Download - Uralkali

Research Update:
Russian Potash Producer OJSC
Uralkali Rated 'BBB-'; Outlook
Stable
Primary Credit Analyst:
Ekaterina Grinevich, Moscow (7) 495-783-4061;ekaterina_grinevich@standardandpoors.com
Secondary Contact:
Elena Anankina, CFA, Moscow (7) 495-783-4130;elena_anankina@standardandpoors.com
Table Of Contents
Overview
Rating Action
Rationale
Outlook
Related Criteria And Research
Ratings List
June 18, 2012
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Research Update:
Russian Potash Producer OJSC Uralkali Rated
'BBB-'; Outlook Stable
Overview
• Russian potash producer Uralkali benefits from a leading global position
in the supportive potash market, robust profitability, and a prudent
financial policy resulting in healthy credit metrics.
• Key risks relate to industry cyclicality, concentration on a single
product, dividend pressure from high debt at the shareholder level, and
Russian country risk.
• We are assigning our 'BBB-' long-term corporate credit and 'ruAAA'
national scale ratings to Uralkali.
• The stable outlook reflects our expectations that Uralkali will continue
to benefit from a supportive potash market environment, impressive FOCF
generation capacity, while keeping debt leverage at modest levels even
after the planned exceptional shareholder distributions this year.
Rating Action
On June 18, 2012, Standard & Poor's Ratings Services assigned its 'BBB-'
long-term corporate credit and 'ruAAA' Russia national scale ratings to OJSC
Uralkali, a Russia-based potash producer. The outlook is stable.
Rationale
The rating on Uralkali is supported by our view of the company's
"satisfactory" business risk profile and "intermediate" financial risk
profile, as our criteria define these terms. Key strengths include its leading
position in the global potash market; fundamentally strong industry conditions
with high barriers to entry; robust profitability supported by a low cost
base; and a prudent financial policy, which results in healthy credit ratios
and an "adequate" liquidity position.
These strengths are partly challenged, in our view, by the inherent
cyclicality and volatility of the potash market; Uralkali's concentration on a
single product (potash); dividend pressure from servicing the substantial bank
debt incurred by its five Russian individual shareholders, which own a
combined 55% stake; and risks of operating in the Russian Federation (foreign
currency BBB/Stable/A-3; local currency BBB+/Stable/A-2; Russia national scale
'ruAAA').
Uralkali's "satisfactory" business risk profile is largely supported by the
company's leading market position in potash. It provides about 20% of global
capacity and production and holds the world's second-largest potash reserve
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Research Update: Russian Potash Producer OJSC Uralkali Rated 'BBB-'; Outlook Stable
base, behind Canada's Potash Corp. of Saskatchewan Inc. (PotashCorp;
A-/Stable/A-2).
Fundamentals for the potash business are strong, given that approximately
two-thirds of the world's high-quality, economical potash capacity and almost
90% of estimated reserves are in Canada, Russia, and Belarus. China and India
rely heavily on imports.
Furthermore, the industry is consolidated and has high barriers to entry,
given limited available potash reserves and the substantial investment and
extensive time needed to build up new supply. Although recently announced
greenfield projects by several new entrants could lead to a supply-demand
imbalance in the medium to long term, we currently don't view it as a high
risk because we expect three leading global consortia to continue dominating
global supplies, because of the lower industry expertise of new, much smaller
players, and because several projects have already been delayed.
Uralkali expects to increase its potash capacity to approximately 19 million
metric tons by 2021. We think this will allow it to maintain its market
position in the long term. Its potash mines are among those with the lowest
cost and have long reserve lives.
Uralkali's business risk profile is constrained by the fertilizer industry's
inherent volatility and cyclicality, as seen in the severe drop in potash
prices in 2009 from their peak in 2008. Although demand for potash and
fertilizers remains strong in general, given tight global grain inventories,
we don't rule out a softening in demand--and consequently in prices--because
of increasing global economic uncertainty. Absence of product diversity is
another rating constraint, as Uralkali is concentrated on only one product,
unlike PotashCorp, which is diversified into phosphate mining and fertilizer
production.
Uralkali's financial risk profile is "intermediate" in our view, which is
largely supported by the company's prudent financial policy, with a publicly
stated target of net debt to EBITDA of below 2.0x and a balanced approach to
investment spending and shareholder distributions. Another important
supportive factor is Uralkali's robust free operating cash flow (FOCF),
healthy credit metrics, and adequate liquidity position.
Uralkali's financial risk profile is challenged mainly by its substantial bank
debt at the individual shareholder level of approximately $7.7 billion in
total, according to publicly available information. This creates a risk of
excessive shareholder distributions, but is partly mitigated in our view by
the 45% free float and management's public commitment to modest leverage. For
example, Uralkali has announced a $2.5 billion share buyback program, which we
think will result in a manageable increase in debt.
Our base-case scenario for 2012 foresees EBITDA increasing further to $2.5
billion or higher, supported by favorable potash demand and prices ($460 per
metric ton). This follows EBITDA of $2.1 billion in 2011, ($423 per metric ton
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Research Update: Russian Potash Producer OJSC Uralkali Rated 'BBB-'; Outlook Stable
average price) and margins of about 60%.
At the same time, we expect leverage to increase somewhat in 2012, with
adjusted debt to EBITDA up to 1.5x on the back of the company's sizable share
buyback program and after an extraordinary dividend payment, which in our view
could total $2.5 billion. Adjusted debt could, for instance, rise to $3.8
billion from $2.7 billion at year-end 2011. We forecast Uralkali's debt and
leverage will fall again to about 1.0x in 2013-2014. This forecast factors in
an assumed 50% dividend payout ratio (equating to annual dividends of $0.7
billion-$0.8 billion) and capital spending averaging around $0.7 billion
annually in the next two-three years. In our base-case scenario, we foresee
adjusted funds from operations (FFO)-to-debt ratios of at least 55%-65% in
2012-2014 (63% on Dec 31, 2011).
Liquidity
We currently view Uralkali's liquidity as "adequate" according to our
criteria. We base our assessment of Uralkali's liquidity on our estimated
ratio of potential sources of liquidity to potential uses of liquidity over a
two-year period, as well as demonstrated access to financing from Russian
banks.
For the first year (starting April 1, 2012), we estimate the ratio at about
1.3x, and for the second year (starting April 1, 2013) at 1.6x.
As of April 1, 2012, we estimate Uralkali's liquidity needs over the next 12
months to be about $3.9 billion, comprising:
• Debt maturities of about $1.0 billion in the first year and $1.0 billion
in the second year;
• Maintenance capital expenditures of about $300 million per year;
• Dividends for 2011, which we expect will be paid in the amount of $600
million within the next 12 months (including $378 million announced
recently);
• Execution of the share buyback, on which we believe Uralkali will spend
at least $2.5 billion in total, or $2.0 billion starting April 1, 2012;
and
• Assumed minimal working-capital outflows.
Although the $2.5 billion share buyback program has been exercised only for
25%-30% to date, we believe that Uralkali will either complete it if market
conditions are favorable or will pay the unutilized amount in full to its
shareholders as an extraordinary dividend.
We estimate Uralkali's liquidity sources to be about $5.0 billion. These
include:
• Considerable estimated surplus cash and short-term investments of about
$1.7 billion on April 1, 2012. We exclude about $100 million in cash,
which we consider tied to the operations;
• A long-term committed credit line at Sberbank of about $1.2 billion,
available for use until November 2012 and maturing in late 2014; and
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• FFO, which we estimate in our base-case credit scenario at about $2.1
billion.
Uralkali is subject to maintenance covenants under several of its bank loan
agreements. We consider that the headroom for the April 1, 2012, test is
robust and will remain so, with net debt to EBITDA closer to 1.0x-1.5x under
our base-case scenario.
Outlook
The stable outlook reflects our expectation that Uralkali will maintain
moderate leverage and adhere to its relatively prudent financial policies,
notably in terms of managing shareholder distributions versus prevailing FOCF.
It also factors in our expectation of a continued supportive potash market,
despite the uncertain global economic environment.
We consider adjusted debt to EBITDA of about 1.0x-1.5x as commensurate with
the current rating, under normal pricing conditions.
We could lower the rating if adjusted debt to EBITDA exceeded 2.0x in a
downturn, without near-term prospects of recovery or appropriate management
actions. A downgrade could also occur if the company's leverage or dividend
policies were to become more aggressive than we currently anticipate.
We do not currently see any potential for an upgrade, mainly because of
country risk constraints and sizable debt at the shareholder level.
Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit
Portal, unless otherwise stated.
• 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
• 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
• Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May
27, 2009
• Use Of CreditWatch And Outlooks, Sept. 14, 2009
• Methodology And Assumptions: Liquidity Descriptors For Global Corporate
Issuers, Sept. 28, 2011
Ratings List
Research Update: Russian Potash Producer OJSC Uralkali Rated 'BBB-'; Outlook Stable
New Rating
OJSC Uralkali
Corporate Credit Rating BBB-/Stable/--
Russia National Scale Rating ruAAA
Additional Contact:
Industrial Ratings Europe;CorporateFinanceEurope@standardandpoors.com
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Research Update: Russian Potash Producer OJSC Uralkali Rated 'BBB-'; Outlook Stable
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