Research Notes

Owing to a breakdown UralKaly adopted a decision to shut down the mine which accounted for 20% of the company’s potassium ore output. The decision triggered a decline in URKA stock valuations which, in our opinion, is too harsh and unjustified. Needless to say, the serious nature of this event prompted us to revise our forecast for the company’s fair value and cut its year-end target price from $1.92 to $1.75 per common share of UralKaly. However, in view of the current stock valuations we assign a Buy recommendation to the company’s shares.

For the record, reserves within the Bereznikovsky acreage, which was shut down, were on the verge of depletion, while the mine group itself was planned for closure in 2015 (which was factored in our initial valuation model). Force majeure, however, prompted the company to shut down the mine group ahead of schedule. Meanwhile, taking into account the expected depletion of the Bereznikovsky acreage, UralKaly has been building a new mine at the Ust-Yaivinsky acreage which was purchased in 2005, whose commissioning will enable the company to offset loss at the Bereznikovsky acreage. However, it will take an average 5-6 years to have the mine up and running. Thus, the new facility at the Ust-Yaivinsky acreage is expected to come on stream no earlier than 2009. However, the company is currently building a second mineral-salt section at the Bygelsko-Troitsky acreage, which will enable the company to boost production as early as 2008, but until that time it will have to operate at lower capacity.

Meanwhile, in our view, the company will strive to offset reduced production by further hikes in potassium chloride prices. For the record, UralKaly, which commands 10% of the global potassium market, is able to pursue such a price policy owing to the limited number of consumers amid rising demand for potassium fertilizers worldwide.

It should also be noted that this turn of events will in no way affect the company’s three other mine groups which are located at a considerable distance from the shutdown facility.

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Anastasia Sarapultseva

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