Mosaic: Future Looks Bright

Apr.28.14 | About: The Mosaic (MOS)

Summary

Mosaic Co. has recently declared its interest in buying Archer Daniels Midland Co.’s fertilizer distribution business in Brazil and Paraguay for a consideration of $350 million.

The deal will allow the company to acquire four fertilizer blending and warehousing facilities in Brazil and one in Paraguay in addition to supplying fertilizer to Archer in respective countries.

The buyout will increase Mosaic's annual distribution capability in Brazil to about 6 million metric tons of crop nutrients from approximately 4 million metric tons.

During 2012-2016 14% and 11% of the growth in world demand of phosphate and potash is projected to be in Brazil supported by its ample supply of natural resources.

Brazil and Paraguay’s transportation systems are susceptible to bottlenecks making it problematic to move agriculture products that indicate an opportunity for Mosaic.

Mosaic Co. (NYSE:MOS) is a manufacturer and seller of concentrated phosphate and potash crop nutrients for the global agriculture industry. The company has recently declared its interest in buying Archer Daniels Midland Co.'s (NYSE:ADM) fertilizer distribution business in Brazil and Paraguay for a consideration of $350 million. The company's share price rose 0.7% to $47.79 as a result of this announcement. Although the deal is currently subject to regulatory clearance in this article I will discuss the prospects for the company if the deal is authorized.

The Deal and Its Prospects for the Company

Through the deal under consideration Mosaic Co. will acquire four fertilizer blending and warehousing facilities in Brazil, one similar facility in Paraguay, and further warehousing and logistics service capabilities. The $350 million deal includes the delivery of $150 million in working capital upon closing. Additionally, as part of the deal, Mosaic Co. agreed to supply Archer's fertilizer needs in Brazil and Paraguay for five years. Mosaic stated that it would fund the buyout with its cash from operations. Furthermore, the transaction is not likely to impact the company's shareholder distribution plans.

According to Archer Daniels Midland, it is determined to sell these assets to a buyer as the business was finding it challenging to meet the company's return objective. According to Mosaic's President and CEO James Prokopanko, this acquisition will provide Mosaic co. with a grave distribution platform in one of the globe's rapidly growing agricultural regions. The acquisition of Archer's distribution business will hasten Mosaic's growth plans in Brazil by expanding the company's market access and substitute a considerable amount of planned internal investments in this key market.

The buyout will increase Mosaic's annual distribution capability in Brazil to about 6 million metric tons of crop nutrients from approximately 4 million metric tons. The move is also in-line with the company's growth strategies, will drive the company's ongoing growth plan in Brazil, and offer access to new customers across Brazil and in Paraguay according to Tobias Grasso, Mosaic's Country Manager in Brazil. The company aims to expand scale and operating efficiencies through this acquisition along with a capable group of employees who will join the company.

Brazil is considered among the world's leading fertilizer importers as its nutrient-deficient soil has to support the region's enormous crops of sugar cane, soybean, and corn. Moreover, the region's transportation system is susceptible to bottlenecks making it problematic to move crops and nutrients. Therefore, this creates an attractive opportunity for Mosaic to capitalize the prospects in the region for agriculture infrastructure and distribution facilities.

Growth Potential for the Company in Brazil and Paraguay

Following China and the U.S., Brazil is where Mosaic Co. made the highest shipments in FY 2013. The company has also projected its shipments to Brazil to rise between 8.2-8.8 million tons in FY 2014 up from 8.2 million tons in FY 2013 as illustrated in the following table.

Click to enlarge

Source: MOS Presentation

In terms of the company's global phosphate shipments by region Brazil falls 4th. Brazil received 6.5 million tons of phosphate shipments by Mosaic in FY 2013 following China, India, and the U.S. Mosaic projects it will record 6.6-6.8 million tons of phosphate shipments for Brazil in FY 2014 as shown in the following table.

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Source: MOS Presentation

The company projected an increase in its shipments for potash and phosphate in the coming years in Brazil on the basis of the forecast for potash and phosphate imports by Brazil as shown in the graphs below.

Source: MOS Presentation

Brazil is anticipated to prolong its trend of rising imports in 2014 with Muriate of Potash (MOP) imports of approximately 8 million tons up from 7.7 million in 2013.

The imports of the foremost phosphate products including MicroEssentials by Brazil rose to 5.1 million tons in 2013 reflecting a growth of 31% in comparison to the previous year. Looking forward, the Brazilian phosphate imports are projected to remain flat at 2013 level as shown in the chart above.

Brazil forms the largest economy in Latin America and is expected to grow its GDP by 3.1% in 2014 up from 2.5% recorded in the previous year. The following pie chart shows that the Latin America and Caribbean region is projected to account for 21.1% and 15.5% or the 2nd and 3rd biggest driver of the world increase in phosphate and potash fertilizer consumption respectively during 2012-2016.

Source: Current World Fertilizer Trends and Outlook to 2016

Among the major countries in the Americas, 14% and 11% of the growth in world demand of phosphate and potash is projected to be in Brazil during 2012-2016. Brazil has the goal to become the global agricultural center due to the ample supply of natural resources. Increased fertilizer usage is essential to accomplish this goal.

Paraguay, a country located in central South America, is also expected to record historic growth in its soybean production in 2014 and the region's agricultural land has grown from 3-6% each year over the past two decades. Since President Cartes took office in April 2013, the agricultural sector of the region has flourished and the government is looking for more infrastructures to facilitate the agriculture sector. The state has also introduced a new law allowing public-private alliances to undertake the expansion and improvement of public infrastructure in the region. Hence Mosaic's acquisition of agriculture transportation and distribution facilities in the region is suitable to capitalize on growth in this market.

Concluding Remarks

The company's recently announced deal with Archer Daniels Midland that is still subject to regulatory approval will assist the company in achieving its growth objectives in Brazil and Paraguay. Both regions are forecasted to record handsome growth with respect to the agriculture sector and thus fertilizer demand in the coming years. On the other hand, the regions lack supportive agriculture infrastructure to facilitate growth. Therefore the company's initiative to obtain warehousing and distribution facilities through this acquisition has the potential to capitalize the growth prospects for the company in the region. Due to the optimistic prospects for the company brought in through this acquisition along with other strategic moves enacted by the company since the beginning of the current fiscal year, I rate the stock as a buy.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by a Gemstone Equity Research research analyst. Gemstone Equity Research is not receiving compensation for it (other than from Seeking Alpha). Gemstone Equity Research has no business relationship with any company whose stock is mentioned in this article.