Uralkali Investor Targets African Fertilizer Sales Growth

Billionaire Dmitry Mazepin’s OAO Uralchem, which bought a $4 billion stake in OAO Uralkali last year, is targeting sales growth in Africa as Russia’s biggest nitrogen fertilizer maker seeks to diversify.

“Africa is potentially very interesting for us,” Chief Executive Officer Dmitry Konyaev said in an interview in Moscow. Shipments to Kenya and South Africa have already started. “We see that this market may gradually take up to 10 percent of our sales as it has serious prospects, while the country risks are still high.”

Uralchem, which plans to increase output from 5.8 million metric tons of fertilizer last year to 6.5 million tons by 2015, is seeking growth outside its main markets of Europe, Latin America and Russia. Sub-Saharan Africa, with the world’s most hunger and least-productive agriculture, will see its economy expand 5.2 percent this year, according to the World Bank.

“The African market became attractive to fertilizer makers after they faced a crisis of demand in traditional markets in 2011,” said Konstantin Yuminov, a Raiffeisenbank analyst in Moscow. Producers such as OAO Phosagro and Oslo-based Yara International ASA have overcome hurdles such as poor port infrastructure to market their products in Africa, he said.

Yara, the largest publicly traded nitrogen-fertilizer maker, is among Uralchem’s biggest individual clients, accounting for 14 percent of exports in 2013.

Uralkali Stake

Uralchem entered the potash market last year when it bought a 20 percent stake in Uralkali, the world’s biggest producer, after billionaire Suleiman Kerimov and partners sold out. Uralkali roiled the $20 billion potash market in July when it quit a trading venture with Belaruskali that had controlled more than 40 percent of global exports. The change in ownership prompted speculation of a reconciliation.

Uralchem is not aware of any talks on restoring the alliance, according to Konyaev. Mazepin met Belarus President Aleksandr Lukashenko in Minsk for the first time after the acquisition in April. It was a meeting “to see where we are,” Konyaev said.

“We admit that there was a synergy from the work with Belaruskali. Should the management propose to the board a renewal of joint trading to boost profitability, and the board sees that it’s needed, we would support it,” said Konyaev, who is also a director on Uralkali’s board.

Possible Reconciliation

If the venture is restored, “it may be smaller than it used to be,” said Yuminov, the Raiffeisenbank analyst. “Belarus learned how to sell potash and may not be interested in selling all that it produces through a joint venture.”

Belaruskali CEO Valery Kirienko said last week he was open to restoring an agreement if conditions were profitable. Such conditions “are not in place” currently. The company is selling potash at prices higher than rivals in Canada and 2 percent higher than Uralkali, he said

When the Uralkali stake became available, “we just seized on the window of opportunity,” Konyaev said. “Such assets as Uralkali rarely go on sale.”

Uralchem isn’t considering a merger at present.

“We are not in the discussions for the time being on the merger of the two companies,” he said. “We entered Uralkali as shareholders and plan to define the company’s strategy through our work on the board.”

Uralkali has the lowest production costs globally, while other potash projects face delays as they were started at a time when prices were overheated, he said.

“We believe in potash and think that we will recoup this investment,” Konyaev said.

Investment Outlook

Uralkali shares, which have fallen about 8 percent this year, traded up 0.4 percent at 158.12 rubles at 5:16 p.m. in Moscow.

At the time of the acquisition Uralchem’s ratio of net debt to earnings before interest, taxes, depreciation and amortization stood below one. The company financed the purchase through a loan of about $4 billion from VTB Group. This affected credit metrics, but given that the company has the Uralkali stake against the loan, net debt to Ebitda ratio shouldn’t exceed 3.5 in 2014, while the company has no risks of margin calls, Konyaev said. Uralchem also expects that Uralkali’s dividend payments will mostly cover interest-rate spending, he said.

Prices Fall

Uralchem continues to focus on remaining Russia’s biggest nitrogen producer by output while maintaining the best profitability among Russian peers, Konyaev said.

The company targets investment of $135 million this year, down from $175 million in 2013. The target is lower as nitrogen fertilizer prices are falling, although Uralchem sees them stabilizing in 2015, Konyaev said.

Average prices fell 11.8 percent to $479 a ton in 2013 from a year earlier and were at $438 a ton in the first quarter of this year, according to Uralchem. The company invested $647 million in 2008 through 2013 aimed at improving the performance of its own assets.

Sub-Saharan Africa, with the world’s lowest usage of mineral fertilizers per hectare, also has the lowest agricultural productivity and highest levels of hunger, according to the Paris-based International Fertilizer Industry Association.

Before it's here, it's on the Bloomberg Terminal.