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RMG - Apatite market to be liberalized

31 May 2012
Russian Banks And Brokers Reports
Federal Antimonopoly Service approved a new pricing policy for apatite concentrate supplied to the domestic market, which suggests price liberalization from January 2013. The regulator proposed three price definitions if suppliers and consumers fail to arrange prices themselves: one based on Apatit (APAT RU, APATP RU) net export price, another linked to the Moroccan OCP FOB price, and the last one based on NPK FOB price. The formulas will be adjusted for the ore quality and transportation costs. New pricing can be applied in 2012 if the parties have not arranged prices for this year.
The initiative should largely favor Phosagro (PHOR RX, PHOR LI) and its subsidiary, Apatit, which is the biggest Russian producer of apatite concentrate. By our estimates in 2011 the discount for apatite concentrate on the domestic market was as much as 60% ($120/tonne against $290/tonne for exports). We would expect an average domestic price to increase to $240-270/tonne in 2013, which could bring extra $660m to Phosagro EBITDA in 2013-2015 (19% of our current forecast, based on 1.7-1.8m tonnes of apatite concentrate per year sold internally).
The news is moderately negative for Acron (AKRN RX, AKRN LI), which will have to purchase at least 200k tonnes of apatit concentrate from Phosagro until it launches own production at Olenyi Ruchei. Acron losses may total $20-25m in 2013 (Olenyi Ruchei is scheduled to start output this July).
FAS initiative was surprisingly announced right ahead of the auction for sale of the government state in Apatit falling to June 14. That might indicate that the government wants to encourage applicants to participate more actively in the auction. We believe the new pricing could raise Apatit EBITDA roughly by 50%, thus making current asset valuation potentially underpriced (state stake was earlier valued at $330m by  BNP Paribas ).
We believe that Phosagro remains the main candidate for the government stake, but the auction is likely to be rather hard for the company to win.