By G C Mays
When I wrote, "Mosaic 3Q Earnings Preview: How Did Fertilizer Slowdown Impact Earnings?", I concluded by noting that earnings could be disappointing and slow the stocks recent rise over the short-term. When Mosaic's (MOS) third quarter results were actually released they did indeed disappoint. Company earnings of $0.64 per share was well short of consensus estimates of $0.75. Revenues of $2.19 billion were basically flat compared to net sales of $2.21 billion during the same period a year ago. However, what has caught my attention is that fertilizer dealers in North America remain risk averse. Will dealers continue to shun risk throughout the fourth quarter as they did during the third? Or can we expect them to add to their inventories once the planting season begins?
Phosphates
Phosphate sales were stronger than expected in the third quarter with 2.6 million tons sold, which was at the high-end of the companies range.
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Source: The Mays Report
The company produced 1.95 million tons of finished phosphate with the plant operating at 81 percent of capacity. The number of tons produced were basically flat compared to last year. The South Fort Meade mine issue is now settled and the company expects the mine to return to full working capacity in the 1st quarter of the company's 2013 fiscal year. The increased production will have a moderate impact on profit margins.
Those tons sold at an average price of $536 a ton, which was $4 a ton below my estimate of $540 but within the companies range of $530 - $560 per ton and flat compared to a year ago. The $1.7 billion in revenue generated was 13 percent higher than last years $1.5 billion.
The company estimates the average price received for phosphate tons sold will be in a range $460 - $490 a ton in the 4th quarter, which is $100 less than during the 4th quarter of fiscal 2011 and considerably less than the company's realized pricing during the third quarter. The large reduction phosphate pricing is due to most of the company's recent phosphate sales being sold out of New Orleans where pricing has been about $40 less per ton than in central Florida.
Operating earnings of $190.2 million was considerably less than a year ago when the phosphate segment has operating earnings of $371.8 million. Phosphate operating margins were a paltry 11.5 percent, less than half the 25.5 percent of a year ago and considerably lower than the previous quarter.
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Source: The Mays Report
Operating margins have declined steadily over the last year due to high prices for ammonia and sulfur and well as increased purchases of phosphate rock from third parties due to previous problems related to the Fort Meade phosphate rock mine. Ammonia and sulfur prices are beginning to fall, however, phosphate, ammonia, & sulfur prices tend to move together so seeing ammonia prices begin to fall confirms weakness in phosphate pricing in my opinion.
Potash
In contrast with phosphate tons, which sold at the high-end of company estimates, potash tons sold fell below the company's 3rd quarter estimate. At 1.1 million tons sold, it was a huge miss compared to the company's 3rd quarter estimate of 1.2 to 1.5 million tons. There is an error in Mosaic's earnings press release that states 3Q guidance of 1.0 to 1.2 million tons. If you review both the 2nd quarter earnings release & conference call you will see the company's 3rd quarter estimate was for 1.2 to 1.5 million tons sold. The potash mines ran at 79 percent of operating capacity, which is less than their forecast of greater than 80 percent.
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Source: The Mays Report
At $453 a ton potash prices held up better than I expected. After the company announced a production cut in February I incorrectly calculated that both price and volume would suffer when in fact a production cut so late in the quarter was signaling high inventories. The company expects the reduced production schedule to last through the end of the 4th quarter. Of course this will increase cost per unit and cut profit margins.
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Source: The Mays Report
Despite lower sales volumes, operating margins have been fairly stable in the potash segment. While margins are lower than a year ago, they seem to have stabilized over the last couple of quarters as natural gas prices have remained low.
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Source: The Mays Report
Based on a recent closing price of $55.27, the stock is trading at 2.1 times sales, which is the average for its peer group. Stocks in the agricultural chemicals group trade most closely on this metric. Assuming sales pick up during the April planting season, dealers have expressed that they want to end the season "empty", or with no or as little inventory as possible. I'll be following phosphate pricing closely and watching for news of production adjustments, looking for any signs of strength or continued weakness. Eventually dealers must replenish their stocks, but they could hold off until Mosaic's fiscal year 2013, which begins in June.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
