Stock Analysis: Fertile Mosaic Company
Board: Value Hounds
Most of these company docs I put here are too long and not easily read with a firm conclusion at the end to buy or avoid. These are just notes that go into files and I find having everything in one document saves me time when circling back to revisit the idea weeks or months later. Its too much information for a casual read but I go ahead and post the things here in hopes of some diverse opinions
The Teucrium Corn Fund , which tracks the performance of three corn futures contracts expiring on different dates, is down 15% year-to-date. As the chart below shows, several fertilizer companies including Agrium Inc. , Mosaic , and Potash Corp. all underperformed the Teucrium Corn Fund on Thursday. Mosaic, the largest producer of potash, closed 7% lower on Thursday, despite announcing a $1.2 billion share buy back plan.
Commodity prices can be very confusing for investors. While the long-term bullish case for agricultural is strong due to the growing global population, prices are still affected by market sell-offs. Furthermore, supply issues continue send mixed signals. Last week, the U.S. Department of Agriculture lowered its forecast for the size of the U.S. corn crop for the fourth time in a row and also made a similar cut to domestic demand. In its crop report, the Agriculture Department cut its estimate of this year’s corn crop by 1%, to 12.31 billion bushels.
Mosaic questions some of the USDA figures. The USDA has forecasted that 400,000 to 500,000 acres will be taken out of corn planting/harvest this year. Naturally, that means less potash and phosphate if those acres remain fallow. MOS monitors the ethanol spread and is not convinced the price of ethanol is high enough at present to cut demand by as much as the USDA projects-—a lot of corn goes to ethanol.
Ethanol is not at its highs
Corn storage is projected to hit 10 year lows in 2012 and Mosaic believes that tighter supply will be good for prices but there may be a lag and corn prices may very well continue to drop until the next rotation works through. In other words, farmers may cut corn and plant something else spring this year; next year corn will be in shorter supply, the price will go up, more gets planted and fertilizer companies make more money.
Like FCX and copper, apparently, ag companies live and die by corn prices. Hard to believe that out of all the crops grown, corn dictates the price. Learn something every day. Since the FDA has been cutting planting forecasts and domestic demand, Potash, CF and Mosaic are going down and may get back to 52-week lows if it keeps up.
Recent guidance from Mosaic was notable for flat volume but higher pricing. That has not helped.
Link to pricing POT,MOS,AGU,CF
The price of corn is in decline. The acres to be planted and harvested forecast from the USDA has been cut by 400K to 500K –that means less corn and presumably less phosphate/potash sales.
There are a couple of other negatives the market is turning to and using as a reason to not invest.
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 with the trust feeling the current 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.
Mosaic was created by Cargill 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 is the injunction that has shut down an important phosphate rock mine Florida. As Mosaic exhausted a portion of the acreage in Polk county, they were planning to shift operations to the adjoining Hardee county mine. They were stopped by environmental groups. 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 as 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. So there is some risk.
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.
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.
Phosphate rock is the key mineral used to produce phosphate crop nutrients and feed phosphate. Mosaic phosphate rock production totaled approximately 11.5 million tonnes in 2011 and 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.
Mosaic is the largest producer of concentrated phosphate crop nutrients and animal feed ingredients in the world. U.S. phosphates operations have capacity to produce approximately 4.4 million tonnes of phosphoric acid per year, or about 9% of world capacity and about 45% of North American capacity. Phosphoric acid is produced by reacting finely ground phosphate rock with sulfuric acid.
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 wholly owned phosphate mines and related mining operations are located 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
The Hopewell mine’s reserves were exhausted in January 2011.
All of this detail is included because investment in Mosaic depends on the stability and reserves of their phosphate holdings and that is being partially shut in by environmental groups in Florida. 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 under an injunction and cannot 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. Phosphate mining has been conducted in Central Florida since the late 1800’s. The potentially mineable portion of the district encompasses an area approximately 80 miles in length in a north-south direction and approximately 40 miles in width—not a lot of acreage available.
The company 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; and 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. But a lot of the sector has been in decline along with MOS.
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 indeed following through on legally binding reclamation, then it is possible 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 be a detriment 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% and may be looking to increase their stake. There are plans to increase production to around 6 million tons per year.
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 with a total of three production shafts 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 expansions to increase annualized peaking 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.
Shaft mines flood and Mosaic has been dealing with inflows for years. The cost is mostly expensed. Recently the inflows have been heavier and costs increased. There is insurance coverage for most of their mines, but this complication can affect profitability and decrease margins.
MOS has 6 mines—three in Canada and three in the US.
[See Post for Tables]
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 production of Blends. The price of these materials increased at a lower rate than phosphate prices.
Phosphate’s sales volumes increased 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 costs for sulfur and ammonia.
The average price for sulfur increased to $162 per long ton in 2011 from $71 a year ago—pretty substantial increase. 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.
[See Post for Tables]
The Potash segment’s net sales increased to $3.1 billion in fiscal 2011 compared with $2.2 billion in fiscal 2010 primarily 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 prior year average price of $352 per tonne. MOP selling prices, both domestic and international, increased Although both domestic and international selling prices increased, the international MOP price continued to lag domestic market pricing as North American demand has returned more rapidly than elsewhere.
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. Right now part of the costs is paid by Potash in exchange for at-cost potash under the tolling agreement. MOS believes they are done with this tolling agreement as of 2011. Potash disagrees and it’s up to the courts. It may work out well for MOS if potash continues to rise and they can bring more to market.
In 2011 potash production was 7.3 million tonnes compared to 5.2 million tonnes in fiscal 2010. Production increased to meet increasing 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.
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, or $0.67 per diluted share in 2010.
Both volume and prices increased on higher demand. The fertilizer market remains strong due to the positive global outlook for agriculture fundamentals, supported by continued high grain and oilseed prices in the current year. Customers are 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 in the current year. 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.
[See Post for Tables]
Q1 2011 [FY 2012]phosphates
Sales increased to $2.2 billion compared to $1.6 billion in 2010. 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 during the first quarter of fiscal 2012 compared with 2.3 million tonnes fiscal 2011. The increased phosphate rock production in FY 2012 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 levels through a continuation additional rock sourced from other Florida mines, additional spot purchases from the Miski Mayo Mine and incremental third party purchases. The increased use of purchased rock, including planned purchases from the Miski Mayo Mine, increased costs by approximately $30 million [1.6% of the total COGs] in the 2012 and the use of purchased phosphate rock will shrink gross margins until the injunction is lifted [if ever]
Potash Q1 FY 2012
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.
Because of the mine locations in Canada, Mosaic pays a resource tax and royalties. In Q1 it was $95.5 million compared with $52.2 million in the same period a year ago. The $43.3 million last year due to the increase in sales partially offset by the increased deduction for capital expenditures related to expansion projects.
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.
Some highlights from the conference call
Public filing not SeekingAlpha
Outlook for ag 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 marching 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.
Decreasing raw material costs from ammonia
The combination of factors have tightened the ammonia market, as reflected in recent price changes. I’m sure you are aware of some of the gas delivery problems in Trinidad. There are a couple of plants that have been delayed a bit in Algeria, as well as Qatar. We have had our plant outage at Faustina. So on the supply side, there have been a few hiccups.
And on the demand side, obviously, with the prospect of 93 or 95 million acres of corn, certainly in the US, there is the expectation of very strong fall application needs. And in the case of phosphate, phosphate markets have rebounded and the demand to produce ammonium phosphate continues to climb as well.
So it boils down to, I guess, simple supply and demand fundamentals, and the market has tightened. We expect that eventually there will be some relief in this market, but in the near-term, fundamentals are tight.
Our Faustina ammonia plant will be coming onstream in the next four to six weeks.
As well, we’ve all seen the reports that there is another producer in North America that is going to be bringing up one of its ammonia plants over the next — probably that is maybe more like six months, I believe.
And I think this is a good point, why we — it just highlights our interest and continued interest in expanding our ammonia production. We presently consume 1.5 million tonnes of ammonia a year in the production of phosphates. We are self-sufficient with Faustina to the extent of a third, or 500,000 tonnes. And we are left with about a 1 million tonne hole to fill with on the open market.
And this is an area that we are looking as an investment, is for Mosaic to become fully self-sufficient in its — at least fully self-sufficient in its ammonia production.
Given the very low cost, relatively speaking, of U.S. natural gas, producing our own ammonia provides a decided economic advantage right now, probably to the tune of about $300 a tonne. So having Faustina out is certainly a factor in our gross margin performance.
More potash coming on line—diversification of sources
----a question on the Miski Mayo project. I read recently that Vale is considering expanding this project from 3.9 million tonnes to 5.8 million tonnes. Can you provide some color with respect to whether or not the 35percent interest in Phase I carries over into Phase II? And if it doesn’t, are you talking to them about that?
Jim Prokopanko CEO: Good day, Ben. Thanks for joining us. Miski Mayo has turned out to be a good investment. We are very pleased with how it is working and how the partners are getting along. We are not getting it up to full production as quickly as we’d like, but we are making good, steady progress, and we see more of that to come.
That is a facility that we would like to see expand, and we have aspirations to see it double in size. We are prepared to be a — match the expansion every step of the way. We see demand for that product continuing to grow. And we would like to be — continue with off-takes, at least proportionally to what we are now, and like to continue our investment at current levels. Or we would even be prepared to take a higher stake in that operation. It has been a good investment.
Debt, DSO, cash and cash flow
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.
Then on 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.
[See Post for Tables]
For the second quarter 2012 they estimate total potash sales volumes of 1.7 million to 2.1 million tones [Q1 1.8 2011 million tones]
The average MOP selling price of $440 to $465 per tonne [$446 Q1 2012]. This average price 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 is disappointing—mid-range offers no growth. Pricing is better.
WACC is 9.8% for 2011 using today’s price per share
I guesstimate similar if not a bit lower cost of capital for 2010 and 2009 as debt levels were slightly higher.
Mosaic is creating some value even in a year of slowing growth like 2010.
My biggest quibble is the laughable 20¢ dividend. They are still in growth mode so that may be expecting a little too much.