Laura Gagnon - Investor Relations
Jim Prokopanko - President and CEO
Joc O’Rourke - COO of Operations
Rick McLellan - Head of our Commercial Operations
Floris Bielders - Head of International Operations
Larry Stranghoener - CFO
Mike Rahm - VP, Market Analysis and Strategic Planning
Don Carson - Susquehanna Financial
P.J. Juvekar - Citi
Vincent Andrews - Morgan Stanley
Michael Piken - Cleveland Research
Mark Connelly - CLSA
Adam Samuelson - Goldman Sachs
Jeff Zekauskas - JPMorgan
Mark Gulley - BGC Financials
Joel Jackson - BMO
Kevin McCarthy - Bank of America Merrill Lynch
Bill Carroll - UBS
Matthew Korn - Barclays
The Mosaic Company (MOS) Analyst Day 2013 October 7, 2013 12:30 PM ET
Good afternoon everyone. Wow, the fastest quiet down in history. Welcome everybody to Mosaic’s 2013 Analyst Day. My name is Laura Gagnon and I head the Investor Relations’ function. I would like to cover just a few tactical things before I turn it over to Jim. First, I would like to welcome everybody who’s in this room and also those who are listening in on the webcast.
We do have reconciliations for the decks that you were handed out in this room today available on the webcast and filed with the SEC. The second point I would like to make is that there is a Safe Harbor slide in the presentations and on the screen, and I’d like please pay special attention to that Safe Harbor, we will be making forward-looking statements today.
Finally, for those of who are not aware of it there is tornado watch going on today for this area. In a very highly unlikely event that anything happened and they make announcement you should more towards the stairways at the back to the hallway desk into the left or to the bathrooms, rooms without windows. With all of that out of way, I’d like to hand it over to Mr. Jim Prokopanko, President and CEO.
Well, thank you Laura. Good afternoon everybody and on the half of my colleagues, senior leadership team and our colleagues at Mosaic, thank you for joining us today here in New York at this outstanding venue for our Investor Conference. What the program is going to look like today is this; I am going to speak to some of Mosaic’s strengths & strategy. Then I’ll have some my Mosaic’s colleagues join me. We are going to have Joc O’Rourke, our COO of Operations and he’ll discuss our plans for Mosaic’s operations going forward.
After that, Rick McLellan, Head of our Commercial Operations; and Floris Bielders, Head of International Operations will discuss elements of our commercial strategy and our commercial side of our business. Then we will have Larry Stranghoener, CFO, who is going to discuss our financial implications of our strategies and our capital management priorities. And then I will finally conclude at the end with a few brief comments. We will take a short 10 minute break; then we’ll come back we’ll be set up for questions and we will have a Q&A question following that.
Well here today, I would like to talk to you about Mosaic, our strategy and how we’re going about executing it. I am going to talk about market and external factors to provide a backdrop of both kind of environment we’re working in and we’re going to talk about our operating environment which is important to understand, but that is not the focus of our presentation today. Our story at Mosaic has not changed. We are in exceptionally strong position to thrive and outperform competitors now and in the years ahead. We’re going to discuss things that set Mosaic apart from its competitors and give you a sense of how these differentiators inform our strategy and how we decide what’s next for our Company.
But first I’m going to give you a sense of the uniquely powerful portfolio of assets that we have at Mosaic. We have the slides moving along [Anton?]. There we go. Assets that we have and you could see from this map are strategically positioned all around the world, but concentrated in the key geographies that have the greatest opportunity for food production and agricultural growth. This through a unique mix of production, logistics and distribution assets that we produce 20 million tones of potash and phosphate fertilizer per year and ship that product to over 40 different countries into every major agricultural economy in the world.
You can see from the map that we have a major presence in North America with our production facilities P&K and distribution facilities as well as in Brazil where we have an extensive distribution network. You’re going to get more [indiscernible] about the advantages provided by this network and by these assets. Now expect many of you have visited either our Florida phosphate operations or Saskatchewan potash operations. And if you haven’t, you absolutely have to make the trip out there to see the extent and the size and scale of our phosphate operations and to take the opportunity to go 3600 feet underground and experience the potash operation. That has to be on everybody’s bucket list, let’s see on the room today.
It is hard to understand the scale and the scope of the resources and the machinery that we operate to produce the fertilizer we produce. It is easy to just think while that’s simple comes in a ship, you’ve got these little granules get supplied to the fields. But when you go all the way back to see what’s involved in producing the product, it is remarkable. For example, that bucket you see on the dragline over here, that bucket can hold two full size SUVs together. That arm is holding that bucket up to give that, to put that in to perspective that’s about a football field in length, a tremendous piece of equipment. Think about that into conjunction with the rest of the side, it’s a huge mining property, this machine swinging back and forth, extracting phosphate ore from the orbits.
The scale extends to our plant facilities, our production capacity, the logistics capabilities, the shipping capabilities, production storage, land and mineral rights. The point is, this business is expensive to get into and there are long term investments for anyone that they think they want to expand this in the industry. The hurdles are daunting. In Florida, we own over 250,000 acres of phosphate land, 12 times the size of Manhattan. And so they were in the process of pursuing permits for three more additional mines Ona, DeSoto, and the Wingate east.
With these permits and once we receive them well along on these well advanced, we will have 30 to 40 years of phosphate rock mining reserves in Florida and those years were likely expand.
I will tell you why. We have been seeing for the last decade we have 30 years to 40 years of proven and probable reserves and every year we reprove that we have another 30 years or 40 years. As mining technology improves, we’re finding more efficient ways to mine the rock and finding areas that we previously thought the ore quality was too poor to mine, we're finding we're able to apply the new technologies to mine these zones more profitably with greater returns to our business. Also we have production facilities in Louisiana on the Mississippi river. We produced the finished product, we bring in the phosphor rock to granulated at that site, the advantage of that is on the Mississippi and it’s a straight shot by barges up to Mississippi and to the mid-west, very well positioned to serve farmers in Central U.S.
Now this is a very important slide, you're going to see the cost curve and that’s going to be a theme going through today's program. This shows you the cost to produce phosphates compared with other competitors around the world. The curve looks at prices fob Tampa and show we're amongst the lowest cost phosphate producers in the world. Joc's going to go into more detail in his presentation. And I want to know that we're very much cost focused and you will hear that over and over again. In a large commodity industry, whatever kind of commodity it is, with natural cyclicality that you see particularly in agriculture, low cost producers strive and they are the ones that are going to succeed and we're committed to being that low cost producer in the world.
We have similar asset advantages in our potash operations. We have extensive mineral rights in Saskatchewan; we have centuries’ worth of potash. They are highly productive zones and low cost mines, some of the lowest cost in the world. Similarly with potash, it's not cheap to develop or expand a new facility, new potash capacity requires significant financial strength and not only do you have to have the financial resources, you have to have a belief in the long term outlook for potash and global agriculture. At Mosaic we have both; demonstrating those strengths those strengths with ongoing potash expansions and you will hear more about our expansions in Joc's presentation.
This gives a closer look at our potash operations in North America. The vast majority of our production occurs in Saskatchewan. We have a very small operation in Hersey, Michigan and one in Carlsbad, New Mexico.
Saskatchewan is home for the world's largest potash deposits. We're located in the center of North America which presents some export shipping challenges. About one-half of the potash we produce is sold in North America, so that's rail or maybe barged to the various markets. The other half has to be exported by vessel abroad, where 1,500 miles high water mostly Vancouver where our product leaves the country.
One of the reasons Canpotex, the potash marketing and export association the three Canadian potash members they belong to, allows us to pull our resources and ship efficiently than if each member of Canpotex had its own assets, if we had our own warehouses in the West Coast, if we had our own fleet of rail cars, if we had our own fleet of ocean vessels, it would be much more expensive to ship up products than it is today. So the efficiencies and the logistics are extraordinary with the Canpotex organization. And from Floris you are going to hear more details on how we go to market with product both in North America and overseas.
At this point I want to address a misperception about Mosaic being a high cost potash producer. That simply is not true and this cost curve speaks to that.
We looked at production on an apples-to-apples basis, and two themes become clear. First the cost curve is relatively flat. Aside from a few on the right side of this chart, 6%, 7% of potash production is high cost. There is no big advantage from any one company to the other company when you look at the low end of that cost curve. And second, Mosaic is very competitive especially if you discount our Esterhazy brine management cost marked blue on the chart. And many of you think you know, what are you doing exporting brine management cost as part of your cost structure? Oh yes indeed that's true. But even with Brine costs, Esterhazy is a highly cost effective mine, one of the lowest cost producing mines in the world and the largest mine in world. And with the expansions that we presently have underway, we have some important production optionality and that too Joc can tell you of the advantages once we get K3 shot some operation with some of the alternatives than we face some terms of consolidating mining operations.
I’m not going to spend a lot of time on talking about distribution but it’s worth pointing out. It’s an important part of Mosaic’s advantage in that we have a global reach that there is no other company that has the kind of distribution network available to it. In particular, exports to the world’s most important agriculture geographies include China. Recently it’s been somewhat unpredictable, we can’t tell when we’re going to come back in the market particularly through our potash products; they are an exporter of phosphates.
But in case of potash we still deliver a significant amount of our potash productions to China through Canpotex. And while Mosaic maintains a small cost effective infrastructure to facilitate distribution within parts of China.
India is the other major consumer of both potash and phosphate products. They should be a bigger consumer than they are or they have been these last 18-24 months. Current government fertilizer programs, subsidy programs and have restored the market standards to the farmers. Farmers are favoring putting night vision on over phosphate and potash. That is simply bad science, bad agronomics, and we’ve seen the soil quality, the yields start to plateau, the yields are plateauing, and wheat production and the salt quality is diminishing. After decades of crop progress, we have seen India reduce the amount of grains they’re producing or at least flat line.
We expect India will solve the problem; there is an election coming up next year and some period after that they will address the bad agronomics and we’ll see India return as a major consumer of both potash and phosphates in the world.
As you see, we have a limited infrastructure; we have employees about 300 employees in India. We have a small office in Gurgaon, just outside the Delhi and an important import facility in [Rosy] on the Northwest coast. This enables us to bring in product into an offshore unloading facility onto barges into the port onto trucks; then we can reach every part of India’s agricultural growing regions.
Now a more pleasant part is Brazil, it’s a different story, a much better story in terms of fertilize or crop nutrition production. Ag business in Brazil is growing rapidly. Deal record, if not a record year this past year, 30 million tons of fertilizer imports. We have more land coming into production and that land and the land that’s being farmed is being ever more productive in terms of its yields. We expect this growth to continue and we’ve been investing and continue investing in distribution network in Brazil.
Floris is going to talk about some of our plans. Our plans we’ve announced earlier. We’re going to invest about $300 million over the next several years to enhance and expand our distribution capabilities into this important Ag region of the world.
In addition to our high quality assets that I’ve been talking about, Mosaic has the talent and capabilities to (ripe) long term value from these assets and these previous ore reserves that we have.
Innovation has been one of those important elements in that strategy. It’s an important differentiator to Mosaic amongst all of the competing companies. Rick’s going to discuss product innovation, our past, how we got to where we are with the present hopes and some other future ideas on product innovation. This has been a major success story for us and somewhat underappreciated by the investors. Demand for MicroEssentials or phosphate products that’s either, contain sulfur or zinc has been growing rapidly. With Nexfos, our phosphate animal feed products is gaining market share. All premium products that we produce and these are K-Mag, MicroEssentials, Nexfos, Pegasus get stronger margins than commodity map gap in potash because they meet a customer need. They bring value to farmers, farmers are prepared to pay more for it, dealers see the value and that brings farmers, they’re prepared to pay more for the product.
Rick McLellan will give you some details on our strategy and I was thinking allowing the integrated products that we’re producing. And it’s just not product innovation, its process innovation, very important to us. It helps us save money. It helps us deliver better shareholder returns and it helps us maintain our social license to operate in the market that we run the chemical plants in the mines.
Give you couple of examples; in fiscal 2013, at one of our facilities, the staff found ways to reduce water consumption and water use. That water reduction allowed us to avoid making a $50 million reverse, investment in a $50 million reverse osmosis plan. Through small capital spending, I mean only a couple of hundred thousand dollars, these employees were able to reduce the amount of water consumed from 1,200 gallons per ton of finished phosphate products to 800 gallons per ton of finished phosphate products; a 25% reduction in water utilization with some tweaking and just some care to water use. I have little doubt, I have the challenge for the group to get down to 600 gallons per finished ton of phosphate, and apply that across our entire organization.
We’ve also derived much of the power we need for phosphate in the phosphate operations in Florida which was extensive power needs and we’ve done it through capturing waste heat that’s produced in puration of sulfuric acid, phosphoric acid, exothermic reactions we capture that waste heat, run generators. And it’s allowed us in the past year to save 1 million tons of CO2 emissions in 2013 alone, and it resulted in a major reduction in our electric bill. Within three to four years, we’ll be completely off the grid in Florida, generating all our own power.
You may not spend much time, some of you do, it’s not a common discussion was investor meetings but about sustainability measures. They’re important, we think about them a lot, that’s a big part of our operational discussions.
Land recommendation in Florida is a good example where we do recover the land and those of you that have I’ve seen reclaimed phosphate mines, it’s impressive, it looks, it is much improved over what it started at even before we started mining. These are impacted lands old (saturated), old pastures and when you see it reclaimed, put back to its natural state, it’s impressive.
We’ve relocated threatening species from these lands and bring them back to where we, before mining we’ll bring them back to where they were after we finish the mining. And we’re committed to community investments. And most notably I think of certainly the golfers in the room, you've heard of our signature investment in resort conference at a complex in central Florida, on one of our mines Streamsong Resorts, getting tremendous acclaim for the quality of its two golf courses. And this is being recognized in the communities we operate in the state of Florida. People really do value having Mosaic as a commercial corporate member. Our reputation is good as a corporate citizen in Florida and in Saskatchewan and contributes to maintaining our operate-to license in these two industries, mining and chemical processing that does have an impact in the environment and in the communities. Another of our strengths is a proven execution excellence. Got a few examples; safety is paramount at Mosaic. We want all our employees to go home safely at the end of every workday. In 2012, Mosaic set a new safety performance in a couple of metrics. In 2013, we surpassed that yet again; we take it very seriously, all employees at Mosaic have a financial compensation well related to the safety performance of the entire organization. Our board, our leadership take it very, very seriously. In South Port Meade we got a mine back into production, one of the largest, our single largest phosphate production mine and one of the lowest cost producing mines on a delivered cost to our facilities, I think the lowest cost producing mine in the world.
We’ve made major progress on our products expansions, 3 million tons of expanded capacity, going to cost about $3 billion, we're on budget, we're on time, despite being in a very highly inflationary area market in Saskatchewan, our energy products projects, potash projects and basic materials development in that industry. It's been tough to keep a handle on the capital costs.
We've entered a JV with the Ma'aden company, phase 2 of their phosphate expansion plans, 3 million ton mine and phosphate production facility in Saudi Arabia. Mosaic will have 25% of the equity in that company. We're going to contribute to the technical knowledge and the engineering knowledge to build a facility and Mosaic importantly will have a 25% uptake agreement for that product. So that's going to put us in a position to serve the Indian, the Southeast Asian markets as well it's going to give us a product that going to amongst the lowest cost manufactured phosphate in the world; just a great position, great investment to be part of.
The Esterhazy mine, this past year, set production records, all time production records that our teams are very proud of. And we had another solid increase in the sales of MicroEssentials at Mosaic.
Our financial foundation is another important source of strength, and differentiates Mosaic versus our competitors. We’ve communicated our capital intentions several times. Most recently in May we talked about our financial philosophy, and Larry is going to delve into considerable more detail little later in the program. What I want to remind you about is that our surplus cash, a significant debt capacity, give us meaningful flexibility to return capital shareholders, Larry's going to talk about that in some detail, and our investing for growth and funding the obligations we have whether it's dividends or our bankers and to our suppliers, we are into great, great financial strength. The other thing that some investors talk about and not many do is about our company's cultures and values.
At Mosaic we spend a lot of time on that, that does and as chief executive that does really set the foundation for the company that you're building. It's an important part of what Mosaic does if we want to become truly a world class organization. Our mission and we've left everybody with the mission statement values and vision for the company. Our mission at Mosaic and all employees understand it and really get it, is to help the world grow the food it needs, this is a daunting and humbling task when you really think down to the essence of what it means, it means people getting fed in the world that otherwise might not able to get fed. And we can only make this kind of big contribution in the world that they need from us is if we achieve our vision, and that is to be the world's leading crop nutrition company and internally we have a number of metrics that tell if we are the leading in our judgment top nutrition company. And if we operate with continued and we will get this accomplished if we operate with continuous commitment to our values, and you see them listed - integrity, excellence, sustainability and connectivity. And that top one integrity with all we here, happening in the world and certain other sectors of the world, integrity is a big deal and when you talk to our customers today, our potash customers, they respect the Canadian producers, they respect Canpotex with the integrity about which we go and do our business.
So we're quite proud of our company, the one we built, we do look at external comparisons, we do look at benchmarking to understand, are we as good as we think we are, so we've looked at and considered various awards in the world. We've got a couple here that we're going to profile, we got an external recognition for many of these values and priorities that we have at Mosaic, I am just going to play a short video highlighting some of these accomplishments.
Anton, can you run that?
We all take a lot of pride in having those awards and again it’s just not to have the badge or the trophy in the cabinet in the entry, it’s to get the external validation that yes we are good, we are amongst the best in the world at what we do and compared to all the other industries that go for these awards, it was really heartening to see that we are being selected for them.
So that’s our view of what sets us apart; the most powerful combination of assets, our extensive global reach and some of the best talent and financial strength in the crop nutrition industry. Those strengths have informed our strategy and how we go forward that enables us to generate long term shareholder value by having these things behind us.
Now what does it mean in terms of that strategy. Every four or five years we take a deep dive factory strategic analysis and we bring in external facilitators to help keep us on track. We use Mckenzie, we use BCG for these efforts, and we’ve done two now. We just completed on a year ago and about four years before that we did our first one. And it has really helped guide us and help us decide and keep on track for the next four or five years. This last month I would share with you the five priorities that we’ve established in that strategic review. And I am going to say as we did this review we considered other ways to run this business, other industries, other sectors, and we looked very broadly, we look to draw the fuse around the world. What we determined was, that there is no business sector better than agriculture for the decades ahead. So we decided we are going to stick in agriculture. And within agriculture we looked in extensive range of business alternative from seed companies, to irrigation companies, to chemical companies, equipment manufacturing, mining of the materials and what we have decided crop nutrition was the sweet spot that’s where we wanted to stay, staying in the center of the fairway as they say potassium phosphate. Now, what of the priorities we are going to have executing on that strategy. First is the people, this industry has similar cost curves, similar all, similar technologies, and it’s hard to differentiate yourselves. And what I found to relieve the effect at differentiating ourselves is with the people we have. And we have assembled a team at Mosaic that I believe is the best in the world at the crop nutrition sector and in the sector for that matter. We have a group of noticing the other people. And I think that recognized in much of the industry and at least with the people we serve. We intend to maintain this critical competitive advantage going forward by attracting, retaining and developing these highly talented people. So whether it’s training programs or recruiting programs, or thoughtfully designed retention programs, we really do take as a first priority having noticeably better people in our organization.
The second priority is growth. Potash expansions are a good example of what we’ve been doing. It will significantly increase our operational capacity by 30% up to over 13 million tons of finished potash production. And over the long term our Saudi joint venture enables us to further diversify our sources of phosphate rock, finished phosphate products and provide us access to key markets around the world with logistics advantages. And we’re going to continue to look for value adding businesses, development opportunities that might be any place in the world both joint ventures and through acquisition.
Third priority is market access talked about that a little bit. We’re constantly working to secure our existing market access and that’s one of the developments that is emerging in the coming clear to us. Having access to critical markets in the world those agricultural regions is becoming ever more important. Having ways to get into those markets, having port access, having people that understand those markets; that’s more important than it was five years ago and certainly more important than it was 10 years ago. But we’re increasing presence in the key agricultural regions. You heard about Brazil, you’ll hear more about it. It’s one of the very few regions Brazil is in the world where new farm makers is being brought into production. We intent to invest as I said $300 million in a number of projects to expand both our import and distribution capacities in those countries, and in Brazil.
Fourth priority is innovation; not something you hear a lot of in the crop nutrition business. There aren’t a lot of new crop nutrition products coming down the line. There is nitrogen, phosphate and potash. All elements on the periodic table but we are looking at those from a different perspective and saying how can we augment them, how can we bring more value through potash and phosphate to our customers. MicroEssentials, our phosphate innovative product, reached 11% market share in North America. Over one in 10 acres of phosphate that’s being applied or blend that’s being applied with phosphate is a MicroEssentials’ product. Seven years ago that was nothing. So in 10 years to be where we are now and that growth has happened in the last couple of years, in particular, and is gaining traction in other regions of the world. We’ll continue to deliver product technologies that improve yields and help farmers take care of the environment as they do their important work of farming.
And finally, as always at Mosaic, we take shareholder value very seriously. We’ve made it a strategic priority. It wasn’t a strategic priority two years ago. This year and this past year it’s become part of that. That’s what’s driving what we do. We’ve always been determent to deliver strong shareholder values with a focus on execution and effective capital allocation. As we maintain the right team of people noticeably better people on our organization, as we grow our business, as we maintain market access in those critical growing regions of agriculture in the world, we will deliver shareholder value.
Our ability to execute our strategy is important. This is a bricks and mortar business in the extreme; to us, to you to all our shareholders the global food security we have to be excellent at execution. Feeding a growing world is an enormous responsibility and it brings with it huge opportunities for shareholders and all our stakeholders. Growing demand for food is what will drive Mosaic’s long term success. Population growth is half the story. I will tell you the other half in a moment. This is a daunting task.
This shows going up to 2100, everybody knows Dr. Mike Ron, he is now getting into 100 forecasts by quarter. They are about as accurate as his two year forecast by quarter. But this is a UN chart and you have seen it recently and it shows UN’s high estimate of population growth that by 2100 the world is going to have 16 billion more people. Three times of what we have today almost three times of what we have or 2.5 times of what we have today. Africa by itself is expected to grow from the 1 billion people today to 4.1 billion in 2100 and that is UN’s (medium) case. Keep in mind the world’s population didn’t reach 4 billion until 1975, so 40 years ago since, in the last 40 years the world’s population has grown by 75%.
And so I don’t think these are too extreme and you look at the medium case and that is where it plateaus at about 9 or they are talking maybe 10 million people by the year 2050. But there is more to the food story than just increasing number of mouths to feed. Many parts of the world where it is the greatest population growth is seeing the greatest income growth and these are populations that aren’t going from average incomes of $40,000 a year to $45,000. These are in parts of the world where income is going from a $1,000 to $1,500 to $2,000 a year. When populations improve their income, they demand more protein and this chart shows you what has happened with that, in just 60 years Asia alone meat consumption has increased six fold and that is a lot of people demanding more protein. And more protein, I have told many of you it takes a lot more grain. I will just say it again, one pound of chicken requires three pounds of corn, one pound of pork requires four pounds of corn to produce that pound of pork.
And in the case of beef the Holy Grail of all proteins, it takes seven pounds of corn to produce one pound to finish beef and varies in between that five and seven. So you can see the leveraging power that protein consumption has on the demand for grains and oil seeds around the world it is extraordinary. And that is another statistic that just sounds ridiculous but we do have the data to back it up. The world’s farmers in the next 50 years has to produce as much food as the world has produced in the past 10,000 years just a stunning statistic and that isn’t going to be done without more technology crop nutrition products and technologies. Now here is a closer look at how this impacts agriculture. You have on my right your left demand for grains and oil seeds shown to grow at a steady and brick pace.
Every year there is a couple little dip years economic crisis but there is a pretty straight line that goes over the last 30 years and we predict to go, continue to grow. On my left you can see what happens with grain production. It isn’t quite so this is actual area farmed there is the bars and the yellow shows the actual yields that we have seen. That isn’t as predictable more cyclicality more ups and downs in that and the black line demonstrates the trend line yield we have to continue to grow to keep up with world demand and you could see that in many of the years we have gaps that the world doesn’t grow as much food as is being demanded.
So we could only do this with good crop nutrition. The FAO part of the UN is estimated that up to 60% of grain and oil seed yields and grown crops in the world are due to crop nutrition manufactured crop nutrition products. That is good news for Mosaic and that is good news for the shareholders. Now this is an even more compelling story; taking a look at that farmer’s perspective. Farmers are prospering all around the world. Not every single farmer, not every single crop, there are some that are having some tough times but in general grain and oil seed producers are doing well.
Grain and oil seed prices are elevated even as crop nutrients remain at low costs. Farmers had every incentive to grow good crop and what this shows is our own in-house developed metric showing Plant Nutrient Affordability Index this is 2008, 2009 where grain prices were, corn was at $8 and phosphates and potash were to a 1,000. While you can see it has come down and well below that 10 year line here, crop nutrients are very cheap. With high prices for their outputs, low prices for their inputs, very high global demand, farmers are doing well and we expect this coming year we are going to have just a blockbuster fall season in North America following a darn good season in Brazil.
Mosaic’s in a great position to make a meaningful contribution to what has become one of the defining challenges of our time. Some days it is on the front pages some days it isn’t but it regularly comes back there one of the most defining challenges of our time I believe is how we are going to grow food for the world this is again good news for all stakeholders and investors in Mosaic.
And with that, I am going to conclude and turn it over to Joc O'Rourke our Executive Vice President, COO and he is going to talk to you about some of the operational plans and challenges that we have going forward. Joc over to you, thank you again.
Thank you, Jim, and welcome everybody to our Analyst Day. Some of you haven't met me before and I don't talk to this group as often as some of the others. So let me just give you some of my background. I spent the last 30 years in the mining industry and I developed and operated mining operations all around the world. It was almost 25 years ago now when I was involved in my very first $1billion plus project in the jungles of Papua New Guinea, and I tell you it was a time when it was very challenging to do big projects in places like Papua New Guinea and it was certainly a time when a $1 billion was a big, big project.
So since that time I've been involved in a number of very large projects and integrations, acquisitions, etc. and what I've learned from all of that is what really matters, is the disciplines that come around your strategy, your planning and your execution. Those are critical to your business and then once you're in operations driving the productivities and efficiencies that make sure you get the most out of those very expensive assets that you build. This is a cyclical industry and one of the things we have to realize, we have to do the things we can do, the things we can control to make sure we get superior returns through the whole cycle.
Before I jump into the guts of my presentation, I just want to go back to what Jim said. We at Mosaic are very focused on the execution of our strategy. We're going to control the things we can control so that we do give the best results for our shareholders and that we're able to adapt to any set of market conditions. So, today what I'm going to talk about is our intent to grow free cash flow which is obviously the critical thing for any business. In phosphates as you are aware, most of our growth has been and will continue to be inorganic growth and I'll talk about that a little later. In potash we still have quite a bit of room in our Brownfield expansions, so we can bring on new production as it's required. In both businesses we're going to be very focused on expanding our margin. First by cost management in all of our businesses, making sure that we minimize or optimize our sustaining capital and then of course developing our premium product portfolio and really bringing that higher margin, high return product to market. Anton, thank you.
As you know we have two major joint ventures in our phosphate business. The first of those is Miski Mayo joint venture in Peru and the second one is our new Saudi joint venture with Ma’aden. In 2010 we entered into an agreement with Valle, to become members of the Miski Mayo joint venture, we paid them $385 million for a 35% economic interest in that project and the right to receive 35% of the phosphate rock concentrate coming from that project. That investment has gone extremely well for us. Currently [indiscernible] is supplying us approximately 1.3 million tons of phosphate rock per year. And in 2012 when we had the South Fort Meade injunction, we were fortunate because it was supplying us with about 1 million tons at that stage. And that was rock that if we hadn't got from [indiscernible] we certainly would have had to purchase on the open market and probably at a much higher price than what we ended up paying.
Since the inception of the Miski Mayo joint venture, we have received about $60 million in dividends and distribution and that doesn't include the equity earnings that appear on our earnings statement every quarter. So the Saudi joint venture, it is also proceeding much as planned. Front end engineering is progressing well, we have left three of the eight major project components and we are in final negotiations for the other five to complete that project. The operation is on track for a late 2016 start up. Once this plant is operational though, what we expect to see is a property at the very low end of the cost curve with very advantaged rock, ammonia and sulfur. So because of that we expect a superior return from this project and well above our risk rated cost of capital. Finally the other advantage to the Saudi project is that will give us the option to co-invest with Ma'aden in future expansions of this project or others in Saudi Arabia. For the long term we really like the phosphate industry and are open to any inorganic growth in this industry as long as it sits very low on the cost curve and reaches, exceeds or meets our risk adjusted [indiscernible].
So let me go into the phosphate margins and this is something that's been a little bit confusing for people because we do combine our distribution and manufacturing as one P&L. I’m going to get into that in a second. So in phosphates though raw material prices tend to move sort of in conjunction with the actual price of the phosphate, so it’s not great look at singly at price you really have to look at the margins and that’s what this shows. And as I just mentioned, because we managed the P&L of the distribution and the manufacturing segment together in a holistic way, what we’ve done here is we actually try to pull that out so you can start understanding what’s going on.
So what we’ll see in this is that for instance in 2013 when the manufacturing margin was 23%, the overall segment margin was about 18%. So what is this mean? To put into its context, we sell roughly 2.5 million tons of blended crop nutrients. Those however are sold at a relatively lower margin probably in the single digits, but they do add incremental revenue and they allow us to run our phosphate business particularly a lot more steadily and they allow us to optimize our production capability. Then the other one is quite important from the distribution, you’re going to hear lot more from this with Floris is, it is the platform by which we are able to sell our premium products outside of North America.
So great value add in that business we believe and a great differentiator for us. Overall in prospects, we have been able to maintain pretty darn good margins and those you can see from here on the line of top at 20% or above gross margins in the manufacturing, which is quite attractive for a commodity business. Let’s take into component for that then, first of all our mining and I’m quite proud of the team’s accomplishments in mining. As you can see here, fiscal ’13 our cost both cash and total were lower than they were in 2009. We have been able to reduce our cost from where were five years ago.
And sometimes really necessity does become the mother of invention. As you can see in 2011 and 2012, our costs were up slightly because of our South Fort Meade injunction. So South Fort Meade was partially idle because of the injunction or what we did in the meantime is our Four Corners mine, Wingate and Hookers Prairie really took up the slack, we really made big improvements on the productivity of those mines; and now that South Fort Meade has come back into operation, we have been able to leverage that experience to bring South Fort Meade back better than it ever was before and as you can see from the cost it is really driven our cost down in mining.
In terms of our manufacturing, we’ve done well but the overall trajectory isn’t exactly what we’d like to see and we believe there is room for improvement. In here, we have a couple of things. MicroEssentials adds great additions to our margin over DAP. It does add some cost in terms of our manufacturing. So as we expect to increase our MicroEssentials in the future, we have to take that into account as well. Now we expect out conversion cost or our manufacturing cost going forward, to be more on the 2012 range and the reason we say that we had a couple of went offs in 2013 that we don’t believe will recur and so we see that as where we go forward.
And we also have a lot of cost reduction efforts in place in particular, we’re looking at all of our things, every production related cost and between improved automation continuous improvement and better reliability of our equipment through better planning, we expect we will be able to offset inflation and drive down cost in this business. In terms of sustaining capital, we expect we will be able to maintain our sustaining capital, it about the $215 million mark. Depreciation in this business however is real and we do need to spend money to maintain our equipment in good order that said through privatization a new program for mechanical integrity and reliability, we can optimize these investments going forward.
Let me move onto Potash, I think we’ve all talked about our potash expansions in the past but just want to recap that of the 3 million tons $3 billion projects that we started few years back. We have one project that’s essentially still ongoing, our K3 mine where we’re sinking shafts and the necessary infrastructure to support that mine operation. Larry is going to provide more detail on the economics of these projects, but I would like to say is these projects have been done on time on scope and on budget, and this is no small task considering the inflationary pressure and labor tightness in the province of Saskatchewan.
Our success here really reflects our 50 years of experience in mining and projects in the province of Saskatchewan.
Let me talk a little bit about the Esterhazy K3 which is the one that's still ongoing. We have about $1 billion left to spend at K3, we have completed the headframe, we have installed headframe for both the personnel and production. We have done all the pre-sync and what all we had to do, we have installed the Galloway and now we're into full sync mode to take these shafts down to our ore [indiscernible]. Take down to the ore will take us approximately to 2016 and then we'll be at our range of being able to hoist about 2.7 million tons a year and delver 900,000 tons of ore per year for the K2, 900,000 tons of product per year by milling at the K2 mill.
As we look at how we built K3, we built it for optimum flexibility. In terms of production as well as timing to bring on incremental tons. So what we said here is by using both shaft and a conveyer system going over the K1 and K2 mill, we can build the K3 systems ultimately deliver 19 million tons of ore and 6.3 million tons of products. We will steadily ramp up the K3 over the next decade basically, giving us the option to ultimately migrate our production K1 and K2 and eliminate our brine inflow cost. This will also help reduce long term sustaining capital.
Esterhazy today is the largest underground potash mine in the world. With the efficiency to scale as well as the potential to eliminate brine inflow cost, we expect that in a decade this will be one of the lowest cost potash mine in the world.
Looking back historically as you can see from this slide margins in the potash business have been impacted by both realized price and asset utilization rates, with resource taxes directly linked to our profitability. As I said earlier inflation in Saskatchewan has been significant. In the last few years and our labor cost have gone up, plus we have added about 900 people to support the expansions that we have been building. At the same time realized potash prices have gone down into the low $300 range and with roughly 75% of our total costing we have seen a deterioration of margins, all be it still very attractive in terms of industry.
The next thing I just want to talk to is a little bit of detail about our operating cost by mine, and to do that I need to explain this graph or table, and to do that what we have done here is the bubbles on this represent the size of the production of the given operating rate. The [indiscernible] access, represents the cash cost of production including royalties but excluding the resource taxes. And then the vertical represents the total production cost, so you get the whole set up of it.
And you can see from this, last year fiscal 2013 Esterhazy, much is said about how these different cost curves and everything else. Esterhazy had a cost of $137 upon cash cost and Mosaic overall had a cost of about $135. As you can see our most efficient mine Belle Plaine on the left of the graph which had cost in the range of $100 because of the low cost of natural gas in North America right now.
On the right hand side our smaller higher cost Carlsbad mine did have higher cost from the rest, but Carlsbad is where we make K-Mag, which is a higher margin premium product that we believe adds real value to our portfolio. If we [indiscernible] the fourth quarter 2013 as a proxy for what our business would look like if we are running at more optimum operating rates i.e. 90 plus percent operating rates. You can see a big shift in this graph going to the left, particularly now Esterhazy has moved from the $140 range to under $120. Now recognize that does include brine management cost, so this is not anything other than that. Mosaic is now under $120 and Belle Plaine is under $100 of operating cost. And when we start looking the cost curve, I think that becomes significant.
Here we're, so where does this put us on the cost curve? First based on CRUs latest analysis there is not merely as much difference in the cost curve as some would have you believe. There is a lot of variability in the industry cost curves, but if you cut through all of that noise there is really quite a slim variance in the difference between the major producers.
So when you look there at what it looks like the delivered product through our mid-west U.S. warehouse, Mosaic is actually very low on the cost curve. Clearly this is the reason we sell probably 50% of our products into North America it’s where we’re cost advantaged.
Another key country is China; here Mosaic is still quite competitive despite not having the same rate advantage that we have in North America. If we look forward now and talk about what K3 can do for Mosaic under our long term plan at Esterhazy K1 and K2 production rates will begin to wind down at some point.
We have replaced those ton with lower cost efficient K3 ton without -- at this stage without brand management cost and considering the size and scale of our facilities in Canada, Mosaic Canadian potash producers -- production would be in the first quarter by the middle of next decade. So, that’s significant we really will be able to move our production down into the first quarter.
Regarding capital now, recently our capital spent last year was 400 million, up from 250 million in 2011 for sustaining capital. But when we look at that a 100 million of that was to build our self Farfield injection project. That Farfield injection project greatly and has ability to manage brine investor. So, it’s on a great value plus it was a one off nonrecurring. So, as we look forward we really believe we can manage our capital in the range of $250 million we put a lot of new equipment despite the fact that our depreciation is going up it is new equipment and we expect we can maintain our capital much below the actual depreciation right now.
So to summarize, we feel really good about our track record to successfully executing strategic investment. In phosphates our cost containment efforts have really delivered better profitability for that sector. In potash our expansions have been executed extremely well. Now, going forward we have aggressive plans for continues cost improvements in both the businesses which when combined with the strength of our assets really positions us well to generate superior cash flow across the whole business cycle.
Thank you. And with that I want to hand it over to Floris to talk about our Go-to-Market strategy.
Thank you, Joc. Good afternoon, I’m here today to give you insights in Mosaic’s Go-to-Market strategy. All main phosphates and potash [indiscernible] at the wrong way and we still reach the customers but none of them has level like ours. And I believe that the way we reach our customers gives us a significant competitive advantage.
In the next 20 minutes or so I will talk about how we serve our customers and why in our opinion that Mosaic works well across.
I will first tell you that thing we will cover in the next 20 minutes. I’ll first give you an idea of where we sell our product the geographical spread then we talk about the channels that we use to reach these customers and I’ll give you an idea of our market access strategy, our philosophy behind the whole thing if you will.
Once we are done with that theoretical part we’ll look deeper into two specific examples of regions that we sell a lot of products to, one being the North American region and the other one Brazil. These are interesting to contrast because on the one hand they have a lot in common in terms of size and crops but there also at the same time very different. One of them being mature the other one not only growing but also developing in the way our customers want to be served.
Now, where our products go to first the case of [indiscernible] if you look at this table we have for some time in [indiscernible] that we are focusing a sales more in the Americas, you can see here that is exactly what we have done, we have shifted products always from market like India and we are selling more in the America. The different way to look at that is on this map the darker color; the darker the color is the more products we sell in this market you can clearly see that the majority of our terms stay in the America.
This is for several reasons I mentioned two of them none of them is obvious one logistical advantages as it’s easier to reach customers that are close to where your production facilities are. The other reason is that the Americas has the source equips and the climate that are perfectly suited for the products we produce particularly for MicroEssentials type premium products.
Now, I do want to point out an important thing that while we have a strong focus only Americas we continue to maintain an important foothold in markets like Japan, Australia and India. Particularly India is important not only because it is still one of the largest importing markets for phosphates products but also because in the years to come we expect to have about a million tons of phosphate products the market are not in joint venture and India of course is a perfect destination market for that product.
Not only have we changed over the past few years where we sell our products we’ve also made a significant shift in what type of product we could chose in the case of Phosphate. As you can see here on the slide, in calendar ’14, that is after we have made some more changes at our Riverview plant to be able to have more flexibility on our product mix, we will have as much as 62% of our phosphate product [indiscernible] our phosphate product in the form of MicroEssentials and MAP, which is not only good because it very well suits the soils of the Americas, these products also give us better margins. So it allows us to serve our customers better and improve overall margins.
Now let’s look at potash. Our potash products are predominantly in seven different countries. You first have the North American region, here in [indiscernible] where we saw roughly half of the potash that we produce, managed by our own sales team. And then we have the rest goes for export. A little bit of the exports come from Carlsbad that’s predominantly a K-Mag and the rest of the Canadian exports are handled, like Jim already mentioned, through Canpotex. Canpotex, the bulk of their tons go to five main markets. You see those in blue here, Indonesia, Malaysia, India, China and Brazil.
For Mosaic, in the case of Brazil and China, we go one step further. We have our own distribution network in these countries. We'll go into a little more detail about this later, if we pick up the product in the ports from Canpotex and then we distribute it deeper down the channel. We do this differently than we do it in other markets with our sales, because for instance we sell a larger part to farmers and also in a different form, in the form of blends.
To be clear when we talk about blends, these are physical blends. We simply mix the phosphate, potash and nitrogen to get our blend so that we can serve the particular soil and crop of the farmers; best as opposed to an NPK which is a chemical blend. We do not produce those. So we reach farmers direct. We use blends to give you an example. In the case of Brazil as much as 70% of the sales we make is in the form of blend and more than 50% sold direct to farmers.
In North America, those numbers would be zero and zero; a very different approach. And while in the case of potash, really the Asian markets are more important for us than in the case of phosphate, even there we are growing the sales we make into the Americas.
Now let’s look at the channels that we use to reach the market. The channel we use depends basically on one of two things; either the destination where the product goes to or the product itself. You can see here on the slide. We first had Canpotex focusing on the export of our potash, out of Canada through the imports in Vancouver and Portland. And then the phosphate exports that go to third party customers around the world are currently handled through PhosChem and as I am sure you have heard as often you refers to our own international sales people.
In North American market where we sell all products, phosphate, potash and feed phosphate and finally the international distribution business that I am actively involved. Each of these channel serve customers in a distinctly different way. And that’s why they’re very much complementary. Let’s have a quick look before we go into the North American and Brazil examples into the strategy behind our marketing.
First of all we try to use the strategy of how we approach customers the same way wherever we go in the market. We try to have the same kind of concept used everywhere. To give you some examples of this, first of all we prefer to manage the logistics. That is to say we prefer if we can sell customers on a delivery basis rather than on an ex-plant basis. The reason for that is that that way we can keep the flow out of our plant going, so we don’t [indiscernible] of our warehouses and our plant capacity and it also means we can better serve the customer to make sure they get our products right in time.
Most of our sales are to customers that have a long-term history with us. That boom goes both ways and it’s very often enhanced with annual or sometimes multi-annual supply contract. As a result only a low percent of our sales goes to opportunistic customers.
Another important component of our strategy is the premium products like MicroEssentials that Rick and McLellan will talk further about.
I think an area of our strategy that has not really been talked about enough is the well-recognized brands that we have. We have brands for product like K-Mag, Pegasus and MicroEssentials that are increasingly differentiating us from our competitors. To give you two examples, in North America last year 25% of our sales was done under a branded product, and in most cases these branded products give us a better margin. That percent was only 14% as little as three years ago.
The brand strength is not only working for us in the case of premium products, but I will give you an example. In China we get $40 to $50 upon premium for our DAP over the locally produced DAP and so even though China is one of the larger exporters of phosphate now, from time to time this allows us to bring one or two [indiscernible] of DAP into China at a time that’s for our competitors that is not economically viable simply because we get that significantly.
And finally the wide range we have of different phosphate end product, potash product, clearly makes it interesting for customers to work with us because that’s exactly what many customers want.
Now, while we try to use the strategy on the global basis, the tactics if how we approach customers is different in different destinations. So to give you an example, some countries we will ship the products in bags, in other countries we will not do that. No other phosphate or potash producer as a market excess strategy that matches Mosaic with product portfolio geographic reach all brand strength and I believe that that combination gives us a clear and [indiscernible].
Now let’s look at those two markets, first North America. In North America, our goal is to be the phosphate and potash supplier of choice to the customers that are most attractive to us. We try to achieve this by being a consistent and reliable supplier and by offering a range of products and services yet it’s hard to copy. To give you some examples, we have worked with some of the retailers that sale our MicroEssentials we have trained their sales force and how to sale value, how do you really get paid for this product that is so much better than what else is in the market. We also help them setting up marketing campaigns and as we widen the margin for our customers, they will share that with us and so we’ll both later on.
Another important component of our strategy in North America is the Exclusive Space Program. This is a program only given to select, strategic customers under which we keep their warehouse supply with phosphate and potash throughout the year. With the customer this has to benefit that they know they have secured supply, the do not have to worry whether they will have the product when they needed and they have given some flexibility at the point of the pricing [indiscernible] final price before its pricing.
The Mosaic, the benefit is that we secure the demand. We know for sure that these customers will buy from us. We also have the advantage that we manage the shipment from our plants to the customer warehouse. So you can ship when it suits you best and finally it allows us to optimize the logistics because we control the timing and the method of shipment.
If you take a closer look at the map, you see here the arrows in the North of course you have the potash products, here in the South the phosphate and kind of in the middle you have this North American customer base that we are servicing.
Now, unlike imports which pretty much all come through the river, we service customers by truck, by rail and by barge. This gives us a clear competitive advantage in a few different ways. Number one, we have a lower cost to serve many of these customers and we have a shorter time to reach them which allows for last minute changes in reaching customers in time that need more product.
We also, as you can see in the map with the orange circles, this is our warehouse system that we have in North America where we can store products so we can reach our customers just in time in the season. All of this has allowed us to sale roughly 50% of our phosphate and potash production in the North American geography.
Now we get to the international distribution part. This is the part that I am actively involved and so this is my favorite part of the presentation. The number of countries we have been active in with distribution has varied over the years and the reason for that is that we only want that we are there where we can sale product that we produce in our own plant in North America and so currently we are active in Argentina, India, China, Brazil, and Chile.
The last fiscal year, we shipped 4.5 million tons of fertilizers in these countries. That 4.5 million includes everything so that includes nitrogen as well, about two-thirds of that is phosphate and potash and much of that phosphate and potash we can source from our friends in North America. This is very important. The distribution channel is a means to an end; we use this to sell products for our own production. Because of this, we also try to keep the nitrogen component off the sales in these countries low and we are not active in either seed or agro chemical sales.
Having controlled access to market gives us several significant advantages. First of all, these operations are fully aligned with our upstream production that means that the plants in North America can always count on that demand. Good times or more difficult times when the demand in general is a little bit slack-like which is today, the distribution networks will take that [indiscernible]. It also allows us to tailor (ph) train the sales teams. We have for instance in Brazil 90% of our sales force are agronomist, we trained these people so that they can sale—value particularly important for products like MicroEssentials. It is not for nothing that a high percentage of the exported MicroEssentials end up in our distribution network and that is where we make the highest margins.
We also capture the downstream margin that is available in these countries. These margins very over time and by country but on average you can say we are making mid-single digit gross margins.
And finally, the last advantage is simply having ears on the ground in important markets like India, Brazil, China, gives us an insight of what happens in these markets.
Now this brings us to Brazil. Last year in Brazil Mosaic’s distribution network sold 3.3 million metric tons, and as you heard from Jim, we have a strong growth strategy. And so the question you could ask is why do you want to grow? Well, the answer to that extent is in this slide.
You see here in the graph the growth of acreage and crops grown in Brazil, a very clear upward trend that we expect to continue. If you look at the insert here this gives the global ranking for Brazil, number one in crop here oranges, sugar cane. There is a fair amount of excitement there under the Brazilian farmers at the moment partly because they think that their team will become world champion soccer next year and then we’ll have to see about that. But partly because they actually think that for the first time in history Brazil will produce more soybeans than the United States.
And if that happens that boards well for the demand of potash and phosphate because soybeans as you may know barely use nitrogen, so this is a great crop for a product like a company like Mosaic. And on top of that the soils in Brazil are such that they need a little fertilizer. And so on an acre of soybeans planted in Brazil you need 3.5 times as much phosphate and potash as you need in the United States. So if you wanted one single reason why it makes sense to grow in Brazil that maybe just the one.
Okay, now we’ll go to the next slide. So in the end we’re not in the grain business but the grain -- the size of the crop, the size of the acreage results in increased demand. This is partly also the case because surprisingly enough the soils in much of Brazil are not all that great they have sandy low fertility soils with abundant rain. And so if you want to reach your yield potential you need to very significantly fertilize the crops. Here you see our forecast for growth for the fertilizer demand in the years to come this is a compound average growth rate of about 4%. This is our forecast but frankly forecast from others don’t vary comparably much.
Now this is all the fertilizer demand frankly we don’t care as much about neither as we do about the other products. So here we have a slide that talks about phosphate and potash. Now Brazil is an interesting country in this respect because no less than 67% of all the fertilizer used in Brazil is phosphate and potash, 67%. This compares to about 39% on a global basis, rest of course is nitrogen. So this makes Brazil a very attractive market for phosphate and potash producer like Mosaic. Now Brazil imports a significant part of its phosphate. This slide somehow doesn’t do justice to that in 2012 the imports were 4.3 million tons so that’s significant amount of imports but the real [jump] is in the MOP supply, 90% to 95% of all the MOP used in Brazil is imported and we do not expect that to change much over the years to come.
Okay, so what does that mean for our growth strategy? We have a five year plan to grow our business with about $300 million of investment. That $300 million is needed basically for two main purposes; the first one is to add blend capacity and warehousing capacity; the second one is logistic optimization. Much of the fertilizer demand in Brazil is [surf] to farmers in the form of blended products and therefore if you want to grow you need to build blend plants. To give you some example let’s click here. The yellow areas is where we already have approved our project and are actively implementing them. To give you some examples is Sorriso that is the [Miritituba] area. This [Miritituba] area I was there a few weeks ago. If you ever want to get a sense of what changed in agriculture means you need to visit [Miritituba] not only is the area expanding but these farmer are so ready to soak any different any change you have to offer in how they can become better and more efficient.
There is almost no place in Brazil but maybe anywhere else in the world where our MicroEssentials are doing better than in this area simply because the farmers are so ready to change. So this Sorriso plant that is a blend plant where today have increase in the 50,000 tons capacity, we’re expanding that to 700,000 tons. [Candeias] same story, we’re expanding our blending capacity. And then you get Paranaguá. This is a port project where we are expanding the capacity of our crop that gets me actually I am skipping something let’s go back for a second. Before we go and talk a little more about the logistics, I want to explain that the strategy we have is very much is a modular strategy. So that means that for building it up over time and we’re building it our self, it’s an organic growth strategy. The advantage of doing it this way is that we can build the facilities exactly where we wanted and we will end up with modern low cost facilities that can exactly serve the customers the way we would like it to.
Now we’re going to go to the logistics area. Historically, Brazil it’s actually today Brazil has served its imports through the ports in the south of Paranaguá, Uberaba, Rio Grande and Sorriso. And the fact is that the capacity of this port has not kept up with the fast growth of the fertilizer impact. So the waiting time of these ports is often horrendous. last year from June to November which is the peak season the average waiting time at the public terminal was 50 days with a peak at 74 days so I take 15,000 barrels a day on average for the merit is very expensive to operate okay. Price of terminals like always last year in the same period only had 14 days waiting time so a part of our plan is to invest money in expansion of our Paranaguá port, but equally exciting and great opportunity is to grow in logistics through the North.
What is happening you have the Amazon River in the North and because the areas in which farmers grow their crops have slowly moved for the North it has become possible for grain companies to start exporting from Paranaguá Saudi’s area where you have to service a plant to truck the grain North to the Amazon River and then export it from there and all those trucks that drive North then go back empty so a great opportunity for us to invest in four facilities on the Amazon River and then use that cheap freight to go South and get the fertilizer to the farmers and the good thing about it is that the farmers in Mato Grosso will not only be helped by better prices for the grain because the logistics benefit but also for fertilizer.
And therefore only speed up in my view to grow access market so clearly there is a shift in how the Brazil cut short and this truly is an opportunity for us to help shape the future of Brazil agriculture.
Finally summing it up we believe that we have a different way of reaching our customers several complimentary channels to reach the customers strong positions in the market that really matter excellent long term relations with our customers and a clear strategy for growth in Brazil and on top of that we have this premium products MicroEssentials that Rick McLellan Head of Commercial will explain to you further about. Thank you.
Thanks Floris that was a very good and quick description about what we do around the world. It is going to be my job to spend a little bit of time and talk to you about our premium product strategy and why we place it in such high priority in Mosaic. The short answer is, it’s good for all of us, it’s good for farmers, our retail distributors our own Mosaic company and our shareholders. Now the devil is in the details so let’s take a quick look. In our view premium products contribute primarily to two of our five strategic priorities. Growth and innovation, I can also argue to support Floris’ points that these products are instrumental to our market access in certain parts of the world so that's three out of the five.
And thinking of it we have some of our most talented people working on this strategy and their energy and enthusiasm is infectious still the people that now covers four of five. And of course our premium products deliver shareholder value as I will demonstrate shortly so there you have it. Premium products can be seen as impacting and frankly driving our whole strategy.
Well some might ask why do we produce these products. First and foremost we are meeting a need in global production agriculture; let’s start with a little bit of science of crop production. Crop nutrients supplied in a balanced manner attribute to 60% of grain production and that percentage is only higher in tropical areas like Brazil plants need a wide range of nutrients starting with the primary micronutrients of NPNK we have had our focus on the big three for 100s of years but to reach maximum grain production secondary nutrients and micronutrients are essential.
And I should note that micronutrients are not just critical to plant growth humans require them too. In fact the World Health Organization research indicates that zinc deficiency in diets affects 2 billion people annually and contributes to 800,000 deaths per year of which over half all children. We are helping to combat this problem we started with sulfur in our first MicroEssentials product and we have been expanding from there through the additions of other micronutrients including zinc. We are proud to be the only large crop nutrition company that is committed to this kind of innovation.
Our portfolio of products has been successful and it will continue to grow KMAG has been around for a long time but it still is the only inter [indiscernible] introduced in the potash market in decades, hang on for a bit and bear with me because that's about to change. Micro essentials has been a tremendous success and [indiscernible] our phosphate animal feed product is delivering that premium value to feed producers and the integrators.
And our R&D pipeline is full. We have several potential potash and phosphate products in our stage gate process currently. Important for me to note that we're really quite disciplined about our R&D approach. We put every new product idea through a multi stage approval process all the way through the field trials and we're not afraid to pull the plug on any product concept that doesn't pan out.
The whole development process is highly efficient. We reach go or no go decisions with limited cost commitments nor emotional attachment. Here's a philosophy behind our products our strategies. Our premium products deliver profitability and sustainability for the ultimate end user, the farmer, but also for the retailer and for Mosaic, we're helping retailers and farms grow better crops, make more money, build deeper relationships and improve their sustainability. All while Mosaic reaps some of the same benefits. Frankly it's a good and more importantly repeatable cycle.
Micro essentials product are clearly differentiated from other commodity phosphates. Here's one of our commercials that airs primarily in the Corn Belt in the US. It'll give you some idea of how MicroEssentials works in the field and why we believe there's a compelling value proposition.
We're quite proud to be part of this change and for sure this isn't your daddy's crop nutrition company, we're driving change, we're delivering on our mission of helping the world grow the food it needs. The real story with micro essentials though is about creating value. Our yield trials show on average a 4-7% increased yields from using micro essentials. This graphs show the incremental value, a farmer realizes per acre using micro essential, instead of their usual phosphate utilization program, with just 2% yield increase which frankly is a conservative view. The farmers receive $17 in incremental value per acre, while on a per ton basis a $147 per ton of fertilizer purchased at a 4% yield increase which is frankly much more common. The benefits are all much significant we're driving other yield and we're helping farmers feed to world and we are making better margins. The secret to a product success is understanding how value is created and we've done that and shared equitably.
The questions you have to ask, because every part of the value chain benefit and can you deliver a fair share of that benefit for the end user. If the answer to these two questions is no, the product will fail. The end users, in this case farmers will not support a product for the long term if they don’t get their share of the value, but if the answer to these two questions is yes, you have micro essentials, farmers get approximately 60% of the value, while Mosaic and retail distributors garner the remainder.
Our focus during the past two years has been on training and assisting our own customer facing employees and our retail distributors in garnering their fair share of the value created. I must admit we have had many successes and some failures, but we're gaining ground with this exercise. Demand for micro essentials continues to grow at a very brisk pace and we're see it expand rapidly outside of North America, especially as Floris pointed out - in Brazil. Micro essentials are not easy to manufacture as Joc has pointed out, which by the way recreates significant competitive advantage. We're expanding our production capacity to keep up with demand increases that we expect in the future. We have plans to convert more of our phosphate facilities to micro essentials production in the next few years and we're evaluation additional ways to increase capacity further so that we can meet future demand.
As I mentioned earlier we will be introducing a new potash product in the near future, its branding is not quite ready for public yet, so for now, we’ll call it as we do experimental 2205. In our trials, it delivers the same benefits as our other premium products increasing yields, developing a return on investment to farmers, and delivering on our balanced crop nutrition promise.
The product right now is in the field frankly being harvested with a focus on building our yield data to support a formal product launch during January. Here' why we’re doing this. Again to the meet a customer need which have been identified in our research programs. The difference in these two pictures might not look that significant but it is. These are -- this is corn from same farm the same field and the same conditions. On the left is corn produced using the farmer’s current potassium fertilization program, compare this to the corn on the right produced using 2205 is its primary potassium source. I believe you can see the difference with 2205 as the kernels appear almost to the very top, it appears to have more than more rows of kernels and it does.
Additional role of kernels in the year of corn develops a farmer can reap an additional bushels even with today’s prices one additional rows with an incremental $40 an acre and as you can see most of these years have more rows. But unlike a fashion show, famers make decisions based upon proven yield increases not just looks which is why our focus is on building yield data to support our product launch. They tuned for that January launch. The new product helps the retailer just as significantly. Retailers are the one farmer thank for higher yields and we give retailers support to help their customers achieve this product’s potential that intern gives retailers long-lasting trust and relationships with their key farmer customers.
As a side benefit, the product is easy to store, requires less blending than potash and like its phosphates counterpart has all the nutrients in one granule for improved distribution in the field and in the crop. The strategy has a compounding effect for Mosaic. We use a selective distribution model to improve our ability to support those customers who choose to sell our premium products. This chart shows the growth that we’ve seen with customers in a large market in North America. In 2008, we supported only one retail distributor in this marketplace. In 2010, we realized the market was large enough to support a second retailer. As you might expect, the first retailer was concerned with another entering their marketplace and was concerned that their market would be cannibalized. Quite to the contrary, both of these customers have grown their purchases of MicroEssentials and their purchases of other Mosaic products. Changing our relationship, we have with these customers and our discussions today are all about how do we grow together, not about what’s the price today. We clearly are building upon our successes.
Finally, we do a lot to promote these innovative products and we do it efficiently. We have two interesting digital platforms that I encourage you to checkout. First, our pursuit of 300 Initiative is working with 6 Midwestern farmers chasing the elusive goal of profitably producing 300 bushels of corn per acre. The farmers frankly become local celebrities. In the program, it’s drawing great attention to both the use of balanced crop nutrition and our premium products. Check it out on Facebook or follow us on Twitter, there is a quite following of these group of six farmers.
Second, our new platform dedicated to helping with the message of balanced crop nutrition, cropnutrition.com is a long-term endeavor aimed at helping farmers achieve sustainably higher yields. These promotional efforts are real differentiators. We are the only large crop nutrient company with this kind of presence. Here to summarize, we feel great about where our premium products strategy has come from and where we’re headed. We are focused on delivering incremental value for all stakeholders and we’re in it to win it.
Now, I would like to introduce Larry Stranghoener, our Executive Vice President and CFO, Larry?
Thank you, Rick. Good afternoon all. Some of you may note I’m the token American on the program here this afternoon. I have spending a lot of time trying to explain to my Canadian and Dutch colleagues the workings of the American political system, which is taking up way too much time, but I am pleased to be here thanks all for here attendance. Today, you’ve heard how we’re going to executive our strategies, include about our plans to grow through higher volumes and through margin expansion. You have heard about our plans and expectations for continued growth in our premium products that described, that help drive grow our yields and capture higher margins for us.
You have heard us talk about our distribution capabilities, specifically how we're approaching Brazil, which is one of the fastest growing fertilizer markets in the world. Finally you have heard about our focus on operation and our focus on maintaining our position at the low end of the cost curve.
So what will be the actions needed for Mosaic and for our shareholders? What cash flow, what total shareholder return might expect from us in five years. To some extent of course that depends upon market condition, conditions that can be volatile as we've learned recently, crop nutrition is a cyclical business but we expect it to move higher over time as the ever increasing global demand for food evolves. Today I will show you a few financial scenarios based on our reasonable range of market conditions and the strategic actions my colleagues have described. First let me discuss the environment we expect to see in 2018.
We are certain that demand for food will grow, in fact by 2050 grain and oil seed demand is expected to grow by nearly 70%. We expect world demand for grains and oil seeds this decade to require the global agriculture add production equal to current output from Argentina, Brazil and Canada combined. Against this backdrop we have created come alterative scenarios for you to consider, we have used CRU data to project 2018 industry cost curves, these cost curves along with data from proprietary models are used to project three different scenarios each with phosphate and potash in the year 2018. Our model relies primarily on expected prices of soft commodities and expected supply and operating rates of potash and phosphate industries.
Plus before I get into a five year outlook let's visit our near-term outlook starting with phosphate. We have narrowed the range for our 2013 global finished phosphate shipments from 63 million to 64 million tons. Our current projection is off about 2 million tons from prior forecast, due mainly through large declines in shipments to India.
Our forecast for 2014 calls for a moderate rebound in response to lower phosphate prices and continued positive farm economics worldwide. In India our baseline estimate for 2014 includes a modest 1 million ton increase from the depressed level of 2013. Over the medium term horizon we expect supply to grow along with demand and we expect operating rates to move slightly higher beyond 2014.
We look for major market participants including the non-public companies to continue to be driven primarily by profitability goals. We also expect some large competitors to integrate into finished fertilizer production and finally we look for further consolidation in the industry.
Over the next five years Mosaic will continue executing our strategies going primarily by optimizing our current production, rolling premium products, completing the Saudi Arabian joint venture and speaking other goods strategic investments. We expect our investments in supply chain, distributions to improve our flexibility and ability to optimize both production levels and our net backs.
We are well aware that a low cost position is critical in maximizing margins in any market scenario; this chart shows you our projected phosphate industry cost curve five years from now. You will note that we expect to remain in a very attractive position. It's important to keep in mind the commodity based raw materials account for a significant account component of our cost and projecting phosphate scenarios, the projected price is not as relevant as the projected striping margins, or the projected difference between price and the cost of ammonia and sulfur.
The plan of $200 million in cost savings across all North America facilities as Joc described and proposed ammonia capacity would result in Mosaic continuing to be positioned in the best of bottom cost quartile as these cost savings were expected to offset inflation. The Louisiana operations are higher as we purchased phosphate, as we use phosphate from our Peruvian joint venture dislocation and the joint venture dividend is not taken into account in the chart.
This slide shows three potential scenarios for phosphate manufacturing cash margins depending upon the external markets. This is a different view than presented in our segment reporting as Joc described earlier, which includes distribution margins. I'll add that shortly.
All of the high level assumptions are shown in the printed handouts and in the webcast materials. We expect Mosaic production volumes in all three cases to be 7.9 million metric tons as we are already operating our phosphate’s business at capacity with our mines and chemical plants currently in balance. In each of these scenarios we’ve treated our Ma’aden joint venture as if it were accounted for as our own production. In other words we’ve included cash margins equivalent to the equity earnings we expect. In addition we’ve added a premium for our expected MicroEssentials volumes.
Marginal cost pricing in our likely scenario is based upon 88% [indiscernible] operating rate assumption resulting in a price of $450 per ton and a stripping margin of $265 per ton for a Florida based producer. In comparison today its price is about $390 in the stripping margin about $245 per metric ton. You can see that the phosphate business can continue to generate strong cash margins even if prices are low and that we have significant leverage to grow margins if prices rise.
Let’s move to our near term outlook for potash where we have lowered and narrowed the range of our 2013 global MOP shipment forecast to 54 million to 55 million tons from our pervious guidance of 55 million to 57 million tons. The reduction largely was in response to the challenges in India as well as delays in settling the second half 2013 Chinese contract volumes. In addition, buyers in many other key importing countries have differed purchases as they wait to see how the BCC saga plays out.
Our shipment has to work for 2014 else for moderate growth across virtually all markets driven by positive from economics and lower potash prices. We expect potash demand to grow by about 3% annually over the decade with operating rates moving slightly higher beginning in 2014. Review the price decline we’ve seen over the past 18 months which have accelerated recently reflect the fundamental supplying demand balance and declining industry operating rates and close to 90% since 2010-2011 to approximately 80% in 2012.
We expect that India will eventually obtain more balance in its crop nutrition application practices and ultimately that our share of Canpotex will be consistent with our 2010 share near 40%. Over the next 5 years we will continue to focus on execution, finishing our K3 expansion, managing our expenses and optimizing sustaining capital.
In the 2018 cost grew for potash, we have assumed that $200 million reduction and expenses due to the actions Joc described which primarily offsets inflation, please note that the chart shown here is FOB part and includes about $40 per ton to get product from our mine to Vancouver court.
In addition, if we invest to make K3 the source of all for our rest of these operations as Joc described in this K3 project by the way we think is the very best potash project underway in Canada Greenfield or Brownfield but with this -- if we go ahead with this our cost per ton would decline by $30 or more which is driven by the elimination of brine inflow cost at K1 and K2 this is not included by the way in our scenarios.
We continue to expect the potash cost to remain flat under the low case scenario for potash we use this cost curve and assume price equals the expected marginal cost of production or approximately $240 per ton or almost $200 FOB mine.
Here are the 2018 cash margin scenarios is been for potash because Mosaic has unused capacity in our potash production volumes vary by scenario in the medium and high scenarios volumes prices and industry operating rates are based upon our proprietary model assuming the same external market forces as in the phosphate scenarios.
In potash, the global operating in the medium scenario is 81% with Mosaic producing 9 million metric tons of MOP. In India the three scenarios just remains at highly profitable business. Here is the consolidated view. If we you add cash margins for the manufacturing scenarios I’ve already described and layering distribution cash margins, the medium phase scenario results in a $4.5 billion cash margin Mosaic 2018.
Just to be clear this is not operating earnings as we need to overlay SG&A and resource taxes as well as depreciation which we do here. When you add up all of the pieces, our three potential scenarios drive operating in the range from $1.4 billion in the low case to $4.7 billion in the high case, with a medium scenario of $3 billion. In these scenarios we assume SG&A cost of $380 million per year and that depreciation, depletion and amortization expenses increased to $850 million per year as we continue to invest increasing the depreciable asset base of our business. Note that these are the reasonable scenarios intended to demonstrate what our results might be. The high case is very exciting of course, and the low case is not as bad as some analyst seem to fear.
We expect the business to remain a cyclical business and of course we do not know where in the cycle we will be in 2018. So another way to view the medium scenario is that it is representative of a true cycle earnings number opposed to the average of the past five years but above our fiscal 2013 results, a year of market challenges. We look forward to producing ample cash flow over the next five years and effectively allocating it to generate strong shareholder value both through distributions and investments even as we maintain financial strength and flexibility.
We prioritize investments depending upon operating cash flow expectations, risk and expected returns because we operate in a cyclical business our decisions are based on the probability of exceeding our required risk based return and not on a point estimate or market forecast. We assign a minimum premium of one percentage point for project risk above our weighted average cost of capital between our assignment of risk premiums for project country and other risk our required rates of return vary from 10.3% up to 23.8%. We will not undertake projects unless we believe we have a high probability of meeting or exceeding our risk adjusted required returns.
As a proof point you see our completed potash projects fall in terms of returns keeping in mind that the projects are in varying degrees of production ramp up. Returns on all of these projects are very attractive and well above our weighted average cost of capital even with assumptions of long-term operating rates of 75% and sales prices of $335 per ton fob mine. The construction phase of all of these projects were executed well that the construction cost per ton of operating capacity among the lowest in the industry. These expansions will significantly lower our future operating cost per ton when operating at full capacity.
We are in a capital intensive business and we will continue to invest to sustain our assets, improve our competitive position and drive higher cash flow. Expected capital spending through 2016 consists of the five broad categories shown on this slide. On the bottom you will see the decline in sustaining capital Joc previously described as we expect to lower it to approximately $500 million per year from $700 million. We are continuing to invest in our future to low risk high return Brownfield expansions and joint ventures.
Capital spending for potash expansions shown on this chart consist of previously announced expansions, primarily the Esterhazy K3 project, we continue to believe our Brownfield expansions are likely to be the most cost-effective expansion when market conditions want additional capacity. The Ma’aden project provide significant strategic value to Mosaic and is a great compliment to our phosphate business in Florida and Louisiana. We will be investing up to a billion dollars over the next four years and we will own a 25% interest in the proposed project.
The international and supply chain investments reflect our plans to grow in Brazil and to invest in further supply chain improvements. We are finalizing our evaluation of the potential ammonia project in Louisiana and will announce the decision on that project by the end of this year. Additionally we will continue to manage working capital prudently. Given the seasonality of our industry, it’s an important value driver, the one we pay close attention to. The checking account is not unlimited and we have a rigorous process of evaluating and prioritizing new project proposals. We expect that under the vast majority of cases, capital investments will be funded from operating cash flow.
Today our balance sheet is one of the strongest in the business which has positioned us very well to take advantage of opportunities. In this environment our balance sheet targets remain unchanged. These targets consider the cyclical nature of the business and are conservative assuring us of appropriate liquidity and financial flexibility. We continue to target $2.25 billion of liquidity, with about one-third of that coming from cash in our balance sheet, the remaining two-thirds coming from committed credit lines. We are also looking to optimize our leverage at 1.5 times adjusted debt to average EBITDA where the rating agencies add pension and lease expenses to debt and estimate EBITDA over a five year period.
Some of you are curious as to what happened to the numbers on this slide that you have seen before. I will go into some explanation here. We estimate that we still have approximately $2 billion in on-balance sheet cash in excess of our targets, the majority of which is currently available. We believe however our near-term debt capacity has declined along with EBITDA expectations. Based on two year historical actuals and first call estimates for 2013 through 2015, our five year average EBTIDA has declined, which would lower our near-term targeted debt levels by 20% to 30%, compared to our prior $3 billion estimate.
That said, we continue to believe these balance sheet and liquidity targets constitute a material level of excess capital combined above $4 billion. Our priorities for deploying cash from operations have not changed. We seek to maintain our credit ratings and our liquidity cushion to sustain our assets and our payer dividends, to invest for growth and to return surplus capital to shareholders. The recent decline in valuations has increased the attractiveness of acquisitions and it has also made repurchases of our shares more attractive.
We continue to believe that share repurchases will be a material use of our excess capital and we look forward to later this year when current share repurchase restrictions expire. We continue to target mid-2014 with an even more optimal balance sheet structure.
In the near term when restrictions expire, we favor share repurchases as a key mechanism to help us optimize our balance sheet and ideally eliminate much of the Class A share overhang. Longer term, following resolution of the A share issue, we expect ongoing share repurchases to be both patterned and opportunistic. We also plan to maintain a reasonable dividend that is sustainable across the cycle and to increase it in line with business growth.
So what do we want you take away from our presentations today? First, management’s key priority is long term value creation, driven by growth in cash flow, prudent risk management and effective capital allocation. Second, we believe we can accomplish this value creation over a wide range of market scenarios. We expect to manage effectively through the troughs and deploy our balance sheet in value creating ways. Our ultimate goal is to be the leading crop nutrition company in the world and we know our major part of that is generating great returns for our shareholders.
With that Jim, I’ll turn it back to you for concluding comments.
Thanks Larry. And I hope that demonstrated to you his great insights, his comments about our balance sheet. Larry is a definition of disciplined capital management and prudence and I love your line about the checkbook isn’t limitless and that email has to be get to DC somehow.
What I said earlier on is that we are going to have a break after my concluding comments and then go to Q&A. Looking the way the clock is running down, we are going to dispense with the break. So if you just want a take a minute to step out and come back we are going to immediately after my concluding comments have the management group up here and we’ll take your questions and answers.
I want to leave here with confidence in Mosaic, confident that we are positioned to thrive now and through better market conditions that are just ahead of us. We spent a lot of time talking about our strategy this afternoon and we did that because our strategy works, our strategy matters. We demonstrated that we can execute, we delivered solid returns, we built an extremely strong financial foundation and we have proven our ability to grow.
You saw powerful combination of the assets and hard earned corporate strengths we have. Joc gave you a well-defined path to greater operating efficiency and growth in our business units. Floris and Rick demonstrated their understanding of customer knowledge, the unique promising, commercial strategy that we have ahead of us, how differentiating premium products makes the difference at Mosaic and how far reaching customer focus, go-to-market strategy can really work and add value in this company. And Larry demonstrated the financial strength and competitive operating approach that we have that that can sustain good profitability even when phosphate and potash prices are low as they are today.
That’s our story. Now, just allow me a brief reflection on the last couple of years. We are going to be on the podium at the NYSE—at the Exchange shortly bringing the closing bell and we are just a few days away from the ninth anniversary of Mosaic’s creation, when we first rang that bell and on that day Mosaic came into existence as a public company.
So that was a top school of hard knocks education. We endured a lot in those first few years. We had much too much debt learned a lesson from that. Our markets were weak and our ratings were justifiably poor. This management team has now been together for many years and a number of them from the very first days. This has guided the company through some tough times and we’ve learned some real painful lessons. We’ve gained some tailwinds from the P&K markets that we’ve had over the last few years as well as the wind in our sales from corn and bean prices and prosperity down on the farm.
But to be sure through all this, we’ve taken the long term view. We know that when we’re flying at the top of the markets prices are high and margins are wide, we know that we’re going to see tough days and when we see tough days as we aren’t today, we know somehow, some way, it will change these markets will recover and we’ll see those peaks again.
We have a preference for steady. We like things predictable. We don’t want surprises. We’re careful in our decision making. The decisions we make have long term impacts. The capital investments we make are long lead time projects therefore we’re very disciplined in our capital deployment. By following these philosophies we’ve built a world class organization. We’re the world’s largest producer of phosphate and potash, a tremendous accomplishment. We are the most powerful combination of assets, talent, financial strength and global reach in the crop nutrition industry. There is nobody better. We’ve accomplished a great deal and almost none of that by accident. We’ve stated this number of times this afternoon.
This business, this industry is cyclical. Cycle is different than the equity market cycles you used to cycles more founded in agricultural cyclicality. We understand the broad spectrum of factors that influence our business for better and for worst. We know the weather and world’s agricultural geographies have a profound effect on the pricing of commodities, and we know that to be in predictable.
Commodity prices fluctuate wildly sometimes. Disruptive global and geopolitical events that happen in the world and even most recently market participants that act at what appears to be in opposition to their own economic best interest. You just can’t tell what’s going to happen next.
So that’s where it’s been so important in our strategy development that Mosaic can succeed in the deeps in the market as we’re experiencing now, that we can accelerate when we come up to the peaks and light up the troughs and find opportunities throughout the cycle, the good and the bad. And our results just demonstrate that we can do just that. Expect more from us but more steady prudent management and a willingness to seize opportunities when they present themselves, all with an unflinching commitment to generating solid returns for shareholders, our key strategic priority.
Mosaic’s future is bright. Regardless of the volatility we’re all facing, the markets bring on to us, our future is tied to the greatest challenge of our times, a challenge that will increase with the generations ahead and that’s feeding a growing planet. The world has to grow more food. There is no way around it; and a whole lot more food. Simply cannot do this without sound crop nutrition. And therein lies the value of Mosaic. This is an excellent franchise, built to withstand tough times and prosper through the good and the bad times, supported by the most compelling future demand story I know of, all materials in the world, food to help us survive. This is a great opportunity for the long term and for all our stakeholders and shareholders.
And with that I’ll thank you for your attention and we’ll be right with you in a couple of minutes for the question-and-answer period. Thanks very much.
All right, well thank you. We are back again for some Q&A. There is a couple of rules here. First is, when you ask a question, this is a webcast we are going to have to have the question broadcast as well. So please wait till one of our assistants in the back brings you a microphone, and you just say your name and ask the question. I will moderate and I will pass the questions around up here. Yes sir Susquehanna, Don Carson.
Don Carson - Susquehanna Financial
Thanks, Don Carson from Susquehanna. Jim a couple of questions on potash. The Russians cite their market share loss to Canpotex is one of the factors behind their decision to focus more on volume than price. So the question would be how will Canpotex respond? Do you collectively need to cut your volumes and take less share? And then specifically for Mosaic, why invest in so much potash capacity? I think you'll eventually be over 12 million metric tons when your own upside case is showing only 9.8 million metric tons. Aren't you better off putting more cash back into your own stock.
Okay, I'll answer the first question Joc and Larry could speak to the second one. The view in selling our potash is that we will take care of the customers that have grown to trust Canpotex. We have some customers around the world and some not insignificant ones that are 100% reliant on potash products. They've chosen to have the Canadian suppliers provide their product. We're sticking with those. They're going to be supplied with products and not be found to be at a financial disadvantage.
Growing market share, just speak to that, we're not out for a market share fight by any means and we don't have gain of market share as a goal or a strategy. What's happened this past year and I think it may have got caught up in the noise or people are looking for excuses, is that in a couple of markets of the world the bpc was struggling to get product to the market. In particular in Brazil there were some issues around, there was an early season in Brazil their past spring. Winter in Byelorussia, the northern Baltic ports were frozen in, locked in, they weren't able to get the product into position. So that demand went to Canpotex and other suppliers in the world.
It's not that Canpotex brought it through lower prices. It's just a matter of good marketing, strong relationship building and we're going to do it on that. We don't compete on price. We're competitive. We don't lead the price down. So, how we're going to behave in the future? We're going to ensure that our good selective customers are taken care of and they're not at a financial disadvantage. Larry, Joc, do you want to speak to why this led to where we're at with production capacity versus demand?
So, when we entered into these projects, it's now four to five years ago that we entered into the first three big ones which was the first stage of Esterhazy, Belle Plaine, Colonway and Cave 3. Obviously Cave 3 is a long term project for the future of Esterhazy and as Larry said in his presentation, a great future for Hazy. The other two projects, or the other two, Colonway and Belle Plaine are far enough along that getting food in now is the best prudent thing to do and what we've shown going forward though is the Belle Plaine stage 2, we've been quite prudent by saying we would hold that off until we thought the market needed it. But recognize also, you need a little bit of extra capacity because the market doesn't sell, every month. So the months they're shutdown and there's months where the production will be very low and so you do have to have a little bit of excess capacity in this business.
And where we do have, I'll just add one thing Don; where we do have there's flyups in the market. Things happen in this business, whether on the demand side or on the supply side, and we're going to be in a wonderful position that if there's a fly up, increased sudden demand, we'll be able to put our foot on the accelerator and produce that. Last time that happened in 2008, when we saw that run up, we hit the accelerator and the car stuttered. We were producing full out and even at that, we were scooping every last spoonful out of the mine. So well maybe we didn't pick the right year to get to these new plants up and running but it will be used. I have little doubt, over the next couple years there'll be a time when we'll need all that production.
P.J. Juvekar - Citi
P.J. Juvekar at Citi. I had couple of questions, the first one on sort of very near term. Do you expect growers to reduce their application in the fall, especially P&K application given the situation at BPC and falling prices they might, you think they're likely to hold off?
P.J, I'm going to have Rick McLellan, our commercial leader to speak to that.
Yes. It's a good question and one that we take a look at. I think that from what we can garner and the discussions we've have with dealers and farmers, expectations are for a normal, quite possibly larger than normal fall application period. I think that what people confuse is the primary looks of the economics of grain production, the chart that I believe Jim showed at the start, shows that the value the farmer's getting for his crop inputs versus the grain price are really quite solid and when you think about it, with the potash the farmer grows, potash could drop a $100 a ton. To the farmer that's about $0.70 a bushel. When they look at it, they're smart enough to figure out, it's about the economics, and the economics are, this is the time for them to get the product on so that in the spring they can focus on getting it in the ground.
2008 was a lesson for everybody in this industry, particularly around risk management. So it’s a really matter of psychology now. The supply chain is just reluctant to put product in when you have somebody stating and now they’re trying to pull that back and retract. So we might see $300 or lower than $300 potash. Famers in Nebraska, palm plantation owners in Southeast Asia, they all heard that. They read that’s why I’m waiting $300 potash. I don’t think it’s going to happen.
And so people are just saying well, why should I buy it at $350 when maybe it will go 300. Nobody wants that chance but you get to a point and we’re going to be getting to that in a couple of weeks in the U.S. and Canada, farmers have to get their fall fertilizer on and they just can’t wait to see maybe another $50 or $25. It will be too late then. Dealers won’t have the product. It won’t be positioned. So that’s more about psychology as what’s holding up the market and plugged the market. It’s not the price. The economics are a no-brainer.
P.J. Juvekar - Citi
And my second question is for Larry. Larry, given what the situation at BPC, are you likely to be more cautious in the stock buyback program beyond of course elimination of this classy older rank?
It remains to be P.J. I suppose if there is any silver lining in the BPC slog it’s that we didn’t buy back shares in June when we were ready and willing and able to do so. So well access market circumstances at the time. As you know we are restricted from the doing anything until very late November. So we’ll access market circumstances at the time and then make a decision. But I’ll repeat what I said in my remarks where we were very committed to a meaningful shareholder distribution. Obviously, we’ll need to talk with the trust and find out what their inclinations are at these lower prices, but make no mistake we still have a large appetite for buying back shares and deploying our balance sheet that way.
Vincent Andrews - Morgan Stanley
Thank you, Vincent Andrews from Morgan Stanley. Larry you said that the decision on the ammonia plant would be made probably by the end of this year. We’ve seen a couple of peers throughout this year walkway from green yielding and plant. So what’s left in your analysis to do and then maybe I’m wondering whether or maybe it’s a separate question, how are you going to get the ammonia from Louisiana to Tampa and what other - is that part of it?
That maybe Joc and I could take teams. We are just in the final stages of the evaluation process. I think it should be clear from the knowledge of us in our presentation that we’re fairly deliberate about talking on projects of this size and scope and magnitude and so we’re working hard to make sure all eyes are dotted, tees are crossed and that we evaluate all possible alternatives. So we’re coming to the very end of that process. And part of the decision, as you described, is in fact how do we get ammonia from the Louisiana to Florida. Joc do you want to talk about that?
So the last piece of that project, in this part of the capital, we require and the whole evaluation is we will have to build two ammonia vessels, barges, integrated barges and tugs to move product from Louisiana to Tampa.
Vincent Andrews - Morgan Stanley
That would be an access of sort of the cost numbers that are running around from your competitors to build the actual facility. Do you know by approximately how much?
It’s in excess of the actual facility but it’s been in the cost that we have quoted in the past.
Michael Piken - Cleveland Research
Hi Michael Piken from Cleveland Research. Couple of questions. Number one, could you sort of talk about kind of the incremental margin opportunity win on MicroEssentials versus traditional DAP/MAP and the average selling price if you can? And then as you move the product into Brazil, would we expect with your distribution and blending as this is down there to see the types of margins in Brazil that you’re seeing on MicroEssentials here in North America?
Rick and Floris, handle that.
Yes, Floris, you take the part on Brazil. I will take the overall margin. When we were together the last time at our last meeting, we talked about our margin structure that was around approximately $40 a ton, more than the price of commodity products. We have increased that. We believe that’s a competitive advantage for us and we don’t want to talk about it, but we done a lot with working with our customers on how they can capture and garner more value and we can too. We have seen solid increases in our margin captures as well as our customers and that’s about where we’re going to leave, what will say about it. Now, Floris you can talk about the downstream in Brazil.
And Brazil the mark is ours quite significantly in excess of this $40. It would be tempting to give you an exact number but I think it’s very clear coaching, so I can’t do that. But it has two advantages of MicroEssentials in Brazil. One is the significantly higher margin. The other one is that we sell the product in blends and so with the MicroEssentials we pull the product like MLP through. So double the time.
Over here up front gentleman.
Mark Connelly - CLSA
Mark Connelly, CLSA, just two questions. Floris walked us through the $300 million investment in Brazil distribution. Wondered if you could walk us through the evolution of the thinking on the Brazil expansion? In 2007 you talked about expanding in Brazil and then is various reasons, business actually shrunk. Around the time of the deal it sounded like you had moved away from wanting to expand distribution. So I’m curious if you can help us understand the evolution in that market. And separately with respect to Larry's comment on long term projections, I wonder if you would share with us your view on when Brazil's land conversion process slow down. I assume you have that somewhere in your projections. And when MPK ratios will peak out in Brazil?
I will just comment on what attracted us in the thinking on Brazil. We always believe in Brazil as a growing market and as a customer for potash and phosphate. And Cargill is down there lot of us have the pedigree that goes back and we understand what's happening in Brazil. Then we had a bit of a setback. When the business Fosfertil was sold in Brazil. Our partners Bunge and Yara sold at the Vale. It just was a deal that was going to happen and was directed that way. And so we left and try to get our feet under ourselves and since then we have remained confident that there was a place for us, a substantial place for us even without the base production assets.
What's happened over the last five or six years, is we’re seeing the agricultural zones continue to grow north. Six and seven years ago you have, the grain companies had a good footprint, the ADMs, the Cargills, the Bunges had good footprint. Now Bunge has left that market. They are just doing grain origination and non-fertilizer, they sold their assets. You are seeing this land grow up north, where there is not well served. The south was pretty well served with asset, with facilities, with grain elevators. And it was going to be hard to go in and not just have a market share fight to get that share.
I think we’re ahead of the other army that are going to go in, and we think we'll be the first in somebody's territories of course with our understanding of bringing grains in. The last couple of years has been a real suggestion to bring product into the country. We’re facing that. And as I said in my earlier comments, access to markets is becoming ever more important, to be able to bring product in and not wait 60 days at a port to unload a phosphate vessel. So the market is changing, continues to grow and we see opportunity for us to get in ahead of everybody else.
And Mark with respect to your question about Brazil and our scenarios, you’re giving way too much credit to the detail behind these scenarios. They are scenarios they are not projections. They are certainly not bottom up projections but they were intended to give us a sense of what's possible and against that we'll measure our own projections and our own plans over the next five years, but I don't have that level of detailed sales forecasting for Brazil.
It's remarkable, you look at it and say well this lillypad story you learned in economic school that can't go on forever, but Brazil just going on and going on. There is just so much land, particularly in the central north and going up to the northeast it really just, you don't see an end to sight for some while. Next question?
It’s Thomas [indiscernible] from Stifel. A couple of questions on micro-essentials. First on page 72 you show that Mosaic and retail together now share about 40% of the value created. I am curious, are you at the targeted level of value sharing or should we expect that by 2018 micro-essential is 40% to 50% of volume, that there will be a higher level as Mosaic is realizing that value.
It's a very good question. We’re edging closer and closer to it. When we started in I think it's fair to say we were learning on the fly and as we have become a little more sophisticated, learned how to understand what margin potential there is, we have been able to work to help our own people and the market gaining more of their share and we’re moving towards 60%. We're not there yet. So there probably is further opportunities as we move forward to 2018.
And then, the second question is on the new premium potash product. Is that something that you are going to be marketing internationally and if so, does that flow through Canpotex or will you be marketing that yourself?
It's a very good question. As we did with micro-essentials our pilot and where we'll grow out first and learn is in North America, a more sophisticated market, a group that understands the value equation now. So that's our plan. Short term North America, but we are doing experiments internationally.
And when it comes to a decision that we want to take this internationally, after we get our good base in North America, I have no doubt that something could be worked out with Canpotex to make the arrangement work, get the product to market.
Adam Samuelson - Goldman Sachs
Adam Samuelson, Goldman Sachs. A question on North America and given the outlook for a relatively stable capacity utilization in potash, you got significant new capacity amongst all the Saskatchewan producers coming on stream over the next three, four years. How should we think about sustainability of premium pricing in North America. Currently North American price is 30% or 40% above the rest of the world. How do you see it revolving over time?
Yes. As we look at it there is product - there is expansions happening but in fact we believe the global markets over time will continue to grow. What people sometimes don’t see is the fact that the global markets are standard potash in the domestic markets are granular. And as you look over time, the delivered price Brazil and the price paid at the Gulf and the U.S. isn’t that far apart. They become a bigger spread as standard potash markets have languished or demanded product and granular products going into the U.S. and into North America garners that premium. The second piece is, is that it’s brought in oil cars and then barges, not in vessels. So there is a significant difference of cost to serve.
And I think I also heard you asking about premium product potash. That, we’ve experienced with phosphate there has been some critics that have said while when the wood market gets weak farmers aren’t going to pay for the premium product. There is an advantage over commodity [indiscernible]. We are getting that premium product even in the challenging tough and nutrient economics. We think the values there that farmers are paid for, they will continue to get this 4% or 5%, 6% differential, both on the potash premium product or around the phosphate premium product.
Adam Samuelson - Goldman Sachs
Maybe just a quick second question for Larry. I heard you talk about central deployments of cash and maybe your thoughts on M&A and you mentioned in your prepared remarks that opportunities are becoming more attractive given some of the declines in valuation in this space maybe just reflect on the opportunities that Mosaic sees to fund a bit for M&A essentially with cash?
The comments were no different than what we’ve said in the past about our priorities for capital allocation. We’re always looking for the right strategic alternatives that would complement what we do and phosphate or less likely potash were on our distribution capabilities and that continues be the case. So I’m not intending the highlight any specific opportunities simply to suggest there are opportunities. They are getting more attractive here and of course we would measure those opportunities against the economics of a share buyback if anything came to the floor.
Jeff Zekauskas - JPMorgan
Jeff Zekauskas with JP Morgan. I have two part of question. The first question is for Larry, I was looking at your capital returns slide, and it looks like in 2013 you want to return something like $1.8 billion in capital to shareholders and I think your dividend is about $100 million a quarter. So call it 400 million. So, you’d have to buyback $1.4 billion and you’ve got a month to do it. So does this imply that the base case is that you’re going to buy it back from the trusts and these forecasts are no good if you can’t or do you think you can really accomplish this in about by some other mechanism to return the cash by the end of the year?
The chart is - I don’t recall the exact chart at the moment. The chart is not intended to convey an exact estimate of what we expect to do with respect to shareholder distributions this year. We have ample capacity. We cited a number of $400 billion plus the majority of which we hope to, we would like to apply for share repurchases, if at all possible this year certainly by mid next year, which is the target date for achieving our balance sheet targets.
So, we have our large appetite and we’ve conveyed that to the trust. We don’t know what they’re going to be willing to play ball with us. Ideally we’d be able to conclude a deal with them yet this calendar year that can totally get closer to the time when we can actually do a deal, it’s very difficult to size the parameters of what they might be interested it, what we might be interested in.
Just perhaps anticipated question, we also understand that if they do not have the desire to hit our bid because of their own price on superiority, that we are unlikely to hold her dry just for the sake of buying back their shares whenever they get around to feeling like selling those shares. But they understand that we do have an appetites to deploy this capital, ideally as I said in my comments by buying back some above shares or many of those shares that whether or not they’re going to pay ball, we still have a large appetite. And now I have the follow up with you about what’s specifically you’re seeing on that chart is causing you to read it that way.
Jeff Zekauskas - JPMorgan
The second part of the question is if you look at FOB, your average FOB prices and GAAP [ph] and MAP and MOP today, on October 7th, and you imagine what they will be 12 months from now, October 7th next year, do you think that they’ll be higher, lower or you don’t know and what are the reasons either for your certainty or uncertainty?
Well I think, I don’t know if it’s I think or I wish. But I am an optimist. I think we are going to see higher prices. We have abnormally low prices, abnormally low relative to grain prices. I think there has been a lot of noise. Just the potash sector alone has impacted the other nutrients. So I think the whole idea of gaining price volatility, let alone what’s happening in the U.S. fiscal discussions, I think there is this risk aversion psychology. And I think in one year from now we are going to see the issues that came up in Eastern Europe. That’s going to be ancient history, life is going to go on and people are going to see that crop nutrition products are a wonderful investment and all of those that are invested and heavily invested in the crop nutrition industry know that they have to get decent returns from those capital investments. And I think we will see a recovery.
Jeff Zekauskas - JPMorgan
Is your view the same in phosphate?
Yes I think phosphate is going to come along. The price is, I think that Larry talked about it. It’s - everybody talks about the price. Well you got to look at the stripping margin. There is more raw material ingredients in that and maybe a little more complex a question about depending on nitrogen and sulfur prices going forward, world economy, I think we’re at lows in this. The other piece that’s impacted this is you had, what’s happened with demand, and again potash has had this spillover effect on other products.
You’ve had more production capacity; you have one market, India that is 3 million tons less potash this year, 3 million tons less phosphate this year, and I think we are going to be past that. The election will happen. They are going to have to, just simply have to reform their subsidy program. Indian scientists say it, Indian agronomists, Indian fertilizer leaders say it. They will reform that, and we get back to 6 million tons of P&P going each into India. That’s going to tighten up these markets and I think we’re within a year of that happening. Yes, so we’re on this side.
Mark Gulley - BGC Financials
Mark Gulley, BGC Financials. Two questions. One you did share with us some of the returns and capital that you see for some of the Brownsfield projects you are about to complete. Could you also share with us given your current vision of margins, what the ROC might be on K3? And secondly I think for the first time I have heard you sort of imply that when K3 is fully on stream, some years down the road, K1 and K2 could be shut down and retired, somewhat like the Brunswick and the Atlantic Provinces. So is that your goal, perhaps to shut down those two mines to avoid the cost of?
Larry or Joc, you want to speak to K3, ROIs.
The ROI and K3, this is by far the most costly line in terms of just the dollars and the magnitude of the project, and so given that and given the current pricing environment, these returns aren’t as attractive as what we showed you on the three prior projects, but we are confident that they’re still above the cost of the capital. And of course one of the great values of K3 is this optionality that it gives us, which is the second part of your question which Joc can address.
Actually Larry put that a good way. I would class it as optionality rather than a specific plan. These are nonrenewable resources. The K1 and K2 resources will be depleted at some point, at which time the natural progression will be to the K3 mine. That may be quite a ways down the road, but we have the option with K3 in place to accelerate that or de-accelerate it depending on what makes the best economic sense at that time. So it will depend on market, it will depend on need, and it will depend on pricing.
Joel Jackson - BMO
Joel Jackson, BMO. I had a few quick questions. So where are we with [indiscernible] right now in terms of the expansion if the team or the JV team has approved our flotation unit to move on to next phase? Second questions, where would you be on possibly procuring some Brazilian upstream assets? And thirdly, do you think now Ma’aden, and Ma’aden II will be the price setter in India, or will be a price taker with China really setting the price?
Joc, do you want to take the first question about that, and I didn’t quite catch it about the flotation.
Well let me answer overall. I think you are asking, I mean the next phase of De Yabar [ph] will require flotation to mine the lower seams of this whole body. I would say that the De Yabar [ph] expansion is still in the engineering phase. I think it’s been driven obviously by Vale as the majority owner but I don’t expect that to be coming to a decision certainly, not in the next six to nine months.
You had the second question about upstream assets in Brazil, and upstream did you mean production facilities? Well, we are not likely to see ourselves owning any assets near term. Vale has the principal production facilities. Going downstream to distribution are those --we think the best approach in front of us today is Greenfields with new modern facilities in prime markets rather than acquiring what others have built over the last 10 or 15 years. The third question, you asked about delivery price out of Ma’aden and Rick do you want or Mike do you want to respond to that, Mike Rahm.
I would say that they are both price takers, price be established by the overall supply and demand but Ma’aden certainly will have an advantage into the Indian market and will achieve the better net backs of anyone I think in that market.
Now just to say on Ma’aden projects, its advantage gas pricing, advantage to world price, sulfur pricing and we have equal stake in the oil reserves. Its’ not like we are having to buy the oil reserves. We have a stake in phosphate and oil reserves and northern Saudi Arabia. So this is not likely to see a producer that’s going to have a lower cost phosphate price in the world at the time Ma’aden phase 2 comes on.
Kevin McCarthy - Bank of America Merrill Lynch
Kevin McCarthy, Bank of America Merrill Lynch. Two questions on phosphates. First in the presentation, I think you illustrated that blends and to mask and diminish the segment margins for phosphates because they are sold at a lower single digit margin and so I’m wondering whether or it would be feasible and whether you have considered separating out blends for financial reporting purposes. And then second question, would you comment briefly on the breakup of PhosChem, in terms of the causes and consequences?
Larry, can you speak to the segregation of the blend reporting?
Sure Kevin. Some of you may remember, it was only five years ago that we used to report international as a separate segment. Because of the way we manage that business, it was no longer appropriate to treat it as a second separate segment and we combined it into a phosphate segment. That is subject to review, especially given our aspirations for growth in Brazil which were described earlier.
That said changing segment reporting is not a trivial task and furthermore when you do have segments, the FCC really frowns on you providing financial data if that don’t comport to those segments and so we took a bit of, not a flyer but we went beyond our comfort zone today showing you this notion of manufacturing cash margins and I think it’s fair to say that we will keep you up to date on that generally, even as we revisit the question of what is the proper segmentation for the business.
And here on second PhosChem question, Rick McLellan is the leader of our PhosChem operations and can speak to, what was behind that?
Frankly there was—this is an organization that’s been around for 39 years and has done some really yeomen’s work in developing market places around the world for us. So it wasn’t an easy decision to decide to close it down at the end of the year. But did it come to the point where we were providing over 90% of the product that went in there, the volumes in the future, we look to become de minimums from our partners and so that two of us agreed that the timing was right for us to close it down.
And if you are looking for a parallels to other associations like Canpotex, PhosChem doesn’t have any assets. We ship out of separate ports. We don’t have any common freight systems. The people that sell PhosChem products around the world are Mosaic employees. So for—I think last year it was 6% to 7% was the other company’s product, just extra pounding, more work. It wasn’t going to be change so we just wound it up.
Bill Carroll - UBS
Bill Carroll for UBS. A couple of questions, one on the proposed ammonia plant expansion, have you narrowed down the range of options available to you for securing natural gas supply and then secondly with the Ma’aden JV moving forward, what you are thinking with further developing the Florida mines given the potential environmental issues there?
Joc, do you want to speak to the price risk on the gas contracts?
Yes, we have examined a number of ways of buying natural gas on the long term, one of which of course was to try and get long term contract with one of the major suppliers. We haven’t found one that works too, mutual beneficial to both parties. So at this stage we are not pursuing that. So it will be a normal market-type purchase, whether it’s a forward curve or spot buying but that can always change in the future, if we can find the counterparty that wants to make a different kind of deal.
And your question about the mining in Florida, it’s not going to impact our mining. The three new mines that we have in the permitting process are going to continue. This is going to be incremental tones we get from Ma’aden. So our plan is to continue to produce about 10 million tons of finished phosphates in Florida. To do that we are going to need all the—we are going to need the three mines permitted, approximately 16 to 17 million tons of ore that we extract annually will go into our processing facilities in Louisiana and Florida.
The result is we have to keep that 60 million ton rate. What historically has been the case with these assets is we’re permitted seven years out, eight years out, and we’ll continue that, keep enough permitted land to keep our Florida operations, Louisiana operations fully operating with of course the Peruvian rock that comes in. So no short answer, no impact on mining in Florida. The question Vincent Andrews upfront? Somebody has a one back, has a microphone back there. Go ahead. Then Vincent.
Matthew Korn - Barclays
Matthew Korn at Barclays. Just a question regarding China. No matter how the Russian Belarusian situation may play out, I presume that you’re going to remain as competitive as possible in that market. Now looking what you’re doing in your spend in Brazil, which I kind read is you’re solidifying, leveraging, as you put your home field advantage. Is there any logic or potential benefit that you could see from more spending on infrastructure assets, personnel, anything which you could do there in the Chinese market to maybe take some of that home field advantage and make is portable?
The Chinese market values having a variety of portfolio, balanced portfolio of suppliers. And knowing how they think about securing supply, they are not likely to go to a single supplier or even two suppliers. And this is what’s happened this last couple of months, is proof to them again, why that’s such a good idea. The Canadian suppliers reliable contract integrity, quality of products, reliability of shipping, we get it done. And there is more surprises that comes to them from other suppliers. So it’s a big country, its massive 400 million farmers. It’s a real challenge. We like to have a foothold in China but China and Chinese business, they’re often for the Chinese.
In Brazil we have, at the end of the stick or the end of the supply chain and the Chinese farmers you maybe five or six acres. That’s pretty good bar. We’re talking 10,000 hector, 100,000 hector farms. So in terms of attractiveness we’d rather take a shipload of product, move it in country, move a couple of truckloads number of truckloads and then avoid 5 kilogram bags the individual farmers in China. So it’s a tough market. Rick would you add anything to the?
No, we’ve always had some in country capabilities so that if the chance that the market allowed us to distribute further, we’d look at that. And right now it is in the hands of politicians. When that clears out we’ll look at opportunities and we’re positioned to expand there.
Okay, Vincent has the microphone.
Vincent Andrews - Morgan Stanley
Vincent Andrews from Morgan Stanley again. Just looking at MicroEssentials, could you talk a little bit about the industry structure maybe here in North American as well as in South America, how many other competitors are there? Are they selling products that are identical to your or similar to yours? And how does that evolve from a pricing perspective as well when you look at what others are charging?
Rick, would you speak to that?
Yes, right now, there is kind of two other sources that are coming to market. Neither one of them has any agronomic background to backup what they’re bringing to market. So in effect they’re bringing sulfur products and phosphate products. In comparisons in field they can’t hold a candle to what we’re doing. So we expect overtime that to change. But right now given the data that we have, given the position we have, we’re able to continue to strengthen margins and volumes.
It’s a bit of a threat and its bit of a bother. There is some pricing pressure. But understand this is a product that started over 10 years, development started over 10 years ago. There was a product that was owned by Cargill and came over when Mosaic was created, field trials agronomists working on it, understanding how to produce it. We blew up one phosphate plant trying to figure that out last week, another small blend plant in Saskatchewan owned by a small retailer, blew that up because of sulfur. Sulfur dust is highly, highly explosive. So we understand how to make this stuff. We understand how to sell the stuff. We have the scientific, the agronomic studies on it. And so people are saying geez, I am getting this pressure let’s put a jab of sulfur in this, they use a shell company patent and we’re producing over 1 million tons, nearly 2 million tons of product. We will be over 2.5. Others are selling 200,000 tons and they are going to find it’s a hassle. We can do it to scale it and means a lot to us. My forecast is they’re going to get bothered by this and say it’s just worth of trouble at some point.
Mark Connelly - CLSA
Mark Connelly, CLSA again. Two questions. First with respect to your debt target, in order to lock in long term rates now, do you need a discrete event, do you need either M&A or K3 or Faustina to go through or is the buybacks and spending that you already have in your plants enough to put you in a position to start locking in these rates within long term bonds?
We have stated our plans to go to the debt market yet this year. We still expect to do that and we have hedged a lot of the interest rate risk already. So that is behind us. That is done at favorable rates relative to today’s market.
Mark Connelly - CLSA
And have you done this much as you are going to do in your mind under…
We are unlikely to do more than we currently have done. We are hedged to a great extent. We think we are hedged to an appropriate extent given the likely size of the bond offering that we will do.
Mark Connelly - CLSA
And one last question I am just back from my 12th investor trip to China and I haven’t met anyone in China who feels there is a meaningful amount of price sensitivity to the price of potash in a range of 25% up or down. I wonder if any of you can comment on who you see and where in the world there might be more or less price hit because of that?
Good question and I will take that and that will be the last question because Laura Gagnon is giving me what’s verging on rude hand signals, ending this. And that is the point that some people just completely didn’t get. There is price sensitivity. When you have $1,000 potash people will use less. When you $300 * $400 potash the cots per unit produced is not material. Farmers in North America and Latin America aren’t going to use more potash because it is a lower price. They are going to use the potash they need.
And I don’t know, maybe helped on the margins in India but valuation of the rupees destroyed that advantage. We are not going to see materially more potash consumed because it is or $300 versus $400 and for $250 or $200 and I think most people really understand that. So Rick said $100 change in potash price in North America means $0.07 a bushel on $0.07 of unit class per bushel of corn, not going to change what they use.
With that, you know where to reach us, you know where to reach Laura and Anton. Thanks very much. It has been a great program. Thanks for the attendance. Thank you
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