Privatization of OGKhK-DemGOK: a merger similar to a “drain”...

The press tour to the Volnogorsk Mining and Metallurgical Plant (VGMK), organized by the State Property Fund and UMCC Titanium (SE OGKhK), became a natural continuation of recent events around the titanium industry, and its main result was the statement of representatives of the State Property Fund about the start of preparations for the company for privatization.

During the presentation tour with the participation of representatives of business associations, the Chamber of Commerce and Industry, a number of media outlets and the Indian Embassy in Ukraine, Vladislav Danylyshyn, director of the SPF Privatization Department, informed those present that preparations for the procedure for determining the starting price and paperwork will begin in the near future. which will be provided to future investors to study the object (due-diligence).

According to Mr. Danylyshyn, the company has export revenue and a resource base for the extraction of minerals in the Dnepropetrovsk and Zhytomyr regions, which are strategic in some industries. There are also prospects for increasing production and entering new markets. “When a new investor appears, he will be able to forecast and increase production in a new way in the future, investing money in the enterprise and the economy of Ukraine,” Danylyshyn said.

The auction will be held on the electronic platform “Prozorro Sales”, and in order to prevent the arrival of an investor associated with the aggressor state, a procedure will be launched to study the potential buyer with the involvement of law enforcement agencies. In the future, the enterprise (block of shares) will be transferred to the investor after fulfilling a number of conditions, including signing a purchase and sale agreement, payment and agreement with the Antimonopoly Committee of Ukraine.

However, upon deeper dive into the details of the future privatization of VGMK, it turned out that in addition to a number of current problems, such as prolonged downtime, significant depreciation of production assets and financial debts, a number of other, no less unpleasant “surprises” await the potential owner.

Two in one

As it turned out during the presentation, instead of discounts and incentives, VGMK will be sold with a “makeweight” and additional investment burdens (I dare not call these investment obligations). Thus, according to the SPF plan, it is also planned to include the Demurinsky GOK in the privatization lot of VGMK, which recently confiscated from the sanctioned Russian oligarch Mikhail Shelkov.

Since the Demurinsky GOK is located 200 km from the main processing facilities of VGMK, a potential investor will have to solve not only the problem of increasing production, but also build a new route for delivering rough concentrate to Volnogorsk for subsequent processing. All this is guaranteed to increase the cost of production, require the construction of a new section of the railway and guarantee close communication with bureaucracy of various levels and profiles.

Deputy Chairman of the Board of UMCC Titanium Dimitri Kalandadze does not hide that this measure is forced and is related to the problems of VGMK’s own raw material base. Demurinsky GOK is needed by VGMK as a raw material appendage, since the plant’s own raw materials, during normal operation, will only be enough for the next few years!!!

Representatives of the SPF see a partial solution to this problem in reducing production at the Malyshevskoye deposit in Volnogorsk from 5 million tons to 2 million tons and in parallel increasing production at the Volchanskoye deposit of the Demurinsky GOK to 900,000 - 1 million tons. According to Mr. Kalandadze, given the higher mineral content in the Volchanskoye deposit, “this will give us the opportunity to exist for 7-10 years until someone sorts out the deposit.”

It is obvious that the acquisition of a problematic mining and metallurgical enterprise with a depleted mineral base, a package of valuable methodological recommendations on doing business from the State Property Fund and the prospect of investing several more tens of millions of dollars in logistics and transport is not a test for the faint of heart.

If anyone has forgotten that business in Ukraine is, first of all, an adventure, and only then commerce - Welcome!…

Raw materials gap

It is well known that the raw material problems of VGMK are a consequence of many years of interest in the Malyshevsky (Samotkansky) alluvial deposit of ilmenite-rutile-zircon sands (discovered in 1954) on the part of Dmitry Firtash and the mining company Motronovsky GOK LLC, which he created.

At the very beginning of the “decade of Firtash’s omnipotence” - in 2004, this enterprise received a special permit for the use of subsoil from the State Service of Geology and Subsoil of Ukraine, extended in 2019 and valid until April 2034. It involves the extraction of raw materials suitable for the production of zircon, rutile , ilmenite, disthene-silimanite and staurolite concentrates in the Motronovsko-Anninsky and North-West areas of the Malyshevskoye deposit with a total area of ​​82.3 sq. km.

With a mining capacity of 2.7 million tons per year, the Motronovsky GOK’s reserves of raw materials will last for many 58 years, and the state-owned VGMC, originally designed and built taking into account this deposit back in 1956, is now forced to look for raw materials hundreds of kilometers away.

According to the development program of the Motronovsky GOK, the enterprise was supposed to reach its design capacity of 2.7 million tons in the first quarter of 2022. But work is not being carried out on it, and in March the validity of Special Permit No. 3640 issued to the Motronovsky Mining and Processing Plant was terminated by the State Geological Resources, as well as the validity of other similar documents issued to Group DF enterprises. In May, the Dnepropetrovsk District Administrative Court (DOAS) granted the application of the Motronovsky Mining and Processing Plant and stopped the order of the State Service of Geology and Subsoil of Ukraine.

On August 9, the Supreme Court of Ukraine opened cassation proceedings on the complaint of Motroovsky GOK LLC against the decision of the Third Administrative Court of Appeal dated June 22, 2023 in case No. 160/8773/23 on the termination of the special permit for the use of subsoil No. 3640 issued to the Motronovsky GOK.

Despite the fact that until the completion of this trial, the issue of the resource base of VGMC remains completely unresolved, nevertheless, the new management of the SPF and UMCC Titanium, it seems, does not intend to continue this legal saga and has come to terms with the loss of mineral reserves capable of meeting the needs of the enterprise for decades ahead and increase its starting cost by an order of magnitude. With the merger and privatization of VGMK-DemGOK, the history of this legal confrontation will be finally closed.

By the way, a similar situation also developed with the Selishchansky titanium ore deposit in the Zhytomyr region. It was also returned to the state after the cancellation of subsoil use licenses for Dmitry Firtash’s Valki-Ilmenit and Mezhdurechensky GOK companies, but the oligarch’s lawyers managed to stop the return procedure through local courts. The deposit is still in limbo. The end of this story, as well as the active position of D. Kalandadze’s subordinates in returning once-lost property to its rightful owners, is not in sight. “The deputy chairman of the board of UMCC Titanium is a specialist in privatization, and not vice versa,” market participants sneer.

Let us recall that the emergence of Dimitri Kalandadze as deputy chairman of the board of UMCC Titanium and, in fact, the ideologist of its privatization, was accompanied by rumors that his task was to reconcile the titanium interests of Dmitry Firtash and state ambitions. As we can see, this version has not yet been refuted.

No bargaining

According to the results of work for eight months of 2023, the production of the plant’s main ores, such as ilmenite, rutile and zircon, fell three times compared to even the war year of 2022, and accounts payable reached UAH 350 million, excluding the loan, increasing it to UAH 630 million . To bring the indicators back to normal, management intends to reduce the mining plan from 4 million tons to 3 million, and then to 2.8 million tons.

After the scandal with the re-export of VGMK products through intermediaries Sic Lucea Kft, Timr Sp.zoo, Agroorganika Polska sp zoo - companies associated with the Russian Federation, foreign supplies of products decreased tenfold. As Dimitri Kalanadze admitted, new contracts with the largest American and most reliable buyer of the plant’s products from the point of view of national security have not been concluded. The reason is supposedly the still unset prices for 2024. At the same time, Kalandadze himself has repeatedly stated that his main role is to build direct relations with the largest American and European consumers of the products of the Ukrainian titanium state holding. As of today, we have a diametrically opposite picture: no long-term contracts have been concluded with the Americans and Europeans; sales to random offshore traders continue; scandals with accusations of gray supplies to the market of the aggressor country do not subside.

The board would be happy to sell more raw materials abroad, but this may require appropriate qualifications and competence. Systematic work to promote products on international markets and maintaining a constant dialogue with major Western partners cannot be replaced by sporadic cooperation with offshore companies with poorly hidden Ukrainian roots.

The fourth attempt at privatization, one of the once most attractive lots of the Ukrainian economy - UMCC/UMCC Titanium, for the first time in its history is faced with more than half a billion debts, a multiple drop in production, unfinished lawsuits for the return of resource sites, the absence of serious export contracts, but , with unlimited credit of trust from the SPF and an extremely cheerful new board.

Who is the beneficiary?

In principle, privatization does not happen without the presence of interested parties. The gain of the Ukrainian state from the privatization of titanium industry enterprises, and even in war conditions, is very doubtful. Until recently, OGKhK was a successful company and consistently made a profit. Shortly before the war, the President of Ukraine presented the Americans with a plan for transforming the economy, which talked about the creation of a full cycle of titanium production; a Decree “On stimulating the search, extraction and enrichment of minerals of strategic importance for the sustainable development of the economy and the defense capability of the state” was also signed to the Cabinet of Ministers it was instructed to create a separate State program for the development of the titanium industry in Ukraine. With the outbreak of the war, all this acquired even greater importance, but, for some reason, was forgotten.

The aggressor state would certainly like to continue to control the Ukrainian titanium industry, but the possibilities for this are now very limited. The once “Ambassador No. 1” found himself in exile and is awaiting extradition to the United States under sanctions; the Russians’ assets have been confiscated, and access to privatization is closed. The maximum that can be counted on is small volumes of Ukrainian raw materials obtained through roundabout offshore routes, crisis and degradation in the industry, lack of investment in Ukrainian assets from systemic foreign businesses. There is a big problem with a serious private investor, especially an American and European one. In the previous attempt to sell the state-owned company on August 31, 2021, and 18 potential buyers (including 12 foreign), only 3 reached the auction, 2 of which were rejected due to the submission of incomplete packages of documents. The finalists were the unknown Stugna Limited (Ukraine), Northland Capital Partner Limited (UK) and Tinvest (Ukraine). One of the companies turned out to be associated with Group DF.

According to Vitaly Strukov, managing partner of BDO Corporate Finance and the main consultant of UMCC Titanium on privatization, serious international companies are not ready to participate in the auction due to the lack of guarantees for the protection of large investments. Since then, the operating indicators, own product reserves and export capabilities of the enterprises of the titanium state holding have dropped significantly, and the situation with investment guarantees has hardly changed for the better. Finding a buyer in 2023 will be much more difficult than in pre-war 2021 and even in the unprecedentedly difficult 2022. Actual production output in April-May 2023 amounted to 30% of last year, and the output of main concentrates fell to record-critical values ​​in the entire history of the company. Operating losses at the end of the first quarter of 2023 amounted to 109 million UAH, by the end of the second quarter they increased to 250 million and at the end of the third quarter they could significantly exceed 500 million UAH. At the same time, titanium exports from Ukraine have decreased by 28 times and it is not clear when they will be able to recover to pre-war values.

The most interested party in preserving and maintaining the status of “privatized” state titanium assets is perhaps the State Property Fund. The Fund today pursues a policy completely independent of the Cabinet of Ministers, takes confiscated assets under its management, makes decisions on their privatization, etc. But most importantly, following the pre-war tradition, it continues to independently manage strategic state-owned enterprises. As a result, despite the revival of the defense industry and the creation of new clusters of the world-class Mil-Tech industry, into which hundreds of billions of UAH began to pour in, state titanium assets found themselves on the sidelines of the reforms, continue to live their own lives and prepare as if nothing had happened. to privatization. What we will use to build new missiles, planes, satellites, drones, ships, armored vehicles, etc. is not clear.

Georgian expat D. Kalandadze, who was specially invited to privatize state titanium assets, seems to be satisfied with any scenario other than the implementation of anti-crisis measures in production and the implementation of quality reforms. Either he declares that the company under his leadership has the task of creating highly processed titanium products by 2030... then within a week or two he organizes a privatization press tour.

Logic, consistency and unity of goals in all this diversity of activity of all actors are clearly not visible. As a result, chances for development are missed, enterprises stand idle and degrade, and privatization from a conscious project has turned into a sluggish process for the sake of the process.