The Mosaic Company (MOS) is one the largest global fertilizer producers and sells potash and phosphate to over 40 countries in the world. MOS recently reported its 4Q13 and full-year fiscal 2013 results. The company reported 4Q13 earnings of $1.14 per share, or $1.13 per share after adjusting for non-cash derivative gains and FX translation losses. The results were largely in-line with consensus estimates of $1.12 per share.
Despite ongoing sequential declines for potash and DAP prices, 4Q13 results were slightly better than expected. Improved pricing in phosphate and lower production costs for potash and phosphates drove better-than-expected results.
Strong Export Volumes Drove Better Than Expected Potash Results
Strong export volumes drove solid beat in the potash segment. Total potash shipments of 2.6 million tons were at the high end of the company's expectations of 2.3 to 2.6 million tons. Moreover, average potash pricing of $368 per ton came slightly above the midpoint of the company's guidance of $350 to $380 per ton.
Stable Phosphate Operations
Mosaic's phosphate operations also performed well during the quarter. The segment reported a gross margin of $290 million, or 17% of net sales. Higher prices for Blends largely drove better-than-expected gross margin. Better-than-expected phosphate volumes of 2.9 million ton and lower raw material costs were offset by lower year/year DAP pricing of $483 per ton. As the South Fort Meade mine is running at full production now, phosphate rock costs have improved substantially.
Canadian Potash Production to Slow Down
As part of company's planned transition this fall to a calendar fiscal year, MOS also provided outlook for the September quarter. As compared to 3Q12 when MOS sold 1.8 million tons of potash, the company is expected to sell 1.8 to 2.1 million tons at an average price of $330 to $360 per ton over the September quarter.
Due to planned maintenance and a curtailment at Colonsay, Mosaic announced that in the 3Q13 it will run its Canadian potash mines at less than 75% of capacity. Chief Financial Officer, Larry Stranghoener, said that the U.S. fertilizer giant will curtail production at its Colonsay, Saskatchewan, mine. He further added that depending on the demand the company may curtail output at other mines as well.
Chinese Contract Expected At the End of 3Q13
MOS expects Canpotex, the offshore selling agency for Mosaic, Agrium Inc (AGU), and Potash Corp of Saskatchewan (POT), to close a potash supply contract with Chinese buyers for the second half near the end of the third quarter. The company anticipates 3Q13 potash gross margin in the mid-to-high 30% range.
Indian Rupee Depreciation and Government Subsidies Cut Weigh On Phosphate Business But Margin Remain Stable
Phosphate 3Q13 guidance of sales of 2.9 to 3.3 million at DAP price of $430 to $465 per ton reflects the uncertainty caused by the weakness in the Indian rupee and the generally weak pricing environment.
India is the biggest phosphate importing country and it relies completely on foreign potash supplies but reduced subsidies by the government and depreciation of the Indian rupee has made phosphate and potash fertilizers more expensive for farmers and manufacturers in India.
However, despite lower prices, management expects 3Q13 phosphate gross margin to be flat sequentially as operating rates remain in the mid-80% range and input costs remain relatively low.
Valuation & Financials
MOS is trading at very attractive valuations. The company is trading at a significant discount to its historical average and S&P 500 price-to-earnings (P/E) ratio. It has a current P/E ratio of 12.1 compared to its own 5-year average of 21.8 and S&P 500 P/E ratio of 16.6. MOS has a PEG ratio of 1.1 and a forward P/E of 10.1, compared to 14.7 of S&P 500.
The company has a price-to-book ratio of 1.8 compared to the industry average of 3 and MOS's own 5-year average of 2.5. It has price-to-sales ratio of 2.3 compared to the historical average of 2.8 and industry average of 2.5. Finally MOS has a price-to-cash flow ratio of 10.2 compared to the industry average of 10.3 and company's 3-year average of 12.1.
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Conclusion and Investment Thesis
We have a buy rating on MOS. We believe an inflection point in potash and phosphate fundamentals and buybacks in 4Q13 will ultimately reward investors' patience through a tight 3Q13 operating environment. As far as potash is concerned, broader market uncertainty on the timing and outcome of a Chinese contract in a seasonally weak period for fertilizer demand is reflected in MOS's cautious outlook for 3Q13. But the delay, which will allow Chinese inventories to be drawn down, could ultimately prove favorable in a contract resolution.
On the other hand, delay in the Indian contract, strengthening of the Indian rupee and a favorable monsoon season should also result in a positive supply-demand situation by year-end for the phosphate business. A higher near-term subsidy level could also have positive implications for the company. Moreover, the continued ability of Mosaic's phosphate business to demonstrate effective margin stability (with input costs falling in concert with DAP prices) makes the outlook for phosphate margin less dire than what the industry fundamentals would suggest.