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Uralkali

March 13, 2008

Uralkali Management's comments: Results of the auction for rights to develop Verkhnekamskoye Potash Deposit

The auction for licenses to develop Verkhnekamskoye Potash Deposit in Perm took place on 12 March 2007. Three licences, two of which were for Talitski and Polovodovski sections of the Verkhnekamskoye Potash Deposit, were auctioned. Given the company's positioning to develop the fields, the company saw them as potentially interesting. Uralkali's unique position and ability to explore these fields encouraged it to toke part in the auction and was ready to offer a premium.

In Uralkali's opinion, the prices of all three fields were considerably higher than the fair market value and exceeded the level at which a return on investment could be gained. In particular, the proposed sum of RUR 16.8 bn for the Talitski field would bring a return on investment only if prices at the mine on chloride potash increased fivefold relative to 2007 prices. This is due to the fact that a new mine would have to be built and that the field's deposits allow for the extraction of not more than 2m tonnes per annum.

Polovodovski field, for which Silvinit's subsidiary offered RUR 35,14 bn, is Silvinit's only accessible option to increase its reserves. In Uralkali's opinion, this price is above a fair level and allows for return on investment only in the event of a fivefold increase in prices relative to 2007, given the relatively low level of potash element in this field.

Development of the Palasherski section, for which 4,087m RUR was offered, can largely be considered a venture project, given that there are five oil wells drilled in its territory and that oil production is expected in the next few decades. This will require exclusion from 20 sq km out of a total 75 sq km of the central project development area.

In consideration of all these factors and geological risks, Uralkali decided not to participate actively in the tender for the Palasherski section, and also to withdraw from the Talitski and Polovodovski auctions on the grounds when their asking price was deemed to exceed fair market value.

Uralkali believes that there is a very limited opportunity for putting Palasherski, Talitski and Polovodovski lots in operation in the next ten years. This is due to the complexity of the sections' geology and the lack of experience for over 20 years in building new potassium mines, both in the world potash industry generally and in particular, by those companies that have won the auctions for these particular sections.

Uralkali will continue to accomplish strategic growth, currently supported by the project to develop a new mine at its Ust-Yavinski section. Uralkali intends to produce at this new mine 4m tonnes a year by 2015, increasing its general yearly production capacity to 11m tonnes. Uralkali is prepared to invest in attractive and geologically risk-averse projects. Mining projects with high geological and price risks do no comply with the company's strategy.

 

 

 

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