Uralkali CEO Arrest Makes BPC Restoration Impossible: UBS

Updated on

We reported yesterday that Uralkali OAO (LON:URALL) (MCX:URKA) CEO Vladislav Baumgertner was arrested yesterday in Belarus. His arrest comes about a month after Uralkali OAO (LON:URALL) (MCX:URKA) terminated a trade partnership with Belaruskali. Their partnership was known as Belarusian Potash Co. In 2005, the two companies had signed a contract to market potash globally, according to The Wall Street Journal.

Uralkali CEO Arrest Makes BPC Restoration Impossible: UBS

Russia intervenes in Uralkali-Belaruskali tension

Termination of the Belarusian Potash Co. or BPC partnership will be a big blow to Belarus’ economy. That’s because potash alone accounts for more than 7% of the country’s total exports. After Uralkali OAO (LON:URALL) (MCX:URKA) disclosed the end of the agreement, Vladislav Baumgertner estimated potash prices might decline from $400 to $300 per metric ton. That would cost more than $1 billion to cash-strapped Belarus.

UBS Equities analyst Danila Yakub said in a research note that Belarus has accused Mr. Baumgertner and other  former BPC executives including Messrs Petrov of abusing their position for private gain. Minsk has also informed Interpol. The Russian government responded furiously, saying that the arrest was unacceptable. Russian prime minister Dmitry Medvedev has intervened to help resolve the situation. Russian vice-prime minister Shuvalov said in a statement that Russia insists on a civilized solution to Uralkali-Belaruskali tension.

Uralkali’s vertical integration

UBS Equities believes that the arrest of Mr. Baumgertner further reinforces the case that the BPC partnership will not be restored. Belaruskali is desperate because it is unable to sign contracts after Uralkali OAO (LON:URALL) (MCX:URKA) strategically ended the partnership. The potash market is already facing high uncertainty. Sources close to Uralkali OAO (LON:URALL) (MCX:URKA) told UBS analysts that the Russian company plans to vertically integrate downstream by acquiring potash distributors as global potash market is almost at a standstill.

UBS says that Uralkali OAO (LON:URALL) (MCX:URKA) trades at 21.6x its expected earnings for 2014. The stock is fully priced. UBS analyst Danila Yakub said that the stock price is justified if potash prices reach above $500 per metric ton in the long-term. That seems unlikely as BHP Billiton Limited (NYSE:BHP) (ASX:BHP) has decided to invest another $2.6 billion in Jansen potash project.

UBS Equities has a Neutral rating on the stock with $23 price target.

Leave a Comment