Uralkali announces Q1 2012 sales result

Commenting on the January-March 2012 results, Vladislav Baumgertner, Uralkali CEO, said:

"The financial results of Q1 reflected, on the one hand, lower potash deliveries at the beginning of the year and, on the other hand, continuing strength in potash prices that managed to maintain the levels achieved in 2011. Market conditions and cautious buyer sentiment that had continued since Q4 2011 impacted global potash sales in the beginning of the year and we used that period to proactively manage our capacity utilisation and carry out maintenance works reflecting our strategy to match supply with demand prior to the rebound in recovery experienced so far during the Q2. Moreover, during Q1 we made further progress with respect to our cost-effective expansion programme and expect to reach an annual production capacity of 13 million KCl during H2 2012. Over the medium term we continue to have strong confidence in underlying potash market dynamics.”

Business Review

In Q1 2012, Uralkali’s sales amounted to 2.1 million tonnes of KCl, compared to 2.6 million tonnes of KCl delivered in Q1 2011 on a pro-forma basis. The decline in volumes was primarily driven by lower demand across several major export markets. Slower buyer activity impacted the Company’s utilisation rate, decreasing it from over 90% at the end of 2011 to c. 70% in Q1 2012. With a steady market recovery, Uralkali returned to full capacity operation in May.

The average export price for the reporting period amounted to USD 376 per tonne, a USD 25 per tonne increase compared to full-year pro-forma 2011.

Key top line and operating performance data:

	Q1 2012	Q4 2012	22011, proforma11
Gross Revenue (USD mln)	901	1,021	4,203
Net Revenue (USD mln)	780	872	3,568
Average potash price, FCA, USD — Export  — Domestic	376 268	363 212	351 203
Production (mln tonnes, KCl)	1.9	2.8	10.8
Sales volume (mln tonnes) — Export — Domestic	2.1 1.6 0.5	2.6 2.1 0.5	10.6 8.8 1.9

¹ Uralkali pro-forma full-year financial and operational results including Silvinit results starting from 1 January 2011

Macroeconomic instability led to buyer caution about buying accumulating stocks outside of application season. Growing attention during the reporting period was paid to India.
Following a significant rupee devaluation and the Indian Cabinet’s decision to cut subsidies applicable to fertiliser imports in 2012-13, arrivals under the old contracts were minimal during Q1 2012. Potash shipments by international potash traders of approximately 2.2 million tonnes under the old contracts have been delayed to Q2 2012. Meanwhile, in Russia, Q1 demand remained healthy with domestic deliveries accounting for 24% of Uralkali’s sales in January-March 2012. Growth in domestic deliveries was driven by higher sales to Russian NPK producers.

Uralkali’s production in January-March 2012 amounted to 1.9 million tonnes of KCl, enabling the Company to deplete its stocks in order to provide for the sales volume of 2.1 million tonnes of KCl.

Meanwhile, our strong cash position enabled the Company to maintain its capacity expansion programme. The expansion of Berezniki-4 continued and we expect to bring it to the full capacity of 3 million tonnes of KCL per annum in H2 2012.

Following outstanding 2011 financial results, Uralkali’s AGM approved a dividend payment of RUB 4 per share and RUB 20 per GDR.

In addition to realising the expansion projects and dividend payment, Uralkali carried on with its buyback programme. As of 8 June 2012, the Company purchased its shares and GDRs at the total amount of c. USD 700 million at an average price of USD 35.5 per GDR.

The Company’s net debt amounted to USD 2.2 billion at the end of March 2012, which is equal to 0.9x LTM EBITDA, being slightly below the lower end of our target net debt\EBITDA LTM ratio of 1x-2x.

Market outlook

Following a cautious start of the year driven by higher than usual stocks in the key markets and continuing concerns surrounding volatile macroeconomic environment, potash demand started to recover in March 2012.

At the end of Q1 2012 the major suppliers signed contracts with China for Q2 2012 at a rollover price of USD 470 per tonne on a CFR basis. In total, China has locked in 1.70 million tonnes with an option for an additional 0.5 million tonnes. Clarity regarding China has established a price benchmark for the global market and encouraged buyers in other regions to step into the market more actively.

At the beginning of Q2 2012 the market returned to normal following strong demand in Brazil, and seasonal pick-up in application in the USA, Europe and Asian countries. As a result, potash inventories depleted across spring application in all major markets excluding India. India resumed potash imports in March 2012 and the 2011-2012 potash contract is expected to be executed by the end of July.

Due to a very strong demand for potash from the Brazilian buyers, our trader Belarusian Potash Company (BPC) returned to the price level reached in H2 2011 of USD 550-560 per tonne CFR for granular product. BPC has already secured new sales of 150,000 tonnes in Brazil at USD 550-560 per tonne CFR for shipment in May-June. These deals will bring more confidence to the market.

Taking into account softer Q1 global sales, we have adjusted our 2012 consumption forecast to 54-56 million tonnes. With anticipated global potash deliveries of 51-53 million tonnes, we expect that at year end potash inventories in major markets should be lower compared to the previous year.