F.I.T.T. for investors The protracted downturn. Deutsche Bank Markets Research. Industry Fertilizers

Transcription

1 Deutsche Bank Markets Research Industry Date 23 September 216 Europe Chemicals Virginie Boucher-Ferte Research Analyst (+44) virginie.boucher-ferte@db.com Jarek Pominkiewicz Research Analyst (+44) jaroslaw.pominkiewicz@db.com Tim Jones Research Analyst (+44) tim.jones@db.com Martin Dunwoodie, CFA Research Analyst (+44) martin.dunwoodie@db.com F.I.T.T. for investors The protracted downturn The protracted downturn; defensive M&A moves on the rise We foresee a prolonged fertilizer downturn. With global crop inventories at their highest level since 21, we believe it will take more than one poor harvest to prompt a material crop prices recovery, which is key to restoring farmers' purchasing power. Meanwhile, low cost potash and urea capacity should continue to increase and outpace demand, preventing recovery in prices. We see the resurging M&A activity in the space as defensive moves by companies ahead of further expected weakness. We d/g K+S to SELL and keep a HOLD on Yara & ICL. We have cut our EPS forecasts and continue to note that consensus EBIT is 8-1% too high for the European fertilizer names. Deutsche Bank AG/London Distributed on: 23/9/216 21:31:14 GMT Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 57/4/216.

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3 Deutsche Bank Markets Research Europe Chemicals Industry Date 23 September 216 FITT Research The protracted downturn The protracted downturn; defensive M&A moves on the rise We foresee a prolonged fertilizer downturn. With global crop inventories at their highest level since 21, we believe it will take more than one poor harvest to prompt a material crop prices recovery, which is key to restoring farmers' purchasing power. Meanwhile, low cost potash and urea capacity should continue to increase and outpace demand, preventing recovery in prices. We see the resurging M&A activity in the space as defensive moves by companies ahead of further expected weakness. We d/g K+S to SELL and keep a HOLD on Yara & ICL. We have cut our EPS forecasts and continue to note that consensus EBIT is 8-1% too high for the European fertilizer names. Crop prices staying low for now (a few bad harvests needed to push them up) This note provides new, in-depth analysis on crop prices, supply/demand and farm incomes (pg 8-13). Global crop inventories have been replenished to their highest level since 21, largely a consequence of four strong consecutive harvests across key growing regions. We believe more than one poor harvest will be needed to prompt a sustained and material crop prices recovery. We therefore do not see crop prices recovering short-term (although we expect them to remain volatile and cannot rule out short-term spikes). This will keep farm incomes under pressure and restrict farmers ability to spend. Fertilizer prices recovery unlikely as oversupply continues medium-term Nitrogen and potash prices are down 75% from their 28 peak but we do not foresee an improvement medium-term. In nitrogen, we expect urea effective operating rates to remain low (83%) as the expected decline in (unprofitable) Chinese urea exports will be made up of low cost capacity additions in the US and export regions. With the urea floor price (set by China) expected to remain broadly stable (the recent coal price rally is likely to be short lived), we do not expect urea prices to recover materially and expect other nitrogen fertilizers to follow a similar trend. In potash, we expect operating rates to remain very low (73%) as demand is impacted by poor farm economics and capacity continues to increase. In addition, the potash market is not as disciplined as it has been in so we expect prices to remain around swing producers cash cost. M&A expected to accelerate: Defensive moves ahead of further weakness We see four drivers of accelerating M&A in ongoing low cycle conditions; 1) lower cost positions, 2) access higher growth markets and/or diversify to reduce earnings volatility; 3) consolidate industry structure and improve pricing discipline; 4) we see assets coming to the market from cash strapped junior miners, or large, integrated miners, looking to de-lever their B/S through disposal of assets. In European fertilizers, we believe Yara is the most likely to acquire and cannot rule out the company doing a transformational deal in the US. We see the chances of K+S being taken over as low, so is the likelihood of the company selling its Salt business near-term (see pg 33 for more details). European fertilizer stock recommendations, valuation and risks We have made one rec. change, downgrading K+S to SELL and keep a HOLD on Yara and ICL. We have lowered our EPS materially for all three names and continue to note that 16/17 consensus is 8-1% too high for the European fertilizer names at EBIT/EBITDA level. We value sector using DCF. Risks: crop and fertilizer prices, supply, FX, GDP and M&A. Virginie Boucher-Ferte Research Analyst (+44) virginie.boucher-ferte@db.com Jarek Pominkiewicz Research Analyst (+44) jaroslaw.pominkiewicz@db.com Tim Jones Research Analyst (+44) tim.jones@db.com Martin Dunwoodie, CFA Research Analyst (+44) martin.dunwoodie@db.com Key Changes Company Target Price Rating SDFGn.DE ICL.TA YAR.OL Source: Deutsche Bank Top picks 17. to 14.(EUR) 16. to 15.(ILS) 28. to 275.(NOK) K+S (SDFGn.DE),EUR17.93 ICL (ICL.TA),ILS15.24 Yara International ASA (YAR.OL),NOK271.5 Source: Deutsche Bank Hold to Sell - - Sell Hold Hold Deutsche Bank AG/London Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 57/4/216.

4 23 September 216 Table Of Contents The note in two pages... 3 What is new in this note?... 5 Executive summary... 6 Crop prices limited near-term upside... 8 Nitrogen oversupply continues Potash: no recovery in sight M&A activity accelerating... 3 Company section K+S Yara International ASA ICL OCI N.V SAFCO China China BlueChemical Sinofert QSLI Appendix A: Soft commodity supply/demand Appendix B: Fertilizer overview Appendix C: Nitrogen market at a glance Appendix D: Potash market at a glance Appendix E: Nitrogen and potash production process... 9 Page 2 Deutsche Bank AG/London

5 Mar-95 Mar-97 Mar-99 Mar-1 Mar-3 Mar-5 Mar-7 Mar-9 Mar-11 Mar-13 Mar E 217E 218E E E E Feb-79 Feb-81 Feb-83 Feb-85 Feb-87 Feb-89 Feb-91 Feb-93 Feb-95 Feb-97 Feb-99 Feb-1 Feb-3 Feb-5 Feb-7 Feb-9 Feb-11 Feb-13 Feb September 216 The note in two pages Figure 1: Note in two pages Crop prices have fallen (crop prices indexed to 1) (1) Average stocks-to-use ratios for the key crops have risen to their highest level since 21 (2) 4% 35% 3% 25% 2% 15% 1% Corn Wheat Soybean As a result, farm profits have contracted Net US corn and soybean margin (US$/acre) (3) Average net margin for a French farm* (4) Corn and wheat prices seasonality (5) Global corn stock-to-use ratios** vs. corn prices (6) 6% 4% 2% - -2% -4% -6% J F M A M J J A S O N D 35% 3% 25% 2% 15% 1% 5% % % Average monthly US corn returns Average monthly US wheat returns Stock-to-use ratios Corn price (USD/bu) Urea and CAN prices in Europe (USD/ton) (7) Global (ex China) urea capacity and operating rates assuming reduction in Chinese export vols (8) 8 16, 1% , 12, 1, 8, 95% 9% 85% 2 6, 4, 2, 8% 75% - 7% Urea Yuzhny USD/t CAN Germany USD/t World ex China Effective utilisation world ex China (1) Source: Datastream, (2) Source: USDA, Deutsche Bank, (3) Source: USDA, Deutsche Bank estimates, (4) Source: CER France, Deutsche Bank estimates. * Picardie, North East Ile de France (5) Source: Deutsche Bank estimates, Datastream, (6) Source: USDA, Deutsche Bank estimates, Datastream. ** stock-to-use ratios (measuring crop inventories as percentage of annual consumption) (7) Source: Deutsche Bank, Argus media (8) Source: Fertecon, Deutsche Bank estimates Deutsche Bank AG/London Page 3

6 Uralkali ICL Potash Corp Arab Potash Mosaic K+S Agrium Intrepid Potash Vale E 217E 218E Jan-7 Aug-7 Mar-8 Oct-8 May-9 Dec-9 Jul-1 Feb-11 Sep-11 Apr-12 Nov-12 Jun-13 Jan-14 Aug-14 Mar-15 Oct-15 May-16 Jan-1 Jan-2 Jan-3 Jan-4 Jan-5 Jan-6 Jan-7 Jan-8 Jan-9 Jan-1 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Cash cost (USD/t) 23 September 216 Figure 2: Note in two page 215 urea cost curve and 216E urea price (1) Correlation between wheat price and CAN premium over last 1 years (2) 35 China L. America Anthracite 3 Gas Other Asia Thermal 25 N. America Russia Africa 2 Ukraine 15 India 1 Europe 5 M. East Production (million tons) Cash cost (USD/t) Urea Uzhny 216E (Prilled, USD/t) Potash prices in Europe and Brazil (USD/ton) (3) CAN Germany USD/t (RHS) Matif Milling Wheat Euro/t (LHS) Effects of continued elimination of K use on soybean yield on sandy soil in Brazil (4) MOP Granular Brazil (Spot) CFR, $/ton MOP Granular Europe (Spot) CFR, $/ton Global potash capacity vs. operating rates (5) Potash market after BPC break-up, 213 (6) % 9% 8% 7% 6% 5% 4% ICL 8% K+S 1% ROW 5% Arab Potash China 3% 6% ROW 64% Belaruskali 14% Potash Corp 19% Canpotex 36% Uralkali 17% Mosaic 14% Agrium 3% Capacity (million tons) Operating rates 215 potash total cash cost curve and potash price forecast in Europe and Brazil (216E) (7) SOP premium (8) % 8% 6% 4% 5 2% Total cash cost (US$/ton) MOP granular Europe USD/t (216E) MOP granular Brazil USD/t (216E) % Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 SOP premium over MOP (LHS) SOP Premium (%) over MOP (RHS) (1) Source: Fertecon, Deutsche Bank, Argus Media, (2) Source: Argus Media, Deutsche Bank, (3) Source: Deutsche Bank, Fertecon, (4) Source: IPNI, (5) Source: Deutsche Bank estimates, Fertecon, K+S (6) Source: Deutsche Bank estimates, (7) Source: Deutsche Bank estimates, company data, Argus Media; Note: Total cash cost comprises cost of goods sold and estimates of attributable operation cash cost; ICL cash cost adjusted for impact of employee strike (USD185m) and various provisions (USD15m total); Intrepid Potash cash cost net of by-product credits to COGS; K+S cash cost per ton reflects cash cost for the Potash and Magnesium products BU. 215 revenues for the BU comprise potassium chloride (42.6%), fertilizer specialties, incl. higher-price SOP (44.4%); and industrial products (13.%). The company does not provide cost breakdown for potash; Vale includes $5m of research and evaluation expense (equivalent to $121 per ton). Excluding research and evaluation expense, we estimate Vale cash cost per ton at c$265/t, (8) Source: Deutsche Bank, Argus Media Page 4 Deutsche Bank AG/London

7 23 September 216 What is new in this note? 1) We have analysed the soft commodities' supply and demand drivers, the crop inventories situation and soft commodities prices dynamics. We have also analysed the seasonality of corn prices, which can create short-term trading opportunities and supports our view that investors should not get carried away when the corn price spikes at certain times of the year. 2) In this note, we publish new, proprietary data, on French farm incomes, a good proxy for Western Europe as France is the biggest agricultural market in Europe. The data shows the extent of the agriculture crisis in Western Europe (prompted by the unprecedented fall in cereal yields and quality following the cold and wet spring combined with low prices and gradually declining CAP subsidies). We believe it is likely to have a knock-on effect on Yara, K+S and ICL, for which Europe is the single biggest market. 3) This note provides comprehensive, up-to-date supply/demand, cost curves and pricing analysis for nitrogen and potash: In particular we have analysed the direction of Chinese urea cash costs (which set the global urea price), incorporating the latest coal prices, currency and capacity developments and conclude that Chinese cash costs are unlikely to increase materially from here, therefore keeping global urea prices low in this prolonged downturn. In potash, we expect the market to go back to pre 27-9 bubble pricing dynamics (when the sub sector was not on investors' radar), with pricing settling around swing producers' cash cost level in a downturn due to the loss of the disciplined cartel structure. 4) We have also analysed the nitrates market, one of the key sub categories of nitrogen (and relevant for Yara), highlighting increased risk of cheap imports into Western Europe from the US, Russia and Trinidad. 5) Four mega deals have been announced in the agriculture space in the past 9 months. We see those deals as defensive moves, highlighting companies' fears of a long lasting downturn. In this note, we analyse the drivers of accelerating M&A activity, estimate the war chests of the global players, who could be next and assess the likelihood of the European names being involved in significant M&A activity (with scenarios provided). Deutsche Bank AG/London Page 5

8 23 September 216 Executive summary : in a protracted downturn Soft commodity prices: Limited upside risk short-term. Crop prices have been under pressure since 213 with corn prices currently down 63% from their peak in 212. This has been driven by rising crop inventories, largely a consequence of four strong consecutive harvests across the key growing regions. Grain demand growth tends to be relatively stable, driven by population growth and GDP growth in emerging markets (impacting meat consumption), now that the super bio-ethanol cycle has come to an end. In this section, we analyze the supply/demand factors impacting soft commodity prices and conclude that more than one bad harvest will be needed to prompt a sustained and material crop prices recovery. We therefore do not see crop prices recovering sustainably short-term although we expect them to remain volatile and cannot rule out short-term spikes. This will keep farm incomes under pressure and restrain farmers ability to spend. Nitrogen oversupply continues: Nitrogen prices are down 77% from their peak in 28 due to a fall in global operating rates. We expect urea effective operating rates to remain broadly stable as the expected decline in (unprofitable) Chinese urea exports will be made up with low cost capacity addition in the US and export regions. With the urea floor price (set by Chinese cash cost) expected to remain broadly stable, we do not expect urea prices to recover from current level. Other nitrogen fertilizers should follow a similar trend although we note additional downside risk to European UAN prices due to increasing imports into Europe. For the readers not familiar with the fertilizer world and the chemistry involved, please refer to pages in appendix for a beginners guide Figure 3: Urea supply, demand and utilization assuming Chinese export volumes decline (ktpa) World ex China E 216E 217E 218E Capacity 91,573 95,35 98,792 1,793 12,586 14,797 19,18 112,12 116, ,61 12, , , , ,74 - capacity growth (.3%) 4.1% 3.6% 2.% 1.8% 2.2% 4.1% 2.7% 4.1% 2.6% 1.1% 3.6% 6.% 5.% 4.% Chinese exports 3,943 1,731 1,674 6,49 4,846 3,57 7,141 4,353 7,22 8,514 13,616 13,748 1,359 7,5 5, Production 8,831 85,43 86,77 89,142 88,799 91,922 94,442 98,765 1,38 1,938 99,447 11,265 15,316 19, ,815 - production growth 3.3% 5.2% 2.% 2.7% (.4%) 3.5% 2.7% 4.6% 1.3%.9% (1.5%) 1.8% 4.%* 4.%* 3.%* Effective utilization 92.6% 95.6% 96.4% 96.4% 97.7% 93.8% 94.2% 96.9% 91.8% 88.8% 85.9% 83.8% 83.5% 83.5% 84.2% Source: Fertecon, Deutsche Bank estimates. * We assume 1.5% consumption growth Potash: no recovery in sight: Potash prices are down 75% from their 28 peak, a consequence of weak demand, increased capacity and lost price discipline since the break-up of BPC (Belarus Potash Cartel). We expect global potash supply/demand to remain weak as demand is impacted by poor farm economics globally (farmers can take potash holidays to save costs with a minimum impact on yields) and low cost capacity continues to increase. In addition, the potash market is not as oligopolistic as it used to be We therefore expect potash prices to remain around swing producers cash cost with no recovery in sight for the foreseeable future. Figure 4: Global potash supply, demand and utilization E 217E 218E Available capacity capacity growth.% 3.1% 4.7% 1.8% 2.3% 1.9% 3.6%.%.8% 3.6% 3.8% 4.5%.9% 2.4% 2.9% 4.4% Demand demand growth 7.7% 1.5%.3% -6.8% 15.8% -7.1% -43.1% 88.% 3.3% -9.% 6.8% 16.9% -3.9% -2.% -1.% 2.% Effective utilization 88.6% 94.9% 9.9% 83.2% 94.2% 85.9% 47.1% 88.6% 9.9% 79.8% 77.1% 84.8% 8.4% 76.6% 73.4% 71.6% Source: Deutsche Bank estimates, Fertecon, K+S Page 6 Deutsche Bank AG/London

9 23 September 216 M&A expected to accelerate: Defensive moves ahead of further weakness We see four drivers of accelerating M&A in the fertilizer space in a context of ongoing low cycle conditions; 1) lower cost positions, 2) access higher growth markets and/or diversify to reduce earnings volatility; 3) consolidate industry structure and improve pricing discipline; 4) we see assets coming to the market from cash strapped junior miners, or large, integrated miners, looking to de-lever their B/S through disposal of non-core assets. In our space, we believe Yara is the most likely to acquire and we cannot rule out the company doing a transformational deal in the US. We see the chances of K+S being taken over as low, so is the likelihood of the company selling its Salt business near-term (see pg 33 for more details). K+S (Downgrade to Sell): As analysed in this report, we do not foresee a potash price recovery for the foreseeable future. Furthermore, the European potash market, K+S largest market (over 5% of Potash & Magnesium Products volumes) should be negatively impacted by the very severe decline in farm incomes in the region and see additional volume and price pressure as the season ramps-up. We cut our E EPS forecast by 2-35% (lower potash prices, Legacy delay) and target price to EUR 14. We are now 12% below consensus at EBIT level for 216 and 217. At 2x 217E P/E (a material premium to peers), with no potash recovery in sight and a highly stretched balance sheet (6x 216E net debt/ebitda), we view the valuation as too high and downgrade our recommendation to SELL. Yara (Hold): Weak nitrogen fertilizer prices and the particularly severe decline in farm incomes in Western Europe (Yara s biggest region) are likely to weigh on Yara s H2 16 and 217 earnings. We believe those pressures should offset most of the newly announced $5m p.a. cost savings program and the company s increasing focus on premium products in Brazil. We cut our E EPS by 1-17% (TP lowered to NOK 275). At 13x 217E P/E and with the nitrogen price momentum expected to remain weak for the foreseeable future, we see the valuation as fair. HOLD. ICL (Hold): Weak potash prices and the particularly severe decline in farm incomes in Western Europe (ICL s biggest region) are likely to weigh on ICL s H2 16 and 217 earnings. We believe, however, that the savings from the efficiency program, contribution from the phosphate JV and polysulphate volumes should provide support to margins. We have cut our E EPS by 9% and TP to ILS 15 (from ILS 16). The stock trades at 11x 17E P/E which we see as fair. HOLD Valuation and risks Our target prices are based on DCF models. There are a number of upside/downside risks to our estimates. Higher/lower fertilizer (potash and nitrogen) demand and prices, along with higher/lower crop prices, which impact farmer s profitability and influence their willingness to purchase fertilizer, and delays and closures of / new capacity expansions would all impact our forecasts. Additional risks include volatile energy prices, FX, GDP growth and M&A. Deutsche Bank AG/London Page 7

10 Feb-79 Feb-81 Feb-83 Feb-85 Feb-87 Feb-89 Feb-91 Feb-93 Feb-95 Feb-97 Feb-99 Feb-1 Feb-3 Feb-5 Feb-7 Feb-9 Feb-11 Feb-13 Feb September 216 Crop prices limited nearterm upside Crop prices have been under pressure since the beginning of 213 with corn prices currently down 63% from their peak in 212. This has been driven by rising crop inventories, largely a consequence of four strong consecutive harvests across the key growing regions. Grain demand growth tends to be relatively stable, driven by population growth and GDP growth in emerging markets (impacting meat consumption), now that the super bio-ethanol cycle has come to an end. In this section, we analyze the supply/demand factors impacting soft commodity prices and conclude that more than one bad harvest will be needed to prompt a sustained and material crop prices recovery. We therefore do not see crop prices recovering sustainably short-term although we expect them to remain volatile and cannot rule out short-term spikes. This will keep farm incomes under pressure and restrain farmers ability to spend. Figure 5: Crop prices (indexed to 1) Corn Wheat Soybean Source: Datastream In this section, we outline our view on soft commodity prices and the consequences on farm incomes which are a key driver of fertilizer demand. This is followed by an analysis of crops supply and demand drivers. Page 8 Deutsche Bank AG/London

11 E E Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep September 216 Crop prices: near-term upside limited due to high stocks Recent fall in crop prices reflective of upgraded production projections Both corn and wheat prices declined by c25% since their YTD peaks in June, losing all the gains since the beginning of the year and are, respectively, down 11% and 7% YTD. We believe the trigger for the change in price trajectory has been the USDA upgrading global 216/217 production projections for both crops on 1 th May 216. Figure 6: US corn prices vs. global 216/17 yield projections Figure 7: US soybean prices vs. global 216/217 yield projections Figure 8: US wheat prices vs. global 216/17 yield projections Indexed Corn No.2 Yellow U$/Bushel (LHS) Global corn - Production (RHS) Soyabeans, No.1 Yellow $/Bushel (LHS) Global soybean - Production (RHS) Wheat No.2,Soft Red U$/Bu (LHS) Global wheat - Production (RHS) Source: USDA, Datastream Source: USDA, Datastream Source: USDA, Datastream Crop prices at (or below) farmers breakeven: limited downside risk With soft commodity prices already being at/or below farmers break-even level in the US (Figure 15) and Europe (Figure 16), we see limited downside risk due to the likely supply response as farmers will reduce acreage of the loss making crops. However, we note that the extent of the supply response is limited by agronomic considerations as farmers need to ensure sufficient soil rotation in order to avoid depleting the soil of important nutrients and limit the build-up of disease (see page 11 for more details on our corn S/D analysis). Figure 9: Net US corn and soybean margin (US$/acre) Figure 1: Average net margin for a French farm* Source: USDA, Deutsche Bank estimates Source: CER France, Deutsche Bank estimates. * Picardie, North East Ile de France A crop prices recovery is largely dependent on crops supply/yields As analysed in our soft commodity demand section, grain demand tends to be relatively stable (1-2% p.a. increase per capita over the next 1 years), with growth driven primarily by population growth and the increase in GDP in emerging markets (boosting meat consumption), now that the super bioethanol cycle in the US has come to an end. We therefore believe that any crop prices recovery will most likely come from the supply side. Deutsche Bank AG/London Page 9

12 E 23 September 216 More than one bad harvest needed to push crop prices up As a result of four consecutive years of strong harvest, crop inventories have increased to their highest level since 21 for corn, wheat and rice (soybean inventories have been more volatile) on average. We believe that more than one bad regional harvest will be needed to prompt crop inventories to fall sufficiently to stimulate a sustained and material recovery in crop prices. As an illustration, Western Europe, one of the key wheat producing regions, just saw its worst season on record (in terms of the extent of the yield drop and quality of the crop) and yet wheat prices have remained under pressure as strong harvests elsewhere (US and FSU) were sufficient to keep global inventories well supplied. We therefore do not see crop prices recovering short-term although we expect them to remain volatile and cannot rule out short-term spikes around temporary weather events impacting crops quality or speculation over US corn planting projections. Figure 11: Average stock-to-use ratios for corn, wheat, soybean and rice 4% 35% 3% 25% 2% 15% 1% Source: USDA, Deutsche Bank Corn prices beware the seasonality We examined monthly returns for the corn and wheat indices since 1989 and found that on average corn prices weaken in the summer. We believe this can be at least in part explained by the tendency for US corn acreage and quality expectations to rise compared to initial projections which tend to underestimate production. On the other hand prices tend to rally between October and spring, we believe as farmers await better prices to sell their grain and the market speculates about the production of the upcoming harvest. The point of this analysis is to advise the reader not to be carried away in case of short-term crop prices spikes around the winter and spring months as it might not be indicative of a long-lasting price recovery. Page 1 Deutsche Bank AG/London

13 E E 23 September 216 Figure 12: Corn and wheat prices seasonality 6% 4% 2% - -2% -4% -6% -8% J F M A M J J A S O N D Average monthly US corn returns Average monthly US wheat returns Source: Deutsche Bank estimates, Datastream Corn supply/demand analysis In the analysis, we assume US corn acreage for the upcoming 217/18 season is down 7% - we believe the chances for US corn acreage to decline more than 7% are limited due soil rotation (farmers need to ensure sufficient soil rotation in order to avoid depleting the soil of important nutrients and limit the build-up of disease). We assume yields are in-line with the last three year average and forecast steady demand growth (1.5%). Based on these assumptions, we forecast global corn stock-to-use ratios (measuring crop inventories as percentage of annual consumption) to decrease to 18.2%, broadly equivalent to the 213 level which we believe is consistent with a corn price around $4/bu. Figure 13: US corn area harvested and yield Figure 14: Global corn stock-to-use ratios vs. corn prices 38, 36, 34, 32, 3, 28, 26, 24, 22, 2, % 3% 25% 2% 15% 1% 5% % Area Harvested (1 HA) Yield (MT/HA) Stock-to-use ratios Corn price (USD/bu) Source: USDA, Deutsche Bank estimates Source: USDA, Deutsche Bank estimates, Datastream Deutsche Bank AG/London Page 11

14 E E 23 September 216 Dire farm profits to materially impact demand for ag inputs Arable farm incomes have collapsed Farm incomes started declining in 213 with the fall in soft commodity prices and are currently at their lowest level in 1 years, with soft commodity prices currently at/or below farmers break-even level in the US (Figure 15) and Europe (Figure 16). Figure 15: Net US corn and soybean margin (US$/acre) Figure 16: Average net margin for a French farm* Source: USDA, Deutsche Bank estimates Source: CER France, Deutsche Bank estimates. * Picardie, North East Ile de France An accumulation of bad years has a material impact on farmers ability to spend One bad year after a few strong years does not tend to have a significant impact on farmers demand for ag inputs as farmers robust cash situation enables them to stay afloat and continue to spend in an optimum way. However, the more consecutive years of low farm profitability, the greater the negative impact on farmers demand for ag inputs. After three years of slim (or negative profits), we therefore believe that farmers ability to spend in the upcoming 216/17 season is likely to be very low (possibly lower than in 215/16). Western Europe 216 season: A perfect storm We expect Western European farm incomes to fall dramatically in 216 with many farmers losing cash due to a combination of three issues: 1) Yields for cereals (wheat, barley) down 3-7% in key growing regions (e.g. parts of France, the US and Belgium) as a result of the cold and wet spring; 2) fungus attacks (as a result of the wet weather) impacting the quality (and therefore the price) of the crop and 3) a bumper wheat crop in Russia and Ukraine, having driven up global wheat inventories and put downwards pressure on the price. All the crops were affected by the cold and wet growing conditions last spring but we note cereals were the most impacted. As they represent 53% of arable crops by acreage in Europe, this will have a material impact on farmers incomes, at a time when they are already impacted by gradually falling CAP subsidies in Western Europe (down 2% in 214 and 5-1% p.a. decline expected by 22). We therefore expect most farmers being loss making (and cash flow negative) in 216. Page 12 Deutsche Bank AG/London

15 1999/2 2/21 21/22 22/23 23/24 24/25 25/26 26/27 27/28 28/29 29/21 21/ / / / / / / September 216 Figure 17: Continuous slide in wheat prices alongside a fall in yields EU-28 Wheat Yield (MT/HA) - LHS MATIF-MILLING WHEAT CONTINUOUS - SETT. PRICE (Euro/Ton) - RHS Source: USDA, Datastream In Appendix A (pages of the report), we analyse the soft commodities supply and demand drivers, underpinning our view on crop prices Deutsche Bank AG/London Page 13

16 Bushels/acre Mar-95 Mar-97 Mar-99 Mar-1 Mar-3 Mar-5 Mar-7 Mar-9 Mar-11 Mar-13 Mar E 217E 218E 23 September 216 Nitrogen oversupply continues Urea prices are down 77% from their peak in 28 due to a fall in global operating rates. We expect operating rates to remain broadly stable as the expected decline in (unprofitable) Chinese urea exports will be made up with low cost capacity addition in the US and export regions. With the urea floor price (set by Chinese cash cost) expected to remain broadly stable, we do not expect urea prices to recover from current level. Other nitrogen fertilizers should follow a similar trend although we note additional downside risk to European UAN prices due to increasing imports into Europe. Figure 18: Urea and CAN prices in Europe (USD/ton) Figure 19: Global (ex China) urea capacity and operating rates assuming reduction in Chinese export volumes , 14, 12, 1, 8, 6, 4, 2, - 1% 95% 9% 85% 8% 75% 7% Urea Yuzhny USD/t CAN Germany USD/t World ex China Effective utilisation assuming further decline in Chinese exports Source: Deutsche Bank, Argus Media Source: Fertecon, Deutsche Bank estimates Relatively stable demand growth Nitrogen displays a more stable demand profile compared to other nutrients This is due to a shorter life expectancy as nitrogen is a volatile nutrient which is not retained in the soil beyond a few months after application. In addition, the yield response to nitrogen is fast and direct (before the optimum point) unlike potash and phosphate. However, yield benefits do diminish when nitrogen application has passed the optimum point. These factors result in nitrogen being applied every year at stable rates. We forecast global urea demand of 1-2% broadly in-line with its historical average. Figure 2: Steep initial response of US corn yields to N* Figure 21: Yield benefits diminish at higher levels of N lbs/acre of nitrogen applied US Corn Yields Source: Iowa State University 26. * based on 5-year averages of yield trials, 26 Source: International Potash Institute. Note: ppm denotes parts per million The chart illustrates diminishing yield benefits as level of nitrogen increases in combination with various amounts of potassium Page 14 Deutsche Bank AG/London

17 India US Brazil Thailand Australia Mexico Turkey France Bangladesh UK Urea volumes (' kt pa) 23 September 216 Volumes from capacity additions replacing Chinese exports Significant capacity additions outside of China Looking forward to the rest of 216 and beyond, we expect ongoing urea supply risk to prevent a recovery in nitrogen prices: New low-cost US nitrogen capacity coming on stream: Five new urea plants are expected to come on stream in the next 18 months. These plants are being added by CF Industries, Agrium, Dakota Gasification Company and Koch Industries. We estimate total H capacity additions at c3.6mtpa (excluding c1mtpa of incremental capacity from CF s Donaldsonville, which commenced production in November 215 and should reach full capacity in 216), representing c3% of 216 global capacity ex China. Figure 22: List of major urea capacity additions in the US through 22 when first production Company Location On-stream Capacity (ktpa) Agrium Inc. Borger, TX Q CF Industries Inc. Port Neal, IA Q3/Q4 16 1,155 Iowa Fertilizer Co/ OCI Wever, Lee County Q Dakota Gasification Company Beulah, ND Q Koch Nitrogen Co. Enid Q Source: Deutsche Bank, Fertecon, company information. Note: We excluded CF s Donaldsonville 1,155kt capacity expansion project, which began production in November 215 and is expected to complete in ). Agrium Inc. Borger plant was 6% complete in April 216. The company expects completion by end of 216 or start of 217 with production likely to start in Q ). CF Industries Inc. Port Neal plant to start by late Q3 16 or early Q ). Iowa Fertilizer Co. Wever plant achieved 97% completion by July ). Dakota Gasification Company, Beulah plant expected to be complete by spring ). Koch Nitrogen Co. Enid plant to be complete by end of 216 with start-up expected by Q The US has historically been the largest urea importer before India. We expect this new capacity to displace a significant portion of current imports into the US although the region should remain a net importer. Assuming that the 4.6mt of new capacity added during operates at 95% rate (benefitting from lower energy costs in the US), we estimate the country would lower its import requirements from 8.6mt in 215 to 4.5mt in 218E. Figure 23: US urea consumption, production and net imports E US consumption by source 4.4 Incremental US production Decrease in net exports 218E US consumption by source Figure 24: Largest urea importers in 218E and 21 (ktpa) Net urea imports into US US urea production 218E 21 Source: Deutsche Bank estimates, Fertecon. Note: We included CF s Donaldsonville est. incremental capacity addition in 216 of 962ktpa to the estimate of E urea capacity additions. Source: Fertecon, Deutsche Bank estimates Deutsche Bank AG/London Page 15

18 23 September 216 New export capacity. We forecast 6.3mt new urea export capacity in 216 and a further 1.9mt in 217 which represents 5.% and 1.5% respectively of global capacity ex China. We have listed new urea export capacity projects in Figure 25. Key additions are expected to take place in Asia, North Africa and Middle East (2 new plants in Iran and 1 new plant each in Egypt, Malaysia, Indonesia and Nigeria). We note that that several projects have been facing delays with some shifting to beyond 22. Only YPBF in Bolivia appears to have been brought forward with government support from 218 to 217. We have also included the Pardis 3 (Iran) project in the table, which is understood to be in advanced construction stage, despite reports it was already operational. Figure 25: Urea export capacity changes Capacity Exports Egypt/ENPC April Malaysia/Petronas 1,271 1,271 August Indonesia /PUSRI Nigeria / Indorama Eleme 1,33 1,33 April Iran/ Pardis 3, Bandar 1,73 1,73 July Assaluyeh+ Iran/ Shiraz PCC 1,73 1,73 delayed ,29 6,29 % of 215 global capacity ex 5.% 5.% China Indonesia/Petrokimia Gresik II* July Bolivia/YPBF Ebihara Russia/PhosAgro-Cherepovets 5 5 July 217 1,853 1,635 % of 215 global capacity ex 1.5% 1.3% China Azerbaijan / SOCAR July Iran/Lordegan Petrochemical Plant Egypt/Kima Kazakhstan/KazAzot ,25 2,745 % of 215 global capacity ex China 2.6% 2.2% Total capacity additions % of 215 global capacity ex China 11,348 1,67 9.1% 8.5% Source: Deutsche Bank, Company Data, * Prilled product (the rest are all granular), +Was reported as operational, however, appears not to be the case. Understood to be in advanced stage Re-start of idle capacity in Egypt due to high gas availability. Egypt has been suffering from gas curtailments issues since 212. ENPC1 started in July 215; however, its operations have been affected by intermittent supply of gas. The second ENPC plant started up in April 216. Fertecon estimates exports to increase to.9mt in 216 and to 4.4mt in 22 due to the easing of gas supply situation (especially with latest gas find from ENI increasing gas availability towards the later part of the decade). Page 16 Deutsche Bank AG/London

19 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr E 217E 218E Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr September 216 Declining Chinese export volumes Chinese exports declined for 5 consecutive months (through May), possibly indicating either 1) higher domestic demand, or 2) reduced profitability for Chinese producers of exporting urea following withdrawal of subsidised energy, or 3) combination of both. In June, exports were up; however, in the first 6 months remained 25% below last year. Figure 26: Chinese urea production (million tons) Figure 27: Chinese urea export (kilotons) Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun /14 14/15 15/16 Chinese exports (kt) Urea price, $/ton Source: CFMW, Deutsche Bank Source: BOABC, CFMW, Deutsche Bank Operating rate analysis Decline in Chinese exports... Erosion of margins caused by lower global urea prices and higher domestic energy costs reduced Chinese export volumes in H Over the next two years (217E/218E), we expect China export volumes to decline to 11% of all global export volumes (from c28% in 215) as Chinese producers curtail production in unprofitable plants. Figure 28: Chinese urea export (kilotons) over last 2 years Figure 29: Expected decline in China export volumes (216E-218E) 6, 3% 5, 25% 4, 2% 3, 15% 2, 1% 1, 5% - -% Chinese exports (kt) Urea price, $/ton World exports China as % of global exports Source: BOABC, CFMW, Deutsche Bank Source: Fertecon, Deutsche Bank estimates...offset by increasing supply elsewhere: global operating rates to remain low We expect the decline in Chinese export volumes to offset new capacity additions, leading to broadly stable effective global urea operating rates (ex China) at 83-84%. We expect global urea capacity ex China to expand by c9% (216E-218E) driven by capacity expansions in Asia, Africa & Middle East, US and FSU. During this period, we expect global urea production ex China to increase by 3-4% p.a. (with annual consumption growth of 1-2%) as regional players replace lost export volumes from China. Deutsche Bank AG/London Page 17

20 E 217E 218E E 217E 218E 23 September 216 Figure 3: Global (ex China) urea capacity growth (%) 8% 6% 4% 2% % -2% -4% Figure 31: Global (ex China) urea capacity and operating rates 16, 1% 14, 95% 12, 1, 9% 8, 85% 6, 8% 4, 2, 75% - 7% World (ex China) capacity growth Long-term growth rate World ex China Effective utilisation world ex China Source: Fertecon, Deutsche Bank estimates Source: Fertecon, Deutsche Bank estimates Figure 32: Urea supply, demand and operating rates assuming Chinese export volumes decline (ktpa) World ex China E 216E 217E 218E Capacity 91,573 95,35 98,792 1,793 12,586 14,797 19,18 112,12 116, ,61 12, , , , ,74 - increase (253) 3,777 3,443 2,1 1,793 2,212 4,311 2,95 4,574 3,24 1,355 4,367 7,52 6,643 5,58 - increase % (.3%) 4.1% 3.6% 2.% 1.8% 2.2% 4.1% 2.7% 4.1% 2.6% 1.1% 3.6% 6.% 5.% 4.% Chinese exports 3,943 1,731 1,674 6,49 4,846 3,57 7,141 4,353 7,22 8,514 13,616 13,748 1,359 7,5 5, - % of global exports 13.7% 5.7% 5.2% 16.3% 14.2% 9.7% 17.4% 1.6% 16.2% 18.4% 27.8% 27.8% 22.% 16.4% 11.% Production 8,831 85,43 86,77 89,142 88,799 91,922 94,442 98,765 1,38 1,938 99,447 11,265 15,316 19, ,815 - increase % 3.3% 5.2% 2.% 2.7% (.4%) 3.5% 2.7% 4.6% 1.3%.9% (1.5%) 1.8% 4.% 4.% 3.% Nameplate utilization 84.6% 87.6% 86.4% 83.4% 82.7% 84.8% 81.2% 84.9% 8.8% 78.8% 73.9% 72.8% 73.5% 74.5% 75.2% Outages 8.% 8.% 1.% 13.% 15.% 9.% 13.% 12.% 11.% 1.% 12.% 11.% 1.% 9.% 9.% Effective utilization 92.6% 95.6% 96.4% 96.4% 97.7% 93.8% 94.2% 96.9% 91.8% 88.8% 85.9% 83.8% 83.5% 83.5% 84.2% Source: Fertecon, Deutsche Bank estimates Nitrogen prices to stay soft With the urea floor price (set by Chinese cash cost) expected to remain broadly stable, we do not expect urea prices to recover in 217 from current level. We expect other nitrogen fertilizers to follow a similar trend although we note additional downside risk to European UAN prices due to increasing imports into Europe. Figure 33: Nitrogen prices in Europe (USD/t) E 217E Urea Yuzhny (Prilled, USD/t) % change -3.4% -16.7% -6.4% -14.8% -28.6% -.5% CAN Germany (USD/t) % change -11.6% -6.5% 3.5% -17.3% -25.2% - Source: Deutsche Bank estimates, Argus Media Page 18 Deutsche Bank AG/London

21 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr E 217E 218E Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul September 216 Rising coal prices trend expected to be short-lived c7% of Chinese urea production is coal-based. China marginal cash cost is driven by the more expensive anthracite coal, however we show in figures below Shanxi coal prices as a proxy due to limited data availability. Falling coal prices in China impacted the health of the Chinese coal industry. In order to avoid a wave of bankruptcies, the government took some measures to support coal prices, asking coal mines to reduce their annual operating days from 33 to 276 and effectively run at no more than 84% of their capacity. In response coal prices started to recover in 216. However, we are already starting to see the first signs of the NDRC's willingness to relax coal production constraints now that prices have reached a more acceptable level. We therefore don't expect anthracite coal prices to increase further materially. In addition, rising new thermal coal based urea capacity will offset the capacity withdrawal. This is unlikely to prompt a material increase in the urea floor price. Figure 34: Increasing coal prices in China YTD YTD: +36% Figure 35: Weakening CNY 6.8 YTD: +3% Shanxi superior mixed coal (55 kilocalorie, CNY/ton) CNY to USD Source: Deutsche Bank, Bloomberg Finance LP Source: Datastream Risk of resurging Chinese exports caps urea price upside potential Ongoing lower-cost production increases in US and North Africa are gradually replacing export volumes from China, leading to structurally lower urea prices in those locations and recovery in global effective utilisation rates ex China, thus further reducing cash cost per ton there. Given the current supply/demand environment, we do not see prospects for a material urea price recovery in the short to medium term for two reasons. 1) Rising urea prices would make production at the marginal cost plants in China profitable again. Higher export volumes from these plants and increased urea supply ex China would stifle further price recovery. 2) A decrease in Chinese coal prices would move Chinese plants to the left of the cost curve, leading to higher exports, lower operating rates ex China and lower urea prices. Figure 36: Chinese urea export (kilotons) over last 2 years Figure 37: Expected collapse in China export volumes (216E-218E) , 5, 4, 3, 2, 1, - 3% 25% 2% 15% 1% 5% -% Chinese exports (kt) Urea price, $/ton World exports China as % of global exports Source: BOABC, CFMW, Deutsche Bank Source: Fertecon, Deutsche Bank estimates Deutsche Bank AG/London Page 19

22 Mar-95 Mar-96 Mar-97 Mar-98 Mar-99 Mar- Mar-1 Mar-2 Mar-3 Mar-4 Mar-5 Mar-6 Mar-7 Mar-8 Mar-9 Mar-1 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Jan-3 Jul-3 jan-4 Jul-4 Jan-5 Jul-5 Jan-6 Jul-6 Jan-7 Jul-7 Jan-8 Jul-8 Jan-9 Jul-9 Jan-1 Jul-1 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Cash cost (USD/t) Cash cost (USD/t) 23 September 216 China will remain a marginal cost producer We continue to see China as the marginal cost producer and the main reference point for nitrogen pricing. We expect the current low tax regime to continue for the foreseeable future. Figure 38: 215 urea cost curve and 216E urea price 35 China L. America Anthracite 3 Gas Other Asia Thermal 25 N. America Russia Africa 2 Ukraine 15 India 1 Europe 5 M. East Production (million tons) Cash cost (USD/t) Urea Uzhny 216E (Prilled, USD/t) Source: Fertecon, Deutsche Bank, Argus Media Figure 39: 22 projected urea cost curve and 216E urea price China Anthracite 35 Thermal 3 Europe L. America Ukraine Gas 25 Other Asia 2 Russia N. America Africa 15 India 1 5 M. East Production (mt) Cash cost (USD/t) Urea Uzhny 216E (Prilled, USD/t) Source: Fertecon, Deutsche Bank, Argus Media Nitrates to follow a similar trend to urea Other nitrogen fertilizer prices should continue to move in line with urea Prices of most other nitrogen fertilizers are linked to urea. In particular, as shown in Figure 41, usually with a 4 to 6 months lag on average, we note there is a strong correlation between urea prices and European nitrate prices, as to some extent they are substitutes. Figure 4: Most other nitrogen fertilizer prices are linked to urea prices Figure 41: Strong correlation between European nitrate prices and global urea prices (USD/tone of N) Urea Yuzhny USD/t CAN Germany USD/t France USD/t (NPK) AN Black Sea fob USD/t Urea Yuzhny USD/t CAN Germany USD/t Source: Deutsche Bank, Argus Media Source: Deutsche Bank, Argus Media Page 2 Deutsche Bank AG/London

23 Mar-95 Mar-96 Mar-97 Mar-98 Mar-99 Mar- Mar-1 Mar-2 Mar-3 Mar-4 Mar-5 Mar-6 Mar-7 Mar-8 Mar-9 Mar-1 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Jan-1 Jan-2 Jan-3 Jan-4 Jan-5 Jan-6 Jan-7 Jan-8 Jan-9 Jan-1 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan September 216 Long-term, the nitrate premium tends to remain stable European farmers are willing to pay only a certain premium for the preferred nitrate products (which have a higher effectiveness per unit of nitrogen) than for urea, and therefore European nitrate prices (AN/CAN) reflect a relatively stable margin (in USD per ton of nitrogen) above the urea price. Over the last couple of years, the average nitrate premium remained broadly stable and above its historical average due to tight nitrate supply in Europe (see Figure 42). While we note a correlation between wheat prices (a good indicator for European farm incomes) and the nitrate premium, the tight AN/CAN supply will most likely mitigate the impact of weak farm incomes. Figure 42: CAN premium vs. urea (%) Figure 43: Correlation between wheat price and CAN premium over last 1 years 7% 6% 5% 4% 3% 2% 1% % -1% CAN over urea price premium CAN over urea price premium average since 1995 CAN Germany USD/t (RHS) Matif Milling Wheat Euro/t (LHS) Source: Argus Media, Deutsche Bank Source: Argus Media, Deutsche Bank Capacity expansion in the US to indirectly impact the European UAN market While there has been no significant capacity addition in Europe over the last 2 decades, the US is seeing capacity expansion of UAN (urea ammonium nitrate). As a result, trade patterns are changing with France (second largest UAN import market, importing c2mt p.a. after the US, previously importing 3mt but now on a downwards trend following CF s new Donaldsonville plant) expected to receive an increasing tonnage from Eastern Europe (notably Russia, which was previously directed to the US), Trinidad and even the US. This will most likely have a negative impact on European UAN prices, all other things equal. Deutsche Bank AG/London Page 21

24 E 217E 218E Jan-7 Aug-7 Mar-8 Oct-8 May-9 Dec-9 Jul-1 Feb-11 Sep-11 Apr-12 Nov-12 Jun-13 Jan-14 Aug-14 Mar-15 Oct-15 May September 216 Potash: no recovery in sight Potash prices are down 75% from their 28 peak, a consequence of weak demand, increased supply and lack of discipline in the market. We expect global potash supply/demand to remain weak as demand is impacted by poor farm economics globally and low cost capacity continues to increase. In addition, the potash market is not as oligopolistic as it used to be since the break-up of the BPC cartel. We therefore expect potash prices to remain around swing producers cash cost with no recovery in sight for the foreseeable future. Figure 44: Potash prices in Europe and Brazil (USD/ton) Figure 45: Global potash capacity vs. operating rates % 9% 8% 7% 6% 5% 4 4% MOP Granular Brazil (Spot) CFR, $/ton MOP Granular Europe (Spot) CFR, $/ton Capacity (million tons) Operating rates Source: Deutsche Bank, Argus Media Source: Deutsche Bank estimates, Fertecon, K+S Demand impacted by potash holidays and strong USD We expect global potash demand to remain weak After having already declined by 4% in 215, we forecast global potash demand to decline by 2% and 1% respectively in 216 and 217 as ongoing low crop prices and farm incomes are likely to weigh on potash demand. Potash is the most discretionary agricultural input It is now well understood that potash application can be deferred by several years without causing any short-term detrimental impact on yields (depending on the crop, the quality of the soil and the weather). For example, when the potash industry saw extreme volume weakness in 29, yields remained high. Therefore potash fertilizer demand is more sensitive than nitrogen (especially in more difficult times) due to the possibility for farmers to take potash holidays, i.e. skipping potash application (or reducing the quantity applied) for one or more seasons, as the yield impact from not applying potash is not immediate. In general, the richer the soil, the longer the potash holiday can last. Figure 46 shows that even in Brazil where soils are relatively poor, the effect of not applying potash is only seen in Y4. We understand that in well fertilized soils in the US or Western Europe, the effect can be seen even later. As a result, fertilizer application is often seen by farmers as an investment, which can be reduced when profitability is low. We therefore expect farmers, particularly in Europe, to significantly reduce potash application in the upcoming 216/217 season. Page 22 Deutsche Bank AG/London

25 E 23 September 216 Figure 46: Effects of continued elimination of K use on soybean yield on sandy soil in Brazil Figure 47: Global potash consumption vs. global crop yields Potash consumption, million tons (LHS) Corn yield indexed to 1 (RHS) Wheat yield indexed to 1 (RHS) Source: IPNI Source: Deutsche Bank, K+S, USDA Stronger USD reduces impact of potash price declines in local currencies The strong USD makes potash more expensive in local currency. Currencies of the main potash-importing countries have materially underperformed the USD over the past five years, responsible for the decline in exports seen over the period. Since August 211, the Brazilian Real lost 48% of its value against the USD and the Indian Rupee lost 29%. Figure 48: Performance of currencies in main potashimporting countries vs. USD Figure 49: Share of 215 potash imports by currency of exporting country 3% 2% 1% -% (1%) (2%) (3%) (4%) (5%) (6%) CNY BRL INR IDR MYR 5 years 3 years 2 years 1 year YTD Others 29% Malaysia 3% Indonesia 6% India 8% U.S. 17% China 2% Brazil 17% Source: Datastream Note: We exclude the US and EU, which is a net exporter of potash Source: Fertecon, Datastream, Deutsche Bank Note: We included EU in other, as although it is responsible for 8% of potash volumes globally, it remains a net importer. Capacity grows (but not demand...) We expect global potash capacity to grow by 3.2% p.a E We forecast capacity CAGR of 3.2% p.a E consisting primarily of brownfield expansions from existing potash players (including PotashCorp, Mosaic, Agrium, Uralkali and Belaruskali) and some greenfield projects (including Eurochem in Russia, K+S Legacy mine in Canada, Vale in Brazil, Yara in Ethiopia, subject to final approval expected later this year, and one new project each in Turkmenistan and Uzbekistan). Most of the new capacities should be concentrated in Canada and in Russia/Belarus. We have excluded numerous announced projects from our supply/demand analysis (e.g. BHP s Jansen project) due to expected delays and cancellations. We also note several production curtailments and capacity idling (Uralkali, Mosaic, PotashCorp and Intrepid Potash) this year citing unfavourable market conditions (totalling 4.1mt, 5% of 215 global capacity), as opposed to technical production issues (K+S and wastewater storage/disposal). Deutsche Bank AG/London Page 23

26 E 217E 218E E 217E 218E 23 September 216 Potash operating rates to fall to 76% in 217 After a sharp decline in 215 and 216E, we estimate global potash operating rates to experience another decline to 72-73% in , a consequence of capacity growth (3.2% CAGR) and soft demand (-1%). Figure 5: Global Potash capacity growth (%) Figure 51: Global potash capacity vs. operating rates 6% 5% 4% 3% 2% 1% % -1% % 9% 8% 7% 6% 5% 4% Capacity growth Long-term demand growth Capacity (million tons) Operating rates Source: Deutsche Bank estimates, K+S Source: Deutsche Bank estimates, Fertecon, K+S Figure 52: Global potash supply, demand and effective utilization E 217E 218E Available capacity capacity growth.% 3.1% 4.7% 1.8% 2.3% 1.9% 3.6%.%.8% 3.6% 3.8% 4.5%.9% 2.4% 2.9% 4.4% Demand demand growth 7.7% 1.5%.3% -6.8% 15.8% -7.1% -43.1% 88.% 3.3% -9.% 6.8% 16.9% -3.9% -2.% -1.% 2.% Effective utilization 88.6% 94.9% 9.9% 83.2% 94.2% 85.9% 47.1% 88.6% 9.9% 79.8% 77.1% 84.8% 8.4% 76.6% 73.4% 71.6% Source: Deutsche Bank estimates, Fertecon, K+S Price analysis: no recovery in sight Following Chinese and Indian contracts settlements, potash prices have been stabilising with small signs of improvement seen in some markets (granular MOP prices in Brazil moving up to USD23-235/t cfr in September). However, we see it as a short-term technical impact due to reduced market uncertainty. With crop prices remaining weak, increasing capacity and reduced pricing discipline since the BPC breakup, we do not expect the potash market to recover for the foreseeable future. Figure 53: Potash prices in Brazil and Europe (USD/t) E 217E MOP Granular Europe (Spot) CFR, USD/ton % change -7.3% -4.9% -14.% -12.7% -18.2% - MOP Granular Brazil (Spot) CFR USD/ton % change 1.5% -21.3% -12.7% -9.2% -29.2% - Source: Deutsche Bank estimates, Argus Media Historically, potash prices were supported by market oligopoly Potash, like other fertilizers, is a commodity and its price should be driven by the broader supply/demand dynamics in the industry. However, this did not happen in 29 when crop prices and fertilizer demand sharply declined due to broader economic weakness caused by the financial crisis. Unlike other fertilizers or commodities, the potash price remained high, well above swing producers cash cost. It was supported by the price-setting Canpotex and BPC cartels, which controlled more than 6% of the market and lowered their capacity utilisation in order to balance supply and demand which effectively served as subsidising high cost producers and new entrants. Page 24 Deutsche Bank AG/London

27 E 217E Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan- Jan-1 Jan-2 Jan-3 Jan-4 Jan-5 Jan-6 Jan-7 Jan-8 Jan-9 Jan-1 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan September 216 Figure 54: Potash operating rates vs. potash prices Figure 55: Potash price vs. corn prices 8 1% % 8% 7% 6% 5% 4% Global potash operating rates (RHS) MOP Granular Brazil (Spot) CFR USD/ton (LHS) Source: K+S, Deutsche Bank estimates, Argus Media MOP, Vancouver spot, USD/ton, (LHS) Corn, USD/bu (RHS) Source: Deutsche Bank, Argus Media, Datastream Reduced pricing discipline following breakup of BPC cartel Since the breakup of the BPC cartel at the end of July 213, Brazilian potash prices have declined by 48%. The sole, remaining cartel, Canpotex, accounted for 28% of potash volumes in 215 vs. more than 6% controlled by both cartels prior to the BPC cartel break-up. Alone it is not able to impose volume over price discipline across the industry, which is necessary in order to spark a recovery in potash prices. We therefore expect potash prices to remain around swing producers cash cost for as long as the market remains oversupplied. Reinstatement of BPC partnership unlikely While we note that every few months new press reports appear suggesting potential reinstatement of the BPC partnership (usually initiated by the Belarusian side), we see this as unlikely. We believe that Uralkali s decision to go it alone in 213 and adopt a strategy of volume over price was driven by the unwillingness for the Russian low cost producer to subsidize higher cost players. While the state-owned Belaruskali is a low-cost producer, it is also an important source of foreign currency for Belarus, which may have contributed to differences in strategy between the two miners. With two new greenfield projects under construction by a Russian newcomer Eurochem, we expect Uralkali to maintain its approach, rather than attempt to rationalize production in order to increase potash prices. Figure 56: Potash market before BPC break-up, 213 Figure 57: Potash market after BPC break-up, 213 ICL 8% K+S 1% ROW 5% Arab Potash China 3% 6% Belaruskali 14% ROW 32% BPC 32% Potash Corp 19% Canpotex 36% Uralkali 17% Mosaic 14% Agrium 3% ICL 8% K+S 1% ROW 5% Arab Potash China 3% 6% ROW 64% Belaruskali 14% Potash Corp 19% Canpotex 36% Uralkali 17% Mosaic 14% Agrium 3% Source: Deutsche Bank estimates Source: Deutsche Bank estimates Weak currencies in potash-exporting countries impact potash prices Currencies of all main potash-exporting countries (responsible for 9% of exports in 215) declined against USD over the past 5 years (CAD, Ruble and Euro have lost 2-75% vs. the USD). In the current looser supply/demand Deutsche Bank AG/London Page 25

28 Uralkali ICL Potash Corp Arab Potash Mosaic K+S Agrium Intrepid Potash Uralkali ICL Potash Corp Arab Potash Mosaic K+S Agrium Intrepid Potash Vale Vale 23 September 216 environment, exporters have been passing on some of the benefit to customers in the form of lower USD-denominated potash prices. Figure 58: Performance of currencies in main potashexporting countries vs. USD 2% -% (2%) Figure 59: Share of 215 potash exports by currency of exporting country EUR 9% Other ILS 9% 5% CAD 38% (4%) (6%) (8%) CAD RUB BYR EUR ILS 5 years 3 years 2 years 1 year YTD BYR 19% RUB 2% Source: Datastream, Deutsche Bank Source: Fertecon, Datastream, Deutsche Bank Some producers selling potash below total cash cost Persistently weak potash prices have had a detrimental impact on profitability of potash producers. During the summer 216 reporting season, Intrepid Potash posted its 5 th consecutive quarterly loss, Mosaic reported its first quarterly loss since 26 and K+S Q2 net profit declined to nearly EURm (although we note that company-specific wastewater issues were responsible for some of the decline in profitability). Some producers were faced with a decision whether to sell potash below total cash cost or take capacity out of the market. In Q2 216, Intrepid Potash removed from production its two most expensive potash facilities (idled West operations and transitioned East to produce sulphate of potash magnesia only). Figure 6: 215 potash total cash cost curve and potash price forecast in Europe and Brazil (216E) Figure 61: 215 share of potash sales % 1% 76% 6% 24% 4% 15% 85% 72% 28% 5% 5% 97% 3% 24% 76% 99% 1% Total cash cost (US$/ton) MOP granular Europe USD/t (216E) MOP granular Brazil USD/t (216E) Source: Deutsche Bank, Company Data, Argus Media Note: Total cash cost comprises cost of goods sold and estimate of attributable operating cash cost ICL cash cost adjusted for impact of employee strike ($185m), and various provisions ($15m total) Intrepid Potash cash cost net of by-product credits to COGS K+S cash cost per ton reflects cash cost for the Potash and Magnesium products BU. 215 revenues for the BU comprise potassium chloride (42.6%), fertilizer specialties, incl. higher-price SOP (44.4%); and industrial products (13.%). The company does not provide cost breakdown for potash Vale includes $5m of research and evaluation expense (equivalent to $121 per ton). Excluding research and evaluation expense, we estimate Vale cash cost per ton at c$265/t Potash sales (%) Other sales (%) Source: Deutsche Bank estimates, Company Data Note: Potash Corp sales net of freight, transportation and distribution costs K+S potash sales refer to sales of the Potash and Magnesium Products BU Intrepid Potash non-potash sales comprise sulphate of potash magnesia. Intrepid Potash idled West operations and transitioned East to produce only sulphate of potash magnesia. Page 26 Deutsche Bank AG/London

29 Capital cost per tonne (CAD$) 23 September 216 Reinvestment economics: brownfield projects going ahead The potash industry has high barriers to entry We forecast capacity CAGR of 3.2% p.a E consisting primarily of brownfield expansions (supported by the more-favourable economics) primarily from existing potash players (including PotashCorp, Mosaic, Agrium, Uralkali and Belaruskali). While we note presence of some greenfield projects (including Eurochem in Russia, K+S Legacy mine in Canada, Vale in Brazil, Yara in Ethiopia, subject to final approval expected later this year, and one new project each in Turkmenistan and Uzbekistan), we see them as more likely to face delays and cancellations (e.g. BHP s Jansen project). Brownfield expansion is the preferred route Brownfield projects tend to be far less expensive than greenfield ones although prices can vary significantly (see Figure 62). We estimate a brownfield expansion costs approx USD1,1/t for 1mt of incremental capacity which requires potash selling prices in excess of USD2/t fob to get a decent return and USD1/t to break even. With potash prices currently in the USD22-23/t fob and thus well above the breakeven level (helped by the favourable currency situation in Canada where most of the brownfield capacity is being added), we expect brownfield expansions currently included in our capacity database to go ahead, albeit with possible delays in timing. Figure 62: Estimated capital costs of brownfield expansion Potash Corp Projects Mosaic Projects Agrium Projects Source: AMEC, PotashCorp, Company reports (as of 31 Aug 214) Figure 63: A brownfield expansion requires a potash price at USD1/t fob to breakeven and USD23/t fob to achieve 15% IRR Potash price (USD/t) IRR.6% 5.4% 8.8% 11.8% 14.7% 15.% 17.4% Source: Deutsche Bank analysis, Potash Corp, K+S Deutsche Bank AG/London Page 27

30 23 September 216 High greenfield costs Due to the lack of economically viable and quality deposits, construction costs for a new greenfield mine are substantial (typically costs at least CAD4.7bn for a new 2mt capacity excluding roads, rail lines, utilities, port facilities and other infrastructure costs 2mt usually being the minimum size for a new greenfield project see Figure 64 for more details). In addition, we note the pay-back period is relatively high (it takes a minimum of 7 years to generate positive free cash flow out of a new mine vs. 3-4 years for nitrogen and phosphate). Figure 64: Estimated Greenfield capital costs* (CDN$, billions) Potash greenfield economics Investment Mine development (2mmt conventional mine in Saskatchewan) $1.2 Surface Facilities Development of infrastructure (railcars, road, utility systems, port facilities, etc.) Acquisition of deposits Total Investment for 2mmt conventional mine $3.bn $.5-$1.1bn $.-$1.bn $4.7bn-$6.3bn Investment cost per ton $2,35-$3,15 Source: Potash Corp, AMEC, Deutsche Bank. *Based on 2mmt per year conventional mines in Saskatchewan; costs could vary depending on conventional vs. solution mine, depth of ore, geographic location and other factors. Includes escalation, contingency and owner costs Based on our analysis in Figure 65, we believe a new greenfield expansion today requires potash selling prices in excess of USD52/t fob to get a decent return and USD15/t to break even. Since these prices may be below the level required for some projects to breakeven, we may see further delays in timing (i.e. Jansen) and cancellations. Figure 65: A greenfield expansion requires a potash price at USD15/t fob to breakeven and USD52/t fob to achieve 15% IRR Potash price (USD/t) IRR.% 4.4% 7.% 8.8% 1.4% 11.8% 13.2% 14.5% 15.% Source: Deutsche Bank analysis, Potash Corp, K+S Mine flooding, a possible upside risk We note a number of incidents of mine flooding in the past which has lead to the closure of a number of facilities and consequently impacting the potash price. On November 18, 214 Uralkali announced that it had detected higher level of brine inflow in its Solikamsk-2 mine and consequently suspended all work at this site. We note the site where the inflow of brine has been detected overlaps with the site of the incident which happened at Silvinit Solikamsk-2 on Jan 5, 1995 which suggest direct link between the 1995 accident and the latest accident. Solikamsk-2 has a capacity of 2.2mt accounting for 17% of Uralkali s capacity and 3% of the 214 global capacity. A similar incident in 26 (flooding of Uralkali s mine in Beresniki) triggered an increase in potash prices although that event coincided with the start of a global commodity bull rally. Page 28 Deutsche Bank AG/London

31 23 September 216 Figure 66: Mine flooding incidents in history of potash mining Mine Country Capacity Year closed Solikamsk-2 Russia 2.2mt 214 Berezniki I Russia 1.3mt 26 Cassidy lake Canada 1.3mt 1997 Patience Lake (converted to solution mine in 1988) Canada 1.mt 1987 Berezniki III Russia 1.8mt 1986 Source: Deutsche Bank, Mosaic Corp Potash prices: no recovery in sight Some signs of improvement (granular MOP prices in Brazil moving up to USD23-235/t cfr in September) may suggest that the potash prices bottomed out. However, in the absence of a strong catalyst, with crop prices remaining weak, reduced pricing discipline since BPC breakup and weak currencies in potash-producing countries vs USD, we do not expect potash prices to recover for the foreseeable future. SOP analysis SOP premiums significantly above historic levels... The premium of SOP over MOP depends on the relative tightness of the SOP market, as well the absolute level of MOP price. SOP demand tends to be more stable, as SOP is used with crops, such as fruit, vegetables and grapes, which tend to be less price sensitive. SOP prices have historically traded at a 1-2% premium to MOP prices, however, reduced production levels (Tessenderlo s transition of the Ham (Belgium) production site from a sulphate and phosphate plant to a pure sulphate plant) in in Europe led to a significant increase in SOP premium both in absolute and relative terms. Figure 67: MOP and SOP prices Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 MOP Granular Europe (Spot) CFR, Euro/ton SOP - FOB bulk NW Europe (Spot) Euro/ton Source: Deutsche Bank, Argus Media Figure 68: SOP premium % 8% 6% 4% 2% % Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Source: Deutsche Bank, Argus Media SOP premium over MOP (LHS) SOP Premium (%) over MOP (RHS)... although higher production volumes will put it under pressure Tessenderlo has implemented several projects (including latest new calcium chloride plant started up in Q4 last year, although not yet fully operational, and which will use HCl from the company s sulphate plant) and in 215 was successful in producing SOP volumes in line with historical levels. This has removed some of the supply tightness in Europe, and, despite reduced SOP volumes from K+S, SOP prices declined c11% YTD in the region. The decline in SOP price was reflected in Tessenderlo s H1 216 results. With SOP volumes starting to also recover at the K+S site in Werra in 217, we expect further loosening of the supply in Europe and gradual decline in SOP premium to below USD2/t in 217. Deutsche Bank AG/London Page 29

32 23 September 216 M&A activity accelerating We see four drivers of accelerating M&A in the fertilizer space in a context of ongoing low cycle conditions; 1) lower cost positions, 2) access higher growth markets and/or diversify to reduce earnings volatility; 3) consolidate industry structure and improve pricing discipline; 4) we see assets coming to the market from cash strapped junior miners, or large, integrated miners, looking to delever their B/S through disposal of non-core assets. With limited war chest, we expect most bids to favour stock (instead of cash) or take the form of a merger. We believe, however, that transformational deals may encourage a full use of the B/S. In our space, we believe Yara is the most likely to acquire and we cannot rule out the company doing a transformational deal in the US. We see the chances of K+S being taken over as low, so is the likelihood of the company selling its Salt business near-term. Defensive moves ahead of further weakness Drivers of accelerating M&A activity in the fertilizer space M&A activity is resurging in the agchem and fertilizer space with 4 mega deals announced over the past 9 months (Dow/DuPont, Syngenta/ChemChina, Bayer/Monsanto and PotashCorp/Agrium). This reflects the current low ag cycle conditions and companies expectations that fertilizer prices will remain weak for longer. Beyond cheap financing, we see the following specific reasons underpinning increased M&A activity in the fertilizer space: Lowering position on the cost curve. In the current weak environment, we see producers as willing to lower their position on the industry cost curve. Fertilizer producers may achieve this by acquiring assets with a structural raw material or energy cost advantage (i.e. Yara s past interest in CF s nitrogen assets) or acquire/merge in order to realize economies of scale and generate SG&A & logistics savings (e.g. Potash Corp/Agrium proposed merger expected to yield synergies of $5m, ~ 2.5% of combined sales). Reducing earnings volatility may take a form of a vertical integration (i.e. Agrium s large distribution platform with a stable margin profile smoothing the earnings of the Potash Corp/Agrium newco), or adding a portfolio of premium products (i.e. Yara s nitrates, and NPKs complementing CF Industries offering). Increasing growth through new markets. Established platforms in high-growth markets can provide an attractive growth opportunity at a time when earnings are under strain. Yara has grown its presence in Brazil (24% of group sales) through a series of acquisitions over the last 15 years. The acquisition of Bunge in 213 provided the group with a critical mass in distribution, while the acquisition of Galvani in 214 reduced its reliance on volume imports from Europe. Market consolidation and improving pricing discipline. In potash, attempts by PotashCorp to acquire first ICL and then K+S, if successful, would have further consolidated capacity under the Canpotex marketing organization and improved pricing discipline, particularly after breakup of BPC. Difficult financial position of some of the smaller, inefficient junior miners (e.g. Intrepid Potash) may offer an opportunity for bigger and more solid players to acquire assets at distressed prices. Production there may then be suspended until supply/demand balance tightens and provide a growth platform for when fertilizer prices recover. Page 3 Deutsche Bank AG/London

33 23 September 216 Large, integrated miners disposing of non-core fertilizer assets in order to reduce balance sheet leverage. Anglo sold its Brazilian phosphate and molybdenum assets to China Molybdenum Company in April this year. Fertilizer producers selling non-fertilizer assets in order to generate cash and reduce leverage. While we recognize K+S commitment to its Salt business and the segment s role in diversifying Group earnings, proceeds from its sale could be used to remove balance sheet pressure, particularly if weak potash prices persist over a prolonged period of time. Limited war chest, but transformational deals may encourage full use of B/S In considering the potential for a takeover, we have analyzed the financial capacity each company has to acquire, assuming that a company would be willing to raise 1% equity and increase gearing to 2.5x EBITDA. We do not view this level of equity raise and gearing as aggressive and therefore this analysis does not indicate the highest transaction size a company may be willing to undertake. We estimate the total acquisition capacity for the key global fertilizer players is EUR4.9bn. As a consequence of this relatively limited amount, we see companies engaging in friendly merger talks (Potash Corp/Agrium) and favouring share offers over cash bids. Figure 69: The size of potential M&A war chests in space, EURm Stock 2.5x EBITDA 216E Net Debt Debt capacity Equity issuance (1% of MCap) Total war chest (Euro m) MCap (Euro) Enterprise Value (Euro) K+S 1,25 3,7 (1,757) 341 (1,416) 3,48 6,437 Yara 3,95 1,685 2, ,77 8, CF Industries 2,751 3,245 (495) , Potash Corp. 3,25 3,936 (731) 1, , Mosaic 2,433 2,532 (99) , Agrium 3,913 4,414 (499) 1, , Total 3,451 Total ex K+S 4,867 Source: Deutsche Bank, Company Data, Datastream. This analysis does not include any debt capacity from the assets being acquired Not ruling out Yara making a transformational deal in the US Based on the company s comments and actions historically, we cannot rule out Yara, the company with the largest war chest, again attempting to make a transformational deal in the US in order to lower its position on the cost curve. We believe that when considering larger, transformational transactions it would make strategic sense for Yara to consider making full use of its balance sheets beyond the EUR3.1bn capacity highlighted in Figure 69). We see 2 possible scenarios. Scenario 1: Yara reviving merger talks with CF One such example could involve CF Industries and Yara reviving their merger talks which fell apart in 214. It would allow a combination of CF's strong and low-cost US upstream presence with Yara's global downstream (distribution) presence and exposure to more premium specialty fertilizers. Such a deal would also help to address Yara s relatively high position on the nitrogen cost curve. By increasing leverage to c3.5x 217E net debt/ebitda (including synergies) and with a large rights issue (representing 25-3% of current market cap), Yara could offer a 4-5% premium to the current CF share price, which we see as required in the very low cycle conditions (the company could also offer a combination on shares and cash). As a reminder, when Yara tried to acquire Terra in 21, the company planned a rights issue equivalent to 25% of its market cap. We would expect such a transaction to be EPS accretive in the first year (incl. synergies, +5% to 217E EPS), assuming 2% discount to Yara s share price on the rights issue. Deutsche Bank AG/London Page 31

34 23 September 216 Scenario 2: Yara buying one (or several) OCI asset(s) With the acquisition of OCI by CF Industries having fallen apart due to the US clampdown on tax inversion deals, we cannot rule out Yara being interested in making a bid for the Amsterdam-listed fertilizer group. The key shareholder of OCI (i.e. Sawiris family) has a strong entrepreneurial track record of creating value for shareholders (sold Orascom Construction to Lafarge for $15bn in December 27) and has already demonstrated its willingness to divest fertilizer assets. As the family has a strong entrepreneurial track record of creating value for shareholders (sold its cement business to Lafarge) and has already shown willingness to sell fertilizer assets, we believe the family would also be open to a sale of individual assets. Yara could buy the whole group (European, North American and Distribution assets), which not only would increase Yara's manufacturing presence in the US and thus lower its position on the industry cost curve, but also acquire Europe's 2nd largest integrated nitrates producer. We believe Yara would have to offer a price for the whole OCI business in line with the CF's bid of $8.2bn, which would entail increasing the leverage to c3.x 217E net debt/ebitda (including synergies) and a large rights issue (representing 3% of current market cap). We would expect such a transaction to be dilutive in the first year (incl. synergies, c-6% to 217E EPS), assuming 2% discount to Yara s share price on the rights issue. We think it could make strategic sense for Yara to buy either OCI's European assets (a more manageable deal, involving Europe's 2nd largest nitrates producer and the opportunity to consolidate the fragmented local market), or OCI's greenfield Iowa plant (also a more manageable deal, adding mt of low cost nitrogen fertilizer capacity in the US and lowering Yara's position on the nitrogen cost curve. The plant is located in Mid-West, the largest market in the US and a net importer on nitrates, hence commanding premium pricing). We assume an EV for the European business at $1.5bn (implying 1x 16E EV/EBITDA), which Yara could finance with debt (increasing the leverage to 2.x 217E net debt/ebitda). For just the Iowa plant, we estimate the required price at $3bn (in line with its replacement cost), which Yara could finance with debt (increasing the leverage to c2.7x 217E net debt/ebitda incl. synergies. We would expect both transactions to be EPS accretive in the first year (each +5% to 217E EPS). We cannot rule out other players also bidding for OCI's individual assets. While moving headquarters to a lower-tax jurisdiction is no longer a consideration for CF (which we believe would reduce its appetite for OCI's European assets), we think it might make sense strategically for the company to still bid for the Iowa plant in order to leverage its production volumes and CF's distribution network and create logistic and operational synergies. Agrium may also be interested, as its CEO publicly stated that they were in talks with OCI in 215 to buy the Iowa plant. As this happened prior to the announcement of the deal with Potash Corp, if this transaction closes, we see the Newco s interest in the plant as unlikely in the short term. Page 32 Deutsche Bank AG/London

35 23 September 216 K+S low risk of M&A We see the chances of K+S being taken over as low, so is the likelihood of the company selling its Salt business near-term. We believe the Potash Corp/Agrium merger announcement considerably reduces the potential for K+S to be taken over by Potash Corp. We do not see any other names with a strong enough balancesheet being potentially interested in the company, given its relatively high position on the potash cost curve and ongoing environmental issues/limited life expectancy of its German mines. Even if the merger talks with Agrium were falling apart, we do not believe Potash Corp would come back with a similar bid at E41/share as it would be too high a price to pay to consolidate the market and gain control of Legacy, in our view. As for the possibility of K+S selling its salt business near-term, we believe they are relatively low due to 3 main reasons: 1) timing, with Salt earnings currently at trough; 2) the group s two pillar strategy, with Salt expected to mitigate the volatility of Potash, 3) a sale of Salt would be a u-turn after recent investments (acquisition of a potash license in Asia and Morton Salt acquisition in 211). Execution risk We note that several large scale M&A attempts failed in the past. In order to minimize the execution risk, we see deal teams not only engaging in effective discussions with their counterparties on the opposite side of the transaction, but also proactively liaising with the authorities to address any concerns ahead of transaction closing. Below we list key reasons behind some of the recent failed M&A attempts: Government's aim to protect national assets and control natural resources (BHP/PotashCorp and PotashCorp/ICL) Clamp-down on tax-motivated acquisitions (inversion trade and CF's attempt to relocate headquarters to lower-taxed Netherlands following the merger with OCI) Disagreement around offer terms (PotashCorp/K+S: insufficiently high offer, Yara/CF: headquarter location and ownership post-merger) Counterbid (Yara/Terra). Figure 7: List of incomplete M&A attempts Bidder Target Announcement date Enterprise value ($bn) EV/EBITDA (LTM) Comments Yara Terra Industries Feb x Agreed terms, however, CF Industries made a higher offer for Terra BHP Billiton Potash Corp. Aug x* Blocked by the Canadian government Phosagro Potash Corp. Nov-1 na na Phosagro was planning to bid for Potash Corp., when BHP made its own bid for Potash Corp. Phosagro did not continue with its bid, once BHP s bid collapsed Potash Corp. ICL Oct-12 na na Deal opposed by Israeli government Yara CF Industries Sep-14 na na Could not agree on terms acceptable to all stakeholders Potash Corp. K+S Jun x Offer rejected due to low bid CF Industries OCI Aug x Deal abandoned citing US Clampdown on tax inversion deals Potash Corp.*** Agrium Aug-16 na na Preliminary discussions confirmed regarding a potential merger of equals Source: Deutsche Bank, Company Data, Reuters, Bloomberg Finance LP Note: * Represents TEV / 21E EBITDA multiple, adjusted to exclude market value of affiliates and NPV of provincial mining tax shield ** Reflects net debt per K+S filings (includes pension and mining obligations *** in discussions Deutsche Bank AG/London Page 33

36 23 September 216 Figure 71: M&A history in fertilizers Announcement date Acquiror Target Implied TEV ($bn) TEV/LTM EBITDA Potash Jun-15 Potash Corp K+S x*(f) Mar-15 ICL Allana Potash.14 NA Oct-12 Potash Corp ICL 16.7(i) na Dec-1 Uralkali Silvinit x Nov-1 Phosagro Potash Corp. 45.(k) NA Aug-1 BHP Billiton Potash Corp. 34.3(b) 17.6x*(b) Jan-1 BHP Billiton Athabasca Potash Inc..34 NA Nitrogen Average 13.4 Aug-16 Yara Tata Chemicals urea business Oct-15 Yara Apache Fertilisers.4 NA Aug-15 Rentech Nitrogen CVR Partners.8 9.4x Aug-15 CF Industries(g) OCI x* Jul-15 CF Industries GrowHow x Sep-14 Yara CF industries 29.6 (j) NA Aug-12 CF Industries Viterra's interest in Medicine Hat facility (34%).9(d) 6.4x(d) Nov-12 Rentech Agrifos.2 6.3x Mar-1 CF Industries Terra x Feb-1 Yara Terra x*(e) Dec-9 Terra Agrium (CF assets).5 5.1x* Jul-8 Yara Saskferco x Niche/Specialty Average 8.3 Jun-11 Triton Compo (K+S) x Apr-11 ICL Antonio Fuentes Mendez.3 NA Mar-14 Compass Minerals Wolf-Trax x Dec-7 ICL Scotts Miracle-Gro (Professional Services).3 8.6x Distribution and retail Average 12. Aug-16 Potash Corp Agrium 38.2(h) na Apr-16 China Molybdenum Co. Ltd. Anglo American Plc Niobium and Phosphates # Mar-15 Potash Corp. Fertilizantes Heringer (9.5%).9 7.7x Jun-14 OCP Fertilizantes Heringer (1%).8 6.6x Apr-14 Mosaic ADM South America distribution.4(c) ~8.8x(c) Nov-13 Yara OFD.4 9.x Oct-13 Mosaic CF Industries Phosphate business 1.4 NA Dec-12 Yara Bunge.8 9.7x(a) Sep-12 Apollo Jimmy Sanders.8 8.6x May-12 Marubeni Gavilon ~5.2 ~8.x Mar-12 Agrium Viterra Agri-Products 1.8(d) ~7.3x(d) Aug-1 Agrium AWB x May-8 Agrium UAP 2.6 ~12.x Average 9.2 Source: Deutsche Bank, Fertecon Notes: Figures converted into USD using FX rates as of respective announcement dates * Aborted transaction # Pending transaction (a) Based on 211 EBITDA (b) Represents TEV / 21E EBITDA multiple, adjusted to exclude market value of affiliates and NPV of provincial mining tax shield. (c) Purchase price of $35m includes $15m of working capital; multiple based on 215E EBITDA of USD4m (d) Agrium announced the acquisition of Viterra Agri-Products from Glencore for $1.275 billion plus $.5 billion of working capital, including a 34% ownership stake in an Alberta-based nitrogen facility (Medicine Hat; ~$144mm of EBITDA). In August, Agrium and Glencore announced a modified agreement under which CF Industries (owner of the remaining 66% stake in the Medicine Hat facility) would acquire the minority interest in the facility for $915 million (e) Multiple based on LTM 9/3/29 results. (f) K+S EV including pension and mining obligations (g) Deal abandoned citing new US tax rules designed to restrict inversion deals (h)combined enterprise value of Potash Corp and Agrium before the day announcing potential merger talks (i)enterprise value of ICL around the time of Potash Corp talks with Israeli Government for full take over of ICL (j) Includes combined EV of Yara and CF Industries at the time of announcement but the merger talks failed as the companies could not agree on terms acceptable to all stakeholders (k) Enterprise value of Potash Corp at the time Phosagro was planning to bid for Potash Corp., when BHP made its own bid for Potash Corp. Phosagro did not continue with its bid, once BHP s bid collapsed Page 34 Deutsche Bank AG/London

37 23 September 216 Company section Deutsche Bank AG/London Page 35

38 23 September 216 Rating Sell Europe Germany Company K+S Jarek Pominkiewicz Research Analyst (+44) jaroslaw.pominkiewicz@db.com Virginie Boucher-Ferte Chemicals Reuters SDFGn.DE Bloomberg SDF GR Research Analyst (+44) virginie.boucher-ferte@db.com Weaker for longer; too expensive: Downgrade to Sell Downgrading EPS forecasts materially; stock too expensive As analysed in this report, we do not foresee a potash price recovery for the foreseeable future. Furthermore, the European potash market, K+S largest market (over 5% of PMP volumes) should be negatively impacted by the very severe decline in farm incomes in the region and see additional volume and price pressure as the season ramps-up. We lower our E EPS forecast by 22-39% (lower potash prices, Legacy delay) and target price to EUR 14. We are now 2% below consensus at EBIT level for 216 and 217. At 2x 217E P/E, with no potash recovery in sight and a highly stretched balance sheet, we view the valuation as too high and downgrade our recommendation to SELL We note 5 key reasons for our downgrade to sell 1) As the European season ramps-up, we forecast further potash price and volume softness in the market primarily due to the sharp decline in farm incomes in Europe, forcing farmers to reduce potash application. 2) K+S SOP production has been impacted in 216 at the Werra mines. Whilst we forecast a normalization of the volume situation in 217, we expect the SOP premium seen in recent years to decline and therefore broadly offset the positive volume impact; 3) We expect Salt EBIT to decline materially (34%) in 216 as a result of the mild winter in Europe and the US. Looking forward, we forecast a gradual recovery, with full normalization not expected until 218; 4) The Legacy production start-up has been delayed to Q2 217 (from late 216) following a damaged vessel in July this year. We have lowered our forecast for potash volumes coming from the project in 217 from 1mt to 55kt. Although we do not include in our forecasts any additional costs relating to the vessel damage, we note that further cash outflows may be incurred as full damage is assessed, responsibility for it apportioned and insurance payout awarded. As a result, the project will no longer achieve its 217 EBITDA breakeven target (we expect it to be EBITDA and cash flow positive in 218). 5) We have lowered our E EPS forecast by 22-39% (lower potash prices assumptions, Legacy delay) and target price to EUR 14. At 2x 217E P/E and 1x 217 EV/EBITDA, with no potash recovery in sight and a highly stretched balance sheet (net debt (incl. pensions and mining obligations) / EBITDA ratio at 6x in 216E and 5x in 217E), we view the valuation as too high and downgrade our recommendation to SELL. Transfer of coverage Due to a change in team structure, we transfer coverage of K+S from Virginie Boucher-Ferte to Jarek Pominkiewicz with immediate effect. Valuation and risks TP based on DCF (2.5% tgr, in-line with peers, and 5.9% WACC). Upside risks: higher potash demand/prices; delays in start-ups and capacity closures, M&A, lower energy costs, higher grain prices, a severe winter and FX. Price at 22 Sep (EUR) Price Target (EUR) week range (EUR) Price/price relative /13 3/14 9/14 3/15 9/15 3/16 K+S DJ (.STOXXE) (Rebased) Performance (%) 1m 3m 12m Absolute DJ (.STOXXE) Source: Deutsche Bank Stock & option liquidity data Market cap (EUR)(m) 3,441.4 Shares outstanding (m) 191 Free float (%) 75 Option volume (und. shrs., 1M avg.) Source: Deutsche Bank Implied & Realized Volatility (3M) 6% 5% 4% 3% 2% 1% % Sep 11 Mar 12 Sep 12 Realized Vol Source: Deutsche Bank Implied Vol (ATM) 549,388 Forecasts and ratios Year End Dec A 216E 217E DB EPS (EUR) P/E (DB EPS)(x) Source: Deutsche Bank estimates, company data Page 36 Deutsche Bank AG/London

39 23 September 216 Model updated:19 September 216 Running the numbers Europe Germany K+S Reuters: SDFGn.DE Sell Bloomberg: SDF GR Price (22 Sep 16) EUR Target Price EUR Week range EUR Market Cap (m) EURm 3,441 Company Profile USDm 3,868 K+S runs several potash and salt mines / evaporation plants. For Potash & Magnesium products, K+S is the market leader in Europe and ranks fourth worldwide, selling mainly MoP and SoP as well as other specialty potash and magnesium products and industrial products. In Salt, K+S manufactures and sells salt for industrial and food use, de-icing salt as well as salt for chemical use and brine. Under the 'Complementary business' division, K+S offers a number of services originating from the core business (Services and Trading) and utilizes mined-out underground areas for waste disposal. Price Performance Sep 13 Mar 14 Sep 14 Mar 15 Sep 15 Mar 16 Margin Trends K+S DJ (.STOXXE) (Rebased) E 17E EBITDA Margin Growth & Profitability Solvency EBIT Margin E 17E Sales growth (LHS) ROE (RHS) E 17E Fiscal year end 31-Dec E 217E Financial Summary DB EPS (EUR) Reported EPS (EUR) DPS (EUR) BVPS (EUR) Weighted average shares (m) Average market cap (EURm) 7,45 5,191 4,514 5,651 3,441 3,441 Enterprise value (EURm) 7,891 6,246 6,21 8,68 6,47 6,8 Valuation Metrics P/E (DB) (x) P/E (Reported) (x) P/BV (x) FCF Yield (%) nm nm nm nm Dividend Yield (%) EV/Sales (x) EV/EBITDA (x) EV/EBIT (x) Income Statement (EURm) Sales revenue 3,935 3,95 3,822 4,176 3,386 3,871 Gross profit 2,6 1,956 1,865 2,191 1,712 1,972 EBITDA 1, , Depreciation Amortisation EBIT Net interest income(expense) Associates/affiliates Exceptionals/extraordinaries Other pre-tax income/(expense) Profit before tax Income tax expense Minorities Other post-tax income/(expense) 1-2 Net profit DB adjustments (including dilution) DB Net profit Cash Flow (EURm) Cash flow from operations Net Capex ,19-1,311-1, Free cash flow Equity raised/(bought back) Dividends paid Net inc/(dec) in borrowings Other investing/financing cash flows Net cash flow Change in working capital Balance Sheet (EURm) Cash and other liquid assets 352 1, Tangible fixed assets 2,527 2,933 4,113 5,55 5,939 6,235 Goodwill/intangible assets 1, ,16 1,68 1,127 1,185 Associates/investments Other assets 2,258 1,741 1,797 1,967 1,683 1,786 Total assets 6,597 7,498 7,855 8,274 8,99 9,381 Interest bearing debt 1,266 2,255 1,551 1,544 2,89 2,387 Other liabilities 1,937 1,846 2,329 2,434 2,42 2,51 Total liabilities 3,23 4,12 3,881 3,978 4,59 4,888 Shareholders' equity 3,39 3,393 3,97 4,294 4,399 4,492 Minorities Total shareholders' equity 3,394 3,397 3,975 4,296 4,4 4,493 Net debt 914 1,244 1,176 1,421 1,989 2,273 Key Company Metrics Sales growth (%) DB EPS growth (%) EBITDA Margin (%) EBIT Margin (%) Payout ratio (%) ROE (%) Capex/sales (%) Capex/depreciation (x) Net debt/equity (%) Net interest cover (x) Source: Company data, Deutsche Bank estimates Net debt/equity (LHS) Net interest cover (RHS) Jarek Pominkiewicz (+44) jaroslaw.pominkiewicz@db.com Deutsche Bank AG/London Page 37

40 23 September 216 Page 38 Deutsche Bank AG/London Figure 72: K+S business description Division Description Product categories Major end markets Major end uses Key Competitors Market positioning Potash and Magnesium (46% of 216E Sales) (27% of 216E EBIT) Salt (49% of 216E Sales) (65% of 216E EBIT) Complementary activities (5% of 216E Sales) (8% of 216E EBIT) Source: Deutsche Bank, Company Data The segment extracts potash and magnesium crude salts at six mines in Germany, and refines them. A broad distribution network facilitates sales of the products across the world. The current capacity is about 7 million tons. The salt business unit extracts and markets salt for industrial and food use, de-icing salt as well as salt for chemical use and brine. The current production capacity is 32 million tons It includes recycling and disposal of waste at potash and rock salt mines along with other activities like logistics and trading in different basic chemicals Plant nutrients, Industrial Products, Health care & Nutrition Food grade salt, Industrial salt, Salt for chemical use, De icing Salt Agriculture, Chemical Industrial products, Oil and gas drilling, Pharmaceutical Industry, Cosmetic Industry, Food Industry, Animal feed Industry Food industry, fish industry, textile and leather industry, oil and gas industry, plastics industry, glass industry, pharmaceutical industry, water softening and disinfection, drinking water treatment, animal feed industry, electrolysis, winter road clearance services High purity potassium and magnesium salts are used in pharmaceutical, cosmetics, food stuffs industries and animal feed. Products are also used in Industrial applications, special plant nutrients and oil and gas drilling Salt Products of highest purity and quality are used as food grade salt. The company also produces industrial salt, salt for chemical use and de-icing salts. Industrial salts are used for water treatment, oil and gas supply, medicine, dye mills, leather treatment, preserving fish and production of animal feed. Salt for chemical use is used in manufacture of PVC, Plastics, artificial resins and glass Waste Management and Includes recycling activities and disposal of Recycling, Logistics, Animal waste in potash and rock salt mines, salt hygiene products, Trading of slags and building materials as well as basic chemicals granulation of animal hygiene products Further activities include logistics services through K+S Transport GmbH and trading of different basic chemicals through CFK GmbH Potash Corp, Mosaic, Agrium, Uralkali, BPC, ICL Sudsalz, Salins Du Midi, AkzoNobel, Cargill and Compass Minerals, Artyomsol, American Rock salt, Dampier Fifth largest potash producer in the world K+S is the largest supplier of salt products in the world

41 K+S* China National Salt Compass Cargill Dampier Artyomsol American Rock Salt Akzo Sud-salz Sal-ins Mitsui E 218E 23 September 216 Figure 73: K+S in a page Sales by division (216E) Comp. business segment 5% EBIT I by division (216E) Comp. business segment 8% Potash & Magnesium Products 46% Salt 49% Potash & Magnesium Products 27% Salt 65% Sales by geography (215) PMP sales by products (215) Germany 14% Industrial products 1% KCI (MOP) 46% Overseas 6% Rest of Europe 26% Specialties 44% Potash capacity by producers (215) Salt business sales by product (215) Others 22% ICL 7% Canpotex 35% Food grade salt 21% Salt for chemical Other use 2% 5% De-icing salt 4% K+S 7% Belaruskali 14% Uralkali 15% Industrial salt 32% Global key salt suppliers EBIT contribution by division Potash & Magnesium Products Nitrogen Salt Complementary business segment Reconciliation Source: Deutsche Bank estimates, K+S, IFA, Roskill214, K+S, *K+S salt capacity Includes Morton Salt and European salt company (Esco, Global potash capacity by producer includes *Includes potassium sulphate and potash grades with lower K2o content of around 4 million tons (product), *Canpotex Includes Potash Corp, Mosaic and Agrium. ^ Includes DSW, CPL and Iberpotash, "Participation of Potash Corp, China includes >2 producers, Other includes Intrepid, Vale, Compass, Uzbekistan, Laos Deutsche Bank AG/London Page 39

42 23 September 216 Potash market to stay weak for longer Point 1: Weak potash market in Europe to weigh on H2 216/17 PMP earnings The Western European potash market is K+S s largest region (55% of 215 Potash & Magnesium Products division volumes). Whilst European potash prices have been more resilient than Brazilian prices in USD-terms since May 215, they have started to catch up with overseas prices since March 216 driven by the difficult farm income environment in Europe. As shown on Figure 74, despite the recent fall, European prices remain higher than Brazilian prices which we don t see as sustainable long-term. We expect the convergence of European prices with Brazilian prices to happen rather sooner than later. As the European season ramps-up, we forecast further potash price and volume softness in the market primarily due to the sharp decline in farm incomes in Europe, forcing farmers to reduce potash application. We have analyzed European farm incomes and potash investment decisions. Figure 74: MOP granular spot prices in Brazil and Europe Oct-1 Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 MOP Granular Brazil (Spot) CFR, $/ton MOP Granular Europe (Spot) CFR, $/ton Figure 75: MOPg Europe premium over Brazil CFR, $/ton (2) (4) (6) (8) (1) (12) Oct-1 Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 Source: Fertecon, Datastream Source: Fertecon, Datastream Point 2: Expected normalization in SOP volumes to be offset by lower premium Although MOP is the single largest potash fertilizer sold by PMP in volume terms (3.1mt sold in 215), K+S also has the capacity to produce up to 8-9kt of SOP p.a. K+S SOP production has been impacted in 216 at the Werra mines. Whilst we forecast a normalization of the volume situation in 217, we expect the SOP premium seen in recent years to decline and therefore broadly offset the positive volume impact: In 216, K+S potash production volumes (primarily SOP) at the Werra site were impacted by the limited ability to dispose of the saline wastewater at Werra mines due to absence of a deep well injection permit and dry weather. Management is expecting to receive the permit by the end of the year. If this does not happen, management will put various countermeasures in place (such as storing the wastewater in various other mines and caverns), which would allow the production at the Werra site almost to return to normal levels. We estimate the cost of such measures at EUR2-3m. The strong increase in the SOP premium since late 213 (due to supply tightness) has been mitigating the impact of the fall in MOP prices on K+S earnings. As shown on Figure 77, K+S PMP EBITDA margins have indeed been more resilient than those of its peers in recent years. However as discussed in our SOP analysis we expect the SOP supply/demand balance to weaken therefore pushing the premium sub $2/t in 217. This is likely to largely offset the SOP volume increase we expect in 217 for K+S. Page 4 Deutsche Bank AG/London

43 September 216 Figure 76: K+S PMP product offering (volume, 215) Health Care & Nutrition Industrial products 1% KCL (MOP) 46% Figure 77: Evolution of profitability of potash-producing divisions over last decade 8% 6% Industrial potash 4% Kieserite Korn-Kali SOP Specialties 44% 2% % K+S ICL Potash Corp. Mosaic Uralkali Source: K+S, Deutsche Bank estimates Source: K+S, Deutsche Bank estimates Note: Potash Corp. does not provide potash business EBITDA explicitly. To approximate potash business EBITDA, we have calculated OPEX for potash business (by multiplying the group OPEX with potash volumes and dividing it by the sum of potash, phosphate and nitrogen volumes) and subtracted that from potash business gross margins. Point 3: Salt normalization not expected until 218 Salt represented 32% of K+S 215 EBIT, of which 56% of volumes coming from de-icing salt (out of a 21.1mt total). We expect Salt EBIT to decline materially in 216 as a result of the mild winter in Europe and the US. Looking forward, we forecast a gradual recovery, with full normalization not expected until 218: Following a mild winter in Europe and North America and a tough base (severe winter in North America in 214/15), Q2 volumes in deicing salt declined 48% year-on-year with average prices down 19% year-on-year to EUR52.8/ton. We also note that non de-icing salt sales decreased 2.9% year-on-year due to lower volumes (-5.1%) offsetting higher pricing (+2.2%). We expect de-icing salt volumes to recover to normalized levels in 218. Given the current high levels of de-icing salt inventories, we do not expect inventories to return to normal before winter 217/218 (assuming a normal 216/217 winter) and therefore expect a normalized level of de-icing salt volumes only in 218. Pricing and margins are also likely to remain under pressure until 218. Compass Minerals mentioned on its Q2 216 results conference call that high producers and customers inventories in many North American markets have resulted in a very competitive bid season. The company expected average awarded contract price to decline c7% for the 216/217 winter season. Hence, even if we were to assume normal de-icing salt volumes in 217, we would expect prices (and margins) to remain under pressure and not to recover to before 218. While we recognize the company s efforts in terms of portfolio optimization (shifting from de-icing to non de-icing), structural price initiatives (e.g. food grade salt in China via Morton Salt JV), as well as cost cuttings (closing down several mines and handling facilities like Newark at the US west coast), we view its 22 Salt EBIT I target of >EUR25m which we see as too optimistic in a normalized environment and would require ideal winter conditions across all the regions. In order to achieve the Salt 22 target, we estimate EBIT I Deutsche Bank AG/London Page 41

44 E 217E E 217E 218E 219E 22E Salt volumes (mt) 23 September 216 margins would have to increase to at least 12.5% (based on ce2bn revenues). Whilst over the past 1 years, margins exceeded this level on several occasion, margins averaged only 1%. We forecast a normalized level of margins of 11.5% in 218 and 219, giving the company credit for competitiveness improvement measures over the period (production and logistics costs). Figure 78: K+S salt division volumes Figure 79: Historical K+S Salt EBIT I margin volumes % 14% 12% 1% 8% 6% 4% 2% % Industrial salt De-icing salt Δ normalised de-icing salt levels Salt EBIT I margin DB extrapolation* DB forecasts average** Source: K+S, Deutsche Bank Source: K+S, Deutsche Bank estimates Note:* Margin extrapolation required to meet Salt 22 EBIT I target of EUR25m, assuming normalized top line growth of 2.5% p.a.** Reported Point 4: Legacy start-up delay Legacy production start has been delayed to Q2 217 (from end 216) following a vessel damage in July this year. We have lowered our forecast for potash volumes coming from the project in 217 from 1mt to 55kt. Although we do not include in our forecasts any additional costs relating to the vessel damage, we note that further cash outflows may be incurred as full damage is assessed, responsibility for it apportioned and insurance payout awarded. As a result, the project will no longer achieve its 217 EBITDA breakeven target (we expect it to be EBITDA and cash flow positive in 218). Point 5: Downgrading EPS by 22-39% (TP lowered to EUR 14). SELL We have lowered our E EPS forecast by 22-39% (lower potash prices assumptions, Legacy delay) and target price to EUR 14. For a USD 1 change in global potash prices in 217E, we expect a 24% change in that year s EBIT. We expect the balance sheet to remain stretched due to the combination of lower EBITDA and increasing mining liabilities (treated as debt) as K+S s European mines are gradually coming to the end of their lives (See Figure 82). We forecast a total net debt (incl. pensions and mining obligations) / EBITDA ratio at 6x in 216E and 5x in 217E, well above the targeted level of x required to remain investment grade. Whilst K+S secured a (now partially drawn) EUR1bn credit line in 213 (available until June 22) and a EUR 6m Schuldshein (promissory note) in Q2 216, we believe it does not have much room for maneuver. At 2x 217E P/E and 1x 217 EV/EBITDA, with no potash recovery in sight and a highly stretched balance sheet, we view the valuation as too high and lower our recommendation to SELL. Page 42 Deutsche Bank AG/London

45 Jan-5 Jan-6 Jan-7 Jan-8 Jan-9 Jan-1 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jun-96 Jun-97 Jun-98 Jun-99 Jun- Jun-1 Jun-2 Jun-3 Jun-4 Jun-5 Jun-6 Jun-7 Jun-8 Jun-9 Jun-1 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun E 217E E 217E Net debt (EURm) 23 September 216 Figure 8: K+S net debt and leverage 4, 7 Figure 81: K+S pension and mining obligations 1,2 3, 2, 1, (1,) , Source: K+S, Deutsche Bank estimates Financial net debt (LHS) Pensions (LHS) Mining obligations (LHS) Total net debt / EBTIDA (RHS) Pensions (LHS) Source: K+S, Deutsche Bank estimates Mining obligations (LHS) Figure 82: Mine closure schedule Crude salt in t eff. Million Reserves (212) Extraction 212 t million K 2 O t million Kieserite (a) t eff. million t million K 2 O Theoretical lifetime in years (b) ; Basis K 2 O 212 Neuhof-Ellers Sigmundshall (c) Verbundwerk Hattorf-Wintershall (d) 1.12 (d) 43 Unterbreizbach (e).68 (e) 26 Zietlitz n/a Source: K+S Notes: (a) Kleserit is a usable magnesium mineral in potash deposits. Other minerals containing magnesium sulphate are only utilised secondarily for process-related factors (b) The calculation assumes the granting of approvals, economic exploitability of reserves and an annual extraction remaining constant over time (c) Theoretical lifetime of the Sigmunshall mine is determined by the volume of reserves of sylvinite and the current method of residue disposal (d) Without supplies from Unterbreizbach to Wintershall (e) Including supplies from Unterbreizbach to Wintershall Figure 83: Historic K+S share price vs. corn Figure 84: K+S 12m rolling P/E Corn No.2 Yellow U$/Bushel (LHS) K + S share price, EUR (RHS) Source: Datastream, Deutsche Bank Source: Datastream, Deutsche Bank Deutsche Bank AG/London Page 43

46 23 September 216 Valuation Our price target is based on our DCF valuation, which we believe captures the long-term recovery in potash prices as well as incremental volumes from the Legacy project. We use a WACC of 5.9% and a terminal growth rate of 2.5% (in line with long-term global GDP growth). Risks There are a number of upside risks to our estimates. Along with higher potash demand and prices, as well as higher grain prices, delays of new and closures of existing capacities, as well as industry consolidation would tighten the supply/demand environment in potash. Lower raw material/gas costs have the potential to expand margins. A severe winter in Europe and/or North America will boost Salt earnings. Consolidation or the company selling an asset is another material risk. Page 44 Deutsche Bank AG/London

47 23 September 216 Figure 85: K+S revised P&L forecasts (Euro, m) E 217E 218E Net sales 2,816 2,958 3,344 4,794 3,574 4,633 5,151 3,935 3,95 3,822 4,176 3,386 3,871 4,176 -sales growth % 1.9% 5.% 13.1% 43.4% -25.5% 29.6% 11.2% -23.6%.4% -3.3% 9.3% -18.9% 14.3% 7.9% EBITDA , ,218 1, , EBIT I , PMP , Nitrogen Salt Complementary business segment Reconciliation Hedging adj EBIT II , Net finance expenses Pre-tax profits (reported) Pre-tax profit (adjusted) , , Income tax expense o/w deferred taxes Tax rate 32.8% 2.6% 34.7% 27.3% 23.4% 23.6% 26.% 25.9% 24.3% 28.7% 27.3% 28.% 28.% 28.% One-off taxes Minority interests Net income (reported) Net income (adjusted) Weighted average number of shares outstanding Year end number of shares outstanding Reported EPS Adjusted EPS growth 57% 39% -2% 459% -91% 321% 48% -2% -19% -16% 48% -79% 49% 5% Dividends per share pay-out 47.2% 37.8% 47.% 4.4% 35.5% 42.2% 36.9% 49.8% 1.9% 47.% 4.6% 49.6% 49.9% 51.8% Net Debt, reported , , ,37 1,676 2,395 3,7 3,336 3,468 Source: Deutsche Bank, Company Data Deutsche Bank AG/London Page 45

48 23 September 216 Rating Hold Europe Norway Chemicals Company Yara International ASA Reuters YAR.OL Bloomberg YAR NO Jarek Pominkiewicz Research Analyst (+44) jaroslaw.pominkiewicz@db.com Virginie Boucher-Ferte Research Analyst (+44) virginie.boucher-ferte@db.com Ongoing nitrogen supply risk; stock fairly valued. HOLD Strong Brazil; limited impact of self-help and premium products; M&A likely We expect nitrogen fertilizer prices to remain weak due to significant capacity additions in the US and export regions. In addition, the particularly severe decline in farm incomes in Western Europe (Yara s biggest region) is likely to weigh on Yara s H2 16 and 217 earnings. We believe those pressures are likely to offset most of the newly announced $5m p.a. cost savings program and the company s increasing focus on premium products in Brazil. We have lowered our E EPS by 1-17% (TP lowered to NOK 275). At 13x 217E P/E and with the nitrogen price momentum expected to remain weak for the foreseeable future, we see the valuation as fair. HOLD. We note 5 key points 1) Within nitrogen, Yara is more exposed to premium products, with nitrates and NPKs accounting for over 6% of the group s fertilizer deliveries, partly explaining why Yara s P&L has historically been more resilient than nitrogen peers. However we see short-term downside risk due to the dramatic fall in European farm incomes likely to lower demand for those products in Europe (Yara s single biggest region, representing 38% of sales). 2) Yara has identified a $5m p.a. cost savings program (c.25% of 216E EBITDA) by 22 but has provided little detail so far. We remain of the view that net retention is likely to be low due to the weak nitrogen market conditions expected to prevail for the foreseeable future. 3) Brazil represents 24% of group sales. Yara has been significantly growing its premium products offer in the region and is planning to double the volume of premium products in Brazil by 22 (vs. 215) from 1-15% of region volumes currently which should be supportive to margins. 4) We cannot rule out CF Industries and Yara reviving their merger talks. We believe the value creation from this combination would come from combining CF's strong and low-cost US upstream presence with Yara's global downstream (distribution) network and exposure to more premium specialty fertilizers. We see the transaction as financially doable although it would require a significant rights issue. 5) We have lowered our E EPS by 1-17% due to downwards revisions to our nitrogen prices assumptions. As rolling forward the DCF partially offset our earnings cut, we lowered the TP to NOK 275. At 13x 217E P/E and with the nitrogen price momentum expected to remain weak for the foreseeable future, we see the valuation as fair. HOLD. Transfer of coverage Due to a change in team structure, we transfer coverage of Yara from Virginie Boucher-Ferte to Jarek Pominkiewicz with immediate effect. Valuation and risks TP based on DCF (2.5% LT gr, 8.3% WACC). Up-/downside risks: slower/faster urea capacity additions, lower/higher Chinese exports and higher/lower crop prices. Other risks include FX and energy prices. Price at 22 Sep (NOK) Price Target (NOK) week range (NOK) Price/price relative /13 3/14 9/14 3/15 9/15 3/16 Yara International A Oslo All-Share Index (Rebased) Performance (%) 1m 3m 12m Absolute Oslo All-Share Index Source: Deutsche Bank Stock & option liquidity data Market cap (NOK)(m) 74,442.8 Shares outstanding (m) 274 Free float (%) 64 Option volume (und. shrs., 1M avg.) Source: Deutsche Bank Forecasts and ratios Year End Dec A 216E 217E 218E DB EPS (NOK) P/E (DB EPS)(x) Source: Deutsche Bank estimates, company data Page 46 Deutsche Bank AG/London

49 23 September 216 Model updated:19 September 216 Running the numbers Europe Norway Yara International ASA Reuters: YAR.OL Hold Bloomberg: YAR NO Price (22 Sep 16) NOK 272. Target Price NOK Week range NOK Market Cap (m) NOKm 74,443 Company Profile USDm 9,188 Yara is the world's leading supplier of mineral fertilizers. The core business of Yara is production and marketing of nitrogen fertilizer such as urea, nitrates and NPKs along with the production and sale of ammonia, the key raw material for all nitrogen fertilizers. Yara also markets thirdparty fertilizers including phosphate and potash. In addition, Yara manufactures and markets certain industrial gases such as nitrogen chemicals and technical nitrates that are co-products of its fertilizer operations. Price Performance Sep 13 Mar 14 Sep 14 Mar 15 Sep 15 Mar 16 Margin Trends Yara International ASA Oslo All-Share Index (Rebased) E 17E 18E EBITDA Margin Growth & Profitability Solvency EBIT Margin E 17E 18E Sales growth (LHS) ROE (RHS) E 17E 18E Fiscal year end 31-Dec E 217E 218E Financial Summary DB EPS (NOK) Reported EPS (NOK) DPS (NOK) BVPS (NOK) Weighted average shares (m) Average market cap (NOKm) 72,949 79,549 17,648 74,443 74,443 74,443 Enterprise value (NOKm) 8,714 99, ,689 94,152 99,896 98,639 Valuation Metrics P/E (DB) (x) P/E (Reported) (x) P/BV (x) FCF Yield (%) nm nm 2. Dividend Yield (%) EV/Sales (x) EV/EBITDA (x) EV/EBIT (x) Income Statement (NOKm) Sales revenue 85,52 95, ,897 98,935 98,658 13,461 Gross profit 19,958 24,786 32,83 29,27 28,946 3,355 EBITDA 13,266 16,47 21,36 16,172 15,511 16,759 Depreciation 3,713 4,678 6,933 6,158 6,847 7,113 Amortisation EBIT 9,454 11,642 14,398 9,985 8,635 9,617 Net interest income(expense) ,235-1,368 Associates/affiliates Exceptionals/extraordinaries Other pre-tax income/(expense) -1, , Profit before tax 7,64 1,35 1,644 9,385 7,3 8,148 Income tax expense 1,56 2,92 2,29 1,877 1,518 1,695 Minorities Other post-tax income/(expense) Net profit 5,749 7,624 8,84 7,578 5,782 6,421 DB adjustments (including dilution) 1, ,851 DB Net profit 6,91 8,445 8,662 5,727 5,782 6,421 Cash Flow (NOKm) Cash flow from operations 12,174 8,67 14,631 12,66 1,124 1,273 Net Capex -4,425-7,2-9,631-16,1-12,6-8,8 Free cash flow 7,749 1,587 5, -3,44-2,476 1,473 Equity raised/(bought back) Dividends paid -3,647-2,771-3,581-4,113-3,5-2,459 Net inc/(dec) in borrowings Other investing/financing cash flows -6,526-7,292-1,478 3, ,255 Net cash flow -2,424-8, ,739-5,745 1,27 Change in working capital 2,21-3,827-1,464 2, Balance Sheet (NOKm) Cash and other liquid assets 6,819 3,591 3,22 2,847 2,839 2,977 Tangible fixed assets 32,867 44,584 52,424 63,157 73,57 75,571 Goodwill/intangible assets 8,419 12,8 9,583 8,792 8,2 7,175 Associates/investments 1,931 1,973 11,32 11,124 11,12 11,186 Other assets 29,944 4,476 42,335 38,623 38,543 39,919 Total assets 88,98 111, , , , ,828 Interest bearing debt 1,198 15,413 15,25 18,536 24,273 23,141 Other liabilities 22,364 28,257 27,931 26,231 26,195 26,825 Total liabilities 32,562 43,67 43,136 44,767 5,468 49,966 Shareholders' equity 54,267 63,765 73,89 78,118 81,441 85,13 Minorities 2,152 4,196 1,837 1,624 1,62 1,699 Total shareholders' equity 56,419 67,962 75,727 79,742 83,6 86,829 Net debt 3,379 11,822 11,985 15,689 21,434 2,164 Key Company Metrics Sales growth (%) DB EPS growth (%) EBITDA Margin (%) EBIT Margin (%) Payout ratio (%) ROE (%) Capex/sales (%) Capex/depreciation (x) Net debt/equity (%) Net interest cover (x) Source: Company data, Deutsche Bank estimates Net debt/equity (LHS) Net interest cover (RHS) Jarek Pominkiewicz Jarek Pominkiewicz jaroslaw.pominkiewicz@db.com Deutsche Bank AG/London Page 47

50 23 September 216 Page 48 Deutsche Bank AG/London Figure 86: Yara business description Division Description Key Products Major end markets Major end uses Key Competitors Market positioning Crop Nutrition (55% of 216E Sales) (37% of 216E EBITDA) Industrial (13% of 216E Sales) (1% of 216E EBITDA) Production (32% of 216E Sales) (53% of 216E EBITDA) Supply Chain Source: Deutsche Bank, Company Data Crop Nutrition provides worldwide sales, marketing and distribution of crop nutrition products and programs. It advices customers and farmers on how to deliver the right amount of the right nutrients at the right time based on crops need and local growing conditions Industrial division develops and markets environmental solutions and essential products for industrial application. The industrial product portfolio includes nitrogen based chemicals, both for end user applications and as raw materials for numerous industrial applications This division runs production of ammonia, nitrates, calcium nitrate, NPKs and a growing portfolio of phosphates. The segment comprises a total of 3 production sites and mines located in 16 different countries Supply chain is a global function responsible for optimization of energy, raw materials and third party sourcing. It optimizes Yara's integrated business model, planning material flows between segments and geographies and arranging maritime transport Field applied nitrogen fertilizer - CAN, AN, Urea, UAN, AS and other composite fertilizer products. Fertigation - high quality calcium nitrate, potassium nitrate and micronutrient chelates. Foliar - suspension concentrates, solutions and powders Base chemicals, Ammonia, Nitric acid, Urea, TAN, CN, Animal nutrition Urea, nitric acid, nitrates, NPKs and phosphate Agricultural and food industry Chemical Industry, Transportation, Power generation, Cement production, Civil explosives industry, Agricultural and food industry Providing essential nutrients to crops throughout their growth cycle to sustain crop yield Base chemicals serves the chemical industry with ammonia, nitric acid and urea deliveries. Environmental solutions comprises of air abatement solutions in commercial road transportation, passenger cars as well as in maritime segment. Mining applications sells Technical Ammonium Nitrate (TAN) and related solutions. Gas and Industrial applications comprise technical solutions based on calcium Nitrate, feed additives based on phosphate and urea Provides the foundation of Yara's fertilizer and industrial solutions Nitrates: Acron, OCI, Cherkassy, UralChem, EuroChem Ammonia: Mosaic, Agrium, Terra, Potash, Koch Urea: Sinopec, IFFCO, NFL, Agrium, Kaltim, Qafco, CF, Pusri, RCF, Tessenderlo, Timab, Ecros, Fosfitalia Yara is the world's largest producer of ammonia, nitrates and NPKs

51 E 217E 218E 219E E 217E 218E 219E E 217E 218E 219E E 217E 218E 219E 23 September 216 Figure 87: Yara in a page Sales by division (216E) EBITDA by division (216E) Industrials 13% Industrials 1% Production 32% Crop Nutrition 55% Crop Nutrition 37% Production 53% Sales by product Sales by region Ammonia trade 6% Latam (ex Brazil) 9% Africa 6% Industrial Products 2% Asia & Oceania 11% Europe 38% Fertilizer 74% North America 12% Brazil 24% Sales ( E) EBIT and EBIT margin (23-219E) 12, 1, 8, 6, 4, 2, 18, 16, 14, 12, 1, 8, 6, 4, 2, 2.% 15.% 1.% 5.%.% EBIT EBIT margin EPS (2-219E) ROCE (23-219E) % 35% 3. 3% % 2. 2% % 1. 1% 5. 5%. % Source: Deutsche Bank estimates, Yara Deutsche Bank AG/London Page 49

52 23 September 216 Ongoing nitrogen supply risk Point 1: NPKs & nitrates to suffer from the sharp fall in European farm incomes Within nitrogen, Yara is more exposed to premium products, with nitrates and NPKs accounting for over 6% of the group s fertilizer deliveries. Whilst they provide some degree of insulation from commodity fertilizer price moves and partly explain why Yara s P&L has historically been more resilient than nitrogen peers, we see short-term downside risk due to the dramatic fall in European farm incomes likely to lower demand for those products in Europe, as well as increasing UAN imports into Europe (Yara s single biggest region, representing 38% of sales): We expect NPK demand for the upcoming 216/17 season to decline as farmers reduce potash and phosphate application to make savings wherever possible (see sub-section Potash is the most discretionary of fertilizers.) The nitrate premium has historically been correlated to wheat prices, a good indicator of European farm incomes, as high farm incomes incentivize farmers to buy superior products. Whilst we expect nitrate demand to soften in H2 216/H1 217, we expect ongoing tight nitrate supply in Europe to largely mitigate the negative impact from softer demand. Increasing UAN (urea ammonium nitrate) capacity in the US is changing global UAN trade patterns with US and Russia expected to increase UAN exports into Europe, France notably. UAN represent 4% of Yara s fertilizer delivery volumes. Figure 88: Yara fertilizer delivery by volumes (215) Other products 9% Urea 21% Nitrate 24% CN 4% UAN 4% Compound NPK* 19% NPK blends 19% Source: Yara, Deutsche Bank. Note: Yara-produced compound NPK and third party sourced (Total NPK minus blend NPK) Including other products, which comprise DAP/MAP and MOP/SOP. Page 5 Deutsche Bank AG/London

53 23 September 216 Point 2: $5m cost-cutting - lack of detail and retention likely to be low The company has identified a $5m p.a. cost savings program (representing c.25% of 216E EBITDA) to be realized by 22. These savings are targeted in the areas of Production, Commercial and Supply chain/other. Mgmt highlighted that this program was the result of significant involvement from across the business, with improvement initiatives identified to a reasonable degree of granularity. However, program details and phasing schedule require further diligence and therefore will not be shared with the market until Q4 results are published, with an intermediate update expected with Q3 results. We are of the view that this $5m is likely to be a gross figure with significant restructuring cost involved and limited net retention due to the weak nitrogen market conditions expected to prevail for the foreseeable future. Figure 89: Yara improvement program to deliver $5m EBITDA improvement by 22 Source: Yara Point 3: Brazil premium products strategy to support margins Brazil is Yara s second largest market, representing 24% of group sales in 215. Following the acquisition of Bunge in 213, Yara reached a critical mass in distribution in the country and realized significant synergies in sourcing and operations. The country provides an attractive growth opportunity at a time when fertilizer volumes and margins are under strain. Notably, Yara has been significantly growing its premium products offer in the country (compound NPK, nitrate fertilizer (CAN/AN) and calcium nitrate), which now represents 1-15% of volumes and 4-45% of EBITDA. Yara is planning to double the volume of premium products in Brazil by 22 (vs. 215), which we estimate would increase EBITDA in the region by 5-55%. We note that the company is well on track to grow its premium volumes in Brazil by c4%-45% this year, as its H1 deliveries of premium products in the region were up 47% YoY. The company has taken the following steps to support this growth: The company hired more than 2 sales and marketing agronomists and further 7 sales representatives. More than 4% of sales are made directly to end users and 1% of the sales force in Brazil is composed of agronomists. According to management, in order to meet the organic demand growth, the company needs to build a new blending terminal every one to two years. Acquisition of Galvani lowers Yara s exposure to changes in FX and increases the company s local manufacturing presence in a market, which heavily relies on imports. More than 8% of nitrogen and nearly 6% of phosphate volumes are shipped from abroad. Deutsche Bank AG/London Page 51

54 23 September 216 Figure 9: Continued organic investment in Brazil Figure 91: Galvani acquisition and Brazil s dependence on imports Source: Yara Source: IFA / ANDA / Yara Point 4: Use of cash: large scale M&A increasingly likely We see Yara, the company with the largest war chest, trying to buy an asset in the US in order to lower its position on the cost curve. We believe that when considering larger, transformational transactions the company may be more open to making a full use of its balance sheets beyond the EUR3.1bn capacity highlighted in Figure 69). Below, we summarize the 2 possible scenarios and further analyze them in section Not ruling out Yara making a transformational deal in the US on pages One such example could involve CF Industries and Yara reviving their merger talks which fell apart in 214. It would allow combine CF's strong and low-cost US upstream presence with Yara's global downstream (distribution) presence and exposure to more premium specialty fertilizers. Such a deal would also help to address Yara s relatively high position on the nitrogen cost curve. With the acquisition of OCI by CF Industries having fallen apart due to US clampdown on tax inversion deals, Yara may also be the next bidder for the Amsterdam-listed fertilizer group. Yara could either buy the whole group (European, North American and Distribution assets), or individual assets. Purchase of the whole group, which not only would increase Yara's manufacturing presence in the US and thus lower its position on the industry cost curve, but also acquire Europe's 2nd largest integrated nitrates producer Yara could buy either OCI's European assets (more manageable deal, involving Europe's 2nd largest nitrates producer and the opportunity to consolidate the fragmented local market), or OCI's greenfield Iowa plant (more manageable deal, adding mt of low cost nitrogen fertilizer capacity in the US and lowering Yara's position on the nitrogen cost curve. The plant is located in Mid- West, the largest market in the US and a net importer on nitrates, hence commanding premium pricing). Page 52 Deutsche Bank AG/London

55 Apr-4 Dec-4 Aug-5 Apr-6 Dec-6 Aug-7 Apr-8 Dec-8 Aug-9 Apr-1 Dec-1 Aug-11 Apr-12 Dec-12 Aug-13 Apr-14 Dec-14 Aug-15 Apr-16 Jan-5 Jan-6 Jan-7 Jan-8 Jan-9 Jan-1 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep September 216 Point 5: Lowering our 217 EPS by 17% and lowering TP to NOK 275. HOLD We have lowered our E EPS forecast by 1-17% due to downwards revisions to our nitrogen prices assumptions. We lower our target price to NOK 275 as we note that the earnings cut is partially offset by rolling forward the DCF. At 13x 217E P/E and with the nitrogen price momentum expected to remain weak for the foreseeable future, we see the valuation as fair. HOLD. Figure 92: Zeegrugge natural gas price (USD/MBBtu) Zeebrugge day ahead price (USD/MMBtu) Source: Datastream, Deutsche Bank Figure 93: Historic Yara share price vs. corn Figure 94: Yara 12m rolling P/E Corn No.2 Yellow U$/Bushel (LHS) Yara share price, NOK (RHS) Source: Datastream, Deutsche Bank Source: Datastream, Deutsche Bank Valuation Our price target is based on our DCF valuation, which we believe captures the long-term recovery in potash prices as well as incremental volumes from the Legacy project. We use a WACC of 8.3% (equity risk premium of 7.2%, beta 1.5, cost of net debt of 5.8% and risk-free rate of 1.2%) and a terminal growth rate of 2.5% (in line with long-term global GDP growth). Risks There are a number of upside/downside risks to our estimates. Slower/faster urea capacity additions and lower/higher Chinese exports (due to higher/lower local coal prices, and/or material increase/decrease in export duties) could tighten/loosen the supply/demand dynamic in the European nitrogen fertilizer market and impact our forecasts and valuation. Substantially higher/lower crop prices to a level that would materially influence fertilizer spending and lower/higher natural gas prices in Europe (key determinant of Yara s production cost). Other risks include lower/higher than expected capacity additions, FX and the US government increasing/decreasing bio-fuel targets. Deutsche Bank AG/London Page 53

56 23 September 216 Figure 95: Yara revised P&L forecasts (NOK m) E 217E 218E Revenue 46,171 46,969 57,485 88,775 61,418 65,374 77,654 84,59 85,52 95, ,897 98,935 98,658 13,461 -growth 7.2% 1.7% 22.4% 54.4% -3.8% 6.4% 18.8% 8.8%.6% 12.1% 17.4% -11.6% -.3% 4.9% Operating Income 3,821 3,352 4,987 12,281 1,271 7,467 13,24 11,159 7,791 1,36 14,14 9,267 7,951 8,921 Underlying EBITDA 6,7 5,451 7,789 17,723 5,491 1,748 16,1 16,85 13,713 16,545 18,919 14,639 15,511 16,759 - EBITDA margin 14.5% 11.6% 13.5% 2.% 8.9% 16.4% 2.6% 19.9% 16.1% 17.4% 16.9% 14.8% 15.7% 16.2% Downstream 2,5 1,95 3,123 4,238 1,187 3,78 5,9 3,88 4,37 6,14 6,162 5,577 5,841 6,23 -margin 6.2% 5.6% 7.5% 6.5% 2.6% 7.8% 9.2% 6.4% 6.7% 8.4% 7.4% 7.5% 7.7% 7.8% Industrial activities ,29 1,14 1,34 1,35 1,96 1,447 1,461 1,447 1,326 1,416 -margin 12.6% 12.1% 1.% 4.9% 15.% 11.8% 8.2% 8.2% 8.8% 9.6% 8.3% 8.5% 8.5% 8.7% Upstream 3,844 2,765 3,842 12,665 3,69 6,96 1,298 11,868 7,776 9,797 12,96 8,1 8,929 9,735 -margin 18.8% 12.5% 16.2% 27.6% 14.2% 19.3% 23.7% 26.4% 19.3% 24.% 23.9% 18.1% 2.% 21.% Others Share of net income in non-consolidated investees Interest and other financial income 1,144 1,463 1,624 2,76 1,412 1,516 1,889 1,964 1, , EBIT 5,231 5,92 6,936 15,717 3,58 12,84 15,438 13,527 9,454 11,642 14,398 9,985 8,635 9,617 Foreign exchange gain/(loss) ,313 1, , Interest expense , ,235-1,368 Other financial charges / income Profit Before Tax 4,223 5,43 7,337 1,95 3,477 11,179 14,44 13,183 7,64 1,35 1,644 9,385 7,3 8,148 Income tax expense -1, ,262-2, ,386-2,315-2,582-1,56-2,92-2,29-1,877-1,518-1,695 Tax rate 24.% 16.5% 17.2% 24.4% -9.7% 21.3% 16.1% 19.6% 19.8% 2.8% 2.8% 2.% 2.8% 2.8% Net Income 3,29 4,21 6,75 8,241 3,814 8,793 12,9 1,61 6,97 7,944 8,435 7,58 5,782 6,454 Minority interest Reported net income 3,198 4,188 6,37 8,228 3,782 8,729 12,66 1,552 5,748 7,625 8,83 7,578 5,782 6,421 Underlying net income Earnings per share (reported) DB earnings per share (pre exceptionals) 3,659 2,984 4,684 1,56 2,55 5,972 1,4 9,995 6,91 8,446 8,662 5,727 5,782 6, DPS Payout ratio 22.6% 17.6% 19.4% 15.9% 34.4% 18.2% 16.6% 34.6% 48.2% 47.% 5.9% 39.7% 42.5% 42.5% Net Debt 5,232 5,35 8,924 24,794 16,228 9,54 5, ,378 11,88 11,868 15,67 21,352 2,82 Source: Deutsche Bank, Company Data Page 54 Deutsche Bank AG/London

57 23 September 216 Figure 96: Yara annual production capacity (million metric tons of chemically manufactured product) (May 216) Location Country AmmoniaNitric Acid Phos Acid Phos rock SSP Urea Nitrates NPK CN Solids UAN Sluiskil Netherlands Brunsbuttel Germany.7.7 Porsgrunn Norway Ferrara Italy.6.5 Le Havre France.4.3 Yara Trinidad Trinidad.2 Yara Tringen (49%) Trinidad.4 Tertre Belgium Hull UK.3 Uusikaupunki Finland Siilinjärvi Finland Belle Plaine Canada Cartagena Colombia Galvani (6%) Brazil.3.6 Qafco (25%) Qatar Lifeco (5%) Libya.2.2 Pilbara Australia.9 Glomfjord Norway Montoir France Ambes France.5.5 Rostock Germany Ravenna Italy Rio Grande Brazil.8 Ponta Grossa Brazil.2 Koping Sweden.3.3 Pardies France.2.1 Total Yara Source: Yara website (May 216) Deutsche Bank AG/London Page 55

58 23 September 216 Rating Hold Emerging Europe Israel Company ICL Jarek Pominkiewicz Research Analyst (+44) jaroslaw.pominkiewicz@db.com Virginie Boucher-Ferte Reuters ICL.TA Bloomberg ICL IT Research Analyst (+44) virginie.boucher-ferte@db.com Weak potash backdrop offset by low cost structure; stock fairly valued: Hold Lowering EPS forecasts, stock fairly valued As analysed in this report, we do not foresee a potash price recovery for the foreseeable future. In addition, the particularly severe decline in farm incomes in Western Europe (ICL s biggest region) is likely to weigh on ICL s H2 16 and 217 earnings. We believe, however, that the savings from the efficiency program, contribution from the phosphate JV and polysulphate volumes should provide support to margins. We have lowered our E EPS by 9% (TP reduced to ILS 15). At 11x 217E P/E and with the potash price momentum expected to remain weak for the foreseeable future, we see the valuation as fair. HOLD We note five key drivers for ICL 1) Potash weakness should impact ICL s profitability to a lesser degree than its peers, due to its lower position on potash cost curve 2) ICL realised $275m savings from the efficiency improvement program in 215, with c$4m expected in 216E and further $75-1m in 218, reflecting ongoing tough market conditions. Management is also implementing cash flow optimization measures, with capex not exceeding $65m p.a. and working capital reduction of $5m. 3) ICL is in the process of expanding potash and polysulphate capacities at its Spanish and UK mines which should help reducing the cost per ton and boost margins. 4) Through the 5/5 YPH JV with Yunnan Phosphate Chemicals, the third largest phosphate producer in the world, ICL created a back-integrated phosphate player and secured access to long-term phosphate reserves. Management is planning to grow the JV sales from c$4m to c$55m over the next 5 year (c6.5% CAGR) and operating margins to high single digits by increasing its presence in its core agriculture markets, engineered materials and food as well as expanding share of specialty products in the JV portfolio from 1% currently to 5%. 5) We have lowered our E EPS by 9% (TP lowered to ILS 15). At 11x 217E P/E and 9x 217 EV/EBITDA valuation looks fair with no potash recovery in sight. HOLD Transfer of coverage Due to a change in team structure, we transfer coverage of ICL from Virginie Boucher-Ferte to Jarek Pominkiewicz with immediate effect. Valuation and Risk We value ICL based on a DCF (2.5% TGR, in line with forecast long-term global GDP growth & 7.6% WACC). Risks: higher/lower crop prices, lower/higher demand and/or prices for the company's products, slower/fasterthan-expected restructuring and capacity additions, risk of flooding damage to the company's Dead Sea ponds, BPC being reunited. Price at 22 Sep 216 (ILS) Price Target (ILS) week range (ILS) Price/price relative /13 3/14 9/14 3/15 9/15 3/16 ICL Tel Aviv 1 Index (Rebased) Performance (%) 1m 3m 12m Absolute Tel Aviv 1 Index Source: Deutsche Bank Forecasts and ratios Year End Dec A 216E 217E 218E EPS (USD) P/E (DB EPS) (x) DPS (USD) Yield (%) Source: Deutsche Bank estimates, company data Page 56 Deutsche Bank AG/London

59 23 September 216 Model updated:23 September 216 Running the numbers Emerging Europe Israel ICL Reuters: ICL.TA Hold Bloomberg: ICL IT Price (22 Sep 16) ILS Target Price ILS Week range ILS Market Cap (m) ILSm 19,361 Company Profile USDm 5,15 Israel Chemicals Ltd. is engaged in the development, manufacture and marketing of potash and phosphate-based fertilizers, bromine based products for agricultural and industrial usage, performance products for the food and hygiene industries, and magnesium based metallurgy. ICL mainly operates in the Dead Sea region and the Negev desert, but also has potash facilities in Spain and the UK as well as specialty chemicals in Germany. The company has access to low cost potash reserves and holds the rights to unlimited open-air stockpiling capacity at Israel's Dead Sea. Price Performance Sep 13 Mar 14 Sep 14 Mar 15 Sep 15 Mar 16 ICL Margin Trends Tel Aviv 1 Index (Rebased) E 17E 18E EBITDA Margin Growth & Profitability Solvency EBIT Margin E 17E 18E Sales growth (LHS) ROE (RHS) E 17E 18E Fiscal year end 31-Dec E 217E 218E Financial Summary DB EPS (USD) Reported EPS (USD) DPS (USD) BVPS (USD) Weighted average shares (m) 1,27 1,27 1,27 1,27 1,27 Average market cap (USDm) 9,328 7,818 5,15 5,15 5,15 Enterprise value (USDm) 12,647 11,594 8,687 8,858 8,931 Valuation Metrics P/E (DB) (x) P/E (Reported) (x) P/BV (x) FCF Yield (%).6 nm 1.2 nm 2.6 Dividend Yield (%) EV/Sales (x) EV/EBITDA (x) EV/EBIT (x) Income Statement (USDm) Sales revenue 6,111 5,45 5,531 5,671 5,866 Gross profit 2,624 2,233 2,188 2,251 2,336 EBITDA 1,185 1, ,29 1,16 Depreciation Amortisation EBIT Net interest income(expense) Associates/affiliates Exceptionals/extraordinaries Other pre-tax income/(expense) Profit before tax Income tax expense Minorities Other post-tax income/(expense) Net profit DB adjustments (including dilution) DB Net profit Cash Flow (USDm) Cash flow from operations Net Capex Free cash flow Equity raised/(bought back) Dividends paid Net inc/(dec) in borrowings Other investing/financing cash flows Net cash flow Change in working capital Balance Sheet (USDm) Cash and other liquid assets Tangible fixed assets 3,927 4,212 4,541 4,855 5,98 Goodwill/intangible assets 83 1,185 1,235 1,285 1,335 Associates/investments Other assets 3,359 3,178 3,28 3,88 3,17 Total assets 8,348 9,77 9,69 9,498 9,883 Interest bearing debt 2,96 3,478 3,245 3,423 3,55 Other liabilities 2,441 2,411 2,427 2,446 2,472 Total liabilities 5,347 5,889 5,672 5,868 5,976 Shareholders' equity 2,974 3,28 3,237 3,47 3,747 Minorities Total shareholders' equity 3, 3,188 3,397 3,63 3,97 Net debt 2,659 3,23 2,991 3,163 3,236 Key Company Metrics Sales growth (%) nm DB EPS growth (%) na EBITDA Margin (%) EBIT Margin (%) Payout ratio (%) ROE (%) Capex/sales (%) Capex/depreciation (x) Net debt/equity (%) Net interest cover (x) Source: Company data, Deutsche Bank estimates Net debt/equity (LHS) Net interest cover (RHS) Jarek Pominkiewicz (+44) jaroslaw.pominkiewicz@db.com Deutsche Bank AG/London Page 57

60 23 September 216 Page 58 Deutsche Bank AG/London Figure 97: ICL business description Division Major products/description Major end uses Competitors Market Positioning Essential Minerals (39% of 216E Sales) -Potash & Magnesium -Phosphate Specialty Solutions (59% of 216E Sales) -Industrial Products -Specialty -Advanced Additives -Food Specialties Source: Deutsche Bank, Company Data Potash & Magnesium extracts potash from the Dead Sea and mines Agriculture primarily. Also industrial, and produces potash, polysulphate and salt from subterranean technical & health care mines in Spain and the UK. Magnesium business, markets and sells pure magnesium and magnesium alloys. It also produces dry carnallite and related by-products, including chlorine and sylvinite. Phosphate business unit mines and processes phosphate rock from open pit mines in Israel and China and produces sulfuric acid, agricultural phosphoric acid and phosphate fertilizers. The unit includes the JV with Yunnan Phosphate Chemicals. It also manufactures compound fertilizers. Produces bromine out of a solution that is created as a by-product of the potash production process as well as bromine-based compounds. Industrial Products uses most of the bromine it produces for self-production of bromine compounds. In addition, the company is engaged in the production and marketing of phosphorous flame retardants and additional phosphorus-based products. Specialty manufactures compound fertilizers, slow-release fertilizers, controlled-release fertilizers and liquid and soluble fertilizers for the specialty agriculture, turf and ornamental markets. Advanced Additives business unit primarily develops, produces, markets and sells a broad range of acids, specialty phosphates and specialty minerals which are used in various industries. This business unit purifies some of the agricultural phosphoric acid manufactured by ICL Phosphate and also manufactures thermal phosphoric acid. The business also comprise of processed magnesium products. ICL Food Specialties is a leader of creative food ingredients and phosphate additives, which provide texture and stability solutions for the processed meat, fish, dairy, beverage and baked-goods food markets. In addition, the business unit produces milk and whey proteins for the food ingredient industry. The business unit primarily process phosphates, milk and spices. Agriculture Electronics, construction, automobile industries, clear brine fluids to the oil and gas drilling industry, food, pharma and various industrial application Potash Corp, Mosaic, K+S, Agrium, Belaruskali, Uralkali OCP, Mosaic, Ma'aden, Potash Corp, Agrium, PhosAgro, Yuntianhua, GCT, Eurochem Jordan Bromine Co. (JBC), Albemarle, Chemtura Corp.and several Chinese and Indian producers Agriculture K+S, SQM, Kingenta (China), Haifa Chemicals Metal and water treatment, paints Thermphos International, and coatings, forest fire retardants, Chemische Fabrik Budenheim, cleaning materials, oral hygiene, Innophos, Prayon, PCS, Aditya carbonated drinks, asphalt Birla, and small Chinese producers modification, deicing, nutrition, pharma, specialty steel, fuel additives and rubber, paper industry, cleaning materials and oil additives, catalysts and stabilizers Meat, seafood, dairy, beverage, baked-goods food, functional food and infant food markets, food ingredients industry. #2 in Western Europe, #3 in India #4 in China and Brazil in Potash sales, #1 in Western Europe in PK (compound potash & phosphate fertilizers),fertilizer, #2 Western world magnesium production #1 in Elemental Bromine, Phosphorus-Based Flame Retardants Top 2 worldwide in specialty phosphates Top 3 worldwide in Phosphate- Based Food Additives

61 E 217E 218E 219E E 217E 218E 219E E 217E 218E 219E 23 September 216 Figure 98: ICL in a page Sales by division (216E) EBIT by division (216E) Specialty Solutions 59% Other Activities 2% Essential Minerals 38% Essential Minerals 39% Specialty Solutions 62% Sales by geography (215) Essential Minerals sales by business (215) South America 11% Other 7% Asia 21% Europe 38% Phosphate 38% Potash & Magnesium 62% North America 23% Specialty Solutions sales by business (215) Specialty 22% Food Specialties 2% Industrial Products 29% Advanced Additives 29% 4% 35% 3% 25% 2% 15% 1% 5% % EBIT margin (2-219E) Dividend Yield (2-219E) ROCE (2-219E) 7% 7% 6% 6% 5% 5% 4% 4% 3% 3% 2% 7% 6% 5% 4% 3% 2% 1% % Source: Deutsche Bank estimates, ICL Deutsche Bank AG/London Page 59

62 Potash total cost per ton ($/t) 23 September 216 Weak market conditions offset by low cost structure Point 1: Ongoing potash weakness impacting ICL to a lesser degree than peers Ongoing potash price/volume weakness should continue to impact ICL s profitability although we note that the potential impact on P&L is lower for ICL than its peers as the company has a relatively low cost position on potash cost curve and has a growing, less volatile specialty business (see Figure 6). This should allow the company to remain profitable even under materially weaker market conditions. In addition, the company benefits from virtually unlimited potash storage capacity in open field in the Dead Sea (c3.8-4mt capacity) which allows ICL to continue producing at full capacity even when demand weakens. Point 2: Operational excellence program additional savings targeted In 213, as a part of a long-term Strategy 22, ICL launched its operational excellence program ACE (Ambition Creates Excellence). The program is on course to deliver c$4m of annual run-rate cost efficiencies in 216 (vs. 213), split across HR, procurement and operational excellence, with more than half of the gains coming from Potash business unit. We estimate that potash cash cost per ton declined by nearly 25% during In 215, c4% of the decline could be attributed to external factors, such as lower shipping and energy costs. We forecast a slight increase in cash cost in 216E, due to low potash volumes in Q1 and Q2. As a result of ongoing weak market conditions, management is targeting further $75-1m cost savings (representing c13-17% 216E EBIT) by the end of 218 (we are assuming net retention of c25%) and implementing additional cash flow optimization measures, which comprise capex not exceeding $65m p.a. in and working capital reduction of $5m. Figure 99: ICL efficiency initiatives $275m $4m $475-5m Figure 1: ICL potash total cost per ton (USD/t) $1m E 218E E Source: ICL, Deutsche Bank estimates Source: ICL, Deutsche Bank estimates Page 6 Deutsche Bank AG/London

63 23 September 216 Point 3: Capacity expansion to drive margin growth ICL is in the process of expanding potash and polysulphate capacities at its Spanish and UK mines which should help reducing the cost per ton and boost margins: ICL UK. The company has accelerated the transition of production at the UK mine away from potash, of which it currently produces c6ktpa (one of the highest-cash cost mines in the industry) to polysulphate, a natural cost-effective fertilizer for sulphur-depleted soils, which the company sees as a growing problem across the world. Cessation of potash production may now happen as early as middle of 217, 12 months prior to previous deadline of middle of 218. While cutting potash production, the company is also cutting headcount (33% reduction in H1 216 with additional expected reduction of up to 33% in 217), which should keep cash cost per ton stable, despite lower volumes. Management is planning to grow its polysulphate volumes from 12kt in 215 to 25kt in 216E and 1mt in 22 which should lead to a margin improvement from breakeven (in 216) to over 3% in 22. ICL Iberia. ICL Iberia is undergoing a consolidation and restructuring project into one mine and one processing facility. Phases I and II (22) which comprise capacity expansion of Suria mine to 1,8kt, closure of Vilafruns mine and expansion of granular capacity to 1,3kt is expected to provide a significant cost stepdown, which translates to cost a reduction of ceur25-3/t. Phase III (22) comprises a new crystallization plant aimed to expand Suria s Center capacity by extra 2kt of KCl and 5kt of NaCl, which will further lower cash cost per ton by ceur1/t (cumulative reduction to EUR4/t vs. 214). Phase IV (long term) would involve a brownfield project extending production capacity by additional 1mt of KCl. Point 4: YPH JV secures phosphate reserves and offers growth potential Through the 5/5 YPH JV with Yunnan Phosphate Chemicals, the third largest phosphate producer in the world, ICL created a back-integrated phosphate player with world-scale phosphate rock mine and downstream operations and secured access to long-term phosphate reserves. While the JV made a small loss in Q1 and Q2 216 (low teens in each quarter) due to weak phosphate prices, we expect it to breakeven in Q4 supported by efficiency measures. Management is planning to grow the JV sales from c$4m to c$55m (representing c3% of 216E group sales) over next 5 year sales (c6.5% CAGR) and operating margins to high single digits by increasing its presence in its core agriculture markets, engineered materials and food and expanding share of specialty products in the JV portfolio from currently 1% to 5%. The transition will be supported by cumulative capex of $34m. Deutsche Bank AG/London Page 61

64 Jan-5 Jan-6 Jan-7 Jan-8 Jan-9 Jan-1 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jun-97 Jun-98 Jun-99 Jun- Jun-1 Jun-2 Jun-3 Jun-4 Jun-5 Jun-6 Jun-7 Jun-8 Jun-9 Jun-1 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Commodity Capacity (ktpa) Specialty 23 September 216 Figure 11: ICL expanding capacity through YPH JV %.85 15% 117%.12 58% Purified phosphoric acid Specilaty fertilizers Phosphoric acid 63% Phosphate rock ICL standalone YTH additional capacity Expansion Source: ICL, Deutsche Bank Note: Increase in capacity compared to 215, ICL standalone includes Brazil and N. America Figure 12: ICL transformation into a leading phosphate player Specialty Food Specialties Advanced Additives Phosphate Source: ICL, Deutsche Bank New market supported by Chinese government policy Grow sales in soluble MAP, MKP and Light Specialties Build new CRF and WSNPK plants in China Volume increase of about 15% New multi-ingredient blending plant and lab in China Leveraging ICL s expertise to build a new low cost purified acid plant Strengthen ICL base in the Asian market Technical grade phosphoric acid volume growth, in addition to Fosbrasil Build up niche market applications Secure long term phosphate reserves Expand ICL s commodity portfolio Establish a position in the Chinese and global commodity phosphates markets (DAP, MAP) Point 5: 216/17 EPS broadly unchanged. TP remains at ILS 16. HOLD Changes in ICL reporting structure and grouping Industrial and Performance together under Specialty Solutions makes it more difficult to track their performance going forward. We expect the rapid growth in Q2 in 3 of the 4 BUs (Industrial Products, Advanced Additives and Food Specialties) to gradually normalise in 217 supported by the full-year benefits from the JV in China (Advanced Additives) and increased manufacturing capacity (Food Specialties). We have lowered our 216E and 217E EPS forecasts by 9% and reduced our target price to ILS 15. At 11x 217E P/E and 9x 217 EV/EBITDA valuation looks fair with no potash recovery in sight. HOLD Valuation Our price target is based on our DCF valuation, which we believe captures the long-term recovery in potash prices as well as incremental volumes from capacity expansions and mine restructuring. We use a WACC of 7.6% (equity risk premium of 7.9%, beta 1.5, cost debt of 3.3%, risk-free rate of 1.8%) and a terminal growth rate of 2.5% (in line with long-term global GDP growth). Figure 13: Historic ICL share price vs. corn 1 1 Figure 14: ICL 12m rolling P/E Corn No.2 Yellow U$/Bushel (LHS) ICL share price, ILS (RHS) Source: Datastream, Deutsche Bank Source: Datastream, Deutsche Bank Risks Risks: rise/fall in grain prices, higher/lower demand and/or prices for the company's products (potash and bromine in particular), higher/lower or slower/faster-than-expected restructuring and capacity additions, risk of flood damage to the company's Dead Sea ponds, reunited BPC cartel. Page 62 Deutsche Bank AG/London

65 23 September 216 Figure 15: ICL revised Profit & Loss summary (USD m) E 217E 218E Net sales 2,9 1,859 1,981 2,271 2,715 2,986 3,258 4,13 6,94 4,554 5,692 7,68 6,672 6,272 6,111 5,45 5,531 5,671 5,866 -sales growth % -7% 7% 15% 2% 1% 9% 26% 68% -34% 25% 24% -6% -6% -3% -12% 2% 3% 3% EBIT , ,346 1,926 1,577 1, Essential Minerals Specialty Solutions Other Activities EBIT margins 11% 9% 1% 9% 13% 19% 16% 18% 34% 21% 24% 27% 24% 18% 12% 14% 1% 12% 13% -Essential Minerals 28% 26% 16% 19% 22% -Specialty Solutions 12% 12% 18% 18% 18% Adjusted EBIT 743 2,589 1,27 1,356 1,926 1,621 1, Adjusted EBIT margin 18% 37% 23% 24% 27% 24% 19% 16% 18% 11% 12% 13% Net finance expenses Pre-tax profits (reported) Pre-tax profit (adjusted) , ,295 1,872 1,526 1, ,48 1,31 1,35 1,872 1,57 1, Income tax expense One-off taxes Minority interests Net income (reported) ,4 77 1,25 1,512 1, Net income (adjusted) , ,33 1,55 1,336 1, Weighted average number of shares outstanding Diluted number of shares outstanding 1,21 1,2 1,2 1,261 1,213 1,256 1,283 1,285 1,28 1,263 1,264 1,268 1,27 1,27 1,27 1,27 1,27 1,27 1,27 1,21 1,2 1,2 1,261 1,239 1,278 1,285 1,286 1,286 1,266 1,272 1,273 1,27 1,27 1,27 1,272 1,272 1,272 1,272 Reported EPS Adjusted EPS growth 57% -41% 6% 153% 57% -1% 48% 3% -61% 23% 5% -14% -24% -31% 1% -43% 16% 19% Dividends per share pay-out 84% 12% 88% 6% 4% 36% 1% 68% 51% 73% 67% 7% 7% 78% 7% 7% 5% 5% 5% Net Debt, reported 1,489 1,339 1, ,246 1, ,451 1,567 1,744 2,659 3,23 2,991 3,163 3,236 Source: Deutsche Bank, Company Data Deutsche Bank AG/London Page 63

66 23 September 216 Rating Buy Europe Netherlands Building & Construction Construction Company OCI N.V Reuters OCI.AS Bloomberg OCI NA Volume growth on track, M&A upside still on the cards. Buy Expansion main growth driver in a less supportive pricing environment 216 should be a transition year for OCI with depressed fertilizer prices. Despite low fertilizer price environment, OCI should record superior earnings growth (+18% CAGR over E vs. peers +2%) on the back of c.35% p.a. volume growth. The volumes are largely driven by new capacity (OCI Iowa/Natgasoline) as well as favorable base (215 volumes impacted by plant shutdowns in Europe/Algeria.) Higher margins (favorable gas prices and pricing premium for ammonia/uan in US Midwest region) are also supportive. Fertilizer prices weak; Mgt. expects current levels unsustainably low The key downside risk remains continued weakness in fertilizer prices, which were down c.3% YoY in 1H16 (after c.15% in 215). In 1H16 results conference call, Mgt. stated that current level of low fertilizer prices are unsustainable given significant percentage of producers (particularly in China) are operating below cost. Mgt. sees tightening of supply-demand balance from 2H17 as global supply additions start declining significantly, supporting fertilizer price recovery. M&A upside still on the cards; Iowa plant strategic for potential new buyers The key shareholder of OCI (Sawiris family) has a strong entrepreneurial track record and has already demonstrated its willingness to divest fertilizer assets. Now that deal with CF Industries has been abandoned, we still see OCI as potential beneficiary of global M&A theme. In our view, OCI s assets would be strategically attractive for Yara (presence in low cost US market, consolidation in European nitrates market, see details on P-32), while we cannot rule out other players also bidding for OCI s individual assets (CF or Agrium s interest in strategically located Iowa plant). Maintain Buy; premium multiples supported by higher growth We value OCI N.V. at EUR17/share using DCF 1.1%). On relative basis, OCI N.V. is trading at a premium valuation to global peers (22x 217E P/E vs. 12.5x for global peers) as full impact of higher growth should be visible in 218. (new capacity from Iowa and Natgasoline in US/improved utilization in Egypt). Key downside risks are fertilizer prices and demand/supply cycles. Athmane Benzerroug Research Analyst (+971) athmane.benzerroug@db.com Price at 22 Sep (EUR) Price Target (EUR) week range (EUR) Price/price relative /13 3/14 9/14 3/15 9/15 3/16 OCI N.V DJ (.STOXXE) (Rebased) Performance (%) 1m 3m 12m Absolute DJ (.STOXXE) Source: Deutsche Bank Stock & option liquidity data Market cap (EUR)(m) 4,51. Shares outstanding (m) 21 Free float (%) 46 Option volume (und. shrs., 1M avg.) Source: Deutsche Bank Forecasts and ratios Year End Dec A 215A 216E 217E Revenue (USDm) 2,686 2,186 2,126 2,735 EBITDA (USDm) EBITA (USDm) PBT DB (USDm) PBT stated (USDm) DB EPS (USD) DB EPS growth (%) P/E (DB EPS) (x) EV/EBITDA (x) EV/EBITA (x) DPS (USD).... Yield (%).... Source: Deutsche Bank estimates, company data Page 64 Deutsche Bank AG/London

67 23 September 216 Model updated:8 September 216 Running the numbers Europe Netherlands Construction OCI N.V Reuters: OCI.AS Buy Bloomberg: OCI NA Price (22 Sep 16) EUR Target Price EUR Week range EUR Market Cap (m) EURm 2,82 Company Profile USDm 3,169 OCI N.V. is a leading global fertilizer and chemicals producer based in the Netherlands. The company owns and operates nitrogen fertilizer/chemicals plants in Egypt, the Netherlands, the United States and Algeria and has an international distribution platform. Price Performance Sep 13 Mar 14 Sep 14 Mar 15 Sep 15 Mar 16 Margin Trends OCI N.V DJ (.STOXXE) (Rebased) E 17E EBITDA Margin Growth & Profitability Solvency EBIT Margin E 17E Sales growth (LHS) ROE (RHS) E 17E Fiscal year end 31-Dec E 217E Financial Summary DB EPS (USD) Reported EPS (USD) DPS (USD)..... BVPS (USD) Weighted average shares (m) Average market cap (USDm) 8,423 8,63 6,331 3,169 3,169 Enterprise value (USDm) 12,349 12,584 1,843 8,486 8,117 Valuation Metrics P/E (DB) (x) P/E (Reported) (x) nm P/BV (x) FCF Yield (%) nm nm nm nm 14. Dividend Yield (%)..... EV/Sales (x) EV/EBITDA (x) EV/EBIT (x) Income Statement (USDm) Sales revenue 6,132 2,686 2,186 2,126 2,735 Gross profit 1,188 1, ,64 EBITDA Depreciation Amortisation EBIT Net interest income(expense) Associates/affiliates Exceptionals/extraordinaries Other pre-tax income/(expense) -169 Profit before tax Income tax expense Minorities Other post-tax income/(expense) Net profit DB adjustments (including dilution) DB Net profit Cash Flow (USDm) Cash flow from operations Net Capex ,211-1, Free cash flow -1, Equity raised/(bought back) 161 Dividends paid Net inc/(dec) in borrowings Other investing/financing cash flows 2, Net cash flow 1,221-1, Change in working capital Balance Sheet (USDm) Cash and other liquid assets 2, Tangible fixed assets 4,918 5,272 5,914 5,194 4,934 Goodwill/intangible assets Associates/investments Other assets 3,36 3, Total assets 11,447 1,577 7,765 7,587 7,177 Interest bearing debt 6,66 5,41 4,93 4,4 3,833 Other liabilities 3,293 2,999 1,112 1,112 1,112 Total liabilities 9,359 8,4 6,15 5,512 4,945 Shareholders' equity 1,721 2,119 1,26 1,532 1,691 Minorities Total shareholders' equity 2,88 2,538 1,75 2,75 2,232 Net debt 3,8 4,163 4,97 3,735 3,366 Key Company Metrics Sales growth (%) DB EPS growth (%) EBITDA Margin (%) EBIT Margin (%) Payout ratio (%).. nm.. ROE (%) Capex/sales (%) Capex/depreciation (x) Net debt/equity (%) Net interest cover (x) Source: Company data, Deutsche Bank estimates Net debt/equity (LHS) Net interest cover (RHS) Athmane Benzerroug athmane.benzerroug@db.com Deutsche Bank AG/London Page 65

68 23 September 216 Rating Hold Middle East Saudi Arabia Chemicals Company SAFCO Reuters 22.SE Bloomberg SAFCO AB Weak pricing and higher feedstock prices= subdued outlook Safco largest MENA pure fertilizer (nitrogen based) producers Safco model is rather simple. It has access to one of the cheapest feedstocks globally associated gas in Saudi Arabia hence it generally operates at full capacity (baring any maintenance shutdown). Its growth (or lack of) solely depends on the evolution of ammonia/urea prices, which remain subdued, as highlighted in this report. Weak pricing environment + higher feedstock prices = subdued outlook In addition to the weak pricing environment, Safco s challenges are compounded by pressure on its feedstock prices which in December 215 were raised from USD.75/mmbtu to USD1.75/mmbtu. Furthermore, the Saudi government has announced initiatives to further reduce subsidies in the country and therefore additional increases for its natural gas in the medium term present a risk for the company. That said, for 217E we expect a strong recovery in sales and profits, 16% and 33%, respectively, mainly on volume recovery from an intense maintenance season in 216. Strong balance sheet, low capex supportive for maximizing dividend income With a solid net-cash position, no expansionary capex and minimal maintenance capex, Safco generally maintains 1+% dividend pay-out ratio, which at current prices translates to a dividend yield of 5.2%. Although its strong balance sheet could make Safco a strong contender to be an active participant in M&A, in our view, such moves are more likely to be carried out by its parent, Sabic, which still controls 43% of the company. Maintain Hold; dividend yield supportive despite weak near-term outlook We value Safco at SAR74/share using DCF (WACC 8.5%; terminal growth 2%). Main risks on the upside are strong recovery in urea/ammonia prices. On the downside, main risks are weak prices as well further increases in feedstock prices. Aleksandar Stojanovski Research Analyst (+971) aleksandar.stojanovski@db.com Price at 22 Sep (SAR) Price Target (SAR) week range (SAR) Price/price relative /14 3/15 9/15 3/16 SAFCO Tadawul All Share In (Rebased) Performance (%) 1m 3m 12m Absolute Tadawul All Share Index Source: Deutsche Bank Stock & option liquidity data Market cap (SAR)(m) 8,33.3 Shares outstanding (m) 417 Free float (%) Option volume (und. shrs., 1M avg.) Source: Deutsche Bank Forecasts and ratios Year End Dec A 216E 217E Revenue (SARm) 3,547 2,923 3,397 EBITDA (SARm) 2,415 1,566 1,953 EBITA (SARm) 2,14 1,11 1,492 PBT DB (SARm) 2,196 1,252 1,674 PBT stated (SARm) 2,196 1,252 1,674 DB EPS (SAR) DB EPS growth (%) P/E (DB EPS) (x) EV/EBITDA (x) EV/EBITA (x) DPS (SAR) Yield (%) Source: Deutsche Bank estimates, company data Page 66 Deutsche Bank AG/London

69 23 September 216 Model updated:11 July 216 Running the numbers Middle East Saudi Arabia Chemicals SAFCO Reuters: 22.SE Hold Bloomberg: SAFCO AB Price (21 Sep 16) SAR Target Price SAR Week range SAR Market Cap (m) SARm 28,854 Company Profile USDm 7,692 Saudi Arabia Company (SAFCO) is a Saudi Arabia-based petrochemical company engaged in the production, processing and marketing of chemicals, including ammonia, urea, melamine and sulfuric acid, which are distributed locally and internationally. The Company's ammonia and urea plant is located in Dammam, with an annual production of 2.3 million tons of ammonia and 2.6 million tons of urea. SABIC is the largest shareholder of SAFCO with 43% stake. Price Performance Sep 14 Mar 15 Sep 15 Mar 16 SAFCO Margin Trends Tadawul All Share Index (Rebased) E 17E EBITDA Margin Growth & Profitability Solvency EBIT Margin E 17E Sales growth (LHS) ROE (RHS) E 17E Fiscal year end 31-Dec E 217E Financial Summary DB EPS (SAR) Reported EPS (SAR) DPS (SAR) BVPS (SAR) Weighted average shares (m) Average market cap (SARm) 76,99 63,53 66,636 48,287 28,854 28,854 Enterprise value (SARm) 71,282 59,386 63,83 45,91 26,763 26,138 Valuation Metrics P/E (DB) (x) P/E (Reported) (x) P/BV (x) FCF Yield (%) Dividend Yield (%) EV/Sales (x) EV/EBITDA (x) EV/EBIT (x) Income Statement (SARm) Sales revenue 4,98 4,24 4,456 3,547 2,923 3,397 Gross profit 3,956 3,253 3,44 2,486 1,629 2,19 EBITDA 3,869 3,171 3,343 2,415 1,566 1,953 Depreciation Amortisation EBIT 3,522 2,797 2,975 2,14 1,11 1,492 Net interest income(expense) Associates/affiliates Exceptionals/extraordinaries Other pre-tax income/(expense) 1 1 Profit before tax 3,973 3,273 3,254 2,196 1,252 1,674 Income tax expense Minorities Other post-tax income/(expense) Net profit 3,866 3,16 3,174 2,13 1,211 1,617 DB adjustments (including dilution) DB Net profit 3,866 3,16 3,174 2,13 1,211 1,617 Cash Flow (SARm) Cash flow from operations 3,99 3,278 3,175 2,696 1,639 1,966 Net Capex , Free cash flow 3,242 2,177 2,58 1,917 1,81 1,458 Equity raised/(bought back) Dividends paid -3,236-3,975-3,313-2,242-1, Net inc/(dec) in borrowings Other investing/financing cash flows Net cash flow 314-1, Change in working capital Balance Sheet (SARm) Cash and other liquid assets 3,594 2,14 1,64 1,46 1,81 1,76 Tangible fixed assets 3,5 4,32 4,896 5,173 5,221 5,269 Goodwill/intangible assets Associates/investments 1,263 1,528 1, ,1 1,1 Other assets 1,531 1,255 1,195 1,462 1,546 1,666 Total assets 1,32 9,46 8,925 9,12 8,858 9,651 Interest bearing debt 4 Other liabilities 1,135 1,191 1,63 1,416 2,697 2,77 Total liabilities 1,175 1,191 1,63 1,416 2,697 2,77 Shareholders' equity 8,857 8,269 7,862 7,596 6,161 6,944 Minorities Total shareholders' equity 8,857 8,269 7,862 7,596 6,161 6,944 Net debt -3,554-2,14-1,64-1,46-1,81-1,76 Key Company Metrics Sales growth (%) DB EPS growth (%) EBITDA Margin (%) EBIT Margin (%) Payout ratio (%) ROE (%) Capex/sales (%) Capex/depreciation (x) Net debt/equity (%) Net interest cover (x) nm nm nm nm nm nm Source: Company data, Deutsche Bank estimates Net debt/equity (LHS) Net interest cover (RHS) Aleksandar Stojanovski aleksandar.stojanovski@db.com Deutsche Bank AG/London Page 67

70 23 September 216 China Page 68 Deutsche Bank AG/London

71 23 September 216 Rating Buy Asia Hong Kong Energy Chemicals Company China BlueChemical Reuters 3983.HK Bloomberg 3983 HK Vitus Leung Research Analyst (+852 ) vitus.leung@db.com Price at 22 Sep (HKD) Price target - 12mth (HKD) week range (HKD) HANG SENG INDEX 23,76 Lower production cost remains attractive. Buy CBC remains as our China fertilizer pick with competitive production cost We continue to rate China BlueChem (CBC) Buy with a TP of HK$2.1; we like CBC for being as a low cost urea producer on a longer term basis despite some production disruptions in 216E/17E. CBC is able to resolve gas supply concern and signed a new natural gas supply contract with CNOOC for the DF13-2 gas field at a fair pricing, which DF13-2 is a large-size gas field and will ensure enough gas supply from 2H18 till 23. On the other hand, China urea capacity removal has sped up with c.2mntpa capacity removed in 215 and another c.4mntpa in 1H16. China urea daily output declined to 16kt from 2kt in August. Moreover, CNFIA (China Nitrogen Fertilizer Industry Association) targets to phase out 16mntpa urea capacity by 22 via marketdriven methods plus stricter environmental protection requirements. Valuation The stock trades at significant discount on P/B and P/B to global peers weight average, and are below its -1 stand deviation of historical average, we believe it already reflecting the upcoming negatives, in our view. We derive our price target by using DCF, assuming WACC of 8.3% (based on beta of.95, ERP of 5.6%, and RFR of 3.9%) and terminal growth of 1% based on balance of long term global and China fertilizer consumption growth rate. Risk Key risks to our rating are: 1) a higher-than-expected increase in the natural gas price contract for the Fudao I urea plant, 2) volatility of fertilizer and methanol prices, 3) further asset write-down (such as interest in Western Potash) and 4) any policy and initiative issue by the NDRC for the 13th Five Year Plan. Price/price relative /14 3/15 9/15 3/16 China BlueChemical HANG SENG INDEX (Rebased) Performance (%) 1m 3m 12m Absolute HANG SENG INDEX Source: Deutsche Bank Forecasts and ratios Year End Dec A 215A 216E 217E 218E Sales (CNYm) 1, , ,66.2 9,93.8 9,565.5 EBITDA (CNYm) 2, ,194. 1, , ,37.4 Reported NPAT (CNYm) Reported EPS FD(CNY) DB EPS FD(CNY) DB EPS growth (%) Price/Book (x) PER (x) EV/EBITDA (x) DPS (net) (CNY) Yield (net) (%) Source: Deutsche Bank estimates, company data Deutsche Bank AG/London Page 69

72 23 September 216 M odel updated: 3 M ay 216 Fiscal year end 31-Dec E 217E 218E Running the Numbers Asia Hong Kong Chemicals China BlueChemical Reuters: 3983.HK Buy Target price 52-w eek Range C o mpany P ro file Bloomberg: 3983 HK Price (22 Sep 16) HK$ 1.45 Market Cap China BlueChemical Limited, a subsidiary of CNOOC Group, is principally engaged in the development, production, sales, and export of urea and phosphate fertilizers and chemical products. 1yr Price Performance Sep-15 Dec-15 Mar-16 Jun-16 M argin Trends Growth & Profitability Solvency HK HK$ 2.1 HK$ HANG SENG INDEX (Rebased HK$ 6,685m US$ 862m E 17E 18E EBITDA M argin EBIT M argin E 17E 18E Sales growth (LHS ROE (RHS) E 17E 18E Net debt/equity (LHS Net interest cover (RHS Financial Summary DB EPS (CNY) Reported EPS (CNY) DPS (CNY) BVPS (CNY) Weighted average shares (m) Average market cap (CNYm) Enterprise value (CNYm) Valuation Metrics P/E (DB) (x) P/E (Reported) (x) P/BV (x) FCF Yield (%) Dividend Yield (%) EV/Sales (x) EV/EBITDA (x) EV/EBIT (x) Income Statement (CNYm) Sales revenue 1,797 1,672 9,66 9,94 9,565 Gross profit 3,541 2,636 1,84 2,167 2,565 EBITDA 2,7 2,194 1,316 1,677 2,37 Depreciation Amortisation EBIT 1,844 1, ,122 Net interest income(expense) Associates/affiliates Exceptionals/extraordinaries -1,26 Other pre-tax income/(expense) 8-22 Profit before tax 113 1, ,89 Income tax expense M inorities Other post-tax income/(expense) Net profit DB adjustments (including dilution) DB Net profit Cash Flow (CNYm) Cash flow from operations 1,738 1, ,448 1,686 Net Capex -1, , -1, -1, Free cash flow , Equity raised/(bought back) Dividends paid Net inc/(dec) in borrowings 1,996-1, Other investing/financing cash flows 554 1, Net cash flow 2, , Change in working capital , Balance Sheet (CNYm) Cash and other liquid assets 5,526 5,314 3,295 3,632 4,7 Tangible fixed assets 9,99 9,783 9,96 1,19 1,122 Goodwill/intangible assets 1,6 1,123 1,72 1,54 1,35 Associates/investments Other assets 2,893 3,522 3,975 3,993 4,95 Total assets 19,939 2,212 18,717 19,167 19,791 Interest bearing debt 2, Other liabilities 3,1 4,363 3,21 3,7 3,3 Total liabilities 5,19 5,33 3,921 3,97 3,93 Shareholders' equity 13,6 13,855 13,77 14,92 14,581 M inorities 1,15 1,26 1,89 1,167 1,281 Total shareholders' equity 14,749 14,882 14,795 15,259 15,861 Net debt -3,436-4,347-2,395-2,732-3,17 Key Company Metrics Sales growth (%) na DB EPS growth (%) na EBITDA M argin (%) EBIT M argin (%) Payout ratio (%) ROE (%) Capex/sales (%) Capex/depreciation (x) Vitus Leung Net debt/equity (%) vitus.leung@db.com Net interest cover (x) Source: Company data, Deutsche Bank estimates , ,61 4, , ,748 11,97 6,226 3, , nm ,61 4,61 5,748 5,748 3,714 3, Page 7 Deutsche Bank AG/London

73 23 September 216 Rating Hold Asia China Energy Chemicals Company Sinofert Reuters 297.HK Bloomberg 297 HK Vitus Leung Research Analyst (+852 ) vitus.leung@db.com Price at 22 Sep (HKD) Price target - 12mth (HKD) week range (HKD) HANG SENG INDEX 23,76 Constrained by weak industry backdrop. Hold Sinofert suppressed by the industry backdrop; shifting to higher margin products We maintain our Hold rating on Sinofert with TP of HK$1.1. Sinofert will be constrained by the industry backdrop; in particular that Chinese government is keen to curb excessive use of fertilizer which restricts chemical fertilizer consumption to grow at 1% CAGR in Positively, Sinofert s management expects its GPM will gradually improve from 6.4% in 215 to 7.7% in 218E by shifting to higher margin products instead. Also, Sinofert plans to restructure its non-performing manufacturing assets to move forward into the high value-added fertilizer production, like water-soluble-fertilizer and control released fertilizer. Valuation Our revised SOTP derived PT of HK$1.1 implies 13x /.5x FY16E P/E and P/B. Despite a depressed multiple (currently trading 2% below average historical P/B), we believe Sinofert is currently fairly valued given that its ROIC is below the cost of capital. Hence, we keep our Hold rating. Risk Key up/downside risks to Sinofert: 1) fertilizer price volatility; 2) unanticipated corporate actions; 3) the NDRC's 13th Five-Year Plan initiatives. Price/price relative /14 3/15 9/15 3/16 Sinofert HANG SENG INDEX (Rebased) Performance (%) 1m 3m 12m Absolute HANG SENG INDEX Source: Deutsche Bank Forecasts and ratios Year End Dec A 215A 216E 217E Sales (CNYm) 28, , , ,181.2 EBITDA (CNYm) ,154.3 Reported NPAT (CNYm) Reported EPS FD(CNY) DB EPS FD(CNY) DB EPS growth (%) Price/Book (x) PER (x) EV/EBITDA (x) DPS (net) (CNY) Yield (net) (%) Source: Deutsche Bank estimates, company data Deutsche Bank AG/London Page 71

74 23 September 216 Model updated: 6 April 216 Fiscal year end 31-Dec E 217E Running the Numbers Asia China Chemicals Sinofert Reuters: 297.HK Hold Target price 52-w eek Range Company P rofile Bloomberg: 297 HK Price (22 Sep 16) HK$ 1.5 Market Cap Sinofert is the flagship fertilizer company of Sinochem Corporation. The company's major businesses include production, import, export, and distribution of wholesale and retail of fertilizer raw materials and fertilizer products. Sinofert has more than 2, distribution outlets in China. 1yr Price Performance 2 1 Sep-15 Dec-15 Mar-16 Jun-16 Margin Trends Growth & Profitability Solvency HK HK$ 1.1 HK$ HANG SENG INDEX (Rebased HK$ 7,376m US$ 951m E 17E EBITDA M argin EBIT M argin E 17E Sales growth (LHS ROE (RHS) E 17E Net debt/equity (LHS Net interest cover (RHS Financial Summary DB EPS (CNY) Reported EPS (CNY) DPS (CNY) BVPS (CNY) Weighted average shares (m) Average market cap (CNYm) Enterprise value (CNYm) Valuation Metrics P/E (DB) (x) P/E (Reported) (x) P/BV (x) FCF Yield (%) Dividend Yield (%) EV/Sales (x) EV/EBITDA (x) EV/EBIT (x) Income Statement (CNYm) Sales revenue 34,722 28,311 26,121 26,181 27,181 Gross profit 1,279 1,418 1,669 1,816 1,991 EBITDA ,154 Depreciation Amortisation EBIT Net interest income(expense) Associates/affiliates Exceptionals/extraordinaries Other pre-tax income/(expense) Profit before tax Income tax expense M inorities Other post-tax income/(expense) Net profit DB adjustments (including dilution) DB Net profit Cash Flow (CNYm) Cash flow from operations 68 1, Net Capex Free cash flow Equity raised/(bought back) Dividends paid Net inc/(dec) in borrowings -84-1,55 3, Other investing/financing cash flows , Net cash flow Change in working capital 1,4 1, Balance Sheet (CNYm) Cash and other liquid assets Tangible fixed assets 1,214 1,19 1,158 1,158 1,158 Goodwill/intangible assets 4,124 4,596 4,76 5,296 5,612 Associates/investments 9,159 9,373 12,675 12,994 13,458 Other assets 8,969 9,589 8,561 8,543 8,838 Total assets 23,829 25,211 27,739 28,487 29,434 Interest bearing debt 3,911 2,899 6,274 6,134 6,24 Other liabilities 6,625 8,93 8,389 8,47 8,713 Total liabilities 1,536 11,829 14,663 14,541 14,917 Shareholders' equity 13,87 13,315 13,27 13,835 14,36 M inorities Total shareholders' equity 13,293 13,382 13,76 13,946 14,517 Net debt 3,548 2,436 5,634 5,637 5,836 Key Company Metrics Sales growth (%) na DB EPS growth (%) na nm EBITDA Margin (%) EBIT Margin (%) Payout ratio (%) nm ROE (%) Capex/sales (%) Capex/depreciation (x) Vitus Leung Net debt/equity (%) vitus.leung@db.com Net interest cover (x) nm nm Source: Company data, Deutsche Bank estimates ,77 nm nm ,24 7, , ,675 3, ,683 nm , nm nm ,24 7,24 6,343 6, , Page 72 Deutsche Bank AG/London

75 23 September 216 Rating Hold Asia China Energy Chemicals Company QSLI Reuters 792.SZ Bloomberg 792 CH Dragged by chemical losses. Hold Vitus Leung Research Analyst (+852 ) vitus.leung@db.com Price at 22 Sep (CNY) Price target - 12mth (CNY) week range (CNY) Shenzhen Index 2,111 Price/price relative 5 4 QSLI to continue dragged by chemical losses We rate QSLI as a Hold with a TP of RMB2.. QSLI is the largest potash producer in China with a competitive cost edge, but sluggish potash demand, potash ASP, and the non-performing chemicals business prevent us from having a more positive view. China potash demand dropped by 2% yoy (March July 16) while production is down 5% yoy and imports are down 34% yoy, mainly driven high inventory levels. In the medium term, we expect QSLI s ROE to improve from 2.8% in 215 to 7.8% in 217E on the back of: 1) sales volume growth; 2) narrowing losses in the chemicals segment. That said, the lithium battery partnership with BYD should inject some imagination into the brine refining business, although the chemicals segment remains a key drag to QSLI s profitability. Valuation The stock trades at a significant premium to the average of its global peers on a P/E basis but at a discount on a P/B basis. Our price target is based on a DCF with a WACC of 6.3% (based on a beta of.91, an ERP of 5.6%, an RFR of 3.9%) and terminal growth of 2%. Our terminal growth assumption is in line with long term global fertilizer demand growth. Risk The key upside risks to our assumptions and rating: 1) any delay or cancelation of new potash capacity by its global peers leading to better-than-expected potash prices; 2) global potash production discipline, resulting in better-thanexpected potash prices; 3) a stronger-than-expected recovery in chemical product prices; 4) further cut in gas prices; 5) unanticipated capacity expansion of magnesium and lithium; and 6) divestment of non-core assets. The key downside risks to our assumptions and rating: 1) a further drop in potash prices; 2) a delay of the 1.5mnton new potash capacity; 3) a further decline in commodity prices leading to lower chemical prices and margins; 4) an increase in natural gas prices; 5) transportation issues; and 6) asset writedowns /14 3/15 9/15 3/16 QSLI Shenzhen Index (Rebased) Performance (%) 1m 3m 12m Absolute Shenzhen Index Source: Deutsche Bank Forecasts and ratios Year End Dec A 215A 216E 217E 218E Sales (CNYm) 1, , , , ,882. EBITDA (CNYm) 3, , , ,68.8 6,554.6 Reported NPAT (CNYm) 1, , , ,393. Reported EPS FD(CNY) DB EPS FD(CNY) DB EPS growth (%) Price/Book (x) PER (x) EV/EBITDA (x) DPS (net) (CNY) Yield (net) (%) Source: Deutsche Bank estimates, company data 1 This is the 1st footnote 2 This is the 2nd footnote Deutsche Bank AG/London Page 73

76 23 September 216 Model updated: 22 June 216 Fiscal year end 31-Dec E 217E 218E Running the Numbers Asia China Chemicals QSLI Reuters: 792.SZ Hold Target price 52-w eek Range Company P rofile Bloomberg: 792 CH Price (22 Sep 16) CNY Market Cap QSLI is the largest potash fertilizer (M OP) manufacturer in China with 3.5mntpa of capacity and its new 1.5mntpa capacity is expected to come onstream for a production trial in 2H16, which would boost capacity by 43%. 1yr Price Performance CNY 2. CNY Sep-15 Dec-15 Mar-16 Jun-16 Margin Trends Growth & Profitability Solvency SZ CNY 3,665m HANG SENG INDEX (Rebased US$ 4,598m E 17E 18E EBITDA M argin EBIT M argin E 17E 18E Sales growth (LHS ROE (RHS) E 17E 18E Net debt/equity (LHS Net interest cover (RHS Financial Summary DB EPS (CNY) Reported EPS (CNY) DPS (CNY) BVPS (CNY) Weighted average shares (m) Average market cap (CNYm) Enterprise value (CNYm) Valuation Metrics P/E (DB) (x) P/E (Reported) (x) P/BV (x) FCF Yield (%) Dividend Yield (%) EV/Sales (x) EV/EBITDA (x) EV/EBIT (x) Income Statement (CNYm) Sales revenue 8,95 1,474 1,882 11,975 15,131 16,882 Gross profit 4,164 5,397 5,69 6,21 7,666 8,671 EBITDA 2,751 3,397 3,652 4,459 5,681 6,555 Depreciation ,249 1,647 2,7 2,34 Amortisation EBIT 2,17 2,516 2,365 2,772 3,634 4,211 Net interest income(expense) ,12-1,76-1,47-1,39 Associates/affiliates Exceptionals/extraordinaries , Other pre-tax income/(expense) Profit before tax 1,431 1, ,76 2,581 3,161 Income tax expense M inorities Other post-tax income/(expense) Net profit 1,52 1, ,291 1,954 2,393 DB adjustments (including dilution) DB Net profit 1,52 1, ,291 1,954 2,393 Cash Flow (CNYm) Cash flow from operations 134 1, ,942 5,197 6,13 Net Capex -9,548-7,498-5,119-5, -1, -1, Free cash flow -9,414-6,142-4,366-1,58 4,197 5,13 Equity raised/(bought back) 15 4,862 Dividends paid -1,948-2,166-2,579-1,29-1,248-1,286 Net inc/(dec) in borrowings 11,57 9,199 6,588 1, Other investing/financing cash flows ,227 Net cash flow , ,139 4,48 Change in working capital -2,876-2,276-3, Balance Sheet (CNYm) Cash and other liquid assets 2,331 3,282 9,31 8,754 11,893 16,31 Tangible fixed assets 4,946 53,118 61,594 64,947 63,94 62,636 Goodwill/intangible assets Associates/investments Other assets 11,9 1,176 8,759 9,21 1,513 11,235 Total assets 55,68 67,899 8,713 84,2 87,596 91,382 Interest bearing debt 29, 38,199 4,166 42,156 47,446 48,37 Other liabilities 8,62 1,421 16,65 16,375 12,683 13,679 Total liabilities 37,63 48,619 56,231 58,531 6,13 61,716 Shareholders' equity 16,41 17,685 22,911 24,69 25,822 27,969 M inorities 1,595 1,594 1,572 1,6 1,644 1,698 Total shareholders' equity 18,5 19,28 24,482 25,67 27,466 29,666 Net debt 26,669 34,916 31,135 33,42 35,553 31,736 Key Company Metrics Sales growth (%) na DB EPS growth (%) na EBITDA Margin (%) EBIT Margin (%) Payout ratio (%) ROE (%) Capex/sales (%) Capex/depreciation (x) Vitus Leung Net debt/equity (%) vitus.leung@db.com Net interest cover (x) Source: Company data, Deutsche Bank estimates ,591 33,24 6, nm , nm ,591 1, , ,665 62,879 7,96 65, , nm nm ,857 1,857 3,665 3,665 67,299 63, Page 74 Deutsche Bank AG/London

77 23 September 216 Deutsche Bank AG/London Page 75 Figure 16: Agrochemicals and Fertilizer valuations EPS P/E EV/EBITDA EV/Sales FCF Yield M. Cap Cur. Price Target Rec. 216E 217E 216E 217E 216E 217E 216E 217E 216E 217E (m, USD) Crop Protection Syngenta USD* Buy % 3.5% 4,75 Seeds Average % 3.8% Monsanto USD Buy % 3.8% 45,595 KWS Saat Euro na na 2,24 Vilmorin Euro na na 1,45 Agrochemicals Average % 3.7% Nitrogen Average % 5.8% Yara NOK Hold % -3.9% 9,173 Agrium USD na na 12,796 CF Industries USD na na 5,416 Acron RUB na na 2,187 OCI N.V Euro Buy nm 14.1% 3,179 China BlueChemical HKD Buy nm 7.8% 331 SAFCO SAR Hold % 5.1% 7,682 Potash Average % 2.3% K+S Euro Sell % -3.3% 3,855 Potash Corp USD na na 13,73 ICL" USD " Hold % -.2% 5,174 Intrepid Potash USD nm nm na na 83 Uralkali USD na na 8,317 Arab potash JOD na na 1,91 QSLI CNY Hold nm 11.7% 5,369 Phosphate Average % 6.8% Mosaic USD na na 8,947 Jordan Phosphate JOD na na 319 Phosagro USD Sell % 6.8% 5,235 Average % 4.8% Source: Deutsche Bank, Bloomberg Finance LP, Datastream. *Syngenta Share price in CHF, but the company reports in USD. "Israel Chemicals share price in ILS but the company reports in USD. OCI N.V share price is Euro but company reports in USD, Uralkali share prices is in Ruble but the company reports in USD

78 E 23 September 216 Appendix A: Soft commodity supply/demand Strong harvests driving increased crop supply Crop inventories have been rising (corn in particular). Following a three-year period in of low stock-to-use ratios for the key crops, inventories started to rise through due to favourable weather (and therefore record yields) and lower demand for industrial use (US ethanol). For the 216/217 crop season, the USDA expects global corn stock to use ratio to increase by 3bps to 21.8% due to higher anticipated production in the US, Brazil, Argentina and South Africa more than offsetting the increase in global consumption (mainly from the US and China). Wheat is forecast to decrease by 2bps to 34% due to higher consumption (US, China and India) and a poor harvest in Western Europe, offsetting higher production in Russia and the US, although it nonetheless remains at its highest level since 21. Soybean is forecast to see a second year of decline (-15bps to 22% following a 31bps decline in 215/216) due to higher consumption (China and India). Figure 17: Stock-to-use ratios 5% 45% 4% 35% 3% 25% 2% 15% 1% 5% % Corn Rice Wheat Soybean Source: USDA, Deutsche Bank, *total stocks divided by consumption following three consecutive years of strong harvests. As shown on Figure 18to Figure 11, crop yields have been reaching record levels over the past four years in the key Northern Hemisphere growing regions (except Western Europe in 216) which largely explains why stock-touse ratios have been somewhat replenished. Whilst improvement in technology (e.g. seeds, crop protection, fertilizers, machinery etc) explains the ongoing yield improvements seen since the 6s, the improvement has not happened in a straight line. Yields are indeed volatile, due to weather patterns: ideal weather throughout the growing season drives bumper crops and conversely, adverse weather (e.g. severe drought or wet weather) drives production shortfalls. Page 76 Deutsche Bank AG/London

79 September 216 Figure 18: Historic US corn yields(mt/ha) Figure 19: Historic EU wheat yields (mt/ha) Figure 11: Historic wheat yields in the FSU-12 (mt/ha) US corn yield (mt/ha) European Union wheat yield (mt/ha) FSU-12 wheat yield (mt/ha) Source: USDA, Deutsche Bank Source: USDA, Deutsche Bank Source: USDA, Deutsche Bank Yields remain sensitive to weather patterns After four years of weather supportive of yields, chances of adverse weather patterns unfolding are increasing. As seen on Figure 111 and Figure 112, yields have been rising since the 6s due to improvement technology (seeds, crop protection, fertilizers, machinery etc) but it hasn t happened in a straight line. Yields remain indeed very sensitive to weather patterns (such as La Niña) and better technology won t prevent a material fall in yields should extreme adverse weather (e.g. severe drought, wet weather/floods) unfold. Figure 111: La Niña and wheat and corn yields in EU 28 ( ) Figure 112: La Niña and wheat and corn yields in the US ( ) La Niña Wheat (Brazil) Corn (Brazil) La Niña Wheat (US) Corn (US) Source: USDA, Golden Gate Weather, Deutsche Bank Source: USDA, Golden Gate Weather, Deutsche Bank Deutsche Bank AG/London Page 77

80 E 23 September 216 La Niña chances have been reduced although it remains a possible upside The El Niño weather pattern, which came to an end in May 216, was responsible in the US for some of the warmest weather on record. We continue to believe that the weather system is now transitioning to La Niña, although we note that there is some ambiguity around this. While NOAA (National Oceanic and Atmospheric Administration in the US) reduced its September estimate of the chance of La Niña developing during autumn and winter 216/217 to 35-45% (55%-65% chance of neutral conditions) from 55-6% in August and c75% in June, the Japan Meteorological Agency estimate is at 7% and the Australian Bureau of Meteorology says a late and weak La Nina is still possible this year. La Niña has historically had a positive impact on crop prices in the US. During the last 1 cycles, US crop prices increased at least 6% of times. The average return on wheat was 8% per cycle, 14% on soybean and 24% on corn. Figure 113: Crop price performance during La Niña cycles ( ) US crop price change (USD) La Niña cycle Soybean Wheat Corn % 2% 1% (24%) (6%) (24%) (22%) 6% (16%) % 12% 87% (33%) (14%) (2%) % 2% (13%) 2-1 4% 8% 12% % 18% 113% % 24% 83% % 24% 11% Instances w here 7% 8% 6% price increased Average return 14% 8% 24% Source: Datastream, Golden Gate Weather, Deutsche Bank. Cycle prices return was calculated from 1Julyof first year to 1 July of next year Meat consumption and bio-fuel use driving demand Cereal consumption per capita has grown over the last decade Following a 2y period of decline (by -25bps p.a.), global cereal consumption per capita returned to growth in 23. It increased from 36kg in 22 to expected 342kg in 216E, representing an annual growth per capita of.8%. Figure 114: Global grain consumption (kg per capita, E) Source: Deutsche Bank, USDA, US Census Bureau. Note: Grain consumption comprises barley, corn, millet, mixed grain, oats, rice, rye, sorghum and wheat Page 78 Deutsche Bank AG/London

81 E Grain consumed (kg per capita) 23 September 216 driven by meat consumption and bio-fuels The increase in global grain consumption per capita by c1% p.a. over the last decade has been driven by bio-fuels and meat consumption, whereas food consumption remained broadly stable. We note the following takeaways: Food consumption, the largest category with 44% share of global grain consumption per capita in 215, remained broadly flat during the period. The bulk of growth in cereal consumption came from an increase in bio-fuel use, from 8.1kg per capita in 25 to 22kg per capita in 215 over the period (representing CAGR of 1.7% p.a.), primarily driven by legislation in developed countries. As a result, the proportion of US corn used for ethanol production increased from c5% in the 9s to 14% in 25 and 43% at the peak in 212 and is now at 36%. Use of grains as feed increased from 114kg per capita in 25 to 12kg per capita in 215 (representing CAGR of.5% p.a.). Growing affluence and increased meat consumption in the developing countries more than offset declines in feed use in the rich world. Figure 115: US corn usage in bio-fuels Figure 116: Total grain consumption by type (25-215) 6, 5, 4, 3, 2, 1, 5% 4% 3% 2% 1% % Corn used for ethanol production in the US, million bu (LHS) % of US corn used for ethanol production (RHS) Feed Food Other use Biofuel use Source: Deutsche Bank, USDA Source: Deutsche Bank, FAO, USDA. Note: Total consumption of wheat, maize, other coarse grains and rice per capita Meat consumption to remain key drivers of grain demand growth We expect cereal consumption per capita to continue to grow, mainly driven by population growth and increasing meat consumption in emerging markets. Whilst Bioethanol will remain a key end use for corn (due to the significant existing capacity and government legislation), we forecast limited incremental demand or bioethanol use due to relatively poor economics. Deutsche Bank AG/London Page 79

82 Total grain consumption (mt) 23 September Meat consumption Use of cereals as animal feed expected to grow faster than human consumption Global food and feed consumption of cereals was 1.97bn tons in 215 and is expected to increase to by 1.4% p.a. through 225E. FAO estimates that the use of cereals as feed will grow c3% faster than direct human consumption. Figure 117: Food and feed grain consumption ( E) 2,5 2, CAGR: 1.6% p.a. 1,5 1, 5 CAGR: 1.2% p.a E Food Feed Source: Deutsche Bank, FAO, USDA. Note: Total consumption of wheat, maize, other coarse grains Growing meat consumption in developing countries... As consumers become more affluent, they demand better quality food, which means a diet with higher consumption of meat, eggs and dairy products. Not surprisingly, economic growth has been accompanied by an increased demand for meat in the developing countries. This is most visible in China, where meat production grew by 7.4% p.a. in the 9s. While we note that the meat consumption growth in China has slowed down and the consumption per capita has exceeded global average, we expect it to remain robust, as China s average consumption per capita is still only half of that of the US. Figure 118: Rising meat production in China Sw ine Poultry Beef Figure 119: Significant potential for increasing meat consumption in emerging markets (kg/capita/year), 215 US EU Developed countries Latam China World Brics Developing countries Asia India Source: Deutsche Bank, USDA, Note: Beef includes Beef and Veal. Poultry includes Broiler and Turkey Source: Deutsche Bank, FAO. Note: Total consumption of beef, sheep, pork and poultry per capita Despite the changes in China, developing countries still significantly lag behind the rich world in meat consumption. Here, India is worth noting. Although, according to a 214 survey conducted by the Registrar General of India c3% of the population is vegetarian, and average meat consumption is still <3kg per person (less than 1% of global average), with >1bn population and rising income levels, we expect India to significantly contribute to growth in global demand for meat, albeit from a very low base. Page 8 Deutsche Bank AG/London

83 Jan-82 Jan-84 Jan-86 Jan-88 Jan-9 Jan-92 Jan-94 Jan-96 Jan-98 Jan- Jan-2 Jan-4 Jan-6 Jan-8 Jan-1 Jan-12 Jan-14 Jan (Kilos) 23 September 216 driving demand for grain feedstock Animal protein is more expensive than grain and therefore its consumption is highly correlated with income per capita levels. Livestock needs to consume several kilograms of soft grain feedstock in order to gain one kilogram of weight. The soft grain to protein transformation ratio is seven-to-one for beef, four-to-one for pork and two-to-one for poultry. Protein consumption per capita patterns vary from country to country with beef and chicken, for example, favored in the US, and pork dominating in China. Figure 12: Soft grain to protein conversion ratio Figure 121: Meat consumption per capita by type (215) Beef Pork Poultry 1 - US EU China India Beef and Veal Swine Chicken Turkey Source: Deutsche Bank, USDA and US Census Bureau Source: USDA, World Bank, DB. Note: Turkey data from 214. India data N/A for swine & turkey. 2. Bio-fuels High oil prices the key driver behind bio-fuel production capacity growth Ethanol prices are determined by the oil price level as shown in Figure 122. Both ethanol and oil prices have been under pressure since September 214, after a period of relatively high prices, which started in 21. Ethanol prices declined 48% from their 214 peak, while oil prices declined by 64 % from their 211 peak. During a period of high net returns per gallon 25-21, US ethanol capacity expanded by nearly 3-fold. However, once the bio-ethanol net return fell below USD.1 per gallon, further capacity expansion slowed down. Only 1bn gallons were added since 21, representing 7% of US capacity in that year. We estimate that a net return per gallon of around USD.1 is a threshold, above which capacity expansion makes economic sense. Figure 122: Ethanol and oil prices Figure 123: Annual growth in bio-fuel production and net return per gallon , 5, 4, 3, 2, 1, -1, Bioethanol, $ /gallon (LHS) Oil price, $/bbl (RHS) US ethanol capacity addition (million gallons, LHS) US bioethanol net retrun at market corn prices (USD/gallon, RHS) Source: EIA, Deutsche Bank, Datastream Source: EIA, Renewable Fuel Association, Deutsche Bank Deutsche Bank AG/London Page 81

84 September 216 Legislation driving demand, with Brazil and the U.S. currently more supportive of growth Bio-fuel demand is currently driven primarily by legislation, which sets blending targets for transport fuel in major economies. We note that new mandates in Brazil and the US are likely to have a stronger impact on bio-fuel consumption than EU legislation. In 215, Brazil increased its target for blend of ethanol in gasoline to 27% (from 25%) In 215, the U.S. EPA published its bio-fuel volume requirements for , with higher targets than levels proposed in June that year (although below the target set out in 27). Although the European Union targets 1% of transport fuel to come from renewable resources by 22, it imposed a 7% cap on contribution of food-based bio-fuels. In 214, renewable energy comprised only 5.9% of transport fuels in the EU; however, most of the growth in green transport will have to come from sources other than food-based grains, such as electric vehicles. Operating rates recovered following a period of overcapacity Bio-fuel production in the US increased 4-fold over the last decade to 15.6bn gallons in 215. Following a period of rapid expansion during (equivalent to nearly +3% p.a.), bio-fuel production growth sharply declined to c3% p.a., limited by capacity constraints, while the operating rates tightened to >95% in 214 and 215 due to limited capacity addition. In Brazil, bio-fuel production grew moderately since 28 (+2% p.a.) to 16.1bn liters in 215. In both countries bio-ethanol comprises the majority (c9%) of bio-fuel production. In the US, bio-ethanol is primarily made from corn and constitutes c4% of its use. Figure 124: US ethanol capacity and operating rate 18, 15, 12, 9, 6, 3, 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % US ethanol capacity (million gallons, LHS) Operating rate (RHS) Source: Renewable Fuel Association, Deutsche Bank Page 82 Deutsche Bank AG/London

85 September 216 Figure 125: Bio-fuel production in Brazil and the US (million liters) 7, 6, 5, 4, 3, 2, 1, *Brazil bio-fuels data available only since 26 Source: EIA, Deutsche Bank US biofuels production, million litres Brazil biofuels production, million litres* Figure 126: Share of bio-ethanol in bio-fuel production in Brazil and the US (215) 92% 88% 8% 12% US Brazil Biodiesel Bioethanol Source: EIA, Deutsche Bank Bio-ethanol is cheaper to make in the U.S. Corn has the highest bio-ethanol yield (gallons of bio-ethanol/ton of feedstock) it is 5x higher than sugarcane) Figure 127: Ethanol yields gallons / ton Corn - dry mill Barley 64.3 Sugar beets 24.8 Sugarcane 19.5 Source: USDA Due to Brazil s early adoption and long-standing commitment to ethanol, its costs associated with the production of bio-ethanol were lower than in N. America. In order to ensure that the domesticallyproduced bio-ethanol is cheaper than bio-ethanol imported from Brazil, the US government introduced 1) a duty on imports of bio-ethanol from Brazil, and 2) a tax break to domestic ethanol producers. It appears that the U.S. producers have bridged the cost gap. Our analysis suggests that the cost of producing ethanol in 214/215 was lower in the U.S. than in Brazil, despite removal of both the import duty and tax break in 212. Figure 128: US ethanol production cost (215) Figure 129: Brazilian ethanol production cost (214/215) USD/gallon Cash rent.51 Production inputs.99 Natural gas costs.16 Other variable costs.22 Total va ria ble cos t 1.88 Fixed costs.21 Total fixed a nd va ria ble c os ts 2.9 BRL/liter USD/gallon Sugarcane costs Other costs Total cost of ethanol production Source: USDA AMS Iowa Ethanol Report, ISU Ethanol Profitability, EIA Source: USDA, Datastream, Deutsche Bank. Note: The National Agricultural Confederation (CNA) and Continued Education Program in Economics and Management of Enterprises (PECEGE) report that production costs for anhydrous ethanol for 214/15 were estimated between at R$ /liter depending on the efficiency of the plant. Sugarcane is estimated to represent 6-7% of cost of producing ethanol Deutsche Bank AG/London Page 83

86 23 September 216 Appendix B: Fertilizer overview Basic fertilizers dominated nitrogen fertilizer demand The different types of nitrogen-based fertilizers can be classified into three main categories: 1) basic nitrogen-based fertilizers (ammonia, urea, ammonium nitrate, calcium ammonium nitrate (CAN), nitrogen solutions (mainly UAN), ammonium sulphate and ammonium bicarbonate), 2) multi-nutrient products (NPs, NPKs, etc) and 3) specialty fertilizers (calcium nitrate and potassium nitrate). Basic nitrogen-based fertilizers are the largest category and comprise c 75% of nitrogen fertilizer demand. Figure 13: Nitrogen consumption by fertilizer type Ammonia 4% Other 12% DAP/MAP 7% NPK 7% Urea 56% AN/CAN 9% UAN 5% Source: IFA 212 Product splits, Deutsche Bank, Note: The data does not include industrial nitrogen applications Fertilizer consumption While a variety of nutrients are necessary, the global fertilizer industry centers around the three primary nutrients nitrogen (manufactured through a chemical process), phosphorus and potassium (both mined). Nitrogen is produced from natural gas and may be applied to the soil in gaseous form (ammonia) or more commonly solid (urea, ammonium nitrate) or liquid (nitrogen solutions) form. Nitrogen is involved in protein formation and is a major component of chlorophyll. Use of nitrogen is critical in the improvement of crop size (growth and yield). Due to leaching and volatility losses, nitrogen must be applied every growing season except for certain crops, such as soybeans (fix nitrogen from the atmosphere). After nitrogen, phosphorus is the second most consumed plant nutrient and helps to promote crop quality through encouraging proper root growth, cell and also helps the plant resist drought. It is also helpful for plant growth and development such as ripening of Page 84 Deutsche Bank AG/London

87 23 September 216 seed and fruits. Phosphorous is vital to the transfer of energy during photosynthesis. The most common forms of commercial phosphorus fertilizers are monammonium phosphate (MAP), diammonium phosphate (DAP) and triple superphosphate (TSP). Potassium is used by plants improvement of crop quality through plant growth, starch activation, protein formation and other physiological functions. It also helps improve crop resistance to lodging, disease and drought. The most common form of potassium is potash (salt mined directly from underground and marine deposits). In addition to the primary nutrients discussed above, plants also need secondary nutrients like sulphur, magnesium and calcium and micro nutrients like chlorine, iron, manganese, boron, selenium, zinc, copper and molybdenum for optimum growth. Each nutrient performs a specific physiological function which cannot be replaced by other nutrients. Nitrogen is the most important nutrient. Of all the nutrients, nitrogen is the most important nutrient for the plants, accounting for 61% of total consumption. Each nutrient has its own set of benefits and is required for specific functions of the plants. Figure 131: Fertilizer consumption by nutrient type Potassium 16% Figure 132: Nutrients characteristics Fertilizer Primary benefit Application Industry structure Potassium, Phosphorus Improve crop quality Annual application not always done Fewer suppliers, production discipline Phosphorus 23% Nitrogen 61% Nitrogen Source: Deutsche Bank, Yara Increase crop size, Annual application Most important and critical commonly lacking nutrient Industry more fragmented, under consolidation, more volatile prices, but stable volume Source: IFA statistic seasons 213/14, Yara Source: Deutsche Bank Deutsche Bank AG/London Page 85

88 23 September 216 Appendix C: Nitrogen market at a glance Figure 133: Nitrogen fertilizer market is fragmented Figure 134: Nitrogen fertilizer usage globally Other non-chinese 43% Yara 6% CF industries Agrium 5% 2% TOAZ 2% PCS 2% Orascom 2% Eurochem 1% Uralchem 1% Koch 1% SABIC 1% DAP/MAP 7% Ammonia 4% UAN 5% NPK 7% Other 12% Urea 56% Chinese Players 34% AN/CAN 9% Source: Yara, Deutsche Bank Source: IFA 213 (nutrient total) and 212 (product split), Yara Figure 135: Nitrogen consumption in West/central Europe DAP/MAP 3% UAN 11% NPK 12% Source: Yara, Deutsche Bank Other 1% Urea 22% Nitrates 43% Figure 136: Nitrogen consumption in the US Nitrates 2% DAP/MAP 6% NPK 8% Urea 21% Source: Yara, Deutsche Bank estimates. Others 7% UAN 28% Ammonia 28% Figure 137: Nitrogen consumption in China Figure 138: Nitrogen consumption in India DAP/MAP 9% NPK 6% Others 2% DAP/MAP 15% NPK 2% Other 1% ABC 17% Urea 66% Urea 82% Source: Yara, Note: ABC stands for ammonium biocarbonate Source: Yara, Deutsche Bank Page 86 Deutsche Bank AG/London

89 India US Brazil Thailand Australia Mexico Turkey France Bangladesh China Qatar Russia Saudi Arabia Oman Iran UAE Ukraine Algeria Netherlands UK Grain yield (t/ha) 23 September 216 Figure 139: Nitrogen consumption in Brazil Figure 14: The more nitrate, the higher the yield NPK 8% Other 12% DAP/MAP 15% Urea 49% Nitrates 16% 8.2 Urea UAN CAN CN Source: Yara, Deutsche Bank Source: Levington Agriculture, UK (1999) 15 trails from on winter wheat in UK on a nitrogen application of 16kg/ha Figure 141: Nitrogen consumption by crop Roots/ Tubers Sugar 3% crops 4% Cotton 4% Oilseeds 7% Source: IFA, Deutsche Bank Fruits & veg 15% Other cereal 5% Others 12% Rice 15% Wheat 18% Corn 17% Figure 142: Global nitrogen consumption by country, 215E Germany 2% Others 29% France 2% Canada 2% Indonesia 3% Pakistan 3% Source: Fertecon, Deutsche Bank Brazil 3% US 11% China 29% India 16% Figure 143: Top 1 global urea importers (kt, 215) Figure 144: Top 1 global urea exporters (kt, 215) Source: Fertecon, Deutsche Bank Source: Fertecon, Deutsche Bank Figure 145: Nitrogen application (kg/ha) across regions and crops Country Corn Soybean Wheat Barley Rice Sugarcane USA na na na EU 14 na 118 na na na China 142 na 187 na 165 na Brazil 47 4 na na na 64 India na na 134 na 114 na Source: IFA (211/212 season, FAO 213, Deutsche Bank Deutsche Bank AG/London Page 87

90 23 September 216 Appendix D: Potash market at a glance Figure 146: Potash consumption by crop, EU-28 Figure 147: Potash consumption by crop, North America Other crops 31% Sugar crops 6% Oilseed 1% Corn 12% Fruits & Vegetables 14% Other coarse grains 14% Wheat 13% Sugar Crops 3% Cotton 3% Wheat 5% Other crops 24% Fruits & Vegetables 6% Soybeans 11% Corn 48% Source: Deutsche Bank, IFA Source: Deutsche Bank, IFA Figure 148: Potash consumption by crop, China Figure 149: Potash consumption by crop, Brazil 4% Wheat 4% Sugar crops 5% Oil seeds Corn 2% Other crops 7% Fruits & Vegetables 5% Cotton 4% Fruits & Vegetables 5% Other crops 14% Rice 4% Soybean 35% Rice 28% Corn 17% Sugar Crops 21% Source: Deutsche Bank, IFA Source: Deutsche Bank, IFA Figure 15: Potash consumption by crop, Southeast Asia Figure 151: Potash consumption by crop, India Fruits & Vegetables 12% Source: Deutsche Bank, IFA Corn 6% Other crops Sugar 1% crops 6% Rice 17% Oil seeds 49% Oil seeds 6% Wheat 8% Source: Deutsche Bank, IFA Other Corn coarse 1% garins 3% Cotton 5% Sugar crops 1% Other crops 11% Rice 34% Fruits & Vegetables 22% Page 88 Deutsche Bank AG/London

91 China Brazil U.S. India Indonesia Malaysia Vietnam Poland France Thailand Canada Russia Belarus Germany Israel Jordan Chile Spain Laos UK Potatoes 5cw t Corn 2 bu. Cotton 1,5lbs Rice 7,lbs. Soybeans 7bu. Wheat 8 bu. Pound per acre 23 September 216 Figure 152: Potash consumption by region, 214E Western Europe 1% North America 17% Central Europe /FSU 8% Africa 1% China 24% India 7% Figure 153: Potash (K2O) uptake for selected crops (Pounds per acre) Latin America 19% Rest of Asia 14% Yield per acre Source: Deutsche Bank, FAO Source: Deutsche Bank, Mosaic Figure 154: Top 1 global potash importers (kt, 215) Figure 155: Top 1 global potash exporters (kt, 215) Source: Fertecon, Deutsche Bank Source: Fertecon, Deutsche Bank Figure 156: Potash market overview by region Country Annualized growth rate (24-214E) China 3.7% Primarily contract Predominantly centralized Main purchasing method Structure Products sold Key consuming crops India 1.5% Contract Predominantly centralised, subsidised MOP standard MOP standard Other Asia 3.1% Spot market & contracts Private trade MOP standard and specialties Vegetables, rice, fruit, corn Rice, wheat, vegetables, sugar crops Oil palm, rice, sugar crops, fruits, vegetables Latin America 3.% Spot market Private trade MOP granular Soybeans, sugar crops, corn North America -.3% Spot market Private trade MOP granular and specialties Europe na Spot market & contracts Private trade with country specific regulations Source: Deutsche Bank, Potash Corp, K+S, FAO MOP granular and specialties Corn, soybeans Fruits and vegetables, coarse grains, wheat, corn and oil seeds Deutsche Bank AG/London Page 89

92 23 September 216 Appendix E: Nitrogen and potash production process Figure 157: Nitrogen fertilizer production process Natural Gas Air Ammonia plant NH 3 CO 2 Urea Air Nitric acid plant HNO 3 Ammonium nitrate Rock Nitrophosphate plant Calcium nitrate Salts of K, Mg, S NPK Rock Phosphoric acid plant H 2 SO 4 H 2 PO 4 DAP/MAP Rock Sulphuric acid plant Rock Triple Super Phosphate Source: Yara, Deutsche Bank Figure 158: Potash production process Ore from Mine Size Reduction Remove clay Flotation to separate Potash from salt Sizing Dewatering & drying Crystallization Compaction Soluble or Industrial Granular Standard Solid or Liquid Fertilizer Solid Fertilizer Solid Fertilizer Industrial Source: Deutsche Bank, Potash Corp Page 9 Deutsche Bank AG/London

93 23 September 216 Figure 159: Phosphate fertilizer process flow diagram phosphate rock sulphuric acid phosphoric acid ammonia Source: Company data TSP triple superphosphate DAP diammonium phosphate MAP monoammonium phosphate Deutsche Bank AG/London Page 91

94 23 September 216 The authors of this report wish to acknowledge the contribution made by Rajiv Dalal and Saurabh Mehndiratta, employees of Evalueserve, a third-party provider to Deutsche Bank of offshore research support services. Page 92 Deutsche Bank AG/London

95 23 September 216 Appendix 1 Important Disclosures Additional information available upon request Disclosure checklist Company Ticker Recent price* Disclosure Yara International ASA YAR.OL (NOK) 23 Sep 16 1,7,14 Syngenta SYNN.S (CHF) 23 Sep 16 1,6,7,9,14 K+S SDFGn.DE (EUR) 23 Sep 16 6,7,9,1,14 ICL ICL.TA (ILS) 22 Sep 16 NA *Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors. Other information is sourced from Deutsche Bank, subject companies, and other sources. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at Important Disclosures Required by U.S. Regulators Disclosures marked with an asterisk may also be required by at least one jurisdiction in addition to the United States. See Important Disclosures Required by Non-US Regulators and Explanatory Notes. 1. Within the past year, Deutsche Bank and/or its affiliate(s) has managed or co-managed a public or private offering for this company, for which it received fees. 6. Deutsche Bank and/or its affiliate(s) owns one percent or more of a class of common equity securities of this company calculated under computational methods required by US law. 7. Deutsche Bank and/or its affiliate(s) has received compensation from this company for the provision of investment banking or financial advisory services within the past year. 14. Deutsche Bank and/or its affiliate(s) has received non-investment banking related compensation from this company within the past year. Important Disclosures Required by Non-U.S. Regulators Please also refer to disclosures in the Important Disclosures Required by US Regulators and the Explanatory Notes. 1. Within the past year, Deutsche Bank and/or its affiliate(s) has managed or co-managed a public or private offering for this company, for which it received fees. 6. Deutsche Bank and/or its affiliate(s) owns one percent or more of a class of common equity securities of this company calculated under computational methods required by US law. 7. Deutsche Bank and/or its affiliate(s) has received compensation from this company for the provision of investment banking or financial advisory services within the past year. 9. Deutsche Bank and/or its affiliate(s) owns one percent or more of any class of common equity securities of this company calculated under computational methods required by India law. 1. Deutsche Bank and/or its affiliate(s) holds more than five per cent of the share capital of the company whose securities are subject of the research, calculated under computational methods required by German law (data as of the last trading day of the past month). For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at Deutsche Bank AG/London Page 93

96 Security Price 23 September 216 Analyst Certification The views expressed in this report accurately reflect the personal views of the undersigned lead analyst about the subject issuers and the securities of those issuers. In addition, the undersigned lead analyst has not and will not receive any compensation for providing a specific recommendation or view in this report. Virginie Boucher-Ferte/Jarek Pominkiewicz Historical recommendations and target price: K+S (SDFGn.DE) (as of 9/23/216) Sep 13 Dec 13 Mar 14 Jun 14 Sep 14 Dec 14 Mar 15 Date Jun 15 Sep 15 Dec 15 Mar 16 Jun 16 Previous Recommendations Strong Buy Buy Market Perform Underperform Not Rated Suspended Rating Current Recommendations Buy Hold Sell Not Rated Suspended Rating *New Recommendation Structure as of September 9,22 **Analyst is no longer at Deutsche Bank 1. 13/3/214: Sell, Target Price Change EUR /6/215: Upgrade to Hold, Target Price Change EUR /7/214: Sell, Target Price Change EUR /1/215: Hold, Target Price Change EUR /8/214: Sell, Target Price Change EUR /1/216: Hold, Target Price Change EUR /11/214: Sell, Target Price Change EUR /3/216: Hold, Target Price Change EUR /11/214: Sell, Target Price Change EUR /5/216: Hold, Target Price Change EUR /1/215: Sell, Target Price Change EUR /6/216: Hold, Target Price Change EUR /3/215: Sell, Target Price Change EUR /8/216: Hold, Target Price Change EUR /3/215: Sell, Target Price Change EUR26. Page 94 Deutsche Bank AG/London

97 Security Price 23 September 216 Historical recommendations and target price: ICL (ICL.TA) (as of 9/22/216) 35. Previous Recommendations Strong Buy Buy Market Perform Underperform Not Rated Suspended Rating Current Recommendations Buy Hold Sell Not Rated Suspended Rating 5. *New Recommendation Structure as of September 9,22. Sep 13 Dec 13 Mar 14 Jun 14 Sep 14 Dec 14 Mar 15 Date Jun 15 Sep 15 Dec 15 Mar 16 Jun 16 **Analyst is no longer at Deutsche Bank 1. 2/1/213: Hold, Target Price Change ILS26. Virginie Boucher- Ferte 9. 5/1/215: Hold, Target Price Change ILS24. Virginie Boucher- Ferte 2. 29/11/213: Hold, Target Price Change ILS27. Tim Jones 1. 25/11/215: Hold, Target Price Change ILS23. Virginie Boucher- Ferte 3. 13/2/214: Hold, Target Price Change ILS29. Virginie Boucher- Ferte /2/216: Hold, Target Price Change ILS2. Virginie Boucher- Ferte 4. 22/8/214: Hold, Target Price Change ILS28. Tim Jones 12. 4/4/216: Hold, Target Price Change ILS19. Virginie Boucher- Ferte 5. 28/11/214: Hold, Target Price Change ILS29. Tim Jones /5/216: Hold, Target Price Change ILS18. Virginie Boucher- Ferte 6. 27/3/215: Hold, Target Price Change ILS28. Virginie Boucher- Ferte 7. 14/5/215: Hold, Target Price Change ILS27. Virginie Boucher- Ferte 8. 12/6/215: Hold, Target Price Change ILS28. Tim Jones /6/216: Hold, Target Price Change ILS16.5 Tim Jones 15. 1/7/216: Hold, Target Price Change ILS16. Virginie Boucher- Ferte Deutsche Bank AG/London Page 95

98 Security Price 23 September 216 Historical recommendations and target price: Yara International ASA (YAR.OL) (as of 9/23/216) Sep 13 Dec 13 Mar 14 Jun 14 Sep 14 Dec 14 Mar 15 Date Jun 15 Sep 15 Dec 15 Mar 16 Jun 16 Previous Recommendations Strong Buy Buy Market Perform Underperform Not Rated Suspended Rating Current Recommendations Buy Hold Sell Not Rated Suspended Rating *New Recommendation Structure as of September 9,22 **Analyst is no longer at Deutsche Bank 1. 2/5/214: Sell, Target Price Change NOK23. Virginie Boucher-8. 2/12/215: Hold, Target Price Change NOK38. Tim Jones Ferte 2. 1/7/214: Sell, Target Price Change NOK25. Virginie Boucher-9. 22/2/216: Hold, Target Price Change NOK36. Virginie Ferte Boucher-Ferte 3. 22/8/214: Sell, Target Price Change NOK27. Tim Jones 1. 6/4/216: Hold, Target Price Change NOK34. Virginie Boucher-Ferte 4. 28/11/214: Sell, Target Price Change NOK28. Tim Jones /6/216: Hold, Target Price Change NOK32. Tim Jones 5. 8/1/215: Upgrade to Hold, Target Price Change NOK33. Virginie Boucher-Ferte 6. 12/2/215: Hold, Target Price Change NOK37. Virginie Boucher-Ferte 7. 5/1/215: Hold, Target Price Change NOK36. Virginie Boucher-Ferte 12. 1/7/216: Hold, Target Price Change NOK3. Virginie Boucher-Ferte /7/216: Hold, Target Price Change NOK28. Virginie Boucher-Ferte Page 96 Deutsche Bank AG/London

99 Security Price 23 September 216 Historical recommendations and target price: Syngenta (SYNN.S) (as of 9/23/216) Sep 13 Dec 13 Mar 14 Jun 14 Sep 14 Dec 14 Mar 15 Date Jun 15 Sep 15 Dec 15 Mar 16 Jun Previous Recommendations Strong Buy Buy Market Perform Underperform Not Rated Suspended Rating Current Recommendations Buy Hold Sell Not Rated Suspended Rating *New Recommendation Structure as of September 9,22 **Analyst is no longer at Deutsche Bank 1. 6/2/214: Buy, Target Price Change CHF4. Virginie Boucher /5/215: Buy, Target Price Change CHF45. Virginie Boucher- Ferte Ferte 2. 3/9/214: Buy, Target Price Change CHF38. Virginie Boucher /1/215: Buy, Target Price Change CHF4. Virginie Boucher- Ferte Ferte 3. 16/1/215: Buy, Target Price Change CHF35. Virginie Boucher- 7. 2/12/215: Buy, Target Price Change CHF43. Tim Jones Ferte 4. 4/2/215: Buy, Target Price Change CHF37. Virginie Boucher- Ferte Equity rating key Buy: Based on a current 12- month view of total share-holder return (TSR = percentage change in share price from current price to projected target price plus pro-jected dividend yield ), we recommend that investors buy the stock. Sell: Based on a current 12-month view of total shareholder return, we recommend that investors sell the stock Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not recommend either a Buy or Sell. Newly issued research recommendations and target prices supersede previously published research. Equity rating dispersion and banking relationships % 4 % 54 % 45 % 8 % 35 % Buy Hold Sell Companies Covered Cos. w/ Banking Relationship European Universe Deutsche Bank AG/London Page 97

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