Mosaic: Why Exit Nitrogen?

Yesterday in the news we saw that Mosaic (MOS) was looking to unload the Nitrogen segment of their business. As per CNN, they are seeking the sale of Saskferco, "a private company primarily owned by Mosaic and Investment Saskatchewan, a provincial corporation that seeks to boost Saskatchewan's economy."

At first glance this might not be anything to scoff at. But, at the same time, part of me wonders if the Nitrogen segment of their business is not seeing the continued strong demandof their potash and phosphate segments. Mosaic said it is looking to sell this segment so that it can focus on expansion of their primary business in phosphate and potash.

Maybe Mosaic just wanted to separate themselves from the Saskatchewan investment company who represented the other half in the joint venture of Saskferco. Yet, part of me wonders if they have noticed a developing trend within the industry. Because, after all, they are right smack dab in the middle of fertilizer's secular growth.

I'm going to go sort back through their earnings reports (along with other fertilizer companies) to see if the Nitrogen segments in any of these companies were showing signs of slowing or flat out hurting earnings. We know these companies are facing rising input costs. But that has not been a detriment to them because their revenues are rising faster than their input costs. I'm wondering if possibly the input costs associated to Nitrogen specifically are finally starting to impact the bottom line in that segment.

Again, I might be reading too much into this. But it almost seems as if Mosaic may be 'cashing out' at the top of the Nitrogen trade, while it thinks the underlying trend in potash and phosphates will continue. This would not surprise me one bit, since the company has a front-row seat to the whole agricultural boom we are witnessing.

My bets all along have centered around potash; phosphate and nitrogen were just added bonuses. I'll report back with what I find, if anything. At any rate, good to see them focusing on what I believe to be the main secular growth trend here: the potash itself. That is the nutrient with the brightest future simply because it has the most pricing power. There is ridiculously strong demand for it and very low supply of it. And, additional supply is many years away from coming online (due to construction of mines etc). Most likely this is just a case of me over-analyzing things. But, hey, due diligence is my middle name!

Comments

[Dhinesh]

There are no problems with the nitrogen business. In a research report two weeks ago Citigroup raised their price forecast for nitrogen by 12-38% and potash by 17%. Nitrogen has lower barriers to entry (2-3 years greenfield time vs. 5-6 years for potash), but prices are much more volatile. Producers have been able to pass along rising input costs (natural gas and ammonia) to their customers easily as crop prices have skyrocketed. In fact, their margins are actually increasing as they have more pricing power with the end-user.

There are two reasons why Mosaic is selling this part of their business:

1) Their business focus has long been potash and phosphate fertilizers. In 2007, nitrogen contributed $129 million of revenue whereas potash added $1.5 billion and phosphates $3.2 billion

2) Mosaic just recently achieved investment-grade credit ratings. They want to keep those, but they also want to expand their Potash capacity through their announced expansions. To meet those capital expenditures without taking on new debt and jeopardizing their credit ratings, they decided to try to sell-off a non-core business.

I recently wrote about the prospects of the fertilizer industry and the top producers that I invite you to read my analysis: dhinesh.net/articles/2...

[Brahm]

They are just being both right, and also prudent. Nitrogen fertilizer is based on ammonia which is largely synthesized from natural gas, or when unavailable, from other fossil fuels. There is also significant input of electricity for the process for synthesizing the ammonia. If you have been noticing the trends in natural gas markets in North America the price is mostly steeply up. Ditto electricity since it is derived mostly from fossil fuels also in North America. Many fertilizer companies in the eighties or nineties (?) shut down facilities and relocated production to cheap raw material locations in the Carribean or the Middle East. Yara International, the Swedish company previously parft of Hyro, has got manufacturing facilities in Sweden (cheap hydropower), but also expanded production to the MIddle East through joint-venture.

North American producers of nitrogen fertilizer are probably just anticipating the market for inputs in future, but also expecting rough competition from companies located in favourable raw material rich countries. There is also a push in the Gulf countries to expand industries based on oil/gas to provide employment for their workforce, and onee can expect them to go even more heavily into industries such as fertilizer.

I am not surprised by Mosaic's move! What better time to unload anticipated low performing business.

[Brahm]

Correction on 5.06 PM post. I meant company from Norway, not Sweden (Yara International, NorskHydro, Norway).

[Hod]

If I remember correctly, Potash stated they expect nitrogen supplies to be increasing significantly to match demand over the next couple years during their last conference call.