Create successful ePaper yourself
Turn your PDF publications into a flip-book with our unique Google optimized e-Paper software.
Research Update:<br />
Russian Potash Producer OJSC<br />
<strong>Uralkali</strong> Rated 'BBB-'; Outlook<br />
Stable<br />
Primary Credit Analyst:<br />
Ekaterina Grinevich, Moscow (7) 495-783-4061;ekaterina_grinevich@standardandpoors.com<br />
Secondary Contact:<br />
Elena Anankina, CFA, Moscow (7) 495-783-4130;elena_anankina@standardandpoors.com<br />
Table Of Contents<br />
Overview<br />
Rating Action<br />
Rationale<br />
Outlook<br />
Related Criteria And Research<br />
Ratings List<br />
June 18, 2012<br />
www.standardandpoors.com/ratingsdirect 1<br />
977087 | 301747830
Research Update:<br />
Russian Potash Producer OJSC <strong>Uralkali</strong> Rated<br />
'BBB-'; Outlook Stable<br />
Overview<br />
• Russian potash producer <strong>Uralkali</strong> benefits from a leading global position<br />
in the supportive potash market, robust profitability, and a prudent<br />
financial policy resulting in healthy credit metrics.<br />
• Key risks relate to industry cyclicality, concentration on a single<br />
product, dividend pressure from high debt at the shareholder level, and<br />
Russian country risk.<br />
• We are assigning our 'BBB-' long-term corporate credit and 'ruAAA'<br />
national scale ratings to <strong>Uralkali</strong>.<br />
• The stable outlook reflects our expectations that <strong>Uralkali</strong> will continue<br />
to benefit from a supportive potash market environment, impressive FOCF<br />
generation capacity, while keeping debt leverage at modest levels even<br />
after the planned exceptional shareholder distributions this year.<br />
Rating Action<br />
On June 18, 2012, Standard & Poor's Ratings Services assigned its 'BBB-'<br />
long-term corporate credit and 'ruAAA' Russia national scale ratings to OJSC<br />
<strong>Uralkali</strong>, a Russia-based potash producer. The outlook is stable.<br />
Rationale<br />
The rating on <strong>Uralkali</strong> is supported by our view of the company's<br />
"satisfactory" business risk profile and "intermediate" financial risk<br />
profile, as our criteria define these terms. Key strengths include its leading<br />
position in the global potash market; fundamentally strong industry conditions<br />
with high barriers to entry; robust profitability supported by a low cost<br />
base; and a prudent financial policy, which results in healthy credit ratios<br />
and an "adequate" liquidity position.<br />
These strengths are partly challenged, in our view, by the inherent<br />
cyclicality and volatility of the potash market; <strong>Uralkali</strong>'s concentration on a<br />
single product (potash); dividend pressure from servicing the substantial bank<br />
debt incurred by its five Russian individual shareholders, which own a<br />
combined 55% stake; and risks of operating in the Russian Federation (foreign<br />
currency BBB/Stable/A-3; local currency BBB+/Stable/A-2; Russia national scale<br />
'ruAAA').<br />
<strong>Uralkali</strong>'s "satisfactory" business risk profile is largely supported by the<br />
company's leading market position in potash. It provides about 20% of global<br />
capacity and production and holds the world's second-largest potash reserve<br />
Standard & Poors | RatingsDirect on the Global Credit Portal | June 18, 2012 2<br />
977087 | 301747830
Research Update: Russian Potash Producer OJSC <strong>Uralkali</strong> Rated 'BBB-'; Outlook Stable<br />
base, behind Canada's Potash Corp. of Saskatchewan Inc. (PotashCorp;<br />
A-/Stable/A-2).<br />
Fundamentals for the potash business are strong, given that approximately<br />
two-thirds of the world's high-quality, economical potash capacity and almost<br />
90% of estimated reserves are in Canada, Russia, and Belarus. China and India<br />
rely heavily on imports.<br />
Furthermore, the industry is consolidated and has high barriers to entry,<br />
given limited available potash reserves and the substantial investment and<br />
extensive time needed to build up new supply. Although recently announced<br />
greenfield projects by several new entrants could lead to a supply-demand<br />
imbalance in the medium to long term, we currently don't view it as a high<br />
risk because we expect three leading global consortia to continue dominating<br />
global supplies, because of the lower industry expertise of new, much smaller<br />
players, and because several projects have already been delayed.<br />
<strong>Uralkali</strong> expects to increase its potash capacity to approximately 19 million<br />
metric tons by 2021. We think this will allow it to maintain its market<br />
position in the long term. Its potash mines are among those with the lowest<br />
cost and have long reserve lives.<br />
<strong>Uralkali</strong>'s business risk profile is constrained by the fertilizer industry's<br />
inherent volatility and cyclicality, as seen in the severe drop in potash<br />
prices in 2009 from their peak in 2008. Although demand for potash and<br />
fertilizers remains strong in general, given tight global grain inventories,<br />
we don't rule out a softening in demand--and consequently in prices--because<br />
of increasing global economic uncertainty. Absence of product diversity is<br />
another rating constraint, as <strong>Uralkali</strong> is concentrated on only one product,<br />
unlike PotashCorp, which is diversified into phosphate mining and fertilizer<br />
production.<br />
<strong>Uralkali</strong>'s financial risk profile is "intermediate" in our view, which is<br />
largely supported by the company's prudent financial policy, with a publicly<br />
stated target of net debt to EBITDA of below 2.0x and a balanced approach to<br />
investment spending and shareholder distributions. Another important<br />
supportive factor is <strong>Uralkali</strong>'s robust free operating cash flow (FOCF),<br />
healthy credit metrics, and adequate liquidity position.<br />
<strong>Uralkali</strong>'s financial risk profile is challenged mainly by its substantial bank<br />
debt at the individual shareholder level of approximately $7.7 billion in<br />
total, according to publicly available information. This creates a risk of<br />
excessive shareholder distributions, but is partly mitigated in our view by<br />
the 45% free float and management's public commitment to modest leverage. For<br />
example, <strong>Uralkali</strong> has announced a $2.5 billion share buyback program, which we<br />
think will result in a manageable increase in debt.<br />
Our base-case scenario for 2012 foresees EBITDA increasing further to $2.5<br />
billion or higher, supported by favorable potash demand and prices ($460 per<br />
metric ton). This follows EBITDA of $2.1 billion in 2011, ($423 per metric ton<br />
www.standardandpoors.com/ratingsdirect 3<br />
977087 | 301747830
Research Update: Russian Potash Producer OJSC <strong>Uralkali</strong> Rated 'BBB-'; Outlook Stable<br />
average price) and margins of about 60%.<br />
At the same time, we expect leverage to increase somewhat in 2012, with<br />
adjusted debt to EBITDA up to 1.5x on the back of the company's sizable share<br />
buyback program and after an extraordinary dividend payment, which in our view<br />
could total $2.5 billion. Adjusted debt could, for instance, rise to $3.8<br />
billion from $2.7 billion at year-end 2011. We forecast <strong>Uralkali</strong>'s debt and<br />
leverage will fall again to about 1.0x in 2013-2014. This forecast factors in<br />
an assumed 50% dividend payout ratio (equating to annual dividends of $0.7<br />
billion-$0.8 billion) and capital spending averaging around $0.7 billion<br />
annually in the next two-three years. In our base-case scenario, we foresee<br />
adjusted funds from operations (FFO)-to-debt ratios of at least 55%-65% in<br />
2012-2014 (63% on Dec 31, 2011).<br />
Liquidity<br />
We currently view <strong>Uralkali</strong>'s liquidity as "adequate" according to our<br />
criteria. We base our assessment of <strong>Uralkali</strong>'s liquidity on our estimated<br />
ratio of potential sources of liquidity to potential uses of liquidity over a<br />
two-year period, as well as demonstrated access to financing from Russian<br />
banks.<br />
For the first year (starting April 1, 2012), we estimate the ratio at about<br />
1.3x, and for the second year (starting April 1, 2013) at 1.6x.<br />
As of April 1, 2012, we estimate <strong>Uralkali</strong>'s liquidity needs over the next 12<br />
months to be about $3.9 billion, comprising:<br />
• Debt maturities of about $1.0 billion in the first year and $1.0 billion<br />
in the second year;<br />
• Maintenance capital expenditures of about $300 million per year;<br />
• Dividends for 2011, which we expect will be paid in the amount of $600<br />
million within the next 12 months (including $378 million announced<br />
recently);<br />
• Execution of the share buyback, on which we believe <strong>Uralkali</strong> will spend<br />
at least $2.5 billion in total, or $2.0 billion starting April 1, 2012;<br />
and<br />
• Assumed minimal working-capital outflows.<br />
Although the $2.5 billion share buyback program has been exercised only for<br />
25%-30% to date, we believe that <strong>Uralkali</strong> will either complete it if market<br />
conditions are favorable or will pay the unutilized amount in full to its<br />
shareholders as an extraordinary dividend.<br />
We estimate <strong>Uralkali</strong>'s liquidity sources to be about $5.0 billion. These<br />
include:<br />
• Considerable estimated surplus cash and short-term investments of about<br />
$1.7 billion on April 1, 2012. We exclude about $100 million in cash,<br />
which we consider tied to the operations;<br />
• A long-term committed credit line at Sberbank of about $1.2 billion,<br />
available for use until November 2012 and maturing in late 2014; and<br />
Standard & Poors | RatingsDirect on the Global Credit Portal | June 18, 2012 4<br />
977087 | 301747830
• FFO, which we estimate in our base-case credit scenario at about $2.1<br />
billion.<br />
<strong>Uralkali</strong> is subject to maintenance covenants under several of its bank loan<br />
agreements. We consider that the headroom for the April 1, 2012, test is<br />
robust and will remain so, with net debt to EBITDA closer to 1.0x-1.5x under<br />
our base-case scenario.<br />
Outlook<br />
The stable outlook reflects our expectation that <strong>Uralkali</strong> will maintain<br />
moderate leverage and adhere to its relatively prudent financial policies,<br />
notably in terms of managing shareholder distributions versus prevailing FOCF.<br />
It also factors in our expectation of a continued supportive potash market,<br />
despite the uncertain global economic environment.<br />
We consider adjusted debt to EBITDA of about 1.0x-1.5x as commensurate with<br />
the current rating, under normal pricing conditions.<br />
We could lower the rating if adjusted debt to EBITDA exceeded 2.0x in a<br />
downturn, without near-term prospects of recovery or appropriate management<br />
actions. A downgrade could also occur if the company's leverage or dividend<br />
policies were to become more aggressive than we currently anticipate.<br />
We do not currently see any potential for an upgrade, mainly because of<br />
country risk constraints and sizable debt at the shareholder level.<br />
Related Criteria And Research<br />
All articles listed below are available on RatingsDirect on the Global Credit<br />
Portal, unless otherwise stated.<br />
• 2008 Corporate Criteria: Analytical Methodology, April 15, 2008<br />
• 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008<br />
• Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May<br />
27, 2009<br />
• Use Of CreditWatch And Outlooks, Sept. 14, 2009<br />
• Methodology And Assumptions: Liquidity Descriptors For Global Corporate<br />
Issuers, Sept. 28, 2011<br />
Ratings List<br />
Research Update: Russian Potash Producer OJSC <strong>Uralkali</strong> Rated 'BBB-'; Outlook Stable<br />
New Rating<br />
OJSC <strong>Uralkali</strong><br />
Corporate Credit Rating BBB-/Stable/--<br />
Russia National Scale Rating ruAAA<br />
Additional Contact:<br />
Industrial Ratings Europe;CorporateFinanceEurope@standardandpoors.com<br />
www.standardandpoors.com/ratingsdirect 5<br />
977087 | 301747830
Research Update: Russian Potash Producer OJSC <strong>Uralkali</strong> Rated 'BBB-'; Outlook Stable<br />
Complete ratings information is available to subscribers of RatingsDirect on<br />
the Global Credit Portal at www.globalcreditportal.com. All ratings affected<br />
by this rating action can be found on Standard & Poor's public Web site at<br />
www.standardandpoors.com. Use the Ratings search box located in the left<br />
column. Alternatively, call one of the following Standard & Poor's numbers:<br />
Client Support Europe (44) 20-7176-7176; London Press Office (44)<br />
20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; Stockholm<br />
(46) 8-440-5914; or Moscow 7 (495) 783-4009.<br />
Standard & Poors | RatingsDirect on the Global Credit Portal | June 18, 2012 6<br />
977087 | 301747830
Copyright © 2012 by Standard & Poor's Financial Services LLC. All rights reserved.<br />
No content (including ratings, credit-related analyses and data, model, software or other application or output therefrom) or any part thereof (Content) may be modified,<br />
reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor's<br />
Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well<br />
as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the<br />
Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or<br />
for the security or maintenance of any data input by the user. The Content is provided on an "as is" basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED<br />
WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS,<br />
SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT'S FUNCTIONING WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR<br />
HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or<br />
consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence)<br />
in connection with any use of the Content even if advised of the possibility of such damages.<br />
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact.<br />
S&P's opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any<br />
investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The<br />
Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making<br />
investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from<br />
sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives.<br />
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P<br />
reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the<br />
assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.<br />
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result,<br />
certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the<br />
confidentiality of certain nonpublic information received in connection with each analytical process.<br />
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate<br />
its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com<br />
and www.globalcreditportal.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional<br />
information about our ratings fees is available at www.standardandpoors.com/usratingsfees.<br />
www.standardandpoors.com/ratingsdirect 7<br />
977087 | 301747830