OREANDA-NEWS. Fitch Ratings has upgraded JSC Acron's (Acron) Long-term Issuer Default Rating (IDR) to 'BB-' from 'B+'. The Outlook is now Stable. A full list of rating actions is available at the end of this commentary.

The upgrade to the IDR reflects Fitch's view that Acron's operational profile has fundamentally improved as a result of the ramp-up of the Oleniy Ruchey phosphate mine to sufficient levels to cover the group's internal needs. Acron's lack of self-sufficiency and previous full reliance on monopolistic producer OAO Apatit had been a key constraint on the ratings, which has now been mitigated by its in-house phosphate production.

The upgrade is also a reflection of Acron meeting our positive guidelines for a 'BB-,' largely driven by moderated capex to 2016, as well as rouble devaluation boosting earnings that offsets fertiliser pricing pressure. We forecast funds from operations (FFO) net adjusted leverage at 1.9x for 2015.

The Stable Outlook reflects strong earnings forecasts for Acron, following additional phosphate concentrate and ammonia output and the devaluation of the rouble, with an EBITDA margin of over 30% over the next three years.

KEY RATING DRIVERS

Phosphate Self-Sufficiency
The open-pit mine at Oleniy Ruchey ramped up to the full 1.1 million tonnes per annum (mtpa) capacity in 2014 since its commissioning in 2H12, and is now fully covering Acron's 0.7-0.8mtpa internal phosphate needs, with the remaining sold to external parties. This is a critical and credit-enhancing step for Acron, which had previously depended on monopolistic supplier OAO Apatit for its phosphate concentrate, which had a history of disruptions and price disputes. Acron continues to invest in Oleniy Ruchey with the second stage of the mine expansion project expected to increase capacity to 1.7mt by 2017.

Acron delayed the development of its up to USD1.7bn Verkhnekamsk Potash Company (VPC) project upon its license extension. This was largely due to the Oleniy Ruchey and Ammonia plant project taking priority as well as uncertainty around Potash pricing following the Uralkali-Belaruskali JV break-up in 2013. This gave the group flexibility to start production in 2021 instead of 2016 under the previous license and considerably reduces its external funding needs in the medium term. Once complete, the project is scheduled to deliver 2.6mtpa of potash and will comfortably cover Acron's in-house consumption of 0.6mtpa.

Rouble Devaluation Supports Deleveraging
We expect EBITDA margin to increase to around 34% in 2015 as a result of Acron's USD- linked revenues (around 80%) and rouble-linked costs (around 65%) benefiting from rouble devaluation, leading to strong FFO. This comes at a time of a challenging price environment in the nitrogen and compound fertiliser markets and continued large capex as Acron seeks to increase its self-sufficiency in phosphate and potash. The company's new efficient 700ktpa ammonia plant will begin contributing to earnings from 2016.

FFO net adjusted leverage is therefore forecast at 1.9x at 2015 and is expected to continue to decrease over 2016, assuming no sharp pricing movements and a continued weak rouble. Negative free cash flow (FCF) from 2017 will push leverage to over 2x in 2018, due to large capex requirements for the VPC potash project. However, excluding the VPC project, Fitch forecasts Acron to remain strongly FCF-positive and to deleverage to 1x FFO net adjusted leverage by 2018.

Weak Pricing Environment Continues
Fitch's prudent assumptions include no price recovery in the nitrogen, phosphate or potash segments over the next three years. With additional capacity entering the nitrogen and potash market in the short term, Fitch forecasts a squeeze on the margins and premium of fertiliser pricing, including complex fertiliser pricing. Volumes increases are expected to be driven by the company's new ammonia plant and higher sales from the Oleniy Ruchey phosphate mine.

Dividends to Normalise
A special dividend for 2013 was paid in 2014, a departure from the group's conservative stance resulting in negative FCF in 2014. Fitch forecasts dividends to decline to more normalised levels of around 30% of net income.

Opportunistic M&A activity remains possible but we do not forecast them to be material over the next three years. Acron holds a 20% (regulatory cap on voting rights) stake in Polish fertiliser producer Azoty Tarnow (ZAT), a 0.93% stake in Uralkali (BB+/Negative) as well as stakes in Canadian exploration permits.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:
- Reduced premiums on complex and nitrogen fertilisers
- EBITDA margin over 30% to 2018.
- Capex increasing to RUB37bn to 2018 from RUB18bn in 2015
- Dividends of 30% of net income
- No material acquisitions

RATING SENSITIVITIES

Positive: Future developments that could lead to positive rating action include:
- An enhanced operational profile as a result of self-sufficiency in potash, clear and sustainable deleveraging with FFO net adjusted leverage below 2x and continued prudency on financial investments.

Negative: Future developments that could lead to negative rating action include:
- Aggressive capex or shareholder distributions resulting in leverage sustained above 3x.
- Sustained materially negative FCF (excluding funding of the potash project).
- A sharp deterioration of market conditions or Acron's cost position with a sustained drop in EBITDA margin below 20%

LIQUIDITY AND DEBT STRUCTURE

Acron's liquidity improved during 1Q15 with the share of short-term debt decreasing to 32% at end-1Q15 from 62% at end-2014 as a result of the financing of a new USD525m five-year secured pre-export facility. Unutilised long-term credit facilities (end-1Q15: RUB10bn) as well as cash of RUB38bn at end-1Q15 and positive FCF in 2015 covered end-1Q15's short-term debt maturities of RUB30bn.

FULL LIST OF RATING ACTIONS

JSC Acron
--Long-term local and foreign currency IDRs upgraded to 'BB-' from 'B+';Stable Outlook
--National Long-term Rating upgraded to 'A+ (rus)' from 'A(rus)';Stable Outlook
--Short-term foreign currency IDR affirmed at 'B'
--Local currency senior unsecured rating upgraded to 'BB-'/'RR4' from 'B+'/'RR4'