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Announcement:

Moody's: Uralkali financial metrics will improve in 2014 after weakening in 2013

16 Apr 2014

London, 16 April 2014 -- Moody's Investors Service has today said that the creditworthiness of OJSC Uralkali (Uralkali, Baa3 negative) will be unaffected by the weakening of the company's financial metrics in 2013, according to recently published consolidated financial statements. Moody's expects that Uralkali's financial metrics will improve in 2014, being driven by the ongoing stabilisation in the global potash market, the company's low-cost business model, its commitment to deleveraging and its solid liquidity position.

FINANCIAL METRICS WEAKENED IN 2013

In 2013, Uralkali's revenue and EBITDA fell by 16% and 31%, respectively, which is below forecasts made by Moody's in October 2013. Uralkali's reported EBITDA margin reduced to 61% versus 71% in the previous year. This deterioration in the company's metrics was primarily driven by a reduction in average potash prices in 2013 by around 30% to $268 on a cost and freight basis (CFR) from $370 in 2012. This fall in price was due to weak potash market conditions in 2013, which were reinforced by the collapse of Belarusian Potash Company (BPC), a sales partnership between Uralkali and Belaruskali (not rated).

Uralkali's leverage (measured by adjusted debt/EBITDA) also increased to above 3.0x, driven by both a reduction in EBITDA and an increase in Uralkali's debt to around $5.0 billion as of year-end 2013 (FYE 2012: around $4 billion) resulting from Uralkali's buyback of 188.8 million ordinary shares from one of its minority shareholders for $1.3 billion in June 2013.

PERFORMANCE EXPECTED TO IMPROVE IN 2014 ON THE BACK OF STABILISATION OF POTASH MARKET

However, Moody's expects that Uralkali's financial metrics will improve in 2014 to adjusted debt/EBITDA of around 2.0x, which is within our guidance for the current rating. This projection is based on Moody's expectations that the global potash market will stabilise in 2014, with (1) moderate growth in global potash demand to around 56-58 million metric tons from 54 million tons in 2013; (2) the restoration of global potash prices to an average range of $300-$350 per ton on a CFR basis. These expectations were recently evidenced by Uralkali's recent deals in China and India, with potash sales volumes of 700,000 and 800,000 metrics tons, respectively, and prices on a CFR basis of $305 per ton and $322 per ton. However, Moody's notes that the upside potential for the current pricing is limited in 2014. The projections are also supported by Moody's expectations that Uralkali will deliver on its target to operate at near full capacity of what was around 13.3 million tons in 2013. Uralkali already operated of around 90% of its full capacity in the first quarter of 2014.

Moody's also notes that Uralkali will remain one of the lowest cost producers globally and expects that its unit cash cost (excluding sales and administrative expenses) will stay below $60 per ton in 2014, thus allowing it to maintain adjusted EBITDA margin of around 60%. The recent devaluation of the Russian rouble will support this expectation given that the majority of company's costs are in rouble.

In addition, Moody's expects that Uralkali will remain committed to deleveraging, will follow its financial policy of net debt/EBITDA of 1.0x-2.0x and its dividend policy of 50% of net profit, and will suspend its share repurchase until its performance metrics improve.

SOLID LIQUIDITY PROVIDES FURTHER SUPPORT

Moody's considers Uralkali's liquidity as solid, as of end Q4 2013. The company will likely generate positive free cash flow in the next 12 months of around $600 million, starting from Q1 2013. This, coupled with a cash balance of around $1 billion and undrawn committed credit facilities from Russian state banks of around $2 billion, will be sufficient to fully cover the company's approximate $1.5 billion debt-service requirements. The company liquidity was recently strengthened by signing a roughly $2billion committed facility with Sberbank available until end-2014.

HOWEVER THE RISKS REMAIN

Moody's notes that the uncertainty regarding the potash market recovery and pricing developing remain high. These uncertainties pose risks for the pace of recovery of the company's financial metrics to levels commensurate with the guidance for the Baa3 rating, which are reflected in the negative outlook for the rating. Additionally, the threat of potential future economic sanctions against Russia (Baa1 review for downgrade) from Western nations in response to the ongoing situation in Ukraine could negatively affect Uralkali's access to financial markets.

Headquartered in the Berezniki Perm region of Russia, OJSC Uralkali (Uralkali) was the largest potash production company (by capacity) globally as at year-end 2013. In 2012, Uralkali produced 9.9 million tons of potassium chloride and generated revenue and reported EBITDA of $3.3 billion and $1.3 billion, respectively. As of 31 December 2013, the company employed approximately 21,000 staff.

Sergei Grishunin
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service Limited, Russian Branch
7th floor, Four Winds Plaza
21 1st Tverskaya-Yamskaya St.
Moscow 125047
Russia
Telephone: +7 495 228 6060
Facsimile: +7 495 228 6091

David Staples
MD - Corporate Finance
Corporate Finance Group
Telephone: 00971 4237 9536

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Moody's: Uralkali financial metrics will improve in 2014 after weakening in 2013
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