Uralkali Announces IFRS 2014 Financial Results

Uralkali Announces IFRS 2014 Financial Results

Uralkali (LSE: URKA, “the Company”), one of the world’s largest potash producers, today published its audited financial results for the full year ended 31 December 2014 prepared in accordance with IFRS and audited by PricewaterhouseCoopers.

FY2014 operational highlights:

  • Production up 21% y-o-y to 12.1 million tonnes of potassium chloride (KCl)
  • Sales volumes up 24% y-o-y to 12.3 million tonnes of KCl
  • Capacity development programme on track, with the construction of the Ust-Yayvinsky mine progressing
  • In November, Uralkali suspended works at the Solikamsk-2 mine and plant after detecting higher brine inflow

FY2014 financial highlights1:

  • Revenue up 7% y-o-y to US$ 3,559 million
  • Net revenue2 up 5% y-o-y to US$ 2,785 million
  • EBITDA3 up 9% y-o-y to US$ 1,784 million
  • EBITDA margin4 up to 64%
  • Foreign exchange loss and fair value loss on derivatives of US$ 2,004 million
  • Net loss at US$ 631 million
  • Average FCA export price down 13% y-o-y to US$ 233 per tonne of KCl
  • Cash COGS down 19% y-o-y to US$ 47 per tonne

FY 2014 corporate highlights:

  • In February, Uralkali acquired a 25% stake in Equiplan Participacoes S.A., the major shareholder of the port terminal in the city of Antonina, to enhance the Companyís logistics infrastructure in Brazil
  • In March, the extraordinary general meeting of shareholders elected a new Board of Directors following changes in the shareholder structure
  • In June, the annual general shareholders meeting approved a dividend payment for 2013 of RUB 1.63 per share and approximately US$ 0.24 per GDR
  • In June, Uralkali agreed a US$ 450 million 5-year unsecured club facility with five international banks, with an interest rate of LIBOR plus 175 bps margin
  • In July, the Company obtained a licence to develop the Romanovsky block of the Verkhnekamskoye deposit
  • In July, Uralkaliís EGM approved the reorganisation of the Company in the form of a merger with Uralkali-Technology, a wholly-owned subsidiary of the Company. Later in the year, it was decided to postpone the reorganisation due to the volatile economic situation.

Dmitry Osipov, Uralkali CEO, commented:

In 2014, our revenue maximisation strategy proved to be effective and we achieved 7% revenue growth year-on-year. At the same time, we maintained our leading position in the global industry as strong potash demand across our markets enabled us to achieve record output of over 12.1 million tonnes.
Despite the suspension of operations at the Solikamsk-2 mine in November, we were able to meet our customer needs in full. Following the accident which affected our output in 4Q 2014, we have revised our capacity development programme for 2015-2020 to maintain Uralkaliís industry leadership going forward.

The key 2014 operational and financial metrics were as follows:

2014 2013
Revenue (US$ million) 3,559 3,323
Net revenue (US$ million) 2,785 2,665
EBITDA (US$ million) 1,784 1,634
EBITDA margin 64% 61%
Net (loss)/profit (US$ million) (631) 666
Average export potash price, FCA, US$ 233 268
Production (KCl, million tonnes) 12.1 10.0

Sales volume (KCl, million tonnes)


— Domestic

ó Export







Financial Review

Due to robust demand, the Companyís revenue in 2014 increased by 7% to US$ 3,559 million as a result of 24% growth in shipments. High capacity utilisation throughout the year, an efficient business model and the rouble devaluation led to a 19% decrease in cash COGS per tonne and an EBITDA margin increase to 64%.

However, financing costs in 2014 increased due to foreign exchange losses and losses from the revaluation of derivative financial instruments, which led to a net loss of US$ 631 million.

The strong fundamentals of Uralkaliís business ensure that it remains a quality borrower with access to long-term funding. In 2014, the Company signed agreements for two unsecured loan facilities: a US$ 450 million 5-year club facility with five international banks and a US$ 250 million 10-year credit line with Russiaís Promsvyazbank. The Company also used an unsecured US$ 2-billion credit line provided by Sberbank.

At the end of December 2014, the Companyís net debt amounted to US$ 3,175 million, which is equal to 1.8 LTM EBITDA. The average interest rate across the portfolio at the year-end was 4%.

In June 2014, Uralkaliís annual general meeting of shareholders approved a dividend payment for 2013 of RUB 1.63 per share and approximately US$ 0.24 per GDR. The total dividend payment for 2013 was approximately 50% of IFRS net profit. In December 2014, shareholders voted against the payment of the interim dividend, taking into account the volatile economic situation in Russia and the accident at Solikamsk-2.

Business Review

Solid demand in key markets enabled Uralkali to produce a record 12.1 million tonnes of KCl and sell 12.3 million tonnes of KCl in 2014, representing a 21% and 24% increase year-on-year, respectively.

At the same time, the Company proceeded with its capacity development programme. At the Ust-Yayvinsky mine, shaft construction has progressed, with 243 metres out of 465 at Shaft 1 and 227 metres out of 423 at Shaft 2 now completed. In 2015, the Company plans to start the construction of permanent facilities for the above-ground complex. Uralkali is also developing its granulation facilities by replacing outdated equipment in order to meet rising demand for this premium product. The total expansion CAPEX in 2014 amounted to US$ 155 million.

In November 2014, Uralkali detected a higher level of brine inflow and hydrogen sulphide at its Solikamsk-2 mine, as well as a sinkhole to the east of the Solikamsk-2 production site. In order to ensure employee safety, works at the Solikamsk-2 mine and plant, which represent 17.7% of Uralkaliís annual KCl capacity, were suspended. Uralkali set up comprehensive monitoring of the Solikamsk-2 mine site and engaged with a number of scientific institutes to implement a plan designed to address the consequences of the accident and mitigate the potential negative impact. Among other measures, the Company restarted backfilling of the worked-out areas of the mine to decrease rock mass deformation. The investigation led by Rostechnadzor (the state supervising authority) concluded that the increased brine inflow in November 2014 was the consequence of the mass collapse of rock in the mine during an accident and earthquake in 1995.

In light of the Solikamsk-2 accident, Uralkali revised the schedule of several expansion projects.†Increasing load measures have been approved to produce additional 0.8 million tonnes of KCl from 2016.†The Company has decided to expedite the commissioning of new capacity at Solikamsk-3 to launch it in 2017. Uralkali will also build two new shafts by 2020 to mine safety the remaining reserves of Solikamsk-2.

In addition, in order to secure the Companyís long-term industry leadership, in 2014 Uralkali obtained a licence to develop another block of the Verkhnekamskoye deposit (Romanovsky) with estimated reserves of 385 million tonnes of sylvinite5. Uralkali also continued to design a new mine and plant at the Polovodovsky site.

In July, the EGM approved the merger of Uralkali with its affiliate Uralkali Technology. However, against the backdrop of a challenging macroeconomic environment in Russia, later in the year, it was decided to postpone the reorganisation.

Market Review and Outlook

2014 was characterised by solid global potash demand and firming potash prices. Major markets have recovered much better than anticipated, led by lower year-on-year potash prices and distributor restocking needs. The growth of the potash market in 2014 was reflected in higher year-on-year operating rates. The potash industry is estimated to have run at 83-85% of global effective capacity, compared with 73% in 2013.

Potash demand has expanded in all regions, particularly in India, China and South East Asia in response to lower prices. Global potash deliveries in 2014 exceeded 2011 levels and are estimated to have reached a record 62 million metric tonnes. Improved consumption and customers rebuilding stocks following the uncertainty of 2H 2013 were the key growth factors.

A combination of shipping backlogs and labour disputes in some regions led to tighter potash availability.

In China, potash demand was stronger than previously anticipated with higher optional volumes of seaborne imports delivered through 2H 2014. Demand is estimated to have grown by 20-24% to 14.0-14.5 million tonnes. Negotiations for the 1H 2015 Chinese seaborne contract are currently underway. The resumption of contract shipments to China is expected to boost market confidence.

In India, potash demand was also strong last year on the back of high levels of NPK application. A total of 4.3 million tonnes of KCl was imported during 2014, representing a year-on-year increase of 23%. Indian potash demand is expected to gradually recover, with consumption volumes reaching approximately 4.5-4.7 million tonnes in 2015. In addition, demand may be further supported by changes in the fertiliser subsidy structure aimed at balancing the application rates of NPK fertilisers within the framework of Indiaís budget coming into force in April 2015.

South East Asian markets were characterised by very strong demand and aggressive competition in 2014. The region is estimated to have imported 9.7 million tonnes last year compared to 8.1 million tonnes in 2013. Demand prospects for South East Asia in 2015 remain good. Despite lower year-on-year palm oil prices, palm oil economics are profitable and producers are expected to continue investing in potash to maximise returns.

In Brazil, demand for granular product was very strong, while availability was limited in 2014. Brazil imported a record 9.1 million tonnes of potash, representing a 20% increase over the previous year. Brazilian demand in 2015 is expected to be close to 2014 levels or slightly lower.

North American potash demand was robust, as farmers replenished declining nutrient levels in their soils after record crop production in 2013. Full-year demand is estimated to have hit record levels of 10.0-10.3 million metric tonnes. 2015 potash demand in this region may decline slightly due to a modest reduction in corn planted acreage. However, lower nutrient levels after record 2014 crop production could be a catalyst for potash demand this year.

In EMEA and FSU (former Soviet Union) markets, demand is estimated to have grown by 3-4% to 12.1-12.3 million tonnes in 2014. In Europe, customer caution during the second half of 2013 led to robust demand in 2014 as buyers rebuilt depleted inventories and took advantage of bottomed prices. In 2015, EMEA demand is expected to stay largely unchanged or be slightly lower than in 2014. In Western Europe, demand may ease off slightly, as lower year-on-year grain prices may have some impact on demand. The FSU, Africa and Middle East markets are expected to demonstrate some increase in potash demand.

The Russian potash market remained stable in 2014, totalling 1.9 million tonnes. Potash consumption by Russian agricultural producers (including consumption of potash as part of NPK) amounted to more than 0.6 million tonnes, compared to approximately 0.45 million tonnes in 2013. Uralkali places special emphasis on supporting the development of the Russian agricultural sector. The Company ensures that its product and nutritional knowledge remains available for domestic customers during a turbulent period for the Russian economy.

Uralkali expects global potash demand to decrease to 58-59 million tonnes in 2015 from 62 million tonnes in 2014, as the growth rate of potash demand last year was somewhat inflated by deferred demand from 2H 2013.

Dmitry Osipov, Uralkali CEO, said:

We operate against the backdrop of an economic slowdown, volatile exchange rates and a challenging geopolitical environment. We are well-placed to face these uncertainties, due to the†effectiveness†of our operations,†low production costs, significant reserves, robust financial performance and a strong balance sheet.
We are confident in the industryís strong long-term fundamentals as the potash sector contributes to global food security. With our revised capacity development programme, we are prepared to continue delivering potash products to our customers around the world and maintain our leading market position.

Uralkali (www.uralkali.com) is one of the worldís largest potash producers and exporters. The Companyís assets consist of 5 mines and 7 ore-treatment mills situated in the towns of Berezniki and Solikamsk (Perm Region, Russia). Uralkali employs ca.11,300 people (in the main production unit). Uralkaliís shares and GDRs are traded on the Moscow Exchange and London Stock Exchange, respectively.

1 The audited financial statements may be found on Uralkaliís website http://www.uralkali.com/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 According to Uralkaliís estimates

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Cardinal rules

Smoking in mines is prohibited.
Work at heights without wearing a safety harness is prohibited.
Work in electrical installations under voltage is prohibited.
It is forbidden to perform work and stay in the bottomhole zone during the operation of the mining machine.
Loading and unloading operations when people are in the danger zone are prohibited.
Working in underground mines with unsecured and/or unassembled roofing is prohibited.
It is forbidden to carry out repairs and maintenance of conveyors without disconnecting from energy sources, use of conveyors for transfer of people and goods (materials and/or equipment), crossing (either above or under) operating conveyors by employees are not allowed.
It is forbidden to carry out welding and flame work in underground mines and mine buildings without the necessary safety measures preventing fire.