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Mosaic Company (NYSE:MOS)

Q2 2011 Earnings Call

January 5, 2011 10:00 a.m. ET

Executives

Christine Battist - Director, Investor Relations

Jim Prokopanko - President and Chief Executive Officer

Larry Stranghoener - EVP and Chief Financial Officer

Mike Rahm - VP, Market and Strategic Analysis

Rick McLellan - SVP, Commercial

Rich Mack - EVP, General Counsel and Corporate Secretary

James O’Rourke - EVP, Operations

Analysts

Jeff Zekauskas - JPMorgan

Vincent Andrews - Morgan Stanley

PJ Juvekar - Citi

Don Carson - Susquehanna

David Silver - Bank of America

Fai Lee - RBC Capital Markets

Ashish Gupta - CLSA

Robert Koort - Goldman Sachs

Elaine Yip - Credit Suisse

Edlain Rodriguez - Gleacher & Company

David Begleiter - Deutsche Bank

Michael Picken - Cleveland Research

Mark Gulley - Soleil Securities

Operator

Good morning ladies and gentlemen and welcome to the Mosaic Company’s fiscal 2011 second quarter earnings conference call. At this time all participants have been placed in a listen only mode. The floor will be open for questions following today’s presentation. Your host for today’s call is Christine Battist, Director, Investor Relations of the Mosaic Company. Please proceed Christine.

Christine Battist

Thank you Keisha and welcome to Mosaic's fiscal 2011 second quarter earnings conference call. With us today are Jim Prokopanko, President and Chief Executive Officer, Larry Stranghoener, Executive Vice President and Chief Financial Officer, and other members of the senior leadership team. After my introductory comments Larry will summarize our second quarter results and update financial guidance. Jim will comment on execution against our strategic priorities, provide an update on South Fort Meade and then finish with some comments on the market outlook.

The presentation slides we are using during the call are available on our Web site at www.mosaicco.com. We will be making forward-looking statements during this conference call. The statements include but are not limited to statements about future financial and operating results. They are based upon management's beliefs and expectations as of today's date, January 5, 2011, 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. Now I'll turn the call over to Larry.

Larry Stranghoener

Thank you Christine and happy new year everyone. It’s a great time to be the world’s leading producer of phosphate and potash. We are on track for an outstanding year in fiscal 2011. Our second quarter results reflect strong global phosphate and potash demand. We had a great North American fall application season with demand outstripping production and we see a continuation of this trend in coming months.

We are executing against our strategic plans and delivering results. As you can see on Slide 3, this quarter we earned net income of $1 billion or $2.29 per share compared to 24 cents a year ago. This includes an after-tax gain of $570 million or $1.28 per share on the sale of our interest in Fosfertil. The gross proceeds from this sale were $1 billion. In addition, we generated $532 million in operating cash flow this quarter and funded $291 million of capital expenditures with the bulk of this going toward our potash expansions.

We also recently announced the redemption of the remaining $455 million aggregate principal amount of our 2014 senior notes. This transaction will close next week and was an opportunistic use of cash that offers significant interest savings. Our phosphates business segment had an exceptional quarter compared to both the year ago period as well as the first quarter of this year. As summarized on Slide 4, both sales volumes and the averaged realized DAP price exceeded the high end of our guidance ranges.

We generated $402 million in operating earnings compared to $29 million a year ago. Over the first half of this fiscal year our phosphate segment operating earnings have outpaced potash earnings. The improvement in second quarter operating earnings compared to last year was primarily due to significantly higher selling prices and record sales volumes partially offset by higher sulfur and ammonia costs. Our phosphate segment generated a gross margin of 24% driven by strong sales volumes in North America and above average margins on blend products.

Demand was strong in many markets during the quarter though we chose to sell more into North America, which contributed to a record level of shipments. This robust demand has drawn down phosphate finished goods inventories to record low levels in spite of high operating rates at our concentrate plants. While phosphate rock production was impacted by the temporary closure of our South Fort Meade mine, finished goods production has not been impacted and we expect to keep our concentrates plants running near capacity to meet expected North American spring demand.

Our potash segment had a boost from the strong North American fall application season. Potash operating earnings were $252 million this quarter, up 67% compared to last year as highlighted on Slide 5. This improvement was primarily due to significantly improved sales volumes and the favorable effect of higher production rates partially offset by a decline in selling prices and an increase in Canadian resources taxes and royalties. Compared to the first quarter operating earnings improved 15% even though MLP production and cost per ton performance in the quarter were constrained by turn arounds that were postponed from the summer.

We ramped up potash production during the course of the quarter and are now operating at very high rates. We are producing as much product as we can to meet continued healthy demand. Potash inventories are relatively low by historical standards and are expected to remain so. The hearty appetites of India, China and North America should drive higher shipments during the second half of our fiscal year. Now let me shift to financial guidance as summarized on Slide 6.

We begin calendar 2011 expecting record phosphate and potash shipments against the backdrop of low producer and distribution pipeline inventories. Being a major producer of both phosphate and potash positions us well in this environment. For our third quarter we estimate total phosphate sales volumes of 2.4 to 2.7 million tons. Third quarter sales volumes will be impacted by normal seasonal factors following which we expect a very good fourth quarter led by strong North American spring demand.

We expect an average DAP selling price in the third quarter of $510-540 per ton as we capture the upward momentum in DAP pricing. To meet continued high demand and build finished goods inventory we expect to operate our North American phosphate plants in excess of 85% of granulation capacity in our third quarter. For raw materials we expect slightly higher sulfur and ammonia costs in the third quarter compared with second quarter levels. We have included a sensitivities chart in the appendix to our slide presentation that you might find helpful particularly as it relates to sulfur and ammonia cost movements.

Now shifting to potash, MLP market pricing and volume continues to firm. For the third quarter of fiscal 2011 we estimate total potash sales volumes of 1.9 to 2.1 million tons and an average MLP selling price of $330-350 per ton. Domestic MLP prices continue to increase while export pricing has lagged primarily because of certain fixed price contracts established a year ago. Recent MLP price increases into Brazil and North America should be realized beginning in our fourth fiscal quarter. We expect to run our potash mines for the third quarter in excess of 90% of operating capacity which should lead to improved per ton production costs compared to the second quarter.

We are funding capital projects that improve efficiencies in both our potash and phosphate segments and are making great progress on our potash expansion plans. Because we have moved some potash sustaining projects into fiscal 2012 we are revising capital spending guidance downward by $200 million. We now expect capital spending for fiscal 2011 to range from $1.2-1.4 billion. Due to improved profitability in our potash segment we are also revising our guidance for Canadian resource taxes and royalties upward by $100 million to a $250-300 million range for fiscal 2011.

There are no changes to our annual guidance on SG&A and our effective tax rate for fiscal 2011 that we previously provided and as shown on this slide. With that, I’ll turn the call over to Jim.

Jim Prokopanko

Thanks Larry. This has been a great quarter and I’m proud of what the Mosaic team has accomplished. Before we turn the call over to Q&A I would like to review our strategic priorities and provide a brief market outlook. First, we have been executing well against our potash expansion plans as detailed on Slide 8. We are well on our way to adding 5 million tons of additional capacity through this decade.

So far we have committed over $3 billion to bring on an additional 3 million tons of capacity over the next several years with an additional 2 million tons in early planning stages. These projects include the expansion of mining and milling capacity at all three Canadian mine sites. Underground we are adding mining equipment and conveyers as well as further development of new mine cavities for our solution mine at Belle Plaine.

Above ground we are adding milling, screening, compaction and storage capacity. Our biggest project is the construction of the K-3 shaft at Esterhazy. Once completed we will have three distinct operating shafts at Esterhazy. We are currently drilling the freeze holes and anticipate shaft sinking to start in calendar 2012. These capacity expansions are significant undertakings but 1200 contractors, engineers and employees are dedicated to these projects. We’re making great progress and are on time, on scope and on budget.

In addition to these expansion projects we also have capacity at our Esterhazy mine that is currently dedicated to production under a toiling agreement (so even at) current shipment levels we anticipate this will revert back to Mosaic by the middle of this calendar year and will add another 1.3 million tons of annual capacity at no additional capital cost. As we bring on new capacity to meet increased potash demand over the coming years, we expect the higher sales volume from our potash business to favorably contribute to our profitability as well as to our company valuation.

Our expansions will ensure we continue to be one of the premier potash companies in the world. Moving on to Slide 9, the variety of initiatives in our phosphate segment are allowing us to maintain our low cost position. We have teams working on improving energy efficiency, optimizing maintenance, streamlining procurement and many other projects. Collectively we are generating efficiencies and cost savings and we expect more to follow. Another highlight of our phosphate segment is MicroEssentials, a premium product that incorporates sulfur and other micronutrients in each and every phosphate granule.

MicroEssentials is an innovative crop nutrition solution. This patented product ensures uniform distribution of nutrients in each granule. We have over 10 years of research trials demonstrating value for farmers through higher yields. MicroEssentials earns a higher margin and has been a resounding success. We are currently on pace to sell over 1 million tons this fiscal year and with growing demand we are finalizing capital investments that will convert existing phosphate capacity for up to 2 million tons of MicroEssentials annually.

This premium product is a win-win for the farmer, for the dealer and for Mosaic. Finally, the realignment of our worldwide distribution and North American production assets continues to pay off. The optimization of our production to feed our global distribution supply chain is working well and is reflected in our strong phosphate segment results this quarter. Now I’ll provide an update on developments at South Fort Meade.

During our last earnings call we outlined a number of factors under consideration that were designed to keep our finished phosphate production running at near capacity until the South Fort Meade litigation is resolved. As previously announced, we reached a partial settlement with the plaintiffs that will allow approximately four months of uplands mining in the Havarti County Extension. We expect to mine approximately 900,000 tons of phosphate rock during this period, which began in early December.

In addition, we have been drawing down existing phosphate rock against finished goods inventories, optimizing mining at our Florida mines, sourcing phosphate rock from our Miski Mayo joint venture and as needed, supplementing with purchases from third parties. During the quarter we began receiving rock from our Miski Mayo joint venture. For our Louisiana operations imported rock has substantially replaced Florida produced rock. We will continue to pursue these mitigation strategies as long as is needed.

As many of you know, we have appealed the issuance of the preliminary injunction that has made it necessary to take these mitigating actions. The 11th Circuit Court of Appeals has scheduled oral arguments for the first week of April, 2011. Our assessment remains the same. We believe that the permit was exhaustively reviewed and validly issued by the Army Corps of Engineers and we look forward to presenting our case. South Fort Meade remains one of our highest priorities.

We continue to evaluate ways to keep the mine operating until the appellate court rules. While mitigating strategies have been successful to date, we are determined to regain full access to this mine. Our South Fort Meade mine is one of the most cost effective and efficient operations in the world and we fully expect that we will be able to mine the ample resources located at South Fort Meade in the years ahead.

Now let me finish with a brief overview of the market outlook, which looks good from any angle that we can see. Phosphate and potash demand is booming. It has not just recovered from the decline in 2009 but it is back on a solid growth trajectory. We are forecasting phosphates and potash to grow to record levels this year. This upbeat outlook is underpinned by a number of factors as listed on Slide 12. Global grain and oil seed demands continue to accelerate. This implies strong growth in global crop nutrient markets.

These factors combined with lower producer stocks have led to extraordinarily high prices for a wide variety of agricultural commodities. This translates into exceptionally profitable farm economics worldwide. Markets are sending clear signals to farmers around the globe to seed more area and apply more crop nutrients. In the United States we expect a real contest for acreage this spring. Our analysis indicates that markets will need to bid for 92-93 million acres of corn and 77-78 million acres of soybeans.

US acreage and crop nutrient demand in 2010-2011 is expected to rival the high levels of 2006-2007. The fall application season was outstanding and P and K shipments this spring are expected to exceed the five-year average and the totals last fall. High agricultural commodity prices are not the only reason for the upbeat outlook. Producers are beginning this year with low inventories following blockbuster shipments during the past six months. Global distribution pipeline inventories remain at low levels in most regions.

And several supply uncertainties still overhang the phosphate market. Around the world we continue to see a focus on food security. I visited with several customers in India last month and I can tell you first hand that the 50% growth in DAK sales and the 40% increase in potash sales during the last three years is evident in the countryside. Grain and oil seed demand and consumption is growing and no one wants to be caught short of crop nutrients.

In Brazil for the first time that I can recall vessels loaded with crop nutrients were given priority to discharge in order to get sufficient tonnage in place prior to the recent planting season. We project that Brazilian crop nutrient shipments of 26 million tons in 2011 will eclipse the previous record set in 2007. On balance the outlook for Mosaic is remarkable and we are excited about the future of our business. It’s a great time to be the world’s leading producer of phosphate and potash. We are executing well against our long-term strategy to create shareholder value and for fulfilling our mission to help the world grow the food it needs. Back to you Christine.

Christine Battist

We would now like to open the call to your questions. Please hold your questions to one per person so we can take questions from as many people as possible. You are welcome to rejoin the queue for a follow up question. Keisha, please open the phone lines.

Question and Answer Session

Operator

Ladies and gentlemen, if you have a question please press star, 1. If your question has been answered or you would like to withdraw from the queue simply press star, 2. As a reminder, please limit your questions to one and rejoin the queue for any follow ups. Your first question comes from the line of Jeff Zekauskas with JP Morgan. Please proceed.

Jeff Zekauskas

Hi. Good morning. I was wondering whether you would reflect on the positives and negatives to the phosphate industry of the announced sulfuric acid and DAP expansions that OCP is making in the 2013-2015 period.

Jim Prokopanko

Well, good day Jeff. Yeah. They have announced the expansion projects we all have read. They haven’t started construction yet so it’s a good announcement and I think reflective of the demand growth that we’re seeing in the world. Outside of China there just has not been very much phosphate production added. The (modern) project has been a grey cloud on the horizon. As we have all experienced, that’s not come on as fast as they anticipated or hoped for.

And so we don’t see significant disruption. I think OCP is going to bring it on in a practical and manageable manner and not going to - may have a small overhang for a period of time but then it’s just going to be brought on in a balanced approach.

Operator

Your next question comes from the line of Vincent Andrews with Morgan Stanley. Please proceed.

Vincent Andrews

Thanks. Good morning. I guess maybe if you could just give a little more detail on potash pricing both sort of in the quarter and then on a go forward basis just in terms of how you’re thinking about your order book and how much you still have sold forward? And just sort of what are the machinations that will get us to realizing the current spot prices in your P&L?

Jim Prokopanko

Vincent, good day. I will give just a few high level comments and then I’m going to ask Rick to add a little more color to what he’s seeing in the sales organization. You may wonder what happened with the drop, why maybe the lower than anticipated potash pricing. Three things contributed.

First we have a carryover of sales made in Q2 that were at some of the lower prices. That’s carried into our Q3 book, the deliveries of those products. Second, we have some international products that we continue to deliver on in December that were priced earlier in the year. And there are some one-year contracts, China, India and so on, that make that up. And finally we have some industrial contracts at below ag-market pricing that were again longer term contracts that are now coming to the end of their life. And so with those three items basically prior sales booked at prior lower prices being delivered and that brought us down. Now Rick, why don’t you just make some comments about what you’re seeing going forward?

Rick McLellan

Good morning. Going forward we continue to see domestic buyers layer in potash for spring. Right now we’re looking at March sales and March and April sales and those are in North America made at the 515 Midwest warehouse price. As well internationally we’re looking at Brazil carrying out inventory in December that will be as low or lower than last year as well as good demand for the second crop coming in. As well as everyone is aware, we have negotiations with China ongoing for their next six months of requirements.

Operator

Your next question comes from the line of PJ Juvekar with Citi. Please proceed.

PJ Juvekar

Good morning. Jim, you just mentioned modern. It seems like it’s delayed until 2012. Is that your latest inclination? And then what are your expectations for DAP exports out of China this year?

Jim Prokopanko

Okay. Good morning PJ. The modern project, their statements are that it’s going to be the latter half of 2011. This is a big project, new ore coming into a new facility. That’s tough work to get that all working quickly so I think it’s going to be if it’s not late 2011, it’ll be up and operating 2012. It’s close to 3 million ton production capacity. I think that’s going to probably take if it works well, it would be up and fully operating at 18 months, probably closer to 24 months. So it’s going to be a slow ramp up in production.

All the while and I touched on it to the question of OCP - we have a phosphate market that is growing 2-1/2 to 3 million tons a year. That’s on the top side. That’s 1-1/2 million more tons a year. So the modern project is two years of growth. You add measured output on the OCP project, I think we’re going to be pretty close to in balance with production coming on matching with growing world demand. And now your second question was about the DAP exports out of China and what we have seen is them bringing down, shutting the door on that quite quickly and abruptly for six months with the higher export duty.

We’re going to have a pretty good, pretty high level ending this year, calendar year 2010. 2011 I think with the window opening I think later in June or July when it opens, Mike, are we in a 2-1/2 to 3 million ton kind of forecasted export range?

Mike Rahm

We think that exports will drop about 1 million tons. DAP/MAP exports in 2010 were in that 4.7 million ton range and we think they will probably drop into that 3.7 with most of that bunched in that export window from June through September. I think just as a comment on China, if you look at the roll it has played during the last two surges in demand, China has played a critical role. So this is an important question in our view.

If you go back to 2007 China basically accounted for all of the increase in import demand in DAP, MAP and Triple. When you look at last year the big increase, they accounted for about 2/3. So how much product comes out of China is one of the supply uncertainties that we keep highlighting.

Operator

Your next question comes from the line of Don Carson with Susquehanna. Please proceed.

Don Carson

Yes. Thank you. Question on pricing momentum - we have seen domestic prices for both potash and phosphate well above international pricing. Potash is almost a $200 gap by the time you get back to the mine in Saskatchewan. So can you talk a bit on how quickly you think you can close that gap and also on how quickly you can capture some of that domestic momentum particularly in potash?

And then secondly, just what was going on in blends? Why did you have such good pricing margins there? And Larry, you didn’t give any guidance on blend pricing. Can you make any comments on the outlook there?

Rick McLellan

Hi Don, it’s Rick. I’ll try and answer your first question on tightening up the gap between export and domestic first on potash. We definitely have seen potash prices strengthen in North America going into spring. And we have yet to see that happen completely in the export markets so there are some bellwether contracts coming with China and India that will kind of set the guidelines and be the momentum for that to happen.

And we’re already seeing those February/March shipments that are being put into Brazil coming u at a higher level of 440 and indications that that can and should go higher as the year goes on. So it’s going to take some time to fill the gap and it always ebbs and flows and we expect that during this calendar year we’ll see that gap close. On phosphates we have seen some imports where limited movement in the river kind of pulled back domestic pricing and so now we’re at a point where domestic pricing and our export sales are being done at about the same net (back).

And we were in a lull in the export season and domestic was the market so people paid up for inventory. Those two have come into balance and we expect that balance at 600 above Tampa to be what we look for as a base to grow off going forward. Larry.

Larry Stranghoener

Don, with respect to your question on blends, it’s Larry. We had very good performance on blends in this past quarter. It’s good execution on the part of our offshore team in various parts of the world. It’s also a function of course of having positioned product in a rising price environment. We would expect that margins would likely revert to a more normal level in the third quarter but again, that depends upon the pricing momentum.

Operator

Your next question comes from the line of David Silver with Bank of America-Merrill Lynch. Please proceed.

David Silver

Yeah. Hi. In terms of your phosphate operations I notice that your non-feed stock costs per ton in the current quarter really seemed to drop off significantly versus one quarter earlier. And given that the South Fort Meade mine was down the entire quarter, I was a little surprised at that. So I was wondering if you could talk about I guess your conversion or non-feed stock cost outlook for phosphate on a go forward basis?

And then separately I was wondering if Jim could just comment on not so much the South Fort Meade litigation but I guess on the Army Corps of Engineers’ role and your understanding of the progress that they have made to cure any deficiencies in their permitting issue process that the federal judge cited? Thank you.

Larry Stranghoener

David, with respect to your first question on phosphate cost performance, you’re right, we had a very good quarter. And it’s as much as anything else a function of production volumes. We had very high production rates in the quarter and as we have said many times, when the plants are running at or near capacity we see very good cost performance. And the second quarter was no exception. Other than that there were no unusual items that would have caused that performance to spike one way or the other.

Jim Prokopanko

The second question David and good day - good hearing from you - was about the Army Corps of Engineers and what they may have done since the injunction. They have not done anything. They have not done anything. There was nothing deficient in their issuance of that permit. It’s a claim made by the NGO party bringing the claim that they were deficient in some way and not clear in what that was.

So we are now having the appeal of the preliminary injunction. The Army Corps is standing with us on that. They are not making any changes to their review and we don’t see that any is necessary. Subsequent to the appeal of the preliminary injunction then the merits will be heard on the case and we think we’ll be successful in the preliminary injunction and then the merits will take some while to hear whether the Army Corps in fact did or did not miss something in their permit. I’m going to ask our general counsel Rich Mack to add any color to that that - and Rich has been the one that has been leading our appeal and the whole permitting process. Rich.

Rich Mack

Thanks Jim and hi David. I think Jim said it well and I can tell you David that the Army Corps of Engineers has 100% conviction behind the South Fort Meade permit. The standard I’ll remind you is whether or not they acted arbitrarily and capriciously and you know all the statistics in terms of how long this permit was reviewed and how extensive the record is and how long the permit is.

And so we are in active dialogue with the Army Corps. Should any additional work need to be done on the permit it can be done very expeditiously. But their current position is that it is one of the most significant permits that have ever been issued by that regional office of the Army Corps of Engineers and they’re standing behind it.

Operator

Your next question comes from the line of Fai Lee with RBC Capital Markets. Please proceed.

Fai Lee

Thank you. I just was wondering in terms of your cash flow priorities. It looks like even with the debt repayment you’re still going to have about $3 billion of cash on your balance sheet. Can you just maybe comment on some things that you might be looking at in terms of using that cash for? Thanks.

Jim Prokopanko

Good morning Fai. Well, we have been pretty clear about that. We do have a rock solid fortress balance sheet and we’re glad to have it in the business that is as cyclical and volatile as the world economy has been over the last 12 months. So our first priority is to maintain a sound and secure balance sheet. Well, we’re well past that sound and secure level.

The second is look to fund our ground field and internal growth opportunities and we’re doing that with operating cash flow. Other activities would be to be aware of and mindful of any M&A activity opportunities. And if something were to come along we’d be prepared to look at that. And finally and we have shown it in the past, but as appropriate we will fund shareholder distributions. And we have experienced doing that. We had a large one last year and at the appropriate time we would consider doing one again.

This is our capital structure and our cash balance is a matter for regular and I’ll assure you very regular review by the management team and is a topic of discussion with our board at virtually every board meeting that we have. So we do have we recognize a large cash balance and as appropriate we’ll ensure that it’s applied appropriately and used appropriately.

Operator

Your next question comes from the line of Mark Connelly with CLSA. Please proceed.

Ashish Gupta

Hi. Good morning everyone. This is Ashish Gupta for Mark. Larry and Jim, can you please provide some perspective on the breakdown in inventory? It looks like it’s the lowest it’s been on a dollar basis since the quarter ending August 2007. We’re just wondering if you can give us some detail there and how that is affected by what’s going on at South Fort Meade. Thanks a lot.

Larry Stranghoener

Ashish, it’s Larry. Inventories are low, there’s no question about it especially in the phosphates business. Finished phosphate product inventories are as low as we can remember them being and we’re close to that point in the potash business as well and it’s a function of the very strong demand that we’ve been seeing and that we have articulated in our comments here this morning.

We think this is something that will likely continue at least through the North American spring season. With respect to your question about rock inventories, as we noted one of our mitigating strategies in the South Fort Meade matter is to use, draw down our existing supplies of phosphate rock and we have been doing that. And we’re now at a point where there is probably little more of that opportunity left as we go forward into the second half of the year.

Operator

Your next question comes from the line of Robert Koort with Goldman Sachs. Please proceed.

Robert Koort

Thank you. Good morning. I was wondering if you could just give us a little more help on your status of your rock inventories, trying to gauge how your cost structure might change as you mentioned with the Louisiana operations going to outsourced rock. And then can you give us some sense of the right way we should think about with current transport costs to translate a 515 Midwest warehouse price to an FOB mine price and say a $400 FOB India or China price to an FOB mine?

Larry Stranghoener

With respect to the rock costs we have been incurring added cost because of the South Fort Meade issue, because of the fact that we have not been running full out at South Fort Meade. As we have noted that when it’s running full out is our lowest cost mine and it’s why we’re anxious to get that back to full production.

But we estimate that we probably had about a $30 million cost penalty in the second quarter relative to what could have been had South Fort Meade been running full out. The impact in the second half of the year will depend and that’s not a completely satisfactory answer I realize but it’s dependent upon what mitigating actions we have available and choose to pursue with respect to filling any gaps in our own rock and with respect to our ability to find additional areas that we might be able to mine at South Fort Meade.

So I think that this cost penalty that we incurred in the second quarter of $30 million is likely to if anything grow slightly larger in the second half of the year to the extent that we purchase more outside rock. But again, I have to say it all depends upon various different scenarios and various different options that we’re working through.

Operator

Your next question comes from the line of Elaine Yip with Credit Suisse. Please proceed.

Elaine Yip

Hi. Good morning. Happy new year. With regard to the potash business the costs per ton were higher sequentially when I thought they would have come down as you increase your operating rates. Can you comment on what might have driven the higher costs? And your operating rates in the quarter of 75% also seem to be lower than what you had indicated when you reported last quarter’s earnings. Were there any issues that may have impacted those operations?

Larry Stranghoener

Well, happy new year to you too, Elaine. I’m going to ask Joc O’Rourke, leader of our operations, Executive Vice President of Operations to address that question. Joc.

James O’Rourke

Hello Elaine. So the question on our cost per ton in our potash business, there are probably two things that really affect the cost per ton there that would’ve impacted the quarter. The first of those is resource tax going up because of higher sales and higher margins. The other one that would have impacted our overall costs, we had two shutdowns or turn arounds of our plants that were taken in that quarter, which were scheduled actually for the quarter before. So actually our operating rates while up year over year were quite impacted by facility shut downs. Thanks.

Operator

Your next question comes from the line of Edlain Rodriguez with Gleacher & Company. Please proceed.

Edlain Rodriguez

Thank you. Good morning guys. Just one quick question. I mean can you remind us again on the (phoscam) deal with India, when does that get re-priced and how do you see the data mix there between having a strong market now and modern on the horizon? And also since your Florida DAP prices have been flat for a while, how soon do you expect the upward momentum to resume in this market here?

Jim Prokopanko

Good morning Edlain. We’re going to have Rick McLellan, our leader of commercial operations, address those questions.

Rick McLellan

Good morning Edlain. On the phoscam contract we’ll finish up shipping. We finished up shipping in December, the end of that agreement with our Indian customers and we’ll begin negotiations and we expect a re-pricing of that agreement somewhere in the March to April timeframe. We have plenty of time. They have plenty of issues to get straight in their own business so we expect that those negotiations will get started in February.

And the second piece of the question was Central Florida DAP. We’re in - this is a traditional lull if you go back through history after fall season. North America, we go into a bit of a lull in pricing and volume and we expect in January that to improve at the end of January/early February as people step back into the market and kind of realize that the price is going to be what the price is and start the planning for either fall demand in South America or spring demand in North America. Thanks.

Operator

Your next question comes from the line of David Begleiter with Deutsche Bank. Please proceed.

David Begleiter

Thank you. Good morning. Jim, looking at your global shipment forecast for potash, what’s your view of global industry effect of capacity for potash in 2011? And do you have a view on the Janssen expansion going forward? Thank you.

Jim Prokopanko

Good morning David. The operating capacity of mines and facilities is a subject for some considerable confusion. I think when people look at there is published name plate capacities, which are the rates that facilities would operate at running 24/7, which is for a proving period of time for 90 days let’s say. And so you get one number that is quite elevated. And when you get down to practical operations with turn arounds, with planned or unplanned outages, you’re down to typically 90% of that.

So Mike, just correct me if I’m wrong here but I think we’re in the 60 million, 62 million ton potash operating capacity. And I think if we continue shipping as we are now and with potash as we’re forecasting at 53-56 million tons consumption shipments in 2011, we’re going to be approaching that 90% capacity rate and that’s going to be as high as the industry has operated for some while. So it’s going to be a tight operating S&D going forward. To the question of Janssen, I think we’re in a situation that our view is a brown field.

In our case it’s a brown field expansion to $5 billion. If we’re - that’s going to require something in the $300 a ton or maybe a bit less than that to justify the kind of cost of capital ROI. You get into the new build green field, we think it’s double that that you’d need. You’d need something closer to $600 a ton. And right now we don’t have $600 a ton and you’d need $600 a ton into perpetuity after your mine and mill comes up into operation after what will probably be a minimum of five years and probably seven years.

So we just don’t see that happening with the supply and demand scenario we see right now. So Janssen, you’ve got a party that’s well capitalized, technical skills to pull it off but I think the economics of it just aren’t there yet. The world will need a green field facility just not this decade. I think it’s going to be the 2020s before we see world demand justifying investment in a new green field operation.

Operator

Your next question comes from the line of Michael Picken with Cleveland Research. Please proceed.

Michael Picken

Hi. I just wanted to see if you could provide an update on the timing of when you expect China and India to settle on the potash side. And then on the other side if we’re thinking about modeling the Canadian resource tax kind of going forward as a percentage of gross profit, like how should we be thinking about it in terms of 2012? Thanks.

Jim Prokopanko

Well, I’ll take the easy question, which is the first one about India and China and I’ll leave Larry to take the second question about the resource tax. We anticipate that China is about to buy their potash shortly. And if we’re forced to guess I think or forced to estimate, I think it’s going to happen in January. We have got information showing that China has low potash stocks in country.

They are going to have to get product moving from various world suppliers by end of February in order to make their spring season and move it in country to distribution points and to the dealers and get it to the farms. So there just isn’t a lot of time for them to delay. You have got I think a number of other signals. You have - they shut the door on year end phosphate exports. I think that is a constructive signal. You have Chinese farmers getting $8 a bushel or higher for corn, which is another very constructive signal.

So they are in need to ramp up food production, deal with the food inflation issues and you’ll do it with more production. So I just think the pieces are coming together. Something has to happen in January or they’re running out of rope here on getting sufficient nutrients for the spring season. In India, I think India is going to happen some time obviously after the Chinese. I think that’s probably an April timeline that we’ll see the Indians book their product.

Larry Stranghoener

With respect to your question Michael on the resource tax guidance for next year, I wish I could give you some help. I truly do. It’s such a complex tax regime that makes it very difficult for us to model and even more so for you to model. It’s a function of course of pricing and profitability and production. And so my suggestion would be to look back at history and understand what the range has been in various types of environments.

And make your forecast with respect to what you think the potash business will be doing next year and use history as a bit of a guide noting that relative to history we’re going to have ongoing benefits from the expansion plans and expansion spending that we have underway that garners a tax credit under this or a tax advantage under this tax regime. So again, I know that’s not a completely satisfactory answer but that’s a realistic answer.

Operator

Your next question comes from the line of Mark Gulley with Soleil Securities. Please proceed.

Mark Gulley

Hey. Good morning guys. Could you remind us with the $1 billion in proceeds for the Fosfertil sale, can you remind us how to model out where the diminution in earnings comes from the absence of that business in your P&L?

Larry Stranghoener

Yeah Mark. It comes from the equity income line. And again if you look back over history you can see how that equity income line has varied over the years and understand that the great majority of the equity income we have earned since our inception has come from that investment.

Operator

Your next question is a follow up from the line of Jeff Zekauskas with JP Morgan. Please proceed.

Jeff Zekauskas

Hi. Thanks for taking my question. It looks like your North American tonnage in phosphate will be very, very strong this year. Call it - I don’t know - 3-1/2 million tons, something like that. And when you look back often your tonnage is more in the mid 2’s or the high 2’s. So do you think this is a year of over application of phosphate because of the high grain prices and that probably in 2012 or 2013 you’ll have lower DAP applications in North America? Or do you see it differently?

Jim Prokopanko

Hi. Good morning Jeff. I don’t think there is over application. I think we’ve had a couple years now that and reports from soil tests and accumulation of data from the field in the US has indicated that there has been a draw down of phosphate levels in US farm soils. And the high yields that we have had the last couple of years would support that. Our calculations show that more corn has been - more phosphate has been removed from the fields in terms of in corn and soybeans than has been applied.

So we think there is to the contrary, some catch up that is necessary and I think back to closer to normal kinds of levels. And we have good indications supporting that this fall, just outstanding farm applications and we are getting signals that this spring will be just as strong. Rick, why don’t you add some dimension to that?

Rick McLellan

Yeah. Thanks Jim. Hi Jeff. I think what we’re hearing from dealers in North America that application rates were strong but not anything extra. And maybe what you’re seeing is the impact of North American buyers didn’t come as early to buy and waited for phosphates. And it’s caused some phosphates to be shipped out of this - more phosphates to be shipped out of the country during the period that normally would have filled North America.

And so I think there are no major swings other than an increase in use in phosphates. But nothing that we’re going to see fall away next year.

Christine Battist

Keisha, it’s Christine. We have time for two more questions.

Operator

Sure. Your next question is a follow up from the line of Fai Lee with RBC Capital Markets. Please proceed.

Fai Lee

Great. Thanks. Jim, I just have a question regarding phosphate in your global demand growth. You expect demand to continue to grow going forward and I guess production will also increase. Do you think the sulfur market in terms of sulfur production will be able to keep up with the growth in phosphate demand?

Jim Prokopanko

Fai, first I’m going to just correct something that I just looked at some notes. I think I said to another question that we’re going to see 2-1/2 to 3% annual growth. Our formal global demand forecast is 2 to 2-1/2% of phosphates so just to set that record straight. The sulfur demand I think is going to be largely driven and has been by gasoline and oil refining, gasoline production and oil refining and diesel refining.

The plants have been running reasonably well, the refiners have been running reasonably well compared to some of the hiccups we saw 18 months and 24 months ago. But with continued demand on sulfur or continued increasing demand for phosphates we’re going to see continued increasing demand in sulfur. And I think that’s going to remain relatively tight. China is running at pretty high rates. They’re a big draw on world sulfur use.

We see on the other hand we get the tar sands in Canada. If you get a little mid term and longer term tar sands in Canada get going again with these high oil prices and I think they will, we’ll start seeing increased sulfur production. So some dislocations perhaps over the next 12 and 18 months but beyond that, low diesel emission standards that are coming in, we see sulfur supplies rebounding and meeting the needs of the phosphate producers.

Operator

Your next question is a follow up from the line of David Silver with Bank of America-Merrill Lynch. Please proceed.

David Silver

Okay. Thanks. Jim, I apologize if I missed the detail on this but I was hoping you could discuss a little bit further about the reversion of the 25% interest in Esterhazy. And in particular, I know that’s gone into Saskatchewan court I believe. But has there been a formal agreement between yourselves and the Potash Corp that kind of led you to estimate a mid calendar year 2011 date for the reversion?

And then from a marketing side should we assume that once that reversion takes place your Canpotex allocation will change as well? In other words, will some marketing rights come along with the capacity at the same time? Thanks.

Jim Prokopanko

Okay David. Two questions there - first is in regards to the agreement. Well, we’re in Saskatchewan courts because we don’t have an agreement. So our estimate of what is left owing to the toiling party is going to take us into some time in the summer. And we will in that case be complete with what in our view is owed under the terms of the contract. The other party interprets the contract differently and what it comes down to is amongst other things what the extraction rate over history has been, what the available reserves were for mining.

And so there are a number of technical matters that are in dispute and it’s just as simple as that. You get two geologists in a room and you’re hardly going to have an agreement and so that’s where we’re at. It’s just simply a matter of interpretation of the legal agreement and what some of the mining practices and our view is that it ends in mid-2011. They have a different outlook. And we’ll get this resolved in due course. As far as the Canpotex, our interpretation is that when that mining capacity reverts back to its owner Mosaic, that those marketing rights should come with that. And that’s simply our position on it David.

Operator

And that’s all the time that we have today for any questions. I would now like to hand the call back over to Mr. Jim Prokopanko for any closing remarks.

Jim Prokopanko

Well, thank you. And with that, we’ll conclude our Q&A session. The demand for nutrients to produce more food will inevitably expand. The world is not getting less hungry. With our balance portfolio and strong competitive position, Mosaic is well situated to create value for our shareholders and customers for years to come. Thank you very much.

Operator

Thank you for joining us today. Please log off the call now.

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