July 20, 2009 Europe, Middle East & Africa: Agriculture July 20, 2009 Europe, Middle East & Africa: Agriculture Lower potash assumptions; no upside for ICL and URKA Lower potash price assumptions post Indian tender results The recently concluded Indian potash tender caught global potash market by RATINGS AND 12-MONTHS PRICE TARGETS surprise with the MOP price agreed at US$460/mt, 26% below last year’s Current Price target Company Rating Currency Return contract price and competing offers from the largest suppliers. Even though price Old New ICL N NIS 38 46 39 2% the new price level is yet to be confirmed as the new benchmark by other Uralkali N US$ 16 22 16 3% producers, recent supply-side commentary and industry sources indicate it is more likely to be accepted globally than not. On this basis and following Goldman Sachs US Agrochemicals Research team which recently cut their EV/EBITDA MULTIPLE FOR POTASH PRODUCERS 2010E potash price assumption from US$550/mt to US$475/mt FOB Saskatchewan, cut our potash price assumptions for Uralkali and ICL for 2H09 25 and thereafter. We now use a benchmark price of US$475/mt FOB Baltics to 20 drive our potash average selling prices forecasts; our 2009E/10E ASP changes are -13%/-13% for Uralkali and -11%/-15% for ICL. 15 10 Stand-off on benchmark contracts prompts 2009 volume cuts We previously assumed that both Uralkali and ICL will resume deliveries to 5 India and China from early 2H09. While some supplies to India may indeed 0 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 start in Jul/Aug if an agreement with IPL is reached at reduced prices, we ICL Uralkali PotashCorp Mosaic Intrepid think that signing of the Chinese contract could be delayed until late Source: Goldman Sachs Research estimates, FactSet 2009/early 2010. According to our Asian fertilizer analyst, China’s potash inventories at the producer/distributor levels amount to c 4-5 mn mt, which RELATED RESEARCH would be sufficient to satisfy consumption needs through spring 2010. We Americas: Agriculture: Potash weakness continues – reduce our estimates for 2H09 potash sales volumes for Uralkali and ICL. nitrogen and phosphates are firming, July 16, 2009 Our volume assumptions for 2010 remain unchanged - we forecast a sharp Europe, Middle East & Africa: Agriculture IPC settles with increase in next year sales as growers should increase application rates India at low US$460/mt; new benchmark or one-off?, July 13, 2009 and global imports should rebound from the 2009 lows. Limited upside for ICL and URKA despite 2010 demand recovery Prices are as of July, 17, 2009 We are using 12-month forward EV/GCI vs. CROCI/WACC which includes 2010 forecasts to derive our price targets. After adjusting our models for revised price and volume assumptions, our 12-month price target for ICL goes down to NIS39 (NIS46) and for Uralkali to US$16 (US$22). On back of revised potash prices both ICL and Uralkali appear fairly valued; both stocks trade at 2010E multiples which are close to historical mid-cycle valuations for the sector. We maintain our Neutral ratings for both stocks. Risks include potash prices, sales volumes, currency moves against the US dollar; potential further mine-flood related damage claims (Uralkali). Vasily Nikolaev The Goldman Sachs Group, Inc. does and seeks to do business with +7(495)645-4011 | [email protected] Goldman Sachs OOO companies covered in its research reports. As a result, investors should Andrei Novikov be aware that the firm may have a conflict of interest that could affect +7(495)645-4228 | [email protected] Goldman Sachs OOO the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification, see the end of the text. Other important disclosures follow the Reg AC certification, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S. The Goldman Sachs Group, Inc. Global Investment Research Goldman Sachs Global Investment Research 1 July 20, 2009 Europe, Middle East & Africa: Agriculture Estimate revisions Exhibit 1: Uralkali and ICL sales volumes and ASP assumptions revisions Potash ASP, US$/mt Potash sales volumes, kt New Old % Change New Old % Change Uralkali 2009E 451 518 -13% 2,475 3,062 -19% 2010E 462 533 -13% 4,950 4,950 0% ICL 2009E 514 576 -11% 2,173 2,698 -19% 2010E 450 529 -15% 4,800 4,800 0% Source: Goldman Sachs Research estimates Exhibit 2: Uralkali and ICL financials, mn US$ Revenue EBITDA Net Income New Old % Change New Old % Change New Old % Change Uralkali 2009E 1,116 1,586 -30% 617 1,015 -39% 383 713 -46% 2010E 2,285 2,638 -13% 1,316 1,666 -21% 949 1,265 -25% ICL 2009E 4,439 4,876 -9% 1,336 1,622 -18% 791 1,003 -21% 2010E 6,130 6,511 -6% 2,122 2,458 -14% 1,377 1,639 -16% Source: Goldman Sachs Research estimates Goldman Sachs Global Investment Research 2 July 20, 2009 Europe, Middle East & Africa: Agriculture Exhibit 3: ICL: summary financials Profit model ($ mn) 12/08 12/09E 12/10E 12/11E Balance sheet ($ mn) 12/08 12/09E 12/10E 12/11E Total revenue 6,904.0 4,439.1 6,130.4 6,471.5 Cash & equivalents 215.2 461.9 1,132.3 1,119.7 Operating costs (4,235.3) (3,018.3) (3,885.8) (3,997.9) Accounts receivable 1,197.7 1,049.3 1,258.4 1,348.2 R&D (57.3) (84.7) (122.6) (129.4) Inventory 1,278.0 1,381.2 1,373.8 1,452.5 Lease payments 0.0 0.0 0.0 0.0 Other current assets 271.9 205.3 205.3 205.3 Other operating profit/(expense) (93.8) 0.0 0.0 0.0 Total current assets 2,962.7 3,097.7 3,969.9 4,125.7 EBITDA 2,517.7 1,336.0 2,122.0 2,344.2 Net PP&E 1,907.3 2,019.2 2,019.2 2,019.2 Depreciation & amortisation (182.2) (192.4) (200.4) (207.7) Net intangibles 521.4 510.8 510.8 510.8 EBIT 2,335.5 1,143.6 1,921.6 2,136.5 Total investments 27.2 27.4 27.4 27.4 Net interest income/(expense) (122.1) (61.0) (86.3) (34.8) Other long-term assets 319.2 284.8 284.8 284.8 Associates 13.8 0.6 0.0 0.0 Total assets 5,737.7 5,939.9 6,812.0 6,967.9 Profit/(loss) on disposals 0.0 0.0 0.0 0.0 Others (recurring) 0.0 0.0 0.0 0.0 Accounts payable 1,099.3 962.4 1,154.3 1,236.6 Pretax profits 2,227.2 1,083.2 1,835.3 2,101.6 Short-term debt 411.5 399.7 402.4 426.2 Income tax (233.2) (297.8) (458.8) (525.4) Other current liabilities 66.0 56.7 56.7 56.7 Tax rate (%) 10.5 27.5 25.0 25.0 Total current liabilities 1,576.7 1,418.7 1,613.3 1,719.5 Minorities 10.3 5.5 0.0 0.0 Long-term debt 1,022.3 957.7 947.0 208.5 Preferred dividends 0.0 0.0 0.0 0.0 Other long-term liabilities 627.8 601.0 601.0 601.0 Net income (pre-exceptionals) 2,004.2 790.9 1,376.5 1,576.2 Total long-term liabilities 1,650.1 1,558.7 1,548.0 809.5 Other non-recurring items post tax 0.0 0.0 0.0 0.0 Total liabilities 3,226.8 2,977.4 3,161.3 2,529.0 Net income 2,004.2 790.9 1,376.5 1,576.2 EPS (underlying) ($) 1.57 0.62 1.08 1.23 Preferred shares 0.0 0.0 0.0 0.0 EPS (basic, reported) ($) 1.57 0.62 1.08 1.23 Total common equity 2,443.0 2,900.0 3,588.3 4,376.4 Weighted shares outstanding (mn) 1,280.4 1,280.4 1,280.4 1,280.4 Minority interest 68.0 62.5 62.5 62.5 Common dividends declared 966.5 301.8 688.3 788.1 Total liabilities & equity 5,737.7 5,939.9 6,812.0 6,967.9 DPS ($) 0.75 0.24 0.54 0.62 Capitalised leases 0.0 0.0 0.0 0.0 Dividend payout ratio (%) 48.2 38.2 50.0 50.0 Capital employed 3,944.7 4,319.9 5,000.2 5,073.7 Dividend cover (X) 2.1 2.6 2.0 2.0 Growth & margins (%) 12/08 12/09E 12/10E 12/11E Adj for unfunded pensions & GW 0.0 0.0 0.0 0.0 Revenue growth 68.3 (35.7) 38.1 5.6 Adj capital employed 3,944.7 4,319.9 5,000.2 5,073.7 EBITDA growth 177.1 (46.9) 58.8 10.5 Gross cash invested 6,799.5 7,138.6 7,348.9 7,642.7 EBIT growth 214.5 (51.0) 68.0 11.2 Net income growth 262.1 (60.5) 74.0 14.5 Ratios 12/08 12/09E 12/10E 12/11E EPS growth 263.4 (60.5) 74.0 14.5 CROCI (%) 34.5 16.0 22.7 24.1 DPS growth 77.9 (68.8) 128.0 14.5 CROCI/WACC (X) 2.2 1.1 1.4 1.5 EBITDA margin 36.5 30.1 34.6 36.2 ROIC (%) 68.4 23.1 35.0 35.6 EBIT margin 33.8 25.8 31.3 33.0 ROIC/WACC (X) 4.4 1.5 2.2 2.2 ROA (%) 38.4 13.5 21.6 22.9 Cash flow statement ($ mn) 12/08 12/09E 12/10E 12/11E WACC (%) 15.5 15.3 15.7 15.9 Net income 2,004.2 790.9 1,376.5 1,576.2 Inventory days 67.6 113.6 81.8 81.9 D&A add-back (incl.