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OCTOBER 29, 2014 RUSSIA > EQUITY RESEARCH > FERTILIZERS

Research Department

Copyright © 2003-2014. Gazprombank (Open Joint-Stock Company)

1

INITIATION OF COVERAGE

Mikhail Ganelin

[email protected]

+7 (495) 983 18 00 (ext. 5 45 83)

Russian fertilizers RUSSIA > EQUIT Y RESEARCH

The three princes: PhosAgro, Uralkali, Acron OIL & GAS

We initiate coverage of Russian fertilizer producers PhosAgro, Uralkali

and Acron. We believe the sector deserves closer attention, as the

operating and financial results of these companies are only weakly

correlated with domestic economic performance and depend on the

global fertilizers market, the fundamentals of which are firm and being

driven by population and food consumption growth. Russian producers

are highly competitive versus global rivals due to vertical integration and

low production costs, while the weaker ruble strengthens their

competitiveness further, boosting margins and cash flow.

Population, income and better diets drive fertilizer consumption

The world population totals more than 7 bln and is rising by 75 mln annually

(1.1% CAGR). This means that 1.1 bln people will be added by 2030, which

equals the population of India or three countries the size of the US. This is

being accompanied by rising income, especially in developing countries, which

has led to a shift in diets as people move away from staple foods, such as

cereals, in favor of higher-value products, including meat, vegetables and dairy.

Food consumption is rising but arable land is not, which is driving a search for

ways to increase crop yields. Proper use of fertilizers appears to be the only

solution to this problem.

About half of the world’s food production is a direct result of fertilizer application

Global fertilizer consumption CAGR stands at 2-3%, while China, India, Brazil

and the US determine global demand trends. Though the Russian market is

relatively small, it is important for domestic producers (accounting for 10-30% of

their sales), as it is expanding faster than the global average while being less

competitive. Nitrogen is the largest and steadiest market, accounting for 70% of

global fertilizer consumption, but large capacity additions (4% CAGR in

ammonia and urea) in China and MENA with access to cheaper gas/coal (the

main cost item) may reposition producers on the global cost curve, limiting price

increases. The phosphate and potash markets still look favorable in terms of the

supply/demand balance, while prices have been rising this year (up 15-20%

YTD). Strong demand for potash will lead to record volumes in 2014 and potash

producers enjoy solid margins. Falling prices for soft commodities, devaluation

of EM currencies and fragile global economic growth may weaken demand for

fertilizers in 2015. Expected new demand from India followed by state reforms

in the agriculture sector may mitigate these factors and support prices.

PhosAgro and Uralkali — OVERWEIGHT, Acron — NEUTRAL

PhosAgro is our top pick in the sector. The company looks undervalued vs.

peers taking into account the superior quality of its fertilizers and production

flexibility, and it also benefits the most from the weaker ruble. We also have an

OVERWEIGHT recommendation on Uralkali, as potash demand and prices are

gaining momentum and we think it may surprise on dividends as soon as its

debt burden achieves a comfortable level. Acron is the cheapest stock on

multiples and suggests solid dividends, but we are NEUTRAL due to uncertainty

regarding its future capex and low liquidity.

Key ratios

EV/EBITDA

2015E P/E

2015E P/FCF 2015E

DIV. YIELD 2014E

PhosAgro 5.1 6.9 23.0 5.4%

Uralkali 6.5 8.5 15.4 4.6%

Acron 3.6 4.2 neg. 7.9%

Relative share price performances

Source: Bloomberg, Gazprombank estimates

TICKER PHOR LI

Closing price, $ 10.8

Target price, $ 14.6

Upside 36%

Recommendation OVERWEIGHT

TICKER URKA LI



Upside 35%


TICKER AKRN RX

Closing price, RUB 1,282

Target price, RUB 1,568

Upside 22%

Recommendation NEUTRAL

0.0

50.0

100.0

150.0

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T 1

3

NO

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3

DE

C 1

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JAN

14

FE

B 1

4

MA

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AP

R 1

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MA

Y 1

4

JUN

14

JUL

14

AU

G 1

4

SE

P 1

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PHOR LI URKA LIAKRN LI MXRU Index


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CONTENTS

Investment case ..................................................................................................................................................... 3

How do the weak ruble, oil price and sanctions affect fertilizer producers?............................................................................................................................................................... 6

Main drivers in the fertilizer industry .......................................................................................................... 9

Fertilizers peer group valuation .................................................................................................................. 16

PhosAgro: touting quality ............................................................................................................................... 19

Valuation: TP $14.6 per GDR, Overweight ..................................................................................................................................21

PhosAgro business overview ..........................................................................................................................................................25

Asset base ..................................................................................................................................................................................................................... 25

Key markets and marketing strategy ............................................................................................................................................................... 27

Investment projects ................................................................................................................................................................................................. 28

Financial financials................................................................................................................................................................................................... 29

Shareholder structure............................................................................................................................................................................................. 31

Phosphate industry overview ..........................................................................................................................................................32

Uralkali: will it become a cash cow? ........................................................................................................... 42

Valuation: TP OF $22.1 per GDR, Overweight ...........................................................................................................................44

Uralkali business overview .............................................................................................................................................................47


Investment projects ................................................................................................................................................................................................. 49

Cash flow distribution ............................................................................................................................................................................................ 50

Financial forecasts .................................................................................................................................................................................................... 51

Shareholder structure............................................................................................................................................................................................. 53

Potash industry overview .................................................................................................................................................................54

Acron: moving toward deep integration .................................................................................................. 63

Valuation: TP $37.5 per share, Neutral ........................................................................................................................................65

Acron business overview: building vertical integration........................................................................................................68


Cash flow distribution ............................................................................................................................................................................................ 71

Financial forecasts .................................................................................................................................................................................................... 72

Shareholders structure .......................................................................................................................................................................................... 74

Nitrogen industry overview .............................................................................................................................................................75


3

INVESTMENT CASE

Global sector drivers. Population and income determine food consumption, while

income changes lead to a shift in diets. As incomes rise, diets move away from staple

foods, such as cereals, in favor of higher-value products, including meat, vegetables

and dairy. Food consumption is rising but arable land is not, which is driving a search for

ways to increase crop yields. Proper use of fertilizers appears to be the only solution to

this problem.

Phosphate market shows the best supply/demand balance. Global demand for

phosphates is strengthening (2% CAGR) due to more rational and efficient use of soil to

improve crop yields, while supply is tightening on the back of limited phosphate rock

reserves and lack of new investment projects that create a favorable environment for

long-term price increases. Phosphate prices have recovered to $450-500/tonne (DAP

Tampa) this year, driven by strong demand from Latin America and Asia. Optional

demand from India, the largest DAP importer, represents an upside risk for prices if the

new government reforms the local subsidy system in the coming years.

PhosAgro — our top pick in the sector. Recovery in phosphate prices and a weaker

ruble make PhosAgro the most appealing investment story among Russian fertilizer

producers. We resume coverage of the company with an OVERWEIGHT

recommendation and target price of $14.6 per GDR. The company has outperformed

the Russian equity market by a wide margin YTD but remains undervalued, trading at a

2015E EV/EBITDA of 5.1x, or 20-50% below its historical average and global peers. We

think that investors will appreciate the company‘s unique set of assets and high quality

of fertilizers, which are in great demand throughout the world. This allows the company

to operate at full capacity and set premium prices vs. benchmarks, while the company‘s

vertical integration is conducive to low production costs.

Potash market steadily recovering. Global potash demand will increase by a solid

11% in 2014, yielding record volumes of 59 mln tonnes driven by firm demand from the

US, Asia and Latin America on the back of low pricing and inventory levels. Long-term

CAGR is estimated at 3.0%, including an expected pick-up in volumes from India, which

currently consumes one third the amount of potash compared to China despite a

comparable population and structure of the agricultural sector. Potash spot prices have

increased 15-20% to $380-420/tonne YTD, but we think that further price growth may be

limited due to falling prices for soft commodities and unstable growth in the global

economy coupled with devaluation of EM currencies. Sector overcapacity risk seems

overblown to us, as new sizable additions may appear only after 2018 and these might

be absorbed with organic growth.

Uralkali: OVERWEIGHT, but more of a speculative investment. We initiate coverage

of Uralkali with an OVERWEIGHT recommendation and target price of $22.1 per GDR.

Our target price suggests upside close to that of PhosAgro, but we consider Uralkali as

more of a speculative investment given the polar opposite views among investors

regarding the long-term supply/demand fundamentals in the potash market. We assume

that Uralkali may substantially outperform PhosAgro if potash prices continue to grow,

which would translate into a dramatic increase in the company‘s earnings. In addition,

Uralkali shares are more liquid than those of PhosAgro. We think that next year will be

key, as it will clarify the prospects for the potash market, including expected additional

demand from India and producers‘ ability to manage prices. We expect Uralkali to

negotiate a new contract with China by year end at a price level 10% above that of the

previous contract, a move that would be taken positively by the market. Uralkali ranks

among the most profitable listed companies in Russia. Operating cash flow remains

impressively strong, easily covering the company‘s capex needs, debt repayment (net

debt/EBITDA should be 1.9x by end 2015) and dividend payments with a 50% payout

ratio, implying a 4.6-5.9% yield in 2014-15. We think the main stakeholders might be

interested in increasing the payout ratio to 70-100% going forward, which would


4

translate into a double-digit dividend yield as soon as the company‘s debt burden

declines below 2.0x, which will happen next year.

Nitrogen market: the largest, but access to cheaper gas drives the appearance of

new capacities. Of the three main fertilizer nutrients, nitrogen is the most important and

widely used. That said, the market is also very fragmented, with supply, demand and

prices depending on the particular region, gas prices (the main cost item) and type of

product (ammonia, urea, ammonia nitrate, complex fertilizers). Urea accounts for almost

half of global production and is the only truly global traded nitrogen fertilizer. The next

five years will be characterized by substantial urea capacity additions, which are

estimated at 4% CAGR according to Fertecon, mainly from low-cost producers in the

US, the Middle East and Africa. China continues to build up capacity and use coal, the

prices of which are at historical low levels. The problem is that global consumption of

nitrogen-based fertilizers, mainly urea, is estimated at 2.0-2.5% CAGR, meaning that

global capacity utilization will contract significantly from the current 80-85% to 70-75%

and even lower in China. That will keep urea prices at a relatively low level. We see

more value in complex fertilizers (NPK), the demand for which has strengthened.

Acron – the cheapest story with potential for good dividends, albeit relatively

illiquid. We initiate coverage of Acron – Russia‘s leading producer of nitrogen and

complex fertilizers, with a target price of $37.5 (RUB 1,568) per share and a NEUTRAL

recommendation, implying 22% upside. Acron trades at 2014E EV/EBITDA of 3.6x

compared to 6.2x for Yara and 5.1x for PhosAgro, which is a reasonable discount, as

Acron is the least liquid among Russia‘s fertilizer producers. The vagueness

surrounding Acron‘s large-scale potash project, if implemented, significantly impacts the

company‘s fundamental value and should restrain share price growth in the near term.

Upside risk to our financial forecasts, valuation and expected dividend yield includes

Acron‘s opportunity to monetize some of its non-core investments, including a stake in

Uralkali, Grupa Azoty, and potash permits in Canada.

Important short-term catalysts

PhosAgro. The company will hold an Investor Day on November 24 (Moscow) and

25 (London), during which the management will present its updated long-term

development program until 2020.

Uralkali. A new contract with China for 2015 is to be signed by year end. The

market expects the price level to rise 10% to $335/tonne compared with the

previous contract.

Acron. A decision on the development of Talitsky GOK will be considered in 2015

and will depend on potash prices. Any news regarding the sale of non-core assets

might be taken positively by the market.

Cash flow yields. All Russian fertilizer producers are at the high point in their

investment cycles, which translates into relatively low cash flow yields for the next 3-4

years. PhosAgro and Uralkali show 4.3% and 9.1% yields, respectively, for 2015, while

Acron has negative cash flow due to high capex. All companies have flexibility with

regard to capex management and can easily scale back their investment should

fundamentals in the global fertilizers market weaken.

Dividends. Acron might pay the highest dividends, with a minimum 8% yield for 2014.

There is upside risk to 10-11% if the company sells non-core assets, including a 1.13%

stake in Uralkali. PhosAgro‘s dividend policy assumes a 20-40% payout ratio from net

income. The company has already paid interim dividends for 1H14 (RUB 25) and we

forecast a 5.4% yield for 2014. Uralkali‘s payout ratio is 50% and we forecast a 5.9%

dividend yield for 2014, but we also think that Uralkali is able to become a dividend cash

cow within a few years,

Liquidity. Uralkali is Russia‘s most liquid fertilizer producer, with ADT of more than $30

mln. The stock is a constituent in many global indexes. PhosAgro is less liquid, with


5

ADT of $3 mln, and is not in any of the main indexes. Acron is the least liquid stock, with

ADT of below $1 mln, trading mainly on the Moscow Exchange.

Risks

Fertilizer prices are cyclical by nature, as they are influenced by growth in demand

and additions to capacity, which are often not in sync.

Fragile world economic growth, especially in Europe and emerging economies may

reduce demand for fertilizers, particularly phosphate and nitrogen-based.

Soft commodity prices have dropped following bumper crops over the past two

years. This has become a limiting factor for fertilizer price increases in the short

term, since farmers‘ cash income has been diminished alongside their ability to buy

fertilizers at a higher price.

The strong dollar and devaluation of EM currencies may reduce demand for

fertilizers.

Russian fertilizers will remain in a heavy investment cycle over the next three

years, as reflected by low free cash flow yields (up to 7%), while their debt

positions are denominated in dollars, reducing the effect from a weaker ruble.


6

HOW DO THE WEAK RUBLE, OIL PRICE AND SANCTIONS AFFECT FERTILIZER PRODUCERS?

We begin our report with three main questions that are important for investors not only

in Russian fertilizer producers, but also any listed Russian company:

How does the weak ruble affect Russian fertilizer producers‘ earnings and debt

position?

What is the impact of the Western-led sanctions?

How do falling commodity prices affect fertilizer producers?

How does the weak ruble affect Russian fertilizer producers’ earnings and debt position?

Russian fertilizer producers are among the main beneficiaries from ruble devaluation, as

70-90% of their revenues are generated from export sales denominated in dollars, while

costs are basically ruble-based (although some are inflated due to devaluation). This

means that dollar-denominated costs have dropped dramatically, boosting the

companies‘ dollar-based EBITDA. PhosAgro‘s dollar-based earnings gain the most from

the weak ruble. We calculate that each RUB 1 depreciation adds around 5-6% to the

company‘s dollar-based EBITDA ($45-55 mln). As a result, the company‘s EBITDA in

2H14 should be at least 17-20% higher HoH (depending on the exchange rate in 2H14).

Acron‘s EBITDA increases by 3.5-4.5% ($20-25 mln) with each RUB 1 depreciation of

the RUB/USD rate, while Uralkali‘s figure increases only 1.1-1.4% due to smaller costs

and abnormally high profitability.

Changes in dollar-based EBITDA for each RUB 1 change in the exchange rate

Companies revenue structure, 1H14

Source: Gazprombank estimates Source: Companies, Gazprombank estimates

Given that Russian fertilizer producers generate the majority of their revenues in dollars,

they also prefer to raise debt in dollars in order to eliminate currency risk. All of the

companies have a moderate debt burden and we see no refinancing risks. Moreover,

while the companies‘ dollar-based EBITDA increases, their net debt/EBITDA will decline

in 2015. The debt repayment schedules for all of the producers are well balanced. Acron

is the only exception given its rather high level of short-term debt, but the company is

able to repay all obligations thanks to its sizable cash pile.

5.5%

4.0%

1.3%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

PHOSAGRO ACRON URALKALI

31.0%

8.8% 18.7%

69.0%

91.2% 81.3%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

PHOSAGRO URALKALI ACRON

RUB REVENUE FX REVENUE


7

Russian fertilizer producers’ debt structure by currency, 1H14 Russian fertilizer producers’ debt structure by duration and debt burden, 1H14

Source: Companies, Gazprombank estimates Source: Companies, Gazprombank estimates

PhosAgro debt repayment schedule, $ mln Uralkali debt repayment schedule, $ mln

Source: Company Source: Company

Acron debt repayment schedule, $ mln Russian fertilizer producers’ debt structure by rate type, 1H14

Source: Company Source: Companies, Gazprombank estimates

98% 100%

80%

2%

11%

2% 5%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


USD EUR YUAN RUB

349 941 920

1,449

3,777

773

1.4

2.5

1.9

0

0.5

1

1.5

2

2.5

3

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000


ST. DEBT LT DEBT NET DEBT/2014E EBITDA

442

1,799

106

289 387

276

594

25

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

CASH 1H14

DEBT 1H14

4Q14 2015 2016 2017 2018 2019

810

4,718

374

798 890 655

1,062

65 65

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

CASH 1H14

DEBT 1H14

4Q14 2015 2016 2017 2018 2019 2020

567

1,693

177

986

252 161

10 14 14

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

CASH 1H14

DEBT 1H14

4Q14 2015 2016 2017 2018 2019 2020

66% 68%

91%

34% 32%

9%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


FLOATING DEBT RATE FIXED RATE


8

Russian fertilizer producers’ public debt COMPANY ISSUE COUPON RATE YTM MATURITY DATE CORP RATINGS

PhosAgro $500 mln 4.24% 5.3% 02/13/2018 BBB-/Baa3/BB+

Uralkali $650 mln 3.72% 4.9% 04/30/2018 BBB-/Baa3/BBB-

Acron RUB 7,500 mln (two issues) 10.25% 11.0% 05/26/2015 (put option) -/B1/B+

Source: Companies, Gazprombank estimates

What is the impact of the Western-led sanctions?

Sanctions against Russia do not affect domestic fertilizer producers. They occupy a

substantial share of the global market and continue supplying the world, including

Europe and the US, with high-quality fertilizers that are crucially important for national

agricultural sectors. Any sanctions against these companies could tighten the supply of

fertilizers in many countries, leading to higher prices. Global portfolio investors can

invest in the companies‘ debt and equity without any restriction and we do not see a risk

for these companies‘ refinancing operations. All are able to raise additional funding for

their capex going forward and are able to purchase foreign equipment.

How do falling commodity prices affect fertilizer producers?

The commodity super-cycle, which lasted over ten years, has come to an end. Oil prices

started to decline recently, while prices of other commodities, such as coal, iron ore and

aluminum, dropped earlier. This global trend affects prices of fertilizers as well, but

some have already experienced a dramatic decline in 2013, especially potash and

phosphates. We are now seeing prices gradually recover and we forecast moderate

growth in the long run, although we do not expect them to return to historical records of

2008 and 2012 in the foreseeable future. We see more downside risk for nitrogen-based

fertilizers in the coming years, as their pricing depends on gas and coal prices, which in

turn correlate with oil prices. Most nitrogen-based fertilizer producers that linked their

gas contracts with the oil price will be able to revise them downward substantially.

Lower gas prices will improve their cost position and make them more flexible in pricing.

This has a negative impact on the margins of Russian nitrogen producers, including

Acron, which will suffer if nitrogen prices decline. The main negative impact on fertilizer

demand and pricing comes from prices for soft commodities, which have dropped

sharply on the back of record harvests for two consecutive years. Later in this report we

analyze price performance and the outlook for the nitrogen, phosphate and potash

markets as well as their dependence on commodity prices.


9

Commodity price corrections from highest level over the past five years


MAIN DRIVERS IN THE FERTILIZER INDUSTRY

Demand for fertilizers is determined by the outlook for crop production, which is related

to food consumption, as well as the need for animal feed, natural fibres and biofuels.

Fertilizer demand and prices are determined by short and long-term factors:

Short-term factors include the performance of agricultural commodity prices, which

in turn depend on annual harvest volumes. The higher the price for agricultural

goods, the higher the cash income for farmers, who may then buy greater volumes

of fertilizers.

In the long run, the population and incomes determine food consumption. Changes

in income lead to shifts in diet. As incomes increase, people move away from

staple foods, such as cereals, in favor of higher-value products, including meat,

vegetables and dairy. Food consumption is on the rise, but arable land is not,

which is driving a search for ways to increase crop yields. Proper use of fertilizers

appears to be the only solution to this problem. Also, the supply/demand balance in

fertilizers is determined by the level of capacity utilization and the implementation

of new investment projects.

World population growing at 1% p.a…

The world population currently stands at more than 7 bln and is rising by about 75 mln

per year, or 1.1% p.a. This means that almost 1.1 bln people are expected to be added

by 2030, which is almost equal to the population of India or three countries the size of

the US.

…with most of the shift occurring in urban areas in developing countries

In 2007, the global share of the urban population exceeded the size of the rural

population. Most of the growth is occurring in developing countries, particularly in

urban areas, where 53% of the global population currently lives. According to the

FAO, the urban population‘s CAGR stands at 1.8% and should rise to 60% of the

world population by 2030, compared with stagnating growth rates in rural areas. This

is an important shift, as urban consumers tend to eat more and their diets are better

balanced. For example, in China, the urban population consumes nearly 75% more

meat than in rural areas.

-45% -49%

-55%

-39% -41%

-52%

-59%

-41%

-32.9%

-46.9% -46.2%

-15.5%

-40.6%

-32.1%

-39.9%

-29.4%

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

OIL (BRENT) IRON ORE NICKEL ZINC ALUMINUM DAP FOB TAMPA

POTASH (VANCOUVER)

UREA (]YUZHNI)

MAXIMUM DROP FROM THE MAXIMUM PRICE OVER LAST 5 YEARS

DROP AS OF TODAY FROM THE PEAK LEVEL OVER PAST 5 YEARS


10

World rural and urban population growth, bln Agricultural population, bln

Source: FAO Source: FAO

Economic growth led by large developing countries

Many countries with rapidly rising populations are also leaders in global economic

growth. The economies of highly populated China and India will continue expanding at

2015E-30E CAGR of more than 5.0% compared with the global average of 3.5%. As

economies grow and individual incomes rise, people in emerging nations will choose to

improve their diets. Ongoing economic growth is expected to continue to increase the

affordability of and desire for more and better food.

Nominal GDP CAGR, 2015-30 Real GDP per capita growth

Source: IMF Source: IMF

Change in diet is the most important factor for growth in food consumption

Many people in developing countries are adopting better diets as their incomes improve.

Brazil, China and Indonesia have experienced significant increases in daily intake of

fruits, vegetables and protein from meat, eggs and fish as people move away from

starch-based diets. The shift to better diets is just beginning in other parts of the

developing world, including India, where fruits and vegetables are becoming a bigger

component of the daily diet and protein consumption has slowly started to increase. This

dietary change – coupled with population growth – is expected to be a key driver of

global food demand. Levels of demand for grain and oilseeds have been growing for

many years. Oilseed demand has nearly tripled, while grain demand is up 50% over the

past two decades. Even during periods of economic crisis, demand for grain and

oilseeds has been resilient.

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1990

1993

1996

1999

2002

2005

2008

2011

2014

2017

2020

2023

2026

2029

2032

2035

2038

RURAL URBAN

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

WORLD ASIA AFRICA EUROPE AMERICAS OCEANIA

1990 2010 2030

6.78% 6.68%

4.98%

4% 3.69%

3.48%

2.57%

1.87%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

INDIA CHINA SEA BRAZIL RUSSIA WORLD US EUROPE

0

50

100

150

200

250

300

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

INDIA CHINA SEA BRAZIL RUSSIA WORLD US EUROPE


11

Food production volumes growth, index Food supply quantity, g/capita/day

Source: FAO, Gazprombank estimates Source: FAO, Gazprombank estimates

Rising population strains the availability of farmland

Less arable land per person is available for agriculture as populations rise and urban

areas expand. With a finite land base and an expanding population, this decades-long

trend is expected to continue. The strain on arable land is most pronounced in

developing countries, where less than 0.2 ha per person are available for crop and

animal production. These are the countries with the greatest need to raise food

production, which highlights the importance of increasing long-term crop productivity.

Water availability an increasing concern

Water availability is a growing concern in many countries. Over the past four decades,

renewable water resources per capita have declined by nearly 50% in the developing

world, straining water supply even as demand for agriculture and industrial purposes

has risen. The competition for water in developing countries is unlikely to slow as

populations rise and economies grow. We believe that agriculture will have to use its

share of water efficiently, and fertilizers – especially potash, which helps plants retain

water – are expected to play an important role in enabling this efficient use.

Agriculture area per capita is falling, but yields per ha are improving

Renewable internal freshwater resources per capita


Half of food production attributable to fertilizer use

According to PotashCorp, about half of world food production is a direct result of

fertilizer application. Irrigation, seed varieties and technology, cultivation practices, weed

and pest control, and planting density contribute the rest. However, fertilizers do far

0

50

100

150

200

250

300

350

400

450

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

WHEAT CEREALS FRUITS

OILCROPS VEGETABLES POULTRY

410

186

147

214

21 17

403

179 148

372

40 24

0

50

100

150

200

250

300

350

400

450

CEREALS WHEAT RICE VEGETABLES POULTRY EGGS

1990 2011

0.0

0.2

0.4

0.6

0.8

1.0

1.2

0

20

40

60

80

100

120

140

160

180

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

CEREALS YIELDS

VEGETABLES YIELDS

AGRICULTURAL AREA PER CAPITA, HA

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

1982 1987 1992 1997 2002 2007 2012


12

more than boost yields; they also strengthen plants and speed growth and maturity.

Potash, in particular, improves the physical quality and taste of many crops, and

phosphate-based fertilizers are essential for root development, increase crop yields and

improve quality, while plants mature more rapidly.

Rising crop yields are driven by more intensive use of fertilizers…

The FAO projects that approximately 90% of the increase in global crop production by

2050 will come from improving yields and increasing cropping intensity. The greatest

opportunities are expected to occur in developing countries, generally in overpopulated

India and Africa, where yields currently lag far behind the global average.

Cereal yields, t/ha Fertilizer consumption, kg per ha of arable land


… and more balanced use of fertilizers

Given that there is a disparity between crop yields in different regions, the use of

balanced fertilizer application is able to contribute significant yield growth. Since all

three nutrients (N)itrogen, (P)hosphates and Potash (K) provide unique benefits to

plants and work in synergy with each other, no nutrient can replace another. Obtaining a

proper balance among N, P and K is key to ensuring that a plant achieves its full

potential. Many developing regions that currently under-apply potash, such as India and

Africa, could make significant improvements in yields for many of their crops by

correcting this imbalance.

Fertilizer production, mln tonnes

Source: FAO

0

10

20

30

40

50

60

70

80

US

A

CH

INA

BR

AZ

IL

SE

A

EU

RO

PE

WO

RLD

IND

IA

RU

SS

IA

OC

EA

NIA

AF

RIC

A

1980 2000 2013

0

100

200

300

400

500

600

700

CH

INA

SE

A

BR

AZ

IL

IND

IA

EU

WO

RLD

US

AF

RIC

A

RU

SS

IA

2003 2012

86.5 89.7 89.2 90.7 95.8 100.6 108.1 115.7 113.4 113.4 119.7

33.9 35.8 39.7 40.1 40.7 40.2 35.3 37.8 44.0 43.8

46.4 24.1 25.2 23.4 27.5 27.4 31.5 27.5

22.0 27.1 30.7 28.5

0

50

100

150

200

250

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

NITROGEN PHOSPHATE POTASH


13

Fertilizer consumption ratio

Source: FAO, Gazprombank estimates

Agricultural commodity prices are volatile, but long-term trend is upward

Fertilizer costs are critical for farmers, comprising 30-40% of input costs for many key

crops. Thus there is a strong correlation between prices for agricultural commodities

and fertilizers, which we estimate at 0.7-0.9 depending on the type of agricultural

commodity (wheat, rice, soybeans) and fertilizer. Сrop prices have been under pressure

for the past few years due to abnormally high harvests in different regions on the back

of favorable weather conditions. This has reduced farmers‘ cash income, thereby

weakening demand for fertilizers, and may prevent growth in fertilizer prices next year.

However, some experts believe that by contrast, abnormally high crops may boost

demand for fertilizers in the coming years, as too many nutrients were extracted from

the soil and thus more should be returned to the soil by farmers. Overall, agriculture

commodity prices have historically grown steadily at well above the average inflation

rate, driven by accelerated growth in demand.

Bloomberg agricultural commodity index High correlation between crop and fertilizer prices, index

Source: FAO Source: Gazprombank estimates

25% 32%

66% 65% 65% 66%

39%

63% 56% 59% 60%

67% 60% 62% 64% 63% 67% 67%

35% 33%

23% 24% 25% 26%

19%

22%

21% 20% 19%

16% 23% 24%

25% 27% 24% 26% 40% 35%

12% 10% 10% 8%

42%

15% 23% 21% 21% 17% 17% 15% 11% 10% 9% 8%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2002 2012 2002 2012 2002 2012 2002 2012 2002 2012 2002 2012 2002 2012 2002 2012 2002 2012

BRAZIL CHINA INDIA RUSSIA US EU WORLD AFRICA SEA

N P2O5 K2O

0

50

100

150

200

250

300

350

400

450

500

SE

P 0

4

MA

R 0

5

SE

P 0

5

MA

R 0

6

SE

P 0

6

MA

R 0

7

SE

P 0

7

MA

R 0

8

SE

P 0

8

MA

R 0

9

SE

P 0

9

MA

R 1

0

SE

P 1

0

MA

R 1

1

SE

P 1

1

MA

R 1

2

SE

P 1

2

MA

R 1

3

SE

P 1

3

MA

R 1

4

SE

P 1

4

BLOOMBERG AGRICULTURE COMMODITY INDEX AVERAGE

0

50

100

150

200

250

DE

C 0

9

MA

R 1

0

JUN

10

SE

P 1

0

DE

C 1

0

MA

R 1

1

JUN

11

SE

P 1

1

DE

C 1

1

MA

R 1

2

JUN

12

SE

P 1

2

DE

C 1

2

MA

R 1

3

JUN

13

SE

P 1

3

DE

C 1

3

MA

R 1

4

JUN

14

SE

P 1

4

BLOOMBERG AGRICULTURE INDEX POTASH DAP UREA


14

Effect of N and P on corn yield Average US corn production costs breakdown

Source: FAO Source: Yara

Average Brazilian soybean production costs breakdown Average Brazilian corn production costs breakdown

Source: Gazprombank Source: Gazprombank

200

BU/A

160

120

80

40

20 40 60 80 100 120 140 160 180 200 LB/A

WITH P AND N WITH N ONLY

24%

15%

7% 22%

24%

4% 4% FERTILIZERS

SEED

OTHER

LAND

POWER AND MACHINERY

LABOR

CHEMICALS

13%

7%

30%

7%

15%

28% SEED

MACHINERY

FERTILIZERS

CHEMICALS

LAND

OTHER

8%

6%

18%

17% 20%

30% SEED

MACHINERY

FERTILIZERS

CHEMICALS

LAND

OTHER


15

Global crop production and fertilizer consumption forecasts

Incr

ease

in c

rop

prod

uctio

n, m

ln to

nnes

Fer

tiliz

er c

onsu

mpt

ion,

m

ln to

nnes

of n

utrie

nts,

201

0

Source PhosAgro

920

1,178

500

1,001

598 573

283 353

0

200

400

600

800

1,000

1,200

1,400

1990-2010 2010-2030E 1990-2010 2010-2030E 1990-2010 2010-2030E 1990-2010 2010-2030E

FRUITS, VEGETABLES, TUBERS GRAIN SUGAR CROPS OILSEEDS

55%

19%

26%

N K2O P2O5

28 MLN T 44%

24%

32%

N K2O P2O5

81 MLN T

67%

10%

23%

N K2O P2O5

18 MLN T 51%

25%

24%

N K2O P2O5

6 MLN T


16

FERTILIZERS PEER GROUP VALUATION

COMPANY TICKER COUNTRY MCAP, $ MLN

EV, $ MLN

EV/EBITDA P/E P/BV P/OCF EBITDA MARGIN

2014E

ROE 12M PERFOR-

MANCE

DIV. YIELD

2014E 2015E 2014E 2015E 2014E 2014E 2014E 2014E

GLOBAL FERTILIZER PRODUCERS

PotashCorp POT US Canada 28,164 32,204 10.9 9.9 18.4 16.2 3.2 11.2 39% 18.3% -6% 4.1%

Mosaic MOS US US 16,245 16,923 8.0 6.8 16.8 13.2 1.5 8.9 21% 9.8% -8% 2.3%

Saudi Arabian Fertilizer

SAFCO AB

Saudi Arabia

14,215 13,975 15.8 14.3 16.6 15.8 7.3 17.7 74% 39.7% -1% 6.2%

Yara YAR NO Norway 12,633 13,781 6.2 6.2 10.6 11.1 1.5 5.7 14% 13.8% 2% 3.7%

Agrium AGU US US 13,339 16,899 9.3 7.4 16.4 11.8 1.9 5.9 11% 14.9% 1% 3.2%

CF Indusrties CF US US 12,935 15,696 7.0 7.0 11.9 12.5 2.9 10.2 61% 24.4% 2% 1.9%

Saudi Arabian Mining

MAADEN AB

Saudi Arabia

9,578 20,257 23.3 15.9 29.8 15.5 1.8 21.0 28% 7.0% 4% 0.0%

ICL ICL IT Israel 8,794 11,476 9.0 7.5 12.3 9.9 2.8 11.1 17% 24.4% -7% 7.2%

SQM SQM/B

CI Chili 6,828 7,495 10.7 9.8 21.2 17.8 2.5 10.2 36% 21.3% -15% 3.6%

K+S SDF GR Germany 5,012 5,259 5.0 5.0 12.4 12.8 1.1 5.4 22% 11.4% -12% 1.6%

Qinghai Salt Lake

000792 CH

China 4,864 10,207 21.2 18.6 25.9 23.3 1.8 n/m n/m n/m 20% 0.5%

Arab Potash APOT

JR Jordan 2,583 2,315 11.3 10.0 17.6 15.3 2.3 18.4 27% 13.3% -13% 4.5%

Grupa Azoty ATT PW Poland 1,753 2,100 7.1 6.1 18.3 12.8 1.0 9.6 12% n/m -22% 0.9%

Intrepid Potash IPI US US 1,090 1,205 11.9 9.6 80.8 45.6 1.1 14.7 21% 3.4% -2% 0.0%

Average 11.2 9.6 22.1 16.7 2.3 11.5 29% 17% -4% 2.8%

Median 10.0 8.5 17.2 14.3 1.8 10.2 22% 14% -4% 2.8%

BLOOMBERG CONSENSUS ESTIMATES

Uralkali URKA LI Russia 9,782 13,705 9.9 8.8 14.7 11.5 1.8 13.5 46.5% 11.4% -6% 4.1%

PhosAgro PHOR LI Russia 4,176 5,497 6.7 5.8 10.1 8.1 3.0 9.7 32% 18.0% 2% 3.8%

Acron AKRN

RX Russia 1,362 2,834 6.3 5.8 4.2 3.7 0.8 neg. 26% 12.5% 9% 6.9%

Average 7.6 6.8 9.7 7.8 1.9 11.6 34.8% 14.0% 2% 5%

Median 6.7 5.8 10.1 8.1 1.8 11.6 32.0% 12.5% 2% 4%

GAZPROMBANK ESTIMATES

Uralkali URKA LI Russia 8,452 12,361 7.9 6.5 10.8 8.5 1.4 15.4 46.5% 13% -6% 4.6%

PhosAgro PHOR LI Russia 4,176 5,423 5.4 5.1 7.4 6.9 2.3 24.3 32% 31% 2% 5.4%

Acron AKRN

RX Russia 1,362 2,255 4.1 3.6 4.9 4.2 0.6 neg. 26% 12% 9% 8.0%



17

Share price performance Share price performance

Source: Bloomberg, Gazprombank estimates Source: Bloomberg

0

20

40

60

80

100

120

140

160

OC

T 1

3

NO

V 1

3

DE

C 1

3

JAN

14

FE

B 1

4

MA

R 1

4

AP

R 1

4

MA

Y 1

4

JUN

14

JUL

14

AU

G 1

4

SE

P 1

4

PHOR LI URKA LI AKRN LI MXRU INDEX

0

4%

1%

-4%

1%

-5%

2%

-3%

-7%

-2%

-3%

-7%

-5%

-7%

-2%

0

20%

9%

2%

2%

2%

1%

-1%

-2%

-6%

-6%

-7%

-8%

-12%

-13%

-0.2 -0.15 -0.1 -0.05 0 0.05 0.1 0.15 0.2 0.25

QINGHAI SALT LAKE

AKRON

CF INDUSRTIES

PHOSAGRO

YARA

AGRIUM

SAUDI ARABIAN FERTILIZER

INTREPID POTASH

URALKALI

POTASHCORP

ICL

MOSAIC

K+S

ARAB POTASH

12M 3M


18

OC

TO

BE

R

27,

20

14

PhosAgro RUSSIA > EQUIT Y RESEARCH

The phosphate prince: touting quality FERTILIZER S

Recovery in phosphate prices and a weak ruble make PhosAgro the most

appealing investment story among Russian fertilizer producers. We resume

coverage with an OVERWEIGHT recommendation and target price of $14.6

per GDR. The company has outperformed Russian equities by a wide margin

YTD, but it remains undervalued, trading at a 2015E EV/EBITDA of 5.1x, which

is 20-50% below its historical average and global peers. We think that

investors will appreciate the company’s unique set of assets and premium

fertilizers, which are in high demand globally. This allows the company to

operate at full capacity and set premium prices vs. benchmarks, while its

vertical integration is conducive to low production costs. PhosAgro’s

Investor Day in November 24-25 and expected solid 3Q14 IFRS results could

act as short-term triggers for the stock.

Phosphate prices have recovered to $450-500/tonne (DAP Tampa) this year,

driven by strong demand from Latin America and Asia

Global phosphates demand is strengthening (2% CAGR) due to more rational and

efficient use of soil to improve crop yields, while supply is tightening amid limited

phosphate rock reserves and new investment projects that create a favorable

environment for long-term price increases. Optional demand from India, the

largest DAP importer, represents an upside risk for prices if the new government

reforms the local subsidy system in the coming years. Prices for soft commodities

have dropped after bumper crops two years in a row. This has become a limiting

factor for fertilizer price increases in the short term, since farmers‘ cash income

has been diminished alongside their ability to buy fertilizers at a higher price,

though this should not impair the favorable long-term outlook.

PhosAgro supplies premium phosphate rock and finest fertilizers

A vertically integrated business model makes PhosAgro the most profitable

company among global peers, with stable cash flow generation even during

market attenuation. The company exports over 70% of its production volumes

and thus shows only weak correlation with the performance of the Russian

economy, while each RUB 1 change in the exchange rate adds around 5% to

the company‘s EBITDA. PhosAgro is embarking on a new investment cycle with

construction of ammonia and urea plants by 2017, which will require over $1 bln

capex in total. We do not think this will influence dividend payments, which we

forecast at a 40% payout ratio (5.4% yield in ‗14E), although the debt burden

may increase. The cash flow yield amounts to just 4% during the investment

cycle, but should jump above 20% as soon as the company completes it,

assuming that no others arise.

Valuation, catalysts and risks

Our target price of $14.6 per GDR is derived from a simple average of target

6.5x EV/EBITDA valuation and a DCF approach with a 13.2% WACC and 3%

terminal growth rate. Short-term catalysts include the publication of 3Q14 IFRS

results and the Investor Day, during which the company will present its long-

term strategic development program and further cost-cutting measures, both of

which should be viewed positively by investors. Risks include a correction in

phosphate prices due to falling soft commodities, rising global competition

particularly for market share in Latin America, a rebound in the ruble exchange

rate and capex overruns.

Source: Bloomberg

Source: Bloomberg

PhosAgro share price performance vs. MSCI Russia Index, past year

PhosAgro key data

2013 2014E 2015E 2016E

Revenue, $ mln 3,286 3,131 3,227 3,344

EBITDA, $ mln 752 1,002 1,059 1,140

EBITDA margin 23% 32% 33% 34%

Net income, $ mln 261 565 602 642

Net margin 8% 18% 19% 19%

EV/EBITDA 7.3 5.4 5.1 4.7

P/E 16.0 7.4 6.9 6.5

P/BV 2.6 2.3 2.0 1.7

P/FCF 55.9 24.3 23.3 17.7

Div. yield 3.2% 5.4% 5.8% 6.2%


TICKER PHOR LI



Upside 36%


MCap, $ mln 4,176

Net debt, $ mln 1,246

EV, $ mln 5,423

52-week high, $ 13.1

52-week low, $ 9.3

SELECTED STOCK DATA

60%

70%

80%

90%

100%

110%

120%

130%O

CT

13

NO

V 1

3

DE

C 1

3

JAN

14

FE

B 1

4

MA

R 1

4

AP

R 1

4

MA

Y 1

4

JUN

14

JUL

14

AU

G 1

4

SE

P 1

4

OC

T 1

4

PHOSAGRO MSCI RUSSIA


19

COMPANY DESCRIPTION

PhosAgro is one of the world‘s leading vertically integrated producers of phosphate-

based fertilizers. Its core line of business is the production of phosphate-based

fertilisers, high-grade phosphate rock (with a content of P2O5>35.7%), as well as feed

phosphates, nitrogen fertilizers and ammonia. Structurally PhosAgro is a holding

company whose major assets include Apatit and Balakovo Mineral Fertilizers (BMF),

PhosAgro-Cherepovets (established via the merger of Ammophos and Cherepovetsky

Azot in 2013), Agro-Cherepovets, and Metachem. The company‘s overall fertilizer

capacity accounts to 6.4 mln tonnes, ranking it the third largest globally after Mosaic and

OCP (excluding Chinese producers). It is self-sufficient in key feedstock (100% in

phosphate rock, up to 90% in ammonia and 40% in electricity), which makes it a low-

cost producer compared to global rivals.

Key financials Shareholder structure

PHOSAGRO

Bloomberg ticker PHOR LI

Current price, $ 10.8


Upside, % 36%


Number of GDRs, mln 389

Market capitalization, $ mln 4,176

Net debt (1H14) 1,233

EV, $ mln 5,423

Free float 20.6%

60.1%

4.8%

14.5%

20.6%

GURYEV'S FAMILY IGOR ANTOSHIN

VLADIMIR LITVINENKO FREE FLOAT

KEY INDICATORS 2012 2013 2014E 2015E 2016E

Brent price, $/bbl 106.0 106.0 104.0 100.0 100.0

RUB/USD, average 31.09 31.82 38.00 40.00 40.00

CPI (Russia) % 6.0% 5.3% 8.0% 6.0% 5.5%

FINANCIAL RATIOS

P/E 5.3 16.0 7.4 6.9 6.5

EV/EBITDA 4.5 7.3 5.4 5.1 4.7

EV/Sales 1.5 1.7 1.7 1.7 1.6

P/BV 3.5 2.6 2.3 2.0 1.7

P/CF 10.1 55.9 24.3 23.3 17.7

Div. yield 8.1% 3.2% 5.4% 5.8% 6.2%

Payout ratio 43% 52% 40% 40% 40%

PER SHARE DATA, $

EPS 2.03 0.67 1.45 1.55 1.65

DPS 0.87 0.35 0.58 0.62 0.66

MARGINS 2012 2013 2014E 2015E 2016E

EBITDA margin, % 32.9% 22.9% 32.0% 32.8% 34.1%

EBIT margin, % 26.8% 15.4% 25.0% 25.1% 25.6%

Pre-tax margin, % 29.6% 9.6% 23.5% 23.3% 24.0%

Net margin, % 23.3% 7.9% 18.0% 18.7% 19.2%

Capex/depreciation 2.05 2.22 2.48 2.48 2.20

Capex/sales 0.13 0.17 0.17 0.19 0.19

Capex/fixed assets 0.20 0.23 0.24 0.24 0.22

ROA 21.2% 6.8% 15.9% 15.5% 15.1%

ROE 49.5% 15.2% 31.4% 28.9% 26.7%

Net debt/Equity 0.54 0.78 0.69 0.60 0.50

Net debt/EBITDA 0.77 1.78 1.24 1.17 1.06


20

KEY OPERATING DATA, KT

2012 2013 2014E 2015E 2016E

Phosphate rock output 7,904 7,713 7,500 7,500 7,500

Phosphate-based fertilizers capacity

4,580 4,580 4,680 4,680 4,680

Phosphate-based fertilizers sales

4,326 4,620 4,710 4,770 4,780

inc. DAP+MAP+NPK+NPS

4,023 4,221 4,273 4,303 4,313

Nitrogen-based fertilizers capacity

1,098 1,310 1,310 1,310 1,310

Urea production 703 903 903 903 903

Implied phospahte rock prices, $/t

294 225 172 180 189

Implied DAP prices, $/t 535 451 470 480 500

KEY OPERATING DATA, KT

2012 2013 2014E 2015E 2016E

Implied NPK prices, $/t 449 375 380 390 400

Implied urea prices, $/t 376 327 323 320 330

Number of employees 23,358 22,331 19,105 16,253 16,000

GROWTH

Revenues 13.0% -15.9% 4.1% 6.6% 3.5%

EBITDA -3.0% -31.2% 5.6% 9.0% 4.9%

Net income -36.7% -58.3% 38.7% 12.8% 5.0%

Capex 9.4% 4.2% 8.1% 22.2% 36.4%

INCOME STATEMENT, $ MLN

2012 2013 2014E 2015E 2016E

Accounting standards IFRS IFRS IFRS IFRS IFRS

Revenues 3,389 3,286 3,131 3,227 3,344

COGS -1,936 -2,141 -1,757 -1,777 -1,837

Gross income 1,454 1,145 1,374 1,450 1,507

SG&A -462 -527 -505 -549 -557

Other income (costs) -85 -111 -86 -90 -93

EBIT 907 507 783 811 857

Depreciation 210 245 219 248 283

EBITDA 1,117 752 1,002 1,059 1,140

Net finance costs 20 -36 -49 -58 -54

Other costs 78 -156 0 0 0

PBT 1,005 316 734 752 803

Taxes -216 -55 -141 -150 -161

Net income 789 261 565 602 642

BALANCE SHEET, $ MLN

Cash and equivalents 311 273 136 213 262

Accounts receivable 382 350 339 345 358

Inventories 397 376 313 313 323

Other current assets 64 71 61 58 57

Total current assets 1,154 1,070 848 929 1,000

PP&E 2,141 2,320 2,298 2,585 2,868

Investments 310 259 220 212 207

Other non-current assets 117 208 176 169 164

Total assets 3,721 3,857 3,542 3,895 4,239

ST debt 709 403 343 330 322

Accounts payable 398 286 239 238 247

Other current liabilities 22 16 13 13 13

Total current liabilities 1,129 706 595 581 581


LT debt 465 1,208 1,039 1,125 1,146

Other non-current liabilities

136 131 111 107 104

Total non-current liabilities

601 1,339 1,150 1,232 1,251

Total shareholders equity

1,593 1,720 1,797 2,082 2,407

Minority interest 399 92 0 0 0

Total liabilities and equity

3,721 3,857 3,542 3,895 4,239

CASH FLOW STATEMENT, $ MLN

Net income before tax 1,005 316 734 752 803

Depreciation 210 245 219 248 283

Change in working capital

-40.3 24.9 -39.5 -21.5 -25.6

Others -355 -38 -200 -184 -202

Operating cash flow 820 548 713 795 858

Capex -430 -559 -548 -631 -638

Other -26 -73 0 0 0

Investing cash flow -405 -487 -548 -631 -638

Dividends paid to shareholders

-383 -229 -112 -215 -229

Other -262 118 12 125 49

Financing cash flow -645 -112 -100 -90 -180

Effect of FX 13 -201 4 8

Change in cash -230 -38 -137 78 48

DEBT AND NET DEBT, $ MLN

Total debt 1,174 1,612 1,382 1,455 1,468

Net debt 863 1,339 1,246 1,242 1,207


21

VALUATION: TP $14.6 PER GDR, OVERWEIGHT

We resume coverage of PhosAgro with a target price of $14.6 per GDR (RUB 1,800 per

local share) and an OVERWEIGHT recommendation. We estimate the company‘s

equity value based on a simple average of target EV/EBITDA valuation (6.5x) and a

DCF approach (using 13.2% WACC and a 3.0% terminal growth rate).

The company‘s share price has advanced 10% YTD, outperforming the MSCI Russia

Index (-28%) by a wide margin on the back of rising global demand and recovery in

phosphate-based fertilizer prices, as well as ruble devaluation. However, PhosAgro

remains undervalued, in our view, trading at a 2015E EV/EBITDA of 5.1x, implying a 17-

20% discount to its historical average of 6.0-6.5x. It also trades at a 25% discount to the

US company Mosaic (6.8x EBITDA for 2015x) – its closest peer and the world‘s largest

listed producer of phosphates (and the second-largest after Morocco‘s state-owned

OCP). We also think that the market underestimates the effect from ruble devaluation

on the company‘s earnings visibility – while we forecast EBITDA to grow 60% YoY to

RUB 38 bln in 2014, the Bloomberg consensus remains at RUB 35 bln. A short-term

catalyst, which will be released in the next few months, includes an Investor Day

(November 24-25 in Moscow and London), at which the company will unveil its long-

term strategic development program and seasonally strong 3Q14 IFRS results.

PhosAgro’s fundamental value drivers include the following issues:

Global phosphate demand is strengthening, driven by more rational and efficient

use of soil to improve crop yields, while supply is tightening on the back of limited

phosphate rock reserves and new investment projects creating a favorable

environment for long-term price increases.

The company supplies premium phosphate rock and phosphate fertilizers, which

are in high demand from customers throughout the world. As a result, the company

has reached full production capacity utilization compared to the 80% global

average. The company also charges higher prices compared to market

benchmarks, while its vertical integration leads to the lowest production costs

among global producers. That business model allows the company to be the most

profitable among global peers and generate stable cash flow even during a soft

market.

The company exports over 80% of its production volumes and thus shows only

weak correlation with Russia‘s economic performance, while each RUB 1

depreciation of the exchange rate adds around $50 mln (5%) to the company‘s

EBITDA. The ruble devaluated by an average RUB 6 during 2013-14, contributing

$300 mln to the company‘s projected $1 bln EBITDA for 2014.

PhosAgro generates robust operating cash flow ($713 mln in 2014E), allowing for

higher capex to build new ammonia (760 kt) and urea (500 kt) plants by 2017 and

dividend payments, which we expect to yield 5.4% for 2014E. Gross debt ($1.7 bln)

is denominated in dollars, diminishing the effect from devaluation, but the debt

burden will also sink to 1.2x by end 2015.

Relative valuation

We use a target EV/EBITDA of 6.5x to calculate the company‘s EV times $1,059 mln

2015E EBITDA and subtract $1.25 bln projected net debt for 2014. We derive an

equity value of $5.6 bln, implying a 12M target price of $14.5 per GDR.

We resume coverage of PhosAgro with an

OVERWEIGHT recommendation and target

price of $14.6 per GDR (RUB 1,800 per local

share)

PhosAgro remains undervalued, trading at a

2015E EV/EBITDA of 5.1x, implying a 17-

20% discount to its historical average of 6.0-

6.5x. It also trades at a 25% discount to US

Mosaic (6.8x EBITDA for 2015x)


22

PhosAgro target multiple valuation

IMPLIED TARGET EV/EBITDA 6.0 6.5 7.0

EBITDA 2015E, $ mln 1,059 1,059 1,059

EV, $ mln 6,354 6,883 7,412

Less net debt 2014E, $ mln -1,246 -1,246 -1,246

MCap. $ mln 5,107 5,637 6,166

Number of GDRs, mln 389 389 389

Target price, $ per GDR 13.1 14.5 15.9

Source: Gazprombank estimates

PhosAgro 12m forward EV/EBITDA vs. Mosaic


0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

JAN

12

MA

R 1

2

MA

Y 1

2

JUL

12

SE

P 1

2

NO

V 1

2

JAN

13

MA

R 1

3

MA

Y 1

3

JUL

13

SE

P 1

3

NO

V 1

3

JAN

14

MA

R 1

4

MA

Y 1

4

JUL

14

SE

P 1

4

PHOR LI MOS US MSCI RUSSIA


23

DCF valuation

Our DCF valuation returns a target price of $14.8 per GDR.

2015E 2016E 2017E 2018E 2019E 2020E

EBIT 811 857 935 995 1,017 1,042

Less taxes -150 -161 -178 -191 -198 -207

Plus depreciation 248 283 314 326 329 314

Less capex -631 -638 -463 -386 -190 -314

Less change in WC -22.1 -26.2 -45.3 -14.0 -16.2 -10.2

FCF 255.3 315.4 562.4 730.6 940.9 824.8

Discount rate 1.00 0.88 0.78 0.69 0.61 0.54

Discounted FCF 255.3 278.7 439.0 503.9 573.3 444.0

Sum DFCF 2,494

Terminal value 4,488

EV 6,982

Less net debt (2014E) -1,246


Number of GDRs, mln 389

Target price, $ per GDR 14.8

Upside 23.0%


Risk-free rate 5.7%

Equity-risk premium 10.0%

Liquidity premium 1.5%

Beta 90.0%

Cost of equity 16.2%

Cost of debt 7.7%

Tax rate 20.0%

Cost of debt (net of tax) 6.2%

Share of equity 70.0%

Share of debt 30.0%

WACC 13.2%

Terminal growth rate 3.0%


PhosAgro swot analysis

STRENGTHS OPPORTUNITIES

Supplies high-grade phosphate rock and premium phosphate fertilizers, which are in high demand from customers throughout the world.

Global phosphate demand is on the rise, pushing prices higher.

Self-sufficiency in key feedstock makes it a low-cost producer. Additional demand from India is an upside risk.

Exports over 80% of its production volumes and benefits from ruble devaluation.

Construction of ammonia and urea plants by 2017-18 will bolster the company's financials.

Low logistics costs. Optimization of operating costs will improve margins.

Stable cash flow generation and dividend distribution.

WEAKNESSES THREATS

Heavy investment program ahead should lift the company's debt burden. Falling agricultural commodity prices may prevent fertilizers from recovering.

Gross debt is denominated in dollars, limiting the effect from ruble devaluation. Rising competition with US producers in the large Brazilian market.

Source: Gazprombank


24

Target price sensitivity

DAP FOB TAMPA, $/TONNE

440 450 460 470 480 490 500

Avera

ge

RU

B/U

SD

rate

35 7.8 8.7 9.6 10.4 11.3 12.2 13.0

36 9.3 10.1 11.0 11.9 12.7 13.6 14.5

37 10.6 11.5 12.4 13.2 14.1 14.9 15.8

38 11.9 12.8 13.6 14.8 15.4 16.2 17.1

39 13.1 14.0 14.9 15.7 16.6 17.5 18.3

40 14.3 15.2 16.0 16.9 17.8 18.6 19.5

41 15.4 16.3 17.1 18.0 18.9 19.7 20.6



25

PHOSAGRO BUSINESS OVERVIEW: VERTICAL INTEGRATION, SUPERIOR QUALITY AND PRODUCTION FLEXIBILITY

Asset base

PhosAgro is a leading vertically integrated producer of high-grade phosphate rock (with

P2O5 content in excess of 35.7%), phosphate-based and complex fertilizers (MAP, DAP,

NPK, NPS), as well as feed phosphates (MCP) and nitrogen fertilizers (urea and

ammonia nitrate). Over the past five years, PhosAgro doubled and diversified its range

of downstream products to over two dozen items. Structurally, PhosAgro is a holding

company whose major assets include Apatit and Balakovo Mineral Fertilizers (BMF),

PhosAgro-Cherepovets (established via the merger of Ammophos and Cherepovets

Azot in 2013), Agro-Cherepovets, and Metachem. PhosAgro‘s overall fertilizer capacity

amounts to 6.4 mln tonnes, ranking third globally excluding Chinese producers after

Mosaic (US) and OCP (Morocco). The company is self-sufficient in key feedstock (100%

in phosphate rock, up to 90% in ammonia and 40% in electricity), which makes it a low-

cost producer.

PhosAgro group structure… …and asset locations


Apatit

Located in Murmansk region on the Kola Peninsula, Apatit is the largest producer of

high-grade phosphate rock globally with a P2O5 content above 35.7%, which is

characterized by a very low level of radioactivity, hazardous metals and cadmium. Its

superior quality decreases the cost of fertilizer production and enhances its value,

which, in turn, improves crop quality and increases yields. The company also produces

nepheline concentrate, which is a by-product used in alumina production.

Apatit is developing four apatite-nepheline igneous ore mines (two underground and

two open pits) at the Khibinsky deposit with a combined mining capacity of 27 mln tpa

CJSC PHOSAGRO AG (MANAGEMENT

COMPANY) (100%)

APATITE-

NEPHELINE ORE

MINING AND

BENEFICIATION

ETC.

PRODUCTION OF

PHOSPHATE-

BASED

FERTILISERS AND

FEED PHOSPHATE

PRODUCTION OF

AMMONIA AND

NITROGEN-BASED

FERTILISERS

OTHER

OPERATIONS

OJSC “PHOSAGRO”(HOLDING COMPANY)

OJSC APATIT

(100%)

OJSC NIUIF

(RESEARCH AND

DEVELOPMENT)

(94.4%)

PHOSAGRO-

TRANS LLC

(TRANSPORTATION)

(100%)

AMMOPHOS

ASSETS

CHEREPOVETSKY

AZOT ASSETS

PHOSAGRO-REGION

LLC (STORAGE AND

DISTRIBUTION)

(99.99%)

BALAKOVO

MINERAL

FERTILISERS LLC

(100%)

PC AGRO-

CHEREPOVETS LLC

(100%)

MINING AND

CHEMICAL

ENGINEERING LLC

(100%)

METACHEM LLC

(100%)

OJSC PHOSAGRO-CHEREPOVETS

(100%)

MOSCOW

SAINT-PETERSBURG

MURMANSK

NOVOROSSIYSK

DISTRIBUTION HUBS

EXPORT PORTS

PROCESSING OPERATORS

MINING OPERATORS

BALTICPORTS

BALAKOVO MINERAL FERTILIZERS (BMF)

METACHEM

APATIT

PHOSAGRO CHEREPOVETS

AGRO-CHEREPOVETS

Leading vertically integrated producer of

high-grade phosphate rock, phosphate-based

and complex fertilizers

Apatit is the largest producer of high-grade

phosphate rock globally with P2O5 content

above 35.7%, which is characterized by a

very low level of radioactivity, hazardous

metals and cadmium


26

and 2.05 bln tonnes of measured and indicated resources according to JORC

standards. The company further produces phosphate rock and nepheline concentrate

at two beneficiation plants located nearby. In 2014, Apatit will produce around 7.5 mln

tonnes of phosphate rock and 1 mln tonnes of nepheline concentrate, on our

estimates. About 60% of the phosphate rock is then turned into phosphate-based

fertilizers and feed phosphates at the subsequent division, which consists of PhosAgro-

Cherepovets and Balakovo Mineral Fertilizers (BMF), while another 40% (2.7 mln

tonnes in 2014) is exported, mainly to Europe, which places high demands on the

quality of fertilizers that will be used in its agricultural sector later. In recent years,

foreign sales of phosphate rock declined at Apatit after Acron launched its own

phosphate rock mine Oleniy Ruchey in the neighborhood and stopped buying it from

Apatit (around 750 kt per annum).

Apatit phosphate rock production and sales, mln tonnes Global phosphate rock production, 2013, mln tonnes

Source: Company, Gazprombank estimates Source: Company

PhosAgro-Cherepovets and Balakovo Mineral Fertilizers (BMF)

The unique competitive advantage of PhosAgro-Cherepovets lies in its technological

ability to operate a flexible MAP/DAP/NPK/NPS production facility with total capacity of

3.0 mln tonnes, of which 1.8 mln tonnes are fully flexible and 2.0 mln tonnes are

MAP/DAP flexible. It requires just two working shifts to switch production depending on

the level of demand for a particular product, leading to maximization of the company‘s

revenues. The product range also includes liquid fertilizers (APP) and aluminum fluoride

(AlF3), which is supplied for aluminum production. In addition, PhosAgro produces

ammonia (capacity of 1.1 mln tonnes), all of which is consumed domestically to produce

its urea derivatives (980 kt capacity) and AN-based fertilizers (450 kt).

BMF is located in the town of Balakovo in Saratov region. It operates 1.2 mln tonnes of

flexible MAP/DAP/NPS production capacity and 0.24 mln tonnes of production capacity

for feed phosphates (MCP). Its own power plant with 49 MW capacity covers more than

70% of BMF‘s electricity needs.

8,120 7,720 7,904 7,713 7,500 7,500

3,712 3,153

3,542 2,920 2,733 2,658

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

2010 2011 2012 2013 2014E 2015E

PRODUCTION EXTERNAL SALES CAPACITY

26.4

19

8.3 7.7 7.7 5.3

3.1

0

5

10

15

20

25

30

OC

P (

MO

RO

CC

O)

MO

SA

IC (

US

)

VA

LE (

BR

AZ

IL)

PH

OS

AG

RO

(R

US

SIA

)

PO

TA

SH

CO

RP

(C

AN

AD

A)

JPM

C (

JOR

DA

N)

MA

AD

EN

(S

AU

DI A

RA

BIA

)

The unique competitive advantage of

PhosAgro-Cherepovets lies in its

technological ability to operate a flexible

MAP/DAP/NPK/NPS production facility


27

PhosAgro phosphate-based fertilizer sales, mln tonnes PhosAgro nitrogen-based fertilizer sales, mln tonnes

Source: Company, Gazprombank estimates Source: Company, Gazprombank estimates

Metakhim

In 2013, PhosAgro acquired 100% of Metakhim, which is a producer of sodium

triphospate (STPP, 130 kt capacity), which is generally used as a detergent. In 2014,

the company also launched a plant for production of PKS (fertilizers with high sulphur

content with total capacity of 100 kt. The company organically complements and

expands PhosAgro‘s product range, and also benefits from good logistics, located in the

town of Volkhov just 100 km from St. Petersburg trade seaport, which is one of the main

export gateways for Russian fertilizers.

Key markets and marketing strategy: “best netback” policy

PhosAgro sells its products in more than 100 countries, but its primary markets are

Russia, Latin America (Brazil) and Western Europe. Its export sales are driven by a

―best netback‖ policy: the company chooses export destinations depending on the ―best

netback‖ (price minus transportation costs) at any given time, which allows the company

to sustain higher margins compared to peers.

PhosAgro has no distribution network outside Russia and exports its products mostly

through large Swiss traders Ameropa and Mekatrade, which together account for more

than 60% of its sales volumes. The lack of an international distribution network removes

the necessity for its management to maintain high inventories and provides cost-saving

advantages during down cycles. On the other hand, the lack of a proprietary distribution

network outside Russia affects the company‘s transportation costs and depresses

margins.

The domestic market is no less attractive and important for PhosAgro, as fertilizer

consumption in Russia is expanding rapidly, at a CAGR of 8% compared to the 3-4%

global average. The level of competition is lower in Russia, because there are no global

rivals on the domestic market due to costly logistics and the relatively small size of the

market compared to such giant marketplaces as China, India and Brazil. Finally, most of

PhosAgro‘s sales of finished fertilizers are made directly to end customers through the

group‘s widespread domestic distribution platform comprising distribution hubs located

in major agricultural regions of the country. These factors allow PhosAgro to set

domestic prices with a premium to global benchmarks earning additional margins.

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

2010 2011 2012 2013 2014E 2016E 2018E 2020E

DAP MAP NPK NPS APP+MCP+SOP PKS

0.0

0.5

1.0

1.5

2.0

2.5

2010 2011 2012 2013 2014E 2016E 2018E 2020E

UREA NP AN AMMONIA

Export sales are driven by a ―best netback‖

policy: the company chooses export

destinations depending on the ―best netback‖

(price minus transportation costs) at any

given time, which allows the company to

sustain higher margins compared to peers.

The domestic market is no less attractive and

important for PhosAgro, as fertilizer

consumption in Russia is expanding rapidly,

at a CAGR of 8% compared to 3-4% global

average.


28

PhosAgro fertilizer and feed phosphate sales by region

Source: Company

PhosAgro investment projects: share of nitrogen-based fertilizers to increase

PhosAgro is developing a new investment program, the details of which should be

outlined at the Investor Day in November. Preliminarily, we estimate the size at around

RUB 70 bln ($1.7 bln) until 2017, including maintenance capex. The company‘s target is

to keep capex below 50% of EBITDA. The key projects are as follows:

By 2017, PhosAgro will complete the construction of a new ammonia plant with

760 kt of production capacity. The facility will make PhosAgro 100% self-sufficient

in ammonia, whereas currently the company purchases around 350 kt of ammonia

outside. Capex amounts to $800 mln ($220 already invested) and will be

completed by 2017. Depending on the ammonia price by this time ($430-

550/tonne), the project‘s IRR is estimated at 13-20% with a payback period of 11-

14 years. The plant will be constructed on the PhosAgro-Cherepovets site.

Construction of a urea plant with total capacity of 500 kt will be completed by

2017as well and will make it possible to utilize the ammonia surplus that will arise

after the ammonia plant is commissioned.

Construction of ore shaft #2 at Apatit‘s Kirovsky underground mine will improve

operating efficiency and increase the share of lower-cost underground mining over

open pits, the cost of production of which is twice as high. The construction will be

completed by 2015. Cash flow distribution looks solid.

PhosAgro generates robust operating cash flow that will increase 30% to $713 mln

in 2014 and 11.5% to $795 mln in 2015. During the high investment cycle of 2015-

17, over 70% of the company‘s operating cash flow will be spent on capex, with the

rest used for dividend payments that should yield 5-6% at a 40% payout ratio. We

estimate the cash flow yield at 4% during the investment cycle, but it will jump to

above 20% as soon as the company completes construction of urea and ammonia

plants and if no other projects appear thereafter.

As of end 1H14, PhosAgro‘s net debt position stood at $1.3 bln, denominated in dollars,

implying net debt/2014E EBITDA of 1.3x. The debt includes $500 mln in eurobonds with

a 4.2% coupon and maturity in 2018. We think the company can afford to increase

gross debt in the coming years to complete all capex and maintain stable dividend

payments.

18% 18% 19% 23%

8% 8% 12%

13% 18%

14% 9%

23% 35% 29%

26%

17% 12%

13% 19%

7% 4% 10% 11%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2010 2011 2012 2013

RUSSIA CIS ASIA INDIA SOUTH AMERICA EUROPE AFRICA NORTH AMERICA

PhosAgro is developing a new investment

program, the details of which should be

presented at the Investor Day in November.

Preliminarily, it amounts to RUB 70 bln ($1.7

bln).

During the high investment cycle of 2015-17,

over 70% of the company‘s operating cash

flow will be spent on capex, with the rest

used for dividend payments that should yield

5-6% at a 40% payout ratio.


29

PhosAgro EBITDA vs capex, $ mln PhosAgro debt burden, $ mln


PhosAgro financials: the only pure phosphate producer

Revenue drivers. Phosphate-based products account for 90% of consolidated

revenues, which makes PhosAgro the only pure exposure to the global phosphate

market, the long-term development prospects of which look more appealing

compared to the potash and nitrogen markets in terms of supply/demand balance.

PhosAgro essentially operates at full capacity, implying limited scope for further

production growth until 2017, when new ammonia and urea plants are to be

launched and making fertilizer prices the main drivers of the company‘s top-line

performance. We forecast revenues for 2014 at $3.1 bln (-4.7% YoY) based on an

average export DAP price of $470/tonne and 3% increase to $3.2 bln in 2015

based on an export DAP price of $480/tonne.

Cost drivers. Firstly, the company exports over 80% of its production volumes and

thus shows only weak correlation with Russian economic performance, while each

RUB 1 depreciation of the local currency adds around $50 mln (5%) to the

company‘s EBITDA. The ruble depreciated by an average RUB 6 during 2013-14,

contributing $300 mln to the company‘s EBITDA of $1 bln in 2014. Secondly,

PhosAgro is implementing a cost-cutting program that envisages a cost reduction

of RUB 3 bln in 2014-15 (RUB 1.5 bln per annum) owing to increased outsourcing

of non-core services, re-engineering of business processes and consolidation of

service department functions on a group-wide level. These incentives will push

down the headcount from 20,000 in 2012 to 16,500 in 2014, thus improving labor

efficiency. We forecast EBITDA to grow 33% and 5.7% in 2014 and 2015 to $1,002

mln and $1,059 mln, compared with the current Bloomberg forecasts of $847 mln

and $961 mln, respectively. The 2014 EBITDA margin will surge by an impressive

9 pps to 32% YoY, while financial results for 3Q14 are expected to be particularly

strong.

0

200

400

600

800

1,000

1,200

1,400

2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018E

EBITDA CAPEX

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

0

200

400

600

800

1,000

1,200

1,400

1,600

2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018E

NET DEBT NET DEBT/EBITDA

Phosphate-based products account for 90%

of consolidated revenues, which makes

PhosAgro the only pure exposure to the

global phosphate market.

The company exports over 80% of its

production volumes and thus shows only

weak correlation with Russian economic

performance, while each RUB 1 depreciation

of the local currency adds around $50 mln

(5%) to the company‘s EBITDA.


30

PhosAgro sales breakdown by product, 1H14 PhosAgro financials vs average DAP FOB Tampa performance

Source: Company Source: Company, Gazprombank estimates

Average gross income breakdown by segment for 2011-13 Average gross margin in phosphate segment for 2011-13


PhosAgro 2014E EBITDA sensitivity, $ mln

DAP FOB TAMPA, $/TONNE

440 450 460 470 480 490 500

Avera

ge

RU

B/U

SD

rate

35 704 746 788 830 872 913 955

36 765 807 848 890 932 974 1,016

37 822 864 906 947 989 1,031 1,073

38 876 918 960 1,002 1,043 1,085 1,127

39 928 969 1,011 1,053 1,095 1,137 1,178

40 976 1,018 1,060 1,102 1,144 1,185 1,227

41 1,023 1,065 1,106 1,148 1,190 1,232 1,274


86%

14%

PHOSPHATE FERTILIZERS NITROGEN FERTILIZERS

2,535

3,425 3,389 3,286 3,131 3,227

674

1,205 1,117

752 1,002 1,059

0

100

200

300

400

500

600

700

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2010 2011 2012 2013 2014E 2015E

REVENUES, $ MLN EBITDA, $ MLN AVERAGE DAP FOB TAMPA, $/TONNE

86%

48% 35%

21% 13%

14%

54%

27%

52%

47%

18%

60%

18%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

PHOSAGRO MOSAIC ICL AGRIUM POTASH CORP

PHOSPHATES NITROGEN POTASH OTHER

39%

31%

25%

22%

18%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

PHOSAGRO ICL AGRIUM* POTASHCORP MOSAIC


31

PhosAgro costs breakdown, 2Q14

Source: Company, Gazprombank estimates

Shareholder structure and corporate governance

PhosAgro is currently controlled by the family of Andrei Guryev (60.1% stake). A 14.5%

stake belongs to BoD chairman Vladimir Litvinenko and 4.8% is held by BoD member

Igor Antoshin. The company held an IPO in July 2011 at $14 per GDR and then an SPO

in April 2013, again at $14 per GDR. In addition, 20.3% is now in free float, with a listing

on the LSE (18.35% of the total) and Moscow Exchange (2%).

The company‘s dividend policy targets 20-40% of IFRS net income.

The BoD consists of eight members, including well-known Jim Rogers, an independent

director who recently joined the board. He was a co-founder of Quantum Fund together

with Gorges Soros and is one of the most experienced investors on commodity markets.

He is a minority investor in PhosAgro, which may be regarded as an additional

argument in favor of the company‘s investment case.

PhosAgro shareholder structure


36%

15% 11%

11%

6%

5%

5%

4%

6% 1%

MATERIALS AND SERVICES

WAGES AND SOCIAL CONTRIBUTIONS

DEPRECIATION

NATURAL GAS

POTASH

ELECTRICITY

AMMONIA

FUEL

SULFUR AND SULFURIC ACID

OTHER

60.1%

4.8%

14.5%

20.6%

GURYEV'S FAMILY

IGOR ANTOSHIN

VLADIMIR LITVINENKO

FREE FLOAT


32

PHOSPHATE INDUSTRY OVERVIEW: FIRM FUNDAMENTALS

Phosphate-based fertilizers are essential for rapid root development, increase crop

yields and improve quality: plants mature more rapidly and are more resistant to lodging

and drought. Unlike potash, phosphate-based fertilizers cannot be applied in their

natural form directly to soil, as plants cannot easily absorb them, thus requiring further

downstream processing into finished fertilizers. Most phosphate fertilizers are

manufactured from phosphate rock, which is mined from underground ore deposits.

Diammonium phosphate (DAP) and monammonium phosphate (MAP) are the primary

phosphate fertilizers used in the world today. The DAP/MAP production process

consists of three main steps: mining of phosphate rock, conversion into intermediary

phosphoric acid reacting it with sulphuric acid and lastly transformation of the

phosphoric acid with addition of ammonia to DAP/MAP. Phosphoric acid is also used for

production of feed and industrial phosphates.

Phosphate-based fertilizers production diagram

Source: Potash Corp:

Global capacity and production

Phosphate rock reserves are geographically concentrated. Morocco is by far the largest

player, holding around 85% of the world‘s total phosphate reserves. Other large

sedimentary phosphate deposits are located in the US (Florida and North Carolina),

North Africa (Tunisia), the Middle East (Jordan) and China. Conversely, phosphate

reserves in Western Europe are negligible. Igneous deposits are exploited in Russia

(Kola Peninsula), South Africa (Phalaborwa), Canada, Brazil and Finland. According to

IFDC, Russia‘s deposits account for almost half of the world‘s igneous reserves, which

deliver high-grade phosphate rock with a low level of radioactivity and hazardous

metals.

PHOSPHATE

ORE FROM THE

MINE

SCREEN,

WASH, FLOAT&

DEWATER

CALCINATION

PURCHASED

SULFUR

PHOSPHATE

ROCK

PHOSPHORIC

ACID PLANTS

SULFURIC

ACID

SULFURIC

ACID PLANTS

PHOSPHORIC

ACID

P2O5

SUPER-

PHOSPHORIC

ACID PLANT

ANIMAL FEED

PLANTS

PURIFIED

PHOSPHORIC

ACID PLANTS

SOLID

FERTILIZER

PLANTS

PRIMARY PRODUCT PRIMARY USE

Phosphate Rock

To phosphate fertilizer

producers; for direct application

on acidic soil

MGA

(54% P2O5)

To fertilizer producers;

to dealers that custom

mix fertilizers

LIQUID FERTILIZERS

Superphosphoric Acid

(70% P2O5)

To dealers that add ammonia

and custom mix fertilizers

Poly-N

(1 1-37-0, 10-34-0)

To dealers that custom

mix fertilizers

FEED AND INDUSTRIAL

Dical, Monocal

and DFP

To producers of poultry, cattle

and swine feed

supplements

Technical-Grade and

Food-Grade Purified

Phosphoric Acid

To producers of food and

beverage products, metal

treatment, detergents and

electronics

SOLID FERTILIZERS

D&P and MAP

To dealers for direct

application or custom

mix fertilizers

Addammonia

AddammoniaCogenerated

Electricity&Steam

Phosphate-based fertilizers are essential for

rapid root development, increase crop yields

and improve quality: plants mature more

rapidly and are more resistant to lodging and

drought.


33

Global phosphate reserves Global phospate rock production by country, mln tonnes, 2013

Source: company Source: USGC

With access to large reserves, Morocco is the largest exporter of phosphate rock and

phosphoric acid through state-owned OCP, which produced around 28 mln tonnes of

P2O5 in 2013. At the same time, the company has insufficient capability to produce

DAP/MAP and complex fertilizers, and thus ranks second in production after Mosaic.

World DAP/MAP imports, average 2011-2012

Source: Company

Global phosphate rock production, 2013, mln tonnes (excluding China)

Source: Company

75%

6% 2% 2% 3% 3% 2%

7%

MOROCCO CHINA US JORDAN ALGERIA SYRIA RUSSIA OTHER

97

32 28

13 7 7 6 4 3

27

0

20

40

60

80

100

120

CH

INA

US

MO

RO

CC

O

RU

SS

IA

JOR

DA

N

BR

AZ

IL

EG

YP

T

TU

NIS

IA

SA

UD

I AR

AB

IA

OT

HE

R

32%

25% 6%

10%

5%

5%

2%

8%

4% 2% 1% INDIA

LATIN AMERICA

NORTH AMERICA

EUROPE

AFRICA

OTHER SOUTH ASIA

MIDDLE EAST

EAST ASIA

OCEANIA

FSU

OTHER

11.9

6.4

3.6 2.9 2.4 1.9

1.1

0

2

4

6

8

10

12

14

MO

SA

IC

OC

P

PH

OS

AG

RO

MA

AD

EN

EU

RO

CH

EM

PO

TA

SH

CO

RP

VA

LE


34

Globally, 70% of phosphate rock is consumed by integrated producers of finished

fertilizers like PhosAgro. There is an ongoing trend toward vertical integration within the

phosphate fertilizer industry as rock producers look to gain more value through

downstream production and assume the cost advantage of secured inputs. This has

resulted in a clear trend toward trade in downstream fertilizer products and away from

upstream rock. Another 30% of global phosphate producers are non-integrated, the

majority of which are located in India, and rely on imports or domestic purchases for

their supply of phosphate rock, sulphur and ammonia. Given that prices for these items

have increased, the production costs for non-integrated producers are well above those

of integrated producers. The price of solid phosphates has historically closely followed

the costs of non-integrated producers. Their higher costs provide a significant margin

opportunity for producers with their own supply of phosphate rock.

The average cost conceals large variation in costs between the high and low ends of the

cost curve, from a minimum DAP of $200/tonne (Saudi Arabia, Maaden) to over

$500/tonne for non-integrated Indian producers. In addition, transportation costs to end-

user markets can vary significantly (for example, the rate for the Baltic — South America

route is $30-35/tonne). Due to the cyclical nature of the purchased raw materials (i.e.

ammonia, sulphur and phosphate rock) there can be a great degree of variability in

costs at a particular plant from year to year.

Estimated DAP production cash cost curve, $/tonne FOB (April 2014)

Source: Company, CRU, Argus-FMB

DAP cash operating costs breakdown by major components

Source: Mosaic

600

500

400

300

200

100

0

PH

OS

AG

RO

INTEGRATED INTO

PHOSPHATE ROCK

NOT INTEGRATEDINTEGRATED

INTO

PHOSPHATE

ROCK AND

AMMONIA

CH

INA

(LA

RG

E P

RO

DU

CE

RS

)

US

A

(IN

TE

GR

AT

ED

PR

OD

UC

ER

S)

CH

INA

(NO

N-I

NT

EG

RA

TE

D P

RO

DU

CE

RS

)

IND

IA (

PH

OS

PH

AT

E R

OC

K)

IND

IA (

PH

OS

PH

OR

IC A

CID

)

CAPACITY, MLN T

DAP FOB TAMPA: $450/T

0 5 10 15 20 25 30 35 40 45 50 55

31%

18%

30%

21%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1

PHOSPHORIC ROCK SULPHURIC ACID AMMONIA CONVERSION COSTS

There is an ongoing trend toward vertical

integration within the phosphate fertilizer

industry as rock producers look to gain more

value through downstream production and

assume the cost advantage of secured

inputs.


35

Global phosphoric acid capacity currently totals 57 mln tonnes of P2O5 content and

another 6 mln tonnes of net capacity should be added by 2018 to 62 mln tonnes (2.6%

CAGR) including the launch of flagship projects initiated by OCP in Morocco and

Maaden in Saudi Arabia. Global capacity will grow in line with demand expansion with

an implied average utilization rate of about 85% of capacity from 2014 through 2018.

This is in line with the average since 2000, but projected rates do not exhibit as much

volatility as during the last decade, when it moved from 60% to 90%.

Phosphoric acid capacity and production, mln tonnes (P2O5 content)

Phosphoric acid capacity expansion, mln tonnes (P2O5 content)

Source: Mosaic Source: Company

Global phosphate fertilizers capacity will increase from a current 90 mln tonnes in

2014 to 100 mln tonnes in 2020, implying 2% CAGR or 2 mln tonnes of annual net

additions that will generally result from the production of MAP/DAP. The main

production growth will come from building new plants under Saudi Arabia‘s Maaden II

project and OCP‘s Jorf Lasfar in 2015-18, which will have a very low cost of

production. The majority of these volumes will be directed to the Indian and Asian

markets and may squeeze costly US producers (Mosaic), which, in turn, will increase

supplies to the Latin America market.

Demand

The maintenance of healthy growth rates of DAP consumption depends heavily on

continued growth of the global economy and particularly the economies of the

developing world, as increased incomes there have a more significant impact on food

demand. China, India and Brazil are the main consumers of phosphate-based fertilizers,

which account for 57% of global consumption of phosphate-based fertilizers, although

almost none (except China) has sufficient capacities for the production of phosphate-

based fertilizers or necessary reserves of raw materials, and thus they are heavily

dependent on imports.

According to industry experts from Fertecon, CRU and IFA, global consumption of

phosphate fertilizers will expand in line with production at about a 2% growth rate, which

lies between long-term growth in nitrogen (1.5%) and potash (3%). However, there is an

upside risk to this forecast if demand from India (which is the largest DAP importer in

the world) exceeds expectations. Aside from any delay in expansion projects, which

often happens in the sector, the announcement of plant closures may also lead to a

tightening of phosphate markets, driving prices up.

China (nearly 30% of global phosphate demand) is largely self-sufficient in

phosphate fertilizer production given that the country has the world‘s second-

largest reserves of phosphates, although Chinese reserves are low-grade with a

large amount of impurities. The Chinese fertilizer industry is heavily regulated, with

50%

55%

60%

65%

70%

75%

80%

85%

90%

95%

100%

0

20

40

60

80

100

120

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

CAPACITY PRODUCTION ACID OPERATING RATE

57 62

- 4,6 +0,9 +1,5 +0,5

+6,7 6.7

0

10

20

30

40

50

60

70

80

TO

TA

L C

AP

AC

ITY

CLO

SU

RE

S 2

013-

18 U

S A

ND

C

HIN

A

OC

P F

IRM

201

4-18

MA

AD

EN

II

OT

HE

R F

IRM

PR

OJE

CT

S

PR

OB

AB

LE/S

PE

CU

LAT

IVE

P

RO

JEC

TS

TO

TA

L E

XP

EC

TE

D

CA

PA

CIT

Y B

Y 2

018

Global capacity will grow in line with demand

expansion with an implied average utilization

rate of about 85% of capacity from 2014

through 2018.

The maintenance of healthy growth rates of

DAP consumption depends heavily on the

continued growth of the world economy and

particularly the economies of the developing

world, as increased incomes there have a

more significant impact on food demand.


36

the government imposing export duties on fertilizers in order to preserve domestic

supply and curb inflation. So far, the Chinese government has followed a policy of

capping exports of phosphate-based and nitrogen-based fertilizers in order to

ensure sufficient availability of the product for domestic consumers. The

government has imposed a 15%+ CNY 40 ($6.5)/tonne export tariff on DAP/MAP

during the peak seasons of January-June and November-December. The export

duty falls to just CNY40/tonne during the off season between July and October.

During this period, cheap low-quality Chinese DAP/MAP reaches the global

market, which can temporarily push down prices. An important shift in Chinese

agricultural policy has occurred this year, with the country abandoning its policy of

self-sufficiency in grains, meaning that grain imports will start to increase in the

coming years, which may provide an additional boost to fertilizer demand.

Phosphoric acid capacity and production, mln tonnes (P2O5 content)

China DAP/MAP/TSP production

Source: PhosAgro Source: Mosaic

India. India is the world‘s largest importer of DAP/MAP (32% of global imports) due

to its large agricultural sector, although the country lacks its own resources. It also

imports phosphate rock and acid, mainly from Morocco, Saudi Arabia and the US,

to produce fertilizers locally. As a non-integrated, Indian DAP producer, it suffers

from the highest cost of production, which is currently estimated above $500/tonne.

Until recently, the Indian government has provided preferential subsidies to local

high-cost DAP producers in order to guarantee their profitability relative to DAP

importers. The introduction of a Nutrient Based Subsidy (NBS) in 2010 reduced

subsidies and timely increased minimum retail prices (MRP) for phosphate-based

and potash fertilizers, leading to a drop in consumption by Indian farmers.

Moreover, the subsidy system is unbalanced, encouraging the consumption of

cheaper N fertilizers (urea) at the expense of P and K fertilizers, while rupee

devaluation has led to substantial contraction of DAP imports in recent years. As a

result, soil health is being destroyed and crop quality in India is deteriorating. Such

a situation cannot last forever and the consumption balance will be restored soon,

as the nutrient imbalance is widely acknowledged. The new Indian government

elected in 2014 has already cited reform of the agricultural sector as one of its

priorities.

29%

19%

10%

9%

33% CHINA

INDIA

US

BRAZIL

OTHER

0

10

20

30

40

50

60

70

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

REST OF THE WORLD CHINA


37

India DAP Shipments, mln tonnes Farmer prices, INR/tonne

Source: Mosaic Source: Mosaic

Pricing

DAP

Cyclical price behavior is one of the important aspects of phosphate pricing. These

cycles result because the growth in demand and the capacity additions are out of sync.

This is due to many factors, including farm product pricing (influenced by weather,

government intervention) and developments in the upstream phosphate rock and

phosphoric acid markets. The DAP Tampa FOB price has historically served as the

benchmark for international DAP sales since the US is the world‘s largest exporter.

Prices for other products tend to follow the level of DAP pricing.

DAP FOB Tampa has recovered this year, trading in the $450-500/tonne range driven

by strong demand across the board, generally from Latin America and Asia, as well as

rising costs for phosphate rock and ammonia. By comparison, the lowest price level of

$350/tonne was touched in 2H13, after Uralkali left BPC in July 2013. In contrast, the

highest price over the past five years of $660/tonne was set in 2012, fueled by strong

demand and economic growth. We think that phosphate prices are in a long-term

uptrend because global demand continues to strengthen and capacity utilization rates

remain stable. Expected additional demand from India will be the most important factor

for further price determination. In the short term, the performance of agricultural

commodities could be a limiting factor for fertilizer price increases. Due to bumper crops

in recent years, soft commodity prices have dropped dramatically, reducing farmers‘

cash income. That means that fertilizer prices should go lower in order for farmers to

buy the same volumes of fertilizers for next year. Another view claims that after two

years of extremely good crops, the quantity of nutrients in the soil substantially declines

and thus more inputs are needed to keep crop yields at existing levels and this is an

important factor that will drive fertilizer demand and contribute further to price stability.

0

2

4

6

8

10

12

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

30,000

25,000

20,000

15,000

10,000

5,000

0

2008

2009

2010

2011

2012

2013

2014

INR/MT

UREA MOP DAP

The cyclical price behavior is one of the

important aspects of phosphate pricing.

These cycles result because growth in

demand and capacity additions is out of sync,

owing to many factors.

DAP FOB Tampa has recovered this year,

trading in the $450-500/tonne range driven by

strong demand across the board.


38

DAP FOB Tampa, $/tonne Correlation between DAP prices and soft commodities

Source: Bloomberg Source: Bloomberg

0

100

200

300

400

500

600

700

800

JAN

10

AP

R 1

0

JUL

10

OC

T 1

0

JAN

11

AP

R 1

1

JUL

11

OC

T 1

1

JAN

12

AP

R 1

2

JUL

12

OC

T 1

2

JAN

13

AP

R 1

3

JUL

13

OC

T 1

3

JAN

14

AP

R 1

4

JUL

14

OC

T 1

4

0

20

40

60

80

100

120

140

160

SE

P 1

0

SE

P 1

1

SE

P 1

2

SE

P 1

3

SE

P 1

4

DAP PRICES AGRICULTURE COMMODITY INDEX


39

INCOME STATEMENT, $ MLN 2012 2013 2014E 2015E 2016E 2017E 2018E 2019E 2020E

Accounting standard IFRS IFRS IFRS IFRS IFRS IFRS IFRS IFRS IFRS

Revenues 3,389 3,286 3,131 3,227 3,344 3,600 3,675 3,751 3,829

COGS -1,936 -2,141 -1,757 -1,777 -1,837 -1,986 -1,986 -2,033 -2,073

Gross income 1,454 1,145 1,374 1,450 1,507 1,614 1,689 1,718 1,756

SG&A -462 -527 -505 -549 -557 -578 -589 -595 -605

Other income (costs) -85 -111 -86 -90 -93 -100 -104 -106 -108

EBIT 907 507 783 811 857 935 995 1,017 1,042

Depreciation 210 245 219 248 283 314 326 329 314

EBITDA 1,117 752 1,002 1,059 1,140 1,249 1,321 1,345 1,356

Net finance costs 20 -36 -49 -58 -54 -46 -39 -28 -6

Other costs 78 -156 0 0 0 0 0 0 0

PBT 1,005 316 734 752 803 890 956 989 1,037

Taxes -216 -55 -141 -150 -161 -178 -191 -198 -207

Net income 789 261 565 602 642 712 765 791 829


Cash and equivalents 311 273 136 213 262 199 189 271 200

Accounts receivable 382 350 339 345 358 390 398 411 420

Inventories 397 376 313 313 323 354 354 367 374

Other CA 64 71 61 58 57 56 56 56 56

Total CA 1,154 1,070 848 929 1,000 999 997 1,104 1,049

PP&E 2,141 2,320 2,298 2,585 2,868 2,981 3,004 2,866 2,743

Investments 310 259 220 212 207 204 202 202 202

Other non-current assets 117 208 176 169 164 162 159 159 159

Total assets 3,721 3,857 3,542 3,895 4,239 4,347 4,363 4,332 4,152

ST debt 709 403 343 330 322 318 314 314 119

Accounts payable 398 286 239 238 247 270 270 280 285

Other CL 22 16 13 13 13 12 12 12 12

Total CL 1,129 706 595 581 581 601 597 607 417

LT debt 465 1,208 1,039 1,125 1,146 843 595 238 0

Other non-current liabilities 136 131 111 107 104 103 102 102 102

Total non-current liabilities 601 1,339 1,150 1,232 1,251 946 697 340 102

Total shareholders equity 1,593 1,720 1,797 2,082 2,407 2,800 3,069 3,385 3,634

Minority interest 399 92 0 0 0 0 0 0 0

Total liabilities and equity 3,721 3,857 3,542 3,895 4,239 4,347 4,363 4,332 4,152


40

CASH FLOW STATEMENT, $ MLN 2012 2013 2014E 2015E 2016E 2017E 2018E 2019E 2020E

Net income before tax 1,005 316 734 752 803 890 956 989 1,037

Depreciation 210 245 219 248 283 314 326 329 314

Change in working capital -40.3 24.9 -39.5 -21.5 -25.6 -44.7 -13.8 -16.2 -10.2

Others -355 -38 -200 -184 -202 -210 -218 -209 -223

Operating cash flow 820 548 713 795 858 948 1,050 1,092 1,117

Capex -430 -559 -548 -631 -638 -463 -386 -190 -190

Other -26 -73 0 0 0 0 0 0 0

Investing cash flow -405 -487 -548 -631 -638 -463 -386 -190 -190

Dividends paid to shareholders -383 -229 -112 -215 -229 -248 -278 -453 -475

Other -262 118 12 125 49 -289 -238 -357 -433

Financing cash flow -645 -112 -100 -90 -180 -537 -516 -811 -908

Effect of FX

13 -201 4 8 -11 -159 -9 -90

Change in cash -230 -38 -137 78 48 -63 -10 82 -71


Total debt 1,174 1,612 1,382 1,455 1,468 1,162 910 553 119

Net debt 863 1,339 1,246 1,242 1,207 962 721 282 -81

KEY RATIOS

P/E 5.29 16.01 7.39 6.94 6.50 5.87 5.46 5.28 5.04

EV/EBITDA 4.51 7.33 5.41 5.12 4.72 4.11 3.71 3.31 3.02

EV/Sales 1.49 1.68 1.73 1.68 1.61 1.43 1.33 1.19 1.07

P/BV 2.62 2.43 2.32 2.01 1.74 1.49 1.36 1.23 1.15

Div. yield 8.1% 3.2% 5.4% 5.8% 6.2% 6.8% 11.0% 11.4% 13.9%

ROE 49.5% 15.2% 31.4% 28.9% 26.7% 25.4% 24.9% 23.4% 22.8%


41

OC

TO

BE

R

27,

20

14

Uralkali RUSSIA > EQUIT Y RESEARCH

Potash prince: will it become a cash cow? FERTILIZER S

We initiate coverage of Uralkali with a target price of $22.1 per GDR and

an OVERWEIGHT recommendation. After having faced a challenging

pricing environment over the past 18 months, potash industry

fundamentals are gradually improving. Low prices and falling inventories

are driving robust demand that will achieve record volumes in 2014. This

has pushed the global capacity utilization rate above 90% and encouraged

suppliers, including Uralkali, to revise their prices upward. Ruble

devaluation also improves EBITDA, which will increase by 18% YoY in

2015, while the net debt/EBITDA ratio may decline to below 2.0x. This

might provide grounds for increased dividend payments, which we think

is the key issue for main stakeholders. Depending on whether the debt

burden continues to decline, we do not rule out that the payout ratio may

reach 100%, implying a double digit yield within a few years.

Steady recovery on the potash market

Global potash demand will increase by a solid 11% in 2014, yielding record

volumes of 59 mln tonnes driven by firm demand from the US, Asia and Latin

America on the back of low pricing and inventory levels. Long-term CAGR is

estimated at 3.0%, including an expected pick-up in volumes from India, which

currently consumes one third the amount of potash compared to China despite

a comparable population and structure of the agricultural sector. Potash spot

prices have risen 15-20% to $380-420/tonne YTD, but we think that further price

increases may be limited due to falling prices for soft commodities and unstable

growth in the global economy coupled with devaluation of EM currencies. The

risk of sector overcapacity seems overblown to us, as new sizable additions

may appear only after 2018, which might be absorbed with organic growth.

Uralkali benefits from the lowest cost of production and robust cash flow

We forecast Uralkali‘s potash output at 11.7 mln tonnes (+17% YoY) and a

3.0% CAGR until 2020, implying nearly a 90% operating rate. We use $227-

245/tonne FCA prices in 2014-15, which will increase EBITDA by 11% and

9.8%, respectively. Ruble devaluation will reduce production cash costs to

$47/tonne in 2H14, down from $51/tonne in 1H14 and eliminate the effect from

ruble inflation in distribution costs. With the EBITDA margin rebounding to

above 50% in 2015, Uralkali ranks among the most profitable listed companies

in Russia. Operating cash flow remains impressively strong, easily covering the

company‘s capex needs, debt repayment (net debt/EBITDA should be 1.9x by

end 2015) and dividend payments with a 50% payout ratio, implying a 4.6-5.9%

yield in 2014-15. We think that the main stakeholders may be interested in

increasing the payout ratio to 70-100% going forward, which would translate

into a double-digit dividend yield.


Uralkali trades at a 2014-15E EV/EBITDA of 7.9x-6.5x, respectively, compared

to the 10.5x historical average and 11.0x for PotashCorp. Our target price is

based on a simple average of target 2015E EV/EBITDA of 8.0x and a DCF

approach (12.7% WACC and 3.0% terminal growth rate). The cash flow yield is

9.0% in 2015. We expect Uralkali to negotiate a new contract with China at 10%

above the previous level by year end, a move that would be taken positively by

the market. Short-term risks include falling prices for soft commodities, while

long-term risks include overcapacity and rising competition between producers.


Source: Bloomberg

Uralkali share price performance vs. MSCI Russia Index

Uralkali key data

2013 2014E 2015E 2016E

Gross revenues, $ mln

3,323 3,364 3,723 3,928

EBITDA 1,634 1,564 1,847 2,020


Net income, $ mln

666 788 995 1,122

Net margin 20% 23% 27% 29%

EV/EBITDA 7.7 7.9 6.5 5.8

P/E 12.7 10.8 8.5 7.6

P/BV 1.5 1.4 1.3 1.2

P/FCF 6.6 15.3 11.1 11.7

Div. yield 3.4% 4.6% 5.9% 9.3%

Source: company, Gazprombank estimates

TICKER URKA LI



Upside 35%


MCap, $ mln 8,452


EV, $ mln 12,361

52-week high, $ 27.7

52-week low, $ 16.4

SELECTED STOCK DATA

60%

65%

70%

75%

80%

85%

90%

95%

100%

105%O

CT

13

NO

V 1

3

DE

C 1

3

JAN

14

FE

B 1

4

MA

R 1

4

AP

R 1

4

MA

Y 1

4

JUN

14

JUL

14

AU

G 1

4

SE

P 1

4

OC

T 1

4

URALKALI MSCI RUSSIA


42

COMPANY DESCRIPTION

Uralkali is the world‘s leading vertically integrated producer of potassium chloride (KCI),

which is the key nutrient for crops development together with phosphate and nitrogen-

based fertilizers. The company accounts for 20% of the world‘s potash production and

23% of the potash export market. The company develops the Verkhnekamskoye

potassium and magnesium salt fields in Perm region of Russia, which is the world‘s

second-largest deposit in terms of ore reserves. The company‘s production facilities

include five mines, six potash plants and one carnalite plant, all located in the towns of

Berezniki and Solikamsk (1,600 km from Moscow), where the company produces

standard white, pink, and premium granular potash. The company has a transport

division that includes 8,000 railcars and a fertilizers terminal at St. Petersburg Sea Port

with total capacity of 8 mln tonnes. The company‘s headcount totals more than 21,000

employers, of which nearly half are involved in the main production units.

Key financials Shareholder structure

URALKALI

Bloomberg ticker URKA LI



Upside, % 34.2%

Recommendation Overweight

Shares outstanding, mln 514


1H14 net debt, $ mln 3,909

Enterprise value 12,336

Free float 38.0%


Brent price, $/bbl 106.0 106.0 104.0 100.0 100.0

RUB/USD, average 31.09 31.82 38.00 40.00 40.00

CPI (Russia) % 6.0% 5.3% 8.0% 6.0% 5.0%

FINANCIAL RATIOS

P/E 5.3 12.7 10.8 8.5 7.6

EV/EBITDA 4.6 7.7 7.9 6.5 5.8

EV/Sales 2.8 3.8 3.7 3.2 3.0

P/BV 1.0 1.5 1.4 1.3 1.2

EV/Output 1.4 1.2 1.1 1.0 1.0

Div. yield 8.2% 3.4% 4.6% 5.9% 9.3%

Payout ratio 50% 50% 50% 50% 70%

CF yield 19.1% 15.2% 6.5% 9.0% 8.6%

PER SHARE DATA, $

EPS 3.11 1.30 1.53 1.94 2.18

DPS 1.36 0.57 0.77 0.97 1.53

MARGINS 2012 2013 2014E 2015E 2016E

EBITDA margin, % 60.1% 49.2% 46.5% 49.6% 51.4%

Adjusted EBITDA margin, %* 71.2% 61.3% 59.0% 62.5% 64.9%

EBIT margin, % 55.5% 39.9% 43.1% 47.6% 49.8%

Pre-tax margin, % 58.1% 31.0% 36.9% 41.4% 44.1%

Net margin, % 40.4% 20.1% 23.4% 26.7% 28.6%

Adjusted net margin, %* 47.9% 25.0% 29.7% 33.7% 36.0%


Capex/sales 0.10 0.13 0.13 0.15 0.19


ROA 11.2% 5.3% 6.5% 8.0% 8.6%

ROE 18.2% 11.6% 12.9% 15.0% 16.1%

Net debt/Equity 0.29 0.72 0.64 0.53 0.47

Net debt/EBITDA 1.08 2.52 2.49 1.91 1.63

*Based on net revenue adjusted on transportation costs

31.0%

22.9% 14.3%

31.8%

ONEXIM URALCHEM CIC FREE FLOAT


43

KEY OPERATING DATA 2012 2013 2014E 2015E 2016E

Production capacity, mln t 11.5 13.0 13.3 14.0 14.3

Output, mln t 9.1 10.0 11.7 12.1 12.4

Domestic sales, mln t 2.1 1.9 2.0 2.1 2.2

Export sales, mln t 7.3 8.0 9.7 10.0 10.2

Capacity utilization 79% 77% 88% 86% 87%

Average realized price, FCA, $/t

356 270 227 245 251

Implied export price, $/t 453 350 305 330 340

Implied domestic price, $/t 254 219 155 164 164

Production cash costs, $/t 63 57 49 49 50


Cash costs, RUB/t 1,967 1,806 1,880 1,928 1,984

Distribution costs, $/t 81 85 75 78 76

Distribution costs, RUB/t 2,519 2,695 2,858 3,105 3,048

Number of employees 21,228 21,137 21,137 21,137 21,137

GROWTH, YOY

Revenues 13.0% -15.9% 1.2% 10.7% 5.5%

EBITDA -3.0% -31.2% -4.3% 18.1% 9.3%

Net income -36.7% -58.3% 18.2% 26.3% 12.8%

Capex 9.4% 4.2% 8.1% 22.2% 36.4%

INCOME STATEMENT, $ MLN 2012 2013 2014E 2015E 2016E

Accounting standards IFRS IFRS IFRS IFRS IFRS

Gross Revenues 3,950 3,323 3,364 3,723 3,928

Net revenues 3,334 2,665 2,652 2,955 3,114

Export revenue 3,300 2,800 2,959 3,284 3,471

Domestic revenue 528 408 311 344 363

Other revenue 121 115 95 95 95

COGS -991 -945 -969 -1,005 -1,055

Gross income 2,959 2,378 2,395 2,717 2,873

SG&A -1,002 -1,159 -1,175 -1,233 -1,247

Other income (costs) -105 -157 -77 -77 -77

EBIT 1,852 1,062 1,143 1,407 1,549

Depreciation 460 415 421 441 471

EBITDA 2,375 1,634 1,564 1,847 2,020


PBT 1,937 827 978 1,223 1,374

Taxes -340 -161 -190 -228 -252

Net income 1,597 666 788 995 1,122


Cash and equivalents 1,386 930 393 565 793


Inventories 242 250 257 267 280

Other current assets 768 18 15 15 15

Total current assets 2,958 1,716 1,189 1,426 1,700

PP&E 3,385 3,235 3,385 3,615 4,015

Goodwill 1,940 1,802 1,802 1,802 1,802

Intangible assets 5,855 5,457 5,337 5,216 5,095

Other non-current assets 154 449 449 449 449

Total assets 14,291 12,660 12,162 12,509 13,061

BALANCE SHEET, $ MLN 2012 2013 2014E 2015E 2016E

ST debt 1,122 1,464 941 941 941


Other current liabilities 101 148 148 148 148

Total current liabilities 1,490 2,168 1,501 1,467 1,423

LT debt 2,820 3,583 3,346 3,146 3,146

Other non-current liabilities 1,222 1,168 1,168 1,168 1,168

Total non-current liabilities

5,533 6,919 6,015 5,781 5,737

Total shareholders equity 8,750 5,727 6,122 6,620 6,957


Total liabilities and equity 14,291 12,660 12,162 12,509 13,061


Net income before tax 1,937 827 978 1,223 1,374

Depreciation -460 -415 -421 -441 -471

Change in working capital -40.4 238.7 -157.0 -99.6 -89.4

Others 315 587 605 633 661

Operating cash flow 1,752 1,238 1,005 1,316 1,475

Capex -399 -416 -450 -550 -750

Other 268 468 0 0 0

Investing cash flow -131 52 -450 -550 -750


-901 -430 -333 -394 -497

Other 52 -1,235 -759 -200 0

Financing cash flow -849 -1,665 -1,092 -594 -497

Effect of FX 11 -80 0 0 0

Change in cash 771 -456 -538 172 228


44

VALUATION: TP OF $22.1 PER GDR, OVERWEIGHT

We initiate coverage of Uralkali with a target price of $22.1 per GDR (RUB 185 per local

share) based on a simple average of target 2015E EV/EBITDA valuation and a DCF

approach, suggesting 35% upside to the current price and supporting our

OVERWEIGHT recommendation.

Following the breakup of Uralkali and Belaruskali in 2013, investors had been skeptical

about the prospects for the potash market, fearing that global overcapacity and

competition may drive potash prices down in the long run. However, we can now see

that investor sentiment is warming up to the potash market and Uralkali in particular,

due to the following reasons:

After a challenging 2013 and first half of 2014, potash industry fundamentals are

gradually improving on the back of robust global demand that is expected to reach

an all-time high of 59 mln tonnes (+11%) this year.

The risk of overcapacity in the potash industry seems overblown to us. A

substantial part of additional capacity that could become operational after 2018 is

owned by the majors, including PotashCorp and Uralkali, the strategic goals of

which are to reduce production cash costs and improve positions on the global cost

curve. As soon as these capacity additions are up and running, the old facilities

may be shut down in favor of stable capacity utilization and firm prices. Moreover

new capacity additions will be absorbed by rising consumption, which is currently

expected at 3.0% CAGR – the highest growth rate among fertilizers.

Uralkali is the only pure producer of potash globally and has the lowest cost of

production, making it the most profitable fertilizer producer in the world. It

generates impressive cash flow that easily covers its investment needs, allows the

company to repay debt principal, and pay out dividends (50% of net income). The

company benefits from a weak ruble, as over 80% of its revenues are dollar-

denominated compared to almost 100% ruble-based costs.

Uralkali trades at a 2014-15E EV/EBITDA of 7.9x-6.5x respectively, compared to the

10.5x historical average. Canada‘s PotashCorp is the closest peer, trading at an

historical average of 11.0x EBITDA. We used a target 2015E EV/EBITDA of 8.0x to

derive the company‘s multiple-based target price of $21.2 per GDR. Our implied multiple

includes almost a 25% discount to the historical averages of Uralkali and PotashCorp,

as the situation on the potash market is not as favorable compared to a few years ago.

Moreover, a discount to PotashCorp seems natural given the heightened country risks.

Uralkali 12m forward EV/EBITDA (non-adjusted on treasury shares)

Uralkali target EV/EBITDA valuation

IMPLIED EV/EBITDA 7.0 8.0 9.0

EBITDA 2015 1,847 1,847 1,847

EV 12,932 14,780 16,627

Less net debt 2014 -3,895 -3,895 -3,895

Market capitalization 9,038 10,885 12,733

Number of GDRs, mln 514 514 514

Target price, $ per GDR 17.6 21.2 24.8

Current price 16.50 16.50 16.50

Upside 6.9% 28.8% 50.6%

Source: Bloomberg, Gazprombank estimates Source: Bloomberg, Gazprombank estimates

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

2010 2011 2012 2013 2014

URKA LI MEDIAN

We initiate coverage of Uralkali with an

OVERWEIGHT recommendation and target

price of $22.1 per GDR (RUB 185 per local

share) based on a simple average of target

2015E EV/EBITDA valuation and a DCF

approach

Uralkali trades at a 2014E and 2015E

EV/EBITDA of 8.1x and 6.7x, respectively,

compared to the 10.5x historical average.


45

Our DCF valuation returns a target price of $23.1 per GDR, implying 40% upside to the

current price. We applied the following potash prices in our financial forecasts:

$245/tonne FCA for 2015, $251/tonne in 2016 and $257/tonne in 2017. We used a

WACC of 12.7% based on a 5.8% risk-free rate and a 10% equity-risk premium. The

cost of debt is 7.3%. The debt/equity structure is 40/60. The terminal growth rate stands

at 3.0%.

Uralkali DCF valuation, $ mln

2015E 2016E 2017E 2018E 2019E 2020E

EBIT 1,407 1,549 1,682 1,831 1,875 2,193

Less tax -228 -252 -276 -301 -306 -358

Depreciation 441 471 491 501 501 501

Capex -550 -750 -750 -550 -500 -501

Chg. In working capital -100 -89 -88 -93 -54 -74

FCF 970 929 1,059 1,387 1,516 1,761

Discount rate 1.00 0.89 0.79 0.70 0.62 0.55

DFCF 970 824 833 969 939 968

Sum DFCF 5,502 Risk-free rate 5.8%

Terminal value 10,259 Equity-risk premium 10.0%

EV 15,762 Company-specific premium 1.5%

Less net debt (2014) -3,895 Beta 100%

Mcap, $ mln 11,867 Cost of equity 17.3%

Number of GDRs, mln 514 Cost of debt 7.3%

Target price, $ per GDR 23.1 Tax rate 20.0%

Current price, $ per GDR 16.5 Cost of debt (net of tax) 5.8%

Upside 40% Share of equity 60.0%

Share of debt 40.0%

WACC 12.7%

Terminal growth rate 3.0%

Source: Gazprombank estimates:

Uralkali target price sensitivity analysis, $ per GDR

IMPLIED AVERAGE POTASH PRICE, CFR $/TONNE

275 285 295 305 315 325 335

Imp

lied

av

era

ge F

X ra

te

36 22.7 22.6 22.5 22.4 22.3 22.2 22.2

37 23.0 22.9 22.8 22.7 22.7 22.6 22.6

38 23.4 23.3 23.2 23.1 23.0 23.0 22.9

39 23.7 23.6 23.5 23.4 23.4 23.3 23.3

40 24.0 23.9 23.8 23.7 23.7 23.7 23.6



46

Uralkali SWOT analysis

STRENGTHS WEAKNESSES

Global potash demand has reached record volumes. Prices are starting to rise. The company‘s current debt burden implies a heavy 2.5x net debt/EBITDA ratio.

Uralkali is the world‘s leading pure potash producer, with a market share of more than 20%.

Uralkali‘s earnings are highly volatile and depend on global potash prices

The company benefits from the lowest production cash costs in the industry, below $60/tonne.

The company enjoys deep vertical integration from potash ore mining to customers globally.

It has the shortest transportation routes from mines in Perm region to St. Petersburg Sea Port (about 2,000 km).

Uralkali is the most profitable publicly listed Russian company, with an EBITDA margin of over 50%.

The company generates stable cash flow that covers capex needs, debt repayments and dividend distribution, with a 50% payout ratio.

Uralkali has a low effective tax rate of 15.5%.

OPPORTUNITIES THREATS

Ruble devaluation reduces the company's dollar-denominated costs and improves its margins.

Raising global potash capacity increases the risk of oversupply, leading to a correction in prices.

As soon as the company reduces its net debt/EBITDA ratio below 2.0x, it will have the opportunity to raise the dividend payout ratio above 50%.

Uralkali and Belaruskali compete on global markets, raising the risk that Belaruskali could dump, squeezing Uralkali‘s market share.

There is a risk that taxes could be hiked in the Russian potash industry, especially in light of the budget deficit and economic slowdown.


Uralkali relative share price performance, % Uralkali GDR price performance vs. MSCI Russia

Source: Bloomberg, Gazprombank estimates Source: Bloomberg, Gazprombank estimate

0

100

200

300

400

500

600

0

20

40

60

80

100

120

AU

G 1

2

OC

T 1

2

DE

C 1

2

FE

B 1

3

AP

R 1

3

JUN

13

AU

G 1

3

OC

T 1

3

DE

C 1

3

FE

B 1

4

AP

R 1

4

JUN

14

AU

G 1

4

URKA LI POT US POTASH PRICE, $/T CFR, SASKATCHEWAN

0

20

40

60

80

100

120

AU

G 1

2

OC

T 1

2

DE

C 1

2

FE

B 1

3

AP

R 1

3

JUN

13

AU

G 1

3

OC

T 1

3

DE

C 1

3

FE

B 1

4

AP

R 1

4

JUN

14

AU

G 1

4

MSCI RUSSIA URKA LI


47

URALKALI BUSINESS OVERVIEW: JUST POTASH

Uralkali is the world‘s leading vertically integrated producer of potassium chloride (KCI),

which is the key nutrient for crop development together with phosphate and nitrogen-

based fertilizers. The company accounts for 20% of the world‘s potash production and

23% of the potash export market.

The company is developing the Verkhnekamskoye potassium and magnesium salt fields

in Perm region of Russia, which is the second-largest deposit in the world (the Canadian

province of Saskatchewan is the largest) in terms of ore reserves. The company‘s

production facilities include five mines, six potash plants and one carnalite plant, all

located in the towns of Berezniki and Solikamsk (1,600 km from Moscow), where the

company produces standard white, pink, and premium granular potash. The company

has a transport division that includes 8,000 railcars and a fertilizer terminal at St.

Petersburg Sea Port with total capacity of 8 mln tonnes. The company‘s headcount

stands at over 21,000, of which almost half are involved in the main production units.

Uralkali production facilities

Source: company:

Uralkali‘s current production capacity amounts to 13 mln tonnes of potassium chloride

(KCL) that will be expanded to 15 mln tonnes by 2020, according to the company‘s

development plan. Driven by strong demand for potash, the company recently revised

its production guidance upward to 11.5 mln tonnes in 2014 (+15% YoY) from 11 mln

guided earlier, implying an 88% capacity utilization ratio. We think that actual production

will be as much as 200-400 kt higher this year on the back of a strong 3Q14, when the

Potash

mines

Potash processing

plants

Greenfield

licences

Railways

MOSCOW

PERM REGION

PERM

REGION

Polovodovsky

block

Ust-Yavinsky

block

KAMA

BEREZNIKI

SOLIKAMSK

Uralkali is the world‘s leading vertically

integrated producer of potash. It occupies

20% of the world‘s potash production and

23% of the potash export market.


48

company increased production by 18% YoY to 3.2 mln. The company‘s total 9M14

output reached 9.2 mln tonnes of fertilizers, up 28% YoY.

Uralkali production (mln tonnes) and capacity utilization ratio

Leading potash producers by export market share

Source: Company, Gazprombank estimates Source: Bloomberg, Gazprombank estimate

Uralkali is the world’s second-largest potash producer by capacity, mln tonnes KCI, 2013

Source: Fertecon, Gazprombank estimates

Marketing strategy

Uralkali exports potash to more than 60 countries, while the largest and most important

markets are China (19% of total volumes based on 1H14 results), Brazil (18%),

Southeast Asia (16%), Europe (12%) and India (11%). The company supplies potash

even to the lucrative US market (7% of total sales in 1H14), despite the traditional

strong presence of Canadian PotashCorp there. Russia‘s domestic market accounts for

15-20% of Uralkali‘s total sales and its growth rates are projected at 5-6% compared to

the 3% global average.

5.5

11.5 11.5 13.0

13.3 14.0 14.3 14.5 14.9 14.9 14.9

5.1

8.6 9.1 10.0

11.7 12.1 12.4 12.8 13.2 13.6 14.0

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

2010

2011

2012

2013

2014

E

2015

E

2016

E

2017

E

2018

E

2019

E

2020

E

CAPACITY PRODUCTION UTILIZATION RATE

22% 17% 23%

19% 17%

17%

27% 32%

27%

3% 4% 4%

29% 30% 29%

0%

20%

40%

60%

80%

100%

1H12 1H13 2013

URALKALI BELARUSKALI POTASHCORP/CANPOTEX SQM K+S/ICL/APC

0

2

4

6

8

10

12

14

16

UR

ALK

ALI

(R

US

SIA

)

PO

TA

SH

CO

RP

(C

AN

AD

A)

MO

SA

IC (

US

)

CH

INE

SE

PR

OD

UC

ER

S

K+

S (

GE

RM

AN

Y)

OT

HE

R C

OU

NT

RIE

S

ICL

(IS

RA

EL)

AR

AB

PO

TA

SH

CO

MP

(J

OR

DA

N)

AG

RIU

M (

US

)

INT

ER

PID

MIN

ER

ALS

(A

US

TR

ALI

A)

Uralkali exports potash in more than 60

countries, including China, Brazil, Southeast

Asia, Europe, India and the US.


49

Uralkali sales breakdown by destination, 2013

Source: Company

After the company‘s partnership with Belaruskali was disbanded in July 2013, Uralkali

shifted to a new strategy that calls for the company to maximize revenues (not volumes)

and sustain its market share focusing on the fast-growing markets of Latin America,

Southeast Asia, China and India. The strategy assumes a more weighted approach to

building up sales volumes, but not at any price.

In April 2014, Dmitry Mazepin, the owner of Uralchem, which is a new Uralkali

shareholder, met with Belarusian President Alexander Lukashenko, reviving investors‘

hopes that Uralkali might restore its alliance with Belauskali at some time in the

future. However, in September 2014, Uralkali CEO Dmitry Osipov put an end to such

speculation, stating that Uralkali was not in talks and has no plans to negotiate with

Belaruskali regarding a new trading merger. Restoring the partnership, he believes,

would raise a number of questions: what conditions should apply to the new structure,

where it should be headquartered, which stakes shareholders should get in the

company, and which intentions and objectives there would be. There are no answers

to these questions, Osipov claimed. This outcome did not surprise the market, as it

seems that both companies are doing well separately and building output to record

levels. There is no reason for cooperation at the present time, but if the global market

environment were to deteriorate the option to merge trading remains on the table, in

our view.

Investment projects

Uralkali‘s investment program includes three main projects worth $2.3 bln that will

increase its capacity to 15 mln tonnes from the current 13 mln tonnes by 2020.

De-bottlenecking of existing mining facilities will add 1 mln tonnes of capacity

by 2016 at a total cost of $113 mln, implying $113 per tonne of additional capacity,

and making this project one of the most efficient in the potash industry. By

comparison, the majority of brownfield projects in the sector cost $350-800 per

tonne of new capacity.

Solikamsk-3 expansion project. The project provides for a capacity expansion of

the Solikamsk mine by 0.4 mln tonnes by 2015. Total capex is $145 mln, implying

$363/tonne, which is also a reasonable expense compared to other sector projects.

The project involves the completion of cargo and ventilation shaft 4, which will be

sunk to a depth of 481 m from the current 356 m with all of the required shaft

equipment, construction of a pit-bottom paddock and loading complex, as well as

installation of a system of conveyers in the mine and on the surface.

19%

5%

11%

18%

26%

11%

9%

RUSSIA

USA

EUROPE

BRAZIL

CHINA

INDIA

SEA

Uralkali‘s investment program is comprised of

three main projects worth $2.3 bln that will

increase its capacity to 15 mln tonnes from

the current 13 mln tonnes by 2020.


50

The Ust-Yayvinksy project is Uralkali‘s largest venture valued at $1.52 bln, of

which over $250 mln has already been invested. It envisages development of a

completely new mine with total capacity of 2.8 mln tonnes by 2020. It will allow the

company to compensate for the decreasing ore reserves of Berezniki-2 mine,

which will be depleted in 2025. To date, the shaft has been sunk to a level over 50

m and the design of the surface complex is in progress. The start of construction of

permanent surface facilities is slated for 2015. Capex is estimated at $600 per

tonne of additional capacity, which appears to be the most effective greenfield

project in the potash industry, costing less than half the industry average,

according to Uralkali estimates.

Uralkali also has plans to develop two other investment projects named Polovodovo and

Solikamsk-3 (stage 2), which may increase the company‘s capacity to 19.5 mln tonnes

by 2021, if approved. The final decision in this regard should be made in 2015 and will

depend on the overall market environment.

Cash flow distribution

To capex…The company‘s operating cash flow will be sufficient to cover its

investment needs by a wide margin, even if potash prices materially decline going

forward. We forecast the company‘s operating cash flow at $1.3-2.0 bln during the

forecast period until 2020, while investment needs (both expansion and

maintenance) amount to $500-750 mln annually, accounting for 20-40% of

Uralkali‘s EBITDA. We estimate the cash flow yield at 6.5% in 2014 and 9% in

2015.

Uralkali cash flow distribution, $ bln Uralkali capex, $ mln

Source: company, Gazprombank estimates Source: company, Gazprombank estimates

… to debt repayment… As of end 1H14, Uralkali‘s net debt position stood at $3.9

bln, implying 2.5x 2014E EBITDA, a rather heavy debt burden that puts the

company‘s investment grade ratings (BBB- S&P, Fitch, Baa3 Moody‘s) at risk.

Thus, deleveraging is one of its financial priorities. We forecast the company‘s net

debt to decline to $3.6 bln, reducing net debt/EBITDA to 1.9x by end 2015. As

soon as Uralkali achieves comfortable debt ratios there will be several options for

cash flow distribution: a) to increase the dividend payout; b) to decrease the debt

burden further; c) to launch a new buyback program; and d) to approve new

investment projects. We think that the final decision will be approved next year

depending on the overall economic situation in Russia and in the sector, as well as

Uralkali‘s capitalization.

…and to dividends. Uralkali‘s dividend policy provides for at least a 50% payout

ratio from net income and this is what we modeled in our financial projections for

1.2 1.0 1.2 1.4 1.5 1.7 1.9 2.1

0.1

-0.5 -0.6 -0.8 -0.8 -0.6 -0.5 -0.5

-1.2 -0.8

-0.2 -0.2 -0.6

-0.4 -0.3

-0.4 -0.5

-0.7 -0.8

-0.9 -1.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

2013 2014E 2015E 2016E 2017E 2018E 2019E 2020E

OPERATING CASH FLOW CAPEX AND ACQUISITIONS REPAYMENTS OF BORROWINGS DIVIDENDS

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

0

100

200

300

400

500

600

700

800

2011

2012

2013

2014

E

2015

E

2016

E

2017

E

2018

E

2019

E

2020

E

EXPANSION CAPEX MAINTENANCE CAPEX CAPEX, % OF EBITDA

Uralkali‘s dividend policy assumes at least a

50% payout ratio, but we think it may

increase higher as soon as the company will

reduce its debt burden.

We forecast the company‘s net debt to

decline to $3.6 bln, reducing net

debt/EBITDA to 1.9x by end 2015.


51

2014 and 2015, while increasing the payout ratio to 70% thereafter. We expect the

company to spend $394 mln on dividends for 2014, implying a 4.6% dividend yield

and $497 mln for 2015 (5.9% yield). By comparison, PotashCorp‘s dividend payout

ratio is over 60%, implying a 4.0% dividend yield. We do not rule out that the main

stakeholders, Onexim Group and Uralchem, might be interested in building up

dividends even higher to a 100% payout ratio as soon as the company achieves a

comfortable debt burden. If this happens, Uralkali would turn into a cash cow,

suggesting a double-digit dividend yield.

Financial forecasts

Revenue drivers. We forecast Uralkali‘s net revenues (adjusted for transportation

costs) to be almost flat YoY at $2.65 bln in 2014, implying average prices of $227

per tonne FCA (vs. $270/tonne FCA in $2013) and 11.7 mln tonnes of production

volumes (vs. 10.0 mln tonnes in 2013). In 2015, the company‘s net revenues will

increase by 11.4% YoY to $3 bln at $245/tonne FCA and 12 mln tonnes of

production. By 2020, net revenues will reach $3.9 bln, implying 2014E-20E CAGR

of 5.6% driven by a gradual increase in potash prices to $276/tonne FCA

($380/tonne CFR) and 14 mln tonnes of sales.

Cost drivers. Uralkali enjoys the lowest cash COGS in the industry, and the figure

declines further when factoring in ruble depreciation. While it was $57/tonne in

2013, cash COGS fell to $52/tonne in 1H14 and we project it to decline to

$47/tonne in 2H14. Payrolls and depreciation are the main COGS items,

accounting for 20% and 40% shares, respectively.

Distribution costs ($967 mln in 2014E) are very large as well. Actually, distribution

cash costs stand at $75/tonne, which is even higher than production cash costs

and together they amount to $130 per tonne of potash. The largest distribution cost

items include railway tariffs and freight. Uralkali exports potash via two routes: by

rail to Northern China at a cost of around $64/tonne; and by rail to St. Petersburg

port ($30/tonne), transhipment in the port ($6/tonne), and freight ($40/tonne).

Thereby, indexation of railway tariffs in Russia heavily impacts the company‘s

distribution cost growth. Though there was no indexation in 2014, but tariffs will

increase by 7.5-10.0% in ruble terms in 2015. However, in dollar terms distribution

costs will decline due to ruble depreciation.

Uralkali production costs breakdown, 2013 Uralkali distribution costs breakdown, 2013

Source: company Source: company

28%

23% 15%

13%

12%

7% 2% DEPRECIATION

PAYROLS

FUEL AND ENERGY

MATERIALS

AMORTIZATION OF LICENSES

MAINTENANCE

OTHERS

$945 MLN

43%

26%

4%

8%

5%

14% RAILWAY TARIFF AND RENT WAGONS

FREIGHT

TRANSSHIPMENT

COMMISSIONS AND LOYALTY FEES

TRANSPORT REPAIRS AND MAINTENANCE

OTHERS

$880 MLN

We forecast Uralkali net revenue (adjusted

on transportation costs) to be almost flat y-o-

y at $2.7 bln in 2014 implied average prices

at $227 per tonne FCA and 11.7 mln tonnes

of production volumes

Uralkali enjoys the lowest production cash

costs in the industry


52

Global production cash costs $/tonne, 2013

Source: Company

Uralkali costs evolution, $/tonne


Earnings and margins. Uralkali is one of the most profitable fertilizer companies

globally and the most profitable among Russian listed companies with a 44%

EBITDA margin in 1H14 (58% adjusted EBITDA margin from net revenue).

Uralkali‘s bottom line will increase by 12% to $995 mln in 2015 driven by an

increase in potash prices and reduction of interest expenses, while the company‘s

EPS CAGR is estimated at 14% until 2020.

58

77

121 125

145 146 151

188

236

0

50

100

150

200

250

UR

ALK

ALI

BE

LAR

US

CA

LIY

PO

TA

SH

CO

RP

AG

RIU

M

MO

SC

AIC

ICL

DS

W

K+

S

ICS

L (S

PA

IN)

ICL

(UK

)

58

30

6 40

135

305

0

50

100

150

200

250

300

350

PRODUCTION CASH COST

RAILWAY TRANSPORTATION

TARIFF TO SPB PORT

PORT TRANSHIPMENT

FREIGHT EBITDA AVERAGE RELEASED

EXPORT PRICE, $ CFR

Uralkali is one of the most profitable fertilizer

companies globally and the most profitable

among Russian-listed companies with a

1H14 EBITDA margin of 58%.


53

Fertilizer producers 1H14 EBITDA margins Most profitable Russian-listed companies by 1H14 EBITDA margin

Source: Bloomberg, Gazprombank estimates Source: Gazprombank estimates

* based on net revenues adjusted for transport costs

Shareholder structure

Uralkali will cancel its 12.5% stake in treasury shares soon and thus we make all

calculations adjusted for them, implying 513.8 mln GDRs. There are three main

shareholders: Mikhail Prokhorov‘s Onexim Group, which officially owns 24.85%;

Uralchem, a Russian fertilizer producer owning 22.85%; and China Investment

Corporation (CIC), which holds 14.30%. Free float stands at 38%, or $3.2 bln, which is

traded on both the LSE and Moscow Exchange. Onexim and Uralchem bought out a

stake in Uralkali from a group of Russian investors headed by Suleiman Kerimov in

December 2013. The size of the deal was not disclosed, but based on market quotes

($13.4 bln MCap) it might have been concluded at about $23 per GDR. CIC obtained its

stake through a bond swap in September 2013.

Why did Onexim, Uralchem and CIC invest in Uralkali? We see the following reasons

despite concerns among global portfolio investors regarding long-term potash price

performance: Uralkali represents a unique high-class investment asset for strategic

investors such as Onexim or CIC, in our view, because it combines leading and stable

market positioning with low capex and impressive cash flow generation.

Uralkali shareholder structure (adjusted for treasury shares)


44%

38%

27% 25%

22% 21% 21% 17%

14% 11%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

UR

ALK

LAI

PO

TA

SH

CO

RP

AP

C

PH

OS

AG

RO

K+

S

MO

SC

AIC

INT

ER

PID

PO

TA

SH

ICL

YA

RA

AG

RIU

M

58%

53%

45% 45% 44% 44% 44% 43% 43% 42% 42% 40% 37% 37%

28% 27%

0%

10%

20%

30%

40%

50%

60%

70%

UR

ALK

ALI

*

MA

IL.R

U

TR

AN

SN

EF

T

ALR

OS

A

UR

ALK

ALI

NO

VA

TE

K

NO

RIL

SK

NIC

KE

L

GLO

BA

LTR

AN

S

MT

S

ME

GA

FO

N

YA

ND

EX

GA

ZP

RO

M

RO

ST

ELE

CO

M

OG

K-4

RU

SH

YD

RO

C.A

.T.

OIL

24.9%

22.9%

14.3%

38.0%

ONEXIM URALCHEM CIC FREE FLOAT

Three main shareholders: Onexim Group,

Uralchem and China Investment Corporation

(CIC)


54

POTASH FERTILIZER SECTOR OVERVIEW: THE QUALITY NUTRIENT

Potash is the third major plant and crop nutrient after nitrogen and phosphate-based

fertilizers. It helps plants to develop strong root systems and retain water; enhances

yields; and promotes greater resistance to disease and insects. Because it improves the

taste and nutritional value of food, potash is often called the ―quality nutrient‖. Most

potash fertilizers (80%) are mined from underground bedded deposits and the rest

comes from underground solution mines and solar evaporation of water from salt lakes

with potassium-rich waters. Over 90% of economically mined potash reserves are

concentrated in just three countries: Canada (46% of world reserves), Russia (35%) and

Belarus (8%), which are also the largest potash exporters. There are also smaller

deposits in China, the Middle East (Israel and Jordan), Latin America (Chile and Brazil)

and Europe (Germany).

World potash reserves

Source: PotashCorp

Robust demand is returning

Following a challenging 2013, there has been a strong recovery in demand for potash

this year on the back of low pricing, robust farmer economics and stable inventories.

Output of the commodity is expected to increase by 11% YoY to 59 mln tonnes in 2014,

approaching the historical peak in volumes reached in 2011 (57 mln tonnes). This is well

above forecasts by industry experts (IFA and Fertecon). Long-term demand CAGR is

estimated at 3-4% to 70-75 mln tonnes by 2020. Asia and Latin America (particularly

China, India and Brazil) are the main consuming markets, with above-average growth

rates, as they have little or no indigenous potash production capability and rely primarily

on imports to meet their needs.

CHILE

2%BRAZIL

3%

US

2%

CANADA

46%

CHINA

2%

RUSSIA

35%

GERMANY

1%

8%

BELARUS

ISRAEL

0,5% JORDAN

0,5%

Over 90% of potash economically mined

reserves are concentrated in just three

countries: Canada (46% of world reserves),

Russia (35%) and Belarus (8%).

There has been a strong recovery in potash

demand this year on the back of low pricing,

robust farmer economics and stable

inventories. Output of the commodity is

expected to increase by 11% YoY to 59 mln

tonnes in 2014.


55

Global potash capacity and demand, mln tonnes Global potash deliveries growth, 1H14 YoY

Source: company, Gazprombank estimates Source: company, IFA

Global potash demand breakdown by region, 2014E Potash demand 2010-2020E CAGR

Source: company, Gazprombank estimates Source: Fertecon, Gazprombank estimates

China consumes over 20% of global potash production, which is generally used for

complex NPK fertilizers. Around one third of the country‘s needs are met by

domestic potash reserves, which are concentrated primarily in Qinghai Province.

That makes China the fourth-largest potash producer in the world. The rest is

imported from Russia, Belarus, Canada, Israel, Jordan and Germany. Potash

demand will continue growing rapidly in China at 4% 2014-20E CAGR according to

PotashCorp and Fertecon forecasts driven by an increasing urban population with

rising consumption standards. Uralkali should supply about 2.2-2.4 mln tonnes of

potash to China this year, which equals 40% of total Chinese imports, but this is

below the 2013 level (2.49 mln tonnes) and well below that of 2012 (2.9 mln

tonnes). This is not a result of changes in Chinese demand, which remains rather

firm, but rather because Uralkali sees better returns on other markets, particularly

in Brazil. The company is also ready to sign a new contract with China for 1H15 by

year end and is seeking to increase prices by 10% to $335/tonne. However, the

negotiations are unlikely to be easy in light of the drop in prices of soft commodities

(as well as other commodities) across the board. Spot SEA prices will be an

important indicator for the Chinese contract and currently are set at $334/tonne

CFR. However, we do not rule out that the new contract might be signed at a level

of $325-330/tonne if market sentiment does not improve. This might somewhat

disappoint investors, but it would be offset by falling dollar-based costs for Uralkali.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0

10

20

30

40

50

60

70

80

90

100

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

E

2015

E

2016

E

2017

E

2018

E

2019

E

2020

E

СAPACITY DEMAND UTILIZATION RATE

30%

22%

16%

13%

5%

2%

0%

5%

10%

15%

20%

25%

30%

35%

N. AMERICA SEA L.AMERICA CHINA INDIA EMEA&FSU

18%

21%

7% 15%

20%

16%

3%

EUROPE AMD FSU

CHINA

INDIA

SEA

L.AMERICA

N. AMERICA

OTHER

1%

2%

4%

4%

4%

4%

5%

6%

6%

6%

6%

0% 1% 2% 3% 4% 5% 6% 7%

EU

NORTH AMERICA

CIS

WORLD

INDIA

ASIA

CHINA PR

RUSSIA

AFRICA

MIDDLE EAST

BRAZIL


56

India has reduced potash consumption by 40% since 2010 to 3.5 mln tonnes in

2014 (100% of which is imported) due to changes in state fertilizer subsidies to

farmers and depreciation of the rupee. As a result, potash demand has dropped in

favor of other fertilizers, leading to a disparity between fertilizer usage and the

reduction of crop quality. Notably, the Indian population (1.25 bln) is only a little

smaller than that of China (1.4 bln), but India consumes less than one third as

much potash as China. Inevitably, India will return to the required purchases of

potash in the coming years due to very poor nutrient balances in the country‘s

soils, and insufficient potash applied relative to nitrogen (more than 70% of soils

have a low to medium potassium content). This should become an additional driver

for global potash demand in the coming years. This year import volumes should

approach 4 mln tonnes, including over 1 mln tonnes from Uralkali (1.1 mln tonnes

in 2013). New contract settlements will start in 1Q15 and we expect a positive

outcome on both volumes and prices, as we think the new government will

introduce positive changes to fertilizer regulation and may increase the minimum

retail price in the country. While recent contract prices are set at $322/tonne CFR,

they might be revised to $340-350/tonne next year.

Global potash demand by region, mln tonnes KCI

2013 2014 OLD 2014 NEW

China 11.2 11.4-11.7 11.8-12.1

India 3.1 3.5-4.0 3.7-4.0

Other Asia 7.8 8.0-8.3 8.0-8.3

Latin America 10.1 10.3-10.7 10.3-10.7

North America 8.7 9.0-9.5 10.0-10.5

Other 12.4 12.7 12.7

Total 53.3 55-57 56.5-58.0

Source: company, PotashCorp, Gazprombank estimates

Brazil is the fastest-growing country in the world in terms of fertilizer consumption

(potash consumption CAGR is estimated at 6.3% until 2020 according to

Fertecon), as soils in Brazil are naturally deficient in potassium and require potash

to remain productive, while the country is increasing acreage and growth of

commodity crops such as soybeans, corn, coffee and sugar. The country produces

only 10% of potash for its own needs, while the rest is imported from Canada,

Belarus, Russia, Chile and Germany. In addition, Brazil consumes only granular

potash, which is $10-20/tonne more expensive than the standard types. Contracts

are settled on a spot basis. This year Brazil will import record potash volumes of

around 8.5 mln tonnes (vs. 8.1 mln tonnes in 2013), of which 2.0 mln tonnes

should come from Uralkali. Spot prices increased to $380/tonne CFR granular in

4Q14 from $350/tonne in the summer, but further growth seems unlikely in light of

falling soft commodity prices.

The US remains the second-largest market after China, which consumes granular

potash and thus is considered a premium market for suppliers. Although Canadian

(PotashCorp) and local producers (Mosaic) are the major suppliers here, Uralkali

exports around 0.5-0.6 mln tonnes of potash to certain regions that major players

find difficult to access. This year has been very successful for suppliers, as

demand is strong (over 10 mln tonnes), but due to logistical constrains supply is

tightening, pushing prices above $400/tonne. We do not see substantial upside

from this level, again because of falling crop prices, but demand will likely remain

strong in 2015, as farmers are likely to replenish declining nutrient levels in soils

following abnormally high harvests.


57

Russia deserves attention as well. Its annual potash consumption is around 2 mln

tonnes, making the market relatively small for global producers, but it promises to

show remarkable CAGR of 5.8% by 2020 and this is an important driver for Uralkali

as the only domestic producer.

Potash consumption growth

Source: Potash Corp

Potash consumption and import breakdown by region, mln tonnes

Source: Fertecon, Gazprombank estimates:

Risk of overcapacity seems exaggerated

Global potash production capacity amounts to 80 mln tonnes, led by Canada (28 mln

tonnes), Russia (13 mln tonnes) and Belarus (10 mln tonnes). High potash prices during

2008-12 (before BPC‘s breakdown in July 2013) lifted industry margins and have led to

dozens of expansion and greenfield projects throughout the world that may add another

30 mln tonnes of capacity by 2025. As a result, some experts see a risk of serious

overcapacity in the industry in long run that may drive potash prices down. However, the

opposite opinion is that many projects will not make it off the ground at all, not be

completed on time, and some might be suspended due to ongoing weak potash prices,

11.50%

1.3%

3.9% 4.0%

1.3%

3.9% 3.5% 3.2%

3.6% 3.5% 2.9% 3.1%

2.0%

0.3%

-1.2% -2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

2013

-18

CA

GR

PA

ST

5 Y

EA

RS

PA

ST

10

YE

AR

S

2013

-18

CA

GR

PA

ST

5 Y

EA

RS

PA

ST

10

YE

AR

S

2013

-18

CA

GR

PA

ST

5 Y

EA

RS

PA

ST

10

YE

AR

S

2013

-18

CA

GR

PA

ST

5 Y

EA

RS

PA

ST

10

YE

AR

S

2013

-18

CA

GR

PA

ST

5 Y

EA

RS

PA

ST

10

YE

AR

S

INDIA CHINA OTHER ASIA LATIN AMERICA NORTH AMERICA

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

2010 2014 2020 2010 2014 2020 2010 2014 2020 2010 2014 2020 2010 2014 2020 2010 2014 2020

CHINA INDIA BRAZIL US SEA EUROPE

CONSUMPTION IMPORT

The opposite opinion is that many projects

will not make it off the ground at all, not be

completed on time, and some might be

suspended due to ongoing weak potash

prices, while organic growth should

eventually absorb some of these additions.


58

while organic growth should eventually absorb some of these additions. Moreover, a

substantial part of new capacity that may be commissioned by 2020 is owned by the

sector majors, including PotashCorp and Uralkali, the strategic goal of which is to

reduce production cash costs, thus improving positions on the global cost curve. As

soon as these capacity additions are up and running, the old facilities may be shut down

in favor of stable capacity utilization rates and firm prices. In view of these assumptions,

Fertecon and Uralkali estimate global capacity expansion CAGR at a moderate 4% to

105 mln tonnes by 2020, which is just 1 pp above average demand growth. This means

that the capacity utilization rate will remain at about 73-75% and it may easily improve if

demand outpaces expectations, as we have seen over the past two years. Moreover,

according to PotashCorp, world potash operating rates exceeded 90% in 1H14, which

would be near a five-year high.

Potash capacity dynamic by region, mln tonnes


Potash capacity dynamic by company, mln tonnes


Potash price performance: positive sentiment driving upward momentum

Over a year has passed since Uralkali broke off relations with Belaruskali and left

Belarus Potash Company (BPC) — the exclusive potash trader for both producers. In

8.7 8.7 9.1 9.5 9.9 10.4 10.8 10.8 10.8 10.8 10.8

10.0 10.0 12.4 12.4 12.7 13.2 13.4 14.8 15.8 16.7 18.2

7.3 7.6 8.1 8.9 10.5 10.9 12.3 12.3 12.8 12.8 12.8 23.1 23.1 24.3 26.2 27.0 29.1

32.6 34.2 36.4 36.6 37.5

0.0

20.0

40.0

60.0

80.0

100.0

120.0

2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018E 2019E 2020E

GERMANY BELARUS RUSSIA ISRAEL JORDAN CHINA CANADA UNITED STATES OTHER COUNTRIES

7 7 7 7 7 7 7 8 9 9 9 9 9 9 10 10 10 11 11 11 11 11 10 10 12 12 13 13 13 14 14 14 14 11 11

11 12 13 13 13 13 13 13 16 12 12 12 13 13 15 17 18 19 19 18 17 18 19 20 23

23 25 27

29 30 32

0

20

40

60

80

100

120

2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018E 2019E 2020E

K+S BELARUSKALIY URALKALI APC ICL MOSAIC POTASH CORP AGRIUM OTHERS


59

the meantime, Uralkali export potash prices have declined by 30% to $220 per tonne

FCA in 1H14 and the potash spot price dropped by 20-25% to $345/tonne CFR

(Saskatchewan) — $320/tonne (China). The reasons for the price correction were due

not only to Uralkali‘s move last year, but also to excess capacity and weak global

demand, particularly from India.

Potash spot prices, $/tonne CFR

Source: Bloomberg

Nevertheless, the existing price level seems resilient, in our view, with some opportunity

for renewed upside in 4Q14 supported by strong demand from US, Brazilian and Asian

importers. Uralkali announced recently that it increased prices for Brazil to $380/tonne

(granular potash) starting in October from $350/tonne in August. In the US, prices were

increased recently to $400/tonne from $390/tonne. Negotiations with China regarding

2015 deliveries will start soon and Uralkali plans to increase prices for China by 10% to

$335/tonne. Finally, potash prices lag behind the robust increase in phosphate prices

and such a large differential seems unjustified, in our opinion. On the downside, excess

capacity and falling soft commodities prices will prevent potash prices from moving

much higher from existing levels, as has been the case with phosphates.

Potash spot price forecasts, $/tonne Uralkali potash price assumptions, $/tonne FCA

Source: Fertecon

Overall, after having experienced a rollercoaster in potash prices, we think the market

will become calmer and more balanced. In our financial estimates, we forecast potash

prices to stabilize at $330-360/tonne CFR in 2015-20, which translates to $245-

260/tonne FCA for Uralkali.

200

250

300

350

400

450

500

550

600

FE

B 1

1

AP

R 1

1

JUN

11

AU

G 1

1

OC

T 1

1

DE

C 1

1

FE

B 1

2

AP

R 1

2

JUN

12

AU

G 1

2

OC

T 1

2

DE

C 1

2

FE

B 1

3

AP

R 1

3

JUN

13

AU

G 1

3

OC

T 1

3

DE

C 1

3

FE

B 1

4

AP

R 1

4

JUN

14

AU

G 1

4

BRAZIL SASKATCHEWAN US GULF NOLA INDIA CHINA

200

300

400

500

600

700

2009

2010

2011

2012

2013

2014

F

2015

F

2016

F

2017

F

2018

F

2019

F

2020

F

VACOUVER FOB FSU FOB INDIA CFR CHINA CFR SEA CFR BRAZIL CFR

0

100

200

300

400

500

2010

2011

2012

2013

2014

E

2015

E

2016

E

2017

E

2018

E

2019

E

2020

E

AVERAGE POTASH PRICES, FCA $ (EXPORT NETBACK) EXPORT, CFR DOMESTIC

The existing price level seems resilient, in our

view, with some opportunity for renewed

upside in 4Q14.


60


Accounting standards IFRS IFRS IFRS IFRS IFRS IFRS IFRS IFRS IFRS

Gross revenues 3,950 3,323 3,364 3,723 3,928 4,142 4,368 4,482 4,906

Net revenues 3,334 2,665 2,652 2,955 3,114 3,285 3,471 3,541 3,900

Export revenue 3,300 2,800 2,959 3,284 3,471 3,664 3,865 3,964 4,342

Domestic revenue 528 408 311 344 363 382 408 423 469

Other revenue 121 115 95 95 95 95 95 95 95

COGS -991 -945 -969 -1,005 -1,055 -1,093 -1,123 -1,144 -1,175

Gross income 2,959 2,378 2,395 2,717 2,873 3,048 3,245 3,338 3,731

SG&A -1,002 -1,159 -1,175 -1,233 -1,247 -1,289 -1,337 -1,387 -1,461

Other income (costs) -105 -157 -77 -77 -77 -77 -77 -77 -77

EBIT 1,852 1,062 1,143 1,407 1,549 1,682 1,831 1,875 2,193

Depreciation 460 415 421 441 471 491 501 501 501

EBITDA 2,375 1,634 1,564 1,847 2,020 2,173 2,332 2,376 2,694


Other costs -4 -4 -4 -4 -4 -4 -4 -4 -4

PBT 1,937 827 978 1,223 1,374 1,528 1,695 1,723 2,060

Taxes -340 -161 -190 -228 -252 -276 -301 -306 -358

Net income 1,597 666 788 995 1,122 1,252 1,393 1,417 1,702


Cash and equivalents 1,386 930 393 565 793 631 327 700 1,351


Inventories 242 250 257 267 280 290 298 303 312

Other current liabilities 768 18 15 15 15 15 15 15 15

Total current liabilities 2,958 1,716 1,189 1,426 1,700 1,581 1,321 1,754 2,491

PP&E 3,385 3,235 3,385 3,615 4,015 4,395 4,565 4,685 4,755

Goodwill 1,940 1,802 1,802 1,802 1,802 1,802 1,802 1,802 1,802

Intangible assets 5,855 5,457 5,337 5,216 5,095 4,975 4,854 4,733 4,612

Other non-current assets 154 449 449 449 449 449 449 449 449

Total assets 14,291 12,660 12,162 12,509 13,061 13,202 12,991 13,424 14,110

ST debt 1,122 1,464 941 941 941 700 700 700 700



Total current liabilities 1,490 2,168 1,501 1,467 1,423 1,137 1,087 1,094 1,105

LT debt 2,820 3,583 3,346 3,146 3,146 3,146 2,500 2,500 2,500

Other non-current liabilities 1,222 1,168 1,168 1,168 1,168 1,168 1,168 1,168 1,168

Total non-current liabilities 5,533 6,919 6,015 5,781 5,737 5,451 4,755 4,762 4,773

Total shareholders equity 8,750 5,727 6,122 6,620 6,957 7,333 7,751 8,177 9,879




61


Net income before tax 1,937 827 978 1,223 1,374 1,528 1,695 1,723 2,060

Depreciation -460 -415 -421 -441 -471 -491 -501 -501 -501

Change in working capital -40.4 238.7 -157.0 -99.6 -89.4 -88.5 -93.2 -54.0 -73.9

Others 315 587 605 633 661 666 668 679 608

Operating cash flow 1,752 1,238 1,005 1,316 1,475 1,615 1,769 1,848 2,094

Capex -399 -416 -450 -550 -750 -750 -550 -500 -450

Other 268 468 0 0 0 0 0 0 0

Investing cash flow -131 52 -450 -550 -750 -750 -550 -500 -450


Other 52 -1,235 -759 -200 0 -241 -646 0 0

Financing cash flow -849 -1,665 -1,092 -594 -497 -1,027 -1,523 -975 -992

Effect of FX 11 -80 0 0 0 0 0 0 0

Change in cash 771 -456 -538 172 228 -162 -303 372 652


Total debt 3,942 5,046 4,287 4,087 4,087 3,846 3,200 3,200 3,200

Net debt 2,556 4,116 3,895 3,522 3,295 3,215 2,873 2,500 1,849

KEY RATIOS

P/E 5.31 12.72 10.76 8.52 7.56 6.77 6.09 5.98 4.98

EV/EBITDA 4.65 7.71 7.91 6.50 5.83 5.38 4.87 4.62 3.83

EV/Sales 2.79 3.79 3.68 3.22 3.00 2.82 2.60 2.45 2.10

P/BV 0.97 1.48 1.38 1.28 1.22 1.16 1.09 1.04 0.86

Div. yield 5.1% 3.9% 4.6% 5.9% 9.3% 10.3% 11.5% 11.7% 11.7%

ROE 18.2% 11.6% 12.9% 15.0% 16.1% 17.1% 18.0% 17.3% 17.2%


62

OC

TO

BE

R

27,

20

14

Acron RUSSIA > EQUIT Y RESEARCH

The nitrogen prince: moving toward deep integration

FERTILIZER S

We initiate coverage of Acron, Russia’s leading producer of nitrogen and

complex fertilizers, with a NEUTRAL recommendation and target price of

$37.5 (RUB 1,568) per share, implying 22% upside potential. The company

trades at a 2015E EV/EBITDA of 3.6x compared to 6.2x for Yara and 5.1x

for PhosAgro, which is a reasonable discount, as Acron is the least liquid

among Russia’s fertilizer producers. The vagueness surrounding the

large-scale potash project, assuming its implementation, significantly

impacts Acron’s fundamental value, as it will reduce free cash flow and

may prevent share price appreciation in the near term. Upside risk to our

financial forecasts, valuation and dividend yield involves Acron’s

opportunity to monetize some of its non-core investments, including

stakes in Uralkali and Grupa Azoty, and potash permits in Canada.

Cheap natural gas, value-added products and deep integration are the main

competitive advantages

Acron is a low-cost producer of nitrogen and complex fertilizers, paying just $3.3

per MMBTU for natural gas, which is one of the lowest prices globally, while ruble

depreciation compensates for price inflation. Acron benefits from its own

transportation facilities (rail cars and port terminals) and is self-sufficient in

phosphate rock. Over 80% of the company‘s revenues come from value-added

complex fertilizers (NPK), ammonia nitrate and UAN, which trade at a premium to

their components (urea, phosphate rock, potash). The price outlook for these

fertilizers looks more favorable, unlike global prices for ammonia and urea, which

may be under pressure in the long run. These factors have secured firm operating

cash flow for Acron and an above-sector average EBITDA margin of 25%.

New ammonia plant and phosphate rock project to drive earnings, while

potash project may dilute its value

We forecast Acron‘s revenue and EBITDA CAGR at 6% and 9%, respectively,

by 2020. The company intends to open a new 700 kt ammonia plant with a

lower gas consumption ratio in 2015, adding around $300 mln (15% of the total)

to its top line. The launch of the Oleniy Ruchey project in 2012 in Murmansk

region provided the company with its own phosphate rock, reducing its

production costs by roughly $50 mln per annum. By 2017, the company expects

to build up export volumes of phosphate rock to 1 mln tonnes, adding another

$200 mln to its revenues. Meanwhile, Acron‘s most ambitious project – the

development of a potassium field in Perm region by 2021 with $2 bln in capex –

raises a red flag, since it looks NPV negative (or at least zero) at current potash

prices. Acron realizes the risks and thus the final decision has been postponed

until next year, but if it is eventually approved free cash flow will go down.


We applied a 5.0X EV/EBITDA to Acron‘s 2015E EBITDA of $594 mln to derive

a target price of $37.5 per share. Our valuation does not include Acron‘s

investments in Grupa Azoty, VPC and Canadian potash deposits, as there is no

clarity on how the company will develop and monetize them, if at all,

representing upside risk to our valuation. Dividends may bring up to a 12% yield

for 2014 if Acron sells its 1.13% stake in Uralkali. Another share price trigger, as

well as a risk, will be the decision on whether to roll out the potash project.


Source: Bloomberg

Acron share price performance vs. MICEX Index, past year

Source: Bloomberg

Acron key data

2013 2014E 2015E 2016E

Revenue, $ mln 2,134 2,019 2,133 2,437

EBITDA, $ mln 484 526 594 706


Net income, $ mln 409 333 323 399

Adjusted net income, $ mln*

311 260 302 380

Net margin 19% 16% 15% 16%

EV/EBITDA 5.6 4.1 3.6 3.1

P/E 4.1 4.9 4.2 3.4

P/BV 0.6 0.6 0.6 0.6

P/FCF neg. neg. neg. neg.

Div. yield 15% 8% 8% 9%


*adjusted for one-offs and minority interest

TICKER AKRN RX

Closing price, RUB 1,282

Target price, RUB 1,568

Upside 22%


MCap, $ mln 1,362


EV, $ mln 2,255

52-week high, RUB 1,372

52-week low, RUB 931

SELECTED STOCK DATA

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ACRON MICEX


63

COMPANY DESCRIPTION

Acron is a leading Russian fertilizer company that produces nitrogen (ammonia, urea,

UAN, AN) and complex fertilizers (NPK), organic and non-organic compounds (methanol,

formaldehyde), and phosphate rock. The holding comprises two fertilizer plants in Russia

(Acron and Dorogobuzh); one production facility in China (Hongri Acron); and a mining

and processing plant in Murmansk region that produces phosphate rock (Oleniy Ruchey).

It also develops potash deposits in Perm region and has potash licenses in the Canadian

province of Saskatchewan. The company‘s transport division includes three port terminals

on the Baltic Sea with total capacity of 5 mln tonnes and 2,500 railcars. Acron also owns a

1.13% stake in Uralkali worth $130 mln and a 20% stake in Polish Grupa Azoty worth

$400 mln. Total headcount numbers more than 16,000 employees.

Key financial data Shareholder structure

ACRON

Bloomberg ticker AKRN RX



Upside, % 22%


Shares outstanding, mln 41


Net debt (2014E), $ mln 1,066

Minority interest, $ mln 605

Investments, $ mln -778

EV, $ mln 2,255

Free float 15.5%

Source: Bloomberg, Gazprombank estimates Source: company data


Brent price, $/bbl 106.0 106.0 104.0 100.0 100.0

RUB/USD, average

31.09 31.82 38.00 40.00 40.00

CPI (Russia) % 6.0% 5.3% 8.0% 6.0% 5.5%

FINANCIAL RATIOS

P/E 2.9 4.1 4.9 4.2 3.4

EV/EBITDA 4.3 5.6 4.1 3.6 3.1

EV/Sales 1.2 1.3 1.1 1.0 0.9

P/BV 0.62 0.63 0.59 0.62 0.56

Div. yield 11.3% 15.2% 7.9% 7.6% 9.4%

Payout ratio 30% 47% 30% 30% 30%

FCF yield neg. neg. neg. neg. neg.

PER SHARE DATA, $

EPS 11.80 10.09 8.21 7.96 9.86

DPS 3.54 4.78 2.48 2.39 2.96

MARGINS 2012 2013 2014E 2015E 2016E

EBITDA margin, % 28.0% 22.7% 26.0% 27.8% 29.0%

EBIT margin, % 25.9% 20.6% 21.6% 23.0% 24.1%

Pre-tax margin, % 26.7% 23.5% 20.6% 18.9% 20.5%

Net margin, % 20.9% 19.2% 16.5% 15.1% 16.4%


Capex/sales 0.23 0.21 0.20 0.21 0.20


ROA 9.5% 9.2% 6.8% 7.4% 8.6%

ROE 21.3% 15.4% 12.1% 14.7% 16.7%

Net debt/Equity 0.54 0.56 0.49 0.54 0.53

Net debt/EBITDA 1.71 2.36 2.03 1.85 1.72

23.3%

19.0% 19.8%

15.6%

6.8%

15.5%

ACRONAGROSERVICE

QUESTAR HL

REFCO HL

GRANADILLA HL

AGROBERRY VENTURES LTD

FREE FLOAT


64


Ammonia capacity, kt 1,900 1,900 1,900 2,100 2,600

AN capacity, kt 900 900 900 900 900

UAN capacity, kt 700 900 1,000 1,000 1,000

NPK capacity, kt 2,600 2,600 2,600 2,600 2,600

Ammonia sales, kt 158 161 95 121 751

AN sales, kt 1,335 1,385 1,379 1,379 1,379

UAN sales, kt 741 766 950 950 950

NPK sales, kt 2,311 2,567 2,524 2,528 2,528

Urea sales, kt 253 283 232 276 296

Phosphate rock sales, kt

12 150 350

Natural gas/ammonia ratio 1.12 1.10 1.10 1.05 1.05


Natural gas prices, $ per MMBTU

3.14 3.54 3.18 3.18 3.26

Implied prices on Urea, $/t 400 327 315 320 330

Implied prices on AN, $/t 306 367 354 360 371

Implied prices on UAN, $/t 451 414 365 380 390

Implied prices on NPK, $/t 12,110 15,700 15,700 15,700 15,700

Number of employees 3.14 3.54 3.18 3.18 3.26

GROWTH, YOY

Revenues 2.7% -6.8% -5.4% 5.6% 14.3%

EBITDA -9.3% -24.6% 8.7% 13.0% 18.8%

Net income -30.6% -14.5% -18.6% -3.1% 23.8%

Capex 40.5% -12.5% -9.7% 8.8% 10.1%

INCOME STATEMENT, $ MLN 2012 2013 2014E 2015E 2016E

Accounting standard IFRS IFRS IFRS IFRS IFRS

Revenues 2,289 2,134 2,019 2,133 2,437

COGS -1,302 -1,320 -1,180 -1,248 -1,419

Natural gas -254 -304 -269 -263 -356

Materials -608 -414 -377 -385 -402

Payrolls -147 -172 -154 -159 -164

Gross income 987 814 839 884 1,019

Transportation costs -217 -238 -219 -234 -258

SG&A -176 -166 -154 -159 -173

Other income (costs) -1 29 -31 0 0

EBIT 593 439 435 491 588

Depreciation 48 44 90 103 118

EBITDA 641 484 526 594 706


PBT 610 501 417 403 499

Taxes -132 -91 -84 -81 -100

Net income 478 409 333 323 399

Adjusted net income* 434 311 260 302 380


Cash and equivalents 884 391 493 225 179


Inventories 417 334 343 317 360

Other CA 772 317 177 151 147

Total CA 2,382 1,261 1,252 912 938

PP&E 1,541 1,866 2,156 2,167 2,478

Investments 155 319 0 0 0

BALANCE SHEET, $ MLN 2012 2013 2014E 2015E 2016E

Other non-current assets 963 1,017 1,489 1,266 1,235

Total assets 5,041 4,464 4,897 4,345 4,651

ST debt 753 839 794 675 659


Other CL 135 155 229 147 162

Total CL 1,060 1,146 1,177 964 982

LT debt 1,229 694 765 650 732

Other non-current liabilities 206 196 192 163 159

Total non-current liabilities 1,435 890 957 813 891

Shareholders equity 2,041 2,024 2,157 2,054 2,277


Total liabilities and equity 5,041 4,464 4,897 4,345 4,651


Net income before tax 610 501 417 403 499

Depreciation 48 44 90 103 118

Change in working capital 2.5 198.4 -106.5 4.5 -36.0

Others -362 -292 -119 -123 -137

Operating cash flow 299 451 281 387 444

Capex -519 -454 -410 -446 -491

Other -122 171 -70 11 12

Investing cash flow -641 -283 -480 -435 -479


-60 -79 -183 -137 -92

Other 880 -561 300 0 97

Financing cash flow 820 -641 117 -137 5

Effect of FX -21 -12 0 0

Change in cash 478 -493 -94 -184 -29

* adjusted for one-offs and minority interest


65

VALUATION: TP $37.5 PER SHARE, NEUTRAL

We initiate coverage of Acron with a NEUTRAL recommendation and target price of

$37.5 (RUB 1,568) per share, implying 22% upside potential.

We see three strategic outcomes for Acron that would substantially impact its

fundamental value.

First option is the most favorable. Acron will abandon development of the potash

project requiring $2 bln in capex. Instead, the company will focus on cash flow

generation, reducing its current debt burden to less than 2.0x EBITDA within a few

years and focusing on paying dividends with a potential payout ratio above 50%,

suggesting a double-digit dividend yield.

Second option — the risky one. Acron will commence development of the potash

project. Thus, its investment program will be burdened for almost a decade. There

is a risk that the project will be value-dilutive for Acron if potash prices are lower

than expected by the time mining gets underway. Portfolio investors, despite a

favorable outlook on potash pricing, will likely take this as a negative since it

means small free cash flow until 2020. The management is looking for a better

understanding of potash price performance and thus the final decision on the

project may be approved in 1H15 or even later (2016). However, that may prevent

the stock from rising at least as long as uncertainty prevails, we believe.

Third option — monetization of investments. Acron looks more appealing from

a valuation standpoint if it is considered on a sum-of-the-parts basis, adding up the

value of the company‘s 20% stake in Grupa Azoty, and potash licenses in Russia

and Canada. That scenario shows the company‘s intrinsic value at around $2.3

bln, or $57 per share, but there is no clarity how or when the company will release

these assets.

Acron currently trades at a 2015E EV/EBITDA of 3.6x compared to 6.2x for Yara – the

world‘s leading producer of nitrogen fertilizers, which is the closet peer to Acron – and

5.1x for PhosAgro, which is the best Russian peer. However, we think that Acron

deserves to trade at a discount to these peers due to its lower liquidity and weaker

production flexibility.

We estimate Acron‘s target price based on a target EV/EBITDA multiple of 5.0x

EV/EBITDA to projected 2015E EBITDA of $594 mln. We then subtracted the

company‘s 2014E net debt ($1.1 bln) and minority interest ($514 mln), and added the

value of a 1.13% stake in Uralkali ($133 mln). That calculation translates into $37.5 per

share. Our valuation does not include Acron‘s investments, including a 20% stake in

Grupa Azoty ($360 mln based on the current market price), Verkhnekamskaya Potash

Company (VPC), or Canadian permits for potash field exploration, since there is no

clarity on how the company will develop and monetize them, if at all. However, their

book value is estimated at around $800 mln, translating into an additional $19.6 per

share, which we do not take into account in our valuation.

AKRN RX TP: $37.5 (RUB 1,568) per share,

NEUTRAL

There are three strategic outcomes for Acron

that will substantially influence the company‘s

fundamental value going forward. Pending

clarity on the company‘s strategy, we have a

NEUTRAL recommendation.

Acron currently trades at a 2014E

EV/EBITDA of 3.6x and P/E of 4.2x, which is

not overly cheap given the company‘s poor

liquidity.


66

Acron 12m trailing EV/EBITDA


Acron target price valuation, $ per share

IMPLIED EV/EBITDA 4.5 5.0 5.5

EBITDA 2015, $ mln 594 594 594

Enterprise value, $ mln 2,672 2,969 3,266

Less net debt 2014E, $ mln -1,067 -1,067 -1,067

Less minority interest, $ mln -514 -514 -514

Plus 1.13% stake in Uralkali, $ mln 133 133 133

Market capitalization, $ mln 1,224 1,521 1,818

Number of shares, mln 41 41 41

Target price, $ per share 30.2 37.5 44.8

ADDITIONAL VALUE OF ACRON INVESTMENTS

Plus 20% stake in Grupa Azoty, $ mln (based on MCap) 360 360 360

51% book value of VPC, $ mln 235 235 235

Potential value of Acron potash permits in Canada, $ mln 200 200 200

Total Acron equity value, $ mln, 2,019 2,316 2,613

Target price, $ per share 49.8 57.1 64.5


We do not utilize a DCF valuation for Acron due to uncertainty related to its long-term

investment program.

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ACRON PEER GROUP MSCI RUSSIA


67

Acron SWOT analysis

STRENGTHS OPPORTUNITIES

Acron is a low-cost nitrogen and complex fertilizer producer paying just $3.3 per MMBTU for natural gas, which is close to cheap gas prices in the US.

Acron will launch a new 700 kt ammonia plant in 2015 with better gas consumption ratios.

The company has its own rail transportation company and three fertilizer terminals on the Baltic Sea, allowing it to control transport costs.

The company will expand its phosphate processing capacity to 1.7 mln tonnes by 2017, of which 1 mln tonnes will be exported.

The company benefits from ruble depreciation, as over 80% of its goods are exported, while costs are set in rubles. Each RUB 1 change in the RUB/USD exchange rate boosts the company‘s EBITDA by about $20-25 mln.

Acron has permits to explore potash deposits in Canada. The company has already set up a JV with BHP Billiton to continue field exploration. It may start large-scale development of potash fields or sell them going forward.

Acron has deep raw material integration, being self-sufficient in ammonia and phosphate rock.

Acron has considered starting potash production after 2021, covering the company's own potash needs for production of NPKs. Additional volumes will go toward exports.

Over 80% of the company‘s revenues comes from value-added nitrogen and complex fertilizers (NPK, AN, UAN), which trade at a 9-12% premium to their components (urea, phosphate, potash).

The company has a number of additional investments, including a 1.13% stake in Uralkali and 20% in Grupa Azoty, which might be released on the open market in the future.

The company has disbursed healthy dividends in the past and is capable of continuing this policy going forward.

WEAKNESSES THREATS

Acron‘s most ambitious project – the development of a potassium field in Perm region by 2021 with $2 bln in capex – raises concerns, because NPV looks negative at current potash prices.

There is execution risk for Acron‘s potash and phosphate field development projects, which could lead to capex overruns.

The company has nearly topped out its debt capacity, with current net debt/EBITDA of 2.5x.

We see the threat of a decline in potash prices in the long run, making Acron‘s potash project NPV-negative, if implemented.

Ruble appreciation has a negative impact on the company's profitability.

Falling oil prices will lead to reduced prices in gas contracts for global nitrogen producers and improve their cost position against Russian producers, including Acron.



68

ACRON BUSINESS OVERVIEW: BUILDING VERTICAL INTEGRATION

Acron is a leading Russian fertilizer company that produces nitrogen (ammonia, urea,

UAN, AN) and complex fertilizers (NPK), organic and non-organic compounds

(methanol, formaldehyde), and phosphate rock. It is a holding that comprises two

fertilizer plants in Russia, namely Acron and Dorogobuzh; a production facility in China

named Hongri Acron; and a mining and processing plant Oleniy Ruchey in Murmansk

region that produces phosphate rock. It also develops potash deposits in Perm region

and has potash permits in the Canadian province of Saskatchewan. The company‘s

transport division includes three port terminals on the Baltic Sea with total capacity of 5

mln tonnes and 2,500 railcars. It also owns a 1.13% stake in Uralkali and 20% in Polish

nitrogen fertilizer producer Grupa Azoty. Total headcount currently exceeds 16,000.

Acron production assets

Source: Company

MINING PRODUCTION LOGISTICS DISTRIBUTION

4 NWPC, the Oleniy Ruchey mine

2013 output: 642 kt of apatite

concentrate

5 VPC (potash licence)

Recoverable resources: 99 mn t KCI

6 North Atlantic Potash Inc.

(exploration permits in

Saskatchewan, Canada)

Recoverable resources (inferred):

418 mn t KCI

1 Acron

2013 commercial output: 3.6 mn t

2 Dorogobuzh


3 Hongri Acron


The Group’s total commercial output

in 2013: 6.1 mn t

The Group’s sales in 2013: 6.2 mn t

7 AS BCT port terminal facility

Capacity: 1 mtpa of ammonia,

1 mpta of UAN

8 AS DBT port terminal facility

Capacity: about 2.5 mpta

9 Andrex port terminal facility

Capacity: 500 ktpa

Blending and packaging capacity:

400 kpta

10 Acron-Trans (railway operator)

About 2,500 railcars and tanks

11 Agronova

19 branches and representative offices

16 warehouses

12 Beijing Yong Sheng Feng AMPC, Ltd.

Chinese distribution network

13 Agronova Europe AG

Global trader

14 Agronova International Inc.

Global trader

6

14

12

3

4

13

10

1

2

11 57

8

9

Countries to which the Group

supplies its products

Russia‘s leading producer of complex

fertilizers (NPKs) and among the top 5

largest producers globally, with production

facilities in Russia and China.


69

Over 50% of Acron‘s costs come from natural gas and raw materials (potash, phosphate

and sulphur), the prices of which are still lower compared to nitrogen producers in other

countries, making Acron highly competitive on the global market with above-average

margins. However, inflation and tariff regulation are driving domestic raw material prices

higher, forcing Acron to preserve its margins by strengthening vertical integration with

in-house phosphate rock and potash and improving gas consumption efficiency.

Fertilizer production facilities

Acron‘s facilities, located in Veliky Novgorod, North-West Federal District, are the

largest part of the Group. Production capacity allows the company to produce 1.2 mln

tonnes of ammonia, 0.8 mln tonnes of urea, 0.9 mln tonnes of ammonia nitrate, 1 mln

tonnes of UAN and 1.2 mln tonnes of NPK fertilizers. Additionally, the company

manufactures methanol, formaldehyde and urea-formaldehyde resins. Dorogobuzh is

located in Smolensk region and has 600 kt of ammonia, 600 kt of NPK and 900 kt of AN

capacity. China-based Hongri Acron was built in 1999-2000 and is currently one of the

largest domestic producers of complex fertilizers, with 800 kt of capacity. Acron owns a

51% equity stake in the company, while another 49% is held by a local partner.

Acron production and capacity, kt

ACRON DOROGOBUZH HONGRI ACRON

PRODUCTION 2013 CAPACITY PRODUCTION 2013 CAPACITY PRODUCTION 2013 CAPACITY

Ammonia 1,220 1,200 616 600

AN 551 900 983 900

Urea 656 800

UAN 807 1,000

NPK 1,151 1,200 631 600 732 800

Methanol 88 100

Hydrochloric acid 130 200 129 170

UFRs 164 200

Source: Company

Phosphate and potash projects

Oleniy Ruchey mining and processing plant is located in Murmansk region, where it

develops high-grade phosphate-nepheline deposits located not far from Phosagro‘s

Apatit. After having received licences in 2008, Acron started this greenfield project in

2009 and ran the first stage of phosphate rock production in 2012. In 2014, the

processing plant should deliver 1.1 mln tonnes of phosphate rock, which fully covers

Acron‘s own needs (750 kt) for production of NPK fertilizers, while the rest is exported.

That project has allowed the company to stop buying phosphate rock from PhosAgro.

Under the second stage, production will rise to 1.7 mln tonnes by 2017 and to 2 mln

tonnes going forward.

In 2008, Acron subsidiary Verkhnekamskaja Potash Company (VPC) won licenses

from the state to develop the Talitsky area of Verkhnekamsk potassium-magnesium

salt deposit in Perm region for $470 mln (RUB 18.8 bln). Extracted reserves amount

to 99 mln tonnes of KCI. In 2012, VPC started field development, while the first potash

volumes should be mined in 2021 according to the licence terms.

North Atlantic Potash (NAP)

Acron owns Canadian-based North Atlantic Potash, which focuses on exploration of

potash greenfields in Canada. The company currently holds 20 permits, the second-

largest in the Saskatchewan Potash District. In 2014, NAP established a JV with Rio

Tinto, 60% and 40%, respectively, contributing nine lease permits. Geological

Acron‘s total production capacity amounts to

1.9 mln tonnes of ammonia, 0.8 mln tonnes

of urea, 1 mln tonnes of UAN, 2.6 mln tonnes

of NPK fertilizers and 1.1 mln tonnes of

phosphate rock. The company also produces

methanol, formaldehyde and urea-

formaldehyde resins.

In 2012, Acron started processing of

phosphate rock. In 2014, the processing

plant should deliver 1.1 mln tonnes of

phosphate rock, which fully covers Acron‘s

own needs (750 kt) for production of NPK

fertilizers, while the rest is exported. The

second stage assumes production growth to

1.7 mln tonnes by 2017 and to 2 mln tonnes

thereafter.

Acron has a license to develop potash fields

in Perm region, but the project raises concern

from a value perspective.

Acron also owns permits for exploration of

potash deposits in Canada.


70

exploration showed recoverable resources reaching 329 mln tonnes of KCI in this area.

The exploration results in other areas also point to sizable KCI deposits. Acron has not

yet decided on how to develop Canadian assets going forward, though one potential

option might be to monetize these permits, if global demand and potash prices recover.

Acron marketing strategy

Acron sells fertilizers to over 60 countries all over the world. Asia is the largest market,

accounting for 31% of total sales, including 21% to China, which is natural, as Acron

owns a production facility there. Russia is the second-largest market (19%), where

Acron sells primary ammonia nitrate, NPK and industrial products. The US and Canada

account for 11% of Acron‘s total sales, but almost 90% of its UAN (urea ammonium

nitrate solution) products. The company is also the largest supplier of ammonia nitrate

to Brazil (36% of the country‘s imports), while Latin America accounts for 14% of the

company‘s consolidated sales.

Acron is focused on production of value-added nitrogen and complex fertilizers,

including NPK, ammonia nitrate and UAN, the demand for which is growing steadily,

while supply is not excessive, leading to premium pricing compared to the base

products. Over the past five years, UAN and AN have traded at a 9% premium to urea,

while NPK trades at a 12% premium to the fertilizers basket.

Acron revenue breakdown by country, 2013 Acron revenue breakdown by product, 2013


Investment projects

Acron‘s investment program includes three main projects that should strengthen the

company‘s vertical integration, making it self-sufficient in terms of potash and allowing

the start of phosphate rock exports. The company may spend up to $3 bln in total until

2021, compared with $1.6 bln invested over the past five years.

New 700 kt ammonia plant. The plant should become operational in 2015,

boosting the company‘s total ammonia capacity to 2.6 mln tonnes. The additional

ammonia volumes will be exported mainly to Europe and the US. The new

ammonia plant will require 14% less natural gas than Acron‘s current ammonia

facilities and should add around $300 mln to the company‘s top line, or 15% of the

total. Total capex amounts to $420 mln, of which $170 mln has already been

invested.

Oleniy Ruchey. Stage 2. The project includes construction of an underground

mine and expansion of the processing plant‘s capacity from 1.1 mln to 1.7 mln

tonnes of phosphate rock by 2017 and to 2.0 mln tonnes thereafter. As Acron has

already secured phosphate rock for production of NPK, the additional volumes will

21%

5%

5%

8%

6%

11%

7%

7%

19%

11% CHINA

THAILAND

OTHER ASIA

BRAZIL

OTHER LATIN AMERICA

NORTH AMERICA

AFRICA

CIS

RUSSIA

EUROPE 48% 23%

10%

5%

3%

10%

NPK

AMMONIA NITRATE

UAN

UREA

AMMONIA

OTHERS

Acron is focused on production of value-

added nitrogen and complex fertilizers,

including NPK, ammonia nitrate and UAN,

the demand for which is growing steadily,

while supply is not excessive leading to

premium pricing compared to the base

products.

Acron‘s long-term investment program

includes three main projects that should

strengthen the company‘s vertical

integration, providing self-sufficiency with

own potash. In total, the company may

spend up to $3 bln until 2021, compared with

$1.6 bln invested over the past five years.


71

also be directed toward exports. The capex program will amount to $350 mln, while

additional revenues should reach $250 mln, on our estimates.

Talitsky processing plant: potash field development. This is Acron‘s most

ambitious and long-term project, envisaging development of potassium fields in

Perm region. The company currently owns 51% in the project through VPC, while

another 49% has been acquired by financial investors EBRD, VEB and Sberbank

that paid a total of nearly $500 mln. Total capex will amount to $2 bln, including

field and infrastructure development and construction of a processing plant with 2

mln tonnes of potash production capacity, of which 600 kt will go toward satisfying

Acron‘s needs for production of NPK fertilizers, while the rest will be slated for

external sale. The project implies $1,000 per tonne of installed capacity, which is

relatively costly – this is above the global average and the most expensive potash

project in Russia. For example, Uralkali‘s Polovodovsky project is potentially

valued at $700 per tonne of capacity and Uralkali management is not confident on

whether to start it up or not.

Acron investment program, $ mln


Cash flow distribution

Firm demand for complex fertilizers globally and low production costs are conducive to

stable operating cash flow for Acron, which we forecast at $400-550 mln annually in

2014-20. However, the size of future free cash flow will depend on whether Acron

approves its potash project. Generally, if it is approved, Acron‘s future operating cash

flow should cover the company‘s investment needs according to our financial forecasts,

which are based on a 2-4% annual increase in pricing for nitrogen and complex

fertilizers. As of 1H14, the company‘s debt burden stood at 2.5x net debt/EBITDA and

we expect it to decline to below 2.0x by end 2015. Our financial forecasts show that the

debt burden may remain at this level following implementation of the potash project,

although the company itself assumes that it may increase to 3.0-3.5x EBITDA during the

peak of the investment cycle and will depend on the pace of project development. In any

event, this implies a lack of free cash flow to the firm until the end of the project‘s

construction in 2021, which is not in the interests of minority shareholders, we believe.

We do not think that the potash project will affect the company‘s current dividend policy,

which calls for a 30% payout ratio and implies an annual dividend yield of 8-9% based

on the current price. Moreover, there is upside risk to this yield if Acron sells its 1.13%

stake in Uralkali, a move that is highly likely to occur this or next year. The gain from this

179

369

519 453

410

296 241

162 182

150 250 350

400

0

100

200

300

400

500

600

700

2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018E

APPROVED CAPEX (AMMONIA AND PHOSPATE ROCK PROJECTS) POTENTIAL CAPEX ON POTASH PROJECT


72

$130 mln (RUB 5 bln) stake would feed into the company‘s bottom line, lifting dividends

to RUB120-140 per share and yielding 11-12%.

If the potash project is not approved, the company‘s free cash flow to the firm will total

around $170 mln in 2016 and jump to more than $300 mln in 2017, implying a free cash

flow yield of 24%, which might translate into generous dividends.

Acron capex scenarios, $ mln Acron DPS, RUB


Acron cash flow distribution including capex on potash project, $ mln

Acron cash flow distribution without potash project, $ mln

Source: Gazprombank estimates Source: Gazprombank estimates

Financial forecasts

Revenue drivers. Nitrogen and complex fertilizers account for 41% and 48% of

Acron‘s consolidated revenues, respectively, with the rest coming from organic and

non-organic compounds. We forecast a 5% revenue decline for 2014 to $2 bln

driven by a 5.5% increase in output of commercial fertilizers, mainly UAN (+21%

for 9M14) and NPK (+2.8%), but lower prices for key nitrogen fertilizers, which are

down 4-8% YTD. We forecast the company‘s 2014-20 revenue CAGR at 6%

compared to 10% 2007-13 CAGR driven by growing sales of ammonia and

phosphate rock from the Oleniy Ruchey project.

Cost drivers. Natural gas is the most important cost item for Acron, accounting for

23% of total operating costs, followed by potash (13%). The company pays $3.3

per MMBTU of natural gas, which is comparable to cheap gas prices in the US,

-0.50

0.00

0.50

1.00

1.50

2.00

2.50

3.00

-500

0

500

1,000

1,500

2,000

2013 2014E 2015E 2016E 2017E 2018E 2019E 2020E

NET DEBT WITH TALITSKY GOK

NET DEBT WITHOUT TALITSKY GOK

NET DEBT/EBITDA WITH TALITSKY GOK

NET DEBT/EBITDA WITHOUT TALITSKY GOK

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

0

20

40

60

80

100

120

140

160

2010

2011

2012

2013

2014

E

2015

E

2016

E

2017

E

2018

E

2019

E

2020

E

DPS % OF NET INCOME

299 451 281 387 444 541 594

-641 -283

-480 -435 -479 -506 -575

760

-720 -273

-1,500

-1,000

-500

0

500

1,000

1,500

2012 2013 2014E 2015E 2016E 2017E 2018E

OPERATING CASH FLOW CAPEX DIVIDENDS FINANCING CASH FLOW

299 451 281 387 443 537 588

-641 -283 -480 -289 -235 -160 -180

-277 -461

760

-720 -273 -88 -312

-802

-2,000

-1,500

-1,000

-500

0

500

1,000

1,500

2012 2013 2014E 2015E 2016E 2017E 2018E

OPERATING CASH FLOW CAPEX DIVIDENDS FINANCING CASH FLOW


73

allowing Acron to be highly competitive on the global market. We forecast a 2.5-

5.0% average annual increase in domestic gas prices in 2015-20, but the efficiency

of gas consumption will improve at Acron as well with the commissioning of the

new ammonia plant. Self-sufficiency in phosphate rock for NPK production has

already saved the company around RUB 2-3 bln ($50-70 mln) annually, or 4-6% of

total costs, on our estimates.

Acron revenue breakdown by product, $ mln


Acron costs breakdown, 2013

Source: Company

0

500

1000

1500

2000

2500

3000

2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018E 2019E 2020E

NPK AN UREA-AMMONIUM NITRATE

UREA AMMONIA UREA-FORMALDEHYDE RESINES

OTHERS TOTAL

13%

7%

13%

2%

2%

6%

11%

23%

8%

15%

STAFF COSTS

PHOSPHATES

POTASH

COAL

SULFUR

DEPRECIATION

FUEL

NATURAL GAS

MAINTENANCE

OTHERS


74

Acron revenue and EBITDA breakdown by subsidiary, 2013, RUB bln


Shareholders

Acron is owned by Vycheslav Kantor, a Russian businessman who controls 84.5% of

the company through five offshore entities. Another 15.5% is in free float ($200 mln), of

which 14.43% is listed on the Moscow Exchange and a minor 1.09% is a GDR listing in

London. Average daily turnover (ADT) is below $1 mln, making the company the most

illiquid among Russian fertilizers. There are no plans to hold an IPO anytime in the near

future, as the company is only midway through its investment cycle.

Acron shareholder structure

Source: Company

33.421

17.497

10.234

4.115

9.08

4.611

0.622 0.719

27% 26%

6%

17%

0%

5%

10%

15%

20%

25%

30%

0

5

10

15

20

25

30

35

40

ACRON DOROGOBUZH HONGRI ACRON NW PHOSHPATE COMPANY (OLENIY

RUCHEY)

REVENUE EBITDA EBITDA MARGIN

23.3%

19.0%

19.8%

15.6%

6.8%

15.5%

ACRONAGROSERVICE

QUESTAR HL

REFCO HL

GRANADILLA HL

AGROBERRY VENTURES LTD

FREE FLOAT


75

NITROGEN AND COMPLEX FERTILIZER SECTOR OVERVIEW

Nitrogen is the most important and widely used of the three main fertilizer nutrients

(nitrogen, phosphorus and potassium). It is an essential building block of amino and

nucleic acids, essential to life on Earth. Nitrogen (N), the main constituent of proteins, is

essential for growth and development in plants. Supply of nitrogen determines a plant‘s

growth, vigour, colour and yield. Nitrogen fertilizers are consumed more substantially

than phosphate and potash-based fertilizers, as they need to be injected regularly into

the soil to support crops, while phosphates and potassium fertilizers may be used

unevenly (every few years), though this leads to deterioration of crop quality. Overall,

nitrogen fertilizers account for 70% of total fertilizer consumption.

Nitrogen fertilizers production scheme

Source: PotashCorp

Global nitrogen installed capacity amounts to 178 mln tonnes, according to the IFA, but

effective global supply is estimated at 152 mln tonnes (85% of installed capacity), as

there might be delays with natural gas supply or downtimes including repairs. Global

demand is estimated at 148 mln tonnes in 2014, meaning that additional surplus is

estimated at a moderate 5 mln tonnes (3% of potential supply). However, access to new

cheaper gas and coal resources in the US, MENA and China is encouraging producers

to build new, more efficient nitrogen plants. Up to 23 mln tonnes of additional installed

capacity will be built globally within the next five years, according to the IFA, while

expected demand will increase by only 13 mln tonnes, leading to a surplus of 10 mln

tonnes (9% of potential supply) by 2018.

NATURAL GAS

Fertilizers&

Industrial Sales

AMMONIA NITRIC ACID AMMONIUM NITRATE UAN SOLUTION SOLID UREA

Industrial

SalesExplosives Fertilizers

Fertilizers, Feeds&

Industrial Sales

CARBON DIOXIDE

CO2

Air from the Atmosphere

LIQUID UREA

UR

LIQUID AMMONIUM NITRATE

AN

NITRIC ACID

NA

32.5 MMBtu/ton

0.78 t/tANHYDROUS AMMONIA

NH3

0.22 t/t 0.58 t/t0.29 t/t

0.80 t/t

PRILL TOWER OR

GRANULATOR

UAN SOLUTION

28-32% N

UAN

PRILL TOWER OR

GRANULATOR

0.35 t/t0.45 t/t

1.01 t/t1.01 t/t

Nitrogen is the most important and widely

used of the three main fertilizer nutrients. It is

an essential building block of amino and

nucleic acids, essential to life on Earth.

More than three quarters of world ammonia is

used in the production of upgraded fertilizers,

with more than half going to produce urea

and around 18% used for non-fertilizer

production.


76

Global nitrogen supply/demand balance, mln tonnes

Source: IFA

Synthesized from hydrogen sources (primarily natural gas or coal), steam and air,

ammonia is a concentrated source of nitrogen and the basic feedstock for all upgraded

nitrogen products. Ammonia is costly and difficult to transport because its physical

properties require high-pressure containers. As a result, most ammonia is consumed

close to the area where it is produced, upgrading to other nitrogen products. China is

the largest global ammonia producer, but it uses virtually all of the ammonia it produces

and is not a significant factor in world trade. Only 12% of produced ammonia is traded

globally, while Trinidad, Russia, Indonesia and Ukraine are the main ammonia

exporters.

Global ammonia usage, 2010-12 average

Source: PotashCorp

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

0

50

100

150

200

250

2014E 2015E 2016E 2017E 2018E

NAMEPLATE CAPACITY POTENTIAL SUPPLY DEMAND % OF SURPLUS

48%

11%

14%

6%

3%

18%

UREA

AN

OTHER FERTILIZERS

DAP/MAP

DIRECT APPLICATION

NON-FERTILIZER


77

Nitrogen fertilizer use by crop

Source: IFA

Over 50% of global ammonia consumption is used in the production of urea, which is

the main globally traded nitrogen fertilizer due to its physical properties and solid form,

which is easy to store and transport (about 0.58 tonnes of ammonia is required for

production of one tonne of urea).

Global urea production capacity amounts to 220 mln tonnes, of which 65% is

concentrated in Asia, including 45% in China. The next five years will be

characterized by substantial urea capacity additions, which are estimated at 4%

CAGR according to Fertecon, mainly from low-cost producers in the US, the Middle

East and Africa. China continues to build up capacity as well. Only proved additional

capacity should add 55 mln tonnes by 2020, but there are a large number of potential

projects that might be launched as well. The problem is that global consumption of

nitrogen-based fertilizers, including urea, is estimated at 2.0-2.5% CAGR, meaning

that global capacity utilization may contract significantly from the current 80-85% to

70-75% and even lower in China. Exports from low-cost regions, like the Middle East,

Africa and the US, will emerge, squeezing high-cost producers in Europe and Ukraine

from their traditional markets, but growing supply from China will continue to influence

prices, we believe.

Global urea capacity expansion, mln tonnes Global urea capacity breakdown 2013, mln tonnes

Source: Fertecon, Source: Fertecon

17%

16%

17%

1% 1% 4% 3%

16%

26%

WHEAT

RICE

CORN

SOYBEANS

PALM OIL

COTTON

SUGAR

FRUITES AND VEGETABLES

OTHERS

0

50

100

150

200

250

300

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

WORLD

3% 3%

7%

3%

10%

66%

0% 5% 3% 0%

EU-15

EU-13

CIS

AFRICA

MIDDLE EAST

ASIA

OCEANIA

NORTH AMERICA

LATIN AMERICA

OTHERS


78

Global urea production and capacity utilization level, mln tonnes


The US and India together account for approximately one third of global urea trade, while

countries in Asia, Latin America and Europe are expected to provide most of the future

growth in import demand. China has periodically been the world's largest urea exporter,

although its annual volumes fluctuate with changes in the government‘s export policies.

Top 10 largest urea exporters, 2012, mln tonnes Top 10 largest urea importers, 2012, mln tonnes

Source: Yara Source: Yara

Production costs

Natural gas is the most common feedstock and a key competitive factor in the

production of ammonia and its derivatives, depending on price, account for 70-90% of

its cash costs (excluding depreciation, corporate overhead, debt service, transportation

costs, etc). Another sensitive factor is the gas consumption ratio to produce one tonne

of ammonia, which varies from 0.9-1.3/tonne. Additional conversion costs are typically

estimated at $25-30/tonnes. For example, Acron purchases gas in Russia at RUB 4,250

per tonne ($110/tonne), which translates into $3.3/MMBTU. That means that the

ammonia production cash cost for Acron is estimated at around $140/tonne compared

with the global market price of more than $500/tonne. Each $1 per MMBTU increase

adds around $36 to the cost of manufacturing one tonne of ammonia. Coal is another

feedstock for the production of ammonia, which is widespread in Asia, principally in

China.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

0

50

100

150

200

250

300

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

CAPACITY PRODUCTION CAPACITY UTILIZATION

6.9

4.8 4.2

3.6 3.1 3.1 2.9

2.2

1.4 1

0

1

2

3

4

5

6

7

8

CH

INA

RU

SS

IA

QA

TA

R

UK

RA

INE

OM

AN

SA

UD

I AR

AB

IA

IRA

N

EG

YP

T

CA

NA

DA

IND

ON

ES

IA

8

7.1

3

2.3 1.8

1.5 1.4 1.1 0.9 0.8

0

1

2

3

4

5

6

7

8

9

IND

IA

US

A

BR

AZ

IL

TH

AIL

AN

D

ME

XIC

O

AU

ST

RA

LIA

TU

RK

EY

PA

KIS

TA

N

ITA

LY

FR

AN

CE

Natural gas is the most common feedstock and

a key competitive factor in the production of

ammonia and its derivatives, depending on

price, account for 70-90% of its cash costs


79

The price floor for the nitrogen market is established by marginal producers that are

primarily located in Ukraine, Western Europe and China, which lack large gas and coal

resources. Their production cash costs for ammonia are set in a range of $400-

450/tonne depending on the type of gas contract. For example, the potential gas

contract between Gazprom and Ukraine at $385/tonne should translate into a Ukrainian

ammonia production cash cost of at least $450/tonne, we estimate.

Ammonia production cost, $/short tonne Urea production cash cost, $/tonne

Source:Gazprombank Source: Fertecon

Pricing

There are dozens of market prices for nitrogen fertilizers that vary depending on the

type of nitrogen product, the point of export and prices for natural gas in a particular

region. Though gas is the main feedstock for nitrogen fertilizers, there is a weak

correlation between their prices, while the supply/demand balance is the key factor for

price settings on nitrogen. The Black Sea and Baltic spot FOB prices are the most

important for Russian producers, which export most of their fertilizers through ports

located in proximity to these seas.

The spot price for ammonia FOB Black Sea is currently 10% above the five-year

historical average and it has surged 30% YTD to $510/tonne due to the Ukraine

conflict, as those ports are the main export gateways for CIS exports. However, we

see downside risks for nitrogen-based fertilizers in the coming years, as their pricing

depends on gas and coal prices that in turn correlate with the oil price. Most

producers of nitrogen-based fertilizers link their gas contracts with oil price

performance with some time lag (usually within six months) and thus will be able to

revise them downward substantially on the back of falling oil. Lower gas prices will

improve the cost positions of many producers on the cost curve and allow them to be

more flexible in terms of pricing power.

Urea has traded 10% below its five-year historical average of $360/tonne at about

$320/tonne for more than a year. In our view, urea prices will remain flattish due to

substantial urea overcapacity globally, particularly in China, where capacity

utilization will soon decline to below 70%. On the other hand, Chinese urea prices

are currently close to the breakeven point, thus preventing them from a further

decline. We see $300/tonne as a floor for urea. Just 5% of Acron‘s revenue comes

from urea and for this reason the commodity does not materially impact the

company‘s earnings performance.

We can see a more favourable market environment shaping up, with prices for ammonia

derivatives like AN and UAN slightly higher YTD due to robust demand globally,

especially from Brazil. Moreover, NPK complex fertilizer prices are on the rise,

0

100

200

300

400

500

600

2 4 6 8 10 12

GAS COST CONVERSATION COST

396 335 330

265

160 150 147 85 67 66

050

100150200250300350400450

WE

ST

EU

RO

PE

EX

-PLA

NT

B

AS

ED

ON

CO

NT

RA

CT

S

UK

RA

INE

WE

ST

EU

RO

PE

EX

-PLA

NT

B

AS

ED

ON

SP

OT

CH

INA

CO

AL-

BA

SE

D

AV

ER

AG

E

RU

SS

IA

MID

DLE

EA

ST

HIG

H C

OS

T

US

GU

LF

MID

DLE

EA

ST

AF

RIC

A

NO

RT

H A

ME

RIC

A

In terms of capacity, production and

consumption, China is the largest market and

consumes almost one third of the world's

ammonia supply. Although it is the largest

global producer, it uses virtually all of the

ammonia it produces and is not a significant

factor in global trade, while urea and urea

derivatives are the main tradable nitrogen

fertilizers.


80

supported by stronger demand in China and higher prices for P and K fertilizers. There

is no excess global supply for these products, making the market overall balanced.

Ammonia black sea, $/tonne Urea Black Sea, $/tonne

Source: Bloomberg Source: Bloomberg

UAN Black Sea, $/tonne NPK 16-16-16 Black Sea, $/tonne

Source: Bloomberg, Source: Bloomberg

0

100

200

300

400

500

600

700

2009 2010 2011 2012 2013

0

100

200

300

400

500

600

2009 2010 2011 2012 2013

0

50

100

150

200

250

300

350

400

MA

R 1

3

AP

R 1

3

MA

Y 1

3

JUN

13

JUL

13

AU

G 1

3

SE

P 1

3

OC

T 1

3

NO

V 1

3

DE

C 1

3

JAN

14

FE

B 1

4

MA

R 1

4

AP

R 1

4

MA

Y 1

4

JUN

14

JUL

14

AU

G 1

4

SE

P 1

4

0

50

100

150

200

250

300

350

400

450

MA

R 1

3

AP

R 1

3

MA

Y 1

3

JUN

13

JUL

13

AU

G 1

3

SE

P 1

3

OC

T 1

3

NO

V 1

3

DE

C 1

3

JAN

14

FE

B 1

4

MA

R 1

4

AP

R 1

4

MA

Y 1

4

JUN

14

JUL

14

AU

G 1

4

SE

P 1

4


81


Accounting standards IFRS IFRS IFRS IFRS IFRS IFRS IFRS IFRS IFRS

Revenues 2,289 2,134 2,019 2,133 2,437 2,597 2,740 2,765 2,840

COGS -1,302 -1,320 -1,180 -1,248 -1,419 -1,482 -1,550 -1,585 -1,641

Natural gas -254 -304 -269 -263 -356 -364 -367 -370 -382

Materials -608 -414 -377 -385 -402 -412 -422 -423 -426

Payrolls -147 -172 -154 -159 -164 -168 -174 -181 -190

Gross income 987 814 839 884 1,019 1,115 1,190 1,180 1,198

Transportation costs -217 -238 -219 -234 -258 -275 -299 -307 -319

SG&A -176 -166 -154 -159 -173 -180 -187 -189 -193

Other income (costs) -1 29 -31 0 0 0 0 0 0

EBIT 593 439 435 491 588 660 705 685 686

Depreciation 48 44 90 103 118 133 152 171 191

EBITDA 641 484 526 594 706 793 857 856 877


Other costs 4 166 77 -6 -6 -6 -6 -6 -6

PBT 610 501 417 403 499 563 598 572 563

Taxes -132 -91 -84 -81 -100 -113 -120 -114 -113

Net income 478 409 333 323 399 450 479 458 451

Adjusted net income* 434 311 260 302 380 431 460 439 432


Cash and equivalents 884 391 493 225 179 331 326 330 469


Inventories 417 334 343 317 360 381 399 413 427

Other current assets 772 317 177 151 147 145 143 143 143

Total current assets 2,382 1,261 1,252 912 938 1,128 1,154 1,179 1,340

PP&E 1,541 1,866 2,156 2,167 2,478 2,823 3,214 3,625 4,016

Investments 155 319 0 0 0 0 0 0 0

Other non-current assets 963 1,017 1,489 1,266 1,235 1,220 1,206 1,206 1,206

Total assets 5,041 4,464 4,897 4,345 4,651 5,171 5,574 6,009 6,561

ST debt 753 839 794 675 659 651 643 643 643



Total current liabilities 1,060 1,146 1,177 964 982 994 996 992 990

LT debt 1,229 694 765 650 732 964 1,071 1,190 1,429

Other non-current liabilities 206 196 192 163 159 157 156 156 156

Total non-current liabilities 1,435 890 957 813 891 1,121 1,227 1,346 1,584

Shareholders equity 2,041 2,024 2,157 2,054 2,277 2,561 2,861 3,182 3,497




82


Net income before tax 610 501 417 403 499 563 598 572 563

Depreciation 48 44 90 103 118 133 152 171 191

Change in working capital 2.5 198.4 -106.5 4.5 -36.0 27.9 6.2 16.4 -2.0

Others -362 -292 -119 -123 -137 -184 -162 -151 -132

Operating cash flow 299 451 281 387 444 541 594 609 620

Capex -519 -454 -410 -446 -491 -512 -582 -582 -582

Other -122 171 -70 11 12 6 7 0 0

Investing cash flow -641 -283 -480 -435 -479 -506 -575 -582 -582


Other 880 -561 300 0 97 241 119 119 238

Financing cash flow 820 -641 117 -137 5 125 -13 -23 101

Effect of FX

-21 -12 0 0 0 0 0 0

Change in cash 478 -493 -94 -184 -29 160 6 4 139


Total debt 1,981 1,533 1,559 1,325 1,390 1,614 1,714 1,833 2,071

Net debt 1,098 1,143 1,066 1,100 1,211 1,284 1,388 1,503 1,603

KEY RATIOS

Adjusted P/E 2.94 4.10 4.90 4.22 3.36 2.96 2.77 2.90 2.95

EV/EBITDA 4.28 5.56 4.13 3.56 3.13 2.87 2.77 2.91 2.95

EV/Sales 1.20 1.26 1.07 0.99 0.91 0.88 0.87 0.90 0.91

P/BV 0.62 0.63 0.59 0.62 0.56 0.50 0.45 0.40 0.36

Div. yield 11.2% 15.2% 7.9% 7.6% 9.4% 11.8% 12.7% 12.3% 12.1%

ROE 21.3% 15.4% 12.1% 14.7% 16.7% 16.8% 16.1% 13.8% 12.3%

HQ: 16/1 Nametkina St., Moscow 117420, Russia. Office: 7 Koroviy val St.

Research Department

+7 (495) 983 18 00

EQUITY SALES

+7 (495) 988 23 75

EQUITY TRADING

+7 (495) 988 24 10

FIXED INCOME SALES

+7 (495) 983 18 80

FIXED INCOME TRADING

+7 (499) 271 91 04

Copyright © 2003-2014. Gazprombank (Open Joint Stock Company). All rights reserved

This report has been prepared by the analysts of Gazprombank (Open Joint Stock Company) (hereinafter — Gazprombank) and is based on information obtained from public sources believed to be reliable, but is not guaranteed as necessarily being

accurate. With the exception of information directly pertaining to Gazprombank, the latter shall not be liable for the accuracy or completeness of any information shown herein. All opinions and judgments herein represent solely analysts’ personal opinion

regarding the events and situations described and analyzed in this report. They should not be regarded as Gazprombank’s position and are subject to change without notice, also in connection with new corporate or market events that may transpire.

Gazprombank shall be under no obligation to update, amend this report or otherwise notify anyone of any such changes. The financial instruments mentioned herein may be unsuitable for certain categories of investors. This report should not be the only

basis used when adopting an investment decision. Investors should make investment decisions at their own discretion, inviting independent consultants, if necessary, for their specific interests and objectives. The authors shall not be liable for any actions

resulting from the use of this report. Any information contained herein or in the appendices hereto shall not to be construed as a solicitation or an offer to buy or sell any securities or advertisement, unless otherwise expressly stated herein or in the

appendices hereto. Gazprombank should in no way be viewed as soliciting, facilitating, brokering or causing any persons to invest in any instrument or otherwise engage in transactions that may be prohibited to those persons under applicable laws and

regulations. Investors should independently evaluate whether any investment transactions undertaken after reviewing Gazprombank research materials are permitted under any applicable economic sanctions laws and regulations or other laws applicable to

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