Uralkali expects the unfavorable environment on the global financial markets to take a toll on its 2008 financials and 2009 production targets, Interfax reported. Uralkali notes that many agricultural producers have become unable to purchase fertilizers in planned volumes in the ongoing global financial crisis. As a result, demand for the company’s goods has fallen on certain markets, which has caused Uralkali to cut its production plans for November and December 2008 by 50%. This implies a further overall decline in the company’s productive output by 10% y-o-y and a downturn in the company’s financial indicators.
In line with Uralkali’s projections, a 500,000 ton reduction in 4Q 2008 production volumes will reduce the company’s cash flow in October-December 2008 by USD 650 million. Therefore, the company expects a year-end cash balance of around USD 300 million, with loan debts at USD 470 million. The company has also assumed that the complex environment on the mineral fertilizer market will continue into early 2009, and Uralkali productive output will be cut in 1Q 2009 as well. Uralkali has not issued any exact forecasts for its 2009 output volume and said it would inform investors "as the situation becomes clearer".
In our opinion, this news is of a negative character and is not likely to raise investor optimism and may well impair the company’s market valuations in the mid-term. Although the production cutback was generally expected in view of the financial crisis, Uralkali believes its consequences may turn out to be graver, both this year and next. Fortunately, given the fertilizer manufacturer’s financial results, company debt is currently at a fairly acceptable level.
However, what is now really important for the company is the decision of a new committee investigating the 2006 accident at the Berezniki mine. If the company is found guilty, the government may require the recovery of direct expenditures incidental to the emergency activities, i.e. the construction of a railway line and a thermal power plant and the resettlement of displaced persons, which amount to RUB 16.7 billion, or nearly USD 600 million. This, however, would be a favorable outcome: In the worst case scenario, Uralkali would have to recover not only direct losses incurred from the accident, but also pay for damages inflicted on the state by the loss of mine reserves: nearly 120 million tons of sylvinite. In this case, the government’s claim against Uralkali could reach a total of USD 2-20 billion, which would have much graver consequences for the company.
We currently do not have an official recommendation for Uralkali (RTS: URKA).
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