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Executives

Laura Gagnon - VP of IR

Larry Stranghoener - EVP and CFO

Rich Mack - General Counsel

Analysts

Vincent Andrews - Morgan Stanley

Adam Samuelson - Goldman Sachs

P. J. Juvekar - Citi

Kevin McCarthy - Bank of America - Merrill Lynch

Bill Carroll - UBS

Mark Gully - VGC Financial

Don Carson - Susquehanna Financial

Adam  Schatzker - RBC Capital Markets

Charles Nievert - Dahlman Rose

Mark Gulley - BGC Financial

The Mosaic Company (MOS) Capital Management Philosophy Call May 13, 2013 9:00 AM ET

Operator

Good morning ladies and gentlemen and welcome to the Mosaic Company’s Conference Call on Capital Management Philosophy. At this time, all participants have been placed in a listen-only mode. After company completes the prepared remarks the lines will be open to take questions. Your host for today’s call is Laura Gagnon Vice President Investor Relations at The Mosaic Company. Ms. Gagnon you may begin your conference.

Laura Gagnon

Thank you, and welcome to our capital management call. Presenting today will be Larry Stranghoener, Executive Vice President and Chief Financial Officer. We also have Rich Mack, General Counsel available to answer questions related to the Cargill split-off. After my introductory comments, Larry will provide a brief review of our current philosophy with respect to capital management after which we will open the lines for Q&A. Please limit your questions to the topic at hand capital management and to one question per turn. The presentation slides we are using during the call are available on our website at mosaicco.com.

We will be making forward-looking statements during this conference call. The statements include, but are not limited to, statements about our financial future and operating results. They are based on managements’ beliefs and expectations as of today’s date, May 13, 2013, and are subject to significant risks and uncertainties. Actual results may differ materially from projected results. Factors that could cause actual results to differ materially from those in the forward-looking statements are included in our press release issued this morning and in our reports filed with the Securities and Exchange Commission.

Now I would like to turn it over to Larry.

Larry Stranghoener

Good morning. Thank you for joining us this morning. As we promised during our last quarterly earnings call we are hosting this call to help you understand the capital management philosophies that will guide Mosaic’s actions in the coming years. As you know, our opportunities to manage our capital become flexible after May 26th of this year, the two year anniversary of the Cargill split-off transaction. After May 26th we will be able to engage the MAC Trusts and Cargill family members owning Mosaic shares and substantive discussions on the timing and structure of one or more transactions designed to transfer their Mosaic shares. In anticipation of this state we have managed our balance sheet in order to provide us great flexibility and we look forward to enhancing our capital structure.

Today we will provide insight into our decision making process and priorities by reviewing our capital management philosophy. Our philosophy is founded on the principle of generating attractive shareholder returns overtime and maintaining a solid sustainable financial foundation, while operating with a much more efficient balance sheet. While we do not yet have complete and final elements of our plan, we look forward to more fully deploying our balance sheet for the benefit of our shareholders.

First, let’s discuss our balance sheet targets. These targets are driven by our objective of maintaining an investment grade rating and financial flexibility. An investment grade rating is important for allowing access to credit markets, optimizing our cost to capital, facilitating joint venture opportunities, and for meeting regulatory obligations.

Let’s begin with our liquidity target. Mosaic will target a liquidity buffer in the area of $2.25 billion comprised of roughly one-third cash and two-thirds credit line. Given our historical financial performance and future prospects, we believe we can increase our current credit line to accomplish this objective. The target is not a minimum but rather a benchmark as to where we would expect to be under this more circumstances. When there are normal calls on our liquidity like when markets are strong and we are building inventory prior to the fertilizer application season or in periods of cyclical weakness our liquidity buffer could drop below this target for short periods of time.

Next our targeted leverage ratio or adjusted debt-to-EBITDA is 1.5 times. When rating agencies look at debt they generally adjust it to include pensions and certain other liabilities. Today, Mosaic has approximately $1.5 billion of adjusted debt. Keep in mind that EBITDA used in the calculation represents a cross-cycle estimate so the annual ratio will vary overtime. Over the past five years Mosaic has averaged about $3 billion annually in EBITDA. While our target leverage ratio is 1.5, we believe we could go to 2.0 times adjusted debt-to-EBITDA, while maintaining an investment grade rating. We consider the difference between the target of 1.5 and 2.0 as contingent capital available for strategic opportunities. If we move to this higher level of debt, we would expect to replenish this contingency prior to resuming share repurchases.

On this slide you see a breakdown of our estimated surplus cash. These numbers are all approximate of course and at a single point in time. Of our estimated $3.7 billion cash balance at the end of this fiscal year, about $950 million of foreign cash is currently targeted for use in international investments such as our joint venture interest in Ma’aden. We will hold approximately another $750 million as a liquidity buffer, which would leave us with about $2 billion in available surplus cash.

Moving to slide 6, we have said, on multiple occasions during the past few years that our balance sheet is not as efficient as we would like it to be. We have surplus cash and debt capacity. Based on existing adjusted debt of about $1.5 billion and $3 billion of EBITDA, the average over the past five years we could issue approximately $3 billion in additional debts, taking us to our targeted leverage ratio of 1.5 times.

Of course this number could and likely will change based on expected future EBITDA. We would like to use a sizable portion of this surplus cash in debt capacity for share repurchases where the amount and timing will be influenced by our post May 26th discussions with the parties to the split off agreements. As we indicated on our third quarter call we may also use a portion of the surplus cash in that capacity approximately $600 million to fund an escrow for existing asset retirement obligations in our Phosphates business.

Finally another portion could be used for strategic investments. From a timing perspective we would like to achieve these targets as soon as reasonably possible, ideally no later than mid-2014. As noted we view share repurchases as an important tool to accomplish our targeted goals. Therefore timing will be highly dependent on market conditions, the price of our stock, and our ability to reach agreement with the parties to the split off agreements.

Longer term, once we have reached a more optimal balance sheet and resolve the backend transactions related to the Cargill split off transaction, our priorities for use of the cash we generate have not changed. For clarity, let me review them.

Our first priority is to maintain the targeted balance sheet ratios I discussed and an investment grade rating. Second we intent do sustain our assets and provide for our quarterly dividend. Our third priority is to pursue growth initiatives including capital expenditures to grow the business, and opportunistic strategic investments and finally we expect to return remaining cash to shareholders.

We have covered the first priority in detail but I would like to provide perspective on the remaining priorities. Sustaining capital is expected to be around $700 million this fiscal year. We expect this amount to remain flat over the next few years. We anticipate that our current $1 per share dividend will grow as our earnings grow over time. As we discussed in the following slide we intent to use share repurchases as the primary method of returning surplus cash to shareholders. Note that we are not specifying a target payout ratio or dividend yield.

This chart reflects our estimated growth in capital expenditures over the next several calendar years. First we are announcing today that the final 2 million tons of our Potash expansion strategy are being deferred. When market conditions warrants and when risk adjustable returns justify them we expect to reinitiate these projects. We believe these projects will continue to be the most cost-effective expansions to come online when market conditions warrant the additional capacity.

The capital spending for Potash expansion shown on this chart are previously approved expansions primarily the (inaudible) mine. Second we have committed to grow in Brazil and to invest in further supply chain growers. Third in Phosphates the Ma’aden project is proceeding under the heads of agreement and we are well underway in finalizing our joint venture agreement. Fourth, the potential ammonia project in Faustina is still undergoing forming engineering and design work. While the project is shown on this chart, we won’t make a final go-no-go decision until later this year.

Finally, though not shown here, our next two phosphate mines Ona and Desoto are in the permitting stages. We plan to begin construction of these new mines during the latter half of this decade with production feeding our phosphate operations by the end of the decade. This will require roughly $2 billion of capital over a three year span beginning in 2017. Commitments to these projects and future capital expenditures are based on operating cash flow levels and an assessment of risk adjusted returns.

For most of our projects if we look at our number of scenarios and assess the probability of meeting or exceeding our risk adjusted return targets before proceeding.

Our philosophy on returning capital to shareholders includes both dividends and share purchases, note that we have a good track record of returning capital and we expect to build on this during the next 12 to 24 months.

In the near term, we favor using share purchases as a primary way to return capital, improve our balance sheet efficiency and move toward our longer term balance sheet targets. Longer term, we expect share repurchases to include a combination of price-driven opportunistic repurchases given the inherent volatility in our stock and time averaged repurchases.

We will continue to favor investing for shareholder value creation over share purchases as long as returns on those investments exceed our risk adjusted return requirements.

Next, let me turn to details of the Cargill split off transaction. We have build our current financial capacity in large part in contemplation of this transaction and are well prepared to address opportunities that may arise after May 26, when we can engage in discussions the MAC Trust and Cargill family members who will continue to own Mosaic stock.

As you know, the terms of this transaction have restricted our ability to repurchase shares since the initial formation offer in May 2011 and continue to do so. As a brief refresher, there are approximately 129 million class A restricted shares outstanding, half of these shares or about 64 million are held by the MAC Trust while the other half are owned by Cargill family members.

Pursuant to the spilt off roles we cannot have substantive discussions with these owners about their plans to transfer Mosaic stock until after May 26 of this year. It is possible that plans may differ between the MAC Trust and Cargill family members. For example, some of the family members may want immediate liquidity and want to sell all of their Mosaic shares while others may want to hold the shares as a long term investment.

The terms of the split-off also restrict Mosaic’s ability to engage in open market or direct share repurchases until November of this year. After November, there will be no contractual restriction on Mosaic’s ability to repurchase shares whether directly from a MAC Trust, the Cargill family members or in the open market should we have a desire to do so.

When the split-off transaction was completed two years ago, the structure contemplated and orderly distribution of class-A shares to be sold through three annual secondary offerings. The first schedule to occur between May and November of 2013. To that end, the MAC Trust have a right to notify us within 30 days after May 26 of their desire to move forward with the secondary offering and the Cargill family members have the right to piggyback with the MAC Trust on the request. The size of a potential secondary offering is not limited by current track. They could be part of all of the 129 million class A shares and would be sized in accordance with what the market will reasonably bare as determined by Mosaic and our underwriters.

If one-third of the 129 million class A shares or 43 million shares are not sold in the secondary offering or otherwise disposed of prior to November in 2013, 2014 and 2015 respectively they will automatically convert to regular common shares that are freely tradable by the MAC Trust and Cargill family members at that time. Said another way, if not otherwise sold MAC Trust and Cargill family members prior to these dates, the lock ups on those shares expire. This complex structure was implemented as a way to provide for an orderly distribution of Class-A shares. This is the base line and its contractual in nature; meaning that it can be modified if the different and the more conducive transaction structures agreed upon by the parties.

After May 26th, when we are able to engage and substantive discussions with the parties involved, we will review the original process I just outlined as well as other potential transaction structures which may include share repurchases earlier than November. Our objective is to satisfy the interest of Mosaic and our common shareholders while meeting the liquidity desires of the Class-A holders in a sufficient manner as possible. So, let me summarize the information we have covered today, first and foremost, our priority is to generate attractive shareholder returns overtime. In doing so, we are committed to maintaining an investment grade rating.

Given our balance sheet and liquidity targets, we believe we currently have approximately $5 billion of surplus cash and debt capacity. This amount will vary based on our future EBITDA performance and prospects. We expect our recurring dividend per share to grow in line with earnings growth. We expect to fund our ongoing capital expenditures primarily with operating cash flow.

We favor repurchases over dividends to deploy our current surplus cash balance and as a primary way to meet our updated liquidity and leverage targets over the next twelve to twenty four months. Longer term, we will continue to favor investing for shareholder value creation or share repurchases as long as returns exceed our risk adjusted requirements.

Finally, we have been diligent about building and sustaining our strong financial position and we look forward to deploying capital more efficiently in the near future. With that, we will take your questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Vincent Andrews of Morgan Stanley. Your line is now open.

Vincent Andrews - Morgan Stanley

Larry if I could just ask you the 1.5 target with the potential to go to two. Is that something that you discuss with your rating agencies or are you still waiting for final guidance on them and I only ask because Moody's came out last week and upgraded CF and said that they could go to three times debt to EBITDA if they did something substantially shareholder friendly and still maintain their rating.

Larry Stranghoener

This is a target that we have discussed extensively with rating agencies, with investment banks; we sought input from investors, we looked at where our peers are and have determined that this is the appropriate target for us, so target that still leaves us with some flexibility and of course it needs to be seen in conjunction with the very extensive surplus cash and current debt capacity that we have.

Operator

Your next question comes from Adam Samuelson from Goldman Sachs. Your line is now open.

Adam Samuelson - Goldman Sachs

Just thinking about the leverage targets, certainly you have got potential for EBITDA growth going forward for some of the Potash expansions that you have underway. Do you look at the one and a half time EBITDA target on a through cycle EBITDA basis or was that more flexible based on where EBITDA can move over the next couple of years?

Larry Stranghoener

Yes, we do look at EBITDA on a true cycle basis as noted. We have average to about $3 billion annually in EBITDA over the last number of years. And you raised a very good point, clearly we look for improving EBITDA overtime which should improve our debt capacity opportunities.

Operator

Your next question comes from the line of P.J. Juvekar from Citi, your line is now open.

P. J. Juvekar - Citi

You know you're delaying your potash projects for 2 million tons. Is that connected to your potential accelerated buyback? meaning otherwise you couldn’t do both at the same time, can you just shed light on that?

Larry Stranghoener

No, the two are not connected at all, we have built ample financial flexibility that gives us the opportunity to pursue value enhancing growth projects such as the potash expansion project which is currently under way as well as return cash to shareholders. We continue to generate a healthy amount of operating cash flow, and so the two decisions are unrelated. Again as we look at these future potash expansions, the remaining two million we will reassess market conditions within the next 12-24 months and make a determination at that time, whether those projects are warranted.

Operator

Your next question comes from the line of Kevin McCarthy from the Bank of America - Merrill Lynch, your line is now open.

Kevin McCarthy - Bank of America - Merrill Lynch

Yes, good morning. Larry, in your prepared remarks and also on slide 11 you indicated that the contractual agreement may be modified. Wonder if you could comment on what modifications if any might be desirable for Mosaic's perspective and given that you cannot have a dialogue with Cymac trust is there any way to gauge the likelihood of modifications.

Larry Stranghoener

Kevin, good morning, I'll ask Rich Mack to answer that question. Rich.

Rich Mack

You're right that we can't engage in substantive discussions until after May 26, so as Larry commented on in his prepared remarks, two years ago there was a pretty complex structure set up not knowing exactly what market conditions would be three years or two years ahead, where we are here in 2013. What our performance would be during the last two years and so forth, and so the way that we look at is that this is a baseline, and of course general rule today is that we cannot engage in direct share repurchases until November of 2013, but if the interest of the Mac Trust and Cargill Family members are such and it would permit the probability of some or a major portion of a shareholder distribution plan during the next six months to include share repurchases, that would be something that would be included in an amendment to our current agreements. So time will tell, hopefully very shortly, after May 26 we'll have a better idea as to what potential alternatives might be out there. Of course there is the baseline if we need to use the baseline and we'll update the market as soon as we know more.

Operator

Your next question comes from Bill Carroll of UBS, your line is now open.

Bill Carroll - UBS

You mentioned that you were looking to make a decision on the Faustina expansion later this year, I believe you had targeted mid this year previously, so that's the case then I'm just wondering what has pushed out the decision and what would the time line be now.

Larry Stranghoener

I think we had previously said mid this year, the project team has been working on the schedule that they've long been on which will lead to a decision sometime in the second half of the year. There's been no delay in the project from our standpoint, we're being very diligent in doing the upfront engineering work so that if we go ahead we know exactly what we're going to be dealing with in terms of costs, so we would say we're still on the original timeframe and we look forward to coming to a final decision in the second half of the year.

Operator

Your next question comes from the line of Mark Gully from VGC Financial, your line is now open.

Mark Gully - VGC Financial

Good morning Larry, with respect to Faustina, I'm wondering if you thought about what I might call a virtual capital investment in ammonia. By that I mean entering into off take agreements with all the people that have committed to ammonia and getting much, not all but much of the benefits of that integration through a contractual arrangement without having to put up say a billion dollars of capital.

Larry Stranghoener

Mark, yes we have thought and are thinking about that, we obviously are very mindful of the various different ammonia projects that have been announced and we are trying to sort out which of those will actually be built overtime. Ultimately our interest is in having more ammonia capacity available and certainly there are advantages to us controlling our ammonia supply, but we are looking at what the overall supply and demand picture for ammonia looks like, what the overall supply and demand picture for natural gas looks like, and what the overall capital costs are likely to be. And out of those elements we will make a final go, no go decision but yes we have certainly considered the question you pose.

Operator

Your next question comes from Don Carson from Susquehanna. Your line is now open.

Don Carson - Susquehanna Financial

Larry I want to get back to this announcement you made on deferring the 2 million tone expansion. Is this -- what was the timing of those capital expenditures and the amount and is that deferral based on your assessment of the potash market or were these particular projects where the cost is just getting out of hand where you couldn’t justify the investment?

Larry Stranghoener

The most immediate next project was going to be at Belle Plaine and this is a project that we would be ready to move ahead on as soon as determine market conditions warrant that. We have done a fair amount of front-end engineering on that work already. And I will just go back to my prepared comments, at this point in time we are not sure that the market conditions warrant the size of the investment that would be required. We think that by waiting a year or two we may see improved labor conditions in Saskatchewan that might help bring down the cost of this project and I think we might at that time have better clarity about the long-term supply picture in the potash industry.

Operator

Your next question comes from (inaudible) from JPMorgan. Your line is now open.

Unidentified Analyst

On slide 10 it looks like that the bar chart indicates that what you hope to do is to repurchase at least a $1 billion worth of shares in 2013, is that correct? And I was also wondering that if Cargill and the MAC Trusts combine and do a secondary offering, I just need to clarify would that allow Mosaic to buyback any shares in the market prior to November? Thank you.

Larry Stranghoener

The bar chart was deliberately not meant to be definitive which is why we showed some of the shading. We clearly have surplus cash available, we clearly have excess, we clearly have debt capacity available. We have indicated we would like to use a sizable portion of that surplus cash and debt capacity for share repurchase but again that will depend upon whatever agreements we might be able to reach in the near-term with the MAC Trusts or with Cargill and the Cargill family members. So we just are limited in what we can say at this point in time until we can have substantive discussions with those parties and understand what their appetite might be. I would also note however that come November we have no restrictions on our ability to deploy cash through share repurchases.

Operator

Your next question comes from the line of Adam Schatzker from Capital Markets. Your line is now open.

Adam  Schatzker - RBC Capital Markets

I just have a question when you are looking at the opportunities of investing cash and strategic investments versus your own shares. You mentioned you of course have a hurdle rate on one side can I assume that there would also be a price at which when repurchasing your shares you don’t meet some sort of hurdle rate for that and if you can maybe just discuss the philosophy I know you are not going to tell us what that number is and how you approach that as either return of capital or on investment of cash?

Larry Stranghoener

Yes we certainly would be looking at the economics of share repurchase versus capital projects we take on. I would remind you when we did have a small opportunity to repurchase shares about a year and a half or so ago we bought back about just over 20 million shares and we said at that time that that was the single best investment that we could see. And so I think you should take that as a guide to how we look at deploying capital for the benefit of shareholders.

Operator

Your next question comes from the line of Charles Nievert from Dahlman Rose, your line is now open.

Charles Nievert - Dahlman Rose

Is there any restriction simply on the MAC Trust and family shareholders, when those come out in terms of how much you are allowed to pay on a per share basis; is there any sort of limit on that or anything that restricts how much you can pay?

Richard McLellan

Yes, Charles, there is a restriction with respect to the class -A shares, in terms of we cannot pay more, than the 20 day moving average for the price of those shares.

Operator

And your last question comes from the line of Mark Gulley from BGC Financial. Your line is now open.

Mark Gulley - BGC Financial

Yes, thanks for the follow up opportunity, Larry I know this is a very complex transaction, but I am trying to simplify a little bit if I can. So we try some math to see if I am on the right track. You say you have $5 billion approximately available cash and available debt. Market cap is about $27 billion, that’s about 20%. So from that very simple calculation can I assume that buying at least 20% of your stock is pretty straight forward and after that it gets a little tricky recognizing, I know that EBITDA can grow over that two year period.

Larry Stranghoener

No, I don’t think you should assume it’s that simple. What we said in our prepared comments is that we’ve got $5 billion of surplus cash and currently available debt capacity; to be used for share repurchases, to be used to fund an escrow account for our asset retirement obligations and possibly to be used for strategic opportunities. So that’s an available part of cash as we see it while maintaining our financial strength and flexibility which may or may not be used fully for share repurchases and we are not committing at this point in time to using all of that amount for share repurchases. We will see what the opportunities are as we get to post May 26. We simply wanted to give you an idea of our view of what our current overall capacity is with respect to surplus cash in that capacity.

With that we will bring the call to a close. Thank you all for your attention. We hope this provide some of the clarity that many of you have been looking forward and we will look forward to having further dialogue with you in coming weeks. Good bye.

Operator

This concludes today’s conference call, you may now disconnect.

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