The Mosaic Company (MOS), one of the largest North American fertilizer companies, held its annual analyst day last week in New York. Instead of focusing on the ongoing potash soap opera in Eastern Europe that has been the topic of discussion of the potash markets since mid-summer, the company outlined a set of high-level strategic themes periodically punctuated by specifics on expansion plans, cost structures, demand expectations and share buyback plans.
The second largest North American potash producer after Potash Corporation of Saskatchewan (POT) now expects 2013 global potash shipments to be range of 54-55 million tons down from earlier estimates of 55-57 million tons. The new estimates are still higher than last year's shipments of 51 million tons. However, next year the company sees a recovery in the potash market that slipped sharply following the breakup of BPC. The company expects shipments to rebound to 57-59 million tons next year.
"I think 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's going to go on," said Chief Executive Officer Jim Prokopanko. "I think we'll see a recovery."
The company also clarified its position on the global potash and phosphate cost curves with particular emphasis to counter what the company considers a misperception among investors that MOS is a high cost producer. Mosaic showed that this is not the case, even with Esterhazy brine inflow expenses. In fact the company asserted that with the completion of the new K3 shaft at Esterhazy, the mine could gradually become one of the lowest cost potash mines in the world.
Similar to potash, phosphate markets are also likely to remain challenged in the near term, but Mosaic is uniquely positioned to reduce its operating costs, particularly in the phosphate segment. In the near-term weak demand particularly from India is likely to keep prices low. MOS, the world's largest producer of finished phosphate products, has cut its global phosphate shipment forecast by 2 million tons to 63-64 million tons. However, the company expects shipments to increase to 64-66 million tons next year. The current challenges facing the phosphate market will likely keep the attention of investors in the near term but going forward the phosphate segment should benefit from lower sulfur and ammonia costs, and lower costs should eventually result in improved margins early next year. The company reiterated its long term growth strategy in phosphate markets and remains focused on expanding rock production in low cost areas including North America and the Middle East.
One of the biggest concerns of investors was that recent events in potash markets and decline in prices of both potash and phosphate has not hurt company's ability or willingness to buy a large amount of stock once the Cargill restriction is lifted late next month (26th November), and to that end the company has delivered.
Christmas will probably come early for Mosaic investors in the form of a significant buyback, but will that be enough to offset the damage that mid-summer events did or the new structure that has emerged following the BPC breakup? We believe the new volume over price industry structure price will likely not pay off for Mosaic until end market demand increases for the company to sell its incremental brownfield capacity and the buyback opportunity is probably already reflected in MOS's current valuation. The company should benefit from lower costs in the phosphate segment and improving prices next year but the magnitude of it will also depend on India returning to the market.