OREANDA-NEWS. On 11 July 2008 was announced, that Fitch Ratings upgraded EuroChem Mineral and Chemical Company, OJSC to ‘BB’. Recently Standard&Poor’s had also upgraded EuroChem to ‘BB’.

Fitch Ratings upgraded Russia-based OJSC EuroChem Mineral and Chemical Company's (EuroChem) Long-term Issuer Default rating (IDR) and senior unsecured debt rating to 'BB' from 'BB-' (BB minus). The Outlook for the Long-term IDR is Stable.

The Short-term IDR is affirmed at 'B'.

The upgrade reflects Fitch's view that EuroChem has achieved and, more importantly, will maintain a credit profile commensurate with a 'BB' rating through the next cycle.

The group's performance and credit metrics benefited from exceptionally strong market fundamentals in 2007. Sales grew 38% to RUB73.8bn (around USD3bn) in FY07, driven by soaring fertilizer prices and, to a lesser extent, strong demand and EuroChem's capacity upgrades. Cost inflation in Russia (labour, natural gas, sulphur) was more than offset by the rise in crop nutrient prices and the group's EBITDA margin increased to 31.2% from 22.1% yoy, positioning EuroChem amongst the most profitable fertilizer producers globally.

The Outlook reflects Fitch's belief that low grain inventories globally, strong fertilizer demand and raw material cost push (natural gas, sulphur) will continue to support high fertilizer prices in 2008-09 and should translate into strong earnings and cash flow generation for EuroChem. Whilst new urea and ammonia capacity in the Middle East could translate into downward pricing pressure post-2010, Fitch notes that delays or cancellations due to considerable bottlenecks in the region could result in a tighter market balance than currently forecast. The Outlook also encompasses the group's strategic focus on productivity gains and vertical integration, which are expected to partly offset general cost inflation in Russia.

The ratings also recognise that EuroChem's investment strategy will necessitate some degree of re-leveraging. More specifically, the group is in the first stages of development of a potash mine in the Volgograd region, which, like any exploration project, entails material risks and uncertainties. The cost of the five-year development (2007-12) has been revised to USD1.9bn, from USD1.1bn initially, to factor in a contingency reserve as well as rising equipment, metal and labour costs. Peak spending is forecast in 2009 and 2010. Total capex is expected to range between USD900m and USD1.0bn in 2008-10 and also includes sizeable investments towards the modernisation and upgrading of the group's existing facilities. EuroChem is also expected to actively pursue acquisitions in the near-to-medium-term.

Fitch, however, derives some comfort from the group's conservative financial policy. In particular, management is committed to maintaining GD/EBITDA at or below 1.5x and dividends will be adjusted to reflect the group's business and financial needs. EuroChem's debt structure and maturity profile was noticeably enhanced in FY07 through the issuance of a five-year USD300m Eurobond, the proceeds of which were used to refinance short-term loans.

The ratings continue to be supported by EuroChem's leading market positions in the growing Russian fertiliser market and its strong product and market diversification.

Fitch also takes a positive view on the group's plan to diversify into potash, as this strategy will in enhance EuroChem's business risk in the long-term by providing further product diversification and materially reducing its sensitivity to natural gas.