The Mosaic Company (ticker: MOS)
Ari Ades, Senior Vice President
Dave Pusar, Junior Analyst
Dan Marks, Junior Analyst
James Vessa, Junior Analyst
Company Snapshot (comparables discussed under Competitor Analysis)
Market Cap: 24.48B
Enterprise Value: 21.59B
Trailing P/E: 10.98
Forward P/E: 11.95
Enterprise Value/Revenue: 1.93
Enterprise Value/EBITDA: 5.95
Who and What?
- The Mosaic Company engages in the production and marketing of concentrated phosphate- and potash-based crop nutrients for the agriculture industry worldwide.
- The company also offers phosphate-based animal feed ingredients; and produces and sells potash for use as fertilizers and animal feed ingredients, as well as for use in industrial applications. Its potash products are also used for de-icing and as a water softener regenerant.
- The company’s distribution facilities include sales offices, port terminals, crop nutrient blending and bagging facilities, and warehouses. It sells its products primarily to wholesale distributors, retail chains, cooperatives, independent retailers, and national accounts.
- Mosaic is the world’s largest producer of phosphate and second largest producer of potash.
Earnings Call Highlights (Jan 5)
- Mosaic’s fertilizer business yielded higher earnings in the 2nd Quarter of their 2012 fiscal year. The company reported earnings from continuing operations of $1.40 per share versus $1.02 in the year ago period (excluding the $1.27 per share gain from the sale of Fosfertil in the 2nd Quarter of FY 2011).
- Revenues increased by 340 million or 13 percent year-on-year to 3.01 billion. Revenue gains reflected higher selling prices for both potash and phosphate. However, tonnes sold in the second quarter were lower than the same period a year ago for both fertilizer types. Third quarter sales are being adversely affected by customer purchasing decisions due to global economic concerns.
- Improved capital structure. MOS purchased 21.3 million shares for $1.2 billion, issued $750 million of low-cost debt, and called $469 million of high-cost debt. (Debt-to-Equity Ratio = 0.4)
- Gross margins for the 6 months ended November 30th were 28.4 percent compared to 26.2 percent over the same period a year ago.
- Operating margins are just as strong at 25 percent compared to 22 percent a year ago.
- Breakdown of Sales:
- Revenues: Phosphates (72%), Potash (28%)
- Sales up 24% y-o-y
- 29% from North America, 71% International
- Gross Margin – 2010: 20%, 2011:20%
- Sales up 30% y-o-y
- 2010: North America (67%), International (33%)
- 2011: North America (52%), International (48%, 87% growth! y-o-y)
- Gross Margin – 2010: 41%, 2011: 49%
- CEO James Prokopanko’s comments from earnings call:
- “We continue to expect an above average application season in North America and record-setting global demand for both phosphate and potash in 2012″
- “We are confident strong farmer economics and agricultural fundamentals will ultimately prevail over the near-term cautious sentiment.”
- “Isolated phosphate market spot prices have become disconnected with the underlying agricultural fundamentals. As dealers and distributors focus on the macroeconomic uncertainty and delay purchases for the North American Spring Season, near term supply of phosphate barges on the Mississippi River has exceeded near-term demand. The current spot prices in this market do not reflect our outlook for the business, nor do we think they are sustainable. In response, we have decided to cut planned production by 250,000 tonnes over the next three months”
- “We continue to expect an above average application season in North America and record-setting global demand for both phosphate and potash in 2012…We are confident strong farmer economics and agricultural fundamentals will ultimately prevail over the near-term cautious sentiment.”
- Discuss Excel Spreadsheet & DCF (Dave)
- Potash Corporation of Saskatchewan (POT): $46.10
- Largest potash producer (1/5 total world supply)
- CEO: William Doyle
- CEO since 1999, 22 years at Potash
- CEO: William Doyle
- Production cutbacks at two of its facilities
- Poor transportation and distribution infrastructure
- Main driver of revenue is Potash which has increased in price, lowering sales volume
- Sales volumes fell from 2.4 million tons in 2010 Q4 to 1.6 million tons in 2011 Q4
- Especially hurt in North America where sales fell from 0.8 million tons to 0.4 million tons in Q4 2010 and 2011 respectively
- Only company delivering two essential crop nutrients, potash and phosphate, on a massive global scale.
- 2011 invested $600 million to expand potash production capacity, $900 million in planned capital spending in 2012
- 2011 agreed to an orderly distribution of Cargill Incorporated’s 64% ownership share, a big step toward becoming a fully independent public company
- Corporate Responsibility Magazine’s 100 best Corporate Citizens List: Second year running and only one among its competitors
- Rank first in production efficiency in phosphates and third in potash among competitors according to cost curve
- Potash is a higher margin business and will enhance the overall profitability (strategic moves being made to expand potash production).
- Mosaic is on track to emerge as one of the safest, lowest-cost and most capital-efficient producers in our industry
- Much more liquid than its main competitors
- Current ratio: 3.03
- Quick ratio: 2.45
- Current ratio: 1.10
- Quick ratio: 0.76
- Current ratio: 1.74
- Quick ratio: 1.45
- CF Industries (CF) – Total Sales: $6 billion
- Nitrogen: $5 billion or 82%
- Phosphates: $1.1 billion or 18%
- CF does not produce potash
- Potash (POT) – Total Sales: $8.7 billion
1. Potash: $4 billion or 46%
2. Phosphate: $2.5 billion or 29%
3. Nitrogen: $2.2 billion or 25%
- Mosaic Total Sales: $9.9 billion
1. Phosphates: 6.9 billion or 69%
2. Potash: $3 billion or 31%
Why We’re Bullish?
- 1. Profitability/Valuation
- Steady and Improving Margins/EPS Growth
- Growth in Potash production (87% y-o-y)
- The stock is selling for 10x trailing, 11x forward earnings (Industry: 16.5x) which seems cheap give the long term secular food demand in the developing economies and for a company that has grown EPS at a better than 13% a year pace over the turbulent last five years.
- 2. Pristine Balance Sheet
- Cash (over $2B in net cash vs POT’s several billion net debt position)
- Debt/Equity Ratio (0.4 vs POT 1.12 vs CF 0.82 vs AGU 1.04)
- Liquidity Ratios very favorable to Industry averages
- 3. Expansion Projects
- They hold the largest potash mine in the world at Esterhazy, Saskatchewan, currently producing about 5.3 million metric tons per year (Mtpy).
- Mosaic’s K1 and K2 expansion projects aim to increase the production to 7.1 Mtpy by 2017.
- c. Potash (Esterhazy Mine = largest in world)
- i. K1: Expansion of the Saskatchewan Potash operations, and the 4 projects under construction today remain on track and on budget. MOS invested more than $267 million on these projects during the second quarter.
- ii. K2: At Esterhazy K2, they completed the aboveground mill expansion ahead of schedule and below budget. Combined with the underground expansion activities, which are nearly complete, capacity is expected to increase by more than 750,000 tonnes a year.
- iii. In 12 months, Mosaic’s Esterhazy operation will have 2 million tonnes of incremental Potash peaking capacity to meet customers’ needs. In addition, expansion projects at Colonsay and Belle Plaine are expected to come online by the end of calendar 2012.
- iv. Belle Plaine, we expect to complete our stage 1 expansion by mid-2012 and are beginning the next phase of our expansion plan. As the operator of the largest potash solution mine in the world, we believe we are best positioned to produce the white, premium potash derived from this type of mining.
- d. Phosphate
- i. “We estimate that global shipments of phosphate products totaled a record 60 million tonnes in 2011. In 2012, shipments are forecast to climb to yet another record in the 62 million to 64 million tonne range.” -CEO
- Global Monetary Easing
- Globally Coordinated Central Bank Intervention (BOJ, BOE, PBoC, Fed, ECB, SNB)
- Agricultural Commodities (real assets) will outperform in times of expansionary monetary policy.
- Show MOS vs MOO vs GSPC QE 1 & 2 Charts
- Macroeconomic factors: Agricultural commodities are highly sensitive to nominal price changes across the macroeconomy.
- Contraction of Monetary Policy (raising interest rates, unwinding balance sheet, subsequent fall in demand)
- Bad farming season – weather is unexpected, could lead to decrease demand for fertilizer, driving prices down.
- Failure to execute on expansion projects – currently undergoing expansions projects on the Esterhazy mine (world’s largest potash mine). K1 expected to increase production from 2.5 Mtpy (million metric tones per year) to 2.7 mtpy, K2 expected to increase production from 2.6 MTPY to 4.3 mtpy by 2012. Failure to execute on these expansions could lead to a fall in stock prices
- Competition – In Potash (POT, AGU), In Phosphate (POT, AGU, CF)
Relevant Developments/Other Notes
- The presumed next leader of China – Xi Jinping – met in Iowa with officials last month from the Dept. of Agriculture and local farmers, reiterating his nation’s reliance on the U.S. for soybeans and other food and livestock feed supplies. It wasn’t all empty rhetoric either based on a promise from Chinese government officials to buy more than $4B in soybeans this year with more deals expected down the road.
- Analysts continue to be positive on the stock. Credit Suisse has an “outperform” rating on Mosaic and S&P has a “Buy” on the stock along with a $75 price target. The median analysts’ price target on MOS is $85 a share.
- Mosaic sells in the bottom third of its five year valuation range based on P/E, P/B, P/CF and P/S.
- Natural Gas, which is a primary cost input for the company, continues to hit new lows and is currently down to levels not seen in a decade. This certainly should help margins.