Russian Magnesium will have to start over

16.08.2012 — Analysis

Actions taken in the Sverdlovsk region by the company's new owner will probably force the shutdown of the project, but, as the correspondent for RusBusinessNews has determined, the concept of extracting metal from serpentinites is too promising to be abandoned forever.

The Russian Magnesium project was born in January 1998, when the managers of the Uralasbest complex and Solikamsk Magnesium Works agreed to work together to develop the technology of producing metal from refined asbestos-ore waste, or, more precisely, from Uralasbest's tailings. The first metal was obtained from serpentine asbestos in April 1999 in Solikamsk.

Around the same time they began a search for an investor to help create a company. In 2004, they found the Swiss firm, Minmet Financing Company S.A., which received a 50% stake in Russian Magnesium, OJSC. Another 25% was owned by Uralasbest, OJSC and the government of the Sverdlovsk region. At that time, the future of the new production looked quite rosy. The global uptick in magnesium consumption was a guarantee of reliable sales, and production costs were low because waste products were used as raw materials.

Construction of the company began in 2007. Until mid-2011, Russian Magnesium was only running a small pilot operation - a project had been created at the production facilities and excavating work was being carried out at the future industrial site in the town of Asbest (90 kilometers from Ekaterinburg).

The development of the industrial technology could be seen as the young company's biggest achievement. This technology made it possible for a high percentage of magnesium to be extracted from the serpentine rock, and for silicon dioxide to be obtained in addition to the metal, all while making the process quite easy on the environment, in particular, by "sealing in" the chlorine and hydrochloric acid. In this way they could be used again and again without being released to pollute the environment. All the costs of the research work were covered by a loan (about 1 billion rubles) provided by Minmet.

Maksim Shchelkonogov, director of production at Russian Magnesium OJSC, explained to RusBusinessNews that the process that was developed for the new plant took advantage of techniques and equipment that have never been used anywhere before. Much of the machinery and installations had to be invented from scratch, and 20 research institutes and engineering firms were involved in the work. As a result, Russian Magnesium was in possession of some unique methods, the key elements of which were protected by international patents.

But in order to convert innovations into real production, the company needed additional 16 billion rubles. Neither Minmet, Uralasbest, nor the government of the Sverdlovsk region had that amount of money. As a matter of fact, from the very start of the project it was clear that to get it moving either outside investors would have to be brought in or the number of shareholders would need to be expanded. The government of the region negotiated with both Vnesheconombank as well as the state corporation Rusnano. MBC Corporation, LLC also expressed an interest in buying shares in the new business. As a result, all of these parties reached a framework agreement (a term sheet) in Sept. 2011 about how to launch the project.

An option was considered, under which Rusnano would become the major investor with 66% of the company, but the internal reorganization of that state corporation subsequently halted a decision regarding the financing for the construction of the plant. Nor did Vnesheconombank provide any funds. The Swiss firm Minmet, which for 5 years bore the burden of being the primary investor, stopped financing the magnesium project altogether in Nov. 2011, because of that company's own financial difficulties.

In 2012, Russian Magnesium, OJSC began to fall into debt. Those liabilities currently total about 60 million rubles, most of which - 51 million rubles - is for payments due to Uralgipromez, OJSC for its design of the magnesium production project. In addition, there are unpaid wages and taxes.

Over the past year and a half, Minmet Financing Company S.A. has repeatedly tried to recover its investment in the magnesium project. On June 29, 2012, it was announced that the Swiss company had sold all but two of its shares to a firm called Solimag, owned by Mark Lisyansky, a US citizen. There was a shakeup in the management of Russian Magnesium on the same day. Aleksei Ginsburg took over the position of CEO, replacing Fabio Tamburrano, and the board of directors was now led by Joël Lautier, a French chess player. Two weeks later, the new managers gave the firm's employees the choice of resigning or taking four months' of unpaid leave.

Currently, the shares in Russian Magnesium, OJSC are allocated as follows: 50% plus 2 shares are owned by Solimag, LLC; 25% plus 4 shares - by the government of the Sverdlovsk region; 25% minus 8 shares – by Uralasbest, OJSC; and 2 shares are retained by Minmet Financing Company S.A. ...

Aleksandr Petrov, the deputy prime minister of the Sverdlovsk region, told RusBusinessNews that the changes in the shareholder lineup negated all the previous agreements about providing financing in the form of loans or contributions to the firm's capital stock, claiming that "the term sheet had been voided". In fact, the problem now is how to start all over to work out a new cycle of negotiations with potential investors.

Uralgipromez, OJSC, which designed the plant for Russian Magnesium, has already expressed an Interest in taking part in the project, as has its owner, AFK Corporation. In addition, regional officials have announced the possible resumption of negotiations with Vnesheconombank and Rusnano. Moreover, they do not object to increasing Russian Magnesium's capital stock and reducing the Sverdlovsk region's stake in it, if that will help get the project off the ground.

Spokesmen for the new owner claim that they are also prepared to search for funds to build a magnesium plant, and, according to the management of Solimag LLC, their attempts to lay off the employees of Russian Magnesium were nothing more than a temporary measure. But before the issue of full funding can be raised, the primary shareholder simply needs a few months time-out to subject the project to a thorough, critical examination.

But Maksim Shchelkonogov is certain that a "time-out" of this nature will spell the project's demise. The highly skilled professionals who have assembled this unique system of technology will drift back to their hometowns (primarily in the Perm territory), and it won't be possible to bring them back. When speaking to the correspondent from RusBusinessNews, Mr. Shchelkonogov said that he felt the business was in the process of being shut down. And perhaps the point of no return had already been passed.

But it would be ridiculous to simply abandon a project like this! Even exponentially ridiculous! It includes too many unique useful components.

Uralasbest's tailings pile stretches for over 3,000 hectares. It mostly consists of serpentine rock, which has a magnesium content of 20-26%. Processing would significantly shrink these stockpiles of industrial waste, especially if silicon and other elements were extracted in addition to the magnesium. Moreover, there are also good economic reasons to take advantage of local serpentine instead of using many types of "classical" magnesium ore, such as carnallite, kieserite, and dolomite, which contain only 8 to 18% useful elements. It should also be noted that magnesium-bearing rock is found in the surface formations near the town of Asbest, so there are no expenses associated with extracting them from underground.

Another interesting figure emerges as one continues to examine the economics of the project. The relative capital investment to produce 1 thousand tons of magnesium a year for the first phase of Russian Magnesium totals $9 million. During the second phase that figure will shrink to $7.6 million. By comparison, $16 million was invested in the Dead Sea magnesium plant in Israel.

Thus, it is clear that producing magnesium from Uralasbest's waste is not only a socially significant project (that industry is the primary employer in Asbest) and a major environmental program, but it is also a very profitable business venture. According to various estimates, financial returns could be seen in 8 to 9.9 years.

Commenting on the current situation Aleksandr Petrov, the regional deputy prime minister, said bluntly that if Russian Magnesium ends up being shuttered, the government will open a new company, Russian Magnesium – 2, but with different founders and investors, and perhaps - other employees. But it's true that there are difficulties with the technology.

The first Russian Magnesium’s one-of-a-kind innovations belong to the company’s Western investor, who will keep them if the company is liquidated. The work would have to begin all over again in Russia. But even so, there is room for hope. According to A. Petrov, there are currently three groups of scientists who have suggestions for alternative ways to work with serpentine rock. It is entirely possible that at least one of these groups could serve as the brains behind Russian Magnesium – 2.

Andrei Gubanov