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The Mosaic Company (NYSE:MOS)

Q2 2010 Earnings Call

January 6, 2010 11:00 am ET

Executives

Jim Prokopanko – President & CEO

Dr. Mike Rahm – VP, Market Analysis & Strategic Planning

Larry Stranghoener – EVP & CFO

James O’Rourke – EVP Operations

Rick McLellan – SVP, Commercial Manager

Christine Battist – Director IR

Analysts

PJ Juvekar – Citigroup

Jeff Zekaukas - JPMorgan

Edlain Rodriguez - Broadpoint Gleacher

Robert Koort - Goldman Sachs

Vincent Andrews - Morgan Stanley

Mark Connelly – Sterne, Agee

Jacob Bout – CIBC

Fai Lee – RBC Capital Markets

Don Carson - UBS

Steve Bryne - Bank of America-Merrill Lynch

Michael Piken - Cleveland Research

Mike Gulley – Soleil Securities

Operator

Good morning ladies and gentlemen and welcome to The Mosaic Company's fiscal 2010 second quarter earnings call. (Operator Instructions) Your host for today's call is Christine Battist, Director, Investor Relations of The Mosaic Company. Please proceed, Christine.

Christine Battist

Welcome to Mosaic's fiscal 2010 second quarter earnings conference call. Joining us for the call this morning are Jim Prokopanko, President and Chief Executive Officer; Dr. Mike Rahm, Vice President, Market Analysis & Strategic Planning and other members of the Mosaic senior leadership team.

We will be using presentation slides during the conference call today. You may view the slides simultaneously with the audio webcast. The slides are available on our website and may enhance our discussion, but are not a requirement for the call. If you are unable to download the slides, please contact me after the call, and I'll send them to you.

We will be making forward-looking statements during this conference call. The statements include, but aren't limited to, statements about future financial and operating results. They are based upon management's beliefs and expectations as of today's date, January 6, 2010, and are subject to significant risks and uncertainties.

Actual results may differ materially from those projected in the forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is included in our press release issued yesterday and in our reports filed with the Securities and Exchange Commission.

This call is the property of Mosaic. Any distribution, transmission, broadcast or rebroadcast in any form without the expressed written consent of Mosaic is prohibited.

Recently Mosaic took the important step of issuing its first sustainability report. We followed the rigorous reporting standards of the Global Reporting Initiative and identified new goals going forward. In December, we reported that we realigned our segments.

We combined the offshore segment with the phosphate segment to more clearly reflect the company’s strategic direction. Our website includes recasted segment data for comparative analysis. If you have questions on interpreting and modeling the realigned phosphate segment, I’d be happy to talk with you and provide clarification after this call.

Our comments during the call reflect recast information for the phosphate segment.

Now I’ll turn the call over to Jim.

Jim Prokopanko

Thank you Christine, good morning and Happy New Year. Following the year of challenging economic events and considerable economic uncertainty, I’m happy to say 2010 is beginning with greater clarity and direction in the markets we serve.

We are seeing encouraging signs of a return to confidence and optimism in the farm sector. Farmers are preparing to invest in the coming planting season and take advantage of the strong commodity outlook.

Mosaic is uniquely positioned as a leader, a leading supplier of both potash and phosphate products needed by grain, oilseed, and livestock producers worldwide. This unique pairing of nutrients will benefit our customers, our shareholders, and our employees.

Mosaic’s second quarter results showed improvement over first quarter performance. Market conditions improved for phosphate shipments and DAP prices firmed up. These positive factors were offset by guarded purchasing activity in potash, higher phosphate raw material costs than a quarter ago, and a $5 million pre-tax charge for write-off of certain assets.

Since the end of the second quarter we have seen DAP spot pricing march upwards. Although the potash markets remain soft, we expect stronger global nutrient demand for both potash and phosphate once we enter the Northern Hemisphere’s spring planting season.

Longer-term we’re confident that demand in both of our businesses will be strong as farmers continue to invest in increasing yields and meeting the growing demand for grains and oilseeds. We are delivering on our capital expansion plans to expand potash capacity and increase productivity and in turn, driving strong cash flow and enhancing shareholder value.

What we have learned time and again, is that we are in a cyclical business. And through the business cycles having two product lines has produced enhanced returns for our shareholders. Mosaic’s balanced portfolio of phosphate and potash is paying dividends. For example, over the past two years our cumulative operating profits in the phosphates and potash segments were comparable.

Both businesses during this period generated robust results that have contributed to our strong balance sheet of today. Reinforcing both our confidence in the future and the solid foundation of Mosaic’s balance sheet our Board of Directors approved a special cash dividend of $1.30 per share in October.

This distribution was not only a reflection of our strong cash position, it also underscored our optimistic long-term outlook for our future prospects and cash flows. We generated nearly $175 million in cash flow from operations this quarter despite weak potash shipments and lower selling prices throughout most of the quarter.

We expect to fund over $1 billion of capital spending this year primarily with operating cash flow, though most of this won’t come until our fourth quarter. Let me now highlight our business segment results as summarized on slide seven to be followed by an update on our outlook going into the spring season.

Potash markets are now gaining traction with some recent sales and we expect this trend to continue. Despite a soft market in the quarter potash gross margin was a healthy 43%, up from 37% sequentially.

Key factors impacting potash results this quarter compared to a quarter ago were 30% increase in sales volume, and higher production levels. North American shipments ticked up in the last month of the second quarter following higher than expected application rates as a result of favorable weather.

Producer potash inventory levels remained relatively high and we continue to operate at lower production levels, however, operating rates can be increased rapidly on the heels of increased demand.

Our phosphates business segment posted a 15% increase in sales volume compared to the first quarter. We saw strong demand from both Asia and the Americas. Operating earnings were down sequentially due to a $51 million write-off of certain assets, partially offset by higher sales volumes.

We were beyond the high end of our guidance range for volumes and within guidance range for prices under the prior basis of segment reporting. As I mentioned earlier, we’ve seen steady increases in spot pricing of phosphates, some of which we will capture in our third quarter.

Mosaic’s margin expansion in the third quarter may be constrained by higher raw material costs and the normal lag between our average realized prices and prevailing market prices. Now I’ll share some financial guidance for fiscal 2010 as summarized on slide eight.

For the third quarter of fiscal 2010 we estimate an average DAP selling price of $310 to $350 per tonne and total phosphate sales volume of 2.2 to 2.6 million tonnes. It is important to note that historically third quarter shipment levels are the lowest of the year due to seasonal demand patterns.

Until potash markets gather greater momentum we are not providing guidance on potash sales volumes or MOP selling prices. However, recent price reports indicate Russian and [Bella] Russian potash producers settled contracts in China at levels less than the average selling prices for the second quarter.

We are confirming the guidance we previously shared on capital spending, SG&A and the effective tax rate as noted in the chart. With this as background, I’d like to turn the call over to Dr. Mike Rahm to provide some market outlook.

Many of you tell us we have the best understanding of market conditions around the world and we believe you will find this update valuable.

Mike Rahm

Thank you Jim and good morning, during our last earnings call on October 6, we indicated that signs of a demand recovery were emerging. Phosphate sales had picked up and our assessment was that potash demand was on the brink of recovery.

A strong rebound was expected due to the improved outlook for the global economy, positive agricultural fundamentals, and the need to restock a bare distribution pipeline. We noted that the strength and the speed of the recovery depended on a number of largely unpredictable variables such as weather, macroeconomic developments, and government policies.

Since our last call a number of positive developments have occurred to bolster the likelihood of a strong demand recovery in 2010. First, agricultural commodity prices have staged another harvest rally. Slide 11 shows that 2010 new crop prices for corn and soybeans have increased about $0.55 and more than $1.35 per bushel respectively since our last earnings call.

This rally was not confined to just corn and soybeans, sugar prices have jumped more than 14% and palm oil prices have climbed 25%. Our sales teams from around the globe point to this rally as a key factor in turning market sentiment from cautious to confident regarding demand prospects.

A second surprise development was the weather, particularly in North America. An extremely wet and cold October delayed the North American harvest and most crop nutrient producers had written off the fall application season as farmers struggled to get crops out of the fields.

However ideal weather during November enabled most farmers to complete their harvest and salvage the fall application season. For example the US soybean harvest was 90% complete by November 8 and decent weather during the remainder of the month gave farmers a longer than expected window to apply P&K to harvested soybean grounds.

Slide 13 shows that phosphate and potash shipments during November were the largest so far this fertilizer year and nearly equaled or exceeded the three year average for this month. The combination of stronger than expected shipments and lower production due to plant turnarounds has resulted in a sharp draw down of our phosphate inventories.

We held just 420,000 metric tonnes of phosphate products in inventory at the end of December. That is the lowest month end total in the five year history of Mosaic. A third positive development was consistent reports of a recovery in P&K application rates throughout most of North America last fall.

Although application rate statistics are not available anecdotal reports and other statistics point to a recovery in rates to average or even above average levels. For example, in addition to strong November shipments, slide 15 indicates that the cost of crop nutrients measured in terms of the number of bushels of corn that a farmer would have to sell in order to pay for crop nutrients has declined to the low end of the recent historical range.

Early reports indicate that farmers have applied more normal rates of P&K this fall in response to a favorable grain crop nutrient price ratio. The fourth and maybe biggest surprise since our last call was China’s purchase of approximately 600,000 tonnes of DAP in November.

Phosphate demand in China remains strong underpinned by higher domestic commodity prices. In addition DAP has taken market share from other products such as [NPK] compounds. These base load sales helped to ease concerns about a seasonal slowdown following the completion of large shipments to India last fall.

Finally buyers in many parts of the world began to position phosphates for next spring. The combination of the above factors quickly changed expectations from prices will soften to prices have bottomed and that caused many distributors to position product for deferred applications.

For example, we shipped 15 unit trains from Central Florida to customers throughout North America in December and as of today we’re scheduled to ship a total of 28 unit trains in January and February.

The combination of these developments caused a surge in phosphate prices. Slide 18 shows that the price of DAP fob Tampa Vessel bottomed at about $280 per tonne during the first week of November. Since then the spot price has climbed from this low level to about $380 per tonne.

The recent price recovery has been impressive but keep in mind that not all of the increase falls to the bottom line due to actual or anticipated increases in raw material costs. Potash buyers however have remained cautious due to expectations of lower prices once the 2010 Chinese contracts were settled.

As a result buyers sourced product on a hand to mouth basis or utilized no price established contracts to position product for nearby sales. Nonetheless potash has moved to meet end user demand. For example, in addition to strong North America shipments in November, imports by Brazil last August and September or prior to their peak application season were nearly in line with the high levels of 2007 and 2008.

Given attractive farm economics and good demand prospects one consequence to this hand to mouth buying is extremely low inventories throughout the global distribution pipeline. The developments during the last 90 days have bolstered the outlook for the last half of our fiscal year, but the strength of the demand recovery still depends on several unpredictable variables.

I will highlight what we view as the most important factors and indicate how we handicap them at this point. The first factor is agricultural commodity prices, agricultural commodities continue to trade at relatively high values and generate solid farm returns for most crops around the globe.

As we noted during our last call, high prices reflect the fact that global grain and oilseed stocks still are not at secure levels despite back to back bend busting harvests. Slide 22 shows that a supply shock in 2010 would cause stocks to drop to levels that likely would produce disruptive spikes in many agricultural commodity prices.

Futures markets appear to agree with that assessment and our signaling farmers to keep their foot on the accelerator. Weather obviously is one of the key drivers and markets will try to figure out during the next few months the extent of field losses for the 5% or so of the US corn crop still in the field as well as the size of the upcoming Southern Hemisphere harvest.

In addition other drivers such as the value of the dollar, the price of oil, and the strategies of commodity fund managers will continue to play an equal if not greater, role in determining agricultural commodity prices. A second factor to watch is how quickly and how much potash demand responds to the recent decline in prices.

We all have read recent industry news about the long awaited and much anticipated settlement between China and the Russian and Bella Russian potash producers. Our assessment is that this will set a general floor for potash prices and has provided the marketplace with the price discovery that it has been seeking.

The unprecedented drop in shipments last year has resulted in very low channel inventories and suggests there is large pent up demand. We believe this event coupled with attractive commodity prices will be the catalyst to get product moving again.

A third factor we’re monitoring is government policies, especially in key countries such as China. For example China recently announced its phosphate export policy for 2010 and this year’s policy is not materially different from last year’s policy.

Strong domestic demand combined with high export taxes from February through May are expected to limit phosphate exports from China during the first half of 2010. A final factor worth watching is the potential for pinch points throughout the North American supply chain later this spring.

Our analysis shows that suppliers of the most widely used dry fertilizer products will need to ship near record tonnage during the first half of 2010 in order to meet even a moderate rebound in demand. I realize that suppliers warn of a potential of logistical bottlenecks every year, but the likelihood of pinch points is elevated this year.

Stock outs could occur depending on the strength of the demand recovery, how much product moves during the next 45 days, and how quickly and orderly the spring season opens up in just a few short weeks.

In conclusion, prospects for phosphate and potash markets look increasingly positive at this point. We project a strong recovery in global demand and shipments this calendar year due to relatively high agricultural commodity prices, positive farm economics, and the need to restock a bare distribution channel.

The phosphate market is expected to remain tight especially during the first half of 2010. Producer stocks are extremely low levels today and reports indicate that many producers have committed production for the next 60 to 90 days.

Peak Northern Hemisphere demand is still ahead of us and a strong uptick in Southern Hemisphere buying is expected to follow by mid year. The potash market is projected to come into balance during the first half of 2010.

We expect that the recent decline in potash prices will unleash large pent up demand from all corners of the globe. In particular we forecast that global myriad of potash shipments will increase to 47 to 50 million tonnes in 2010 compared to about 32 million tonnes in 2009.

As a result North American producer stocks are projected to continue to trend downward due to the strong rebound in domestic and offshore shipments and inventories likely will drop to average or even below average levels by mid year.

Jim, back to you.

Jim Prokopanko

Thanks Mike, to wrap up I’d like to recap a few points. Our confidence in Mosaic’s long-term outlook has not waivered. Farmer economics are strong in the Americas and Asia. Farmers are getting a great return on their investment in crop nutrients and as the global population continues to increase, there is little doubt that food security will rank among the world’s highest priorities.

We are encouraged by recent market trends and the growing sense of confidence amongst our many customers. Demand has picked up in phosphates and we expect potash will soon follow. Once confidence is gained, demand will improve. Potash tonnes will move and the market will tighten.

Though we can’t predict exactly when this will occur we are quite certain that farmers will replenish depleted potash levels in the soil. These trends will result in gradually improving financial performance through the remainder of fiscal 2010.

We expect to finish the fiscal year on a strong note in our fourth quarter which will provide significant momentum as we move into fiscal 2011. We are committed to value creation and our strategic plans. Being a producer and marketer of both potash and phosphate, gives us a strong and unique advantage.

Long-term fundamentals remain in tact due to continued demand for food, feed, and fuel. We are now ready for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of PJ Juvekar – Citigroup

PJ Juvekar – Citigroup

A couple of questions on potash, can you talk about why hasn’t Canpotex settled yet with China and what is Canpotex looking for.

Jim Prokopanko

I’m surprised that’s our first question, well quite simply we don’t have a meeting of the minds on what the fundamentals, forward fundamentals are on potash. Canpotex and the Canadian producers have one view that it’s a stronger and tightening market than the Chinese see it at.

We’re not prepared to meet the kind of price expectations the Chinese have and we continue to discuss and negotiate a contract and we feel evermore confident over the last weeks given indications of what’s happened in international markets and demand for potash.

It continues to remain strong and strengthening.

PJ Juvekar – Citigroup

And just as a follow-up what are your expectations for the Indian contract that comes for renewal in March, 2010.

Jim Prokopanko

Its March, April that that contract with the Indians are due. We expect that some time soon before March, likely in February or the next few weeks we’ll get interest from the Indians and they have no production as you know, and we expect their demand needs will be what they were in the past years and likely higher.

So we’re optimistic that we’re going to see a good demand pull and that would be going into a strengthening market.

PJ Juvekar – Citigroup

I’m sorry, I was talking about price and you think Indian contract will be similarly priced to the Chinese contract.

Jim Prokopanko

We’re not prepared to do business with the Chinese at the current price expectations and the current history of what’s been negotiated with other suppliers, so I just don’t see that price being reflective of what’s going to happen in the new year.

I’ll just add one thing to that, with some reduced demand expectations in China, its certainly the ones that are being reflected by the Chinese and communicated by the Chinese, and some modestly improved production volumes, China is in demand on the world’s potash market is not what it used to be and I just don’t see that as being influential with world pricing going forward.

Operator

Your next question comes from the line of Jeff Zekaukas - JPMorgan

Jeff Zekaukas - JPMorgan

Just to continue on potash for a moment, do you think that an agreement with Canpotex or whether an agreement is or isn’t signed is something that needs to be clarified before other potash suppliers negotiate agreements with China.

Jim Prokopanko

Simple answer to that, no I don’t think we need that. The price that’s been established between the Chinese with other producers have set I think a bottom and we are now seeing interest at prices higher then that so, I don’t see that Canpotex China contract is going to have much of an impact going forward.

Jeff Zekaukas - JPMorgan

Secondly in the phosphate area, did you absorb extra costs from the higher levels of water at Esterhazy and going forward when you talk about higher raw materials, is it sulfur that you mean in particular.

Jim Prokopanko

I’m going to let our CFO, Larry Stranghoener address the question on the cost absorption on the brine and then turn it over to James O’Rourke, our Senior Vice President for Operations to touch on the raw material costs.

Larry Stranghoener

With respect to the brine inflow which of course is in the potash business segment, we spent just over $35 million in the second quarter which was up marginally versus $28 million in the first quarter. We did have an elevated level of brine inflow during the quarter, this happens from time to time, its something that we have proved to be able to manage effectively and we’re doing so again this time.

James O’Rourke

In terms of raw materials we see our three probably biggest raw material costs were ammonia, sulfur and natural gas. We’re seeing some midterm tightness in ammonia. Suffer is probably the one that has the largest impact in terms of the market is quite tight right now, both the international market and the North American market.

And so we do expect to see some increases in that. And then natural gas particularly right now with the winter conditions here in the US, we’re seeing the forward curve in [inaudible] costs of natural gas are going up. So we see sort of a broad reasonable increase in raw material costs.

Operator

Your next question comes from the line of Edlain Rodriguez - Broadpoint Gleacher

Edlain Rodriguez - Broadpoint Gleacher

Quick question on DAP prices, the upsurge recently, are there any concerns at all about potential demand destruction if prices rise too fast and especially given what happened last year.

Jim Prokopanko

Certainly at today’s phosphate and generally all nutrient prices and given the foreign [bean] wheat prices that we’re seeing and other commodities, we see fertilizer being very, very affordable. This is down to some historic lows in terms of the total cost of farmers’ production costs.

So we don’t see any demand destruction occurring at the currently priced product pricings and we think there’s potential certainly for the farmers to absorb higher costs. We’d like them to be as prosperous as possible and, so simply no, we don’t see demand destruction occurring.

Now if we start seeing some run ups to the sort of torrid levels of a year and a half ago, that’s another question.

Edlain Rodriguez - Broadpoint Gleacher

Now a follow-up on phosphate, in the past, we [soon] see 2 million, 2.1 million tonnes of phosphate volumes as normal for you, but now the folding of offshore into phosphates, what should we regard as the new normal in terms of volumes for that segment.

Jim Prokopanko

Rick McLellan, our Commercial Manager can address that.

Rick McLellan

As we look into Q3 because I think that’s what you’re asking about, the volume with the new segment that we’re planning on shipping or the ranges that we have, is very close to what if you look at the recast segments, very close to what we did in Q3 two years ago.

So I think that if you look, you’ve got to remember Q3 is going to be the lowest quarter that we have, and that’s, and so for this quarter coming forward you’ve seen our ranges. So the expectation is take a look back at the recast numbers and that will give you a good idea going forward.

Operator

Your next question comes from the line of Robert Koort - Goldman Sachs

Robert Koort - Goldman Sachs

I was just wondering if you could help me reconcile the $370 DAP price with the guidance in the third quarter for $310 to $350.

Rick McLellan

That is always a question when we move into markets that are moving up. We sell into moving markets so that we’ve got a book of business on that reflects moving into it and we always trail spot pricing and this is, if you look back, this is what’s happened in previous quarters that we’ve had price moves like this and so its very consistent.

Robert Koort - Goldman Sachs

And just following up on that last question on the volume side with phosphate, when you’re looking back two years ago, that 2.2 to 2.6 is that comparable to the 1.9 in February of 2008.

Rick McLellan

You have to go back and look at the recast segments rather than the, is that 1.9—

Robert Koort - Goldman Sachs

I think that’s what I’m looking at.

Christine Battist

The 1.9 was in a year that was seasonally low, that was when demand was falling off.

Rick McLellan

Yes, and the number was 2.6.

Operator

Your next question comes from the line of Vincent Andrews - Morgan Stanley

Vincent Andrews - Morgan Stanley

How much, you’re expectations for potash picking up and for it sounds like you think price is going to firm up or its already firming up, how much of that is perception relative to how much of it is your actual order book and how quickly your order book is shaping up, in terms of Canpotex desire not to settle with China right now.

Jim Prokopanko

I can’t say much at all about what is on, in discussions with Canpotex and our various international customers, but its encouraging. We are seeing other customers show a determination and willingness to commit to product at prices above the recently agreed to China BPC pricing. So its coming along and getting the timing down to this month, next month is a little tricky but we’re not seeing a lot of resistance to higher prices.

Vincent Andrews - Morgan Stanley

And then just as a follow-up to that for Mike, a lot of the demand recovery is predicated on very attractive farmer economics which are on one hand a function of higher corn and soybean prices and then on the other hand also a function of lower fertilizer prices, so in your view what’s the risk from here that we lose the favorable commodity prices. What could happen over the next couple of months that would derail that part of the story.

Mike Rahm

That’s certainly one of the key factors that we’re watching. I think one, obviously the world has rebuilt stocks to more comfortable levels than a couple of years ago. The Southern Hemisphere harvest is one of the factors that could swing things.

But I think it’s the generally favorable global economic outlook and the bit of improvement maybe in the livestock sectors bode well for demand going forward as well as the higher energy prices and the demand going into the bio fuels refineries around the world.

So I think what futures markets are telling us, best bet or the best guess at this point and things continue to look very favorable. You look at closing prices yesterday, new crop corn at [$4.45], new crop soybeans at [$10.23], sugar prices at over $0.27 a pound, palm oil prices at [$2,600] plus ringgits per metric tonne.

Those are all very high and favorable prices and that certainly is the most important factor as far as farmer economics right now.

Operator

Your next question comes from the line of Mark Connelly – Sterne, Agee

Mark Connelly – Sterne, Agee

Two closely related questions, you’ve spoken very candidly in the past about the difficulty of having visibility into the DAP pipeline, and I’m curious what your relative confidence is in the visibility of what’s actually going on in that pipeline today. And the second question is you mentioned reluctance of distributors to carry inventory of potash and I’m curious are you seeing that starting to shift. Are distributors starting to relax a little bit about inventories yet.

Jim Prokopanko

Well the two components of the visibility of the pipeline, we know the producer stocks and through trade associations, that’s pretty clear and Mike I think adequately captured well the low levels that we are and in the case of Mosaic, historically low levels we have in producer stocks.

The pipeline going forward into warehouses and distributions, it is low. There’s no formal reporting of that but we have sales staff and marketing staff that are travelling the country and they see the warehouses and over the last six weeks or so, eight weeks, we have seen dealers begin to position products.

And we’re not to full stocks by any means yet, or the pipeline isn’t fully charged, so we’ve got a ways to go yet. Is it one quarter full, one half full, its tough to say. I’d say its less than half full and there is a lot of product that has yet to move between now and a planting season and fertilizer season getting started.

So we do see a diminished pipeline and we’re not running into plugged warehouses as far as moving product. You asked the next question on potash, until the, in North America dealers have been waiting to see what happens in China, that’s been the [bell weather] deal to happen before dealers and distributors got comfortable with what direction we may head.

I think two things have happened, one a price has been put in, a very low price on potash and I think the sense now is with strengthened commodity prices, there’s a feeling that there’s more upside in the material costs and the fertilizer costs then there is downside so we are, after the holiday break that we just have gone through and people just getting back to work, we’re starting to get calls in and people are prepared to make decisions about their potash pricing and the potash orders for the spring season.

But we expect, and that’s part of the reason why we’re reluctant at this point to give any guidance, we just haven’t had the sort of solid book of orders show up just yet, but this is all three, four week old news and it will come in the couple weeks ahead.

Operator

Your next question comes from the line of Jacob Bout – CIBC

Jacob Bout – CIBC

A couple of questions here on potash, maybe you can talk a little bit about what you’re seeing as far as Brazilian potash demand.

Rick McLellan

In Brazil, if you think about, the best way to look at it is last year coming out of December, Brazil had just over two million tonnes of inventory in the system, the whole distribution system. The latest kind of numbers that we look at show that being less than 600 and probably closer to 400,000 tonnes.

And so that is about as empty as anyone in this marketplace has seen it. So again its not if, its when they come back into the market to restock themselves to meet their demand. But this is counter cyclical to North America so their real demand is going to come in that April forward period, their real need.

Jacob Bout – CIBC

Maybe just a couple of questions on Esterhazy, maybe you can talk a little bit about your K3 and K4 expansion and just an update there and what potash price you would, at what potash price would you not go ahead with this project.

Jim Prokopanko

We’ve not given a lot of direction on individual projects. We have in the case of the potash expansion plans, we’ve announced broadly what our expansion goals are. We have about 12 individual projects for expansion that will take upwards of 10 years to get fully online. We are continuing to pursue all the projects as to the extent we’ve discussed in the past and continue to look at that on a regular and very periodic basis of where we may pull back or what we might accelerate.

But right now we’ve not made any decisions to pull back on any of the projects we’ve addressed. Your question about pricing, and what impact that’s going to have, these prices are volatile, this business as I keep saying is cyclical and at this point we are not seeing anything on the horizon saying that there’s been a fundamental change to the world S&D on potash and we feel that we’ll continue these projects.

The numbers that we’ve thrown out in the past have been the new green field project, is going to cost something in the range of $2,000 a tonne, that’s probably conservatively and would require a $600 a tonne pricing level into perpetuity to get a return on that investment and we think brown fields are $1,000 to $1,200 a tonne and that’s going to take something just under $300 a tonne to justify a return on those investments.

So I hope that gives you some kind of bounds of what we’re thinking and what the economic returns are to either of those kind of projects.

Operator

Your next question comes from the line of Fai Lee – RBC Capital Markets

Fai Lee – RBC Capital Markets

You had some commentary about higher feed stock costs for phosphate ammonia sulfur, and I’m just wondering do you see the additional cost push pressure on pricing for DAP, higher prices even about what you talked about for January because of the rising cost environment.

Jim Prokopanko

Yes, I think James touched on it, we see the greatest pricing pressure in the sulfur markets and that is something that traditionally and historically is passed on in the price of the phosphates and I expect that will continue. We are advantaged in North America that we’re paying lower costs than the Asian markets are or the Latin American markets for our sulfur being close to many of the sulfur producers.

So we see an advantage there versus global competition and to the extent that sulfur prices go up I think that’s going to be pretty close dollar for dollar transferred to the price of the product that we sell.

Fai Lee – RBC Capital Markets

So you don’t see the current DAP price doesn’t fully reflect the rising cost pressure then, now the last time, well we’ve seen this before where also when we saw higher ammonia and higher sulfur prices, phosphate rock exporters saw that as an opportunity to raise their prices as well which turned out to be beneficial for Mosaic, is that something similar that you’re seeing happening heading into the spring this year.

Jim Prokopanko

That’s a potential, we don’t sell rock. We buy a little bit ourselves and I’d anticipate with the rising phosphate market, those that do produce and sell rock would look for an opportunity to increase the price on rock as well. An increasing phosphate market will, that tide will rise that boat as well.

Fai Lee – RBC Capital Markets

On the brine inflow, in terms of the $35 million in Q2 do you expect that to come down a bit going forward or just remain at that level for next couple of quarters.

James O’Rourke

We really expect that cost to remain fairly flat over the next few quarters.

Operator

Your next question comes from the line of Don Carson - UBS

Don Carson - UBS

Question going back to potash, I think in the Q you actually mention that in, you slipped some guidance in there, you said in Q3 you expect potash prices to be down sequentially, how far is down. And I guess the question on Brazil would be are you seeing price pressure in Brazil because of the Chinese settlement. I think they would agree with your assessment that China is not the biggest buyer anymore. Brazil is a large importer and China is buying on a landed basis so they’re not taking freight risk anymore, both reasons for Brazil to get as good a price as China. So I’m wondering is the Canpotex refusal to do business at 350 landed in China really an attempt to maintain the nice spot premiums that you’re seeing in Brazil and as well as in the US where obviously you sell individually.

Jim Prokopanko

I would say on the potash pricing we are, refusal to meet the Chinese price expectations is reflective that we see the current market as being stronger than that. That we are able to find customers willing to pay higher prices and no point in lowering it for the Chinese business, particularly as small as it is potentially this year.

But we see the market, global markets, North America and international going beyond what the Chinese price is. We’ve made some sales as recently as yesterday in North America at prices higher than that and we find international customers willing to pay more than what the Chinese negotiated, whatever it is that they’ve negotiated with the [EPC].

So we’re going forward looking for higher pricing in potash.

Don Carson - UBS

So is pricing holding in Brazil at that $400 landed level and can you comment on your new price list in the US. I know one of your competitors posted about a 430 metric tonne equivalent.

Rick McLellan

What kind of pricing we’re seeing in Brazil, we’re seeing business close. Canpotex hasn’t closed any yet but we’re seeing business close there at that 400 level and so that seems to be a number that’s acceptable.

In North America we came out with a program on Monday that’s market competitive, put it in front of our customers on Monday and as you know, our customers have just come through the holiday season, a relatively robust prepayment season from their customers, and they’re just getting their heads back trying to understand what’s going on in all the markets.

But we feel that the kind of global price discovery and these prices that fit well for both the dealer and the farmer customer, that we’re going to get uptick and as Jim said, we continue to see customers coming in and buying. We’re still in transition, but we expect that that’s going to continue on into January.

Don Carson - UBS

And can you clarify the comment about how you expect potash prices to be down sequentially in Q3, how far is down.

Rick McLellan

I’ll just answer it in the fact that we look at Q3 as a potash market in transition and that’s why we haven’t given price guidance and it would be unfair for me to even provide some right now.

Operator

Your next question comes from the line of Steve Bryne - Bank of America-Merrill Lynch

Steve Bryne - Bank of America-Merrill Lynch

Your competitors in India and China are certainly [putting] a lot more for sulfur than you are now, but expecting that sulfur market in the US Gulf to tighten up, can you put a range of your expectations of where your sulfur contract price will be in the first calendar quarter.

Jim Prokopanko

Sorry, I’m not going to be able to cooperate with you on that question. We’re in the midst of negotiation on that so we’re not about to play our card now and while we’re talking to suppliers and just can’t help you out. Market is tightening, we recognize that, we see some international pricing and the next few weeks will tell.

Steve Bryne - Bank of America-Merrill Lynch

Well if the Indians and the Chinese are paying $130 a tonne or more do you at least expect to maintain an advantage.

Jim Prokopanko

Yes, absolutely. Being as close as we are to the domestic producers, handling a molten products, being able to be there with long-term demand expectations, we do get a considerable advantage.

Steve Bryne - Bank of America-Merrill Lynch

And when do you expect to work through that high cost sulfur contract that you secured from Canada back in 2008, are you nearly through that.

Jim Prokopanko

By the end of the third quarter we’ll be done.

Steve Bryne - Bank of America-Merrill Lynch

And then can you comment on maybe where and what product you think that the supply chain delivery constraints are most likely to be pinched.

Mike Rahm

We looked at the four main dry products, urea, DAP, MAP and potash, and there are a couple of other smaller ones in there. What’s interesting if you look at shipments in July through December of 2009, they were actually less than the previous year so all of the increase that we’re projecting in demand really needs to be shipped in the first half of 2010.

And of those products, the phosphate products have returned to a bit more normal shipments and its really the potash and the dry nitrogen products that have the largest shipments ahead of them.

Steve Bryne - Bank of America-Merrill Lynch

And then can one of you characterize this roughly one million tonnes of additional volume that you’re now lumping into the phosphate segment that presumably you don’t have producer economics on, what is it and where are you sourcing it.

Rick McLellan

Those tonnes are the international distribution tonnes and they’re sourced both from ourselves and others but the, if you want to think about the margins on those, its around 3% to 5%, 3% to 7% with an average of 5%.

Operator

Your next question comes from the line of Michael Piken - Cleveland Research

Michael Piken - Cleveland Research

Couple of questions, first question is with respect to China and their buying in November, do you think that at this point the Chinese market is fairly balanced or what are you expectations for net Chinese phosphate in 2010 and then my second question relates to the loss that you had in your earnings of affiliates and when you would expect that to return to profitability.

Jim Prokopanko

China is as ever unpredictable and frankly surprised us when they did come back to the market, came into the market for phosphates given a couple of years of export history. We think, we see that as an anomaly. Its fairly well balanced to exportable balances available in China.

There was two things that contributed to that, one is the product mostly went into mostly the Northern parts of China. China produces and mines its phosphates in the South and the logistics were advantaged just to send it by ship from other locations to their tide water ports in the North. That happens time to time.

The other piece was with the NPK compound producers in China, they pulled back high potash values. Farmers weren’t prepared to put up potash on their fields and they stopped producing and farmers were prepared to buy phosphate in place of NPK’s and so you had this sort of unusual set of circumstances contribute to a 600,000 tonne import and we don’t have that in our grid going forward.

Michael Piken - Cleveland Research

So just to clarify that, so in terms of like if you were looking out for 2010 do you have any sort of estimate for net Chinese DAP and MAP trade.

Mike Rahm

Our expectation is that basically the Chinese net exports will be roughly in line with what they were in 2009 however we don’t think there will be a whole lot coming out the first half of the year due to the fact that domestic demand has been so strong and more of that is backend loaded.

But with the way demand is shaping up, when we see peak, Southern Hemisphere demand come to the market and the large Asian demand shipping in the same period we think there will be room for those tonnes in the marketplace second half of the year. For a number, 2.5 million tonnes of DAP MAP net exports plus or minus a couple hundred thousand tonnes is what we would use.

Rick McLellan

With [Phosphorteel] we’re an investor so it would be wrong for me to give any kind of forward look for them. So I would encourage a discussion with [Phosphorteel] although looking at overall phosphate businesses, like our own, we expect improvement.

Operator

Your final question comes from the line of Mike Gulley – Soleil Securities

Mike Gulley – Soleil Securities

You talked about potash pricing has come up quite a bit and I’m going to try to ask the question a little bit differently, do you see differentials in the various markets against China expanding or contracting on a go forward basis.

Jim Prokopanko

I’m not clear, what do you mean differentials going forward.

Mike Gulley – Soleil Securities

Let’s assume for example that North America has always sold, I’ll just make it up for now, $100 a tonne differential versus China, on a go forward basis given whatever China is going to settle, do you see those differentials and let’s say a North America, a Brazil, a Southeast Asia, see those differentials changing up or down.

Jim Prokopanko

Okay, China has been a very good and continues to be or has until recently been a very good customer. In many regards they appreciate the quality of the Canadian product, they are not as predictable as they are in their demand and nor are they buying at the scale that they have in the past.

That was one reason why China would often get a preferred pricing. They bought large volumes, predictable, evenly distributed over the year. For various reasons they’re not continuing to operate with those attributes and so I just don’t see that the Chinese are going to be able to justify premium pricing or discount pricing given their reduced volumes and their unpredictability in terms of their annual or quarterly take.

So I think that it’s a loss of a discount into that market.

Mike Gulley – Soleil Securities

And then secondly, on North America you’ve made some very positive comments about inventory demand, interest, and all that, how do I square that with the fact that one of your competitors dropped the North America price, at least for the first two months of this calendar year quite significantly. Can you help me reconcile those two sets of facts.

Jim Prokopanko

You’re talking about potash.

Mike Gulley – Soleil Securities

Right.

Jim Prokopanko

Well the producers have a large inventory, very large inventories at our production facilities or warehouses and we’re going to, we’re at a point now as we experienced with phosphate, we are going to find the market clearing price and we think that the kind of prices we’re quoting now will be that market clearing price in North America.

We recognize that, we’ve taken action on that and it is still a handsome price for producers given what we’ve seen two and three years ago, not what it was a year ago and that was an anomaly. So I think there’s going to be a period where we clear out the inventories, demand recovers, farmers have to replace their potash levels in their soils, whether its this year or between this year and next year, and it will be back to a more balanced time to supply and demand scenario.

Mike Gulley – Soleil Securities

I was hoping to get the return of a variable cost numbers for corn and soy in your presentation, I think you might have left that out. This is more of an observation than a question, but clearly a lot of the good ROVC we’re going to see this coming year is due to lower fertilizer prices, not so much to higher crop prices. If fertilizer prices do advance the way that seems to be the theme on this call, wouldn’t that have a fairly big impact on farmer profitability for the 10 crop.

Mike Rahm

I think when you look at the farmer economic, I don’t have the numbers right in front of me, but I think return over variable cost right now for a high yield Midwest farm operation for corn is somewhere in that 380 plus range. And in terms of the improvement certainly compared to a couple of years ago, there’s certainly been an impact with lower commodity prices, but if you take current new crop prices of 445, subtract our a normal basis, part of that, a significant part of that improvement is in terms of higher prices compared to the lower values that we’ve seen earlier.

Certainly the drop in energy, the drop in some of the chemicals, the drop in fertilizer prices, certainly that drop in input costs is a big factor. Seed costs are probably the one exception to that but the whole bundle of crop input has improved that.

In terms of where prices go and what kind of increase might be in store, I think we’ve indicated we don’t see a return to the extraordinarily high levels of two years ago. So certainly there may be some adjustments. We’re seeing phosphate prices increase, a recalibration of some of the potash prices. The number in terms of the cost of fertilizer for this kind of operation is sort of in that $85 to $90 per acre range and its been in that range for quite a while and that is down from about $145 a year ago and two years ago.

So it certainly helped and bottom line is with where commodity prices are and input costs are, we believe farm economics, not only for corn and soybean but for many crops around the globe are just fine.

Operator

There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.

Jim Prokopanko

With that we’ll conclude our question-and-answer session and thank you all for your considerable interest. The demand for nutrients to produce more food will inevitably expand. The world is not getting less hungry. With our balanced portfolio, and strong competitive position, Mosaic is well situated to create value for our shareholders, and customers for years to come.

Again thank you, have a great day.

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Source: The Mosaic Company F2Q10 (Qtr End 11/30/09) Earnings Call Transcript
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