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Speculation regarding a potential merger of OJSC Uralkali and OJSC Silvinit

17.12.2010

NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION, IN WHOLE OR IN PART, IN OR INTO CANADA, AUSTRALIA OR JAPAN, OR ANY OTHER JURISDICTION WHERE TO DO SO WOULD CONSTITUTE A VIOLATION OF RELEVANT LAWS OR REQUIRE REGISTRATION THEREOF

Speculation regarding a potential merger of OJSC Uralkali and OJSC Silvinit

OJSC Uralkali ("Uralkali") confirms that it has been in discussions with OJSC Silvinit ("Silvinit") regarding a possible merger of Uralkali and Silvinit. To date the Board of Directors of Uralkali has not agreed to any terms of the potential transaction and there can be no certainty that any transaction involving Uralkali and Silvinit would take place. Uralkali will make a further announcement in due course.

The Directors of Uralkali consider that this announcement contains sufficient information about Silvinit to provide a properly informed basis for assessing the enlarged group’s financial position.

Uralkali will make public disclosure via the RNS of the London Stock Exchange of any developments concerning Silvinit without delay that would be required to be released under the UK Disclosure and Transparency Rules if GDRs of the enlarged group were admitted to trading on the regulated market of the International Order Book of the London Stock Exchange.

As any proposed combination, if completed, would be classified as a reverse takeover of Uralkali under the Listing Rules of the UK Listing Authority, Uralkali will be required to apply for a new admission of GDRs to the Official List of the UKLA and to trading on the regulated market of the International Order Book of the London Stock Exchange. The eligibility of the enlarged Uralkali to be admitted to the Official List has not yet been agreed with the UK Listing Authority, although an application regarding the eligibility of the combined Uralkali and Silvinit will be made in the event agreement is reached in relation to a combination.


Enquiries:
Investor Relations
Anna Batarina, CFA
Vice President, Investor Relations, Uralkali
Tel.: +7 (495) 730 2371
E-mail: Anna.Batarina@msc.uralkali.com

Media Relations
Alexey Sotskov
Head of Media Relations, Uralkali
Tel.: +7 (495) 730 2373
E-mail: Alexey.Sotskov@msc.uralkali.com

IMPORTANT NOTICES

General

This announcement is not intended to, and does not constitute, or form part of, an offer to sell or an invitation to purchase, exchange or subscribe for any securities or a solicitation of any vote or approval in any jurisdiction. This announcement does not constitute a prospectus or a prospectus equivalent document.

Overseas jurisdictions

The release, publication or distribution of this announcement in jurisdictions other than the United Kingdom may be restricted by law and therefore any persons who are subject to the laws of any jurisdiction other than the United Kingdom should inform themselves about, and observe, any applicable requirements. This announcement has been prepared for the purposes of complying with English law and the information disclosed may not be the same as that which would have been disclosed if this announcement had been prepared in accordance with the laws and regulations of any jurisdiction outside of England. Except as required by applicable law, copies of this announcement are not being, and may not be, mailed or otherwise forwarded, distributed or sent in, into or from any Restricted Jurisdiction. Persons receiving this announcement should observe these restrictions and should not send or distribute documents in or into any Restricted Jurisdiction.

Notice to U.S. investors

It is important for U.S. securities holders to be aware that this announcement is subject to disclosure and regulations in England that are different from those in the United States. In addition, U.S. securities holders should be aware that this announcement has been prepared in accordance with English format and style, which differs from the U.S. format and style. In particular the financial information of Uralkali and Silvinit included herein has been prepared in accordance with International Financial Reporting Standards, and thus may not be comparable to financial information of U.S. companies whose financial statements are prepared in accordance with generally accepted accounting principles in the United States.

It may be difficult for U.S. securities holders to enforce their rights and any claim they may have arising under the U.S. federal securities laws, since Uralkali is located in the Russian Federation, and some or all of its officers and directors may be residents of countries other than the United States. U.S. securities holders may not be able to sue a non-U.S. company or its officers or directors in a non-U.S. court for violations of the U.S. securities laws. It may be difficult to compel a non-U.S. company and its affiliates to subject themselves to a U.S. court’s judgment.

Securities may not be offered or sold in the United States absent registration under the US Securities Act of 1993, as amended (the "Securities Act"), or pursuant to an exemption from such registration. The Uralkali Shares to be issued in connection with any transaction are not, and will not be, registered under the Securities Act or under the securities laws of any jurisdiction of the United States and would be issued to Silvinit Shareholders in the United States in reliance on the exemption from registration provided by Rule 802 under the Securities Act and in reliance on available exemptions from any state law registration requirements. The securities of Uralkali and Silvinit have not been, and will not be, registered under the Securities Act or under the securities laws of any jurisdiction of the United States.

No profit forecast

Nothing in this announcement is intended to be, or is to be construed as, a profit forecast or to be interpreted to mean that earnings per Uralkali Share, Uralkali GDR, or Silvinit Share for the current or future financial years, or those of either Uralkali or Silvinit, will necessarily match or exceed the historically published earnings per Uralkali Share, Uralkali GDR or Silvinit Share.

Forward looking statements

This announcement, including any information included or incorporated by reference, may contain "forward-looking statements" concerning Uralkali and Silvinit. Generally, the words "will", "may", "should", "could", "would", "can", "continue", "opportunity", "believes", "expects", "intends", "anticipates", "estimates" or similar expressions identify forward-looking statements. The forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. Forward-looking statements include statements relating to the following: (i) future capital expenditures, expenses, revenues, earnings, synergies, economic performance, indebtedness, financial condition, dividend policy, losses and future prospects; (ii) business and management strategies and the expansion and growth of Uralkali and Silvinit operations and potential synergies resulting from any transaction; and (iii) the effects of government regulation on the businesses of Uralkali and Silvinit. Many of these risks and uncertainties relate to factors that are beyond the companies’ abilities to control or estimate precisely, such as future market conditions and the behaviours of other market participants, and therefore undue reliance should not be placed on such statements which speak only as at the date of this announcement. Each of Uralkali and Silvinit assumes no obligation in respect of, and does not intend to update, these forward-looking statements, except as required pursuant to applicable law and as set out on the first page of this announcement.


Appendix I

Information on Uralkali and Silvinit

Uralkali

Uralkali is one of the world's leading publicly-traded dedicated potash producers. Uralkali also has one of the world's leading potash export platforms through its joint venture interest in Belarusian Potash Company. Uralkali is listed on the RTS and MICEX stock exchanges (URKA). In 2007, Uralkali obtained admission of GDRs to the Official List of the UKLA and to trading on the regulated market of the International Order Book of the London Stock Exchange (URKA LI). For more information on Uralkali, visit www.uralkali.com.

As of the date of this announcement, Uralkali’s issued share capital was comprised of 2,124,390,000 ordinary shares.

Silvinit

Silvinit is among the world’s largest potash producers. Silvinit operates three mines at the Verkhnekamskoe deposit of potassium and magnesium salts in the Perm region of the Urals in Russia, in close proximity to Uralkali’s operations. In addition, Silvinit’s wholly-owned subsidiary Kamskaya Gornaya Kompaniya has a licence to develop the Polovodovsky site, which is located adjacent to Silvinit’s three existing mines. For more information on Silvinit, visit www.silvinit.com.

Silvinit produces two main potassium-based fertilizer products (standard and granular), each of which are derived from potash ores comprising potassium chloride (KCl) mixed with other minerals. Silvinit also produces carnallite, which is used in the production of magnesium, and salts for industrial use.

The table below shows production volumes of potassium chloride and carnallite for Silvinit for the periods indicated.



Year ended 31 December Six months ended 30 June


2007 2008 2009 2009 2010
Product
Mineral fertilizers (thousand tonnes of KCI) 5,469 5,082 3,519 1,186 2,570
Carnallite (thousand tonnes) 344 335 261 124 143

Production declined in 2009 largely in response to decreased demand in Silvinit’s main export markets and Russia due to the global economic downturn.

In 2009, export sales accounted for 73 per cent. of Silvinit’s total volume of sales. The total volume of export sales in 2009 included sales to India (39%), China (9%), other Asian countries (14%) and Brazil (9%). Export sales accounted for 79 per cent. of Silvinit’s total volume of sales in 1H 2010, including sales to India (10%), China (22%), other Asian countries (26%) and Brazil (6%).

Silvinit’s ordinary and preferred shares are listed on the RTS (ordinary shares: SILV, preferred shares: SILVP) and MICEX (SILV) stock exchanges in Russia. As of the date of this announcement, Silvinit’s issued share capital was comprised of 7,825,760 ordinary shares and 2,608,580 preferred shares.

Selected Historical Consolidated Financial Information of Silvinit

The table below shows historical consolidated financial information of Silvinit as at and for the years ended 31 December 2007, 2008 and 2009 prepared in accordance with International Financial Reporting Standards ("IFRS"). The historical consolidated financial information as at and for the years ended 31 December 2008 and 2009 has been extracted from the audited consolidated financial statements of Silvinit as at and for the year ended 31 December 2009. The historical consolidated financial information as at and for the years ended 31 December 2007 has been derived from the audited consolidated financial statements of Silvinit as at and for the year ended 31 December 2007.

In connection with the preparation of its audited consolidated financial statements as at and for the year ended 31 December 2009, Silvinit restated the comparative 2008 information included in such 2009 consolidated financial statements for the following changes in accounting policy: the adoption by Silvinit of IAS 23 Borrowing Costs (2007) and revised IAS 1 Presentation of Financial Statements (2007). As a result of this restatement, the comparative information for 2008 included in the audited consolidated financial statements as at and for the year ended 31 December 2009 is not comparable in all respects to the consolidated financial statements of Silvinit as at and for the year ended 31 December 2008. The 2008 financial information presented below has been derived from the comparative 2008 information in the audited consolidated financial statements of Silvinit as at and for the year ended 31 December 2009 and not the previously published 2008 financial statements.


Consolidated statement of comprehensive income information Year ended 31 December

2007 2008
(Restated)
2009


(amounts in RUB millions, except earnings per share)
Revenues 22,981 55,402 33,994
Cost of sales (8,553) (10,203) (8,691)
Gross profit 14,428 45,199 25,303
Distribution costs (4,918) (5,412) (3,166)
Export duties - (2,013) (260)
General and administrative expenses (1,656) (1,711) (1,610)
Other income 60 167 128
Other expenses (793) (1,177) (1,975)
Operating profit 7,121 35,053 18,420
Finance income 235 148 151
Finance expense (487) (10,440) (3,991)
Share of profit/(loss) of investments accounted for using the equity method (42) 49 62
Profit before income tax 6,827 24,810 14,642
Income tax expense (1,521) (7,127) (4,124)
Profit for the year 5,306 17,683 10,518
Profit attributable to:


Equityholders of the Company 5,251 17,685 10,517
Non-controlling interests 55 (2) 1
Net profit for the year 5,306 17,683 10,518
Basic and diluted earnings per share (in RUB)
Preference shares 507 1,709 1,016
Ordinary shares 507 1,709 1,016


Consolidated statement of cash flows information Year ended 31 December

2007 2008
(Restated)
2009
(amounts in RUB millions)
Cash flows from operating activities 2,556 22,033 12,843
Net cash used in investing activities (6,274) (54,660) (7,884)
Net cash (used in)/generated from financial activities 4,013 35,833 (5,505)


Consolidated statement of financial position information As at 31 December

2007

2008
(Restated)
2009


(amounts in RUB millions)

Total assets 42,182 99,591 106,466
Total current liabilities 6,731 32,838 6,418
Total non-current liabilities 7,583 26,325 51,327
Total liabilities 14,314 59,163 57,745
Non-controlling interest 9 7 7
Total equity 27,868 40,428 48,721
Total liabilities and equity 42,182 99,591 106,466

The audited consolidated financial statements of Silvinit as at and for the three years ended 31 December 2007, 2008 and 2009 prepared in accordance with IFRS, together with the respective independent auditors’ reports of ZAO KPMG, are available at www.silvinit.com/stockholder/ifrs/.

The following table sets forth selected operating data for Silvinit for the periods indicated.


Year ended 31 December

2007

2008
(Restated)
2009





EBITDA (RUB millions) 9,220 37,231 21,241
EBITDA margin(1) 46% 74% 68%
Capital expenditure (RUB millions) 6,690 7,472 5,570
Capital expenditure in intangible assets, excluding capitalised borrowing costs (RUB millions) 38 47,024 111
Borrowing costs, capitalised in intangible assets (RUB millions) - 2,207 4,361
Number of employees - OJSC Silvinit (annual average).. 11,098 11,301 10,892
Actual KCI Production (thousand tonnes) 5,469 5,082 3,519
Actual KCI Sales volume (thousand tonnes) 5,485 5,263 3,553

(1) EBITDA margin is defined as EBITDA divided by net revenue.


The following table sets forth a calculation of EBITDA for the periods indicated.



Year ended 31 December

2007 2008
(Restated)
2009
(amounts in RUB millions, except earnings per share)
Net profit 5,306 17,683 10,518
plus income tax expenses 1,521 7,127 4,124
plus finance expense 487 10,440 3,991
less share of net (loss)/profit of investments accounted for using the equity method 42 (49) (62)
plus depreciation 2,071 2,116 2,789
plus amortization 28 62 32
less finance income (235) (148) (151)
EBITDA 9,220 37,231 21,241

The following table sets forth a calculation of Silvinit’s net revenues for the periods indicated.



Year ended 31 December

2007 2008
(Restated)
2009
(amounts in RUB millions, except earnings per share)
Revenues 22,981 55,402 33,994
less export duties - 2,013 260
less railway tariff 2,579 2,393 2,528
less freight costs 231 161 23
less transhipment costs 216 257 161
Revenues less railway tariff, freight and transhipment costs 19,955 50,578 31,022

Trading Update of Silvinit

In the first half of 2010 Silvinit’s operations recovered following the sharp contraction observed in 2009, driven by both global economic recovery and rising fertiliser demand.

During the first six months of 2010 Silvinit saw a strong recovery of volumes of production. Production volumes for mineral fertilizers increased to 2,570 thousand tonnes of KCI as compared to 1,186 thousand tonnes of KCI in the first six months of 2009. Production of carnallite grew to 143 thousand tonnes in the first six months of 2010 from 124 thousand tonnes in the first six months of 2009.

Sales prices to the export market continued the decline which started in 2009 as a result of the financial crisis, reaching a low point in the 1H 2010, although prices have since recovered. Domestic sales prices increased over the comparable period. The overall decline in sales prices partially offset a significant increase in sales volumes in 1H 2010, particularly to export markets, resulting in a significant increase, in local currency terms, in revenues for first six months of 2010 as compared to first half of 2009.

Silvinit’s costs structure remained stable in the first half of 2010, which, coupled with growing revenues, enabled Silvinit to maintain high levels of profitability.

Silvinit reserves and resources

The table below shows the balance reserves of sylvinite ore of the mines currently operated by Silvinit as at 1 January 2010, presented in accordance with the FSU Classification reporting system.



++1

Deposit Sylvinite Ore (million tonnes)
Solikamsk 1 245.4
Solikamsk 2 550.6
Solikamsk 3 1,472.3
Total 2,268.3

In addition, Silvinit has licence rights to the Polovodovsky deposit which has estimated resources of 3,080 million tonnes of ore.

Ore reserves and resources estimation

Silvinit’s ore reserves described in the table above are presented in accordance with the FSU Classification classifications, while Uralkali estimates its reserves in accordance with JORC Code. This FSU Classification system, developed in 1960 and revised in 1981, is still widely used today in the Russian Federation, and divides mineral concentrations into seven categories of three major groups, based on the level of exploration performed. Explored reserves are designated as either A, B, or C1, evaluated reserves are designated as C2 and prognostic resources are designated as either P1,P2 or P3. Silvinit plans to undertake an audit of its reserves in accordance with the JORC Code in 2011.

Category A

The reserves in place are known in detail. The boundaries of the deposit have been outlined by trenching, drilling, or underground workings. The quality and properties of the ore are known in sufficient detail to ensure the reliability of the projected exploitation.

Category

The reserves in place have been explored but are only known in fair detail. The boundaries of the deposit have been outlined by trenching, drilling, or underground workings. The quality and properties of the ore are known in sufficient detail to ensure the basic reliability of the projected exploitation.

Category C1

The reserves in place have been estimated by a sparse grid of trenches, drill holes or underground workings. This category also includes reserves adjoining the boundaries of A and reserves as well as reserves of very complex deposits in which the distribution cannot be determined even by a very dense grid.

The quality and properties of the deposit are known tentatively by analyses and by analogy with known deposits of the same type. The general conditions for exploitation are known tentatively.

Category C2

The reserves have been extrapolated from limited data, probably from a single hole. This category includes reserves that are adjoining A, B, and C1 reserves in the same deposit. Prognostic resources are estimated for mineralisation outside the limits of areas that have been explored in detail and are often based on data from trenches and from geochemical and geophysical surveys.

Category P1

Resources under the P1 category may extend outside the actual limits of the ore reserves defined in the C2category. The outer limits of P1-type resources are determined indirectly by extrapolating from similar known mineral deposits in the area. P1is the main source from which C2 reserves can be increased.

Category P2

These resources represent possible mineral structures in known mineral deposits or ore-bearing regions. They are estimated based on geophysical and geochemical data. Morphology, mineral composition and the size of the ore body are estimated by analogy with similar mineralised geologic structures in the area.

Category P3

Any potential ore-bearing deposits are classified as resources in the P3 category. The presence of these resources relies on the theoretical definition of a "favourable geological environment". Resource figures are derived from figures of similar deposits in the region. Estimates of prognostic resources routinely depend on assumptions and projections regarding the probable dimensions (i.e., length, width and depth) and grade of the deposit that are subject to confirmation by more detailed investigations.

Comparison between the FSU Classification and the JORC Code

Under the FSU Classification, C1 and, in some cases, C2 are considered to be categories of reserves. Whilst a direct comparison between the JORC Code and the FSU Classification is difficult as each is based on different principles, in general terms "proved reserves" correlate to categories A and under the FSU Classification, "probable reserves" correlate to category C1 and some category C2 under the FSU Classification and "inferred mineral resources" equate to category C2 under the FSU Classification. However, it should be noted that these relationships may vary between deposits and at different times for the same deposits.

Financial reporting of Uralkali and Silvinit

Both Uralkali and Silvinit prepare their consolidated financial statements in accordance with IFRS. International Financial Accounting Standards may allow for various options for the recognition, measurement and presentation of transactions, events or conditions in the financial statements. Management also exercises its judgment in developing and applying an accounting policy in the absence of a standard that specifically applies to a transaction, event or condition. Accordingly, the IFRS accounting principles applied by Uralkali may differ in certain significant respects from those applied by Silvinit.

The discussion below summarizes certain differences between the IFRS accounting principles applied by Uralkali and Silvinit based on a preliminary analysis of their consolidated financial statements for the years ended 31 December, 2009, 2008 and 2007, which may have an impact on the measurement or presentation of the consolidated financial statements of a combined group following any transaction.

This preliminary analysis was prepared by Uralkali and Silvinit. In preparing the consolidated financial statements of the enlarged group, other significant accounting differences may be identified. Accordingly, there can be no assurance that these are the only differences in accounting principles applied by Uralkali and Silvinit which may have an impact on the measurement or presentation of the consolidated financial statements of a combined group following any transaction.

Presentation of financial statements

IAS 1 Presentation of Financial Statements requires the presentation of certain specific items on the face of financial statements. However, the standard allows entities to present additional line items, headings and subtotals when such presentation is relevant to an understanding of the entities' financial statements. In addition, IAS 1 and other standards allow for various alternatives regarding the presentation of transactions, events or conditions in the financial statements.

Income Statement

IAS 1 requires entities to present an analysis of expenses in the income statement using a classification based on either their nature or their function within the entity. Entities are also required to disclose separately the nature and amount of material items of income or expense. Both Uralkali and Silvinit present an analysis of expenses in the income statement based on the function of the expense.

IAS 1 allows entities to present its comprehensive income in a single statement of comprehensive income or in two separate statements – a statement of income displaying components of profit or loss and a statement of comprehensive income that begins with profit or loss and displays components of other comprehensive income.

Uralkali prepares two separate statements – a statement of income and a statement of comprehensive income, whereas Silvinit presents its comprehensive income in a single statement of comprehensive income.

Uralkali presents the following main subtotals in its statement of income:

  • Gross profit, presenting the difference between revenues and cost of sales;
  • Group revenues, shown net of discounts and export duties;
  • Operating profit, presenting the difference between gross profit and distribution costs, general and administrative expenses, taxes other than income tax and other operating income and expenses. Other operating expenses generally comprise social costs and charitable donations and net loss on disposal of property, plant and equipment.
  • Profit before income tax, which is stated after finance income and expenses and mine flooding costs.

In its statement of comprehensive income, Silvinit presents a subtotal equivalent to Uralkali’s Gross profit, although Silvinit’s revenues are not decreased by the amount of export duties, which are shown in a separate line below Gross profit. Regardless of the effect of any differences in accounting principles, Silvinit’s line item, "Operating profit" approximates the line item, "Operating profit" in the Uralkali’s statement of income, after deduction of export duties.

Statement of cash flows

IAS 7 Statement of Cash flows allows for various classifications for the reporting of cash flows from certain transactions, such as interest paid or received.

Uralkali prepares its statement of cash flows starting from Profit before income tax. Silvinit begins its statement of cash flows with Net profit for the period and adjusting it for income tax expense in the determination of Operating cash flows before working capital changes.

Dividends paid to shareholders are shown within the cash flows used in financing activities in Uralkali’s statement of cash flows and within operating cash flows in Silvinit’s statement.

Judgments in applying accounting policies

In the process of applying accounting policies, management makes various judgments that may significantly affect the financial information presented in the financial statements. The judgments exercised by each company may differ, which may significantly affect the financial information disclosed in their financial statements.

The judgments which may significantly affect the Uralkali and Silvinit financial statements relate mainly to the assessment of whether the conditions to apply hedge accounting are met and the identification of commodity purchase and sale "own use" contracts as defined by IAS 39, concession contracts (IFRIC 12), the classification of arrangements which contain a lease (IFRIC 4 and IAS 17), the evaluation of levels of control and influence (IAS 27, IAS 31, IAS 28 and SIC 12) and the identification of elements to be separately disclosed in the income statement.

Property, plant and equipment

Uralkali and Silvinit have adopted different accounting policies in calculating depreciation rates and estimated useful lives for different groups of property, plant and equipment.

Under Uralkali’s accounting policy, depreciation on property, plant and equipment is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives for all groups of property, plant and equipment.

Under Silvinit’s accounting, policy, depreciation on property, plant and equipment is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives for all groups of property, plant and equipment, except for the group of mine infrastructure items that are connected with mine production. The depreciation for these items is calculated proportionally to extracted tonnes of ore.

The table below shows the comparison of estimated useful lives for both companies.



Uralkali Useful lives in years
Silvinit Useful lives in years

Buildings 10 to 50 15 to 50
Mine development costs 10 to 30 proportionally to extracted tonnes of ore
Plant and equipment 2 to 30 4 to 25
Transport 5 to 15 3 to 25
Others 2 to 15 4 to 30
Land Not depreciated Not depreciated

If Silvinit had applied Uralkali’s accounting policy in respect of depreciation on property, plant and equipment, Uralkali estimates that the Net profit of Silvinit would have been lower by 3 per cent. in the year ended 31 December 2009, by 2 per cent. in the year ended 31 December 2008 and by 6 per cent. in the year ended 31 December 2007.

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