Minutes of teleconference with shareholders 6/11/08

On November 6 Ukrzernoprom Agro held a teleconference with its shareholders. Eugene Leng, General Director of Ukrzernoprom Agro LLC, provided participants with the latest updates on MCB Agricole / Ukrzernoprom Agro‘s activities. The following are the main talking points of Mr. Leng’s presentation:

Despite the difficult situation currently facing the agricultural sector and due to the significant drop in agricultural commodity prices caused by the global financial crisis, Ukrzernoprom Agro is doing relatively well.

-    59 ths ha of winter crops have been sown in a timely manner and in strict accordance with agro-technologies. All sown crops are in excellent condition;

-    The company has approximately USD 10 mln in storage of unsold commodities (wheat, sunflower seed and corn), and it has no debt;

-    Between 20 and 40 ths ha are planned to be sown with spring crops depending on financing;

-    The company has expanded its land bank (under lease) and presently controls more than 100 ths ha.

About thirty percent of arable land in Ukraine was not sown in time, which will lead to a loss in the yield index. It means that next year’s crop will be worse in Ukraine and that prices should be significantly higher.

The prices for all agricultural commodities dropped significantly (sunflower seed dropped from USD 900 to USD 200; milling wheat dropped  from USD 300 to USD 200 or even to USD 150, etc). Due to the fact that Ukrzernoprom Agro’s very conservative yields and very conservative prices were already set in its model, the deviation from the planned EBITDA will be lower in comparison with many other companies. EBITDA will be about 25-30% lower than planned. More precise figures will depend on the prices at which the company will sell its commodities (more than 50 ths tons of milling wheat, corn and sunflower seed).

QUESTION: How much cash do you have currently?

MR. LENG: Currently I have approximately USD 2 million in cash and I do need money. I need money for three things: salaries, harvesting corn, and for transporting corn to the silos.

QUESTION: What is the price for feed wheat?

MR. LENG:  The price is very low. Now it’s less than USD 100 per ton in Ukraine. The reason is not only the global downstream in prices but the credit crunch in Ukraine. Most [commodity] buyers don’t have money to actively purchase any commodities. This season we had a kind of oligopoly in the local market of a few big foreign trade companies (like Cargill, Toepfer and others), which have financial support from the foreign parent companies. All the other players who once had access credit with local banks were out of the game this season. The difference between Ukrainian prices and global prices this year was at least USD 50 per ton.  I think that next season will be different. I’m waiting for very good prices for next season because local farmers have no money with which to harvest their crop. As I understand, many farmers in Ukraine and even many big companies will have no money   for the spring crop. 

QUESTION: And you are looking to harvest 63 ths ha this year in 2008? And your total land under lease is about 100 thousand hectares?

MR. LENG:  Right. I increased the amount of land I lease by 30 ths ha.  So, in 2007 I received about 70 ths tons of different agricultural crops. This year the figure is 234 ths tons of different commodities. Next year the figure will be about 400 ths tons.

QUESTION: Could you give us a rough breakdown by crop please?

MR. LENG:  Winter crops consist of 59 ths ha and are comprised of the following: wheat – 33,500 ha, rapeseed – 19,214 ha, rye – 3,400 ha, barley – 2,700 ha.  As for the crop of 2008 I got winter wheat – 119 ths tons; rapeseed - 33.5 ths tons; winter barley – 6.6 ths tons; rye – 7 ths tons; spring barley - 19 ths tons; corn – 34.5 ths tons; spring wheat - 3.1 ths tons; and sunflower seed – about 12 ths tons.

QUESTION: What are you going to do about storage?

MR. LENG:  I’ll outsource the elevators [silos]. And I don’t think it’s a good idea to build your own facilities for different reasons. The main reason is that our investors do not want to invest in the storage facility business. They want to invest in the crop raising business. That’s where the main value is.

QUESTION: Are you going to be cash positive this year?

MR. LENG:  Yes I am. I’m in a very good shape. As I told you today, I have no debt, I have 59 ths ha of fantastic crops in the field; I still have about 50 ths tons of unsold crop.

QUESTION: Have you made any cost reductions?

MR. LENG: You can’t make a lot of cost reductions in agriculture. By saving some inputs you’re going to have to lower yields and so on. I am waiting that the prices for inputs I optimized the salaries, but salaries are only a small portion of expenses. I need about USD 1 mln to insure my crop. And I’m going to get some of that money back next year from the government. I’m going to get paid approximately USD 350 ths, which will come back to me. Next year the government should pay me USD 1 mln for subsidies for my winter crop as well but this will be in February.

QUESTION: Are you fully financed to do 20 ths hectares in the spring or 40 ths hectares?

MR. LENG:  I don’t think that I’m ready to finance my spring crop without any debt. I need leverage. And that’s why I’m working with the banks. As for my spring crop, it depends upon the bank financing and I’m working very hard with different banks. The situation here is not good. However, I’m sure the company will receive one or another facility. I met with Mrs. Tymoshenko, our Prime Minister, next week we’re going to have a brainstorm on what can be done in financing Ukrainian agriculture.

QUESTION: What do you think about the share price and the pressure on the share price from what could well be significant selling pressure by major shareholders? Could you perhaps update us?

MR. LENG: One of our shareholders is an English family fund, which is called MKM Longboat.  Due to mass redemptions, this family is closing. There is a significant number of our shares, about ‘zero-point-seven-point-seven’ percent, in the hands of MKM Longboat.  Now that family of funds is in the process of liquidation. They have only two months to sell all the shares. The second is our shareholder, which is called Wermuth Asset Management.   As far as I know, it is also in the process of liquidation, which causes additional pressure  on our shares. So, the share price isn’t based on any fundamental changes in the company. We are here. We are working hard. We are doing our job. We are not going to run away. Our goal is still achievable and we’re working hard on it. Of course, our shares are not liquid,  we understand that. However when we made our presentation during the road show, I mentioned that you should at least look at two years’ investment horizon. I think the two-years investment horizon will be fine for us because we’re increasing our operations, we are developing the company on a very good basis.