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Uralkali Announces IFRS 2015 Financial Results

11.04.2016

Uralkali (“the Company”, MICEX: URKA), one of the world’s largest potash producers, today published its financial statements for 2015 prepared in accordance with IFRS, audited by ZAO Deloitte & Touche CIS and approved by the Companys Board of Directors.

FY2015 operational highlights:

  • Production down 6% y-o-y to 11.4 million tonnes of potassium chloride (KCl)
  • Sales volumes down 9% y-o-y to 11.2 million tonnes of KCl

FY2015 financial highlights1:

  • Revenue down 12% y-o-y to US$ 3,123 million
  • Net revenue down2 5% y-o-y to US$ 2,645 million
  • EBITDA3 up 7% y-o-y to US$ 1,913 million
  • EBITDA margin4 is 72%
  • Net profit at US$ 184 million
  • Average FCA export price up 5% y-o-y to US$ 245 per tonne of KCl
  • Cash COGS down 30% y-o-y to US$ 33 per tonne

FY2015 corporate highlights:

  • In March, Uralkalis Board of Directors approved a revised Development Strategy for 2015-2020 as a result of a strategic review following the Solikamsk-2 accident. The updated programme is focused on capital intensive investment in the Companys production facilities in order to sustain Uralkalis industry leadership. Total capital expenditure will amount to approximately RUB 300 billion between 2015 and 2020
  • In April, Uralkali signed a US$ 530 million 4-year Pre-Export Facility with the option to increase the amount up to US$ 800 million. In June, the amount of the facility increased to US$ 655 million
  • In April, Uralkalis Board of Directors adopted a new dividend policy, allowing it to determine the amount of dividend payments in line with the Companys financial position and overall economic conditions
  • In April-June, Uralkali executed a tender offer for its shares and GDRs, purchasing 11.56% of Uralkalis outstanding common shares (including common shares represented by GDRs) for a total amount of US$ 1.09 billion
  • In August, the Moscow Exchange registered Uralkalis exchange traded bonds programme of up to RUB 100 billion
  • In August-October, Uralkali executed a tender offer for its shares and GDRs, purchasing 21.98% of Uralkalis outstanding common shares (including common shares represented by GDRs) for a total amount of US$ 2.07 billion
  • In September, Uralkali and PJSC Sberbank signed an agreement to open a non-revolving US$ 1.5 billion credit line with a five-year maturity period
  • In September, JSC Uralkali-Technology signed a REPO transaction agreement with JSC VTB Capital to obtain financing for a total amount of US$ 800 million. The subsidiary transferred 370,123,777 common shares of PJSC Uralkali, constituting 12.61% of the Companys share capital. Uralkali-Technology also signed a pledge agreement with JSC VTB Capital for Uralkalis global depositary receipts (GDRs), pledging 43,335,594 GDRs, representing 7.38% of the Companys share capital
  • In November, the Companys Board of Directors approved an open market buyback programme, which was limited to 6.5% of the Companys share capital. As of 31 December 2015, shares and GDRs amounting to 2.4% of the Companys share capital had been purchased
  • In December, the Company announced the delisting of its GDRs from the London Stock Exchange

Dmitry Osipov, Uralkali CEO, commented:

2015 was a challenging year for the potash industry and a number of factors affected the Companys financial results. On one hand, the rouble depreciated and cash COGS dropped. On the other hand, we saw significantly weaker demand in key markets in the fourth quarter of 2015. However, in the long term, we remain optimistic on potash industry fundamentals.

The key 2015 operational and financial metrics were as follows:



2015

2014

Revenue (US$ million)

3,123

3,559

Net revenue (US$ million)

2,645

2,785

EBITDA (US$ million)

1,913

1,784

EBITDA margin

72%

64%

Net profit/(loss) (US$ million)

184

(631)

Average export potash price, FCA, US$

245

233

Production (KCl, million tonnes)

11.4

12.1

Sales volume (KCl, million tonnes)

TOTAL

 Domestic

 Export


11.2

2.0

9.2


12.3

1.9

10.4

Financial review

Weaker demand and lower potash prices in key markets, combined with a reduction in Uralkalis production capacity, impacted the Companys revenue. Full-year revenue amounted to US$ 3,123 million, a decrease of 12% compared to 2014.

Despite an increase in the EBITDA margin, supported by a drop in cash COGS by almost a third in US dollars terms, foreign exchange losses and fair value losses on derivative financial instruments had a negative impact on the Companys net profit in 2015. Consequently, in 2015, this amounted to only US$ 184 million.

Challenging conditions in the potash market had no material impact on the Companys access to long-term external financing. Uralkali borrowed funds from both Russian and international financial institutions. Under agreements with foreign banks, the Company raised US$ 655 million as part of a four-year syndicated loan with an optional increase up to US$ 800 million. Russias Sberbank provided the Company with a non-revolving US$ 1.5 billion credit line with a five-year maturity period.

By the end of December 2015, the Companys net debt amounted to US$ 5,377 million, equivalent to 2.8x LTM EBITDA. The average interest rate for the entire loan portfolio was approximately 4%.

In June 2015, the Annual General Meeting decided not to pay dividends for 2014.

Operational review

As a result of several factors, including weaker demand for potash fertilisers in key markets and a reduction in Uralkalis production capacity, the Company produced 11.4 million tonnes and sold 11.2 million tonnes of potassium chloride in 2015, decreases of 6% and 9%, respectively, compared to 2014.

The total investment in capacity expansion projects in 2015 amounted to US$ 160 million.

In 2015, Uralkali continued the implementation of its capacity development programme. The Company started construction of the permanent energy facilities and the ground-level complex at Ust-Yayva mine, while it also continued construction of Shaft 1 and Shaft 2, which are expected to be completed in 2017.

The Company signed a turnkey contract to construct shafts at the new Solikamsk-2 mine by 2020. The design documentation for the Polovodovo potash plant is at the final stage of development. It will then be submitted to the state authorities for approval.

Uralkali also implemented projects to increase its granular MOP capacity, such as replacing of outdated production equipment with modern versions and beginning construction of a new unit at Solikamsk-3 plant.

As part of the capacity expansion project for other types of products, the Company acquired a licence to use the western part of the Novo-Solikamsk block of the Verkhnekamskoye field, with the right to extract magnesium salts (carnallite ore) until 6 April 2035.

The new block has estimated commercial reserves of 55.7 million tonnes of carnallite ore. The new licence increased the Companys total carnallite ore reserves to 1,540 million tonnes.

Market Review and Outlook5

2015 was a weak year for the potash market in terms of demand and prices. The pace of global potash sales remained subdued during the year. High carryover stocks, lower y-o-y crop prices and currency headwinds have curbed global potash demand growth. 2015 global potash demand is estimated to have contracted 3-4% y-o-y and totalled 61 million tonnes. Potash prices moved significantly lower due to combination of weak demand and intense competition.

Shipments to China were very strong through the year. China has outperformed other markets in terms of import volumes. According to China customs data, potash imports reached 9.4 million tonnes, up 18% on the previous year. With strong buying over 2015, which followed exceptionally large 2014 buying, potash inventories hit an estimated record 6 million metric tonnes by the end of 2015. Owing to high end-year inventories, 2016 Chinese deliveries are expected to be below 2015 record level of approximately 17 million tonnes.

In India, weak monsoon, subsidy issue and rupee depreciation against USD remained a challenge for potash demand growth in 2015. Full-year demand is estimated to have declined to 3.9 million tonnes compared to 4.5 million tonnes in 2014. Potash demand upside is expected to be limed in 2016 due to high carryover stocks.

Devaluation of local currencies against USD and palm oil price volatility negatively impacted demand and prices in Southeast Asia. Potash imports in 2015 are estimated at 9.3 million tonnes, representing a 9% decrease over 2014. In 2016, importer economics continues to be highly sensitive to changes in FOREX and could limit potential upside to potash demand in 2016. But the pace of dollar strengthening is likely to be slower and more moderated in 2016. Palm oil prices have shown strength in the first quarter of this year and may support potash demand in the region.

In Latin America, limited credit availability, weak crop prices, currency volatility against USD and inventory destocking during Q1 2015 were forcing down farmer demand in the region and causing a sharp drop in potash prices amid escalating competition in the region. Potash demand in the region is estimated to have fallen by 3-4% to 11.3 million tonnes. In 2016, we expect a moderate increase in demand driven by favourable crop economics. However, the upside to potash demand may be limited due to lower economic growth in the region.

North American market has been under heavy pressure for the nearly all of 2015. Potash demand was below average mainly due to delayed planting season, high potash price volatility because of intense competition, and lower corn planted acreage. Demand is estimated to have contracted 23-24% y-o-y totalling approximately 8 million tonnes. In 2016, potash demand is expected to recover: lower nutrient levels after extremely weak 2015 could be the catalyst for potash demand.

EMEA&FSU potash demand is estimated to have been flat y-o-y in 2015 and totalled 12 million tonnes. Potash demand drop in Western and Central Europe was offset by demand increases in FSU and Africa. 2016 demand is expected to see moderate y-o-y increases owing to stronger demand in Eastern Europe.

Domestic shipments in 2015 were stable throughout the year and amounted to 2 million tonnes. Due to increased demand from NPK fertiliser producers, potash supply in Russia grew by 7% compared to 2014.

Global potash demand is expected to range 58-60 million tonnes in 2016 depending on macroeconomic environment and industry related issues.

Uralkali (www.uralkali.com) is one of the worlds largest potash producers and exporters. The Companys assets consist of 5 mines and 7 ore-treatment mills situated in the towns of Berezniki and Solikamsk (Perm Region, Russia). Uralkali employs ca.11,000 people (in the main production unit). Uralkalis shares are traded on the Moscow Exchange.



1 The audited financial statements may be found on Uralkalis website
http://www.uralkali.com/ru/investors/reporting_and_disclosure/uk_msfo/

2 Net revenue represents revenue net of freight, railway tariffs and transshipment costs

3 EBITDA is calculated as operating profit plus depreciation and amortisation and does not include one-off expenses

4 EBITDA margin is calculated as EBITDA divided by net revenue

5 Sources: Uralkalis estimates, the IFA data, customs statistics, financial statements of potash producers.

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