RUSSIAN POTASH PRODUCERS Looking for a Potash Industry Reset 18 10 2010

8/14/2019 RUSSIAN POTASH PRODUCERS Looking for a Potash Industry Reset 18 10 2010

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Fairvaluesdecreased.InlateDec2009,UralkalistradingarmBelarusianPotash

Company(BPC)finallyreachedapotashsupplyagreementwithChina.The2010price

wassetat$350pertonne(CFR)for1.2mntonnes,including200,000tonnesofoptional

volumes,vsourexpectationsofapriceofaround$390410pertonne(CFR).

Consequently,wehaverevisedourforecastforpotashpricesgoingforward,leadingtoa

downwardadjustmentofourfairvaluesforUralkaliandSilvinit.

Our

new

fair

values

for

Silvinit

are

$1,127

per

common

share

(down

from

$1,398)

and

$495perpreferredshare(downfrom$590).WearealsoslightlycuttingUralkalisfair

valuefrom$6.6percommonshareto$6.3.Nevertheless,ourratingsremainBUYsfor

bothcompanies.

Nonetheless,theChinesecontractcouldpotentiallysparkglobalpotashdemand

recovery.Wecontinuetoarguethat,inlightofChinashistoricalpositionastheindustry

benchmarksetterforpotashprices,thislongawaiteddealcouldnowhelptounfreeze

theglobalpotashmarket,andhenceunlockfreshdemandforthesoilnutrient.

Ourkeyreasoningisthat,inourview,othercountrieshavewithheldmakingfurther

potashpurchasesuntilChinasecureditsagreementwithBPC,availinggreaterprice

visibility.

Hence,we

expect

that

potash

producers

should

now

be

able

to

decrease

inventory

levelsandimprovecapacityutilisationratesfrom2010.Thenetimpactofthisisthat

highercapacityutilisationratesshould,inourview,partlyoffsetthenegativeeffectof

lowerpotashpricesonthecompaniesfinancials.

Chinacouldstepdownastheworldslargestpotashimporter.AlthoughChinacurrently

playsacrucialroleinthepotashimportmarket,weanticipatethat,withtime,the

countrysinfluenceislikelytoweakenasitrapidlypushesaheadwithitsownpotash

output.

Incontrast,itisourviewthatcountrieswithinsufficientorzeropotashproduction,

particularlyIndia,arelikelytotakeonmoreimportantrolesindeterminingpotash

prices.Webelievethatwithtime,potashconsumerslikeIndonesia,Malaysia,SriLanka

and

other

South

East

Asian

countries

may

look

to

India

as

a

benchmark

setter

rather

thanChina.Further,givenIndiasinsufficientinhousepotashproduction,weexpectitto

bemoreflexibleintermsofpricing.Thiscouldpotentiallystrengthenpotashproducers

pricingpower.

WebelievethatRussiaspotashproducersarewellpositionedtobenefitfroma

recoveryinpotashdemand.Inadditiontobeingtwooftheworldslowestcostpotash

producers,webelievethatbothUralkaliandSilvinitarewellpositionedtocapture

potashdemandgrowthin2010.Weexpectthistoincreaseatleast40%YoYinvolume

termsto3538mntonnesinlightoftherecentdealwithChina.

Note:Pricesasofclose15Jan2010throughoutthereport.

MARKETINGMATERIAL

SPECIALSITUATIONS

18January2010

RUSSIAN POTASH PRODUCERSLooking For a Potash Industry Reset

Fairvalueandratingsummary

Company

Current

price

($)

Fair

value($)

Upside/

Downside

potential

Rating

Uralkali 4.9 6.3 29% BUY

Silvinit 800 1,127 41% BUY

Silvinit(pref.) 390 495 27% BUY

Source:Atonestimates

Internationalcomparison:MktCap,EVMktCap

($mn)

EV

($mn)

Uralkali 10,427 10,495

Silvinit 7,278 8,496

PotashCorp 34,752 37,861

ICL 18,181 19,127

K+S 12,503 12,584

ArabPotash 4,201 4,112

IntrepidPotash 2,392 2,290

Source:Bloomberg

Internationalcomparison:

EV/EBITDA,

EBITDAmarginEV/EBITDA

2010(x)

2010EBITDA

margin(%)

Uralkali 10.9 64%

Silvinit 9.0 60%

PotashCorp 12.8 49%

ICL 12.1 29%

K+S 11.1 18%

ArabPotash 11.1 48%

IntrepidPotash 13.8 50%

Source:Bloomberg,Atonestimates

Internationalcomparison:P/E,net

margin

P/E2010(x)2010net

margin(%)

Uralkali 15.2 46%

Silvinit 12.2 38%

PotashCorp 19.0 31%

ICL 16.2 20%

K+S 21.9 9%

ArabPotash 14.3 38%

IntrepidPotash 27.1 27%


Forprofessionalinvestorsonly.Thisdocumenthasnotbeenpreparedinaccordancewithlegalrequirements

designedtopromotetheindependenceofinvestmentresearch. Pleaserefertoimportantdisclosuresandanalyst

certificationattheendofthisdocument.

MIKHAILPAK [email protected]

IOULIMATEVOSSOV [email protected]

NIKITAMELNIKOV [email protected]


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2

Investment summary

UralkaliandSilvinit:Fairvaluereductionsonlowerpotashprices

InlateDec2009,UralkalistradingcompanyBelarusianPotashCompany(BPC)

concludedanagreementtosupply1.2mntonnesofpotashtoChinain2010.Theprice

wassetat$350pertonne(CFR)whichwasbelowourexpectationsof$390410per

tonne(CFR).

Wehaveconsequentlyadjusteddownwardourforecastforpotashpricesasweexpect

mostinternationalpotashimporterstofollowChinasleadandnegotiatesupply

contractsataround$350pertonnefor2010.Havingincorporatedthesechangesinto

ourmodel,wehavecutbothUralkaliandSilvinitsfairvalues.

Figure1:Fairvalueandratingsummary

Figure2:Averagepotashpriceforecast,$pertonne(exworks)

0

100

200

300

400

500

600

2007 2009E 2011E 2013E 2015E 2017E 2019E

Previous Revised

Source:Companies'data,Atonestimates

Previous Revised NewvsOld

Fairvalue($) Rating Fairvalue($) Rating Fairvalue Rating

Currentprice

($)

Upside/

downside

potential(%)

Silvinit 1,398 BUY 1,127 BUY 19% Maintained 800 41%

Silvinitpref.

590

BUY

495

BUY

16%

Maintained

390

27%

Uralkali 6.60 BUY 6.34 BUY 4% Maintained 4.9 29%



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4

Figure3:Silvinit'sselectedfinancialmetrics($mn)

Figure4:Uralkalisselectedfinancialmetrics($mn)

2010E 2011E 2012E 2013E 2014E 2015E

Previousforecast

Revenue 1,928 2,778 3,023 3,087 3,150 3,215

EBITDA 1,379 2,020 2,022 1,975 1,972 1,968

Netincome 1,031 1,554 1,552 1,512 1,510 1,509

Average

potash

price,

$

per

tonne

(ex

works)

482

494

501

508

516

523

Capacityutilisationrate,% 65% 70% 75% 75% 80% 80%

Revisedforecast

Revenue 1,504 2,313 2,510 2,567 2,623 2,883

EBITDA 966 1,566 1,475 1,418 1,406 1,588

Netincome 688 1,177 1,096 1,047 1,037 1,190

Averagepotashprice,$pertonne(exworks) 348 357 361 366 370 375


RevisedvsPrevious

Revenues 22% 17% 17% 17% 17% 10%

EBITDA 30% 22% 27% 28% 29% 19%

Netincome 33% 24% 29% 31% 31% 21%

Averagepotash

price,

$per

tonne

(ex

works)

28%

28%

28%

28%

28%

28%



2010E 2011E 2012E 2013E 2014E 2015E

Previousforecast

Revenue 1,782 2,484 2,705 2,865 2,931 2,998

EBITDA 1,174 1,651 1,756 1,823 1,817 1,818

Netincome 766 1,201 1,402 1,465 1,471 1,477

Averagepotash

price,

$per

tonne

(ex

works)

387

391

393

396

398

400


Revisedforecast

Revenue 1,573 2,089 2,359 2,419 2,479 2,540

EBITDA 943 1,297 1,451 1,458 1,466 1,482

Netincome 598 937 1,160 1,177 1,194 1,213

Averagepotashprice,$pertonne(exworks) 326 331 335 341 346 351


RevisedvsPrevious

Revenue 12% 16% 13% 16% 15% 15%

EBITDA 20% 21% 17% 20% 19% 18%

Netincome

22%

22%

17%

20%

19%

18%

Averagepotashprice,$pertonne(exworks) 16% 15% 15% 14% 13% 12%




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5

TheChinesefactor:Waningmarketinfluenceonthehorizon?

AlthoughChinacurrentlyplaysanimportantroleinthepotashexportmarket,withtime

itsinfluenceislikelytodecrease,inourview.

Atpresent,Chinaisrampingupitsownpotashproductionandcouldpotentiallycoverup

to50%ofitsdomesticpotashdemandintwoyears,basedontheChinaEconomic

InformationNetworksestimates.Thesameorganisationcalculatesthatthecountrys

potashoutput

rose

by

25%

YoY

in

11M09

to

5.6mn

tonnes,

while

imports

halved

during

thisperiodto2.2mntonnes.

Figure5:Chinesepotashproduction,importsandconsumption('000tonnes)

0

200

400

600

800

1,000

1,200

1,400

1,600

Ja n07 May07 Sep07 Jan08 May08 Sep08 Jan09 May09 Nov09

Potashpr oducti on Pota shImports Pota shconsumption

Source:ChinaEconomicInformationNetwork

Withthisinmind,wesuggestthatChinasinfluenceoninternationalpotashpricescouldsubsideasthecountrysdomesticproductiongrows.Initsplace,wewouldexpect

countriesgrapplingwithhighpotashdemandandinsufficientorzeroproduction,suchas

India(around30%ofallimportstoAsiain2008,onourestimates)totakeonmore

importantrolesindeterminingpotashprices.

Inotherwords,wedonotexpectarepeatof2009,whenSouthEastAsiancountries

drasticallydecreasedpotashpurchasesinanticipationofChinasettingitsbenchmarkfor

potashprices.WebelievethatwithtimepotashconsumerslikeIndonesia,Malaysia,Sri

LankaandotherSouthEastAsiancountrieswilllooktoIndiaasthebenchmarksetter

ratherthantoChina.

Further,givenIndiasinsufficientinhousepotashproduction,weexpectittobemore

flexiblein

terms

of

pricing.

This

could

potentially

strengthen

potash

producers

pricing

power.


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6

Figure6:Internationalvaluations


Figure7:Internationalpotashproducersselectedfinancialmetrics

P/E(x) EV/EBITDA(x) EV/Sales(x)

MktCap EV($mn) 2009E 2010E 2011E 2009E 2010E 2011E 2009E 2010E 2011E

Uralkali 10,427 10,495 24.6 15.2 8.9 16.1 10.9 6.7 8.2 7.0 4.5

Silvinit 7,278 8,496 16.7 12.2 7.8 10.9 9.0 6.6 7.1 5.4 4.1

Weightedaverage 21.4 13.9 8.4 13.8 10.0 6.6 7.7 6.3 4.3

Potashgroup

PotashCorp

34,752

37,861

40.2

19.0

14.6

25.7

12.8

9.9

10.2

6.3

5.5

ICL 18,181 19,127 23.1 16.2 13.7 15.8 12.1 10.3 4.2 3.5 3.2

K+S 12,503 12,584 77.2 21.9 14.4 20.7 11.1 8.3 2.5 2.0 1.8

ArabPotash 4,201 4,112 18.1 14.3 13.5 14.1 11.1 10.3 7.5 5.3 4.8

IntrepidPotash 2,392 2,290 41.5 27.1 19.8 20.0 13.8 10.6 8.2 7.0 5.7

Weightedaverage 41.0 18.8 14.4 21.6 12.3 9.8 7.2 4.9 4.3

Company Silvinit Uralkali MosaicPotash

CorpICL K+S

Arab

Potash

Intrepid

Potash

Revenue($mn)

2008

2,149

2,527

10,298

9,447

6,904

7,016

943

415

2009E 1,196 1,275 7,354 3,720 4,590 5,038 550 278

2010E 1,573 1,504 9,184 5,979 5,540 6,323 774 329

2011E 2,089 2,313 10,315 6,942 6,024 7,021 850 399

EBITDA($mn)

2008 1,411 1,664 3,167 4,503 2,611 2,143 540 212

2009E 778 651 1,744 1,475 1,207 604 291 115

2010E 943 966 2,896 2,960 1,585 1,118 372 165

2011E 1,297 1,566 3,551 3,830 1,866 1,505 399 217

Netincome($mn)

2008 759 883 2,350 3,495 2,004 1,274 440 143

2009E 436 423 967 882 787 162 232 58

2010E 598 688 1,771 1,832 1,122 560 293 88

2011E

937

1,177

2,133

2,385

1,332

859

311

121

Profitabilityratios Silvinit Uralkali Mosaic PotashCo ICL K+S Arab Intrepid

EBITDAmargin(%)

2008 66% 66% 31% 48% 38% 31% 57% 51%

2009E 65% 51% 24% 40% 26% 12% 53% 41%

2010E 60% 64% 32% 50% 29% 18% 48% 50%

2011E 62% 68% 34% 55% 31% 21% 47% 54%

Netmargin(%)

2008 35% 35% 23% 37% 29% 18% 47% 34%

2009E 36% 33% 13% 24% 17% 3% 42% 21%

2010E 38% 46% 19% 31% 20% 9% 38% 27%

2011E 45% 51% 21% 34% 22% 12% 37% 30%

YoYgrowthrates Silvinit Uralkali Mosaic PotashCo ICL K+S Arab Intrepid

Revenue(%)

2009E 44% 50% 29% 61% 34% 28% 42% 33%

2010E 31% 18% 25% 61% 21% 26% 41% 18%

2011E 33% 54% 12% 16% 9% 11% 10% 21%

EBITDA(%)

2009E 45% 61% 45% 67% 54% 72% 46% 46%

2010E 21% 48% 66% 101% 31% 85% 28% 44%

2011E 37% 62% 23% 29% 18% 35% 7% 31%

Netincome(%)

2009E 42% 52% 59% 75% 61% 87% 47% 60%

2010E 37% 62% 83% 108% 42% 247% 26% 53%

2011E 57% 71% 20% 30% 19% 53% 6% 37%

Source:Companies'data,Bloomberg,Atonestimates


7/10

7

Figure8:Potashproducers'9M09revenuebreakdownandcapacityutilisationrates

295

91

244295

209251

184

382

321

279

196 129

0

100

200

300

400

500

600

700

PotashCorp K+S ArabPotash ICL Uralkali Silvinit

0%

10%

20%

30%

40%

50%

60%

70%

Operatingprofitpertonne Operati ngcostspertonne

9M09capacityurate,%,rhs

Source:Companies'data,Atonestimates

Figure9:Potashproducers'9M09EBITDAmargins

34 %

12 %

49 %

26 %

57 %

70 %

31 %

42 %

100%

62 %

100% 100%

0%

10 %

20 %

30 %

40 %

50 %

60 %

70 %

80 %

90 %

100%

Pota s hCorp K+S Ara bPota s h ICL Ura lka li Silvinit

9M09EBITDAma r gi n P ota s hsales as a %oftotal

Source:Companies'

data,

Aton

estimates


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8

Figure10:Potashproducers'potentialcapacityincreases

5.5 5.7

13.2

6.85.0

1.8

1.5 0.5

4.8

1.0

0.8

0.6

0

4

7

11

14

18

21

Uralkali Silvinit PotashCorp K+S ICL ArabPotash

Annual capacity(KCl),mn t Po te n ti a l capacityincrease over201012,mn t

Source:Companiesdata,Bloomberg

Figure11:Relativestockperformance

10% 0% 10% 20% 30% 40% 50%

Uralkali

Silvinit pref.

Silvinit

PotashCorp

Mosaic

K+S

IntrepidPotash

ICL

ArabPotash

1M 3M

0% 100% 200% 300% 400%

Uralkali

Silvinitpref.

Silvinit

PotashCorp

Mosaic

K+S

IntrepidPotash

ICL

ArabPotash

vs 52Whi gh vs 52Wl ow

50% 0% 50% 100% 150%

Uralkali

Silvinit pref.

Silvinit

PotashCorp

Mosaic

K+S

IntrepidPotash

ICL

ArabPotash

6M YtD

Source:Bloomberg


9/10


10/10

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RUSSIAN POTASH PRODUCERS Looking for a Potash Industry Reset 18 10 2010

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