Research Notes

Uralkali's latest long-term contracts with China and India, its core customers, have triggered off a spike in potassium chloride prices on the spot market to above USD 1,000 per ton, a new and substantially higher price level on the market. Brisk demand for the product against its tight supply mean that prices may stay at, or above, their newly-reached level for a long time, making it possible for potassium producers to improve their finances. We have revised our valuation model for Uralkali shares in line with our new projections for price growth and the company's production, sales and investment targets.

In mid-June, the Belorussian Potassium Company (BPC), the exclusive exporter for Uralkali and Belaruskali, delivered on its promise of last April to lift the export price of potassium chloride for Brazilian customers from USD 600-610 to USD 1,000 per ton as of July 1, 2008. BPC also announced the delivery of the first shipments of potassium chloride to Southeast Asian countries at USD 1,000 per ton. Finally, the company stated plans to increase its potassium chloride prices for domestic customers as of July 1. In so doing Uralkali has substantially raised its prices for all of its customers since the start of the year.

In view of current price trends on the potassium market, we have revised our outlook for potash fertilizer prices. We expect the price to move further up, by 20% from July towards the year-end, mainly thanks to price rises on the spot market.

Uralkali has voiced its investment plans. The company estimates the cost of a project to build a 5th mine at the Ust-Yaivinsky block in the Perm territory at USD 3 billion. By 2016, the mine expects to extract 3.7 million tons of ore a year from the deposit. Given the projected pace of the area's development, Uralkali expects its production volumes to more than double by 2016.

Price hikes on potassium chloride have affected sales volumes in the relevant markets. Uralkali, which previously bet on long-term contracts, with a 40% bulk of its export supplies bound for China, in 2008 shifted its focus to the spot markets, which now look more lucrative due to their faster growing prices.

Favorable price trends on the potassium chloride market and production expansion at the company should act as growth drivers for its financials. Under our updated outlook, the company's revenue will rise by 14.4% on average each year from 2008 to 2015, its EBITDA will increase by 11.1% yearly and its net profit will grow at an average yearly rate of 10.0%.

In line with our updated estimate of the fair value of Uralkali shares, we raise our target price for the company to USD 18.5 per share, with an upside potential of 23.1%. We reiterate our BUY recommendation on the company's shares.

Michael Frolov

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