Uralkali's $1.5 bln share buyback credit negative - Moody's
MOSCOW. April 29 (Interfax) - Moody's Investors Service views Russian potash miner Uralkali's (Uralkali, Ba1 negative) recently announced $1.5 billion share buyback programme as credit negative, the agency sqid in a press release.
"On 24 April 2015, Uralkali announced that its board had approved a share buyback programme worth up to $1.5 billion, which is likely to be implemented by 16 June 2015 and funded with cash. The programme is credit negative for Uralkali because, in our view, it will reduce the company's financial flexibility and slow down deleveraging efforts in the context of contracted capacity and accelerated capex as a result of a mine accident at Uralkali in November 2014, at a time when price competition in the global potash market is increasing. The programme also signals Uralkali's more aggressive approach to shareholder returns, which was not anticipated by Moody's and is credit negative," Moody's said.
"While the programme is credit negative, there is no immediate ratings effect, given Uralkali's liquidity cushion and our expectation that the post-buyback evolution of the company's financial profile will not significantly deviate from what we expect for the company's Ba1 rating. The current negative outlook on the rating already captures the risk of weaker-than-expected cash flow generation owing to continued potash market's volatilities," it said.
"Uralkali noted that the programme is intended to distribute cash to shareholders at a time when a dividend distribution would not comply with the company's dividend policy, owing to a net loss in 2014 caused by foreign exchange losses. No dividends will be paid for 2014. The board also adopted a new, discretionary dividend policy allowing the board to determine the amount of dividend, while the previous policy set the amount at 50% of net profit. Uralkali plans to eventually cancel the acquired shares. The company says that it sees a return of capital to investors as consistent with its strategy to maximize the value for shareholders. In 2012-14, Uralkali distributed $1.6 billion in dividends and conducted share buybacks totalling $2.6 billion."
"We see any shareholder distribution from Uralkali this year as being aggressive, in the context of an accident at one of its largest mines, Solikamsk-2 mine in 2014. On 18 November 2014, Uralkali suspended operations at this mine, owing to increasing brine inflows. As a result, Uralkali's total potash production capacity (of 13.3 million tonnes per
annum) and ore reserves have contracted by 20%, possibly on a permanent basis, making the company more vulnerable to potash market volatilities and resulting in accelerated capex in new capacity projects."
"However, we expect that the post-buyback evolution of Uralkali's financial profile will develop broadly in line, although with a short-term delay, with what we expected for its current rating, if the global potash market were to remain relatively stable. In particular, Uralkali's financial metrics will improve in 2015-16, with adjusted debt/EBITDA to strengthen from 3.2x at end-2014 to around or just slightly above 2.0x in 2016, which is within our guidance for the current rating. The expectation factors in Uralkali's low cost base and strong margins as well as its leading position in the global potash market."
"In addition, Uralkali does not need to raise additional debt to fund the buyback or address its other liquidity needs, given its sizable cash balance ($3.2 billion as of April 2014) and strong positive free cash flow ($0.8 billion for 2015 under our base case scenario)."
"We expect that Uralkali's liquidity will remain sufficiently strong with a cash balance of around $3.2 billion (as of 24 April 2015) and projected operating cash flows of $2.6 billion from Q2 2015 to end-2016. These cash and cash flows will more than cover the company's liquidity needs of $4.8 billion up to end-2016, including $1.5 billion debt repayments, $1.2 billion capital expenditure, $1.5 billion share buyback and our assumption that Uralkali's dividend payments in 2016 are unlikely to exceed a half of its 2015 net profit," Moody's said.
