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K+S may resort to hybrid bonds to fund Canada expansion

FRANKFURT, Oct 9 (Reuters) - German potash fertiliser supplier K+S is looking into hybrid bonds to finance its C$4.1 billion ($3.97 billion)expansion project in Canada after uncertainty over potash prices upset its previous funding plans.

K+S has remained committed to its planned investment in the new Canadian mine, Legacy, even after the breakup of an export cartel of two larger rivals in July led to expectations of a slump in prices for the fertiliser mineral.

"Apart from standard fixed-income bonds, hybrid bonds are also a possibility," a spokesman said on Wednesday, adding that no decision had been made.

He reiterated previous statements that the main focus of financing the project was debt, on top of existing cash held and future cash flows.

In a note to investors issued on Tuesday, Bernstein Research analyst Jeremy Redenius cited K+S finance chief Burkhard Lohr as saying that the miner may consider a hybrid bond worth up to $1.4 billion, secured against its future cash flows.

The K+S spokesman declined to confirm that amount, or specify what kind of bond it was considering.

Hybrid bond is an umbrella term for a range of debt instruments with features of equity financing, typically a convertible bond, which pays a lower coupon than a standard bond in exchange for the potential to benefit from a rise in the share price. It may include an option for the issuer to change the terms depending on the company's financial situation.

Bernstein also cited CFO Lohr as saying he would expect potash prices to be around $400 per tonne in three years, an outlook that the company spokesman declined to confirm on Wednesday.

K+S's potash prices tend to follow the bulk purchasing agreements hammered out between the world's biggest users, China and India, and the top producers in Canada, Russia and Belarus.

The German producer tends to charge a mark-up on those prices because it sells fertilisers in smaller lots and many of its products include additional minerals such as magnesium compounds.

Russia's Uralkali, the world's largest potash producer, in July sent shockwaves through the industry by saying global potash prices would likely fall to below $300 per tonne in the second half - from $400 at that time - because of its decision to leave its export alliance with Belaruskali.

Uralkali has since changed its stance and said it expects prices to stay above $300, citing robust global demand. This month it predicted global potash prices would rebound as soon as supply contracts for top global consumer China are set in early 2014.