Interfax announced that Uralkali (Berezniki, Perm territory) produced 2,658,400 tons of potassium chloride in 1H 2008, up 5.3% y-o-y. In June, the company made 462,700 tons of potassium chloride, a 7.7% gain y-o-y.
We are moderately upbeat on the company's performance in 1H 2008, which should enable it to meet its full-year production target of 5.3 million. The company even has a chance of exceeding its target for FY 2008 if it maintains such a high rate of production in 2H 2008. We expect the company to produce around 5.47 million tons of potassium chloride in FY 2008. In our opinion, the company is capable of overshooting its target on the successful implementation of several investment projects, including installation of additional floatation equipment at the BKPRU-2 mine and new dissolution equipment at the BKPRU-4 mine.
Production expansion, even though anticipated in advance, is a positive event for Uralkali, enabling it to boost sales revenues amid high potassium chloride prices on world markets. In April, the company signed a contract with China, its major foreign partner, for potash fertilizer shipments this year at a price of USD 650 per ton. In mid-June, the company reached a deal with Brazil at a record price of USD 1,000 per ton, up from its export price of USD 600/ton a month earlier. The company will apply the same prices on the Southeast Asian spot market. As a result, Uralkaki is in a position to improve its FY financials due to favorable price trends on the world potash fertilizer markets and production expansion.
Our recommendation is to BUY Uralkali (RTS: URKA) shares. Our target price for the shares is USD 18.5 per share, with an upside of 30%.
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