Management Discussion and Analysis

Promoting Financial Stability

The absence of agreements concerning contract prices with China and India in the first half of 2016 and high level of potash inventories at the beginning of 2016 had a negative impact on the world market environment in 2016. Although demand in 2016 remained at the previous year’s level (61 million tonnes), the difficult market environment became the main reason for the sharp drop in potash prices compared to 2015.

Compared to 2015, the results of the Group were as follows:

  • The Group’s sales dropped by 2% year-on-year;
  • Total revenue fell by 27% compared to US$2.28 billion in 2016 from US$3.12 billion in 2015;
  • The average export price on a delivery basis in U.S. dollars decreased by 25% in 2016;
  • Cash cost of goods sold increased by 6% compared to 2015 and amounted to US$35 per tonne;
  • Adjusted EBITDA decreased by 38% to US$1.18 billion in 2016 from US$1.91 billion in 2015;
  • Cash CAPEX decreased by 6% to US$323 million in 2016 from US$343 million in 2015.

Gross sales

Protracted negotiations with Chinese and Indian buyers on the signing of new contracts, the use of potash inventories in the first quarter of 2016 and intense competition among suppliers put pressure on the market environment and export sales of the Company in 2016. The Group’s sales volumes decreased by 2% compared to 2015. The average export price in U.S. dollars for the Company’s products on a delivery basis decreased by 25% in 2016 compared to 2015.

All these factors led to a decrease in total revenue by 27% compared to the previous year, to US$2.28 billion.

Other sales (carnallite enriched, pit-run industrial sodium, as well as solutions of sodium chloride and magnesium) amounted to 3% of total revenue in 2016, or US$59 million.

[US$ per tonne]
[US$ per tonne]


The Company shipped 80% of the exported products in 2016 by marine transport, mainly through its own terminal in St. Petersburg. The costs of marine transportation of exported products include railway tariffs from Berezniki and Solikamsk to ports of transshipment, transshipment expenses at the seaport and freight costs (except for deliveries on an FOB basis).

The other 20% of export sales were transported by rail, including 16% to China, 4% to other regions.

Costs for these deliveries include the railway tariffs to China and other regions respectively.


The average freight rate in U.S. dollars decreased in 2016 compared to 2015 by 7% per tonne and amounted to US$28 per tonne.

The freight market slump continued in 2016 against the background of surplus fleet capacity in all segments and a decrease in marine shipping of bulk cargos. Oil prices also contributed to the low freight level. In the first quarter of 2016, the freight market reached its historic low.

In 2015, the Company abandoned river transportation on the territory of Russia in order to optimize transportation expenses.

The Company also covered barge transportation costs in the United States, which are less significant compared to sea transportation costs.

Railway tariffs

The Company performs direct railway shipments to its customers in Northern China, Europe and CIS countries. The weighted average railway tariff1 increased by 8% (in dollar terms it increased by 2%) in the direction of St. Petersburg, and by 1% (in dollar terms it decreased by 9%) to China, mainly due to tariff indexation (9%) and an increase in the share of routing to St. Petersburg and China.


Transshipment expenses in 2016 increased by 14% compared to 2015 and amounted to US$29.32 million.

Net sales

Net sales are defined as the gross revenues for the period net of variable distribution costs - freight costs, railway tariffs and transshipment costs.

Net sales decreased in 2016 compared to 2015 by 30% according to IFRS financial statements, reaching a level of US$1.85 billion, due to a drop in sales volume by 2% and a 30% drop in export prices on an FCA basis.

[US$ per tonne]

Cash cost of goods sold2

[US$ per tonne]

Cash cost of goods sold amounted to US$35 per tonne, which is 6% more than in 2015. The main reason for this increase in COGS per tonne were larger cost of materials and energy resources as well as payroll indexation.



As compared to 2015, payroll in 2016 increased by 4.8% in dollar terms and amounted to US$242 million (US$231 million in 2015). The main factor in the payroll increase was salary indexation due to inflation.

In 2016, about 20,500 people worked in the Group.

Fuel and energy

The potash production process is very energy-intensive. Expenses on fuel and energy largely depend on production output and are denominated in roubles. Electric power and gas were purchased at unregulated rates. However, the price of electricity and gas transmission services were regulated by the government. The Company’s power needs were partially met by our own generation. As a result, the effective tariff on gas increased by 4% in 2016 (in dollar terms there was a 5% decrease) compared to 2015 and amounted to US$57 per 1,000 m3. The effective tariff on electricity increased by 8% in 2016 (in dollar terms it decreased by 1%) compared to 2015 and amounted to US$39 per 1,000 kWh.


Other cash costs

Other cash costs are costs of materials, maintenance, transportation between mines, etc. Other cash costs include variable costs (costs of production materials and transportation between mines) and fixed costs (such as costs related to outsourced repairs and maintenance and materials for repairs).


General and administrative expenses3

As compared to 2015, general and administrative expenses decreased by 2% in 2016 in dollar terms, but increased by 0.73 billion roubles in rouble terms. The main constituent element of general and administrative expenses is labour costs (61%).


Finance income and expenses

The appreciation of the rouble by 17% in 2016 led to a foreign exchange gain in the amount of US$0.89 billion and gain on revaluation of the fair value of derivative financial instruments in the amount of US$0.18 billion.

Adjusted EBITDA

In 2016, adjusted EBITDA4 decreased by 38% as compared to 2015 and amounted to US$1.18 billion. The adjusted EBITDA margin5 was 64%.

[US$ mln]
  2016 2015
Operating profit 989 1,725 Operating profit
Adjusted for depreciation and amortisation 194 220 Adjusted for depreciation and amortisation
    One-off expenses
    (27) Reversal of Solikamsk-2 impairment
    (5) Reversal of provisions related to flooding at Solikamsk-2
Adjusted EBITDA 1,183 1,913 Adjusted EBITDA


In 2016, total CAPEX6 amounted to US$323 million, 63% of which were expansion CAPEX. The main expenditures during 2016 were related to the construction of the Ust-Yayva mine. Other projects related to production expansion included load increase, completion of the fourth shaft with Solikamsk-3 expansion, granulation capacity expansion and carnallite production expansion. The design of the main facilities of Polovodovsky potash plant was completed in 2016 and design and preparation work for the construction of the new mine Solikamsk-2 began.

Cash flow

Due to a drop in prices on the potash market, net cash received from operating activities decreased in 2016 by approximately 43% year-on-year to US$1.01 billion. As of 31 December 2016, the Company’s net debt amounted to US$5.52 billion. The Company’s cash balance amounted to approximately US$1.49 billion, and total debt to US$7.00 billion. Appreciation of rouble led to a gain on revaluation of the fair value of the crosscurrency and interest rate swaps concluded in 2011–2013. The gain amounted to US$0.18 billion in 2016. The effective interest rate on loans for the year 2016 amounted to around 4% (including crosscurrency and interest rate swaps).

In May–December 2015, the Company’s subsidiaries bought back 1,056 million of the Company’s ordinary shares, including shares on which GDRs were issued, which is about 36% of the outstanding shares. The total amount of funds spent by the Company on the buyback of its shares and GDRs during 2015 amounted to US$3.37 billion7.

In 2016 the Group acquired 171 million of the Company’s ordinary shares, including shares on which GDRs were issued, which is about 6% of the outstanding shares. The listing and admittance of the company’s GDRs according to Provision 144А and Provision S on the London Stock Exchange (LSE) were cancelled on 22 December 2015. On 12 January 2016, the GDR Programme according to Provision 144А was dismissed.

Due to the fact that, following the previously completed buyback programmes, the number of free-floating shares decreased to 5.6% of the total number of issued shares, the Moscow Exchange may lower the securities listing tier from One to Three. According to Moscow Exchange listing rules, the reduction in the number of free-floating shares to 7.5% of the total number of issued shares or below will constitute grounds for exclusion of the shares from listing Tier One, if the situation does not change within 6 months. At that, Moscow Exchange can transfer the shares to the listing Tier Three.

[mln KWh]
[US$ mln]
1 Weighted average tariff takes into account the volume of the Company’s shipments in the direction.
2 Cash cost of goods sold = cost of goods sold net of amortization of intangible assets and depreciation of fixed assets.
3 General and administrative cash expenditures = general and administrative expenditures net of amortization of intangible assets and depreciation of fixed assets.
4 Adjusted EBITDA index is considered as operational profit adjusted for nonrecurring expenses, depreciation and amortization.
5 Adjusted EBITDA margin is considered as the adjusted EBITDA divided by net revenue.
6 The sum of capital expenditures includes acquisition of fixed and intangible assets based on consolidated statement of cash flows according to IFRS.
7 According to the consolidated statement of changes in equity according to IFRS.