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By John Helmer in Moscow

The world’s largest potash miner, Russia’s Uralkali, reports recovery of growth, as commodity prices jump.

Uralkali, the world’s largest potash exporter, is recovering momentum in a global market that is likely to see the Russian miner challenge its Canadian peers for earnings growth, profitability, and share valuation.

“Despite difficulties in 2006, Uralkali isn’t not going back on its growth strategy,” board chairman and controlling shareholder, Dmitry Ribolovlev, told the annual meeting of shareholders last week. “On the contrary, we plan to accelerate the building of new capacities and modernisation of the existing ones. This is dictated by the situation in the market. The demand for potash fertilizers continues to grow everywhere, and for the foreseeable future this trend will continue. Having made good our losses from last year, we should swiftly increase our mining capacity.”

Potash, as the name indicates, was first produced by burning hardwood, and refining the potassium from a soluble solution. Its ancient uses were in the manufacture of glass, soap, and crop fertilizers, and it is the last of these that predominates today, supplying one of the key nutrients for plant and crop growth. Instead of burning wood, however, most of the world’s supplies of the industrial mineral are mined; and the largest mineral reserves of potash are concentrated in just three countries – Canada, whose stocks are the largest at about half the global aggregate, according to the U.S. Geological Survey; Russia, with more than a quarter; and neighbouring Belarus, with 9%; altogether, the three hold 85% of global reserves.

In terms of production capacity, two linked Russian companies, Uralkali and Silvinit, trail just behind Belaruskali, which in turn is just behind Potash Corp, and another North American producer, Mosaic. In the global market, the concentration of potash mining is greater than that of gold, silver, diamonds, nickel, copper, and bauxite.

Global trade in potash is even more concentrated, with just two syndicates dominant – Canpotex managing sales of the three North American majors – Potash Corporation, Mosaic, and Agrium – and Belarusian Potash Company (BPC), a joint venture combining Uralkali and Belaruskali.

As population growth drives demand for foodstuffs, and the arable land available to supply food shrinks, it is the mineral fertilizers which farmers use to cover the gap between consumer demand for calories, and the productivity of farm land to supply it. Thus, the biggest consumers of potash are China and India, followed by Brazil, which nature has not endowed with the sub-soil resources of potash to meet their own requirements.

But with just two syndicates in control of trade, and just three major importers, there was a fierce tussle last year as BPC sought to bargain supply for a price increase of $40 per ton for China, while holding the line with India. On the other side of the negotiating table, the Chinese wanted a reduction of $20 per ton, and the Indians also sought a price cut.

In time, BPC won the contest, getting what it wanted. Both the Chinese and Indian prices have risen – the Chinese price by $25/ton, the Indian by $50/ton. But the immediate impact in the first half of 2006 was a cutback in both output and exports for Uralkali. Then in October a flood forced a halt to production at one of its mine units. The combination reduced Uralkali’s mine output from 5.4 million tons in 2005 to 4.2 million tons in 2006. The mine losses have been totaled at $73 million, while the combination of factors reduced net sales from $725 million in 2005 to $613 million in 2006. Net profit dropped $333 million to $129 million.

Until the bad news struck, Uralkali was reporting net sales growth of 67% per annum, the highest in the global industry; and lowest cost of sales. Ebitda margin in 2005 was 66%, also the highest in the business.

A report this month by Alfa Bank of Moscow indicates that just two internationals, Uralkali and Potash Corporation of Canada, “are the only companies that can cost effectively add significant capacity, and together these two firms account for over 50% of planned global expansion at $136 and $147 per ton respectively.” By contrast, Alfa’s analyst Roydel Stewart estimates that the cost of greenfield projects–like the new Rio Tinto potash mine in Argentina due to come on stream in 2011–is about $800/ton.

Russian mineable potash is cheaper to lift also, because the mineral is at shallower depth, compared to the Canadian mines; and it contains relatively higher nutrient value per ton.

In a presentation to an investor conference last week in Moscow, Uralkali’s Chief Executive Vladislav Baumgertner said his company plans to increase mine output to 7 million tons within three years, out of two working mine pits. Mine-5 remains under feasibility study with substantial reserves for exploitation at least five years away. Uralkali has also reduced its transportation costs by investing its own fleet of rail wagons, and in a loading facility at St.Petersburg port, the Baltic Bulker Terminal.

On June 6, BPC confirmed that it had agreed with IPL, India’s largest importer, to a $50/ton increase for deliveries over the year to March 2008. The price gain this month, with scope for lifting prices further, reflect the rundown of inventories in India during the price and contract negotiations twelve months ago. An Uralkali source told Mineweb that the pricing logic allows China a discount on the potash price, because it is the largest market in the world. “The increase in the Indian price gives the Indian market a chin-up over the others,” the source told Mineweb. “Now that it is ahead, we expect others to follow the Indian market upwards.”

Globally, the commodity price trajectory is moving steadily upwards; it has tripled since 2004; from next month, the southeast Asian price is forecast in industry reports to grow $40 to reach $300. “This is an impressive achievement. The problem of deliveries of potash fertilizers to China and India in the current year is solved,” an Uralkali source told Mineweb.

The mineral commodity boom worldwide has already fired market speculation on the North American potash miners. Potash Corp’s market capitalization went to $23 billion, with a price/earnings ratio of 42 as of last year. Mosaic was rated at $16 billion, with a P/E of 205; and Agrium, $5 billion with a P/E of 46. By contrast, Uralkali’s market capitalization is estimated at $5.6 billion. P/E, according to Alfa Bank, is 17.3. In the Russian market, Uralkali’s share price (RTS ticker: URKA) has gained 52% in the past 12 months; 26% in three months; and, during the May-June downward correction of the Russian stock market as a whole, Uralkali rose by 7%.

According to Afla’s Roydell, “On a P/E basis, Uralkali remains at a discount to the group. We believe Uralkali should trade higher because it has high net-income margins and steady earnings growth…Uralkali should trade at a premium to other fertilizer companies given its unique position as a low-cost dedicated potash producer with increasing market share.”

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