TEXT-S&P summary: EuroChem Mineral and Chemical Co. OJSC
(The following statement was released by the rating agency)
Oct 29 -
Summary analysis -- EuroChem Mineral and Chemical Co. OJSC -------- 29-Oct-2012
CREDIT RATING: BB/Stable/-- Country: Russia
Credit Rating History:
Local currency Foreign currency
29-May-2008 BB/-- BB/--
27-Feb-2007 BB-/-- BB-/--
The rating on Russia-based fertilizer group EuroChem Mineral and Chemical Co. OJSC (EuroChem) reflects Standard & Poor's Ratings Services' opinion of the group's "fair" business risk and "significant" financial risk.
The main constraint on EuroChem's rating and business risk is our country risk assessment--although most of the group's products are exported, most of its profits derive from assets located in Russia. The business risk also reflects the group's exposure to cyclical markets for nitrogen- and phosphate-based fertilizers, iron ore, and other base chemicals, which leads to substantial EBITDA and operating cash flow swings depending on industry conditions. Capital expenditure (capex) to increase production capacity and, to a lesser extent, enhance efficiency, is significant and time consuming.
Positive rating factors for EuroChem's business risk include the group's high profitability, as illustrated by favorable return on capital, and substantial EBITDA minus maintenance capex levels and margin over industry cycles. EuroChem owns high-quality phosphate rock that covers about 80% of its needs. The group also has access to cheap Russian gas, with gas being the largest cost component of nitrogen fertilizers, and is constantly aiming to improve production and logistical efficiency. Diversification by client and asset is supportive.
EuroChem is Russia's second largest fertilizer group. It reported sales of about $4.4 billion (Russian ruble 131 billion) and EBITDA of about $1.6 billion (RUB49 billion) for 2011, which translates into a high 38% EBITDA margin. The group's core activity is the production of nitrogen and phosphate fertilizers. A sizable part of its EBITDA comes from iron ore. EuroChem extracts around 5.5 million tonnes per year, as a by-product of phosphate mining, at a low marginal cost.
Our view of EuroChem's financial risk as significant takes into account the country risk inherent in operating in Russia and, to a lesser extent, the group's two large, complex greenfield potash mining projects which require huge capex and entail execution risk, very long lead times, and delayed returns. While EuroChem's annual capex budget is largely non-mandatory, it is strategic. Even during 2009's very difficult economic conditions, the group did not veer from its plan.
That said, management is committed to retaining what we believe is a moderate financial policy, which encompasses a 2.5x net debt-to-EBITDA cap. Leverage was only 1.3x on June 30, 2012, 1.35x in December 2011, 1.1x in 2010, and 2.2x in 2009. We assess EuroChem's liquidity as adequate owing to, among other factors, its proactive and successful refinancing in the past several years, and access to bank funding and debt markets. EuroChem also generates significant free operating cash flow (FOCF) under top- and mid-cycle industry conditions, excluding growth projects.
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