Daily analyst comments

According to Interfax, Uralkali has agreed with the Eurochem and FosAgro companies, compound fertilizer producers and Uralkali consumers, to keep potassium chloride prices unchanged at RUB 3,500 per ton until the end of the year. Potassium chloride is used in compound fertilizer production. The price at which the company directly supplies the product to Russian consumers is to be kept at RUB 3,000/ton. The export price of potassium chloride is to be calculated in accordance with the formula fixed in an agreement with the Federal Anti-Monopoly Service (FAS). The agreement stipulates that the price for Russian industrial consumers should be calculated on the basis of a weighted average export price for markets with the minimum prices (China is now one such market) minus transportation costs. Uralkali is hopeful that the decision will contribute to the development of the Russian agrarian sector and the domestic mineral fertilizer market.

We view this news as neutral for Uralkali, given that the decision made will not seriously impact its revenues. It should however, reduce the specific risks typically faced by Russian mineral fertilizer producers.

The state has recently been actively involved in the regulation of domestic mineral fertilzier producers through the adoption of tariff measures and customs regulation and by conducting addition checks on producers. This decision shows that Uralkali sides with the government in its policy of supporting Russian agrarian producers.

Even though potassium chloride prices for domestic producers have been fixed at a low level, as compared with the relevant export prices, they only make up about 2% to 3% of the company's total revenue as domestic sales by the company stand at just 10% of its total output. In the meantime, the likelihood of claims against the company on the part of regulatory bodies, including FAS, has been reduced to a minimum.

Investors are advised to BUY Uralkali (RTS: URKA) shares, with a target price of USD 18.5 per share, which implies an upside potential of more than 70% to the current stock valuations.