A move by Russian potash miner Uralkali to break out of a venture with its Belarus partner could push its credit rating into junk territory, as cash and debt levels come under pressure, rating agency Moody's warned.
Uralkali on Tuesday quit Belarussian Potash Company (BPC), a joint venture with Belaruskali that was one of the world's two big potash cartels, heralding a price war for the key crop nutrient and sending the shares of companies that produce it sliding.
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The miner plans to compensate for the expected price fall by increasing sales to 14 million tonnes in 2015 from a forecast 10.5 million this year.
Moody's analyst Sergei Grishunin said in a research report that the plans to increase volume were "realistic" and should help maintain Uralkali's cash flow at the current level.
"However, we expect Uralkali's liquidity to come under pressure because it is already weak after recently using cash reserves for a 41 billion rouble (approximately $1.3 billion) share buyback," he wrote in the report earlier on Thursday.
The agency said later that Uralkali's Baa3 rating - the last investment grade rung - was on review for a downgrade given concern that its financial and liquidity profile could deteriorate beyond the thresholds the agency has set for Baa3.
Uralkali said in June it would buy back investor and politician Zelimkhan Mutsoev's 6.4 percent stake in the firm for around $1.3 billion, raising new borrowing to finance the deal.
Grishunin said that had weakened the credit profile.
"If they hadn't done the transaction with Mr Mutsoev, I would say that they were very strongly positioned because they have sufficient reserves, but now because they spent a lot of cash, they put themselves in a weaker position," he said.
Grishunin estimated that Uralkali needs to raise additional debt by the end of 2013 to cover projected capital expenditure of $400 million, $180 million of dividends and $370 million of debt which matures in the third and fourth quarters.
He estimated its reported debt would rise to around $4.7 billion by the end of this year from $3.9 billion in 2012. It has almost half a billion of dollar-denominated Eurobonds outstanding, according to Thomson Reuters data, as well as a raft of bank loans.
Grishunin said the company would also be hit by a drop in potash prices, contributing to a weaker financial profile.
Rival rating agency Fitch, in its own statement, said the break-up of the cartel could favor low-cost producers like Uralkali. But it warned a bigger-than-expected drop in prices, pressuring debt levels, could result in a downgrade.
Fitch had already revised its rating outlook to "negative" from "stable" in July - an indication of a potential downgrade - over concerns a buyback program left little room for further market deterioration. It rates the company BBB-, the lowest investment grade rung.
Uralkali declined to comment on the report.
(Reporting by Megan Davies; Additional reporting by Clara Ferreira-Marques in London; editing by Patrick Graham)