian market, products of the finer processing are needed. Today, there are several enterprises of this type integrated in UMMC. They are developing with sufficient dynamics but there are problems, of course.
The Kirov non-ferrous metals processing plant is loaded 100 % and it works round the clock. Last year the plant made over 30,000 tons of rolled stock. But the quality of products, like at other similar Russian plants, does not conform to today’s requirements. We are engaged in technical re-equipping of the plant. Its future basic market specialization is to make flat rolled products. The investment program costing $27 million has been worked out and it is expected to be implemented in the nearest three years. The task is to establish production of strip according to the European standard. That should completely meet the needs of the SHAAZ plant, where we started last year to manufacture heat exchangers under the CuproBraze technology.

- Is the betting on the implementation of the CuproBraze project in Russia justifying itself?

- The new complex just started its operations last year and it went through the phase of familiarization. Now the positive dynamics of sales is beginning to show itself. But if we mean the terms of recoupment, then, I think, it will be impossible to stick with them. We have to put it straight: the market is objectively not ready yet for a new kind of products. That is why we are concentrating our main efforts on attempts to convince partners that our products are economically justified with respect to their business. Russia’s leading automotive plants keep installing radiators designed as far back as the 1950s and they think that the population will forever prefer to buy cars with parts like this, if only they are cheaper. Hence, there is a unfair price competition, there is a dumping, etc. It seems that this inertia will be hampering the market development for some time. But, on the other hand, if Russia, nevertheless, makes a decision to introduce the Euro-2 and Euro-3 requirements with respect to car engines, the market situation will radically change. I hope that new models, which will conform to the European standards, will get our heat exchangers. So, it is too early to sum up results. In any case, we have been the first to occupy the promising market niche.

- You have mentioned that the production of copper rod has reached the design capacity level. What do you plan to do next:-to improve quality, to raise volumes, to increase using it to make cable and conductor products?

- There is not a single claim with respect to the rod quality. To raise volumes? We are thinking over it and, yes, it is a more likely option. We are gradually increasing export shipments. As for using it to make cable and conductor products so as to sell them in the Russian market, the same thing happens here as in the case with the market of automotive components: our business is colliding with the competition and price dumping by producers of the low-quality cable. We have done reconstruction, we have reviewed the list of products and we have guaranteed that our products conform to high standards of operational reliability, durability, safety. That is why they cost more. But consumers are not ready to pay for quality. Thus, there is a problem of profitability coming up. For example, last year the profitability at the Sibcabel Plant was purely relative: between 1% and 1.5%. We, of course, took some measures so as to ensure that the plant could go on operating: by results of the first quarter of this year the profitability has increased up to 6% and in a number of cases even to 8 %. But it is difficult to make long-term predictions in the ‘wild market’ conditions.
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- Large Russian metallurgical companies are buying enterprises in Eastern Europe in order to secure their presence in the EU markets this way. You also have acquired assets in Serbia?

- In our relations with the copper-pipe-producing plant in the Serbian town of Maidanpek we are using the tolling scheme. We signed two types of contracts. Under one of them we ship blanks from the Kirov non-ferrous metals processing plant, take finished pipes and sell them in Russia. In accordance with the other contract, we ship cathode copper to the Balkans, process it at one of the nearest enterprises, transport it from there to Maidanpek, and there we again get pipes for selling them in Russia. Some part of this plant’s capacities is, indeed, working for Europe but we have nothing to with it.

- Recently a large bell has been installed as your company’s gift in the Troitse–Sergieva Lavra, the center of the Russian Orthodoxy. This is very symbolic and it reminds of the considerable help that UMMC provides to the Church. Will you, please, tell us about this aspect of your charitable activity.

- It is called the czar bell. Two years ago we received a letter from the Patriarchy: we provided copper and tin, which were used for casting the bell at the Baltic plant in Saint Petersburg. Now our most active participation in the Church affairs comes to building the monastery complex in the tract called the Ganina pit, where in 1918 the remains of the czar’s family members were buried after they were shot down. Besides, we are restoring destroyed temples practically in every town, where enterprises of UMMC operate. Or we are building the new ones, if the town is young.
The company provides assistance to other religions as well. Since the considerable part of the Urals’ population practices Islam, we have built a mosque in the town of Verkhnyaya Pyshma and delivered it to Moslems.

- The Urals and particularly the Sverdlovsk region are attracting the attention of the world business. It will be sufficient to mention the visit of chancellor Gerhard Schroder, who headed the delegation of German businessmen, as well as the recent trip by the delegation of Japanese companies’ staff members. You also received high guests from the companies Codelco and KGHM Polska Miedz, which by their specialization are close to yours. What is the purpose of these visits and what are their practical results?

- Each visit has its own goal. Polska Miedz is about to run out of its raw material base: in approximately 12 to 15 years they will be left without their own sources of raw materials, And that is why they are checking various options in advance. We have common interests with Codelco in technologies of processing copper-containing raw materials. The Japanese are interested in our copper rod and metal powders. And as far as we are concerned, we are interested in mining engineering and equipment of Japanese firms, particularly Komatsu. It is good that foreign businessmen are coming here. But it will be even better, if they start actively working here and make serious investments in Russia, in the Sverdlovsk region. It is quite possible that the city of Yekaterinburg will also become one of the business world center.