Mosaic Company's (MOS) weak quarterly results should not be a surprise to anyone as the largest U.S. producer of potash and phosphate fertilizer had effectively pre-announced results in mid-September and industry peers Intrepid Potash (IPI) and Potash Corp (POT) also reported weak results last month. You can read our article on POT here.
The Plymouth, Minnesota based MOS reported third quarter adjusted EPS of $0.51, missing consensus estimates of $0.56 by 5 cents. The higher than expected COGS for the phosphate segment were the main reason of earnings miss. The outlook remains challenging for this fertilizer producer as pricing is expected to remain challenging into 2014.
Despite of a challenging operating environment, in moves both small and big MOS continues to optimize its asset base and performance. The company is taking actions on underperforming assets of its portfolio including the potential sale of assets in Chile and Argentina and selling the salt operations at Hersey. In the past 2 years, the Hersey mine has produced minimal quantities of potash. Additionally the company is also willing to restructure the potash component of the Carlsbad mine if weak conditions persist.
Mosaic is slightly more cautious on the potash markets then its peers. The largest U.S. producer of potash and phosphate doesn't see India or China returning to market this year. Moreover the company is also seeing destocking in Brazil, China, and India. We think the lower market prices for potash and negative effects of higher international sales volumes will continue to deteriorate FOB mine prices in 2014, putting further pressure on earnings. However, phosphate fundamentals are likely bottoming and should show a substantial improvement in 2014 and further reductions in input costs should also help MOS. As we have mentioned in our previous article on MOS, the company is uniquely positioned to reduce its operating costs in the phosphate segment. You can read our previous article on MOS here.
CF's Phosphate Business Acquisition A Positive
Despite of the challenging operating environment there are some positives for Mosaic. MOS recently announced that it will acquire CF Industries' (CF) phosphate business, comprising the South Pasture mine (with roughly 70 million tons of rock reserves), and the Plant City processing plant (1.8 million tons of annual finished fertilizer capacity), and related infrastructure for $1.4 billion ($1.2 billion in cash plus a $200 million contribution for asset retirement obligations associated with the assets).
The transaction is a win-win for both companies. CF's phosphate mine in Florida is basically contiguous to MOS's four other mines in the region and creates real operational and logistical synergies which MOS estimates at $40 million. The transaction will help MOS further in growing its phosphate business. The estimated spending of $2.1 billion ($1.4 billion on CF assets, $0.5 billion on Hardee plant improvement, and $0.2 billion on ammonia transportation assets) eliminates the need to build a new beneficiation plant for the Ona mine or build a new ammonia plant in Louisiana ($2.1 billion combined capital outlay). So the estimated $2.1 billion of investments and capital expenditures is expected to be offset by an estimated $2.1 billion in capital savings. Moreover, the company confirmed that the CF deal doesn't alter its buyback plans and MOS plans to buyback a substantial number of its shares once the Cargill-related restrictions roll off in late November.
MOS shares will likely remain range-bound until there is a total reset of the operating environment. While MOS sees some signs of buyers emerging, much of the outlook for the global potash market lies with the outcome of Uralkali-Belarus dispute, and there is little visibility at this time on that front. In an uncertain and difficult environment for fertilizer producers MOS continues to optimize its asset base and performance. Mosaic's purchase of CF's phosphate business and the ammonia off-take agreement increase revenue and lower COGS. The Ma'aden JV will provide growth at an attractive ROIC due to a favorable JV split and logistics arbitrage. The company is also willing to consider shuttering the MOP component of its Carlesbad facility assuming potash production economics do not improve.
As mentioned earlier CF deal is also a positive for both CF and MOS. Talking about MOS, it allows the company to incorporate phosphate producing assets and reserves in an area with great geographical overlap and potential synergies with the company's existing operations. Moreover it provides MOS with new flexibility in its capital spending plans as management looks to develop the Ona and Desoto mines. Instead of investing at least $1.1 billion in greenfield nitrogen capacity and putting $1 billion toward a beneficiation plant for Ona, Mosaic can spend $500 million to enhance its existing mines and $200 million in nitrogen transportation assets. The deal doesn't alter Mosaic's share buyback plans and the company is expected to buyback a large number of its shares once the Cargill restrictions are lifted in late November.