potash -_k+s_redburn

K+SCapacity challenge8 July 2010

Tony Jones

Important notice:

See regulatory statement on page 48 of this report.

Important Note:

Thesis: K+S will disappoint investors hoping for a return to the abnormally high profits seen in 2008, with over 60% of sales to stagnant regions and industry capacity expanding at 5% per annum, relative to global demand growth of 4% per annum. The companys cost position remains inferior to all other major producers. The likely entry of BHP will make things even worse.

K+SCapacity challenge

Sell

> Expectations for potash pricing are too high: the current $370/tonne potash price offers suppliers an abnormally high return relative to the long-run $100/tonne average from 2000-06. Normalisation is a material risk. > Demand growth of 4% per annum but capacity expands at 5% per annum: our global potash consumption model by crop, country and application rate shows demand will not exceed 4% per annum, whereas capacity is being expanded by over 5% per annum. We include rising potash use in China, Brazil and Eastern Europe, but with farmed land expanding at barely 1%, and slowing, our demand growth forecasts may be excessive. > BHP will make matters worse: BHP is expected to sanction an eight million tonne potash mine in Canada, with output starting in 2015. Our NPV analysis of the project underlines the strategic fit for BHP. The impact on K+S from high quality mines at the low end of the cost curve will be material. > Capacity limitation a growth constraint: K+S mines are forecast to reach optimum capacity utilisation by 2012, so further revenue growth is geared to potash price inflation. Fertecon, the leading industry consultants, conclude Europe is the most stagnant potash market globally unfortunately where K+S generates >60% of sales. This is compounded by earnings struggling to grow over the long term, due to an inferior cost position predicated upon lower quality mine deposits. We commence coverage of K+S with a Sell recommendation, based on a fair value of 32/share. Our 2010/11 EPS forecasts are -9% and -10% lower than consensus and when compared to the mining sector, a P/E of 12.8x 2011 appears excessive.Fig 1: Consensus estimates expect even higher premiums 1995 to 2011E700 Cost / price $ per tonne 450 400 350 300 250 200 150 100 50 0

8 July 2010 Current Price: 38 Market Cap: 7.3bn Bloomberg: SDF GY Next News: H1 results, 12 August 2010

500 400 300 200 100 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010E2011E Potash price $/t Marginal cash costs $/t Market premium $/t

www.redburn.com Important Note: See Regulatory Statement on page 48 of this report.

Source: Company data, ICIS, Fertecon, Redburn Partners

Market premium $ per t

Tony Jones Tel: +44 (0)20 7000 2128 Mob: +44 (0)7912 649 946 [email protected]

600

Redburn Research

K+S 8 July 2010

Performance data Performance and summaryand summary dataCompany dataPrice Market capSource: Redburn Partners

Summary financials38 7.3bn Enterprise Value Recommendation 8.2bn Sell m Revenues EBITDA EBIT EPS adjusted Redburn EPS adjusted consensus % difference EBIT % EV/EBITDA EV/EBIT P/E FCF % 2007A 2008A 2009A 2010E 2011E 2012E 3,344 4,792 3,207 4,650 5,125 5,396 427 886 1,151 1,266 412 1,476 284 656 910 1,017 285 1,342 0.55 2.07 2.99 3.37 1.06 5.93 0.55 2.30 3.30 3.77 1.06 5.93 0% -10% -10% -11% 0% 0% 8.5% 28.0% 17.8 4.6 25.7 5.0 36.4 6.4 -4.0% 10.1% 8.9% 14.1% 17.7% 18.8% 20.0 9.3 6.9 6.1 30.0 12.6 8.8 7.5 73.4 18.4 12.8 11.3 1.9% 2.4% 6.3% 8.2%

Sales mix 2011E28% 25%

Germany

Rest of Europe

47% %

Overseas

Source: Company, Redburn Partners Source: Company, Redburn Partners

EBIT mix 2011E18% 4% 2%

Price and Estimates Momentum100 900 800 80 700 600 60 40 500 400 300 20 200 100

76% Potash Nitrogen Salt Complimentary

0Feb 05 Jul 05 Dec 05 May 06 Oct 06 Mar 07 Aug 07 Jan 08 Jun 08 Nov 08 Apr 09 Sep 09 Feb 10 Jul 10

0

Price M oment um

Est imat es M omentum

Price Relative to STOXX 600.(RH)

Source: Company, Redburn Partners

Source: www.redburn.com/ideas

Redburn vs consensus EPS4.0 Earnings /share 3.5 3.0 2.5 2.0 1.5 2010ESource: FactSet, Redburn Partners

EBIT margin vs free cash flow-9.0% -9.5% -10.0% -10.5% -11.0% -11.5% -12.0%1600 1400 1200 1000 800 600 400 200 0 -200 -400 2007 2008 2009 2010E 2011E FCF 2012E EBIT FCF% 15% 10% 5% 0% -5% FCF yield %

% difference

2011E

2012EConsensus EPS

Redburn EPS %diff


ROCE, WACC and EV/CE40% 35% 30% 25% 20% 15% 10% 5% 0% 2007 2008 2009 ROCE (post tax) % 2010E 2011E Cost of capital 2012E EV/IC 4.9 3.9 EV/IC 2.9 1.9 0.9 -0.1


4

ROCE or WACC %

Important Note: See Regulatory Statement on page 48 of this report.

EUR m

Redburn Research

K+S 8 July 2010

Executive summaryK+S offers the illusion of vast earnings potential, based upon extrapolation of the abnormally high profits in 2008, predicated upon rising agricultural demand and potash prices. In this report we analyse the main drivers which, on closer examination, offer no reason to be optimistic over the long run. Furthermore, we expect demand in 2010 to be muted in Europe, where the company generates over 60% of sales, with a material risk of near-term earnings downgrades. Analysts earnings estimates appear to be rising quickly, as many believe farm demand for potash fertilisers will recover strongly, outstripping supply and prompting a return to the unprecedented pricing power observed in the agflationary cycle of 2007-08. In contrast, however, we highlight the following factors as major risks of disappointment: > Short-term excessive supplier premium shows risk of deflation: our analysis of historic potash prices, industry cash costs and the resulting supplier premium indicates that $100/tonne was the average return from 2000 to 2006. But at the current $370/tonne market price, suppliers are extracting over double the normal premium, which suggests reversion is a potential risk as industry capacity builds. > Demand grows at 4% per annum, capacity expansion at 5% per annum: modelling global consumption of potash by crop, country and application rate shows demand will not exceed 4% per annum, whereas capacity is being expanded by over 5% per annum at the incumbents. Furthermore, the risk of demand falling below expectations comes from increasingly precise application of fertilisers by farmers, which suggests demand has, at best, stagnated in some regions. In addition, rising livestock demand in China requires more animal feed, which may prompt an increase in the amount of wheat and soy grown both low consumers of potash. > BHP will make matters worse: during the next few months BHP is expected to sanction the development of at least one potash mine in Canada and over 3.5 million tonnes of potash will be progressively available from the first phase, during 2015. Although some time away, markets will discount the impact of even more excess supply, with the company stating the new mine will be state-of-the-art and operate at the lowest end of the cost curve. > K+S potash output is constrained and geared to low growth: with insufficient financial muscle for a new mine, optimum mine capacity utilisation will be reached by 2012, thereafter limiting revenue growth to the hope of rising market prices. This may actually be a blessing as the company generates over 60% of potash sales in Europe, the region forecast by industry experts to have the slowest growth worldwide and not expected to fully recover until 2018. We argue consensus forecasts over-estimate the potential output from K+S. > Low profitability from an inferior cost position: K+S is already the marginal cost producer, with low quality German potash reserves and cash costs/tonne >60% higher than the industry average. As capacity continuously increases in Canada, China and Eastern Europe, we fear K+S will become priced out of the important growth markets and instead limited to stagnant demand in Europe. We commence coverage of K+S with a Sell recommendation based on a fair value of 32/share, which is 19% below the current share price. On a P/E of 12.8x 2011 and 11.3x 2012 earnings, we believe K+S only offers the potential for low output growth, the risk of near-term deflationary potash prices and an inferior cash cost position. Our earnings forecasts are -10%, -9% and -11% below consensus, from 2010-12, making the shares appear very expensive when compared to other commodity-geared stocks, such as mining companies, with vastly superior profitability but trading on multiples typically below 7x 2011 earnings.


5

Redburn Research

K+S 8 July 2010

Table of Table of contentscontentsPerformance and summary data .............................................................................................. 4 Executive summary.................................................................................................................... 5 Long-term industry deterioration ............................................................................................. 7 Global capacity to increase by over 5% per year until 2020 ........................................................ 7 No more than 4% demand growth expected per year ................................................................ 8 Global acreage expands at just over 1% .................................................................................. 11 Redburn potash growth model concludes growth will be 4% ................................................... 11 Less of an oligopoly than you think........................................................................................... 13 BHP Billiton to disrupt the potash cartel................................................................................. 15 Potash offers diversified growth for BHP .................................................................................. 15 The Jansen project .................................................................................................................. 17 The implications of BHP market entry....................................................................................... 18 Low expectations for recovery ............................................................................................... 21 Over 60% of K+S sales in low growth countries ....................................................................... 21 Europe the worlds most stagnant potash market.................................................................. 21 K+S may miss out on growth in China ..................................................................................... 22 K+S mine constraints prevent upside too ................................................................................. 23 Excessive premium above cash costs ................................................................................... 25 K+S cost position over 60% worse than peers ......................................................................... 25 Supplier premium remains abnormal, further deflation a risk ..................................................... 26 Recouping greenfield mine capex costs ................................................................................... 27 Correlations conclude over 10% downside........................................................................... 28 A poor correlation to potash implies K+S is fairly valued ........................................................... 28 A much stronger correlation to corn suggests 11% downside .................................................. 28 The oil correlation is even more worrying.................................................................................. 29 Valuation ................................................................................................................................... 30 An over-valued mining company .............................................................................................. 30 DCF valuation .......................................................................................................................... 31 Valuation multiples over the cycle............................................................................................. 32 Return on investment............................................................................................................... 34 Appendix on capacity additions.............................................................................................. 35 Appendix 1 Global potash mining capacity......................................................................... 35 Appendix 2 K+S sales by region........................................................................................... 39 Appendix 3 Potash capacity utilisation rates...................................................................... 40 Financial model ........................................................................................................................ 41

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Redburn Research

K+S 8 July 2010

Long-term industry deterioration Long-term industry deteriorationThe excessive valuation premium K+S shares command over higher-margin mining stocks is predicated upon the argument that the potash industry is oligopolistic in character. In contrast, analysis shows that global potash capacity will increase by >5% per annum from 2011 to 2015, with an additional 14% added from 2016. Our modelling of potash usage, by country, acreage, crop, and application rate concludes that 4% per annum demand growth will result, at best, from 2011 until 2018. Clearly, the obvious risk of excess capacity suggests inventory build up appears increasingly likely, which would be the simple reversion to industry dynamics pre-2004. Furthermore, China currently consumes >20% of all potash and of this 80% is used to fertilise rice, fruit and vegetables. However, the imminent problem is to raise animal feed output for rapidly rising livestock demand, due to dietary change. The potential acreage rotation towards soybeans or wheat would likely decrease the Chinese potash demand, as these crops require lower levels of fertilisation, therefore further exacerbating weakening industry attractiveness.

Global capacity to increase by over 5% per year until 2020Between 2010 and 2015, a vast sequence of mining projects are planned, partly to free some companies from looming capacity constraints, but also as new companies enter the market. However, the commentary from Potash Corp and K+S has suggested that a potash price less than $400/tonne would be too low to justify greenfield expansion, but this is now being contradicted by BHPs actions, and discussions with the company indicate that the current price range would be acceptable. Furthermore, Eurochem states that a $380 price will still generate a 12-15% IRR on the companys Greenfield project in Volgograd.Fig 2: Potash industrial capacity additions from 2005-20E70,000 60,000 Agrium Global potash capacity / mT 50,000 40,000 30,000 20,000 10,000 Other 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 APC ICL Silvinit Urakali K&S Belaruskali Mosaic Potash Corp BHP Qinghai Saltlake

Source: Fertecon, Redburn Partners

Of the major suppliers, four of the top eight have announced expansion projects to increase output by an additional 2.3 million tonnes from brownfield sites by 2012. However, the most concerning issue for the industrys weaker companies is the strategic plan by BHP Billiton, Vale and various Chinese independents to boost global potash capacity by over 40% by 2020, as shown above in Fig 2, with key mines becoming operational by 2015.


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Redburn Research

K+S 8 July 2010

Long-term industry deterioration

Even with postponements, annual growth is above demandDue to the turbulent economic outlook, there has been speculation that some projects would be postponed, perhaps even indefinitely. However, while we accept that a few companies hastily announced expansion at the peak of the commodity super-cycle, the majority of projects appear to be intact. However, attracted by on going high margins, Fertecon has concluded that industry capacity is now growing at over 5% per year, even excluding various projects in Africa, Asia and South America, which are in early assessment phases. Including these mines would boost output to >6% growth per year. Over the longer term, the rationale for the expansion wave although challenged by Potash Corp and K+S is that the returns on the current potash price are sufficient to justify new greenfield mines, as the current price generates a premium above cash costs, which is far above the historic norm. This is explored in more detail on page 26. Those companies with access to state-of-the-art processes and a balance sheet capable of financing the rapid development of large mines and distribution hubs observe potash as an attractive industry, where barriers to entry are lower than many believe. For K+S, which has been the major European potash company for over 120 years, local potash sales in 2009 were very volatile (>60% of sales were made in Europe) due to the recession and weaker farming returns, but also a high legacy nutrient content of soils in many cases. Demand has recovered partially in 2010, but this volatility may be difficult for the company to offset as less effort is being made by K+S to develop sales in China.

No more than 4% demand growth expected per yearAlthough we feel it is imperative to understand the outlook for potash capacity and industry output, it is equally important to examine the underlying drivers for demand growth. The companies have suggested that the need to improve farming productivity will result in near-perpetual consumption growth for fertilisers. While we agree that the desire to increase crop yields is an important consideration, there are many options available to the agricultural industry and investment in biotechnology, machine intensification and irrigation may be the most effective routes for some geographies. To examine the outlook for potash in detail, we have constructed a demand growth model, which introduces three major variables below: > Potash usage by crop type: the financial markets focus almost exclusively upon the future prices of corn as a measure of healthy demand for farming inputs. In reality, barely 15% of total potash is used to cultivate corn, but over 20% is applied to grow fruit and vegetables, due to their (typically) intensive water-uptake. > Geographic consumption of potash: the use of fertilisers is clearly influenced by the crop types cultivated on a regional basis, but this is also influenced by local climate (drier climates are likely to demand additional potash levels, to optimise plant water-uptake) and local farm profitability. Fig 3 below details the regional imports, exports and local consumption. Note our growth assumptions already recognise that some of the drier regions need to increase potash demand to improve yield, so further upside appears limited in our view.

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Redburn Research

K+S 8 July 2010


Fig 3: Regional potash trade and consumption in 2008Region West Europe Central Europe East Europe North America South America Africa Middle East South Asia East Asia Oceania TotalSource: IFA, Redburn Partners

Imports 11.0% 3.7% 1.1% 17.8% 19.2% 1.5% 0.9% 9.7% 34.1% 1.0% 100.0%

Exports 13.3% 0.0% 36.2% 39.0% 0.1% 0.0% 11.3% 0.0% 0.0% 0.0% 100.0%

Consumption 12.2% 3.1% 5.8% 14.2% 18.6% 1.2% 1.3% 8.1% 34.6% 0.9% 100.0%

> Application rate growth by country: local climate, government support, but also trade links are influential in agriculture, for determining the proportion of GDP, but also impacting the likely farmer returns possible for different crops. An interesting case is China, where the average operating profit per acre is vastly different between grains and fruit crops, as shown below in Fig 4. As an aside, we think it is worth considering the implications of this disparity, as the economic incentive for farmers to adjust crop type over the long term may progressively reduce grain output, while acreage may be slowly switched to higher margin fruit and vegetables. Whilst it takes time to develop fruit plantations, in many cases the motivation appears considerable and we already observe contracting corn and rice acreage in China at the expense of industrialisation, but also conversion to more profitable crops. Not all land may be suitable for such a change, but new varieties are being bred by the leading seed companies, such as Syngenta, which aim to meet local demands, soil types and regional climate.Fig 4: Average farm operating profits by crop type in China, 2006-084,500 4,000 3,500 $ per acre 3,000 2,500 2,000 1,500 1,000 500 0 Soyabeans Wheat Corn Rice Tobacco Cotton Oranges Cauliflower Apples Peppers Aubergine Cucumber Tomato

Source: Economic Research Service, Redburn Partners

However, the increasing need for livestock in China drives up demand for animal feed, which would force farmers to plant more soybeans and wheat crops with a low potash demand. So although our long-term estimates for 4% demand growth already includes rising Chinese consumption, we may actually be too optimistic over the long term.


9

Redburn Research

K+S 8 July 2010


Mixed outlook on potash usage by cropWe detail the potash usage split by crop in Fig 5 below, and this is dominated by the socalled cash crops (farming to generate profit, whereas subsistance farming typically produces grains for animal feed), which include fruit, vegetables, rice, sugar and cotton, and consume 60% of all potash. Although wheat is a major crop across Europe (59 million acres, 29% of global farmed wheat), this only accounts for 5.9% of total potash usage and is not increasing, as application rates have stabilised. A similar trend can be seen in the US for corn farming, as we discuss below.Fig 5: Potash usage by crop 2006-08Crop Fruit and veg Corn Other cereals Rice Sugar Soybean Wheat Oil palm Other oilseeds Other cereals Cotton TotalSource: IFA, Redburn Partners

------ Million tonnes ----2006-07 2007-08 5.9 4.1 3.9 3.6 2.3 1.9 1.6 1.4 1.0 0.9 0.6 27.2 6.2 4.1 4.1 3.8 2.5 2.3 1.7 1.5 1.0 0.9 0.6 28.7

------- Share % -------2006-07 2007-08 21.7% 15.1% 14.3% 13.2% 8.5% 7.0% 5.9% 5.1% 3.7% 3.3% 2.2% [100%] 21.6% 14.3% 14.3% 13.2% 8.7% 8.0% 5.9% 5.2% 3.5% 3.1% 2.1% [100%]

Saturation point reached in the mature marketsUS farming trends over the past 60 years can be used as a proxy for other mature regions and as the long-run outlook for emerging countries. Observing historic data shows that several phases of investment in agriculture have taken place, initially driven by a drop in local labour during the 1950s, as rural populations migrated to urban environments seeking higher wages. To decouple the reliance of farming upon intensive labour, the introduction of machinery became more widespread but also the application and use of fertilisers increased dramatically, as shown below in Fig 6.Fig 6: US potash and nitrogen consumption from 1960 to 200915000 13000 11000 9000 7000 5000 3000 1000 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 7000 6000 5000 4000 3000 2000 1000 Potash and phosphate usage kT

Nitrogen usage kT

Nitrogen fertiliserSource: USDA, Redburn Partners

Potash fertiliser

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Redburn Research

K+S 8 July 2010

Long-term industry deterioration During the period from 1960 to 1980, annual consumption of potash increased by 6% per year, as farmers realised incremental yield and returns from higher potash applications. However, since 1985, the market has become saturated, with 0% growth from 1997 to 2007. Over time therefore, the high growth emerging markets are likely to adopt a similar trend, as additional methods are deployed to improve farming yields.

Global acreage expands at just over 1%Acreage expansion leads to immediate market enlargement, so a long-term uptrend here would clearly be positive for the potash industry. Despite the fear that land is continually being converted to industrial uses, the past 20 years have seen global acreage expand by 1.6% on average, as technology is deployed to use marginal land for commercial farming purposes. However, this expansion rate is slowing, and now barely 1% expansion is being observed a year.Fig 7: Global farmed acreage expansion since 19903.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Corn Wheat Soybean 20-year CAGR %Source: USDA, Redburn Partners

Growth rates %

Rice 10-year CAGR %

Fruit

Vegetables

It may be stated that the use of fertilisers, such as potash, will need to increase to offset the slowing acreage expansion but we predict that the combination of more effective machinery, targeted use of non-generic crop protection chemicals and release of biotech-seeds will be the route to improved crop yields. It is worth noting that the recent record yields observed in the US for corn have resulted during a period of low fertiliser application, but this is likely to be due to better performance and resistance from the latest GM-seed varieties. This highlights that farmers may be able to expect slow, nutrient depletion from the soil, permitting a period of potash abstinence K+S indicates that three to four years is possible in some cases. Although we observe growers reapplying this year, to ensure the potash level remains optimal, we now realise farmers have greater opportunity to time their purchases, which we think limits the potential for a reoccurrence of the 2008 potash peak.

Redburn potash growth model concludes growth will be 4%Overlaying the data above, for potash consumption by country with usage by crop type, gives us the opportunity to build a forecasting model in order to assess the likely growth over the medium-to-long term and this can be seen in Fig 8. We have highlighted those country/crop combinations with demand >3% of global potash output. Although the US corn belt is important, the major consumptions actually result from rice, fruit and vegetable farming in China.


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Redburn Research

K+S 8 July 2010


Fig 8: Potash consumption by country and crop in 2008 %% China ROW US Brazil EU27 India Indonesia Vietnam Russia Canada Australia Turkey Pakistan Total Wheat 0.9% 1.0% 0.8% 0.3% 2.0% 0.8% 0.0% 0.0% 0.3% 0.1% 0.1% 0.1% 0.0% 6.3% Rice 6.3% 2.0% 0.2% 0.6% 0.1% 3.3% 0.4% 1.0% 0.0% 0.0% 0.0% 0.0% 0.0% 13.9% Corn Cereals 0.5% 1.3% 7.5% 2.8% 1.7% 0.1% 0.3% 0.1% 0.1% 0.3% 0.0% 0.0% 0.0% 14.8% 0.2% 0.5% 0.2% 0.2% 1.7% 0.3% 0.0% 0.0% 0.3% 0.0% 0.0% 0.0% 0.0% 3.4% Soy Oil palm Cotton 0.2% 0.3% 2.5% 5.2% 0.0% 0.1% 0.0% 0.0% 0.0% 0.1% 0.0% 0.0% 0.0% 8.4% 0.0% 3.8% 0.0% 0.0% 0.0% 0.0% 1.5% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 5.3% 0.3% 0.3% 0.5% 0.6% 0.1% 0.5% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 2.3% Sugar Fruit & Veg 1.1% 0.8% 0.5% 3.1% 0.7% 1.0% 0.3% 0.1% 0.3% 0.0% 0.2% 0.1% 0.0% 8.1% 11.3% 4.4% 1.1% 0.8% 1.9% 2.1% 0.4% 0.1% 0.0% 0.0% 0.2% 0.2% 0.0% 22.5% Others 1.2% 2.6% 2.9% 1.7% 4.2% 1.1% 0.2% 0.2% 0.1% 0.4% 0.3% 0.0% 0.0% 14.8% Total 22.0% 17.0% 16.1% 15.1% 12.5% 9.2% 3.1% 1.5% 1.1% 1.0% 0.8% 0.4% 0.1% 100.0%

Source: IFA, Redburn Partners

In Fig 9 we detail the absolute potash consumption, in millions of tonnes. China has the largest demand for potash globally, requiring, on average, over 12 million tonnes per year. Currently, China is a small export target for K+S, at around 3% of group sales, as the company does not expect to generate high returns in such a competitive (but expanding!) market. However, we are concerned that the opportunity for incremental sales in regions targeted by the company (India and Brazil) will become undermined by the vastly increased output in Canada, Russia and Israel.Fig 9: Absolute potash consumption by country and crop in 2008mt China ROW US Brazil EU27 India Indonesia Vietnam Russia Canada Australia Turkey Pakistan Total Wheat 495 533 453 150 1,104 425 0 0 154 54 58 34 16 3,477 Rice 3,471 1,098 90 308 62 1,803 238 575 0 0 0 2 6 7,652 Corn Cereals 276 727 4,152 1,542 943 54 170 56 34 190 0 14 6 8,162 124 262 90 84 935 176 0 0 168 22 26 6 0 1,891 Soy Oil palm Cotton 124 168 1,350 2,844 24 54 10 12 10 52 0 0 0 4,647 12 2,103 0 0 0 0 815 0 0 0 0 0 0 2,930 162 186 272 308 38 292 0 0 0 0 2 10 4 1,272 Sugar Fruit & Veg 619 427 264 1,701 409 531 154 70 142 4 90 28 8 4,447 6,191 2,422 617 441 1,064 1,168 204 44 22 12 108 88 8 12,389 Other 643 1,440 1,588 935 2,308 583 90 86 74 200 154 26 8 8,134 Total 12,115 9,366 8,874 8,311 6,887 5,086 1,679 843 603 533 437 208 56 55,000

Source: IFA, Redburn Partners

Applying the assumption (and perhaps the benefit of doubt) that the potash application rate will increase selectively by country and crop combination, we have obtained a growth forecast, as summarised in Fig 10. From 2009 we assume a base case industry demand of 31 million tonnes of potash, which was a capacity utilisation rate of 55%, followed by a substantial increase in 2010 of around 60% and in line with the recovery observed so far this year.

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Redburn Research

K+S 8 July 2010

Long-term industry deterioration After discussions with farmers, distributors and several industry consultants, it is clear that farmers are willing to purchase fertilisers at current lower prices, but any increases are likely to suppress enthusiasm as operating profits from some crops remain quite fragile. Furthermore, some farmers, especially those in the US, indicated that an ongoing move towards precision agriculture and the increased use of soil testing to assess true soil nutrient need is curtailing the growth.Fig 10: Redburn potash growth forecast, 2008-14Emt China ROW USA Brazil EU27 India Indonesia Vietnam Russia Canada Australia Turkey Pakistan Total growth % 2008A 12,115 9,366 8,874 8,311 6,887 5,086 1,679 843 603 533 437 208 56 55,000 -7% 2009A 6,615 5,085 4,845 4,535 4,760 2,775 920 455 330 290 240 115 30 30,995 -43.6% 2010E 10,695 8,250 7,525 7,315 7,680 4,480 1,485 735 530 465 690 195 50 50,095 61.6% 2011E 11,386 8,576 7,635 7,604 7,792 4,769 1,581 782 564 472 717 203 53 52,135 4.1% 2012E 12,121 8,916 7,746 7,905 7,905 5,077 1,683 833 601 479 746 211 57 54,278 4.1% 2013E 12,903 9,268 7,859 8,218 8,020 5,405 1,792 887 639 486 775 219 60 56,532 4.2% 2014E 13,736 9,635 7,973 8,543 8,137 5,754 1,907 944 681 493 806 228 64 58,901 4.2%

Source: USDA, FMB, FAO, Redburn Partners

Our potash demand model indicates that annual growth will be close to 4% from 2011, which is slightly lower than that expressed by the industry, although similar to the opinion of notable industry associations, such as the International Fertiliser Association.

Less of an oligopoly than you thinkDespite potash prices crashing over the past year and some suppliers capitulating, to agree supply contracts and generate cash flow, the consensus view still appears to be that the potash industry is cartel-like in structure and that growth will rapidly resume, with market prices rising steadily beyond H1 2010. In contrast, we believe the global potash industry is more fragmented than generally appreciated, and far from a cartel, with the largest supplier Potash Corp having 19% of global capacity, followed by Mosaic and Belaruskali with 13% each (refer to Fig 11 below). However, the output scale drops sharply to less than 10% for the next major producer, and eight further suppliers have potential output greater than 1,000 tonnes, against a global potash capacity of 45,000 tonnes in 2010. In total there are 67 producers globally, with new entrants over the next few years taking this closer to 75.


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Redburn Research

K+S 8 July 2010


Fig 11: Global potash capacity split by supplier20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Other Potash Corp Mosaic Belaruskali K&S Silvinit Urakali ICL Qinghai Agrium Saltlake APC


Unusual for a commodity market, we believe the degree of fragmentation is likely to increase over the next five years, as the potential for high returns (>50% EBITDA margin average in 2008) is likely to attract additional capacity (in addition to BHP Billitons plans). The dramatic potash price falls from 2008 to 2009, highlight the lack of robustness across this industry, a problem underpinned by several companies having a weaker cost position (e.g. K+S, Intrepid) or unfavourable historic supply contracts (e.g. Silvinit, Uralkali). But market prices still appear elevated and consensus expectations still anticipate rising spot potash prices over the coming years (Potash CIF Brazil: $415 in 2010, $440 in 2011, $460 in 2012), simultaneously with vast capacity expansion projects, which would be relatively unusual for any commodity. For a complete detailed list of global potash capacity by company, country and mine, refer to Appendix 1. Note this data has been collated by Fertecon. However, we remain sceptical and see the potential reason for prices to fall as capacity is added, BHP enters the market, asset utilisation rates are likely to decay and the weaker suppliers are likely to agree to lower prices. Analysis shows that global potash capacity will increase by >5% per year, whereas demand will grow at 4%, assuming emerging markets continue to increase fertiliser application. Building excess capacity suggests that inventory build up appears increasingly likely, which would be the simple reversion to industry dynamics pre-2004 when potash prices remained below $200/tonne.

14

Potash market share %


Redburn Research

K+S 8 July 2010

BHP Billiton to disrupt the potash cartel BHP Billiton to disrupt the potash cartelPerhaps even worse than our assessment of deteriorating market conditions, BHP appears increasingly likely to invade this industry. Recent statements show the intention is to develop at least one (eight million tonnes) potash greenfield mine in Saskatchewan, Canada, with phase one of the potash output to commence from 2015. Combining a strong balance sheet and the desire for diversification away from certain regions and industrial metal ores together with solid mining expertise should worry the incumbent suppliers. The company has been clear that the project appears scalable and a series of potash operations are being assessed. Our detailed cost analysis, as shown on page 27, highlights that the expected $2bn capital requirement for a greenfield mine can be fully recovered (a positive NPV) from a potash market at $420/tonne, so offers no barrier to BHPs market entry.

Potash offers diversified growth for BHPAfter years of speculation, the management of BHP Billiton have now opted to proceed in the potash industry with new greenfield operations and will begin mining the first ores in 2015. Whereas the major incumbent potash companies have often claimed the current market price for potash is too low to justify new mines and highlighted that the capital cost is prohibitive, BHP has stated that market conditions are quite acceptable. Furthermore, the companys $10bn cash position could be targeted towards an aggressive expansion programme, designed to establish BHP as a major player within the next five years. Strategically, potash mining offers BHP diversification away from the main metal ores where demand is predicated upon industrial production. But it is also worth noting that Saskatchewan is a region where the local authorities remain open to attracting new investment, and corporate taxes are low. State-of-the-art capabilities, ability to leverage a global freight network and a rich cash pile offer BHP considerable advantages over smaller companies, such as K+S.

Accelerating BHPs potash reserves developmentBHP began assessing the potential for potash much earlier this decade and started initial rock examinations in 2005 and as shown below in Fig 12, a small 77km2 area was classified as containing high-quality potash reserves in 2006, within a region 125km to the East of Regina.Fig 12: BHP Billiton potash basin 77km2 in 2006

Source: BHP Billiton, Redburn Partners


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Redburn Research

K+S 8 July 2010

BHP Billiton to disrupt the potash cartel Since this time, $230m has been spent on identifying commercial-quality potash reserves and now five projects have been nominated for progressive development. Over the past four years, the company has accelerated this exploration process considerably, now with over 14,000km2 of identified reserves, as shown in Fig 13. Although the company plans to ramp-up supply to eight million tonnes of potash annually from 2015, the company states this basin contains nine billion tonnes of highgrade reserves over 150 years supply at the initial eight million tonnes output rate which highlights the enormous potential and emerging competitive threat for the current major fertilizer suppliers. Interestingly, BHPs potash basin which will be further expanded is intertwined within the region mined by competitors such as Potash Corp. While we do not expect a strategic move until mining commences, it may be possible in the longer term for the company to acquire other local peer companies, to leverage scale and transport networks across the region.Fig 13: BHP Billiton potash basis 14,000km2 in 2010


The five project regions that have been established for ongoing exploration and progressive development include: > Jansen: initiated formally in 2008, this potash development is the most advanced and is discussed in detail below. The first ores will be extracted in 2015. > Young: 35 ore exploration holes have been drilled so far, over a 379km2 development area. This mine development is the second most advanced, and is likely to become commercial closer to 2018. > Boulder: located 15km from the major Jansen project, Boulder has been the third project BHP has initiated, but still covers a 293km2 region, highlighting the scale and progress the company is making. 29 exploration holes have been drilled to date. > Burr: this is a relatively new project, and is under commercial assessment for potash hole drilling and exploration.

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Redburn Research

K+S 8 July 2010

BHP Billiton to disrupt the potash cartel > Melville: the most recent of the five projects and exploration will commence from July 2010. As the furthest site away from the core of BHPs potash basin, reasonable success in identifying high-quality ore is likely to lead to a second seam for commercialisation from 2018-25. Over the next five years, BHP is planning to complete another 3,100km2 of seismic assessments and will begin drilling at least another 100 holes. The strong cash position of the company offers a near unrestricted barrier to growth, unlike some of the current potash suppliers, which have become more cash restrained after a few tough years of trading.

The Jansen projectThe most advanced of BHPs projects, Jansen offers 3.4 billion tonnes of 25% K2O highquality reserves, selected for mining from 2015 and with an initial planned output of over three million tonnes from 2015. 3D seismic tests covering 869km2 have been performed since 2008. The development is scalable, and three phases have been selected for commercialisation, as shown in Fig 14 below.Fig 14: Jansen offers at least 18 million tonnes of phased potash extraction

35 30 25 20 15 10 5 0 Jansen phase 1 Jansen phase 2 Jansen phase 3 Future - min Future - max


Three phases will be successively brought on-stream, with the initial ore being sold in 2015. A regional headquarters is being developed in Vancouver, together with a local supply chain network, which will benefit from standardised processes to maintain a low cost position. BHP has now committed $240m to perform ground freezing in readiness for ore mining, but also to ensure necessary regulatory obligations are met. Local land royalties to the Government of Saskatchewan are likely to be $110m. These early stage activities will begin in H2 2010, as shown in Fig 15 below, with four years being forecast for mine development. The time period to bring the mine on-stream will be similar to the current leading suppliers, with five years needed for initial drilling, ground freezing and sinking the mine shaft. Work is due to begin later in 2010.


Incremental capacity mtpa

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Redburn Research

K+S 8 July 2010

BHP Billiton to disrupt the potash cartel

Fig 15: Jansen project timeline from 2010 to 2017Ramp up Production start Construction Regulatory review Ground freezing EIS submission 2010Source: BHP Billiton, Redburn Partners

2011

2012

2013

2014

2015

2016

2017

The implications of BHP market entryAlthough BHP is unlikely to enter the potash market until 2015, futures prices would begin to price in the new output ahead of time, in addition to the ongoing projects from current suppliers. As for all commodity markets, short-term demand/supply dislocations will lead to periods of insufficient potash supply and elevated prices, as the market experienced during the recent commodity bubble from 2007 to 2008. To a lesser extent, we believe this mechanism also contributed to price increases implemented in Europe during Q1 2010, as poor winter weather limited mine output and exacerbated logistical problems. Conversely, during periods of considerable excess potash capacity, market prices should fall as experienced since Q4 2008/Q1 2009, when the spot price fell sharply, as shown below in Fig 16.Fig 16: Short-run inflated potash price 2006-101000 800 $ per T 600 400 200 0 Dec-06 Apr-07 Aug-07 Dec-07 Apr-08 Aug-08 Dec-08 Apr-09 Aug-09 Dec-09 Apr-10

Source: ICIS, Redburn Partners

Squeezing the incumbentsWe know that BHP is planning to build up at least eight million tonnes of potash capacity over the coming decade, and has the option to add at least an additional seven million tonnes beyond 2018. We also appreciate that the strategy of a single company can change the dynamics of a global industry, such as Ryanair did to the European airlines. Although both companies operate in very different industries, we think the model for BHP to establish significant capacity at the low end of the cash cost curve, and squeeze much more mature businesses, seems like a potential risk for K+S.

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Redburn Research

K+S 8 July 2010

BHP Billiton to disrupt the potash cartel BHP has clearly stated the intention to build low-cost mines and implement effective supply chains, so could withstand current potash prices and still make an acceptable return. Consequently, if the companys incremental capacity disturbs the oligopolistic characteristics of the potash industry, we believe this strategy may actually be desirable as a mechanism to squeeze the smaller producers, or those with an inferior cost position, such as K+S and Intrepid. However, we accept that K+S generates a high proportion of sales in Europe, and with estimates of deep sea freight costs from Vancouver to Europe appearing prohibitive, a direct threat to local K+S sales seems unlikely. An alternative route though would be to ship from New Brunswick, which could be available at low cost if an arrangement was reached with Potash Corp. Over the long term, we should expect downward pressure on potash prices if demand cannot outstrip incremental supply. An important example can be found when examining the cause of prolonged low potash prices prior to 2006. Here, excess capacity operated in Eastern Europe, created a long period of inventory overhang, despite little change to the normal market growth rate of between 4% and 5% per year.Fig 17: Long-run historic potash prices 1980 to 20101000 800 $ per T 600 400 200 0 Jan-80Source: ICIS, Redburn Partners

Jan-85

Jan-90

Jan-95

Jan-00

Jan-05

Jan-10

During the 1970s the Soviet Unions planned economy aimed to transform the country into a self-sufficient livestock producer, which required vast quantities of fertiliser for the grain used to generate animal feed. But after the collapse of the nation, this strategy changed and the economy slowly moved towards exploiting local commodity resources, including potash reserves. However, new owners emerged (such as at the Belarusian companies) who aimed to maximise returns and operated the assets at high rates. Consequently, large inventories of potash accumulated, flooding the global market. We appreciate that more recently capacity utilisation has been moderated to help protect the potash price, but there is still an underlying risk, which we discuss below.

Local governments expect potash at cash cost pricesSome industry observers may claim that the two major suppliers in this region have now adopted oligopolistic strategies under their new owners, and follow Potash Corp (for example) to set potash prices in line with the global market. However, we believe in lieu of additional operating/mining taxes, both companies are required to sell a significant proportion of potash produced into the local Russian market, at a price barely above cash costs (25% of Silvinit production, 15% of Uralkali output).


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Redburn Research

K+S 8 July 2010

BHP Billiton to disrupt the potash cartel The implication of this local demand was observed in Q2 2009, when Silvinit disengaged from high agreed global price and agreed to supply potash to China at $360/tonne, at that time a 26% discount below the market level. As global demand progressively deteriorated, pricing decreased further, compounded by high inventories. For Silvinit, as the local demand decreased less than export markets, the proportion of total output generating a low return increased substantially, which crushed earnings and put a strain on the companys balance sheet. The company was required to act and, although some analysts have been critical, we sympathise with Silivinits management during this period.

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Redburn Research

K+S 8 July 2010

Low expectations for recovery Low expectations for recoveryBeyond the partial potash market recovery of 2010, K+S is likely to disappoint investors with low volume growth, predicated upon excessive exposure to Western Europe and structural barriers to develop additional business in China and Eastern Europe. The leading industry consultants, Fertecon, predict that European volumes will not recover to 2007 levels until 2018, suggesting current consensus forecasts are too high, even before considering views on the potash price.

Over 60% of K+S sales in low growth countriesAs the leading supplier of potash in Europe, K+S benefitted from stable, local demand that was underpinned by a heavily subsidised farming industry. However, from 2008 weak sentiment and deteriorating crop returns prompted farmers to skip potash applications and become increasingly scientific about excessive use in future. We appreciate that after potash volumes for K+S collapsed in 2009 due to poor weather, low credit availability and weak soft commodity prices, a subsequent recovery is inevitable. But although European demand is expected to recover over 2010 (refer to Fig 18), this is still expected to remain 20% below the peak application years of 2005 and 2007. When our forecasts are combined with the leading industry consultants, it appears the opportunity for a volume recovery above current expectations is remote.Fig 18: K+S potash sales by region 2005-10EPo t a sh sa le s / k T 2500 2000 1500 1000 500 0 Europe FSU NAFTA LATAM Africa2005Source: Company data, Fertecon, Redburn Partners

Middle East2006 2007

Asia2008

Oceania2009 201 0E

Within Europe, the major potash sales are made in France, Germany and Italy, where application rates have begun to stabilise over the past few years and planted acreage offers limited hope for growth. The UK and Spanish markets, collectively >15% of total European acreage, are effectively unavailable to K+S, but served by Israeli Chemicalowned potash companies.

Europe the worlds most stagnant potash marketBeyond 2011, expectations for Europe are even less appealing, with long-term growth estimates being barely above 1% from 2014. This is due to stable acreage expectations, after recent expansion from marginal (and lower yielding) land, but principally it is down to the stagnant application of fertilisers. Industry consultants indicate that an increasing proportion of European farmers are practising soil tests as a means to optimise potash and limit over-application. This seems logical, and suggests that local growth will be curtailed as farmers seek to further optimise current profitability, with fertilisers being 30-40% of variable spend.


21

Redburn Research

K+S 8 July 2010

Low expectations for recovery

Fig 19: European potash demand forecast 2005E -20E4500 4000 Potash consumption / kT 3500 3000 2500 2000 15002005 2006 2007 2008 2009 201 0E 201 E 201 1 2E 201 3E 201 4E 201 5E 201 6E 201 7E 201 8E 201 9E 2020ESource: Fertecon, Redburn Partners

Examining Fig 19 highlights that peak consumption of potash in Europe is not expected to recover fully until 2015 at the earliest. Since K+S generates >60% of sales in Europe, but is also output constrained, we find the company rather unattractive as either a commodity play, or as a means to increase exposure to agricultural demand.

K+S may miss out on growth in ChinaOver the past decade, and to offset the low growth in Europe, K+S has developed a larger export business in Brazil, which has now stabilised at 20% of sales. But we feel that the sizeable capacity expansion plans both local and at NAFTA exporters will increasingly limit further growth options. K+S management have opted to remain a smaller participant in the growing Chinese market (3% of potash sales). Although the demand for potash in China is forecast to grow at over 6% a year, local capacity is also being expanded aggressively across the vast salt deposits in Qinghai Province, with local output estimated to reach seven million tonnes by 2015. Due to the high local growth forecasts in China, and a lower cost position from extracting potash from salt lakes, we expect to see the potential for the industry to fragment, as new suppliers enter the market rather than consolidate, with industry consultants identifying 14 local companies, either with mines already operating or new facilities in development. The Chinese market has become one of the most competitive, and as such agreed tender prices tend to settle towards the lower end of the range. This characteristic has been exacerbated by former Soviet Union (FSU) potash suppliers (Silvinit, Belaruskali and Urakali) transporting potash to China by rail, again having a much lower cash cost position than K+S. As the demand and supply dynamics of the Chinese market are forecast to become more balanced (refer to Fig 20), K+S exports to this region are expected to remain low. With the companys higher cash cost position, we tend to agree with management that China remains unattractive but unfortunately this removes another opportunity for growth.

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Redburn Research

K+S 8 July 2010

Low expectations for recovery

Fig 20: Chinese potash capacity forecast to match local demand 2005-15E8000 7000 6000 Potash / kT 5000 4000 3000 2000 1000 0 2005 2006 2007 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E

Chinese potash capacitySource: Fertecon, Redburn Partners

Chinese potash consumption

K+S potash in China

Dont expect much from Eastern Europe eitherSome analysts have begun to suggest that Eastern Europe offers attractive growth potential for K+S as an alternative to China. Russia in particular has stated the intention to increase crop output considerably, but to improve crop yields higher application rates of potash are likely. However, similarly to China, the incumbent but much larger suppliers are already increasing capacity by over 1.1 million tonnes by 2015, with an additional 3.3 million tonnes being added by Eurochem and phased in from 2016. Realistically, this severely limits the regional opportunity available to K+S, and we would point to the absence of FSU (Former Soviet Union) sales from 2007, as shown in the table below (Fig 21).Fig 21: K+S potash sales in FSU 2005-10EKT FSU 2005 165 2006 120 2007 38 2008 0 2009 0 2010E 0

Source: Fertecon, FMB, Redburn Partners

K+S mine constraints prevent upside tooAs is normally the case for any commodity producing company, K+S tends to operate its assets at a high rate to optimise profitability. Mines are never perfectly operational though and output rates >90% are unsustainable over the long-run, due to ongoing planned and unplanned shutdowns, with 70-75% being the norm at an industry level. But as shown in Fig 22, K+S has had a mine capacity limitation for some time and even with our mediocre growth forecasts, further volume upside becomes constrained by 2012. It is an option to allocate capital for another mine, but the required $2bn capex investment would eliminate FCF generation for many years.Fig 22: K+S potash capacity and output forecastsKT MOP Production Capacity Utilisation rate % 2005A 8.0 9.1 88% 2006A 7.99 9.1 88% 2007A 8.22 9.1 90% 2008A 6.99 9.1 77% 2009A 4.35 9.1 48% 2010E 6.75 9.1 74% 2011E 7.4 9.1 81% 2012E 7.77 9.1 85% 2013E 8.01 9.1 88% 2014E 8.01 9.1 88%

Source: Company data, Fertecon, Redburn Partners


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Redburn Research

K+S 8 July 2010

Low expectations for recovery This is in addition to the $400m capex already needed to prevent further effluent being discharged into the river Werra. This provision may need to be revised upwards to >$650m, to build a 290 mile pipeline from K+S mines to the North Sea. Emerging markets will be the only regions contributing to long-term demand growth for potash, but K+S exposure is low. Over 60% of sales are made in Europe and structural barriers to developing additional business in China and Eastern Europe are likely to lead to disappointment. We agree with the industry consultants, Fertecon, and expect that European volumes will not recover to 2007 levels until 2018. This suggests that current consensus forecasts are too high for K+S, and with anecdotal market information suggesting inventories may be rising in some regions, we would be cautious in a turbulent industry.

24


Redburn Research

K+S 8 July 2010

Excessive premium Excessive premium above cash costs above cash costsAs we entered 2010, some analysts suggested that exposure to K+S would benefit investors from earnings leverage at the highest-cost producer. This opportunity has now passed and, looking forward, we must assess the implications of a company with cash costs >60% greater than peers. Perhaps more worryingly is that potash suppliers have received a $100/tonne premium above average cash costs from 1990 to 2010. However, the current $370/tonne market price for potash returns a >$200/tonne premium, which appears unsustainable for a commodity with significant additional capacity being developed over the next eight years.

K+S cost position over 60% worse than peersAs expected during a period of lower volume, cash costs for K+S deteriorated sharply in 2009, so a short-term opportunity existed for investors to buy exposure to the most leveraged margin as analysts predicted a recovery. However, we now have more visibility on potash sales and prices for 2010, making this opportunity seem less appealing. We have benchmarked the cash costs for K+S to produce one tonne of potash, not only to assess likely returns over the next few years but also to examine the discount or premium to the peer average. Unfortunately, the companys cost position does not appear very attractive, being on average over 60% worse than the other major producers, as we highlight in Fig 23. The quality of the companys reserves are generally inferior to peers, which leads to a lower yield and ultimately is reflected in higher extraction costs/tonne of potash nutrient. Therefore, even if the issue of higher labour and transportation costs could be addressed (for example by M&A), there is no available remedy to address the lower-quality deposits.Fig 23: Cash costs of major potash suppliers, 2007-11E300 250 Potash cash cost $/t 200 150 100 50 0 2007-AK+S UrakaliSource: Company data, Redburn Partners

2008-A

2009-APotash Corp Silvinit

2010-EICL Peer average

2011-EMosaic

Consequently, there are two issues to be wary of: > K+S shares should trade at a significant discount: clearly, we should anticipate weaker margins at K+S resulting from its inferior cost position and this should translate into a lower valuation. We explore valuation in more detail in the next section, but on a P/E, Price/Book and EV/Sales basis, the shares appear 25% too expensive.


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Redburn Research

K+S 8 July 2010

Excessive premium above cash costs > K+S assets appear unattractive to acquire: periodically, the market anticipates M&A activity within the fertiliser industry, especially due to building interest from largecap mining companies wishing to diversify from metals and ores. But in our opinion, K+S receives an excessive level of attention at least at the current valuation as the total European market for potash is only 13% of global demand, K+S cash costs are significantly higher than the companys peers but with capacity constraints too.

Supplier premium remains abnormal, further deflation a riskGiven that K+S is a commodity-geared company that is becoming increasingly constrained on volume, buying the shares is a call on future potash prices. Inevitably, short-term volatility will occur due to temporary supply constraints or the occasional demand spike, which seemed to be the case during Q1 2010 when poor weather physically limited K+S from making deliveries in Europe. However, under the medium- to long-term scenario, 4% demand growth does not exceed currently planned incremental capacity additions, so it is likely that excess inventories will be maintained and that market prices for potash could decrease. We think an appropriate mechanism to forecast future potash prices is to deconstruct the historic premium between producer cash costs and the market price. Worryingly, the average supplier premium was $60/tonne between 1990 and 2006, but as highlighted in Fig 24, the premium still remains >$200/tonne above average forecast cash costs for 2010, despite a lower potash price compared to 2009.Fig 24: Supplier premium over cash costs, 1990 to 2010E650 550 450 $ per tonne 350 250 150 50 -50 -150 -250 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Potash price Premium Avg prem (excl. 2008/9)Source: ICIS, Company data, Redburn Partners

Cash cost Avg prem

As we highlighted earlier in the report, some inventory overhang resulted from operating former Soviet Union assets for cash generation, rather than to preserve supplier power, which likely depressed the supplier premium somewhat over this period. But, as we have also shown, the considerable capacity being introduced progressively from 2011 may well reintroduce the industry to similar, weakened dynamics.

BHP Billiton likely to worsen the situationThe current potash suppliers will benefit from not having to contend with BHP Billitons market entry for another three to four years, although the impact will become reflected in earnings forecasts and valuation far ahead of this time. This companys future is26 Important Note: See Regulatory Statement on page 48 of this report.

Redburn Research

K+S 8 July 2010

Excessive premium above cash costs predicated upon expansion in strategic growth industries where large, low-cost operations permit the company to influence the market pricing dynamics. We see the potential for potash pricing to gravitate to a simple spot mechanism, and away from the longer-term contracts frequently in place. As the company ramps up output, it will make sense to maximise volumes quickly, to increase scale, lower cash costs and optimise supply chain networks. During this period, companies such as K+S may find it difficult to maintain volumes in some regions, unless lower prices are acceptable. Inevitably, in our view, the outlook appears less exciting than many speculate.

Recouping greenfield mine capex costsOver time, the new greenfield assets will increase the average industry cash cost, and therefore may support a higher market price for potash. The typical capital investment in a greenfield mine is $2bn, as indicated by the producers and also industry consultants. An NPV analysis shows that a potash market price of $410/tonne would yield a positive return assuming the cost of capital is 15%, which implies some degree of inflation is needed from current levels ($370/tonne). But this effect is unlikely to be a significant influence until beyond 2018, when some current mines reach the end of viable lifetime. In the interim, we expect market prices for potash to remain below $420/tonne. As shown below in Fig 25, no greenfield mines will be operational until 2015, and then only contribute The correlations of potash, corn and oil to the K+S share price, from 2002 to 2010, have been used to generate an alternative means of valuing the company and conclude that a considerable risk of downside exists. > The strongest correlations with corn and oil imply that K+S shares are overvalued by 11% and 19%, respectively. > Combining all three relationships and weighting these by the strength of the correlation suggests the fair value for K+S shares is 33/share, 11% below the current share price.

A poor correlation to potash implies K+S is fairly valuedOne might expect that the shares of K+S should be correlated closely to the potash price, as 75% of the companys profits are generated from sales of this commodity. Over the recent agflation cycle, extreme market shortage of potash prompted the K+S share price to surge and forcing the market cap above 15bn; five times the valuation prior to 2006. As shown in Fig 26, we have plotted monthly potash prices against the K+S price from 2003 to 2010 and calculated the best-fit trend line over the period, to indicate where K+S shares should be trading at any given potash price.Fig 26: K+S share price correlated to Canadian FOB spot potash price 2003-10120.0 100.0 K+ S sha re pric e / $ 80.0 60.0 40.0 20.0 0.0 100 200 300 400 Po t a sh price / $ p e r t o nn e 500 600 y = 38.448Ln(x) - 169.85 R 2 = 0.58

Source: ICIS, Bloomberg, Redburn Partners

This relationship, when including the peak potash prices from 2007to 2008, implies that at the current FOB spot rate of $320/tonne K+S shares should be trading at $51 or 40, suggesting the company is currently fairly valued. However, we would be wary of emphasising this conclusion, as the correlation is rather weak (R2 is 58%).

A much stronger correlation to corn suggests 11% downsideIn contrast, the relationship of K+S shares from 2002 to 2010 to the S&P corn price index is much stronger, with a correlation coefficient of 83%, as shown below in Fig 27. The tighter spread appears logical, as farmers are (in theory) motivated to invest more in the coming season if grain prices will generate attractive returns. The price of the S&P corn index is $305, implying a fair value for K+S stock of $41 or 33/share, which is 20% below the current share price. Since Q4 2008, the trading range for this index has been $260-350, which would generate a theoretical range for K+S shares of 24-41.28 Important Note: See Regulatory Statement on page 48 of this report.

Redburn Research

K+S 8 July 2010

Correlations conclude over 10% downside Investors should note that either the market is discounting an imminent 20% rise of the corn price or that K+S shares are considerably overvalued. We tend to conclude that although the most recent data suggests a more upbeat outlook for corn, K+S shares already appear to be pricing this in.Fig 27: K+S share price correlated to S&P Corn Index 2002-10140.0 120.0 K+ S sh a re p ric e / $ 100.0 80.0 60.0 40.0 20.0 0.0 100 200 300 400 500 S&P co rn p rice in d e x / $ 600 700 y = 0.0002x2 + 0.1209x - 14.894 R 2 = 0.8275

Source: Bloomberg, Redburn Partners

The oil correlation is even more worryingThe complexity of market correlations seems ever more creative, but the link between the oil price and K+S shares also has substance. A rising oil price tends to favour the biofuel industry, as above $70/barrel the conversion of $4 corn to produce bioethanol is economically favourable. In Fig 28 we have plotted the oil price against the K+S share price from 2002 to 2010 and as for corn, the correlation appears robust, implying at $70 oil that a fair value for K+S stock should be $35 or 28/share, which is 25% below the current share price.Fig 28: K+S share price correlated to oil price 2002-10160.0 140.0 K+ S sh a re p ric e / $ 120.0 100.0 80.0 60.0 40.0 20.0 0.0 30 50 70 90 110 Oil p rice / $ p e r M M b t u 130 150 y = 0.0081x2 - 0.2734x + 14.626 R 2 = 0.7202

Source: Bloomberg, Redburn Partners


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Redburn Research

K+S 8 July 2010

Valuation ValuationOur Sell recommendation for K+S shares is based on low long-term earnings expectations, due to (i) near-zero volume growth as the company becomes capacity constrained, (ii) weaker-than-expected potash prices, and (iii) a poor cash cost position. We also worry that BHP may accumulate control of the industry. Our earnings forecasts are -9% and -10% lower than consensus estimates for 2011 and 2012, respectively. On a P/E basis, K+Ss current rating of 12.8x 2011E and 11.3x 2012E our earnings appears very inflated, based on the profitability and cash generation of the company, when compared to peers and other mining stocks. With >75% of earnings geared to a commodity with a material risk of price deflation, we question this valuation and why K+S shares trade on a >60% premium to the mining sector. Furthermore, cyclical peak EBITDA margins of 31% (falling to 13% at the low) compares poorly against >45% EBITDA available from other mining companies. We also believe there is an element of acquisition premium factored into the K+S share price. Although the market anticipates that Eurochem may bid for K+S, our discussions indicate this is unlikely, which raises the risk that the company reduces its 15% shareholding, which would be a major negative catalyst for the shares.

An over-valued mining companyWe accept that in the short term the potash demand/supply dynamic needs to stabilise and retail supply chains be replenished after the demand collapsed in 2009. But we would urge investors to be wary, as recent industry feedback suggests the picture is mixed, with weak orders from Asia indicating inventories may be building again but also poor recent weather in Europe curtailing demand. Also, the market needs to reconcile the potential for subdued industry growth, with the output constraint faced by K+S, in addition to the risk of lower than expected potash prices. We are taking a longer-term view on this industry because even though K+S shares can be volatile and frequently move on near-term data points, we see a heightened risk of K+S becoming considerably over-valued. We would suggest Syngenta offers better value over the long term, with a much superior ROCE and growth outlook. Our fair value for K+S in our base case is 32/share, which offers -19% downside from the current price. This is based on combining fair values by using relative multiples (30/share) but also DCF (33/share), which we feel is appropriate for this company given the risks we outline below. Our current sales and margin forecast is shown in Fig 29, with detailed financial models reproduced in a later section. Our main assumptions are summarised below: > Potash: we assume market recovery as farmers restore fertiliser applications and retailers restock deleted inventories, but this results in high-capacity utilisation being reached by 2012 (7.8 million tonnes). Beyond this point, we forecast 1% growth, derived from small debottlenecking projects. However, we observe little reason for potash prices to climb and point to current prices ($370/tonne) being 150% above the K+S cash cost ($180/tonne in 2010), which offers an abnormally high premium. We anticipate that the incremental capacity additions from 2011 to 2018, appearing to outstrip demand, will close this gap. Our long-run assumption is that potash prices remain below $420 until 2018.

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Redburn Research

K+S 8 July 2010

Valuation > Nitrogen: market recovery will also apply to K+Ss nitrogen fertiliser business but, since the product is supplied under a punitive contract by BASF, only a small portion of the earnings potential is captured by K+S. Beyond 2010, 3-4% sales growth seems feasible, whereas earnings are capped at 60m. The market for nitrogen fertilisers is incredibly fragmented, with Yara having only 6% of the global production capacity, for example. K+S has indicated its intention to exit part of this business, given the low returns and lack of scale. > Salt: sales can flex by +/-15% as winter weather patterns vary and as volumes increase, margins typically stabilise as energy costs typically inflate simultaneously. Nevertheless, we expect 4% revenue growth from 2011-14, and the company has no mining capacity constraints for this business, although significant changes to the business mix would require the company to lower the output rate for potash. Providing costs remain under control we expect earnings to grow at a similar rate, although additional synergies from the Morton acquisition may result over time. After the long and cold 2009-10 winter, we anticipate a limited opportunity for high growth over the next few years. But with stable EBITDA % margins (in the 18-20% range) we forecast a 160-190m operating income contribution from 2010-14.Fig 29: K+S assumptions for sales growth and marginsm Division Potash fertilisers Nitrogen fertilisers Salt Complementary Group ------ Sales ---------2009 2010E 2011E 2012E 1,423 935 693 129 3,179 1,731 1,214 1,566 139 4,650 2,076 1,262 1,644 145 5,127 2,239 1,300 1,709 149 5,398 ----- Growth ------2010 2011E 2012E 21.7% 29.9% 126.0% 8.0% 46.3% 19.9% 4.0% 5.0% 4.0% 10.2% 7.8% 3.0% 4.0% 3.0% 5.3% ------- EBIT % --------2009 2010E 2011E 2012E 16.3% -6.3% 15.1% 12.2% 8.9% 27.4% 2.0% 10.3% 16.0% 14.1% 34.0% 3.0% 10.3% 15.0% 17.7% 35.6% 4.0% 10.3% 15.0% 18.8%

Source: Company, Redburn Partners

DCF valuationCore assumptionsWe believe DCF is an appropriate tool for valuing chemical companies as it allows one to adjust for numerous divisions, variable growth rates, portfolio changes and inevitable cashflow cyclicality. This section presents our base case valuation for K+S, using assumptions as summarised in Fig 30. Revenue growth and margin assumptions are shown above in Fig 29. Throughout our analysis we have applied a corporate tax rate of 28% from 2010, as guided by the company. However, it is worth noting that a >30% tax rate was applied until the end of 2007, which subsequently decreased to 27% in 2008-09 as financial losses occurred in some potash trading regions. Therefore, there is a risk that the group tax rate increases again, as earnings recover from 2010. A discount rate of 8.6% has been calculated using the companys current cost of debt (5.0%), cost of equity (12.9%), and debt-to-equity ratio of 77%. Given the companys share price volatility, we have assumed a beta of 1.15.


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Redburn Research

K+S 8 July 2010

Valuation

Fig 30: K+S base case DCF assumptionsDiscount rate Terminal growth rate Normalised tax rate Normalised D&A as % sales Normalised capex as % sales Forecast period cashflow Normal period cashflow Terminal cashflow Total cashflow Pension liabilities Net debt/cash Implied valuation Share in issue Implied value per share CHFSource: Redburn Partners

8.6% 1.0% 28.0% 4.0% -3.5% 2,040 1,045 4,299 7,383 -182 -1,121 6,080 191 32

A sensitivity analysis of our base case fair value to discount rate and terminal growth is provided in Fig 31.Fig 31: Impact of terminal growth and discount rate on K+S fair value/share--------------------------- Terminal growth rate ------------------------0.0% 0.2% 0.4% 0.6% 0.8% 1.0% 1.2% 1.4% 1.6% 1.8% 2.0% 33 34 35 36 36 37 38 39 40 41 42 32 33 34 34 35 36 37 37 38 39 40 32 32 33 33 34 35 35 36 37 38 39 31 31 32 32 33 34 34 35 36 37 37 30 30 31 31 32 33 33 34 35 35 36 29 29 30 30 31 32 32 33 33 34 35 28 29 29 30 30 31 31 32 32 33 34 27 28 28 29 29 30 30 31 31 32 33 27 27 28 28 28 29 29 30 30 31 32 26 27 27 27 28 28 29 29 30 30 31 26 26 26 27 27 27 28 28 29 29 30 25 25 26 26 26 27 27 28 28 28 29 24 25 25 25 26 26 26 27 27 28 28 24 24 24 25 25 25 26 26 27 27 27 23 24 24 24 25 25 25 26 26 26 27 23 23 23 24 24 24 25 25 25 26 26

7.6% 7.8% 8.0% 8.2% 8.4% 8.6% 8.8% 9.0% 9.2% 9.4% 9.6% 9.8% 10.0% 10.2% 10.4% 10.6%

Source: Redburn Partners

Valuation multiples over the cycleComparative company analysis to potash peersThere are no direct European peers to allow direct comparison with K+S for valuation multiples, but there are many globally and in Fig 32 we provide group sales and EBITDA margins for the most comparable companies as forecast by consensus for 2010 and 2011. We have also included the related P/E and EV/EBITDA ratios. Whereas the market values K+S shares at 11.5x 2011 expected earnings, our estimates increase the multiple to 12.8x. However, even if we assume our forecasts are too bearish, the company is trading on a slight premium to its peers, whereas profitability is anticipated to be 47% below the average.

32

--------------- Discount rate ------------


Redburn Research

K+S 8 July 2010

Valuation The lower potash content of the companys German mines result in inferior cash costs and positions the company as the marginal cost producer, which offers the most earnings leverage at the trough of the cycle (Q4 2009) when earnings visibility is absent however, we are now past this point, so upside from this strategy appears low.Fig 32: Comparative margins and consensus multiples K+S versus potash peersCompany K+S Potash Corp Mosaic ICL Silvinit Urakali Average K+S premiumSource: Bloomberg

Currency EUR USD USD USD RUB RUB

Share price 38.1 1,789.0 3,036.0 909.4 62.4 10.5 38.3 -

Market cap/bn 7.3 111.0 69.1 26.7 27.0 10.7 223.8 -

EBITDA % 2010E 19.9 48.0 46.4 39.2 51.7 13.8 48.8 40.3

EBITDA % 2011E 23.1 55.9 48.2 42.8 51.6 16.3 53.6 43.8

P/E 2011E 11.6 7.0 5.8 5.5 7.0 9.7 6.4 5.9

EV/EBITDA 2011E 6.6 4.7 4.6 3.8 3.4 6.1 4.8 3.6

We think it appropriate to apply a P/E multiple of 10x 2011 our earnings estimates (2011 EPS of 3/share) for valuing K+S shares perhaps even this rating is excessive which generates a fair value of 30/share.

K+S shares at >60% premium to top-tier mining stocksWe think it is important to compare K+S shares against the top-tier mining companies, as shown below in Fig 33, which highlights the vast premium being applied today. This may be partly explained by metal and mineral commodity prices trading at a lower premium to marginal cash cost (except copper), but not a difference in P/E rating greater than 70%.Fig 33: Comparative margins and consensus multiples K+S versus mining peersCompany K+S BHP Billiton Rio Tinto Xtrata Freeport Alcoa Vale Average K+S premiumSource: Bloomberg

Currency EUR USD USD USD USD USD BRL

Share price 38.1 1,789.0 3,036.0 909.4 62.4 10.5 38.3 -

Market cap/bn 7.3 111.0 69.1 26.7 27.0 10.7 223.8 -

EBITDA % 2010E 19.9 48.0 46.4 39.2 51.7 13.8 48.8 40.3 -51%

EBITDA % 2011E 23.1 55.9 48.2 42.8 51.6 16.3 53.6 43.8 -47%

P/E 2011E 11.6 7.0 5.8 5.5 7.0 9.7 6.4 5.9 72%

EV/EBITDA 2011E 6.6 4.7 4.6 3.8 3.4 6.1 4.8 3.6 50%

Peak-to-trough multiples over the cycleIn order to offer investors a view on where the current K+S share price is trading and to provide context for our suggested valuation, we have identified the historic peak-totrough multiples for the company, as shown in Fig 10. Over the commodity super-cycle, the valuation multiple for K+S shares traded over a wide range, due to the perceived outlook for vast, perpetual earnings growth and peaked at >20x forward earnings. However, during periods when the earnings grew at low rates, when potash pricing was more subdued, the normal P/E range was 5-9x forward earnings.


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Redburn Research

K+S 8 July 2010

Valuation

Fig 34: Historic forward P/E for K+S25 P/Ex next year

Fig 35: Historic forward P/E for BHP25 P/Ex next year 20 15 10 5 0 May- Nov- May- Nov- May- Nov- May07 07 08 08 09 09 10Source: FactSet

20 15 10 5 0 May 07 Nov 07 May 08 Nov 08 May 09 Nov 09 May 10

Source: FactSet

Return on investmentWhen applying the ROCE/WACC methodology, K+S initial appears a viable option as profitability and asset turn improve from the potash trough point in 2009. However, ongoing improvement will be curtailed by limited mining capacity and post-tax ROCE seems rather disappointing from 2011. As shown in Fig 36, although we forecast ROCE/WACC to increase from 0.5 in 2009 to 1.4 in 2010 and 1.9 by 2011, this remains considerably below EV/IC over this period. For those investors wishing to obtain exposure to agrichemical companies over the long term, we favour Syngenta, which offers a >25% ROCE from 2012, and much lower downside risk.Fig 36: ROCE/WACC versus EV/IC, 2007-12E40% 35% 30% 25% 20% 15% 10% 5% 0% 2007 2008 2009 ROCE (post tax) %Source: Company data, Redburn Partners

4.9 3.9 EV/IC 2.9 1.9 0.9 -0.1 2010E 2011E Cost of capital 2012E EV/IC

The current P/E for K+S shares is 12.8x our 2011 earnings forecasts and when compared to better quality potash stocks and other mining companies, the companys shares appear >20% over-valued. The inability to grow volumes beyond 2012, weaker earnings outlook due to high cash costs and additional risk of falling potash prices, highlight considerable risk in our opinion and we believe 10x earnings appears more realistic as a base case valuation.

34

ROCE or WACC %


Redburn Research

K+S 8 July 2010

Appendix 1 capacity additions Appendix on capacity additions on Global potash mining capacityFig 37: Global potash capacity by company and mine 2005-20E (m tonnes)Company Germany Deusa K+S AG K+S AG K+S AG K+S AG K+S AG K+S AG K+S AG K+S AG Germany Total Spain Iberpotasas Iberpotasas Spain Total United Kingdom Cleveland Potash Belarus Belaruskali Belaruskali Belaruskali Belaruskali Belaruskali Belaruskali Belarus Total Russia EuroChem JSC Silvinit JSC Silvinit JSC Silvinit JSC Uralkaliy JSC Uralkaliy JSC Uralkaliy JSC Uralkaliy Russia Total Turkmenistan Turkmen Chemicals Turkmen Chemicals Ukraine JSC Oriano Polymineral Mine Suedharz-Bischofferode Neuhof-Ellers Sigmundshall, Hannover Werra- Unterbreizbach Werra-Hattorf Werra-Hattorf Werra-Wintershall Werra-Wintershall Zielitz 2005A 2006A 2007A 2008A 2009A 2010E 2011E 2012E 2013E 2014E 2015E 2020E 30 350 450 650 300 300 400 300 1,500 4,280 30 350 450 650 300 300 400 300 1,500 4,280 30 350 450 650 300 300 400 300 1,500 4,280 30 350 450 650 300 300 400 300 1,500 4,280 30 350 450 650 300 300 400 300 1,500 4,280 30 350 450 650 300 300 400 300 1,500 4,280 30 350 450 650 300 300 400 300 1,500 4,280 30 350 450 650 300 300 400 300 1,500 4,280 30 350 450 650 300 300 400 300 1,500 4,280 30 350 450 650 300 300 400 300 1,500 4,280 30 350 450 650 300 300 400 300 1,500 4,280 30 350 450 650 300 300 400 300 1,500 4,280

Sallent de Llobregat Suria, Catalonia

485 325 810

485 325 810

485 325 810

515 325 840

545 325 870

575 325 900

575 325 900

575 325 900

575 325 900

575 325 900

575 325 900

575 325 900

Boulby

650

650

650

680

710

740

740

740

740

740

740

740

Soligorsk 1 Soligorsk 2 Soligorsk 3 Soligorsk 4 Soligorsk 5 Soligorsk 6

1,080 1,380 1,380 1,380 0 0 5,220

1,080 1,380 1,380 1,380 0 0 5,220

1,080 1,380 1,380 1,380 0 0 5,220

1,080 1,380 1,380 1,680 0 0 5,520

540 1,380 1,380 1,680 690 0 5,670

0 1,380 1,380 1,680 1,380 0 5,820

0 1,380 1,380 1,680 1,380 0 5,820

0 690 1,380 1,680 1,380 690 5,820

0 0 1,380 1,680 1,380 1,380 5,820

0 0 1,380 1,680 1,380 1,380 5,820

0 0 1,380 1,680 1,380 1,380 5,820

0 0 1,380 1,680 1,380 1,380 5,820

Kotelnikovo Solikamsk 1 Solikamsk 2 Solikamsk 3 Berezniki 1 Berezniki 2 Berezniki 3 Berezniki 4

0 499 1,323 1,150 840 1,004 806 738 6,360

0 499 1,323 1,280 840 1,004 806 738 6,490

0 499 1,323 1,280 162 1,026 1,044 768 6,101

0 499 1,653 1,280 180 1,096 1,064 870 6,642

0 499 1,983 1,280 240 1,096 1,064 870 7,032

0 499 1,983 1,280 270 1,096 1,064 870 7,062

0 499 1,983 1,280 270 1,096 1,064 870 7,062

0 499 1,983 1,280 270 1,096 1,064 1,770 7,962

0 499 1,983 1,280 270 1,096 1,064 1,770 7,962

690 499 1,983 1,280 270 1,096 1,064 1,770 8,652

900 499 1,983 1,280 270 1,096 1,064 1,770 8,862

1,380 499 1,983 1,280 270 1,096 1,064 1,770 9,342

Garlyk, near Magdanly Garlyk, near Magdanly

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

600 100

600 100

600 100

Kalush Stebniki

33 100

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0



35

Redburn Research

K+S 8 July 2010

Appendix 1 Global potash mining capacity

Fig 38: Global potash capacity by company and mine 2005-20ECompany Uzkkimesanoat Congo Mengo Potash Israel Dead Sea Works Israel Total Jordan Arab Potash Co. China Beijing Kunlun Golmud Blue Seashore CITIC Guoan Group CITIC Guoan Group Dalangtan Fangcheng Gelmud Gelmud Gelmud GelmudLtd Gelmud Hongfeng Potash Jiangcheng Mengyejing Jin'ou Chemical SDIC Xinjiang Luobupo SDIC Xinjiang Luobupo SDIC Xinjiang Luobupo SDIC Xinjiang Luobupo SDIC Xinjiang Luobupo Mangya Kangtai Mangya Kangtai Qinghai Bindi Qinghai Bindi Qinghai Bindi Qinghai Chenggong Qinghai Dikuang Qinghai Lenghu Qinghai Lithium Qinghai Salt Lake Qinghai Salt Lake Qinghai Salt Lake Qinghai Salt Lake Qinghai Salt Lake XJ Yaret Chemical Yuangtong Various China PR Total Mine Dekhanabad 2005A 2006A 2007A 2008A 2009A 2010E 2011E 2012E 2013E 2014E 2015E 2020E 0 0 0 0 0 60 120 120 120 120 120 120

Pointe-Noire

0

0

0

0

0

0

0

0

45

240

405

720

Sodom

2,257 2,257

2,257 2,257

2,257 2,257

2,257 2,257

2,410 2,410

2,440 2,440

2,471 2,471

2,501 2,501

2,562 2,562

2,562 2,562

2,562 2,562

2,562 2,562

Safi

1,220

1,220

1,220

1,220

1,220

1,300

1,495

1,495

1,495

1,495

1,495

1,495

Golmud, Qinghai Golmud, Qinghai Xitai Jinaer, Qinghai Xitai Jinaer, Qinghai Dalangtan , Qinghai Fangcheng , Henan Gelmud, Qinghai Golmud, Qinghai Gelmud, Qinghai Gelmud, Qinghai Gelmud, Qinghai Daozuo, Sichuan Jiangcheng, Yunnan Fangcheng Lop Nor Lop Nor Lop Nor Lop Nor Lop Nor Kangtai, Qinghai Gelmud, Qinghai Dayan Beach, Qaidam, Qinghai Dayan Beach, Qaidam, Qinghai Deyantan Dikuang, Qinghai Dikuang, Qinghai Lenghu, Qaidam Qinghai Lake Chaerhan Lake Chaerhan Lake Chaerhan Lake Chaerhan Qinghai Manas Salt Lake Qinghai Qinghai

0 0 100 55 25 13 42 108 60 0 60 0 0 150 40 0 0 0 0 60 60 0 0 0 30 30 180 0 300 600 0 0 0 0 0 250 2,163

0 0 100 88 25 13 90 120 180 0 60 0 0 150 50 0 0 0 0 60 60 0 0 0 60 30 180 0 480 600 0 0 0 0 0 250 2,596

0 0 100 88 25 13 180 120 180 0 60 0 0 150 60 0 0 0 0 60 60 0 0 0 60 30 180 0 540 600 0 30 0 0 0 250 2,786

60 0 100 88 25 13 180 120 180 0 180 0 6 150 60 100 0 0 0 60 60 30 0 33 60 30 180 0 570 600 0 60 0 25 0 250 3,224

60 0 150 88 25 13 180 120 180 90 360 18 6 150 60 600 0 0 0 60 60 60 0 66 60 30 180 0 600 600 0 60 0 100 60 250 4,291

60 60 150 88 25 13 180 120 180 150 360 60 6 150 60 600 0 0 13 60 60 60 0 66 60 30 180 19 600 600 0 60 0 100 120 250 4,551

60 60 150 88 25 13 180 120 180 225 360 90 6 150 60 600 0 0 13 60 60 60 40 66 60 30 180 75 600 600 0 60 0 100 120 250 4,752

60 60 200 88 25 13 180 120 180 300 360 120 6 150 60 600 0 0 13 60 60 60 240 66 60 30 180 75 600 600 0 60 0 100 120 250 5,107

60 60 200 88 25 13 180 120 180 360 360 180 6 150 60 600 0 121 13 60 60 60 240 66 60 30 180 75 600 600 0 60 0 100 120 250 5,348

60 60 200 88 25 13 180 120 180 390 360 180 6 150 60 600 300 242 13 60 60 60 240 66 60 30 180 75 600 600 300 60 0 100 120 250 6,099

60 60 200 88 25 13 180 120 180 420 360 180 6 150 60 600 300 242 13 60 60 60 240 66 60 30 180 75 600 600 600 60 0 100 120 250 6,429

60 60 200 88 25 13 180 120 180 420 360 180 6 150 60 600 600 242 13 60 60 60 240 66 60 30 180 75 600 600 600 60 0 100 120 250 6,729


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Redburn Research

K+S 8 July 2010

Appendix 1 Global potash mining capacity

Fig 39: Global potash capacity by company and mine 2005-20ECompany Archean Group India Total Laos Lao Rock Salt ISL Sichuan Kaiyuan SinoAgri Zhongliao Mining Laos Total Canada Agrium Inc. Mosaic Mosaic Mosaic Mosaic PotashCorp PotashCorp PotashCorp PotashCorp PotashCorp PotashCorp PotashCorp PotashCorp Canada Total United States Compass Compass Intrepid Mining Intrepid Mining Intrepid Mining Intrepid Mining Intrepid Mining Intrepid Mining Mosaic Mosaic Mosaic Mosaic USTotal Mine Greater Rann 2005A 2006A 2007A 2008A 2009A 2010E 2011E 2012E 2013E 2014E 2015E 2020E 0 0 0 0 0 0 0 0 0 0 25 25 50 50 100 100 150 150 150 150 150 150 150 150

Khammouan Vientiane n.a. Vientiane Vientiane

0 0 0 0 0 0

0 0 0 0 0 0

0 0 0 0 0 0

0 0 0 0 0 0

0 12 0 0 12 24

0 30 0 30 30 90

0 30 180 60 30 300

0 30 180 60 30 300

0 30 180 60 30 300

0 30 180 60 30 300

300 30 180 60 30 600

300 30 180 60 30 600

Vanscoy Belle Plaine Colonsay Esterhazy Esterhazy Allan Cory Lanigan New Brunswick New Brunswick Patience Lake Rocanville Rocanville

1

potash -_k+s_redburn

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