EuroChem Group AG Third Quarter / First Nine Months 2016 IFRS Results
Zug, Switzerland, 10 November 2016 – EuroChem Group AG (hereinafter “EuroChem”, “Group” or “Company”), one of the world’s leading global agrochemical companies, today reported consolidated sales for the third quarter of 2016 of $1.05 billion as compared to $1.12 billion during the same period last year. The third quarter performance carried the Group’s sales for the first nine months of the year to $3.32 billion, 5% behind sales of $3.49 billion realised in the first nine months of 2015 as significantly lower prices outweighed a 6% growth in sales volumes.
Under pressure from the sustained lower market prices, third-quarter earnings before interest, taxes, depreciation, and amortization (EBITDA) retreated 47% year-on-year to $230 million. EBITDA for the first nine months of the year amounted to $816 million, which represented a 33% decline on the corresponding period of 2015. Our EBITDA margin for the first nine months of the year stood at 25%, as compared to 35% for the 1 January – 30 September 2015 period.
Third-quarter nitrogen and phosphates sales volumes grew 9% year-on-year and amounted to 2.98 million tonnes (MMT) of product on higher urea and MAP/DAP sales. The third quarter’s strong growth brought nitrogen and phosphates sales volumes for the first nine months of the year to 8.62 MMT, 6% ahead of volumes sold during the first three quarters of 2015.
Driven by higher production on favorable geology, third-quarter sales volumes of iron ore jumped 19% year-on-year and amounted to 1.7 MMT. The Group sold 4.47 MMT of iron ore during the first nine months of 2016, which was 6% above the 4.21 MMT sold during the corresponding period of 2015.
In addition to its own products, the Group’s sales of third-party products rose 82% to 2.65 MMT (excluding acquisitions: 25% to 1.82 MMT), including 1.0 MMT of urea and 953 KMT of ammonium sulphate, during the first three quarters of the year as a result of expanding distribution capabilities.
“Against a challenging market backdrop, we continue to increase our sales volumes and expand both our reach across new markets and our offering of premium and enhanced products”, said EuroChem CEO Dmitry Strezhnev. “The platform we are creating today, anchors our position ahead of the market recovery and the start of our potash production.”
Overall trading condition remained weak on the back of excessive supply, low soft commodity prices and the seasonal Q3 lull across the Northern hemisphere. Accordingly, the response from buyers was to delay purchasing decisions and limit volume commitments so as to maintain lean inventory levels until prices neared trough-levels.
In nitrogen, new supply additions and softer demand continued to weigh on sentiment and prices, leading to estimates that up to a quarter of global supply moved into loss-making territory at operating profit level. Increasing coal prices continued to intensify cost pressure on Chinese producers. According to trade data from China Customs, urea exports amounted to 7.5 MMT in the first nine months of 2016, 21% below last year’s exports during the same period. Overall capacity utilization for nitrogen fertilizer production assets in China was estimated at around 60% in the third quarter. Prilled urea (FOB Yuzhny) averaged $183/tonne in the third quarter, 32% below its Q3 2015 average of $269/tonne, and 7% lower than in the second quarter of 2016. Despite support from improving demand dynamics in the CIS, at $145/tonne, average ammonium nitrate (AN) (FOB Black Sea) prices declined 26%. As with urea, a 5% quarter-on-quarter loss from $153/tonne in Q2 2016 highlighted the proximity of pricing trough.
Third-quarter phosphates prices, while stable quarter-on-quarter, were considerably lower than a year ago. MAP and DAP (FOB Baltic Sea) prices respectively declined 28% and 30%over their third quarter 2015 averages as elevated inventory and product substitution weighed on demand in key markets.
With a third quarter average of $200/tonne, MOP (FOB Baltic Sea) contract prices were 30% lower year-on-year, while spot prices fared slightly better, down 25% at an average of $222/tonne.
Finishing the quarter at an average of $60/tonne (63.5% Fe, CFR China), iron ore prices were 6% higher year-on-year, buoyed by strong demand from the Chinese steel sector. As a by-product of EuroChem’s phosphate rock mining operations at Kovdorskiy, the Group sold 1.71 MMT and 4.47 MMT of iron ore in the third quarter and first nine months of 2016, respectively.
The Group’s business is conducted by five operating divisions aggregated in five reportable segments identified as Oil & Gas, Mining, Fertilizers, Logistics, and Sales. Although the information provided in this publication is based on product groups, the Group presents both reporting approaches in its financial accounts. Starting from Q4/FY 2016, the Group will report its financial results solely according to segments and will discontinue presenting financial information based on product groups.
Despite a 12% growth in the Group’s sales volumes, lower market prices for fertilizer and mining products pushed third-quarter sales 6% lower year-on-year. We realised sales of $1.05 billion in the third quarter of 2016, as compared to $1.12 billion in the third quarter of 2015. The Group’s sales for the first nine months of the year amounted to $3.32 billion, 5% behind the $3.49 billion realised over the same period in 2015.
The Group’s third quarter EBITDA declined 47% to $230 million. For the 1 January to 30 September 2016 period, EBITDA amounted to $816 million, which was 33% below EBITDA of $1.22 billion realised in the first nine months of 2015. While the Group benefited from its low-cost and integrated operations in Russia as well as higher sales volumes, the substantially lower market prices were the main driver behind the decline in EBITDA. The lower pricing environment eroded EBITDA by $707 million year-on-year, eclipsing gains of $246 million from additional volumes and changes in product mix.
EBITDA Development ($m)
The Group’s home markets, Europe, CIS and Russia, accounted for 59% of third-quarter sales and 58% of sales during the first nine months of the year (9M 15: 65%).
Encouraged by good demand and the consolidation of Fertilizantes Tocantins (Tocantins) from 1 September 2016, sales to Latin America more than doubled to represent 13% of third-quarter sales. As in 2015, Latin America accounted for 9% of the Group’s sales during the first nine months of the year, although its weight is expected to increase as we develop Tocantins’ business and, in time, with the start of our potash distribution.
The combination of lower volumes and prices led to a 21% decrease in third-quarter sales to North America, which accounted for 11% of our sales in the July to September period. For the first nine months of this year, sales to North America showed a growth of 38%, pushed up by our acquisition of the Bentrei distribution assets in October 2015. The North American market generated 17% of the Group’s sales during the first three quarters of this year.
The Group’s third-quarter costs of sales, excluding the costs of goods for resale, decreased 11% year-on-year to $486 million. Accounting for 51% of costs, raw materials decreased 16% to $246 million. Cost of sales for the first nine months of the year mirrored the quarterly trend and also declined 11%, amounting to $1.46 billion, as compared to $1.64 billion in the corresponding period of 2015.
Our expanding distribution reach increased goods for resale for the third quarter and first nine months of the year to $149 million and $553 million, respectively, representing increases of 26% and 59% over their corresponding periods of 2015.
Total group-wide staff costs for the first nine months of 2016 declined 2% to $280 million, as compared to $285 million in the first nine months of 2015.
Below the operating profit line, we recognised non-operating gains of $177 million, as compared to losses of $131 million in the first nine months of 2015, comprised mostly of financial foreign exchange gains. The latter gains arise mostly from accounting effects, such as for example the revaluation of US$-denominated financial liabilities at the level of Russian entities, which have the Russian rouble as their functional currency as prescribed by IFRS rules. The management believes that foreign exchange gains and losses, as well as gains and losses from currency translation, should be excluded from the analysis of the underlying operating performance of the Group.
As at 30 September 2016, the Group had a covenant net debt of $3.35 billion. The weaker fertilizer pricing environment brought the Group’s 12-month rolling EBITDA lower to $1.21 billion, which carried the Group’s net debt to EBITDA leverage ratio to 2.78x, as compared to 2.39x as at 30 June 2016 and 1.97x as at 31 December 2015. In September 2016 the Group entered into a facility agreement with AIM Capital SE, the Group’s principal shareholder, for zero-interest, non-callable, perpetual debt financing with a limit of up to $1.5bn in order to bring its covenant debt in line with current operating conditions. As at 30 September 2016, no contribution from the facility had been received.
Net working capital decreased 22% quarter-on-quarter to $625 million primarily as a result of an increase in both payables and customer prepayments following the consolidation of Fertilizantes Tocantins.
On 13 September, the Group signed an $800 million pre-export finance club facility with a club of 12 leading international banks. The deal was structured as a 5-year facility and includes a 2-year grace period.
In early October 2016, we completed a tender offer for the Group’s 2017 loan participation notes (5.125% p.a. coupon) with a simultaneous new issue of $500 million with a coupon of 3.80% p.a. to finance the purchase of the $426 million of notes redeemed under the tender offer. With an April 2020 maturity, the new bonds issue allowed us to extend the Group’s debt maturity profile while also lowering its cost.
The Group generated $305 million in operating cash flow in the third-quarter, bringing total cash flow generation for the first nine months of 2016 to $822 million, as compared to $344 million and $1.03 billion in the third quarter and first nine months of 2015, respectively.
With three major capital projects underway, including two benefiting from non-recourse project financing, the Group’s third-quarter capital expenditure (capex) increased by 23% year-on-year to $382 million. The third quarter’s increasing spending carried capex for the first three quarters of the year to $934, which was 41% ahead of capex spending during the first nine months of 2015.
As at 30 September 2016, we had allocated a total of $1.94 billion to the VolgaKaliy potash project, $1.29 billion to the Usolskiy project and $385 million to the EuroChem Northwest ammonia project on the Baltic seacoast. The Usolskiy and Northwest projects both benefit from non-recourse project financing facilities covering 35% of Phase I and 64% of total estimated project costs, respectively.
We invested $153 million in the Group’s phosphates operations during the January to September period. The majority of investments were directed at our Kovdorskiy operations and the Group’s mining project in Kazakhstan. At Kovdorskiy, we continued working on the ramp-up of the apatite staffelite ore complex and installed new feeder equipment for the tertiary crushers. Meanwhile, phosphate rock mining operations in Kazakhstan hit their full design capacity of 55 KMT per month in September.
The pick-up in construction activity at the Group’s Northwest ammonia project helped drive nitrogen capex for the first nine months of the year 95% higher year-on-year to $378 million.
In 2014, the Group secured project financing for its Usolskiy potash project in Russia’s Perm region. As at 30 September 2016, the Group had utilized an aggregate $546 million from the $750 million non-recourse facility.
In December 2015, the Group’s EuroChem Northwest subsidiary signed a EUR 557 million loan agreement with a club of banks for the project financing of an ammonia plant in Russia. As at 30 September 2016, the Group had utilized an aggregate EUR 66 million from the non-recourse facility.
In September 2016, the Group completed the acquisition of a controlling interest (50% interest plus one share) in Fertilizantes Tocantins Ltda, a leading fertiliser distributor in Brazil, as well as entered into mandatory put and call options for the remaining 50% interest minus one share to be executed in 2022. Considering the agreement’s terms and conditions, the transaction was accounted for as the acquisition of 100% interest in Fertilizantes Tocantins Ltda.
The acquisition of Fertilizantes Tocantins’ market expertise, blending facilities and established network of 2,000 customers has rapidly strengthened EuroChem’s capabilities in the fast growing Latin American fertilizer market.
Volumes and values are shown gross and inclusive of intra-group sales.
The Group sold 1.91 MMT of nitrogen products in the third quarter of 2016. The 11% increase was primarily driven by higher urea and UAN sales, which increased 29% and 20%, respectively. Both products benefited from good demand, especially in the Russian market, where the Group continued to develop UAN demand from a virtually absent base a few years ago.
Total nitrogen sales volumes for the first nine months of the year grew 7% year-on-year and amounted to 5.44 MMT, as compared to sales of 5.10 MMT over the same period a year ago.
Despite the positive sales growth dynamics, lower prices pushed nitrogen revenues 20% lower year-on-year to $372 million, down from $463 million in Q3 2015. Nitrogen revenues for the first nine months of the year were in-line with the trends of the latest quarter, declining 20% year-on-year to $1.17 billion. Consequently, the Group’s third-quarter nitrogen EBITDA retreated 58% from $236 million in 2015 to $98 million this year. Totaling $389 million, nitrogen EBITDA for the first nine months of 2016 was 42% behind last year’s $665 million, while EBITDA margin amounted to 33% (9M15: 46%).
As highlighted by the Group’s natural gas costs in Russia, which remained amongst the lowest globally, the lower product prices remained partially mitigated by the Group’s access to low cost raw materials. For the nine-month period ended 30 September 2016, excluding supplies from our Severneft Urengoy natural gas operator, average natural gas prices at our nitrogen facilities declined to around $2.1/mmBtu (9M 2015: $2.3/mmBtu). For reference, during the January to September period, average natural gas prices at benchmark hubs were $2.35/mmBtu in the U.S. (Henry Hub), $4.24/mmBtu in the Netherlands (TTF).
For the three-month period ended 30 September 2016, the Group’s phosphates sales volumes amounted to 1.07 MMT, which was 4% higher than the 1.03 MMT in sales realised in the third quarter of 2015. The 44 KMT increase was the result of higher MAP/DAP sales volumes offsetting lower complex fertilizer and feed product sales.
Phosphates sales volumes for the first nine months of the year reached 3.19 MMT, which was a 4% improvement on the 3.07 MMT sold in the same period last year.
Favorable geological conditions during apatite mining coupled with good demand from the Chinese steel sector helped sales of mineral raw materials rise 19% to 1.71 MMT as compared to sales of 1.44 MMT in the third quarter of 2015. Amounting to 4.48 MMT, sales volumes of iron ore and baddeleyite during the first nine months of the year were 6% higher year-on-year
We realised third-quarter phosphates revenues of $435 million, as compared to $513 million in the same period last year, as higher iron ore sales mitigated some of the pressure from the lower fertilizer prices. Phosphates sales for the first nine months of the year were 14% lower year-on-year and amounted to $1.33 billion.
Despite some support from mining products, the weaker fertilizer pricing backdrop reduced the Group’s phosphates EBITDA for the three-month period ended 30 September 2016 by 41% to $97 million, bringing EBITDA for the first nine months of the year to $295 million (9M 2015: $452m). Mining products contributed 28% and 22% to third quarter and first nine months phosphates EBITDA, respectively (Q3 2015: 11%, 9M 2015: 13%).
EuroChem is currently developing two potash deposits in Russia. The company’s projects in the Verkhnekamskoe potash deposit (Perm region) and the Gremyachinskoe deposit (Volgograd region) are a key component of EuroChem’s vertical integration strategy. The projects, which are widely expected to be amongst the lowest cost potash operations globally, will provide in excess of eight million tonnes of annual potash capacity once fully completed. The Group expects its first potash mining operations to start in late 2017.
As of 30 September 2016, the Group had spent an aggregate $3.2 billion on its two potash projects in Russia.
Commenting on the development of the Group’s potash projects, Clark Bailey, Managing Director of EuroChem’s Mining Division, said “This last quarter has shown us how truly amazing it is to witness what can be accomplished in a relatively short time in Russia, on fairly remote, yet true greenfield sites, while maintaining excellent safety and quality standards coupled with proper record keeping.”
EuroChem VolgaKaliy (Gremyachinskoe potash deposit, Volgograd region)
Several new project milestones were achieved in the last quarter. The skip shaft #1 passed through the potash production layer and was sunk through the carnallite zone to a final depth of 1,147.4 meters from the surface collar – making it the first shaft in the world completed beyond 1,000 meters in a virgin potash deposit in more than 40 years. Excavation and lining work continued at the hitch beam and loading stations. Additional samples of potash ore were performed and corroborated the initial geological samples. Over 300 tonnes of potash were excavated and pilled.
Worked continued on the lateral development of the skip shaft #2 station. A Galloway stage is being positioned at the bottom of the shaft with a deck installed above for the lateral development program.
At the cage shaft, where water inflow halted sinking progress at -813 meters, new conductor pipe has been installed and cemented, in preparation for the drilling of extra freeze holes to extend the freeze wall and capture the irregular dip in the water bearing formation. This program is expected to allow sinking to resume in approximately 6 to 7 months, which should allow the site to commission the cage shaft by March 2019 – by which time the site will already be producing potash via skip shafts #1 and #2. The expected commissioning of the cage shaft will enable the ramp-up of the project’s total mining and skipping capacity to remain in-line with our original mining plan.
With over 4,670 people involved and working on the site or in the adjacent town of Kotelnikovo, construction and installation continued to progress at numerous surface facilities, the most significant being: the main beneficiation building (including grinding, de-sliming, flotation, and de-watering units), finished product storage building, ore storage building, transfer towers and galleries, the crushing building, and new work began at the rail station. The construction of the beneficiation plant is expected to be completed in 2017, with potash production following by mid-2018.
EuroChem Usolskiy Potash (Verkhnekamskoe potash deposit, Perm region)
The commissioning and testing of the cage shaft hoisting system was carried out in the third quarter and new mining equipment was lowered to the mine development level.
The skip shaft headframe and facilities are expected to be structurally complete by the end of December 2016 to undergo testing and begin commissioning procedures.
Marking another milestone, the Group’s first URAL-20R mining machine was assembled underground and is going through commissioning checks. The hoisting of excavated material is currently scheduled to start from March 2017 with the start of sylvinite (potash) ore production following later in the year.
The construction of temporary buildings and facilities for rock freezing continued at the site’s third shaft. All freeze holes were prepared and readied for connection to the freeze system. Once connected to the freeze plant, the freezing of the ground is expected to take approximately 6-9 months.
On the surface, work continued throughout the site, including at the main beneficiation building (Grinding and Flotation Department / Drying and Compaction Department / Thickening Department), where some 15 cranes of different capacities are working a daily choreographed lifting plan of steel and equipment, reflecting the various contractors capabilities and professionalism. Construction of the stainless steel roof and floors commenced at the raw ore storage building #1, while the installation of glulam beams at storage building #2 started in September. The site’s 220 kV substation will be commissioned this month, while the water treating system, incoming gas system, water supply and other infrastructure are now near completion and getting ready to commission. On any given day, some 4,700 people of various disciplines from a variety of companies at this extremely busy site, working on over fifty buildings, installations and infrastructure items.
Our outlook on fertilizer demand and prices for the rest of the year is mixed. Whereas we take a relatively constructive view on nitrogen price dynamics, we remain cautious on the phosphate market. Overall fertilizer demand will continue to be supported by acreage growth and soft commodity pricing trends, although the latter will remain under pressure from expectations of another record crop year across major markets.
In nitrogen, despite the commissioning of new lower cost capacity, higher raw material costs in China are keeping capacity offline and supporting current price levels. As well, additional support to prices could come from producers looking to bring forward maintenance and turnarounds originally scheduled for next year. At this point in time, we see current urea pricing levels as sustainable with perhaps some moderate growth materializing as the market moves towards peak application season.
In phosphates, above average inventory levels are expected to compound seasonal demand factors as the market remains oversupplied with large volumes available from China and the MENA region. We expect to see prices eroding until year-end with potentially steeper cuts should changes to the Chinese export tax materialize. That being said, delays in purchasing in certain markets could create bottlenecks and fuel short-term price volatility in the coming weeks.
Potash prices continue to benefit from significant voluntary capacity shutdowns in North America, leading us to expect prices to remain at current levels through the year-end. A more disciplined supply approach remains necessary for any chance of sustained pricing appreciation, in our view.
Iron ore prices will remain range bound on excessive supply and high stock levels coupled with China’s continued drive to downsize its steel sector through capacity cuts.
 Covenant EBITDA as per loan agreements i.e. including dividend income, income from associates, interest income, and minority interests.
 Average prices derived from monthly data points.