The Mosaic Company (NYSE: MOS) is the second-largest public potash producer and the largest phosphate producer in the industry. It is my favorite North American fertilizer stock and I see a lot of company specific catalysts for the stock which will lead its outperformance over its peers in the next 12-15 months.
Better Geographic Exposure than its immediate peer – Potash Corp. (NYSE: POT)
On 24th April, MOS provided positive update on its shipment trends driven by an early and strong spring season in North America, combined with increasing shipments to South America. MOS said that its phosphates volumes will be in the upper end of the guidance range provided in late March of 2.3mn-2.7 million tons.
The following day, Potash Corp posted a 1Q miss and lowered guidance for global potash demand. POT posted a 12% EBITDA miss on weaker Potash profits (weaker on both volumes and pricing). Sales were 8% below expectations. Phosphate margins were weaker but were offset by higher Phosphate sales. Additionally, POT lowered its outlook below consensus for EPS by 30c (at mid-point) to $3.20-$3.60 and Potash Gross profits (by ~12% or by $350mn at midpoint), while keeping gross profit forecast for phosphate and nitrogen broadly intact at $1.3-1.5B (prev. $1.3-1.6B)
POT’s 1Q earnings and outlook commentary was in contrast with MOS’ positive update on fertilizer fundamentals (on 24th April) in which MOS highlights stronger than expected demand in US and LATAM. MOS has higher sales exposure to these geographies (~75%) Vs POT (~65%), which partially explains the difference in the commentary.
Solid Balance Sheet which should enable sizeable buy backs
Mosaic has ~ $2.4 billion (~$5.75/sh, or 12% of its current market capitalization) in net cash on its Balance sheet. This will enable sizeable share buybacks once restrictions (imposed after tax free spin off of Cargill’s stake) will lift in May 2013. Although it is still a year away, I beleive catalytic investors will start accumulating the stock months before in anticipation of a large buy back announcement.
South Fort Meade’s return and Esterhazy’s credit should provide earnings upside
The company should see an earnings upside in FY2013 as South Fort Meade returns to production. Mosaic reached a settlement agreement with respect to South Fort Meade permit litigation, which was approved by the courts on March 28. The company expects to be at full production at South Fort Meade in the first fiscal quarter of 2013.
The company should also benefit as POT’s Esterhazy tons are repatriated to Mosaic from January 2013. In December last year, Potash Corp. of Saskatchewan Inc. and Mosaic Co. settled a legal dispute over a so-called tolling agreement at Esterhazy, the world’s largest potash mine. As part of the companies’ settlement, Mosaic got a credit for 1.3 million tons of capacity at Esterhazy to be used to calculate Mosaic’s share of sales made by Canpotex Ltd. to international customers. (For more details on the settlement click here)
Potential Takeover Offers
After BHP’s hostile bid for potash failed in 2010 due to the Canadian government blocking the transaction, Mosaic appears to be a viable alternative. Cargill’s exit has left Mosaic without a majority shareholder making it an attractive target. There could be potential bidders for Mosaic (Sell side analysts estimate its replacement value in $80-$90/sh) after May 2013 as they would not be subject to tax penalty (stemming from the effects of a tax-free spin of Cargill-owned shares).
The following tables show nutrient sales exposure and relative valuations of the major US listed fertilizer companies.
Table1: Nutrient Sales Exposure
|CF Industries Holdings, Inc.||CF||18%||82%|
|Intrepid Potash, Inc.||IPI||100%|
Table2: Relative Valuations
|Company Name||Ticker||CMP||FY13 PE||FY13 EV/EBITDA|
|CF Industries Holdings, Inc.||CF||160.4||7.7||3.4|
|Intrepid Potash, Inc.||IPI||19.56||11.64||5.92|
Based on FY13 Street estimates, we see that Mosaic is trading at a discount to Potash Corp. and Intrepid Potash (NYSE: IPI) and inline with Agrium (NYSE: AGU). Although CF Industries (NYSE: CF) is trading at even cheaper valuations, it is primarily due to its high Nitrogen exposure (roughly 85% of sales) where prices have peaked and reached unsustainable levels and margins are likely to compress from 2H2012.
RISKS / CONCERNS
Oversupply concerns in phosphate: -MOS has nearly 70% sales exposure to Phosphate. Consensus view is that new phosphate production in Saudi Arabia would increase in 2012 leading to a sharp fall in DAP pricing. OCP, the largest phosphate rock producer based in Morocco (16% of global phosphate rock production) is in the midst of a $10B capital expansion to boost downstream phosphoric acid and DAP production. However, supplies from Asia have generally been constrained on production issues. Saudi Arab has been facing some temporary issues in phosphate rock processing. Greater than 350,000 tons of phosacid are offline from civil unrest in Tunisia.
While Phosphate oversupply concerns in long term are real, they are unlikely to manifest meaningfully over the near term (next 12 months) which will allow MOS to outperform over the next one year driven by multiple catalysts, in particular, potential for large share buyback announcement. Besides, there is an upside risk to street estimates as South Fort Meade’s return to production, and POT’s Esterhazy tonnes are repatriated in January 2013.