Uralkali Stock Stares Into A Chasm

In a week when all investors in Russia were holding their breath, the bluest faces had to belong to Uralkali shareholders.

Catching both the market and the potash producer by surprise, Deputy Prime Minister Igor Sechin reopened a 2006 investigation into the flooding of a Uralkali mine, sending the company's shares — darlings of the Russian market not long ago ?€” down 75 percent in London in the three trading days after the announcement.

The losses came on top of the 75 percent Uralkali had already fallen since this summer.

The flood, ruled an accident in the original probe, created an enormous sinkhole in the Perm region, which is home to both Uralkali and its main rival Silvinit, the country's largest producer of fertilizer. What's worse, the hole is spreading and has already forced the construction of two new rail links to export the companies' potash.

A state commission will now decide whether the fertilizer producer will have to pay reparations, which analysts say could range anywhere from $600 million to $2.6 billion, depending on the state's ultimate intentions. The commission is expected to issue a decision by the end of the month.

For its part, Uralkali said it was surprised by the decision to reopen the investigation but that it would cooperate fully.

"We have no information as to why this decision was made," the company said in a statement. "We believe that the first commission comprised recognized experts; that its investigation was competent and comprehensive, and we see no reason to question its conclusions."

The circumstances surrounding Uralkali drew immediate comparisons to Prime Minister Vladimir Putin's public assault on coal miner Mechel this summer. The involvement of Rosneft chairman Igor Sechin, a deputy chief of staff to then-President Putin who was seen as the engine behind the dismantling of Yukos, generated echoes of that affair as well.

In a somewhat hopeful sign for Uralkali, however, chemicals analysts said the investigation could be an attempt to pressure the company into forking over some cash to help pay for the new railroad links and the relocation of regional power producer TGK-9.

While in the past higher transport prices have helped Russian Railways finance such projects with assistance from the state, the government is now looking, with an eye on inflation, to cap freight-carrying charges.

Potash, a little-noticed asset until prices took off this year, garnered momentum as grain shortages produced greater demand for fertilizer. In the year through September, Uralkali's revenue rose 150 percent, under Russian accounting standards, and its net profit rose 470 percent, the company said Friday.

It had been reported earlier that the company's net profits had jumped by 370 percent year on year for the first three quarters of 2008, according to Russian accounting standards.

Majority-owned by billionaire Dmitry Rybolovlev, who also holds 25 percent of Silvinit, Uralkali is the country's second-largest potash producer and third-largest in the world. It exports 90 percent of its output, primarily to the other BRIC markets ?€” Brazil, India and China.

"Until now, the government was not particularly interested in the [fertilizer] sector," said Yelena Sakhnova, senior analyst at VTB. "It was very small compared with oil and gas and even metals, and it was not strategically important."

Should the state find Uralkali liable for the accident, however, fines against the company could extend above Uralkali's current cash position, forcing the company into bankruptcy and leaving it open to a possible state takeover.

Sakhnova said that, in the best-case scenario, Uralkali would only have to help cover the costs of building railway bypasses, relocating local Berezniki residents and transporting the nearby TGK-9 power facilities, a total of $600 million to $800 million ?€” an "unpleasant but not devastating" figure for Uralkali.

The worst-case scenario would bring charges of up to $2.6 billion, to cover the drop in tax revenues from lost reserves, a figure likely to dump the company into state hands ?€” something Sakhnova said would hurt the entire market.

"We think that right now the state is concentrating on the crisis and isn't prepared to take such actions," she said.

In the immediate term, analysts are more concerned about negotiations of a new potash contract with China in December. If negotiations stretch on for months, as they have in the past, the Uralkali affair could reduce the industry's leverage in striking a deal with its biggest global importer.

Since Uralkali fell to $5.01 in London on Tuesday ?€” its lowest closing price in the company's history, the stock has gradually rebounded both in Moscow and London. In London, the stock rose 15.4 percent on Thursday, or 84 cents. On Friday, the shares finished up 24 percent, at $7.80 in London, and up 13.9 percent in Moscow at $44.87.

Sakhnova said investors still might have reason to fear the beginnings of a state takeover until the commission releases more information.

"In the worst of the worst scenarios, where the government would try to go not only for Uralkali but for the whole industry, the government might try to create one company in Russia that would be producing potash," Sakhnova said.

But given the current circumstances, she said, the state had likely bigger concerns than an overhaul of the national potash industry.