Shares of Mosaic (MOS) jumped on Monday after the phosphate and potash producer announced the acquisition of phosphate businesses from CF Industries.
The deal looks really attractive on valuation multiples and the prospects for the avoidance of large capital expenditures going forward.
I will await the next quarterly earnings report, scheduled to be released next week, to judge the impact of the break-up of the potash cartel this summer. Only then will I make up my opinion on the stock.
Mosaic will pay $1.2 billion in cash, while funding $200 million in asset retirement obligation escrows.
Mosaic will buy the 22,000 acre South Pasture phosphate mine as well as an ammonia terminal and finished product warehouse facilities in Florida. The facilities currently produce some 1.8 million tonnes of phosphate fertilizer, adding to the current production of 8.2 million tonnes.
The deal will add some $0.30 to earnings per share in Mosaic by 2015. This excludes the impact of debt financing costs and an increase in the outstanding share base.
The proximity of the South Pasture mine to the planned Ona phosphate mine of Mosaic allows the company to take advantage of synergies from combining these assets. This could result in savings of $500 million by not having to construct a $1 billion beneficiation plant.
On top of the deal, Mosciac will buy 1.0 million tonnes per year of ammonia from CF Industries. As such, Mosaic will forego its proposed ammonia plant at is Faustina facility, saving an estimated $1.1 billion in future capital expenditures.
The deal is expected to close in the first half of 2014, and will not impact Mosaic's dividend plans. The deal is subject to normal closing conditions including regulatory approval.
Mosaic ended the fourth quarter with $3.70 billion in cash and equivalents. Total debt stood at $1.08 billion, for a net cash position of $2.6 billion.
Note that Mosaic is scheduled to report its third quarter results on the 5th of November.
Revenues for the fiscal year of 2013 came in at $9.97 billion, down 10.2% on the year before. Earnings fell by merely 2.1% to $1.89 billion, as the fall in earnings was limited on the back of lower income tax provisions.
Trading around $47 per share, the market values Mosaic at some $20 billion. This values operating assets at around $17.4 billion, or about 1.7 times annual revenues and 9-10 times annual earnings.
Mosaic currently pays a quarterly dividend of $0.25 per share, for an annual dividend yield of 2.1%.
Some Historical Perspective
Shareholders in Mosaic have seen a lot of volatility over the past decade. Shares traded around $15 per share in 2004-2006 to peak to levels above $150 per share by 2008. Shares ended the year around $30 per share and have mostly traded in a $40-$80 trading range ever since.
So far this year, shares have seen losses of about 18%, currently trading around $47 per share.
Between fiscal 2010 and 2013, Mosaic has increased its annual revenues by a cumulative 48% to nearly $10 billion. Net earnings more than doubled to $1.9 billion.
The deal appears to be quite a nice addition for Mosaic. For $1.4 billion, including the assumption of all liabilities, Mosaic will get its hands on an asset, expected to generate $230 million in additional EBITDA by 2015, including the assumption of synergies. This values the business at 6.1 times annual EBITDA.
Yet more important, Mosaic will be able to forego $1.4 billion in capital expenditures which were otherwise necessary to build a $1 billion Ona beneficiation plant and a $1.1 billion Louisiana ammonia plant. Yet Mosaic will need to build a $500 million washing facility and invest another $200 million in transportation capabilities. The avoidance of these investments will allow Mosaic to possibly buy back stock later this year.
As such Mosaic is increasing the production of phosphate, boosting its production to 10 million tonnes per year. Back in March, Mosaic already announced that it would invest $1 billion in a joint venture to produce phosphate in Saudi Arabia together with Ma'aden and SABIC.
While the deal appears nice, all eyes are on the third quarter earnings report to be released in a week's time. Investors will focus on potash and phosphate pricing following the breakup of the Belerusian Potash Company, which put huge pressure on pricing. Despite the price drop witnessed on spot markets, CEO Prokopanko believes that the market will recover.
To offset some of the pain which the move has inflicted on Mosaic's shareholders, which now witness year to date losses of 18%, Mosaic has doubled its dividends to $1 per annum. Note that shares of Mosaic fell 18% on a single day, or nearly $10 per share in July when the news about the breakup of the potash cartel broke out, after the Uralkali Group pulled out of the BPC cartel. BPC and North American's Conpotex accounted for the majority of potash trade across the world, keeping prices for major users in India and China high.
In October last year, I last took a look at Mosaic's prospects. At the time, I concluded to wait for a pullback to place your long-term bets, with shares trading around $55 per share at the moment.
I concluded at the time that investors were fearful for the high volatility in production levels and earnings in the short term. While the long-term prospects looked rosy, I saw few triggers for a short to medium term uptrend. The break-up of the potash cartel obviously dominated 2013's news so far, but Mosaic is making good progress through this announced deal and through the Saudi Arabia joint venture.
The current valuation and the strong balance sheet look very appealing, but note that the true impact of the break-up of the cartel is yet to be felt. Shares have however lost some 15% of their value over the past year on the back of this bad news. I will await next week's earnings report to judge the damage before making up my position on the stock.