ANNUAL REPORT ACRON

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(1)WorldReginfo - e963cf0f-7324-4ac3-9eda-22eb605bfcf7.

(2) WorldReginfo - e963cf0f-7324-4ac3-9eda-22eb605bfcf7.

(3) WorldReginfo - e963cf0f-7324-4ac3-9eda-22eb605bfcf7. ANNUAL REPORT ACRON.

(4) DISCLAIMER Disclaimer This annual report of Acron open joint stock company and its subsidiaries (together, Acron Group) contains certain statements of future expectations in relation to the Group’s operations and its expected results, economic performance, financial conditions, projects and growth prospects. Acron’s annual report contains forward-looking statements which reflect the Group’s intent, opinions and current expectations. All statements other than statements of historical facts as of the date of this annual report are forward-looking statements. Words and expressions such as “may,” “will,” “expect,” “estimate,” “plan,” “forecast,” “assume,” “continue,” “intend,” “believe” and similar words and expressions and the negative thereof, identify forward-looking statements based on assumptions and estimates which the Group believes are reasonable as of the date of this annual report. Forward-looking statements in relation to the future are subject to uncertainties, assumptions and inherent risks, both of a general nature and specific to the Group’s business. There is no assurance that any assumptions, intent or other forward-looking statements will be achieved.. When acting in reliance on forward-looking statements one should take into account economic, social and legal factors existing in Russia and abroad and in the Group’s business, all of which may affect the Group’s performance, as well as conditions in the markets where the Group operates or plans to operate, including their financial performance, liquidity, indicators, prospects and opportunities. Such factors include, without limitation, changing business environment and other market conditions, general economic climate in Russia and abroad, including actions by the governments of Russia and other jurisdictions where the Group is surveying, developing or operating any assets, such as changes in civil, financial, tax, customs, currency, or environmental laws and regulations. The above list is not exhaustive.. WorldReginfo - e963cf0f-7324-4ac3-9eda-22eb605bfcf7. The Group hereby informs that its actual performance may differ from forecasts, which are only valid as of the date of this annual report. The Group does not represent or warrant that its forecasted performance will be achieved or should be considered the most probable scenario..

(5) 2/3 CONTENTS Contents GROUP PROFILE............................................................ 6. MANAGEMENT DISCUSSION AND ANALYSIS......... 42. IFRS PERFORMANCE HIGHLIGHTS............................. 7. SUSTAINABLE GROWTH ............................................ 54 Human Resources Policy.....................................56 Safety....................................................................57 Social Responsibility.............................................57 Charity...................................................................58 Environmental Policy............................................58. LETTER TO SHAREHOLDERS FROM THE CHIEF EXECUTIVE OFFICER................................................... 10 2008 MILESTONES....................................................... 12 ABOUT US..................................................................... 14 Acron’s Structure..................................................16 Growth Strategy....................................................17 Global Fertiliser Market Overview.........................18 • Key Competitive Strengths...............................18 BUSINESS OVERVIEW................................................. 20 Operations............................................................22 • Mineral Fertilisers and Ammonia......................23 • Organic Compounds........................................27 • Non-organic Compounds.................................29 • Quality Management........................................30 Mining....................................................................31 Logistics................................................................32 Distribution............................................................33 Investments...........................................................34 Portfolio Investments............................................35 RISK FACTORS............................................................. 36 Industry Risks........................................................38 Technical Risks.....................................................39 Country And Regional Risks.................................40 Financial Risks......................................................40 Legal Risks............................................................41. CORPORATE GOVERNANCE...................................... 60 Board of Directors................................................64 Committees of the Board of Directors..................67 Managing Board...................................................69 Internal Control......................................................71 Shareholders’ Equity.............................................73 Dividend Policy.....................................................74 Disclosure.............................................................74 Auditors.................................................................75 SCHEDULE 1. COMPLIANCE WITH THE PROVISIONS OF THE CORPORATE GOVERNANCE CODE................................................... 76 SCHEDULE 2. MAJOR TRANSACTIONS AND RELATED PARTY TRANSACTIONS FOR 2008......................................... 88 SCHEDULE 3. IFRS FINANCIAL STATEMENTS AND AUDITOR’S REPORT........................................... 92 SCHEDULE 4. RAS FINANCIAL STATEMENTS................................ 136 Contact Info....................................................................152. WorldReginfo - e963cf0f-7324-4ac3-9eda-22eb605bfcf7. LETTER TO SHAREHOLDERS FROM THE CHAIR OF THE BOARD OF DIRECTORS............................................................... 8.

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(8) GROUP PROFILE Group Profile Acron is a fast-growing group of interrelated companies. It is one of the leading mineral fertiliser producers in Russia and globally. Its broad offerings include ammonia, complex fertilisers (NPK, dry blends, NP), straight nitrogen fertilisers (urea, ammonium nitrate (AN), and urea ammonium nitrate (UAN)), the fertilisers of choice for an increasing number of farmers all over the world. The Group’s product portfolio also includes organic and non-organic compounds. In 2008, Acron produced a total of 3.6 million tonnes of ammonia and mineral fertilisers (less own consumption) and 1.2 million tonnes of organic and non-organic compounds. The Group covers more than 50 countries, with its major focus on fast growing markets in Russia, China, South America, and Asia.. WorldReginfo - e963cf0f-7324-4ac3-9eda-22eb605bfcf7. At the core of the Group are three production facilities: Acron plant (which gave the name to the Group and is located in the city of Veliky Novgorod) and Dorogobuzh plant (Dorogobuzh, Smolensk region) in Russia, and Hongri Acron (Linyi, Shandong province) in China. Acron’s logistic arm consists of three transshipment terminals on the Baltic Sea – .. Kaliningrad (Russia), Sillamae and Tallinn (Estonia), and its own railcar park. The Group owns distribution networks in Russia and China. To secure its phosphate and potash inputs, Acron has acquired two subsoil licenses – a phosphate license in the Murmansk Region and a potash license in Perm Krai. The Group employs more than 13,000 people..

(9) 6/7 Net profit, RUB million. 4,000 2,000 0. 0 2007. 2008. 2004. 2005. 2006. 2007. 214. Capital expenditure, RUB million. 30,000. 116. 24,000. 1,214. 2004. 2005. 6,000 0. 2005. 2006. 2007. 2008. 2006. Investments and capital expenditure. 2,427. 868. 12,000. 52. 69 29. 18,000. 4,334. 120. 2008. 2007 Subsoil licenses. 2008. WorldReginfo - e963cf0f-7324-4ac3-9eda-22eb605bfcf7. 2007. 25,395. 2006. 160. 2004. 41. 0 2005. 200. 0. 28. 40 20. EPS (10 GDRs represent interest in 1 ordinary share), RUB. 80. 2008. 60. 0. 2004. 2007. 80. 20. 8,586. 4,762. 2,590. 5,969. 16,000. 4,000. 2006. 100. 26. 20,000. 8,000. 2005. EBITDA margin, %. 17,475. EBITDA, RUB million. 12,000. 2004. 2008. 15. 2004. 40. 5,668. 2006. 6,000. 2,464. 2005. 8,000. 3,383. 10,000. 10,000. 1,389. 20,000. 23,625. 30,000. 22,748. 17,342. 40,000. 31,105. 50,000. 43,132. Sales revenues, RUB million. 9,891. IFRS IFRSPERFORMANCE Performance HighlightsHIGHLIGHTS.

(10) LETTER Letter to Shareholders TOfrom SHAREHOLDERS the Chair of the THE BoardCHAIR of Directors FROM OF THE BOARD OF DIRECTORS I believe that 2008 was one of the most volatile years in history, both for Acron and for the global economy. Over the first nine months of the year, the international fertiliser industry demonstrated unprecedented growth, which fed the Group’s outstanding financial and business performance and financed a number of strategic steps aimed at future development. However, in the last three months of 2008 the global economy was shaken by financial crisis and the Group was forced to cut back on production amid slipping demand and prices. Our major achievement over the past year was the Group’s transformation into a vertically integrated business, including its own mineral resources base, processing, logistics and distribution. Acron has created a platform for further sustainable growth. In 2008, the Group strengthened its positions in a new role as a public company. In January 2008, its shares were listed at the Russian stock exchanges – RTS and MICEX; in August it was listed at the London Stock Exchange. We saw strong interest in our company from Russian and international investors in the capital markets, which opens up new opportunities for raising capital as soon as financial markets stabilize. Our even stronger commitment to Acron’s role as a public company triggered major improvements in. WorldReginfo - e963cf0f-7324-4ac3-9eda-22eb605bfcf7. Dear Shareholders,.

(11) 8/9. corporate governance. In line with the Group’s policy to implement the best international practices, three independent directors who meet the most stringent eligibility criteria were elected to Acron’s board, where they chair special committees of the Board of Directors.. In all regions of its geographical presence, Acron remains strongly committed to social responsibility standards. We do realize that the key to our business success and sustainable growth is our people. Acron’s management is making continuous efforts to improve conditions for our employees at work and in their communities. The Group pays competitive salaries and provides its workforce with comprehensive social packages. The key short-term objective of the Group, its Board of Directors and executives is to adjust Acron’s operations to the global crisis at minimum cost to the Group and to secure its growth potential for rapid expansion after the crisis. Our long-term strategy remains to enhance the Group’s vertical integration with a focus on securing our own resource base.. Alexander Popov Chair of the Board of Directors. WorldReginfo - e963cf0f-7324-4ac3-9eda-22eb605bfcf7. Despite the global crisis, the Group’s performance hit record levels. In H1 Acron paid intermediate dividends of approximately 42% of its RAS-based net profit for 2008..

(12) LETTER TO Letter to Shareholders SHAREHOLDERS from the Chief Executive Officer FROM THE CHIEF EXECUTIVE OFFICER Dear Shareholders,. Unfortunately, the mineral fertiliser industry was one of the first to take the blow. As the global economy slowed down, in late October Acron cut output and expenses. However, I am proud to say that all the investments and improvements made at the Group’s facilities in recent years have helped us mitigate the effects of the crisis. The Group is in a far better position than most of our Russian and global rivals. To outline our key competitive advantages, I would start by saying that we manufacture several brands of nitrogen fertilisers, which are most widely used in the global agricultural industry. Second, we have access to relatively cheap natural resources and efficient power-saving technologies. Third, the Group has a diversified product mix, which makes it more resilient to demand fluctuations in various segments. Another important advantage is the Group’s broad geographical footprint – we sell our products to more than fifty countries. In 2008, our growth investments hit a record level. In the favourable, pre-crisis market environment, we invested heavily over the past few years in modernizing. WorldReginfo - e963cf0f-7324-4ac3-9eda-22eb605bfcf7. The year 2008 was a stress test for Acron. Skyrocketing demand and prices in the global fertiliser market over the first half of the year were followed by a rapid decline in the second half..

(13) 10/11. Last year, the Group took major steps to expand its distribution and logistics. As part of our logistics strategy, we acquired a controlling stake in one of the largest Estonian transshipment terminals for dry fertilisers. Acron has started shipping its UAN .. through its own AS BCT terminal in Sillamae, Estonia. The ammonia transshipment unit is expected to be commissioned in Q3 2009. Regretfully, we were prevented from using the Estonian ports to full capacity in 2008 due to restrictions imposed by Russian Railways on cargo transit through Estonia. However, we believe the Estonian cargo flow will rebound and the Group will significantly reduce transport expenses for export. In 2008, the Group completed its own distribution infrastructure. We established an international trader, Agronova International Inc., which will streamline our export operations. Later in 2008, Acron finalized acquisition of its Chinese distributor, Yong Sheng Feng, which is licensed to sell mineral fertilisers. These acquisitions fit perfectly in the Group’s marketing infrastructure, including its Russian distribution network and mark further strengthening of our positions in our key markets – Russia and China. Our investments in upstream operations also hit a record level. In 2008, Acron acquired a license to develop the Talitsky area of the Verkhnekamsk. potash deposit. On our phosphate project, the Group has obtained all the government permits required to construct the mine at Oleniy Ruchey phosphate deposit. Our mining projects require significant capital outlay, but we believe that once developed, these projects will secure the Group’s independence from third party suppliers of raw materials and will open new opportunities for expanding our product offering. In 2008, the Group invested more than USD 1 billion, including the purchase of the potash license for the Talitsky area. The global financial crisis is taking its toll, but despite revising our capex program for 2009 the Group will continue with its strategic projects. Everything we achieved in 2008 was made possible by the efficient and coordinated work of our employees and the prudent decisions made by management. We believe our major asset is our highly professional team that knows to set high goals and achieve them. In early 2009, the fertiliser market saw a mild recovery when the Russian government made a strategic decision to lift export duties on nitrogen and complex fertilisers. Rouble depreciation also had a positive effect on our cash flow and margins. We believe that the Group is well-positioned to cope with the crisis and sustain its growth.. Ivan Antonov Chief Executive Officer. WorldReginfo - e963cf0f-7324-4ac3-9eda-22eb605bfcf7. our existing facilities and building new capacity. We also added a new product to our portfolio (urea ammonium nitrate (UAN) produced at Veliky Novgorod) and made major repairs at ammonia units in Veliky Novgorod and Dorogobuzh, adding capacity and reducing gas consumption rates..

(14) 2008 MILESTONES 2008 Milestones January. June. Acron ordinary shares admitted to the B List of the MICEX and the Russian Trading System (RTS).. Acron’s ordinary shares are included in the RTS index.. February North-Western Phosphorous Company (NWPC), Acron’s phosphate subsidiary, tests apatite and nepheline processing technology at Oleniy Ruchey deposit, producing first pilot lots of apatite and nepheline concentrates. Acron starts construction of methane conversion unit at methanol plant in Veliky Novgorod, bringing methanol capacity to 175,000 tpa.. Acron and Veliky Novgorod administration sign agreement on social and economic cooperation in 2008–2009.. July European Commission lifts anti-dumping import duty on ammonium nitrate produced by Acron and Dorogobuzh and imported to the EU, within a set quota. Acron completes major overhaul of second ammonia unit.. March Verkhnekamsk Potash Company (VPC), Acron’s potash subsidiary, wins license for Talitsky area of Verkhnekamsk potassium-magnesium salts deposit (Perm Krai). The Group pays RUB 16.8 billion for the right to develop the area with recorded sylvinite reserves of 681 million tonnes. .. AS BCT port terminal (Sillamae, Estonia) starts shipping Acron’s UAN.. August Acron's global depositary receipts are admitted to official list of the UK Listing Authority and to trading on the main market of the London Stock Exchange. Acron acquires 45% of AS DBT (Muuga, Estonia) – port terminal for mineral fertilisers. Dorogobuzh purchases 300 gondola-cars for bigbagged fertilisers.. April. May Acron and Dorogobuzh hold annual general shareholders meetings. A RUB 13.4 billion loan agreement between Acron and Sberbank is approved. The loan proceeds are used to finance VPC. VPC receives license for Talitsky area of Verkhnekamsk potash deposit. Agronova International Inc. is incorporated in the United States to perform marketing operations, distribution and sea transportation of fertilisers exported by the Group.. September NWPC obtains government approval for mine construction at Oleniy Ruchey phosphate deposit.. October Dorogobuzh completes overhaul of ammonia unit, adding more than 10% to its capacity. NWPC enters into agreement with Murmansk regional government on social and economic cooperation in 2008–2013. VPC and Interregional Investment Company (MIK) Severozapad-Prikamye sign a memorandum, under which VPC joins Belkomur project. The project includes development of industrial facilities and infrastructure, construction of new production facilities, creation of jobs, development of untapped mineral and forestry resources in the Republic of Komi, Perm Krai and Arkhangelsk region.. WorldReginfo - e963cf0f-7324-4ac3-9eda-22eb605bfcf7. Dorogobuzh, a member of Acron Group, wins allRussian award Golden Support, organized by RAO UES of Russia and the Russian Ministry of Industry and Energy to recognise the most efficient thermal energy consumer..

(15) 12/13. Alexander Popov Chair of the Board of Directors. “The year 2008 marked a breakthrough in the Group’s corporate governance, which was brought in line with the best international practices. Today Acron is listed at both the major Russian stock exchanges and the London Stock Exchange. Three independent directors were elected to the Board. The next item in our strategic agenda is to further improve corporate governance standards to cope with the global financial crisis with minimum losses.”. November Hongri Acron overhauls its phosphorous acid shop. NWPC starts construction of office and auxiliary facilities at Oleniy Ruchey. Acron sets price cap for mineral fertilisers for domestic farmers under a cooperation agreement between the Russian Fertiliser Association and the Farmers’ Association aimed at securing mineral fertiliser supplies for Russian farmers.. December Agronova International Inc. registers the acquisition of Yong Sheng Feng, a Chinese company licensed to trade in mineral fertilisers and other chemicals in China.. Events after the Reporting Date January Russian Prime Minister Vladimir Putin visits Acron’s Veliky Novgorod production facility to hold a meeting attended by deputy Prime Minister Igor Sechin, governor of the Novgorod region Sergey Mitin, deputy minister of industry and trade Denis Manturov and Acron management.. February Russian government lifts 8.5% export duty on nitrogen and complex fertilisers, effective February 1, 2009. Acron and Sberbank of Russia sign a three-year USD 128 million loan agreement. Rosselkhozbank and Acron sign an agreement for financing fertiliser sales to domestic farmers for 2009–2010.. WorldReginfo - e963cf0f-7324-4ac3-9eda-22eb605bfcf7. Acron announces that it is temporarily cutting output due to unfavourable market conditions..

(16) WorldReginfo - e963cf0f-7324-4ac3-9eda-22eb605bfcf7. About Us US BOUT.

(17) ACRON’S STRUCTURE GROWTH STRATEGY GLOBAL FERTILISER MARKET OVERVIEW. WorldReginfo - e963cf0f-7324-4ac3-9eda-22eb605bfcf7. KEY COMPETITIVE STRENGTHS.

(18) ACRON’S STRUCTURE Acron’s Structure MINING PROJECTS. PRODUCTION. LOGISTICS. DISTRIBUTION AND SALES. FINANCIAL INVESTMENTS. NWPC 95% (100%). Acron1. AcronTrans 50%. Agronova3 99%. Nordic Rus Holding 51%. VPC 100%. Dorogobuzh 66.39 (77.64%). Andrex2. Yong Sheng Feng4 100%. Apatit5 7.73% (10.3%). 101109718 Saskatchewan Ltd. 98%. HongriAcron 50.5%. AS BCT 85%. Agronova International Inc. 100%. Silvinit 6.08% (8.1%). Sibneftegaz 21%. As of December 31, 2008, percent of authorised capital held by Acron, percent of voting shares in parentheses 4 1 2 3. Dorogobuzh holds 8.48% of Acron’s shares Dorogobuzh holds 100% of shares Dorogobuzh holds 1% of shares. 5. Agronova International, Inc. holds 100% of shares Acron holds shares of Apatit through Nordic Rus Holding (51% of shares held by Acron, 49% held by Hydro Agri Russland AS). WorldReginfo - e963cf0f-7324-4ac3-9eda-22eb605bfcf7. AS DBT 45% (50%).

(19) ABOUT US. 16/17 GROWTH STRATEGY Growth Strategy. Alexander Dynkin Member of the Board of Directors. “The global financial crisis has certainly affected Acron’s key sales markets. This is a major challenge for the Russian economy and Acron Group. However, Acron’s efficient management, transparency, and social responsibility, coupled with its strategic vision of the global economy’s prospects and government support, lay a strong foundation for the Group’s stability and post-crisis expansion.”. Increasing sales in key markets. Acron sells its products to more than 50 countries. Its sterling reputation and strong market position make the Group a reliable supplier of high-quality products. Despite a broader global presence, the Group remains focused on Russia and China. Unlike most other economies, the Chinese economy is forecast to see GDP growth of between 6.0 and 6.5%**. Therefore, the demand from Chinese farmers is likely to remain at a significant level. The Group intends to further strengthen its position in priority markets by expanding distribution and adding value to its offering.. Further enhancing vertical integration. The Group is pursuing its strategy to build a vertically integrated business, including mining, production, logistics and distribution.. To mitigate the negative impact of the global crisis and overcome its consequences, the Group has adjusted the following aspects of its growth strategy: Cost management. The Group is introducing cost control measures to manage its costs in the most efficient way. In particular, decision-making procedures were implemented to streamline and reduce costs.. The Group reasonably believes that its mining projects will reduce its dependence on third party suppliers of raw materials, further eliminating dependence and ensuring stable deliveries of raw materials.. Product portfolio and capacity optimization. The Group’s operations are flexible and can adjust to changing demand for mineral fertilisers. The broad product portfolio, ranging from basic goods to highmargin fertilisers, may adjust to demand at growing or declining markets. Acron owns several production facilities and a number of various operations, which enables it to vary capacity load depending on demand level. In the long run, wholly-owned mining operations will provide a platform for an increase in complex fertilisers output and a more diversified product offering.. * Acron and Dorogobuzh use the mineral concentrate sylvine for complex fertiliser production.. ** The Economist Intelligence Unit. The key priority at this point is the development of the Group’s phosphate and potash assets. Acron has obtained licenses for two phosphate deposits in Murmansk Region and a potash license in Perm Krai. Once on stream, these projects will cover the Group’s need for apatite concentrate and potash*.. WorldReginfo - e963cf0f-7324-4ac3-9eda-22eb605bfcf7. Acron’s strategic objective is to become one of the leading mineral fertiliser producers in the world in terms of output, sales and margins. To this end, the Group has developed its growth strategy covering the following areas..

(20) GLOBAL FERTILISER Global Fertiliser MARKET OVERVIEW Market Overview. For many farming regions, especially in the developing world, fertiliser application rates are far below the recommended level, which creates an enormous growth potential for these markets. Moreover, global supply in the fertiliser market is often restricted due to limited natural resources and expansion capabilities. In 2008, the global fertiliser market was highly volatile. An upward price trend for fertilisers and soft commodities emerged in early 2008 and continued through mid-year. Mineral fertiliser prices reached their peak at the end of summer, to dramatically dive due to the financial crisis and speculative capital outflow from the grain market. These trends destabilized the global commodities markets. Farmers were delaying their fertiliser purchases in hopes that prices would fall further. By late 2008, demand for all types of fertilisers shrank significantly, and prices returned to the level of 2006-2007. As a result, the price of urea (the key nitrogen market indicator), which topped USD 800 per tonne in JulyAugust, fell to USD 240-245 per tonne in November. This price is below cost for many producers that do not have access to cheap natural gas. As a result, such producers were forced to shut down or cut their operations to avoid stockpiling. Europe was the hardest hit, but as the overall situation deteriorated this process spilled over into almost all regions. However, fertiliser producers saw the financial crisis push both revenues and costs. The dramatic decrease in prices for hydrocarbons (especially oil and gas), freight and other expenses had a positive effect on the cost structure and cost position of nitrogen producers. For Russian manufacturers, depreciation of the Russian rouble in late 2008 – early 2009 offset the effects of lower international prices to a certain extent. Moreover, in a move to support domestic producers, the Russian government lifted. export duties on nitrogen and complex fertilisers, effective February 1, 2009. Global fertiliser demand started to rebound in the runup to the 2009 spring planting season, and Russian producers were able to resume operations at normal capacity.. Key Competitive Strengths Acron operates in a highly competitive environment in the domestic and international fertiliser markets. Its production facilities enjoy certain advantages which make them among the most efficient market players and offer broad growth opportunities. The Group’s competitive strengths over foreign peers: Access to unique reserves of natural resources. Access to huge reserves of natural gas, potash, and phosphates brought Russian producers to top positions in the global fertiliser market. More than 30% of the world’s potassium-magnesium salts, approximately 60% of apatite ores and about 2% of the world’s phosphate reserves are contained in the Russian subsoil. Given the unequal distribution of natural resources over the world, access to raw materials will be increasingly important for fertiliser producers. Low costs. Domestic Russian prices for natural gas, electricity, raw materials, and labour are far below those in other regions where fertiliser producers are based. The Russian government is planning to incrementally increase domestic gas and electricity prices; however, according to forecasts, domestic prices are not likely to reach netback with European or U.S. prices any time soon. Diversified product portfolio. Acron produces more than 40 types of products, including nitrogen and complex fertilisers and a wide range of technicalgrade goods. Therefore, its facilities can easily adjust their operations to market conditions to produce the items which are in greatest demand. NPKs are the base of the Group’s offering. NPKs have high added value, and their price is less closely linked to natural gas prices than straight nitrogen fertilisers.. WorldReginfo - e963cf0f-7324-4ac3-9eda-22eb605bfcf7. Fertilisers play a crucial role in global agriculture. There are a few fundamentals that indicate longterm growth in agriculture and, as a result, in mineral fertiliser application: • Growing population • Improving living standards in emerging countries • Limited head room for arable lands • Increasing biofuels production..

(21) ABOUT US. 18/19 Vladimir Kunitsky Member of the Managing Board. “In 2008, Acron capitalized on its 2007 success. In 2008, our Group sold more than 1 million tonnes of its products in the Russian market.The Group fills all orders for mineral fertilisers from local farmers at the lowest possible prices. We continue expanding and improving our regional distribution network under the Agronova brand. I believe the Group demonstrated excellent performance in the Russian market in 2008. Despite the global financial crisis, next year we intend to do even more and to increase the supplies of all types of fertilisers to Russian farmers.”. Efficient operations. Thanks to significant and timely investment in technical advances, the Group’s Russian production facilities are among the most efficient in the industry. In 2008, our average natural gas consumption was 1,158 cubic meters per 1 tonne of ammonia, below the industry average of 1,226 cubic meters per tonne of ammonia*. The Group invests in power-saving technologies to boost its efficiency and reduce gas and energy costs.. infrastructure, Acron can optimize cargo delivery terms, which may have a material effect on the price in the global fertiliser market. Efficient distribution network covering the Group’s main distribution markets – Russia and China. Acron has direct access to consumers. A network of warehouses enables the Group to manage its delivery schedules and ensure safe storage.. Favourable location. The Group’s Russian facilities are located close to major Russian farming regions and sea ports, enabling the Group to control its transportation costs.. Cutting-edge technologies. The Group’s facilities apply deep processing and waste reduction. One example is Acron’s launch of calcium carbonate production for further sale (calcium carbonate is discarded at many other companies). This allowed us to reduce adverse environmental impact and generate additional profit.. Wholly-owned logistics infrastructure. The Group owns port terminals in Russia and Estonia and rolling stock (railcars and tanks), which expands its distribution options. With its own logistics. Professional management. Most of the Group’s management have been with Acron for more than ten years and have extensive experience in operations management, logistics and distribution.. * Source: Grodno Institute for Nitrogen Industry (GIAP). WorldReginfo - e963cf0f-7324-4ac3-9eda-22eb605bfcf7. The Group’s competitive strengths over Russian peers:.

(22) WorldReginfo - e963cf0f-7324-4ac3-9eda-22eb605bfcf7. VERVIEW. Business USINESS Overview.

(23) OPERATIONS MINERAL FERTILISERS AND AMMONIA ORGANIC COMPOUNDS NON-ORGANIC COMPOUNDS QUALITY MANAGEMENT. MINING LOGISTICS DISTRIBUTION. PORTFOLIO INVESTMENTS. WorldReginfo - e963cf0f-7324-4ac3-9eda-22eb605bfcf7. INVESTMENTS.

(24) OPERATIONS Operations. Ivan Antonov Chief Executive Officer. Acron offers more than 40 products applied in agriculture and other industries. All three of the Group’s production facilities focus on straight nitrogen and complex mineral fertilisers. Another important business segment is organic and non-organic compounds.. in Russia’s north-western region. The facility was launched in 1967 and underwent major modernization in the 1990s. The Veliky Novgorod facility produces ammonia, nitrogen fertilisers (urea, ammonium nitrate and UAN), complex fertilisers (NPK, NP, dry blends), and organic and non-organic compounds. The Group’s Dorogbuzh production facility (Dorogobuzh, Smolensk Region) is located in western Russia. It was launched in 1965 and also modernized in the 1990s. Dorogobuzh manufactures ammonia, ammonium nitrate, complex fertilisers (NPK and dry blends) and non-organic compounds.. The Group’s production facility in Veliky Novgorod (also named Acron) is one of the largest operations. Acron’s Chinese operation, Hongri Acron, is located in Linyi, Shandong province. The facility was launched in 1999–2000. In 2006, a methanol plant was added to existing capacity. Hongri Acron produces ammonia, complex fertilisers, methanol and hydrochloric acid. The facility is fully oriented toward the domestic market.. 2008 Sales by Business Segment (in monetary terms), %. 2008 Sales by Region (in monetary terms), %. Acron’s Production Facilities. Complex fertilisers – 50. China (Hongri Acron sales) – 13 Russia – 30 CIS – 4 Australia – 1. Nitrogen fertilisers – 26. Other businesses and services – 3. Ammonia – 7 Organic compounds – 7 Non�organic compounds – 7. Russian facilities’ export to China – 8 Other Asian countries – 3 Europe – 20. Africa – 4. Americas – 17. WorldReginfo - e963cf0f-7324-4ac3-9eda-22eb605bfcf7. “Over 2008, Acron invested USD 136 million in technical modernisation. In recent years, we have laid the foundation for sustainable operation of our main and auxiliary plants and production facilities. Acron maintains the highest quality of its products, fully meeting market demand. We have added capacity to major process units and installations while significantly reducing our costs.”.

(25) Mineral Fertilisers and Ammonia. BUSINESS OVERVIEW. 22/23 2008 Nitrogen and Phosphate Fertiliser Output in Russia by Producer, %*. Straight nitrogen fertilisers and complex fertilisers are Acron’s key business segment.. PhosAgro – 20. EuroChem – 21. Straight nitrogen fertilisers effectively boost crop yields, especially in soils with low nutrient content, humid forest-steppe areas and in irrigated farming zones where soils have low nitrogen content. Application of complex fertilisers facilitates the task of balancing all soil nutrients.. Acron – 11. In 2008, the global mineral fertiliser and ammonia market was very volatile. Early in the year, prices for all types of mineral fertilisers were racing to reach their peak at the end of the summer. In Q4, the market deteriorated drastically due to slipping prices and demand. As a result, Acron was forced to cut output of its major products by as much as 50%.. UralChem – 14. Companies of Gazprom Group – 15 *. Other – 19. Source: AzotEcon. Product, ‘000 tonnes. 2008. 2007. YOY, %. Ammonia. 1,494. 1,690. –12%. incl. own consumption. 1,242. 1,381. –10%. Nitrogen fertilisers, incl.:. 1,710. 1,665. 3%. incl. own consumption. 281. 195. 44%. Ammonium nitrate. 997. 1,214. –18%. 81. 94. –14%. Urea. 449. 450. 0%. incl. own consumption. 200. 100. 100%. Urea ammonium nitrate (UAN). 264. 1. 1,996. 2,673. –25%. 31. 52. –40%. 1,813. 2,239. –19%. 31. 52. –40%. 5. 136. –96%. 178. 298. –40%. incl. own consumption. Complex mineral fertilisers, incl.: incl. own consumption NPK incl. own consumption NP Dry blends. Indicative Prices for Major Products in 2008, USD per tonne * 1,000. Ammonia, FOB Yuzhnyy. 900 800 700. Urea, FOB Baltic Sea. 600 500. Ammonium Nitrate, FOB Baltic Sea. 400 300 200. UAN, FOB Baltic Sea. 100 0 December. November. October. August. July. June. May. April. September. * Source: Fertecon, FMB. March. February. January. NPK, FOB FSU. WorldReginfo - e963cf0f-7324-4ac3-9eda-22eb605bfcf7. Group’s Consolidated Output.

(26) Complex Fertilisers. Global NPK Producers in 2008, million tonnes *. NPK is a highly efficient complex mineral fertiliser which contains the major nutrients necessary for plant growth – N, P and K in various percentages. NPK application harmonizes various nutrients balance in the soil and boosts yields. That is why NPKs have traditionally been the fertilisers of choice among farmers.. 10 8 6 4 2 0 Yara. Acron. BASF. SACF. IFFCO. *Source: Worldwide NPK Capacity. NPK Production, ’000 tonnes. All of Acron’s production facilities manufacture NPK. In 2008, NPK output totalled 1.81 million tonnes, of which 31,000 tonnes were used to produce dry blends. Dorogobuzh’s output was lower against previous years due to disruptions in supplies of the main input – apatite concentrate – in the first six months of 2008. As regards Hongri Acron, lower output was the result of significant price fluctuations for major inputs and the negative market in the second half of 2008. Acron is the second largest NPK producer in the world.. 2,500. As the fertilisers of choice all over the globe, NPK sales are geographically diversified.. 2,000. More than 30% of NPKs produced by the Group’s Russian production facilities was sold domestically.. 1,500 1,000. The main export market for Acron’s NPKs is China. Apart from Hongri Acron’s sales, Russian production facilities of the Group exported about 24% of their NPKs to China.. 500 0 Acron. 2005. 2006 Dorogobuzh. 2007. 2008 Hongri Acron. Group’s NPK Sales by Region, %. Dry blended fertilisers are a variation of NPK produced by mechanically blending ready. Dry Blends Production, ’000 tonnes. 300. Baltic States – 4 Venezuela – 4. China – 38. 240. CIS – 3. 180. Turkey – 4. 120. Thailand – 3 60. Russia – 26 Other – 14. Nigeria – 4. 0 2004 Acron. 2005. 2006 Dorogobuzh. 2007. 2008 Hongri Acron. WorldReginfo - e963cf0f-7324-4ac3-9eda-22eb605bfcf7. 2004.

(27) Group’s Sales of Dry Blends by Region, %. granulated fertilisers (ammonium nitrate, NPK, and potash) in various proportions. UK – 11. Ireland – 31 France – 6. In Russia, dry blends are produced and packaged by Dorogobuzh’s subsidiary Andrex, a terminal facility. In 2008, the Group produced 93,000 tonnes of dry blended fertilisers in Russia. Over the same period, Hongri Acron produced 85,000 tonnes of dry blends.. China – 48. Urea Production in Russia by Producer in 2008, % *. Togliattiazot – 13. EuroChem – 23. Companies of Gazprom Group – 34 Acron – 7. UralChem – 8 Other – 15. NP is a complex fertiliser containing nitrogen and phosphate. Acron launched its NP operations in 2004 using its own process. In 2008, the Group significantly cut NP output as the demand shrank, producing a total of 8,000 tonnes. The output was mostly sold to Brazil, and small volumes were supplied to Russian consumers.. Straight Nitrogen Fertilisers Urea is the most widely used highly concentrated nitrogen fertiliser, with at least 46.2% nutrient content. It is mostly popular in countries with hot climates. Urea is also a raw material for urea formaldehyde resins and urea ammonium nitrate. Urea is produced at the Veliky Novgorod production facility, and in 2008 its output remained at the level of 2007, totalling 449,000 tonnes. Acron used almost half of its urea to produce urea formaldehyde resins and UAN. 247,000 tonnes of urea were sold in the market.. *Source: AzotEcon. Urea has traditionally been exported, as it is not widely used by Russian farmers.. Urea Output, ‘000 thousand. Urea Sales by Region, %. UK – 4 500 400. Poland – 7. Brazil – 16. Senegal – 5. Canada – 3. Ireland – 5 300. Russia – 3 Baltic States – 4. 200 100. Germany – 19 Other – 12. 0 2005. 2006. 2007. 2008. France – 17 Turkey – 5. WorldReginfo - e963cf0f-7324-4ac3-9eda-22eb605bfcf7. Other – 4. 2004. BUSINESS OVERVIEW. 24/25.

(28) Ammonium Nitrate Output, ’000 tonnes. Ammonium nitrate is a nitrogen fertiliser with at least 34.4% per cent nutrient content. In 2008, Russian facilities of the Group produced 997,000 tonnes of ammonium nitrate, an 18% decline year-on-year. More than 8% of produced ammonium nitrate was used to produce dry blended fertilisers and urea ammonium nitrate.. 1,250 1,000 750 500 250 0 2004 Acron. 2005. 2006. 2007. 2008. Dorogobuzh. The Group has worked consistently on improving the quality of its ammonium nitrate by harmonizing grain size, introducing special stabilizing admixtures and surface treatment to prevent caking. Such measures allow ammonium nitrate to be transported in any packaging or in bulk and to be stored for longer periods without loss of quality. The major market for the Group’s ammonium nitrate has been Russia, with the major export market being the Americas. Acron joined forces with other market players and engaged in sunset reviews of anti-dumping duties imposed by the United States and the European Union on Russian ammonium nitrate. In July 2008, the European Commission lifted the anti-dumping duty for Acron’s and Dorogobuzh’s ammonium nitrate exported to the EU within the set quota, subject to a minimum import price.. Group’s Ammonium Nitrate Sales by Region, %. Russia – 54. USA – 3 Canada – 7. Serbia – 5 Guatemala – 6 Colombia – 5 Baltic States – 2. Other – 10. CIS – 6. Ammonium Nitrate Production in Russia by Producer in 2008, % *. In late 2007, Acron launched a UAN unit. These operations do not require any additional natural resources, as they are based on deeper processing of ammonium nitrate and urea. They are environmentally safe, with low hazardous emissions and no solid. UAN Sales by Region, %. EuroChem – 20 PhosAgro – 6. Denmark – 2 Acron – 18. Companies of Gazprom Group – 15. * Source: AzotEcon. Argentina – 24. UralChem – 26 Other – 15. Canada – 16. France – 5. USA – 53. WorldReginfo - e963cf0f-7324-4ac3-9eda-22eb605bfcf7. Morocco – 2. Urea ammonium nitrate (UAN) is a highly efficient liquid nitrogen fertiliser that consists of a mix of urea and ammonium nitrate water solution with controllable nitrogen content between 28% and 32%..

(29) BUSINESS OVERVIEW. 26/27 Ammonia Output, ‘000 tonnes. 2,000 1,600. Viktor Kochubey. “Consistent efforts to modernise Acron’s major operations have brought us to a new capacity level: 3,270 tonnes of ammonia per day and 1,550 tonnes of urea per day. This is more than 20% above design capacity! Moreover, we have vision and knowledge necessary to further increase our capacities.” wastes. UAN operations are export-oriented. UAN is shipped through the Group’s Estonian terminal, AS BCT. In 2008, the Group produced and sold 261,000 tonnes of UAN. Technical grade liquid ammonia is a basic raw material for nitrogen fertilisers. Russian facilities of the Group use gas process for ammonia production, while Chinese Hongri Acron operates coal gasification process. In 2008, 83% of produced ammonia was used for own consumption; 17% was sold to the market. In 2008, the Group produced 1.5 million tonnes of ammonia, a 12% decrease year-on-year due to the overall decline in Q4 output and the ammonia unit overhaul at Dorogobuzh. The Group heavily invests in modernizing its ammonia facilities. In 2008, average gas consumption at the Group’s Russian production facilities was 1,158 cubic meters per 1 tonne of ammonia, while the industry average for Russia is 1,226 cubic meters per tonne.. 1,200 800 400 0 2004 Acron. 2005. 2006 Dorogobuzh. 2007. 2008 Hongri Acron. Russian Ammonia Production by Producer in 2008, % *. EuroChem – 20 Togliattiazot – 17. Acron – 11. Companies of Gazprom Group – 15. UralChem – 16. Other – 13. PhosAgro – 8. * Source: AzotEcon. Ammonia Sales by Region, %. Organic Compounds The main production units for organic compounds are located at the Veliky Novgorod production facility and at Hongri Acron. Organic compounds accounted for 7% of the Group’s revenues in 2008. The Group is heavily investing in expanding this business segment, as industry-wide diversification offsets cyclic fluctuations in the fertiliser industry. Methanol is produced by the Veliky Novgorod production facility and Hongri Acron.. Brazil – 4 China – 7 Baltic States – 4. Finland – 85. WorldReginfo - e963cf0f-7324-4ac3-9eda-22eb605bfcf7. Member of the Board of Directors.

(30) In 2008, the Group maintained methanol output at the level of previous years. Almost all methanol produced was used for deeper processing and production of formalin for UFR.. Dmitry Golubkov. At Hongri Acron, methanol production fell to 85,000 tonnes.. Chairman of Hongri Acron’s Board of Directors. “After the successful first half of 2008, the Chinese mineral fertiliser industry faced major challenges. On the one hand, the Chinese fertiliser market deteriorated significantly; on the other hand, the world economy was suffering from the global financial crisis. However, Hongri Acron mobilized its resources and, in late 2008, performed a major overhaul of its main production units, initially scheduled for 2009. Now the company is 100 per cent ready for the 2009 spring season.”. Acron produces formalin mainly as an input for urea formaldehyde resins. Any excess is sold in Russia, Belarus or Latvia. Late in 2006, Acron increased capacity with the launch of a new formalin and urea formaldehyde concentrate production unit. In 2008, formalin output rose 5% year-on-year to reach 193,000 tonnes, 19,000 tonnes of which were sold to the market. Urea formaldehyde resins (UFR) is an adhesive for all types of wood particle and wood fibre boards, plastics, MDF or plywood. In 2008, the Group produced and sold 219,000 of URF, up 9% year-on-year. Acron produces both standard and custom-tailored UFR to meet customers’ requirements for various applications. Acron’s major UFR market is Russia, where the Group sells more than 85% of its UFR; the remainder is sold in the CIS and Europe.. Product, ’000 tonnes. 2008. 2007. YOY, %. Organic compounds, incl.:. 601. 623. –4%. incl. own consumption. 273. 257. 6%. Methanol. 187. 231. –19%. incl. own consumption. 98. 98. 1%. Formalin. 193. 189. 2%. incl. own consumption. 174. 159. 9%. Urea formaldehyde resins (UFR). 221. 203. 9%. Methanol Output, ‘000 tonnes. UFR Output in Nature, ’000 tonnes. 250. 250. 200. 200. 150. 150. 100. 100. 50. 50. 0. 0 2004 Acron. 2005. 2006. 2007. 2008 Hongri Acron. 2004. 2005. 2006. 2007. 2008. WorldReginfo - e963cf0f-7324-4ac3-9eda-22eb605bfcf7. Group’s Consolidated Output.

(31) Non-organic Compounds. Calcium Carbonate Sales, ’000 tonnes. All of the Group’s production facilities produce certain types of non-organic compounds, which accounted for 7% of the Group’s sales revenues in 2008.. 600. The main applications for liquid carbon dioxide are beverages, dry ice and other industrial applications. In 2008, output of liquid carbon dioxide, which is produced at the Group’s Russian facilities, was down 27% to 45,000 tonnes.. 480. The quality of liquid carbon dioxide produced by Dorogobuzh meets the most stringent international standards. It has a wide range of customers, including large global beverage producers.. 120. Low-density and technical grade ammonium nitrate is a high-growth product produced by the Group at its Veliky Novgorod and Dorogobuzh facilities using its own patented technology. The main application for the product is explosives, with demand coming from mining companies and explosives manufacturers. In 2008, sales of these types of ammonium nitrate were up almost 44%. Traditionally, the main markets have been Russia and Latin America.. BUSINESS OVERVIEW. 28/29. 360 240. 0 2004. 2005. Acron. 2006. 2007. 2008. Dorogobuzh. Calcium carbonate (chalk) is a by-product of NPK production at the Group’s Russian production facilities. It is used to produce glass, glass containers and cement. In 2007, Dorogobuzh implemented a project at its NPK unit to upgrade the quality of its chalk and to construct a handling facility. As a result, the company was able to sell a larger portion of its chalk. Sales of calcium carbonate enable the Group to significantly reduce solid wastes.. Product, ’000 tonnes. 2008. 2007. YOY, %. Non-organic compounds, incl.:. 901. 964. –7%. Low-density and technical grade ammonium nitrate. 273. 189. 44%. Calcium carbonate. 484. 554. –13%. 45. 57. –21%. Liquid carbon dioxide Argon Hydrochloric acid. 6. 7. –5%. 93. 157. –41%. Liquid Carbon Dioxide Output, ’000 tonnes. Output of Low Density and Technical Grade Ammonium Nitrate, ’000 tonnes. 75. 300. 60. 240. 45. 180. 30. 120. 15. 60. 0. 0 2004 Acron. 2005. 2006 Dorogobuzh. 2007. 2008. 2004 Acron. 2005. 2006 Dorogobuzh. 2007. 2008. WorldReginfo - e963cf0f-7324-4ac3-9eda-22eb605bfcf7. Group’s Consolidated Output.

(32) Argon is an inert gas applied in machine building and electrovacuum operations. Acron sees stable demand for its argon and sold 6,500 tonnes of argon domestically in 2008. Hydrochloric acid is a by-product of NPK operations at Hongri Acron. It is used for the production of amino acids, citric acid and rust solvents. In 2008, hydrochloric acid output fell on lower NPK production at Hongri Acron. A total of 96,000 tonnes were sold. In its operations, the Group uses its own patented technologies. Acron owns the exclusive rights to inventions under 26 current patents issued by the Russian Federation; another patent application has been approved by the Russian Patent Authority and the invention patent is pending. Fifteen of the 26 patents have been introduced and practically applied; they have commercial value and are recorded as intangible assets. Acron also owns exclusive rights to the trademarks used to identify the Group’s goods and services.. QUALITY MANAGEMENT Quality has always been high on the Group’s agenda. All of Acron’s products are competitive in the domestic and international markets and meet customers’ demands. The Group is constantly working to improve its quality management system. Both Acron’s Veiliky Novgorod production facility and Hongri Acron are ISO 9001 certified. Over 2008, the Group’s companies continued their efforts to enhance their quality management system, including updates of all necessary documents and internal audits of the quality management system. In May 2008, Det Norske Veritas performed a scheduled quality management audit at Acron’s Veliky Novgorod production facility to verify its compliance with ISO 9001:2000. This audit was a follow-up from a previous one, and the auditors found that the company’s corrective actions were adequate and effective. The audit concluded that the existing quality management system is in line with ISO 9001:2000.. Product Quality Mineral fertilisers produced by the Group’s Russian production facilities are properly certified and are in compliance with quality and safety requirements. The Group’s fertilisers are registered as agrochemicals with Rosselkhoznadzor (the Federal Service for Veterinary and Phytosanitary Surveillance). The liquid carbon dioxide produced at Dorogobuzh is also certified as food-grade, yet further proof of its high quality. In 2008, the Group developed and implemented a number of initiatives to improve quality, increase its competitive edge and expand its geographical range. To make sure fertilisers retain their properties during transportation and storage, the Group implemented the following projects: • A new, brucite-based conditioning additive with lower iron content was introduced to ammonium nitrate operations at the Veliky Novgorod production facility to ensure more stable unit operations and higher quality output. • Modernization of the Flotigam treatment unit for urea operations (Flotigam is a surface anti-clodding agent), which ensured evener agent application to the surface of urea granules. • Dorogobuzh implemented a project to regulate calcium carbonate quality, improving its value to the glass industry. The Group continually monitors the packaging requirements of its Russian and overseas customers, and in 2008 it commissioned a big bag filling machine for NPK and urea at the Veliky Novgorod production facility. The next project in the pipeline is a soft container filling machine for calcium carbonate. Acron’s Veliky Novgorod production facility manufactures tailor-made urea formaldehyde resins, with a focus on their environmental properties. The formaldehyde content in Acron’s UFR meets all requirements for the E1 emission class. As further evidence of Dorogobuzh’s excellence in quality, the company received the Best Foreign Supplier award in 2008 from one of the leading global producers of carbonated drinks. Dorogobuzh has supplied this soft drink manufacturer with liquid carbon dioxide for the past three years, always meeting the highest expectations in terms of quality and reliability. Together with the Novgorod Agrochemical Agency, the Group continued agrochemical tests and evaluation of new additives for existing blends of mineral fertilisers, as well as of new fertiliser blends.. WorldReginfo - e963cf0f-7324-4ac3-9eda-22eb605bfcf7. Today Acron is almost the only Russian company selling its chalk. In 2008, the Group sold domestically 449,000 tonnes of calcium carbonate. Export remained at the prior year level of 20,000 tonnes..

(33) To further promote its goods, in 2008 the Group continued product certification efforts, development and approval of technical specifications, and issuance of safety datasheets. All certified products were inspected on a regular basis.. BUSINESS OVERVIEW. 30/31 international accreditation of its technical competence and compliance of its quality management with ILAC and APLAC standards. To summarize, in 2008 the Group made significant progress in improving its product quality. Acron intends to keep its focus on this area in the future.. In July 2008, Acron’s Centre for Industrial and Sanitary Monitoring became the first in Russia to obtain an. MINING Mining Developing of its own natural resources base has been a key strategic objective for the Group’s growth.. Sergey Fedorov Vice President, Mining and Chemical Production Development, Acron. “You can buy technology, but you have to have your own natural resource base. This principle has been the foundation of Acron’s mining projects, which will make the Group fully independent from raw materials suppliers and will enable it to increase its mineral fertiliser output – a crucial capability during a time of economic crisis.”. In October 2008, the design for the mine to be built at Oleniy Ruchey phosphate deposit was approved by Russian regulators, including its environmental aspect, and NWPC was issued a construction permit for the mine. Construction at the site began in late 2008. According to the license agreement, the first stage of the Oleniy Ruchey project is to be commissioned in 2013, with the second stage to follow in 2018. The design capacity of the mine is expected at 2 million tonnes of apatite concentrate and 1.8 million tonnes of nepheline concentrate per year. Confirmed (Recorded) Reserves of Oleniy Ruchey Deposit Open Pit Recorded Reserves. Underground Mine. B. C1. C2. B. C1. C2. Total. Ore, ‘000 tonnes. 5,207. 11,084. 1,455. 70,956. 237,949. 58,810. 385,461. P2O5 content, %. 18.48. 13.60. 10.24. 16.41. 16.18. 13.64. 15.8. 962. 1,508. 149. 11,645. 38,501. 8,025. 60,784. P2O5, ‘000 tonnes Source: Mine Design for Oleniy Ruchey Project. WorldReginfo - e963cf0f-7324-4ac3-9eda-22eb605bfcf7. North-Western Phosphorous Company (closed joint stock company) In 2006, North-Western Phosphorous Company (NWPC) obtained a government concession to develop two deposits of apatite and nepheline ores in the Murmansk Region, Oleniy Ruchey and Partomchorr. Once in operation, these two projects will fully cover the Group’s need for phosphates for NPK production..

(34) Verkhnekamsk Potash Company (limited liability company) Verkhnekamsk Potash Company (VPC) was established in 2006 as Acron’s subsidiary to handle its potash mining project. In March 2008, VPC won the auction for the license to develop the Talitsky area of the Verkhnekamsk potassium-magnesium salts deposit in Perm Krai. The potash project will enable the Group both to provide its own companies with potash used in complex fertiliser production, and to enter new market segment as a potash player. The Verkhnekamsk project is currently in development. The mine is expected to come on stream in 2014,with capacity expected to reach 2 million tonnes of potash per year.. 101109718 Saskatchewan Ltd. The Group acquired its Canadian arm, 101109718 Saskatchewan Ltd., in May 2008. 101109718 Saskatchewan Ltd. is the exclusive holder of potash permits in Prairie Evaporite, Saskatchewan covering a total area of 3.2 million acres (13,000 square km). The Russian state design institute TsNIIgeolnerud completed a preliminary geological and economic evaluation of the permits and short-listed nine permits as the most feasible for further development. According to preliminary estimates, the nine permits have total ore deposits of approximately: 130 billion tonnes of potash; 20.8 billion tonnes of KCl and 12.5 billion tonnes of K2O, including about 5 billion tonnes of mineable K2O.. Confirmed (Recorded) Deposits of Talitsky Area Sylvinite Reserves. Natural salts, ‘000 tonnes. Mixed Salts. A. B. C1. A+B+C1. C2. C1. 86,930. 163,469. 431,146. 681,545. 27,315. 1,868. KCl, ‘000 tonnes. 30,071. 58,186. 150,317. 238,574. 9,875. 552. K2O, ‘000 tonnes. 18,999. 36,761. 94,967. 150,727. 6,238. 349. Source: License Agreement on the terms and conditions of subsoil use for exploration and mining of potassium-magnesium salts at the Talitsky area of the Verkhnekamsk deposit, dd. April 30, 2008. The ability to control transportation costs and ensure smooth deliveries of raw materials to its companies and finished goods to its customers enables the Group to efficiently improve performance. To this end, the Group is developing its own logistic infrastructure.. Acron-Trans (closed joint stock company) Due to the specific geography of the Group’s Russian operations, rail is the main transport used to deliver raw materials to Acron’s sites, distribute finished goods to the domestic market or ship them to sea ports. To cover its cargo transportation needs, the Group established its own logistics arm under the Acron-Trans brand. In 2008, the Group transported more than 5 million tonnes of cargo by rail. Acron is increasing its own rolling stock. In 2008, it owned 2,093 railcars and tanks, which covered about 50% of Acron’s transportation needs in Russia.. Andrex (limited liability company) Andrex is a two-terminal complex at Russia’s Kaliningrad sea fishing port on the Baltic Sea. The first terminal, for bulk mineral fertilisers, has its own 15,000-tonne warehouse facility, conveyor belts and a loading machine which transships cargo from the warehouse into vessel holds. The capacity of this terminal is over 350,000 tpa. The second terminal has a capacity of over 300,000 tonnes. It is fully equipped to produce and ship dry blended fertilisers. It includes a special blender to mix certain components, mostly ammonium nitrate, NPK and potash, and automated filling machines for big bags from 500 to 1,250 kg. The Group’s Russian facilities and other mineral fertiliser producers ship their products through Andrex to Europe, North and South America, and Africa. In 2008, Andrex transshipped 269,300 tonnes.. WorldReginfo - e963cf0f-7324-4ac3-9eda-22eb605bfcf7. LOGISTICS Logistics.

(35) AS BCT AS BCT is a terminal facility for ammonia and liquid mineral fertilisers with its own deep-water berth at the Estonian port .. of Sillamae. The facility is located in a non-freezing area of the Baltic Sea and operates year-round, servicing vessels with a capacity of up to 40,000 tonnes. In 2008, the Group completed construction of three 20,000tonne UAN tanks, a piping system, pump stations and railway overpass. In March, Acron shipped its first UAN through BCT. In the second half of 2009, the Group expects to start ammonia transshipment through the terminal.. BUSINESS OVERVIEW. 32/33 of Muuga. Acron acquired shares of AS DBT in 2008. The facility’s core business is mineral fertiliser transshipment, with a capacity of over 2.5 million tpa of dry cargo. The facility includes several indoor warehouses: a 70,000tonne warehouse for several types of fertilisers, and five air-locked warehouses with a total capacity up to 95,000 tonnes. Each of the air-locked warehouses is intended for a specific type of fertilisers, which ensures cargo security. There is another indoor warehouse for packaged goods and an outdoor storage space.. BCT has a design capacity of 1 million tpa of ammonia and 700,000 tpa of UAN. In 2008, a total of 215,000 tonnes of UAN was shipped.. In 2008, the terminal transshipped 541,000 tonnes of fertilisers, including 300,000 tonnes from Acron. Cargo flow through AS DBT has been reduced due to a significant decline in cargo transit through Estonia via Russian Railways.. AS DBT AS DBT is one of the most technically advanced terminals in Eastern and Northern Europe, located at the Estonian port. The Group is already seeing positive results from its major initiatives in 2008 to expand its wholly-owned logistics capabilities. In 2009, Acron will continue this policy.. Mineral Fertiliser Sales in Russia*, ’000 tonnes. 900 600. 1,053. 1,200. 1,065. 1,500. 827. Agronova (closed joint stock company) In 2005, the Group established its own distribution network under the Agronova brand to improve its domestic distribution. Today, Agronova has four regional offices and 16 special-purpose warehousing facilities in Russia’s major farming areas – the regions of Belgorod, Bryansk, Lipetsk, Moscow, Nizhny Novgorod, Veliky Novgorod, Orel, Rostov, Saratov, and Smolensk, and in Krasnodar Krai. Agronova branches provide clients with transportation, distribution and storage services. The network has a total warehousing capacity of 169,000 tonnes.. 678. One of the Group’s strategic priorities is to develop its distribution in Russia and China, which are its key markets. The Group is currently diversifying its client portfolio in all sales regions. It has established longterm relationships with most of its clients. Acron sells its goods both through distributors and directly to end consumers.. Yong Sheng Feng In 2008, the Group completed its acquisition of Beijing-based Yong Sheng Feng Agricultural Means of Production Co., Ltd. (Yong Sheng Feng), a Chinese company licensed to distribute both imported and domestic mineral fertilisers in China and to sell other chemicals. All licenses and permits required for a company with foreign investment have been obtained. Yong Sheng Feng has direct contracts with 1,160 wholesale distributors and more than 40,000 retail. 630. Acron sells its products to a wide range of consumers in Russia, Asia, Latin America and North America, Europe and Africa.. 2007. 2008. 300 0 2004. 2005. 2006. * Including low-density ammonium nitrate.. WorldReginfo - e963cf0f-7324-4ac3-9eda-22eb605bfcf7. DISTRIBUTION Distribution.

(36) fertiliser distributors in 29 of China’s 34 regions. All the wholesale distributors and retail stores have exclusive contracts to sell the Group’s products. Acron intends to further expand its cooperation with individual retail buyers. Moreover, it is looking into the possibility of selling fertilisers produced by other Chinese and foreign companies through its own distribution network.. Agronova International Inc. Agronova International Inc. was founded in 2008 to handle marketing, distribution, and sea transportation for Acron’s export. Agronova International Inc. allows Acron to boost its sales margins and gives the Group more bargaining power in the export markets.. INVESTMENTS Investments In 2008, the Group invested in the following key segments: • Building new capacity; modernizing existing capacity to improve efficiency and eliminate bottlenecks • Mining projects to provide raw materials security • Logistics and distribution infrastructure. New Capacity and Modernization In 2007 and 2008, Acron worked on a project to build UAN capacity. In 2007, new UAN operations were launched, and in 2008, Acron added more capacity, bringing output to the design level of 700,000 tpa. Ammonia production is in the core of the Group’s nitrogen and complex fertiliser operations. The Group heavily invests each year in revamping the ammonia units at its Russian production facilities. Average natural gas consumption at the Group’s Russian facilities in 2008 was 1,158 cubic meters per tonne of ammonia, while the national average is 1,226 cubic meters per tonne of ammonia. In 2008, as part of its Dorogobuzh overhaul, the Group undertook major reconstruction of its ammonia unit, adding capacity to reach 515,000 tpa and reducing gas consumption per unit by 9–10%. At the same time, the Group modernized one of the two ammonia units in Veliky Novgorod, reducing natural gas consumption per unit by approximately 3%. A new air separator with a capacity of 9,000 normal cubic meters of oxygen per hour was commissioned at the methanol unit in Veliky Novgorod; the methane conversion unit was re-launched after deep revamping. These measures are all focused on increasing the capacity of methanol operations.. In 2008, Hongri Acron developed a 5-year growth strategy, which includes the following major investments: • Revamping coal gasifiers at ammonia operations to reduce coal and energy consumption at the gasification stage • Revamping phosphoric acid operations to improve product quality and reduce waste • Revamping blended fertilisers to improve quality Over 2008, the Group invested a total of USD 136 million in revamping its existing capacity and creating capacity. The 2008 capital expenditure program was materially affected by the Group’s cost cut initiatives taken in Q4. Acron’s management also resolved to cut back on its investment program in 2009. It will only continue with those projects which are strategically important for the Group and which have a short payback period. In 2009, the Group is planning the following investment projects at its Veliky Novgorod production facility: • Revamping methanol synthesis units and expansion of methanol storage facilities • Revamping urea operations • Construction of an ammonium nitrate unit for filling big-bags and loading them into gondola cars • Construction of a new 35,000 tpa amino resins unit • Introduction of computer-enhanced control system at the nitric acid plant • Construction of new rail lines for new facilities In 2009, the Group is planning the following investment projects at its Dorogobuzh production facility: • Continuing ammonia unit modernization • Construction of a unit for process air and air for the instrumentation and control system • Continuing automation of the operation process control system at NPK plant • Expansion of the boiler shop • Construction of a railcar handling facility.. WorldReginfo - e963cf0f-7324-4ac3-9eda-22eb605bfcf7. The key elements of Acron’s investment projects are defined in its Strategic Investment Program for 2005–2015..

(37) Mining Investments NWPC Over 2007 and 2008, NWPC finalized the design of the future mine at the Oleniy Ruchey phosphate deposit. Engineering, survey, and research work was done in parallel with construction of the temporary mine site access road. NWPC conducted sample tests and produced pilot batches of apatite and nepheline concentrate, which confirmed the accuracy of the design technical solutions.. BUSINESS OVERVIEW. 34/35 engaged Galurgia – a major Russian design institute – to perform a geological survey of the Talitsky area. In late December 2008, the design was finalized and approved by Geolexpertize (a state-owned engineering company based in Yekaterinburg). The design will be further evaluated by the regional Subsoil Use Agency for Perm Krai.. Currently, VPC is continuing preparations for geological exploration. Negotiations are underway with potential drillers and the Galurgia Institute for engineering and The mine design has been approved by state authorities. design work from 2009 through 2012. Studies of the geological samples obtained through exploration will be Currently NWPC is preparing infrastructure for the mine performed under the geological survey project. premises; at the same time, detail designs are being developed for priority structures. The work is being done within the timeline set by the license agreement.. Logistics Expansion. By May 1, 2009, NWPC will commence construction of the mine infrastructure. As of early spring, 150 contracted engineers have been working at the site. NWPC signed a contract with Interregional Distribution Grid Company of the North-West to connect to the IDGC power grid. NWPC expects to require 38 MW of electricity per year for the Oleniy Ruchey mine, and that number is expected to reach 66 MW by 2018. VPC In May 2008, VPC obtained a subsoil license for the Talitsky area of the Verkhnekamsk potash deposit. VPC. AS BCT Since 2006, Acron has constructed a terminal facility for .. ammonia and liquid mineral fertilisers in Sillamae, Estonia. In 2008, a UAN transshipment plant was commissioned; in 2009, two 30,000-tonne ammonia tanks, piping network, railway flyovers, compressor and pumping units for ammonia shipments were completed. Once commissioned, AS BCT will become the second largest ammonia export terminal on the Baltic Sea. The favourable location and new high-performance equipment will give this terminal a competitive edge in rendering highquality services to third party producers, as well.. Acron holds a significant portfolio of financial investments. The Group hedges its risks associated with raw material supplies through equity investments in commodity companies. Apatit (open joint stock company) is one of the world’s largest mining companies and accounts for 85% of Russian apatite concentrate output. Apatit is the major supplier of apatite concentrate for the Group’s companies. Acron and Hydro Agri Russland AS jointly own Nordic Rus Holding, a closed joint stock company which holds a minority stake in Apatit of 7.73% of the company’s authorised capital (or 10.3% of ordinary shares).. Silvinit is one of the two Russian largest potash producers. It has an operating mine at the Verkhnekamsk potash deposit with mineable reserves of 3.8 billion tonnes of ore (in 100% К2О). Silvinit supplies Sylvite mineral concentrate. Acron owns 6.08% of Silvinit authorised capital (8.1% of ordinary shares). Acron owns 21% of the authorised capital in Sibirskaya Oil and Gas Company (Sibneftegaz). Sibneftegaz is one of Russia’s largest gas producers. The company owns subsoil licenses for Beregovoye, Pyreinoye, Khadyryakhinskoye and Zapadno-Zapolyarnoye gas fields located in the Purovsky area of the YamaloNenets Autonomous Okrug.. WorldReginfo - e963cf0f-7324-4ac3-9eda-22eb605bfcf7. PORTFOLIO INVESTMENTS Portfolio Investments.

(38) WorldReginfo - e963cf0f-7324-4ac3-9eda-22eb605bfcf7. Risk ISKFactors FACTORS.

(39) 36/37. INDUSTRY RISKS TECHNICAL RISKS COUNTRY AND REGIONAL RISKS FINANCIAL RISKS. WorldReginfo - e963cf0f-7324-4ac3-9eda-22eb605bfcf7. LEGAL RISKS.

(40) Acron’s business is associated with various risks, which may have a material impact on the Group’s financial position and performance.. INDUSTRY RISKS Industry Risks Risks associated with seasonality of demand for mineral fertilisers. The above risks are common for all Russian mineral fertiliser companies and are not specific to the Group’s operations.. Demand for mineral fertilisers is seasonal, with peaks during the planting and fertiliser application periods. The Group mitigates the seasonality factor by diversifying its product mix and sales geography. However, this factor may have a material impact on its operations and performance.. Risks associated with an increase in the cost of raw materials, electricity, railroad tariffs, etc.. Global demand for mineral fertilisers is subject to specified risks that influence the agricultural crops market. The following factors have had a material adverse impact on the agricultural crop market in the past, and, therefore, can be expected to do so in the future. As a result, such factors may affect the Group’s business, financial position or performance: • Lower crop prices. Lower grain prices may trigger a decline in grain production, leading to lower demand and prices for fertilisers. • Adverse climate conditions. Climate is a major factor in agriculture. Major deviations from normal weather in certain regions, as well as climate changes or major natural disasters may impact demand for the Group’s fertilisers. • Government agriculture policy. Any changes in farmer subsidies or other government support programs may trigger an increase or decrease in demand for fertilisers. International treaties and agreements, including the World Trade Organization, may result in lower subsidies to local farmers or other changes to government support programs. In the medium-term, the global nitrogen fertiliser market is expected to become more competitive, as new capacities come on stream in the Middle East and North Africa, regions with cheaper natural gas. The resulting increase in global fertiliser capacities may have an adverse impact on the supply and demand balance and worsen the Group’s financial position or performance.. Natural gas. The Group’s Russian facilities consume natural gas in significant volumes. It is the major raw material and cannot be substituted for other resources. Approximately 60% of the Group’s natural gas is supplied by Gazprom subsidiaries at state-controlled prices, which are far below the levels of Western Europe and North America. The Group purchases the remaining 40% of its natural gas at domestic commercial prices, which are 30–40% above state-controlled prices. The Russian gas market is currently undergoing deregulation, resulting in higher prices and lower volumes available at state-controlled prices. Furthermore, the Russian government has developed a long-term plan to switch the Russian natural gas market to a market-based pricing mechanism for domestic consumers. Therefore, in the long term, domestic Russian gas prices can be expected to move towards netback parity with European prices. However, the timeline for the transition is still uncertain. Phosphates. To produce complex fertilisers, the Group’s Russian production facilities use apatite concentrate manufactured by market-dominant Apatit. In 2006, the Group entered into a five-year contract with Apatit for apatite concentrate supplies for its Veliky Novgorod production facility. The Dorogobuzh production facility still does not have a long-term contract for the supplies it needs. From time to time, disputes arise between the Group and Apatit, giving rise to legal actions over pricing and volumes of apatite concentrate supplies. To ensure its. WorldReginfo - e963cf0f-7324-4ac3-9eda-22eb605bfcf7. Risks associated with conditions on the global mineral fertiliser market. The Group’s Russian facilities use three key inputs – natural gas, apatite concentrate and potash, which are supplied by monopolies or companies that dominate their market niche..