Russian Sinkhole Imperils Uralkali Rating as Mine Floods

The briny floodwater threatening to wash away a fifth of OAO Uralkali’s output also imperils the potash producer’s investment-grade rating.

The yield on the April 2018 dollar notes of Russia’s largest potash miner surged 1.69 percentage points this week, set for the biggest jump since the securities were sold in April last year, and set a record 7.77 percent. That drove the extra yield investors demand to hold the bonds instead of similar-maturity debt of Potash Corp. of Saskatchewan Inc. to 6.22 percentage points yesterday, the most on record.

Having halted operations at the mine, the shutdown could cost the company its investment-grade ratings as bondholders recall a more than 100-meter (328 feet) wide sinkhole that closed a Uralkali mine in 2007, according to Sberbank CIB. Rising water flows forced the Berezniki-based company to evacuate its Solikamsk-2 mine about 1,000 miles east of Moscow this week, while a sinkhole discovered 3.5 kilometers from the site suggested a route for water to find its way in.

“Investors are selling off Uralkali bonds as the credit quality of the company may significantly worsen,” Egor Fedorov, a senior credit analyst at ING Commercial Banking, said by phone from Moscow. “Should it lose even one of the mines, that means that its revenue will be 20 percent lower.”

Debt Load

It’s too early to say that the mine will be lost and Uralkali is keeping its 2014 sales target at 11.5 million tons, Interfax cited Deputy Chairman Dmitry Mazepin as saying yesterday. The company wasn’t operating at full capacity before stopping operations at the site. Uralkali’s press service declined to comment when contacted by phone yesterday.

Any permanent shutdown at the 400-meter-deep mine may force Uralkali to borrow or to pay less dividends as it accelerates other projects, potentially boosting its debt load, Fedorov said. Uralkali is rated BBB- at Standard & Poor’s and Fitch Ratings, and Baa3 at Moody’s Investors Service, their lowest investment-grade scores.

Net debt was $3.9 billion by the end of the first half, or 2.56 times earnings before interest, taxes, depreciation and amortization, according to a company presentation this month. Uralkali, which wants to cut that ratio to 2, needs to pay back $1.56 billion in the next two years, it said.

“A one-notch downgrade looks likely if Uralkali loses only one mine,” Sergey Goncharov, an analyst at Sberbank CIB in Moscow, said by e-mail yesterday.

Assessing Ratings

While Fitch and Moody’s both said the mine flooding had no immediate affect on their rating of Uralkali, Fitch said the more negative of two scenarios highlighted by the ratings company could lead to “negative rating action,” according to a statement yesterday.

Moody’s said the accident may have a “material” negative effect on the company’s production volumes and finances, according to today’s e-mailed note.

S&P is awaiting the conclusions of the company’s investigation, Paris-based analyst Lucas Sevenin, said by e-mail yesterday. A possible closure “could have a material impact on profits and thus debt and leverage,” he said.

Uralkali lost a mine at Berezniki in Perm region eight years ago, and if that happens again, the producer won’t be able to recover the output through new mines until 2018, according to Elena Sakhnova, an analyst at VTB Capital. The sinkhole discovered this month is as wide as 40 meters.

‘Under Pressure’

The company is shielded from an output drop by the ruble’s 29 percent weakening this year, Sakhnova said by phone from Moscow yesterday. While most of its earnings are in foreign currencies, expenses are in rubles, giving a 40 percent boost to Ebitda from Sakhnova’s estimate at the start of year.

The 2018 bonds fell for a seventh day yesterday, a retreat that suggests a downgrade is already priced in, Dmitrij Tichonov, an analyst at Commerzbank AG said by e-mail yesterday. They yield was 18 basis points lower at 7.59 percent at 6:21 p.m. in Moscow.

Any cut in dividends could impede efforts by Uralkali’s owners to lower their debt, Fedorov from ING said. OAO Uralchem and billionaire Mikhail Prokhorov’s Onexim Group bought more than 47 percent of Uralkali in December, five months after the company broke a trading venture with Belarus that led to a drop in global potash prices.

Uralchem’s first-half profit slumped 94 percent due to debt expenses and the sharp increase in the exchange rate. Prokhorov, seeking to lower debt, recently explored whether fellow tycoons including Vladimir Potanin were willing to buy some of his stake, two people familiar with the matter said Oct. 27.

“Uralkali owners, who bought their stakes using loans, may be under pressure should the company curb the dividends they rely on to pay down their debts,” Fedorov said.

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