A Young Russian Billionaire Plants the Seeds of Future Success

Updated on
  • Melnichenko brings grand design to his superyacht and business
  • EuroChem is shifting toward higher-value specialty fertilizers

The stealth-like hull of Andrey Melnichenko’s superyacht is designed to cut through waves leaving barely any wake. Costing an estimated $300 million, the ship uses a unique submarine shape to remain stable in rough seas. Interiors combine Baccarat-crystal bling with fingerprint-reading gadgetry to unlock cabins.

The swanky boat reflects the same eye for innovation and high-tech detail that Melnichenko, 44, is now focusing on the fertilizer business that’s helped make him one of Russia’s youngest billionaires. With revenue dropping because of a global surplus and weaker farm income, the tycoon is remaking EuroChem Group AG into one of the few companies in the world using micro-organisms and polymers to tailor-make products so farmers can grow stronger crops.

Billionaire Andrey Melnichenko.

Photographer: Jason Alden/Bloomberg

“We aim to transform ourselves from a manufacturer of cheap commodities into a company that creates and promotes high-tech products,” Melnichenko said during an interview in Moscow.

He owns 90 percent of EuroChem, a producer of nitrogen and phosphate fertilizers with assets in Russia, Lithuania, Kazakhstan, Belgium, China and Brazil, and plans to start potash operations next year.

The company has already shifted about a fifth of its sales to the higher-value specialty fertilizers, its premium product, and seeks to increase that share further. Among them are inhibitor products that allow slow release of nutrients into crops.

If Melnichenko’s ambitions for change are uncommon in a Russian resource company, so was his route to commodity riches. Too young to gain from the 1990s privatizations that made many oligarch’s fortunes, he began trading currency with two friends while a physics student at Moscow State University.

After the Soviet Union fell, the trio registered themselves as a bank, before Melnichenko began buying assets including in thermal coal and fertilizers. He sold his banking interests in 2007, just before the global financial crisis, allowing him to focus on those industrial investments.

Melnichenko’s Philippe Starck-designed superyacht.

Photographer: Leon Neal/Getty Images

In 2012, the acquisition of a BASF SE plant in Antwerp by EuroChem for 830 million euros ($930 million) brought in new technologies.

Another part of his strategy is to make the Russian company a one-stop shop for farmers by selling seeds produced by international producers, testing soil and plants and offering advice on improving conditions and what crops to grow. The group is expanding its distribution network and this week announced that it will open new distribution center in Hungary.

"The company is diversified and starting to provide high-tech specialty fertilizers," said Elena Sakhnova, an analyst at VTB Capital. "It has gained a large distribution network, while having low costs."

Such efforts, and a focus on developing higher quality thermal coal at SUEK Ltd., Russia’s largest producer, aim to increase resilience to roiling markets in recent years. Melnichenko, the nation’s eighth-richest man with a fortune of about $10.3 billion, ranked as high as fourth at the end of 2013 before a slump in commodity prices, according to Bloomberg Billionaires Index data. He’s the youngest Russian on the index’s global top 400 list.

A fertilizer glut has cut prices 20 percent to 30 percent this year. That helped drive EuroChem’s second-quarter earnings before interest, taxes, depreciation and amortization down almost 40 percent and its net debt to 2.39 times long-term earnings, from 1.56 a year before.

Grand Designs

But just as the radical design of Melnichenko’s yacht won over early doubters, the billionaire has managed to keep EuroChem’s creditors on side with his uncompromising plans to expand in spite of weaker markets.

The company remains committed to spending more than $6 billion to build two Russian potash mines producing 8 million metric tons of the fertilizer a year, a 10th of current world output. That’s as potash prices sank to a decade low this year. Plans for an ammonia and urea plant in Louisiana are still on track, Chief Financial Officer Andrey Ilyin said last month.

It helps that EuroChem’s costs are competitive, even more so after the depreciation in the Russian ruble. Its mining costs will be below $40 a ton, compared with $90-$100 a ton for Canada’s Potash Corp. of Saskatchewan Inc. and the U.S.’s Agrium Inc., according to estimates by VTB Capital.

"I am not worried about short-term volatility, especially as I see our advantages over competitors," Melnichenko said in the interview. The billionaire reinforced his commitment to EuroChem on Wednesday with an offer of $1 billion in perpetual funding from his AIM Capital finance unit. That figure may reach $1.5 billion, the company said.

Lenders are also on board.

The producer this month gained an $800 million pre-export loan from 12 international banks, partly to refinance its debt. It’s planning to fund a repurchase of borrowings with a new sale of Eurobonds, which it is marketing now. The company, which has to repay $1.4 billion next year, will bring debt below $3 billion within eight months from $3.3 billion now, and pare investment and net working capital.

“Further market weakness would increase risks," Egor Fedorov, an analyst at ING Bank NV in Moscow, said by phone. “But so far, the lenders still believe in the company and are ready to work with it.”

(Updates with new distribution center in Hungary in ninth paragraph.)
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