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By John Helmer in Moscow

Russian potash leader to sell London IPO on link to booming mineral price.

Uralkali, Russia’s leading potash producer, announced this morning that it intends to issue an initial placement offering (IPO) in the London market, with pricing to be fixed in October, according to market sources.

The company’s principal shareholder Madura Holdings, which is owned by Uralkali’s board chairman, Dmitry Rybolovlev who currently holds 80% of the shares outstanding, will sell the shares.

According to the last market report from UBS, Uralkali shares (ticker URKA:RTS) are trading on the Russian RTS market at $3.35, with a market cap of $7.1 billion. UBS calculates that this is 116% above the share price at the start of this year.

Last October, Uralkali announced an IPO plan with the sale of 21% of the shares, priced within the range of $2.05-$2.45 per share. The IPO will now sell 10%, the company says. A target valuation of the company for the IPO has been fixed by the underwriters, Citigroup and UBS, at $7 billion (about $3.35/share).

Announcements last week from Uralkali and from Belarusian Potash Company (BPC), the jointly owned export marketer of Uralkali’s potash, point to sharply rising sales revenues and profitability in the second half of the year, as the price of potash moves upward.

According to BPC, a new price hike of $40/tonne will be effective for shipments to Brazil from November 1; the new price will be $345 and $355 for large and small importers, respectively. This is the sixth price hike announced by BPC for Brazil this year; the previous one was in August, and represented a $25/tonne increase to $305/tonne, effective from October 1. In the year to date, BPC’s export prices to Brazil have risen by more than 90%, raising the benchmark for Uralkali’s negotiations with China. Brazil currently consumes 15% of BPC’s export volume; China consumes 50%.

In a separate release, Uralkali has also issued the production result for the eight months to August 31 at 3.418 million tonnes; the year-end target of 5 million tonnes is certain to be met, company officials say.

Uralkali’s release of financial results for the first half of the year, calculated according to International Financial Reporting Standards, shows that cost containment measures have held the year on year increase in cost of sales to 30%; from Rb2,399 million ($88.5 million) to Rb3,199 million ($120 million). Rail tariffs grew by 44% year on year; freight by 51%; and labour costs remain virtually unchanged. The company reports provisioning for brine fill operations at Mine-1, flooded by natural groundwater seepage since last October, has been cut from Rb679 million ($26 million) as of January 1 to Rb574 million at June 30 ($22 million).

Headline results are Rb13.3 billion ($512 million) in revenues for the six-month period, up 49% on H1 2006; operating profit Rb5.1 billion ($194 million), a year on year gain of 87%; and after-tax profit of Rb3.8 billion ($146 million), up 83%.

The company also reported that it has cut its loan book by 18% since June 30, 2006. Current bank loans total Rb9.2 billion ($352 million). The lenders identified are ABN Amro, Sberbank, Moscow International Bank, and Bank of Moscow.

In the meantime, Alfa Bank has issued a report in Moscow raising its estimate of the market capitalization of Uralkali to $10.3 billion. This represents a 45% increase on the current Moscow market cap of $7.1 billion.

Alfa is forecasting a price/earnings ratio of 17.9; and with an estimated enterprise value (EV) of $6.7 billion, a projected EV /Ebitda of 15.3.

Roydel Stewart, Alfa analyst for the fertilizer sector, reports that “the company’s progressive recovery from 2006 increases our confidence in its ability to execute its planned capacity expansion. We expect FY2007 results to be even stronger as H1 financials do not include the summer and fall price increases of this year.” Roydel adds that 70% of Uralkali’s freight costs for this year are hedged, “which allows the additional revenue from price appreciation to largely flow to the bottom line.”

Stewart reported on a recent site visit to Uralkali’s mines at Berezniki, in Perm region: “no further complications have arisen from the flood in Mine-1, as the sinkhole is far from operations; the company has installed monitoring equipment; and protective pillars are in place to prevent seepage.”

Flooding is common in mineral salt mines, on account of the typical geology of the sedimentary rock. Uralkali issued a release last week on fresh geological investigations of the problem, and of future flooding risk, recently prepared by German firm Ercosplan. According to the company release, “as part of this study, Ercosplan specifically analysed the overall mine layout, water inflow prevention measures, hydrogeology and tectonics in the overburden strata, the thickness and homogeneity of the hydrogeological protective layer on top of the potash deposit and its integrity during mining-induced deformation of the overburden strata. Such parameters were used to identify differences and similarities between the flooded Mine 1 and the mines under operation, Mine 2 and 4, to assess any potential or specific flooding risks for Mine 2 and 4. Following a comprehensive evaluation, Ercosplan have concluded that “no specific flooding or mining risk exists in any of Uralkali’s mines in operation. The general risk of flooding that does exist due to the inherent water solubility of the host rock, is common with all potash mines”.

According to Uralkali, in the half-century that has elapsed since Mine-1 was prepared, there have been advances in technical understanding of the conditions that precipitated last year’s flooding. “Based on these results,” the company claims, “mining regulations were updated and utilised in the design, construction and operations of Mines 2 and 4”.

Stewart’s study for Alfa has raised the Uralkali share price valuation substantially to $4.27-$4.87, with market cap of $9-$10.3 billion. The higher of the two valuations includes the still to be developed Mine-5; the lower valuation excludes Mine-5. CEO Vladislav Baumgertner said that “at present the feasibility study [for Mine-5] is under way; it should be ready in 2008. At present, it is difficult to predict precisely how much additional tonnage of output the mine will produce, and how we should introduce this additional capacity onstream. For the time being, I can say we are planning several for several million tonnes”.

Meanwhile, Silvinit, Russia’s second potash producer and exporter after Uralkali, will raise output capacity from 5.3 million tonnes at present to 7.3 million tonnes by 2013. The additional mine shafts and production lines will cost $230 million over the next five years, and allow growth in domestic deliveries of potash without diverting tonnage from export markets.

New details of Silvinit’s growth strategy were released in a report issued by Stewart last Friday. Revenues for Silvinit in H1 2007 are up 27% year on year to $420 million; cost of sales grew 3% to $131 million; and after-tax income rose 22% to $122 million. Stewart estimates Silvinit’s current market capitalization at $4 billion; compared with Uralkali at $7 billion.

Stewart warns that Silvinit’s ability to realize future plans is limited, because it is a takeover target from state-owned group Sibur-Mineral Fertilizers (SMF), with the additional prospect of pressure to sell on account of license difficulties. The company’s recorded shareholding structure indicates that 86% of the common stock is controlled by 7 shareholders. Most are controlled in turn by chief executive Pyotr Kondrashov. A 20% stake in Silvinit is controlled by Uralkali’s Rybolovlev. According to Stewart, “stronger firms with closer political connections pose a risk to Silvinit. Competitor Uralkali is determined to obtain the licenses for the remaining plots in Solikamsk, and Sibur Fertilizer is interested in acquiring Silvinit outright, possibly at below market value. We are not convinced that Silvinit can overcome these troubles.”

Stewart also recommended that Silvinit coordinate export pricing and shipments by joining BPC. “Silvinit could join BPC to save on transportation costs. Uralkali’s port in St. Petersburg could manage an additional 3 million tonnes per year, eliminating Silvinit’s need to send shipments to Latvia. The two companies could also coordinate rail sales to northern China…BPC would secure better freight rates through larger volume discounts.”

As for political risk, Stewart concludes that, even if the Kremlin forces the potash producers to accept a lower domestic price for their product, in line with the government’s farm stimulus programme, the future for their revenues and profits remains rosy. “The overall effect of higher costs for [mine] licenses and lower domestic prices will not be significant, in our view. We expect Uralkali, a major taxpayer with strong local support, to arrive at a reasonable solution with the federal authorities. The threat of a takeover by a government-affiliated company is, in our view, a greater risk to Silvinit, which is a cheaper, less well-positioned alternative.”

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