According to Interfax, on Wednesday the Moscow Arbitration Court honored a Federal Property Management Agency (Rosimushchestvo) lawsuit against FosAgro to deprive it of 20% of shares in Apatit (RTS: APAT) and reinstate state ownership of the shares.
The litigation between Rosimushchestvo and the FosAgro holding company over the 20% share in Apatit had been in progress for several years. The lawsuit was lodged at the request of the General Prosecutor's Office, which, in 2003, accused Mikhail Khodorkovsky and Platon Lebedev, the former managers of Yukos, of the fraudulent takeover of a 20% state share in Apatite in 1994.
It is worth noting that Fosagro has pursued an aggressive pricing policy, thanks to its full control of Apatit (the company had until recently owned over 80% in Apatit, both directly and via its affiliates). The period was characterized by frequent conflicts between Apatit and its clients, primarily Acron, over apatite concentrate prices. The company stood accused of charging overstated prices on its apatite concentrate and of reluctance to conclude long-term contracts for concentrate shipments.
Acting on a complaint from Acron, filed with the Federal Anti-Monopoly Service (FAS) and the Federal Service for Financial Markets (FSFR), the latter decided to halt exchange trade in apatite concentrate on the Moscow Stock Exchange and the UMEX universal commercial exchange as of September 1, 2008 on the grounds that ‘trade in goods manufactured by monopoly producers or companies with a dominant position in a specific market segment carried a risk of legalizing monopolistic high prices'. In 1H 2008 alone, apatite concentrate prices on the Moscow Stock Exchange soared by more than 8x, from RUB 2,232 to RUB 18,000.
As matters now stand, a 20% cut in FosAgro's share in Apatit may further weaken its ability to lobby for further price hikes on apatite concentrate. The government is currently in talks with mineral fertilizer producers and their raw material suppliers about their pricing policy on the domestic market. The raw material producers, including Apatit, suggest imposing a discount on raw materials used in the production of fertilizers for Russian farmers. In particular, it was suggested that a discount of 30% be made to the export price for 2009, 20% for 2010 and 10% for 2011. The consumers, including Acron, propose increasing raw material prices in line with industrial inflation (20-25%).
Thanks to the growth of its prices in exchange trade, Apatit managed to significantly improve its financial indices in 2008, which has had a positive impact on its market cap. However, further growth in apatite concentrate prices is now a big question mark, and much will depend on the stance adopted by the state on this issue. In the meantime, FAS head, Igor Artemyev, recently spoke out in favor of Apatite. The official deems it unacceptable to retain the existing domestic prices on apatite concentrate and refers to growth in the prices on the exchanges as quite understandable.
We estimate the fair value of Apatit (RTS: APAT) at USD 520 per share, with an upside of over 50%, which corresponds to a BUY recommendation. Our target price for Acron (RTS: AKRN) is USD 105 per share, with an upside potential of more than 180%, which corresponds to a BUY recommendation.
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