Russia 101026 Basic Political Developments

Tenex could raise syndicated 0 mln loan

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Tenex could raise syndicated $500 mln loan

MOSCOW. Oct 26 (Interfax) - Russian nuclear materials exporter Techsnabexport (Tenex) plans to raise a foreign syndicated bank loan of up to $500 million repayable in five years, the general director of the state Rosatom corporation, Nikolai Solomon, told reporters.

"I think we'll have an official statement by November 1 after we have signed the mandates [with the banks]," Solomon said.

Tomsk Distribution grids might be managed by EDF

VTB Capital

October 26, 2010

News: MRSK Holding might pass management of Tomsk Distribution Grids (TORS RU) over to EDF, according to yesterday's Interfax, quoting Nikolay Shvets CEO of MRSK Holding. Currently, it is under MRSK of Siberia's management. He stressed that privatisation of grids was not on the agenda.

Shvets also stated that 8 regions might switch to RAB regulation from 1 November. He went on to say that all MRSKs would be able to shift over to RAB from early next year.

Finally, the CEO highlighted that the average interest rate for loan portfolio of MRSK Holding (RUB 123bn) had been reduced to 7.11% of late.

Our View: We believe that the news is generally positive for MRSKs. As we have continually reported, the appearance of foreign utilities in the management of distribution grids is likely to add to the investment case of the latter. We think that Enel, who also cooperates with MRSK Holding, might get managing control over some MRSKs.

We also welcome switch to RAB from 1 November should it to occur. We await more details regarding the move of all the other regions from 1 January.

Domestic fertiliser producers to pay market price for potash starting in 2013

Renaissance Capital

October 26, 2010

Event: Today (26 Oct) RBC Daily reported that yesterday (25 Oct), at a meeting with First Deputy Prime Minister Igor Shuvalov initiated by Suleyman Kerimov, the government decided to set potash prices for domestic complex fertiliser producers at the market level from 2013. A transitional period in 2011-2012 will smooth out the sharp increase in prices. Until 2013, complex fertiliser producers will be able to buy potash at minimal export prices (currently RUB6,300/tonne [$210/tonne]) and may be eligible for compensation. Domestic farmers will pay a lower potash price of RUB4,200/tonne ($140/tonne) until 2013. Thereafter, the government plans to provide them with additional subsidies for the purchase of potash and complex fertilisers.

Currently, the potash price for domestic fertiliser producers is RUB4,300/tonne ($143/tonne). According to the government's guidance on nondiscriminatory access to the potash market, potash fertiliser producers have to supply 1.65mnt of potash per year to the domestic market at prices that are indexed to industrial inflation.

Action: In our view, the news is positive for potash fertiliser producers (Uralkali, Silvinit), which will benefit from a higher selling price, and negative for complex fertiliser producers (Acron, Dorogobuzh, EuroChem), due to higher costs.

Rationale: Silvinit and Uralkali supply about 17% and 12% of their potash output, respectively, to the domestic market. In 2009, Silvinit delivered 0.94mnt of potash to the domestic market, while Uralkali delivered 0.6mnt. The current netback average export price for potash is about $270/tonne, on our estimates. If domestic potash prices are set at the market level, we estimate that Silvinit and Uralkali will be able to increase their revenue by $120mn and $76mn, respectively, which will be fully translated into EBITDA.

Mikhail Safin

Gov't to eliminate potassium market regulation

      RBC, 26.10.2010, Moscow 11:55:42.Despite the fact that Russian businessman Suleyman Kerimov has only recently become a player in the Russian potassium business, he has already proven himself to be an efficient lobbyist. He managed to convince the government to abolish price regulations on potassium fertilizers. According to the RBC Daily newspaper, this may put an end to long-term disputes regarding potassium prices for producers of compound fertilizers. At a meeting with First Deputy Prime Minister Igor Shuvalov, a decision was made that starting in 2013, potassium prices on the domestic market will become free market prices. For potassium companies, this means millions of dollars in additional annual revenue.

      Several sources close to the meeting with Shuvalov informed the publication that the meeting had been held at Kerimov's initiative and prepared within a short period of time. At the same time, they indicated that a transition period within the next two years would help prevent a drastic increase in prices. Furthermore, compound fertilizer producers will receive compensation for the period until 2013 in connection with the shift towards market prices. Uralkali and Silvinit, specifically, will be able to generate up to $220m in additional profit. Market participants expect the two companies to merge before the end of 2010.

Export duty for cement abolished

October 26, 2010

The Russian government has cancelled the export duty for cement, lowering it to zero from the current 6.5%. The zero duty will be effective starting November 19.

We believe that no export duty could be beneficial to the Russian producers, since they could increase their exports from 0.6mn tones in 2009 to 3-3.5 mn tones in the next few years. However, the production increase could take place a couple of years later, since the current international market conditions are weak and not favorable for export increases. For example, cement price in Kazakhstan is about USD 60 per tonne, which is even less than USD 76 per tonne in Russia.

Zero export duty is more beneficial for the cement producers located in the Central part of Russia, where the transport cost is rather low for supplying cement to both Asia (Kazakhstan and Turkmenistan) and Europe (Azerbaijan, Belarus, Finland and Baltic states). At the same time, the Russian stocks we are covering (Sibcem, Iskitimcement, Gornozavodskcement) may not benefit as much from the zero duty, since their capacities are located far away from most cement consuming countries, except Kazakhstan.
Consortium of Evraz, EPK and Severstal to build railroad

VTB Capital

October 26, 2010

News: According to today's Vedomosti, the key holders of licenses in the Ulug- Khem basin are set to create a consortium in order to construct a railway to Transsib.

Our View: Insufficient infrastructure is the major issue which deters the development of new coal mining regions in Russia. Capex required for the construction of the Kyzyl-Kuragino railway with capacity of up to 15mtpa of coal totalling roughly USD4bn with the state fund financing one-third of it.

Based on our estimates, Ulug-Khem is to produce at least 30-40mtpa of coal and transportation capacity as a result has to at least double. Moreover, Transsib also has limited capacity which is a bottleneck for the project. Given our bullish view on coking coal and the current news coupled with China being ready to support development of coal mining in Tuva (as much coal as would be needed for exports) through special purpose credit lines (around USD 6bn), we see the news as another positive development for the industry as a whole.

Alexander Pukhaev

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