Uralkali’s reasoning and expectations

On August 19^th, the Belaruskali CEO talked about a possible hostile takeover attempt by Uralkali.

The main driving force behind Uralkali’s actions is an attempt to cash in on falling shares of major Russian shareholders and to increase pressure on Belarus to shift export flows through “Uralkali Trading”. When Uralkali gains maximum profits from the situation, it may resume attempts to negotiate coordinated actions on the potash market.

Uralkali had clear understanding of Belarus’ international trade situation and of Belaruskali’s role as one of the major sources of foreign currency inflow to the country. Any cutback in foreign currency proceeds, against the background of substantial national public debt payments (in July 2013 – over USD 400 million), could significantly increase pressure on the BYR exchange rate. Uralkali ‘hit’ with its breakup announcement when the entire Belaruskali leadership was holding negotiations in Brazil and could not respond rapidly.

In addition, Uralkali won by reducing the cost of two large blocks of shares owned by the now-minority shareholders. Following the breakup announcement with the Belarusian Potash Company (BPC), costs of these shares costs fell by more than USD 120 million.

The breakup pursued financial goals. Firstly, it aimed to consolidate Uralkali’s shares in Kerimov’s hands for less money. Suleyman Kerimov Foundation increased its stake up to 21.75% or by 4.55%, which saved him about USD 100 million. Potentially, this figure could be higher due to other purchases by affiliated companies. Secondly, it strove to increase pressure on Belarus in order to force it to shift export flows through Uralkali Trader. The latter enables Uralkali to dictate the supply terms for Belaruskali and consequently to gain additional revenues by saving the most lucrative contracts for themselves. An additional bonus was the 500 thousand tons option conversion from BPC to Uralkali.

It seems that the announced new strategy “volumes over prices” is probably a bluff. Indeed, Uralkali can take the advantage of the lower production cost relative to key competitors. However, even the potential production capacity growth from 10 to 14 million tons is not decisive given the market scale, and it is unlikely that the company will self-harm by dumping. Moreover, some markets, including North American, are controlled by Canpotex consortium. BHP Billiton Ltd responded to Uralkali’s bluff with a decision to invest USD 2.6 billion to a mining project in Jansen potash mine in Canada. This project could have been frozen due to the anticipated substantial drop in the potash prices. Uralkali has hinted that cooperation with Belaruskali might resume, which appears to indicate that there are no real plans to dump the market.

Thus, the most likely reason behind the breakup was a short-term financial goal. Reconciliation should be anticipated when Kerimov gains the desired package of Uralkali’s shares.