What's Going On At Mosaic?

By j.a. graham - January 10, 2012 | Tickers: MOS | 0 Comments

• Email
• Print

Mosaic (NYSE: MOS) shares are well off the 52-week highs. There are several factors contributing to the overall drop of the fertilizer segment. The price of crops is one negative common across the sector. Corn, soybeans and wheat prices are all down from 2010 peaks and that has impacted most of the fertilizer sector. Specific to Mosaic is the Cargill sales of a big block of shares and the shutdown of one of their phosphate rock mines.  Mosaic makes two fertilizers-—phosphate and potash. The other requirement for crops is nitrogen—this completes the big three or NPK fertilizers. Mosaic will buy some ammonia and add nitrogen to blends and it does supply around 30% of its own ammonia, but does not sell nitrogen fertilizers.

The company  issues beyond crop prices that contributed to its price drop.

 The first was the sale of 157 million shares being divested by Cargill and the MAC trusts. The disposition was to start May 25,2011 and unwind for 15 months. There seems to have been a fear of dilution and fast dropping stock price with the flood of shares. Mosaic had been in discussion with the trust to repurchase the remaining block of 21.3 million shares and was turned down by the trust. Cargill felt the price was too low. On November 17, 2011, Mosaic and Cargill reached an agreement and Mosaic bought the shares for $54.58 spending $1.2 billion.

 Cargill created mosaic in 2004 –34% was publicly held and 66% [common and Class B shares] was privately held mostly by Cargill. The sale of 157 million shares was the Cargill stake.

 The second overhang is an injunction that has shut down an important phosphate rock mine Florida. As Mosaic exhausted a portion of its acreage in Polk county, they were planning to shift operations to the adjoining Hardee county mine. Environmental groups stopped them. The mine is critical over the long run to maintaining their phosphate fertilizer output. So far, Mosaic has been able to increase production from other mines it operates and owns, buy from third parties and take some production from the newly acquired 35% in the Miski Mayo Mine in Peru. The mitigation measures should hold through this year without increasing costs beyond the same impact on gross s we saw in the first quarter. In 2013, there may be a bigger problem and increased buying of third party phosphate is going to hurt margins.

 Mosaic has always run into injunctions and court battles over mining permits in Florida. They have always prevailed. I spent some time looking at their reclamation propaganda and if it is accurate, it looks like they do a good job of returning the land to its former state. If they are as good as they say they are, I expect they will reach an agreement.

Phosphate Overview

Phosphate rock is the key mineral phosphoric acid fertilizer. Mosaic phosphate rock production totaled approximately 11.5 million tonnes in 2011, was 6% of estimated world production and 43% of estimated North American production. Mosaic is the world’s second largest miner of phosphate rock and currently operates four mines with a combined annual capacity of approximately 15.9 million tonnes. Production of one tonne of DAP requires between 1.6 and 1.7 tonnes of phosphate rock. Diammonium Phosphate -- DAP-- is the most widely used high-analysis phosphate crop nutrient worldwide. DAP is produced by combining phosphoric acid with anhydrous ammonia. DAP is a solid granular product.

Phosphoric acid is the key building block for the production of concentrated phosphate crop nutrients and animal feed products.

 Mosaic U.S. phosphoric acid production totaled approximately 3.9 million tonnes during fiscal 2011 and accounted for approximately 10% of estimated global production and 46% of estimated North American output during fiscal 2011.

 All of the Mosaic mines and related mining operations are in central Florida [they have a 35% interest in a Peruvian mine]. During fiscal 2011, they operated five active mines:

 1) Four Corners

2) South Fort Meade

3) Hookers Prairie

4) Wingate

5) Hopewell

 The Hopewell mine’s reserves were exhausted in January 2011.

 It requires nearly 2X the phosphorous rock to produce a unit of DAP fertilizer. With Hopwell exhausted, Mosaic had planned to move operations to South Fort Meade across the county line. Mosaic is now under an injunction and can’t operate the mine. It isn’t easy to just pick up and move on to new phosphate bearing areas—there are not that many. Most are in Florida and with a small extension into southern VA.

 Mosaic was able to continue to make fertilizer by drawing down existing phosphate rock and finished product inventories; sourcing rock from the investment in the Miski Mayo Mine; purchasing phosphate rock from third parties where reasonable; maximizing production at other phosphate mines.

 For fiscal 2012, MOS says it will be able to continue to support planned finished phosphate production levels by continuing the same.

 The South Fort Meade mine’s phosphate rock production is 3.2 million tonnes per year. An extended loss of production could adversely impact production at phosphate concentrates plants and reduce sales volumes, lead to further layoffs of employees, and result in the indefinite closure of at least one of their phosphate concentrates plants. This worst-case scenario is no doubt keeping some investors out.

 Phosphate rock mining is open pit with draglines. To get to the ore, ten to fifty feet of the top layer has to be removed and then the pits are dug. This is destructive and destroys the involved wetlands and uplands and is the argument environmentalists used to stop production. They do have a point.

 Phosphate miners are required to reclaim land within two years of termination of mining activity. The following link is to their web page regarding reclamation. If they are following through on legally binding reclamation, then they may be allowed to develop South Fort Meade

 Annual production capacity for the 5 phosphate mines is 15.9 million tons. Of that, South Fort Meade is 6 million tons—37% of capacity. Its loss will have a significant impact on production of the phosphate fertilizer end products. Even though Mosaic also has potash, phosphates accounted for $6.9 billion out of $10 billion in revenue in 2011 –- 70% of revenue. The loss of nearly 40% of phosphorous capacity will lower margins and revenue and may account for the share prices staying near 52-week lows.

 Mosaic is diversifying phosphate sources and acquired a 35% economic interest in a joint venture, with subsidiaries of Vale and Mitsui & Co that owns the recently opened phosphate rock mine --- Miski Mayo Mine--- in the Bayovar region of Peru for $385 million. Phosphate rock production started at the Miski Mayo Mine and shipments began in the first quarter of fiscal 2011. The Miski Mayo Mine’s annual production capacity is expected to be 3.9 million tonnes when fully operational. That will not cover the loss of South Fort Meade but is a start. Mosaic gets 35% of the mine output and is looking to increase their stake. There are plans to increase production to around 6 million tons per year.

Potash Overview

 Mosaic mines and processes potash in Canada and the United States. The term potash applies to the common salts of potassium. Muriate of potash –MOP---is the primary source of potassium for the crop nutrient industry.

Mosaic operates three potash mines in Canada, including two shaft mines and one solution mine. It has two potash mines in the US including one shaft mine and one solution mine. They also own related refineries at each of the mines. In 2011, MOS mined 30 tons of ore and cranked out 8.3 tons of finished product. The capacity for finished product is currently 10.3 million tons. 

Mosaic expects brownfield (extensions of existing operations) expansions to increase capacity for finished product by approximately five million tonnes. The expansions are planned over the next decade, with the first expansions already on line. The mineral rights in Saskatchewan are sufficient to support current operations for more than a century.

MOS has 6 mines—three in Canada and three in the US. 

Segment Margins and Production

Phosphate revenue/gross margins

 Phosphate production volume   (1000's tonnes)       

 Average selling price per tonne

                          2011    2010    2009                     

 Phosphates net sales for FY 2011 increased to $6.9 billion compared to $4.7 billion in 2010. The increase was primarily due to higher sales prices and a slight increase in volume.

The average DAP selling price was $491 per tonne in 2011, an increase of $164 per tonne or 50% compared to 2010. The increase in the selling price of blends was 20% compared with 2010. Blends pricing is lower due to the mix of potash and nitrogen used in. The price of these materials increased at a lower rate than phosphate prices.

 Phosphate’s  sales volumes were up to  12.0 million tonnes in 2011, compared to 11.0 million tonnes in 2010. 

Gross margin for phosphates increased to $1.7 billion due to higher sales prices partially offset by higher product costs of approximately $680 million. The higher costs were primarily due to higher raw material expense for sulfur and ammonia.

The average price for sulfur increased to $162 per long ton in 2011 from $71 a year ago—-pretty substantial.

 Ammonia increased to $407 per tonne from $265—also a steep price hike. These required inputs to product make the gross much lower for phosphate fertilizer compared to the potash. 

 Phosphate rock production was 11.5 million tonnes in 2011 compared with 13.3 million tonnes in 2010. The reduction in phosphate rock production rates was due to the temporary shutdown for most of the first six months of 2011 and subsequent reduced production level for the remainder of fiscal 2011 at the South Fort Meade mine. 

 Potash revenue/gross margins

 In millions $

Sales Volume in 1000's tonnes

Crop Nutrients

 Average selling price per tonne

The potash segment’s net sales increased to $3.1 billion in 2011 due to an increase in sales volumes that resulted in an increase in net sales of approximately $790 million.

The Potash segment’s sales volumes increased to 7.5 million tonnes for fiscal 2011 compared to 5.5 million tonnes The average MOP selling price was $359 per tonne in fiscal 2011, which is a slight increase compared to the 2010 price of $352 per tonne.

Mines get flooded and this is an ongoing expense for the company. MOS spent  $151.9 million during 2011 compared to $133.4 million in fiscal 2010. At present  part of the cost is paid by Potash Corp of Saskatchewan As part of an arrangement allowing MOS to mine the Esterhazy Canadian mine.

In 2011 potash production was 7.3 million tonnes compared to 5.2 million tonnes in fiscal 2010. Production increased to meet  demand. The operating rate for potash production was 80% in fiscal 2011 compared to 57% in fiscal 2010. Operating rates exclude tonnes produced under the Tolling Agreement with POT. 

Q1 2012

Mosaic acquired a  35% interest in a joint venture, with subsidiaries of Vale and Mitsui & Coin a phosphate rock mine --Miski Mayo Mine”--- in the Bayovar region of Peru for $385 million. Phosphate rock production started at the Miski Mayo Mine and shipments began in the first quarter of fiscal 2011. That will help offset some of the South Meade losses.

Revenue increased 41% to $3.1 billion in Q1 2011. Net earnings were $526.0 million, or $1.17 per diluted share, compared to $297.7 million--$0.67 in 2010.

Both volume and prices increased on higher demand in Q1. The fertilizer market was strong due to the positive global outlook for agriculture fundamentals, supported by historically  high grain and oilseed prices. Customers were filling pipeline inventories in expectation of strong fall fertilizing.

Higher raw material costs partially offset the benefit from the increase in market prices for phosphates products. The higher prices for key raw materials for concentrated phosphates, sulfur and ammonia, resulted from higher global demand and tighter supply for these raw materials. Increased use of phosphate rock purchased from third parties increased raw material costs and will continue to do so in 2012. Higher raw materials contracted gross margins sequentially.

Combined Margins by quarter 

Fertilizer companies need both volume and pricing to to make their best margins. When push comes to shove and both are not rising, pricing trumps volume where margins are concerned. In the quarter for 8/11, prices were coming down even though volume was stable to increased. Margins suffered.  In the February and May quarters, everything was aligning. It takes a very special set of circumstances for fertilizer companies to hit the highs they saw in 2007-2008. We are not there yet. 

Phosphate Q1 2012 sales

Average selling price per tonne  

                           2011        2010     Change     %        

Q1 2012 phosphates 

Sales increased to $2.2 billion compared to $1.6 billion in 2010. Increased sales volumes resulted in additional revenue of $520 million and $40 million, respectively.

The average DAP selling price was $576 per tonne 34% higher than 2010. Crop nutrient blends increased 45%. The increases in selling prices for DAP and Blends were due to increased demand. 

Gross margin increased primarily due to higher sales prices partially offset by higher costs for sulfur, ammonia and third party phosphate rock purchases.

 North American production of phosphate product was 2.2 million tonnes for the first quarter of fiscal 2012 and 2011. Phosphate rock production was 2.8 million tonnes Q1 2012 and 2.3 million tonnes Q1 2011. The increased phosphate rock production was due to increased production at phosphate mines other than South Fort Meade, producing on a limited basis in 2012 and 2011 due to the preliminary injunctions

For fiscal 2012, MOS says it will be able to continue to support planned finished phosphate production through additional rock from other Florida mines, additional spot purchases from the Miski Mayo Mine and incremental third party purchases. The increased use of purchased rock increased costs by approximately $30 million [1.6% of the total COGs] in Q1 2012 and the use of purchased phosphate rock will continue shrink gross margins until the injunction is lifted [if ever] 

Potash Q1 2012 Sales 

Sales volume (in thousands of metric tonnes)                                

Average selling price per tonne 

 Potash Q1 

 Revenue increased to $873.0 million compared to $621.9 million in Q1 2011. Higher average sales prices added $210 million and higher sales volumes accounted for  approximately $40 million.

 Sales volumes increased to 1.8 million tonnes compared to 1.7 million tonnes in 2010.

The average MOP selling price was $446 per tonne compared to $331 per tonne last year. Although both domestic and international selling prices are increasing, the international MOP selling price continues to lag domestic market pricing.

 Gross margin increased to $444.4 million from $256.7 million. Higher selling prices and product mix added $230 million. As a result, gross margin increased to 51% compared to 41% Q1 2011.

Mosaic expensed $38.9 million managing the brine flooding at the Esterhazy mine in Q1 2012 – it was  $36.9 million last year so not a big increase.

Potash production was 1.9 million tonnes compared to 1.4 million tonnes in 2011. Production was raised to fill increased demand.

Debt, DSO,Cash, Cash Flow, ROIC 

On January 13, 2011, Mosaic redeemed the remaining $455.4 million aggregate principal amount of their 7-3/8% senior notes due December 2014. The annual interest expense was cut by approximately $34 million.

October 24, 2011, they sold $450,000,000 3.750% Senior Notes due 2021 and $300,000,000 4.875% Senior Notes due 2041. Mosaic intends to use approximately $505.0 million of the net proceeds from this offering to redeem the 7-5/8% senior notes due 2016 redeemable beginning December 2011 and the remainder for general corporate purposes.

Total debt at the end of August was $825.1 million. The debt/capital ratio was 6.3%.

New debt level will be a little over $1 billion with a debt to capital ratio of 8%.

Mosaic had $9 per share in cash at the end of Q1

 Cash flow is positive and usually working capital control is good with CFFO exceeding net income for 2 out of 4 years. The last 8 quarters had CFFO/net greater than 1 with several 2011 quarters falling below 1. In the February and May quarters, inventory and AR were high and CFFO/net was less than 1. It has improved the first Q of 2012.

 *AR is accounts receivable

 The first quarter of 2012 has seen improvement

In spite of some increases in AR, DSO has been acceptable. They are higher in the same Qs that saw inventory and receivables at higher levels—Feb and May.

 Annual

Quarterly

ROIC three years & WACC 2011

 WACC is 9.8% for 2011 using today’s price per share

I guesstimate similar if not slightly lower cost of capital for 2010 and 2009 as debt levels were  higher

 Mosaic is creating some value even in a year of poor earnings like 2010.

 Guidance 

For the second quarter 2012 they estimate total potash sales volumes of 1.7 million to 2.1 million tones [Q1 2011 was 1.8 million tonnes]

 The average MOP selling price was $440 to $465 per tonne [$446 Q1 2012] and reflects the expectation of a higher percentage of standard product in the international sales mix that lowers the average price. 

They expect to run the potash mines for the second quarter between 80 percent and 90 percent of operating capacity, up from the first quarter, but slightly impacted by turnaround activities at the Colonsay mine.

 In  phosphates Mosaic projects total sales volumes of 3.1 million to 3.5 million tones [Q1 2012 3.2 million tones] and an average DAP selling price of $600 to $625 per tonne [$576 in Q1].

To meet continued high demand, they expect to operate North American phosphate plants in excess of 85 percent of granulation capacity. The second-quarter margins in this segment are expected to remain comparable with the first quarter due to higher raw material costs

Volume at the slightly disappointing—mid-range offer no growth. Pricing is better but may decline if the current downward trend is not reversed by tighter supply. .

 Highlights From the Conference Call

 Outlook for crop production and fertilizer demand

[The] markets fret way too much about the impact of a potential economic slowdown on food demand. As this chart shows, global grain and oilseed demand is cruising upward at an accelerating pace, and it didn’t miss a step during the Great Global Recession. Use increased 2.1 percent in ‘08/’09, or right in line with the compound annual growth rate for the decade. The USDA currently forecasts that demand will increase 2.2 percent in ‘11/’12, and that follows a 2.4 percent increase in ‘10/’11. 

 The agricultural commodity markets must bid for more acres in 2012 and then hope that Mother Nature cooperates in order to prevent another drawdown of global inventories. This chart shows that grain and oilseed stocks are projected to decline for a second year in a row in ‘11/’12, despite the extraordinarily strong price signals since mid-2010. The world needs a stronger supply response in 2012.

 Of the major crops, corn is the poster child for tight agricultural commodity markets. Both global and U.S. inventories as a percentage of use are projected to decline to the second lowest percentage in modern history. As a result, we estimate that the market will need to bid for 93 million to 95 million acres of corn from the United States next spring. 

In the case of phosphate, we estimate that global shipments of the leading solid products will increase to 60 million to 61 million tonnes in 2011 and to 62 million to 64 million tonnes in 2012. For potash, we now estimate that global MOP shipments will increase to 56 million to 57 million tonnes this year and then to 58 million to 60 million tonnes in 2012. 

 While the USDA is projecting record storage and decreased acreage planted in 2012, Mosaic believes the opposite. The agricultural commodity sector has so many moving parts it starts to resemble the complexity of a Rube Goldberg machine.

Most recently, Brazilian rain has been disappointing, setting the stage for lower storage and higher prices. Next spring is too many events away to even make an intelligent guess of crop and fertilizer directions.

 The trend in 2011 has been falling crop prices followed decreasing spot prices for fertilizer and some backed up supply. That led to Mosaic announcing cuts in phosphate production of 250,000 tons.

Mosaic feels the bottom is in. I am not as sure. If rain in Brazil turns heavy, the USDA revises storage up again, spring planting is delayed by bad weather, the South American soy bean harvest falls short, and so and so on, Mosaic and the fertilizer segment will not recover in the next two quarters.

 What we can count on is the long-term population pressure that demands food. There are more people and there are more people using higher and richer levels of consumption. Poor diets of local crops are giving way to meat that is fueled by grain.

What we do now is keep searching for a bottom and a good place to start positions. It looks premature at present.

• Email
• Print
• Feedback