• Eng

Uralkali consolidates market position

09.02.2012
Dickon Harris / Trade Finance (UK)

On the back of an impressive year in which Uralkali acquired rival potash producer Silvinit, Dickon Harris speaks to Uralkali’s CFO Viktor Belyakov about the firms financing plans for 2012.

Trade Finance Magazine (TFM): It has been a pretty big year for Uralkali not least because of the completion of the Silvinit acquisition in June 2011. How has the integration gone so far?

Viktor Belyakov (VB): The integration has been very interesting and very effective. This is mostly because the two companies are situated quite close together geographically and have a similar production process. However, before the combination there was a different set of management cultures in Uralkali and Silvinit. The main issue was get best practices from both companies and achieve synergies in all spheres.

TFM: What were the main savings? You are already one of the most cost-efficient producers.

VB: We are going to be even more cost-efficient, the biggest synergy will be on the revenue and marketing side. Having Silvinit and Uralkali together makes for a much stronger firm. On the cost side we analysed the potential savings and we came up with the conclusion that the synergy on the cost saving could be made in every sphere starting from logistics to administration as well as financial functions. The official target is $100 million in savings per year for the foreseeable future.

However, the estimation was made before the merger and it was quite conservative. We are about to announce that we are planning to make even higher savings per year.

TFM: Why did you buy back your bond early?

VB: It was because it was very expensive. We issued the bonds and then we had interest currency swap into dollars at a fixed rate, but it cost us more than 5% overall. Right now our effective rate across the whole loan portfolio is a little more than 3%, and this includes all the commissions and banking fees. It is low but then we are a first-class borrower.

TFM: Can you tell me more about your $1.2 billion PXF that was signed in September 2011. Can you explain the timing?

VB: We issued a $1 billion bond in February 2011 and raised a $400 million loan from Sberbank. With those funds we purchased 20% of Silvinits shares which was the first step in the whole transaction for $1.4 billion. We then later bought back our bond, partly using our balance sheet and partly using a new PXF.

Moreover, Silvinit had its own loan from Sberbank which was very expensive. As after the merger we became one legal entity, our response was to increase the traditional borrowing of Uralkali and do a syndicated PXF. We had a very good relationship with UniCredit, but it was the first deal with ING. Both banks led the deal. The legal advisors on the deal were Debevoise.

Pricing on the deal was again 180bp, with all-in pricing slightly less than 200bp. This was a significant saving as the original deal was priced at over 7%. The debt was initially raised by Silvinit to purchase the license for Polovodsky, a major greenfield project, in 2008.

TFM: Can you also explain the structure of the two deals.

VB: The structure of the two deals was very similar. Both deals used our Swiss incorporated trader, Uralkali Trading. Uralkali Trading had its own end customers, and we just provided banks with collateral against the final off-take customers. The deal had a one-year grace period and will begin amortising from the second year with a total five-year tenor. We have actually done quite a few PXFs in the last few years, mostly with Societe Generale. Generally they have been between $50 million-$75 million and occasionally $100 million.

TFM: Will you be using PXFs or bonds?

VB: I think now is not the best time to come to the debt capital market so it could be a PXF but we also have some rouble loans from Russian banks. We swapped these into dollars. Because the liquidity on the Russian market is still very high right now the interest rates that you can achieve are similar to PXFs facilities, even taking into account currency swaps.

TFM: So will we see a big PXF this year?

VB: Probably. We are working with the large foreign banks, and we have relationships with all of them.

TFM: Can you explain the logic behind your $2.5 billion share buy-back programme?

VB: We have again an excess of cash because 2011 was a record year in terms of output and earnings, Besides, we are underleveraged. Our strategy is to be a pure potash player we dont have many targets to invest in. There is no sense in simply building up a cash position on our balance sheet that is why we have to distribute the excess of cash to our shareholders in a variety of different ways. We have already re-considered our dividend policy, right now our official policy is to distribute no less than 50% of net income to the IFRS statement, we will do it twice a year. Buyback is also a way of adding value to our shareholders.

TFM: How much cash do you have on your books?

VB: We have about $1 billion. By then end of 2011 our Net Debt /EBITDA was below 1. Our optimal level is close to 1.5, this would give us the optimal capital structure and still allow us to remain considered as an investment grade company.

TFM: You mentioned that you dont have any acquisition targets, does that mean you are not interested in acquiring rival potash producer Belaruskali?

VB: Belaruskali is our partner, we have a joint venture with them, Belarusian Potash Company (BPC), and it is worlds leading potash trading company. It is very famous in the market and is a real price giver with a very professional team. It is one of the major income streams for Uralkali in terms of export sales. That is our relationship. We have no plans to acquire Belaruskali.

TFM: Will there be softening of Potash prices for the rest of the year?

VB: 2011 was a very good year and the industry worked at full capacity. This was true for Uralkali and for most of the other producers. It is quite unusual for the mining industry to operate at full capacity. It is very difficult from a technical point of view. The usual utilisation rate is 80% or 90% which is ok because it allows you to maintain the equipment. The beginning of 2012 is a little bit easier. We think the total demand will not be less than 2011 so still around 58 million tonnes globally.

TFM: Can you tell us more about your $5.8 billion 10-year expansion programme?

VB: We are going to almost double Uralkalis capacity, from current 11.5 to 19 million tonnes in 10 years. Our expansion will now be one of the most efficient in the industry because the cost of additional tonnes is very cheap, especially for our brownfield expansion. For the brownfield capex it will cost us just a little over $420 per tonne and for greenfield capex it will cost us around $750 per tonne.

We have two greenfield projects — one of them, Polovodovsky is from Silvinit, the other one, Ust-Yayvinsky, is a historical one from Uralkali. Ust-Yayvinsky is not entirely a greenfield project because it is adjacent to our current mines and we are going to use existing infrastructure and production lines to process the material from the new mine. That is partly why the expansion is very cheap for Uralkali.

TFM: Will you use ECA financings for these deals?

VB: Construction of mines doesnt rely too much on import costs, other than the import of a few specialized equipment items from Germany or other European countries. Most of the costs are related to construction which are in roubles. We will definitely consider ECA for the equipment deliveries because ECA financing is one of the cheapest methods we will finance through ECA as much as possible. We have already started the work on it, but we are not sure if we are able to structure it this year. The construction of the mines is still some way away, the shafts of the mines will only be ready by 2017.

TFM: Could you summarise the companys position to date?

VB: We are a first class borrower. It is not just a question of significant cash flow and liquidity, it is also about our corporate governance. As a Russian company we pay particular attention to corporate governance.
We havent decided yet but we may be approaching the rating agencies this year and we expect to be investment grade. We have very good benchmarks in net/debt to EBITDA, and profitability but we also have very good corporate governance level with reputed independent directors on the board and high transparency level. And it is the combination of all three things that makes us a first class borrower. Banks are already treating us as investment grade, which you can tell by the pricing on our deals, but we still need to prove it through the agencies.

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