"Increasing production doesn’t come cheap" 

— Some five years ago, at the end of 2013, you left to engage in the oil business in the United States. Why have you decided to come back and head Dmitry Bosov’s company, Sibathracite? Did he call you in as a mergers and acquisitions specialist to prepare the company for sale? 

— First of all, this is a unique, interesting, and ambitious project. Secondly, of course, is my relationship with Dmitry [Bosov]. We’ve been partners in various projects for 20 years, from telecommunications to oil and gas. Sibanthracite has grown into a global company since I left Russia, and Bosov got me interested. 

During the 2014 crisis when no one wanted to invest, Bosov took a risk and started construction of the Vostochny Open-Pit Mine (anthracite producer). And, coincidentally, Sibathracite supplied the entire market with its product. Now all the world’s major steel producers are clients of Sibanthracite. After penetrating the market with one product, you can already offer your entire product line [of coal grades]. 

— Did Bosov promise you a share of Sibanthracite or an option on one? 

— Yes. We have partnerships in all projects. There is an option.  

— There’s been talk of 10 to 15%...  

— I won’t comment on the percentage. 

— What have you been tasked with?

— With growing the company. My job is to double it by 2022.

 — Is the option attached to the completion of that plan?

— No. That’s a Key Performance Indicator. This is why I came [from the USA]. Not to sell the company, as you said, but to double it. 

— Sibanthracite plans to increase production to 58 million tonnes by 2022.  Will it do this solely through organic growth or also by purchasing assets? 

— We’re betting on three grades of metallurgical coal – anthracite, T-grade, and coking coals. In 2018, we produced 15 million tons of anthracite. We see a market for 20 million tonnes, but probably no more – otherwise, we’ll begin to eat away at our own share due to a fall in prices. 

In 2018, we extracted 9.5 million tons of T-grade coal and will increase production. We already have the Open-Pit Mine Kiyzassky in Kuzbass, and we’ve won the license to the Verkhneteshsky site. You’ll hear more about acquisitions in the near future. We’ve developed a resource base that can grow T-grade production to 20-30 million tonnes, but everything will depend on demand. 

In addition, we need to build washing plants, as some of the coal of this grade is steam coal, and washing is necessary for it to be used in metallurgy. Our goal is 100% metallurgical coal. 

We have the Ogodzhinsky Project with reserves of 1.5 billion tonnes. We expect there will be coking coals there close to the surface, at around two meters. The average for Kuzbass is 12-15 meters.

— Isn’t that a problem? Mechel’s reserves at the Elga Coal Field in Yakutia are also close to the surface, which leads to their oxidation. 

— We don’t see such a problem for ourselves – we know what to do and how to do it.  

— But you also have to build a road to the Ogodzhinskoe field. Mechel went into debt and almost went bankrupt building this kind of road. 

— I don’t know why they went into debt, but, of course, we will build the road.

 — Are you interested in the Elga Coal Field, which has been put up for sale? 

— If they’ll sell, we’ll have a look.  We haven’t seen an assessment, but judging by the figures, it’s expensive. Gazprombank acquired 49% for 34 billion rubles. Plus, they [Mechel] have another 60 billion rubles in debt. For that kind of money, you could build two Elgas on Ogodzhinskoe. 

— Starting from scratch? 

— All our projects started as greenfield. Take, for example, the Kiyzassky Open-Pit Mine – no one in the former Soviet Union reached production of 10 million tonnes in three years. 

— Do you expect a similar timeframe for Ogodzhinskoe? 

— Yes. Extraction will begin there this year.

 — And, for now, you’ll haul the production via motor transport? 

— Yes, until we’ve built a rail line.  

— How much investment is required to raise production to 58 billion tonnes?

— Taking into account construction of the washing plants, tens of billions of rubles per year. It’s clear that this won’t come cheap, but our know-how allows us to begin to produce and generate cash flow quickly, so it’s possible to get financing. 

— Who are your main creditors? 

— A consortium of foreign banks. 

— What about Russian banks? 

— Today, Sberbank is our biggest creditor among Russian banks.

 — Do they provide financing without collateral? 

— It depends. There’s project financing that’s being discussed, where there is collateral.  

— Do you have your own money for such large-scale projects, or do you attract shareholder funds? 

 — With revenue of 132.8 billion rubles, don’t you think we can find twenty billion or so [for investment]? We outsource a lot, so we don’t waste money purchasing mining equipment – we give a lot of the work to contractors. If we did all the work ourselves, these kinds of production growth rates would be impossible.

— Is Sibanthracite profitable? The results published for 2018 don’t show the amount of profit. 

— We reported that tax on profit amounted to 8.4 billion rubles, which means we have a profit. We produce high-margin metallurgical coal. This provides stability. 

— But China, the main consumer of metallurgical coal, has begun to smelt less steel.

— Metallurgical coals are subject to the general economic cycle, and if the economy slows, they will be the first to suffer. Therefore, it’s very important for us to be diversified in terms of product line and sales markets. China is a huge market, but we can’t depend on it alone. They can change some requirement, and that’s it! For example, in December [2018], China refused to accept any coal from anywhere and the ports were closed. An overstock resulted, with ships and equipment sitting idle, and we had to deal with this situation until March [2019]. But Korea and Japan are also among our consumers, and we’re number one in India.

— But you’re still betting on the countries of the Asia-Pacific region?

— Yes, that’s where the growth is. Production is moving from China to Vietnam, Indonesia, Malaysia... Asia-APR  countries account for 70% of our total volume of exports. 

"We’re not crazy – we really believe the Severomuysky Tunnel-2 is a winning investment project”

 — How much does the shortage of railway capacity in the East affect you?

— It affects everyone. We have only 100 million tonnes going to the East by rail.

 — Last summer, the Presidential Commission on Fuel and Energy was tasked with doubling rail capacity to the East by 2025.

 — I think the market could supply these 200 million tonnes in the coming years, but there’s no transportation capacity.

— In mid-March, Bosov wrote a letter to Vladimir Putin, in which he offered to finance the construction of the Severomuysky Tunnel-2 and increase the hauling capacity of the BAM and the Trans-Siberian railway. Is this proposal connected with the deficit [in capacity]?

 — Yes, a large part of our 50 million tonnes of coal will go to the East. After analyzing the situation, we made a proposal to the president of Russian Railways, Oleg Belozerov, in the summer of 2018. It’s an elaborate plan, part of our strategy. And we’re not crazy – we really believe this is a winning investment project.

 This tunnel was not in Russian Railways’ immediate plans, but the issue was raised at the Presidential Commission on Fuel and Energy.

 — How did Putin find out about this project if you wrote to Belozerov first?

— Not from us. The BAM’s original Severomuysky Tunnel is very narrow, and it’s been in operation for a long time. It will require renovation after a time.

 — And, how did RZD react to your proposal? 

— The answer was this: “Yes, we need a tunnel, but it’s not in our plans, and it’ll cost about 250 billion rubles.” We said that if RZD doesn’t have it in their immediate plans, let us build it ourselves. At first, this wasn’t taken seriously, but Bosov continued to promote the idea and wrote a letter addressed to the president of Russia, Vladimir Vladimirovich Putin.

— And the president gave the order?

— As far as I know, our initiative was supported.

 — Will the tunnel be built solely with private money or will it be a public-private partnership?

— Initially, there will be private funding. Then the tunnel will be transferred to Russian Railways according to the agreed financial terms, which are now being discussed.

 — On April 21, Sibanthracite reported that a joint working group had been set up on Belozerov’s instructions and had even held its first meeting on April 11. Will Russian Railways be obligated to provide the company with priority access to the BAM and Transsib in return for building the new tunnel?

— Russian Railways is very interested in increasing cargo traffic [after the Severomuysky Tunnel-2 opens] and removing the risks associated with the existing tunnel. Can you imagine what would happen if it had to close for repairs?

 — But many are strongly opposed to the principle of granting priority access to Russian Railways’ infrastructure.

— Let’s look at what’s happening in the coal market. When I came [to the post of CEO of Sibanthracite] I saw [in the coal market] a situation similar to that which existed in the oil market before the construction of BPS-1 and BPS-2. At that time, there was only the Druzhba oil pipeline and the government issued export quotas. There were managers in Transneft who decided your fate: whether your oil would get through or not. At the same time, the margin for oil sales in Russia was half of that for exports. Everyone wanted to export, but there was only one pipeline. That’s what started this whole game.

 The same thing is happening here [in the coal market]. As long as there’s no excess capacity, the battle for export quotas will continue. RZD may cut someone by 5% [of requested capacity], someone else by 15%, while another company may not be cut at all for some reason. To get to the truth of why this happens is impossible. In order to keep everything objective, it’s necessary to either create more capacity, or – within the existing system – to limit capacity based on the profitability of the product. What does a shrewd owner do? He says: “Whoever pays the most [money] will be the one to get through.”

 — Couldn’t it turn out that, after you’ve worked out the plan for the project, Russian Railways won’t go along with your terms?

 — If the government needs this project, we’ll find a mutually acceptable solution with RZD.

 — Where’s the point of no return, when you must decide whether to invest in this project or not?

 — The project has started for us. The company [for building of the Severomuysky Tunnel-2] has already been registered, customer service has been created, and the contractors are being determined. We are carrying out our assignment.

— Is the Nakhodka Open Port terminal built by  Ziyavudin Magomedov’s  Summa still interesting to you? 

— Yes, we’re in negotiations.

— You were also going to build Port Vera, which is also in the Far East.

— Yes, VostokCoal is building Port Vera, and we’re looking forward to its capacity. This is part of our strategy. 

 “It’s hard to make me nervous after TNK-BP”

 — Bosov’s offer was that, not Sibanthracite, but his other company, VostokCoal, would develop the tunnel project, as it is Port Vera.  How will the two companies interact?

— Sibanthracite owns the Severomuysky Tunnel-2 company, but the management company, the General Contractor, will probably be VostokCoal. 

— What’s the difference between the two companies? Why don’t you merge them?

— VostokCoal [which belongs equally to Dmitry Bosov and Alexander Isaev – RBC] is a company that has know-how working with greenfield projects. The company develops and launches new projects. Once these projects enter operation, they are transferred to Sibanthracite. This is my area of responsibility. When I came here, I inherited three fragmented enterprises (Siberian Anthracite,  Open-Pit Mine Vostochny, and  Open-Pit Mine Kiyzassky). The task was to unite all these into a single corporation. 

— Channels on Telegram are now actively discussing a criminal case involving illegal coal mining, which is directed against the management of VostokCoal’s Arctic Mining Company, and Bosov is a witness. Is this interfering with your ability to manage Sibanthracite?

 — No, it has nothing to do with Sibanthracite.

 — But doesn’t it make you nervous that the name of the company’s principal owner is involved?

 — It’s hard to make me nervous after TNK-BP. (Barskiy was Deputy Chairman of the Board of the oil company in 2009-2011 – RBC). At that time, the names of the owners were in the newspapers every day. So, what should I do now, stop working?

— Well, it’s one thing to be mentioned in the newspapers, and quite another to have a criminal case being discussed on Telegram channels.

 — I don’t understand genres like Telegram channels. This falls into the category of fake news.

 — Have the risks of doing business in Russia significantly increased recently?

 — Any businessman looks at the risk/reward ratio [expected return on investment versus acceptable risk – RBC]. If you want to build a global company, you have to bear the risks.

 “I’m not conducting any negotiations”

 — Our sources were told last year that Bosov had held talks on the sale of Sibanthracite with ex-Rosneft president Edward Khudainatov. And the consolidation of Sibanthracite’s assets, which began before your arrival, is part of the pre-sale preparation. Are any such negotiations underway?

 — No such negotiations are being conducted. And there was no preparation for a sale before my arrival.

 — Is Khudainatov still trying to buy Sibanthracite?

 — I don’t know. That’s a question for him. I’m not conducting any negotiations.

 — Could the campaign on Telegram channels be connected to these attempts at a hostile takeover?

 — Anything’s possible.

— Ukrainian businessman Serhiy Kurchenko has been named as another potential contender for Sibanthracite.

— I’ve never heard of him.

 — He’s called the Coal King of Donbass. He supplies anthracite from there.

 — Good to know.

 — So, there are no negotiations being conducted with his people either?

 — No, there’s no negotiations being conducted with anyone at all. There’s no plan to sell the company, there’s a plan to double it.

 — How much would you assess Sibanthracite to be worth?

 — It’s impossible to assess right now. If you look at the multipliers for public companies, Mechel, which is closest to us, is trading with a ratio of 7 to EBITDA, and Evraz – 3.

 — In autumn, we were told that the owners estimated the company’s worth at $3 billion.

 — That’s a question for the owners.

 — Do you have a lot of debt? 

 — No, less than EBITDA.

 — Usually, when a company announces such large-scale growth plans, it’s about monetization, including through sale.

 — This is a profitable business. We want to grow it. There’s a saying, “You can’t sell the skin of a bear that hasn’t been killed.” You’re talking about monetization. When? We still have a long way to go, and a tunnel to build to get there, and so on.

 — Has an IPO been considered?

 — The stock market is a means of raising capital. Today, banks give loans with a ratio of 3 to EBITDA. Why should I place shares on the stock exchange? If there is another assessment [of the business on the stock exchange], we will raise money there.

 — Even big state banks like Sberbank and VTB?

 — In Russia today, all banks are eager to offer financing because they understand that it’s really big business.

— Tell us, who, Sibanthracite’s and VostokCoal’s principal shareholders are, apart from Bosov? Sibanthracite’s Board of Directors includes Dmitry Aga, Alexander Isaev, and you. How are decisions made?

 — You’ve basically named them. This is a team of close associates with whom I have long been familiar. For me, the only new man is Alexander Isaev. I’ve worked with Dmitry Aga and Bosov since 1999. We closely work with Isaev (we sit in adjacent offices) and VostokCoal. Although you call me an M&A specialist, I was invited as an operations manager. I introduce new processes – investment processes, as well as supply and production processes. Our projects are becoming large, and they need control of a different order. And in this respect, we all understand who is complementing whom here: with these processes, I am complementing the work of Isaev, who is certainly talented at launching greenfield projects.

 — Wasn’t Mikhail Abyzov Bosov’s partner in coal projects?

 — I don’t know where he’s been

 — He hasn’t been in Sibanthracite?

— No.

 — Even conceptually?

 — All of Sibanthracite’s shareholders are legally registered.

 — Obviously, Bosov delegates a lot of authority, but does the last word still remain with him?

— Bosov has the last word.

 — And how often does he use it?

 — Less and less often.

 Reference

The Sibanthracite Group is Russia’s largest producer of metallurgical coal, and number one in the world in producing and exporting ultra-high grade (UHG) anthracite. It comprises three coal mining enterprises – Siberian Anthracite, Open-Pit Mine Vostochny (Novosibirsk Region), and Open-Pit Mine Kiyzassky (Kuzbass Region), which produces T-grade coal. According to its own data, in 2018, its combined production volume amounted to 24.1 million tonnes. In 2018, its revenue according to Russian Accounting Standards amounted to 132.8 billion rubles, an increase of 1.9 times, with total accrued taxes of 12.5 billion rubles, including 8.4 billion rubles of tax on profit.

The group also owns Sibanthracite Kuzbass, which holds the license for developing the Verkhneteshsky site. It plans to launch production there in 2020. In addition, the Group has a 50% stake in the Ogodzhinskaya Coal Company, with Rostec controlling 12.5%, and Ekaterina Lapshina’s Era Capital, 37.5%. This enterprise owns the license for developing the Ogodzhinskoe coal field in the Amur Region, which is set to commence production in 2019.  

Sibanthracite Group’s production assets belong to Cyprus-registered Sibanthracite PLC, the sole shareholder of which is Alltech. More than 86% of Alltech is controlled by Dmitry Bosov.