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Uralkali Announces IFRS H1 2012 Financial Results

11.09.2012
Uralkali Announces IFRS H1 2012 Financial Results

Uralkali (LSE: URKA, “the Company”), one of the world’s largest potash producers, has today published the Consolidated Condensed Interim Financial Information for the six months ended 30 June 2012, prepared under International Accounting Standard 34, “Interim Financial Reporting”.

H1 2012 FINANCIAL HIGHLIGHTS1:

Revenue up 13.2% y-o-y to USD 2,234 million
EBITDA2 up 32.8% y-o-y to USD 1,400 million
EBITDA margin3 reached a half-year record of 74%

H1 2012 OPERATIONAL HIGHLIGHTS:

Production of 4.8 million tonnes of potassium chloride (KCl)
Sales volumes of 5.1 million tonnes of KCl
Average export price up 17.3% y-o-y to USD 380 per tonne of KCl
Strategic capacity expansion on track, with Berezniki-4 project approaching completion and commencing development at Ust-Yayvinsky mine

CORPORATE HIGHLIGHTS:

Continued progress in relation to ongoing buyback programme, with approximately USD 863 million purchased as of 11 September 2012 and cancellation of c.5% of share capital
Approved dividend payment for 2011 of RUB 4.00 per share and about USD 0.61 per GDR
Assignment of consistent debut investment-grade ratings by Fitch, Standard & Poors and Moody’s with a «stable» outlook
Completion of reorganisation aimed at optimisation and streamlining of legal and management structure
Increase in the share of independent directors on the Board from three to four out of nine

1 Year-on-year comparison is presented on pro-forma basis and includes Silvinit results starting from 1 January 2011
2 EBITDA is calculated as Operating profit plus depreciation and amortisation and does not include mine flooding cost
3 EBITDA margin is calculated as adjusted EBITDA divided by Net Revenue

Vladislav Baumgertner, Uralkali CEO, commented:

"We are pleased to have demonstrated a solid set of results in H1 2012 which reflected healthy potash demand. Following Q1 which saw some demand caution as consumers actively utilised stocks, demand rebounded in Q2 with robust buying. As a result, our production and sales recovered to target levels and, supported by synergies, allowed us to report record financial numbers. In the first half of 2012 the Company continued to work on optimising the cost of our capital structure by proceeding with the buyback programme, distributing dividends and undertaking broader capital structure initiatives, including the further improvement of our loan portfolio. We are delighted that these efforts, as well as the strong fundamentals of our business have been recognised by the financial community, with consistent investment-grade ratings being awarded to Uralkali by all three leading international credit rating agencies.

Of equal importance is our continued work on enhancing our corporate governance standards. Among key steps achieved in the reporting period was the increase in the number of independent directors on our Board from three to four out of nine and the debut release of the Sustainability report, which we are proud to present today. This report was created as part of our strategy to ensure our position at the forefront of mining industry best practice and in line with our overriding principles of transparency and risk mitigation for all stakeholders.”

The key H1 figures are as follows:

H1 2012 H1 20114 20114
Revenue (USD mln) 2,234 1,973 4,203
Net Revenue (USD mln)5 1,904 1,654 3,568
EBITDA (USD mln) 1,400 1,054 2,459
EBITDA margin 74% 64% 69%
Net Profit (USD mln) 842 794 1,527
Average potash price, FCA, USD
Domestic
Export
 
270
380
 
190
324
 
203
351
Production (KCl, mln tonnes) 4.8 5.2 10.8
Sales volume (KCl, mln tonnes)
TOTAL
Domestic
Export
 
5.1
1.0
4.1
 
5.3
0.9
4.4
 
10.6
1.9
8.8
4 Uralkali pro-forma financial and operational results including Silvinit results starting from 1 January 2011
5 Net revenue represents adjusted revenue (sales net of freight, railway tariff and transhipment cost)

Financial Review

Potash sales recovery and robust demand in Q2 enabled Uralkali to achieve net revenue of USD 1,904 million in January-June 2012, representing a 15.1% increase compared to pro-forma H1 2011. EBITDA amounted to USD 1,400 million for the first six months of 2012, and EBITDA margin stood at a record 74% compared to 64% for the comparable pro-forma in H1 2011.

Uralkali continued with its buyback programme launched in October 2011. As of 11 September 2012, the Company purchased its shares and GDRs in the total amount of c. USD 863 million at an average price of USD 35.7 per GDR. All shares bought before 23 July 2012 were cancelled within the framework of the Group reorganisation which aimed at optimisation and streamlining of the Company’s legal and management structures to enhance efficiency and improve transparency for shareholders.

The Company’s net debt amounted to USD 2.2 billion at the end of June 2012, which is equal to 0.8x LTM EBITDA, lower than our target net debt\EBITDA LTM ratio of 1x-2x.

A strong financial position led to the Company receiving consistent investment-grade ratings from Fitch, Standard&Poor’s and Moody’s with a «stable» outlook in June 2012.

In June Uralkali’s annual general meeting of shareholders («AGM») approved a dividend payment of RUB 4 per share and about USD 0.61 per GDR for the 2011 financial year. On 11 September 2012 the Board Investment Committee recommended the payment of an interim 2012 dividend in line with our established dividend policy. Recommendation on the quantum of the dividend is subject to an ongoing corporate approval process and will be announced by the Board in October.

Business Review

Uralkali’s production through the period from January to June 2012 amounted to 4.8 million tonnes of KCl, with sales totaling 5.1 million tonnes of KCl, compared to 5.2 million tonnes of KCl produced and 5.3 million tonnes delivered in H1 2011 on a pro-forma basis. The year-on-year decline in volumes was primarily driven by stock depletion at the beginning of the year across several major export markets. At the same time, production and sales in Q2 2012 were significantly higher than in Q1 2012, with Uralkali producing 2.9 million tonnes and reporting sales of 3 million tonnes respectively in Q2 2012 as compared to 1.9 million tonnes and 2.1 million tonnes respectively in Q1 2012. This trend reflected a rebound in demand in our key markets, including China and Brazil.

The average export price for the reporting period amounted to USD 380 per tonne, representing a USD 29 per tonne increase compared to full-year pro-forma 2011.

The average H1 utilisation rate of 85% allowed the Company to satisfy market demand and at the same time carry out planned maintenance works during the first quarter and expansion projects.

This year within the framework of the debottlenecking project, efficiency improvement projects have been carried out at Solikamsk-2 and 3, as well as Berezniki-2 and 3.

The Berezniki-4 expansion project is approaching its completion with skip hoist machines having been changed, a new leach line launched and the existing leach line reconstructed. Following test launches and certification, the Berezniki-4 plant will add another 1.5 million tonnes of KCl to the Company’s overall annual capacity, increasing it to 13 million tonnes of KCl starting from the beginning of 2013. The investment in the project in H1 2012 approached USD 43 million.

Moreover, in accordance with Uralkali’s announced development plan, during H1 2012 the Company commenced the development of the Ust-Yayvinsky block. The Company started the construction of the mine with a projected annual capacity of 2.8 million tonnes of KCl, of which 2.3 million tonnes will be used to replace the depleting capacity of the Berezniki-2 mine. Currently freezing holes for Shaft 1 are being bored, and the project works for the above-ground complex are being carried out. The investments in the Ust-Yayvinsky project in H1 2012 amounted to USD 19 million.

In H2 we plan to continue implementing the capacity development programme as well as carrying out maintenance works.

In addition to production and financial optimisation, Uralkali continued to enhance its corporate governance structure. Following the AGM in June, we welcomed new members to our Board and increased the number of independent directors from three to four. The independent directors play an active role in the strategic direction and practices of the Company and have joined all Board committees. Special attention by the Board and the management was given to the preparation of the first Sustainability Report of the Company which was approved by the Board on 11 September 2012.

Market outlook

Following a cautious start to the year as consumers utilised stocks, potash demand started to recover at the end of Q1 boosted by the start of the spring sowing season and the March contract settlement with China. Clarity regarding China established a price benchmark for the global market and encouraged buyers in other regions to step into the market more actively.

Brazil demonstrated almost as strong potash demand during Q2 as in the corresponding period a year ago, as Brazilian farmers increased fertiliser application in view of higher crop yields. By the end of August, demand for fresh shipments diminished as the peak season passed. We expect the demand to pick up again starting from October 2012 in view of the upcoming safrinha corn season and strong profitability expectations by farmers.

Spring planting season in the US resulted in healthy potash demand levels, which alongside seasonal capacity shutdowns helped to decrease North American inventories by 15% by the end of June compared to January 2012. Following the severe drought conditions, demand in the major agricultural areas shrank in the short-term due to lower yields and, consequently, lower volumes of potash removed from soils with the harvest. Despite the drought the US net farm income is forecasted to reach USD 122.2 billion in 2012, up 3.7% from 2011 levels. This income forecast represents all-time record level due to large price-led gains in corn and soybean receipts as well as large increases in crop insurance indemnities. We expect strong farmer cash flows this year supported by high agricultural commodity prices to incentivize a large planting in 2013 which should drive greater potash demand.

In South-East Asia the potash demand in H1 2012 was lower compared to the record H1 2011, impacted by high stocks accumulated by the end of 2011. In addition, stronger US Dollar and weaker local currencies continued to weigh on agriculture and potash demand.

In India high potash retail prices and below-average monsoon rains caused weak consumption despite good loading volumes during Q2 and Q3. Shipments by Belarusian Potash Company, Uralkali’s trader, under old contracts continued through August. We expect that the decreased state subsidies for potash imports will reduce this year’s Indian potash import down to 3.5–4.0 million tonnes as well as limit the room for a possible price increase. Nevertheless, the current low potash application level and high crop prices might boost Indian potash consumption in 2013 and help improve the market sentiment.

Following the implementation of Q2 contracts, China accumulated high port inventories which may delay a new contract settlement until the end of Q3.

Euro depreciation continued to weigh on the potash import demand in Europe during the April-June period. We believe increased wheat prices will accelerate potash consumption in Europe during the fall season.

The Russian market remains robust with increasing potash demand from agriculture and NPK producers. Uralkali’s domestic sales in H1 2012 rose by 18% year-on-year to 1 million tonnes of KCl.

In the past several months drought in USA, India, Russia and other regions caused concerns about lower grain supplies and boosted key crop prices to historical highs. We, therefore, maintain our 2012 potash consumption forecast at 54–56 million tonnes. With anticipated global potash deliveries of 49–50 million tonnes, we expect that at year end potash inventories in major markets are likely to be lower compared to the previous year.

We expect the second half of 2012 to remain dominated by macroeconomic concerns, particularly in Europe. Upcoming crucial elections in N. America and Asia are likely to provide an additional focus for markets.

Overall, Uralkali is well positioned to deliver in the short term as well as in the long term. The Company’s expansion programme remains well on track and provides Uralkali with the lowest-cost expansion programme per tonne globally allowing us to strengthen our position as a global industry leader. Combined with our long-term forecast for global potash consumption, we remain confident in our ability to deliver strong performance and continue to increase our shareholder value.

«This year’s drought in major grain producing regions of the world drove crop prices to record high levels and again attracted the attention of the global community to the security of food supply. It is crucial for stable global food supply to have an ability to mitigate the consequences of unfavourable weather conditions in one part of the planet, by a good harvest in other regions of the world.

We are sure that proper fertiliser application can contribute to sustainable food supply as it can significantly improve soil quality and partially compensate for decreasing arable land per capita. That is why we believe that despite macroeconomic volatility, there is room for increased potash consumption, especially in the fast developing countries where potash application is still significantly below the levels recommended by researchers and scientists.

For these reasons, we are sure that our additional capacity achieved through optimisation and expansion programme will be needed in the long run to satisfy the growing demand for potash», said Vladislav Baumgertner.

You can find the video interview with Vladislav Baumgertner at http://www.uralkali.com/investors/results/ .

Uralkali (www.uralkali.com) is one of the world’s largest potash producers with a market share of about 20%. The Company’s assets consist of 5 mines and 7 ore-treatment mills situated in the towns of Berezniki and Solikamsk (Perm Territory, Russia). Uralkali employs ca. 12,500 people (in the main production unit). Uralkali’s shares and GDRs are traded on the RTS-MICEX and LSE, respectively.

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