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Uralkali Announces IFRS H1 2013 Financial Results

10.09.2013
Uralkali Announces IFRS H1 2013 Financial Results

Uralkali (LSE: URKA, “the Company”), one of the world’s largest potash producers, has today published its audited financial results for the six months ended 30 June 2013 prepared in accordance with IFRS and audited by ZAO PricewaterhouseCoopers Audit.

H1 2013 FINANCIAL HIGHLIGHTS1:

  • Net Revenue2 down 29% y-o-y to USD 1,348 million
  • EBITDA3 down 40% y-o-y USD 876 million
  • EBITDA margin4 down to 65%
  • Net Profit down 53% y-o-y USD 397 million
  • Cash COGS down 3% to USD 58 per tonne

H1 2013 OPERATIONAL HIGHLIGHTS1:

  • Production down 7% y-o-y to 4.5 million tonnes of potassium chloride (KCl)
  • Sales volumes down 17% y-o-y to 4.3 million tonnes of KCl
  • Average FCA export price down 17% to USD 316 per tonne of KCl
  • Strategic capacity development on track, with stage one of Ust-Yayvinsky mine construction completed

CORPORATE HIGHLIGHTS:

  • Announcement of decision to focus Uralkali production and route to market, with streamlining of exports through Uralkali Trading SA
  • Dividend payout ratio for 2012 c.50%
  • Implementation of the share buyback programme between 13 November 2012 and 29 July 2013, with shares to the amount of USD 1,251 million subject to cancellation

Viktor Belyakov, Uralkali CFO and acting CEO, commented:

Potash market in H1 2013 was a challenging period characterised by intensifying competition for market share. This prevented Uralkali from achieving optimum penetration and revenues even in the markets where demand was very healthy. Uralkali primarily maintained its traditional disciplined approach to sales and consequently the Company ceded some of its market share, which resulted in decreased capacity utilisation, sales volumes and income. As a consequence of what we felt was a likely confirmation of these market trends at the end of July Uralkali announced a prioritisation of targeting maximum efficient capacity utilisation, and streamlining all export sales through its own trading arm to achieve the best revenues.
Uralkali is well-positioned to maintain its market share in a competitive environment. We remain the industry leader in terms of production costs, and have clear geographic advantages and ability to sustain and further expand our capacity. With this in mind, we are continuing with our expansion programme. Debottlenecking is on track and through the targeted streamlining this is expected to deliver us one million tonnes of additional capacity by the end of next year. Moreover, we are proceeding with the Ust-Yayvinsky project which will help to compensate for the depleting capacity of Berezniki-2 mine. Combined we feel that our positioning and focus provide the basis for continuing to deliver results for shareholders and we look to the medium term future with confidence.


The key H1 2013 operational and financial metrics are as follows:


H1 2013

H1 2012

Revenue (USD mln)

1,614

2,234

Net Revenue (USD mln)

1,348

1,904

EBITDA (USD mln)

876

1,449

EBITDA margin

65%

76%

Net Profit (USD mln)

397

842

Average potash price, FCA, USD

  • Domestic
  • Export


257

316


270

380

Production (KCl, mln tonnes)

4.5

4.8

Sales volume (KCl, mln tonnes)
TOTAL

  • Domestic
  • Export


4.3

1.0

3.3


5,1

1,0

4,1


Financial Review

Challenging potash market conditions in H1 2013 impacted Uralkali’s financial and operational figures. The Company’s sales volumes decreased by 17% and the average realised export price was down 17% compared to H1 2012. This dynamic was reflected in lower EBITDA, which amounted to USD 876 million. Net profit was USD 397 million compared to USD 842 million in January-June 2012 influenced by forex exchange losses. The Company managed to maintain the EBITDA margin at a strong level of 65% as even despite lower capacity utilisation of around 70% it managed to decrease cash COGS by 3% year-on-year, to USD 58 per tonne.

In Q2 2013, Uralkali used the favourable environment in the international financial markets to optimise its loan portfolio. In April, the Company successfully placed its debut Eurobond of USD 650,000,000 due in 2018 with a 3.7% coupon. In June 2013 Uralkali secured a five-year USD 1 billion pre-export financing facility with an interest rate of LIBOR+215 bps.

At the end of June 2013, the Company’s net debt amounted to USD 2.7 billion, LTM EBITDA – USD 1.8 billion, thus, leverage equaled 1.5x and is in line with Uralkali’s target net debt/EBITDA LTM ratio of 1x-2x, with an effective interest rate across the portfolio of 3.76%.

The Company balanced its investments in growth with shareholder returns, distributing the strong cash flows, generated by the business, through dividends and share buyback programme whilst retaining a prudent capital structure.

In June 2013, the Company’s Annual General Meeting of Shareholders resolved to pay dividends of RUB 3.90 per share (approximately USD 0.61 per 1 GDR), with total dividends for 2012 amounting to RUB 25.3 billion (approximately USD 807 million).

In June 2013 the Company purchased 6.4% of its share capital from Mr Zelimkhan Mutsoev at a 6.2% discount to the Moscow Exchange closing price on the day before the transaction. At the same time, in January-July 2013 Uralkali continued its share buyback programme, which had been launched in November 2012. In total as of 29 July 2013, the Company’s shares and GDRs to the total amount of approximately USD 2,544 million were purchased, subject to further cancellation.

Business Review

In H1 2013, there was good demand in the world potash market. According to the International Fertiliser Industry Association, global potash sales volumes increased 9% y-o-y to 29.3 million tonnes for the period.

Despite solid demand, potash prices have been under downward pressure in all markets. In H1 2013, Uralkali continued its disciplined approach to the market to avoid oversupply. As a result of following this market approach, Uralkali’s half-year sales volumes decreased to 4.3 million tonnes of KCl in the first six months of 2013, compared to 5.1 million tonnes delivered in January-June 2012.

This reduction in volumes resulted in a lower capacity utilisation figure, around 70% on average during the first six months of 2013. In the short period since 30 July 2013 Uralkali started operating at full capacity of 13 million tonnes per annum.

Uralkali continued to progress with its capacity development programme during January-June 2013, with expansion projects accounting for approximately 46% of the total USD 199 million spend in the first half.

By mid-summer, the Company completed the first stage of Ust-Yayvinsky mine construction. With the freeze station completed, all freezing holes bored and infrastructure built, the Company is ready to launch soil freezing process for the shaft sinking.

In addition to operational and financial optimisation, the Company is continually working on its transparency. In line with best practice, in April 2013 the Company presented its debut Integrated Annual Report, which provided a comprehensive overview of its financial, production and social activities.

After the H1 2013 reporting period, the Company announced a refocused approach to the market to optimize revenues and take advantage of cost competiveness of its assets. Uralkali decided to start operating independently and channel all sales through its own trader – Uralkali Trading. The Company believes that in the current market environment the optimal value-creating strategy is revenue maximisation. Uralkali has a number of competitive advantages including the lowest production costs in the industry, ability to increase capacity on the most efficient basis and favourable logistical routes. We believe the potential for strong returns maintains the company in a position of industry leadership.

Market Outlook

2013 started with limited activity on the global potash market although the resumption of contract shipments to China and India helped to restore confidence in the spot markets after a sluggish Q4 2012.

In Q2 2013, potash demand grew, reflecting increasing shipments to India, China and Brazil.

In Brazil, imports increased steadily throughout Q2 2013 as farmers continued to take advantage of good crop economics and prepared for the start of Q3 application season. According to Brazil’s national fertiliser association (ANDA), imports reached 3.5 million tonnes of KCl in the first six months of 2013 in terms of physical shipments, 9% higher than in the same period of 2012. Potash prices for large buyers stayed around USD 430-440 per tonne CFR5. Brazilian farmers’ profitability has improved recently, given the depreciation of Brazilian real and a rise in grain prices ahead of the start of the planting season, and potash shipments to Brazil remain at record highs. 2013 potash demand in Brazil is expected to exceed last year’s peak, reaching 7.8-7.9 million tonnes.

In India, the government approved subsidy rates for FY2013/2014 under the NBS policy. For potash, the subsidy was reduced to INR 11,300 per tonne (USD 210 per tonne) from INR 14,400 per tonne (USD 268 per tonne) previously. In January-August 2013, India imported 1.9 million tonnes of potash, 48% of the total contracted volumes for this year. The depreciation of Indian rupee against the US dollar continued to affect importers and may influence the full-year demand figure.

In Europe, shipments were still delayed in Q2 because of the bad weather, but European NPK demand started picking up from mid-April. Prices remained in the range of €330-360 per tonne CIF5. Buyer activity returned to market only in July and first half of August. Overall, European demand is expected to stay close to its traditional volumes in 2013.

In the US, the delayed spring season has affected potash consumption. Prices stayed at USD 405-410/st fob NOLA, and USD 445-450/st in the Corn Belt5. Potash deliveries to the US are expected to be strong throughout H2 2013, fuelled by the need to restore depleted dealer inventories in preparation for the fall season.

In China, sales of potash came to the seasonal lull from late April. Deliveries of H1 contracts volumes ended in July. At the end of July, Uralkali concluded an option agreement with China for 500,000 tonnes to be delivered by the end of this year. The market is expected to stand at around 10.5-11.0 million tonnes for 2013.

In Southeast Asia, demand has picked up due to a number of fertiliser tenders being held by palm oil plantations. While palm oil prices are lower this year than in 2012, this is not going to filter through to weaker potash prices according to the importers, as plantation owners are expected to absorb the 10% fall in palm oil prices themselves.

We anticipate that strong potash demand will continue for the rest of 2013. However, the market is still affected by macroeconomic instability in India. In addition, the fact that some potash importers are holding off accepting further orders in anticipation of price developments could have a negative impact on the short-term demand. Global potash deliveries in 2013 are expected to be in the range of 53-54 million tonnes. North America, India and China are expected to be the main drivers behind the rebound in world demand in 2013 compared to 2012.


Oleg Petrov, Uralkali Head of Sales and Marketing, said

Over the last several years, we saw macroeconomic challenges adversely affecting demand in one of the main potash consuming regions – India. Depreciated rupee, together with decreased subsidy levels, makes potash prices more expensive for many farmers. Similar problems, though on a smaller scale, are encountered by farmers in China and Southeast Asia. Nevertheless, these areas have huge potash application potential, with higher usage levels recommended by scientists. We believe that market environment going forwards and will make potash fertilisers more affordable for farmers in these developing regions and will ultimately further boost overall potash demand.

You can find more information about Uralkali’s H1 2013 potash market environment in the video interview with Oleg Petrov, Uralkali Head of Sales and Marketing, at http://www.uralkali.com/ru/investors/results/.

1The audited financial statements can be found on Uralkali's website http://www.uralkali.com/investors/reporting_and_disclosure/uk_msfo/.
2Net revenue represents adjusted revenue (sales net of freight, railway tariff and transshipment cost)
3EBITDA is calculated as Operating profit plus depreciation and amortisation and does not include mine flooding cost, other one-off expenses
4EBITDA margin is calculated as adjusted EBITDA divided by Net Revenue
5Price source: FMB, CRU
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