The Mosaic Company's CEO Discusses Q1 2013 Results - Earnings Call Transcript

 |  About: The Mosaic Company (MOS)
by: SA Transcripts


Good morning ladies and gentlemen and welcome to the Mosaic Company’s First Quarter Earnings Conference Call. At this time, all participants have been placed in a listen-only mode. After the Company completes their prepared remarks, the lines will be open to take your questions.

Your host for today’s call is Laura Gagnon, Vice President Investor Relations of the Mosaic Company. Ms. Gagnon?

Laura C. Gagnon

Thank you. And welcome to our First Quarter Fiscal Year 2013 Earnings Call. Presenting today will be Jim Prokopanko, President and Chief Executive Officer; and Larry Stranghoener, Executive Vice President and Chief Financial Officer. We also have members of the senior leadership team available to answer your questions. We also have – Larry will discuss key drivers of the segment results as well as provide insight into future expectations. The presentation slides we are using during the call are available on our website at

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 on managements’ beliefs and expectations as of today’s date October 2, 2012 and are subject to significant risks and uncertainties.

Actual results may differ materially from projected results. Factors that could cause actual results to differ materially from those in the forward-looking statements are included in our press release issued this morning and in our reports filed with the SEC.

Now, I’d like to turn it over to Jim.

James T. Prokopanko

Good morning. Thank you for joining our first quarter earnings discussion. I am pleased to report that Mosaic delivered another solid quarter despite a wide array of external and logistical challenges.

Today, I have three goals. First, to help you understand the various external factors both economic and sentiment related that are impacting our business. Second, to review our results and progress on strategic objectives and finally to convey our confidence in Mosaic’s very bright long-term future. Simply put, we want to be the world’s leading crop nutrition company and we believe we are well on our way to achieving that vision.

First a quick review of the numbers. We reported operating earnings of $610 million on revenue of $2.5 billion for the quarter. The potash business contributed $416 million and the phosphates unit generated $208 million in operating earnings.

In total, we reported earnings per share of $1.01 which includes $0.02 per share of negative impact from notable items. It’s important to point out that we continue to maintain a very strong cash position with $3.6 billion of cash on hand.

I can’t remember another time in my career when so many of the outside influences that impact our business and global food supply were so volatile. Mother Nature has left much of the planet very thirsty, while also battering us with tropical storms, hurricanes and heavy rainfall in Canada.

The North American drought pushed grain and oil seed prices to record highs and the situation is compounded by the growing logistical challenge of the receding the Mississippi River. Drought has depleted the corn crop in the U.S. Heartland, the wheat harvest in Russia and rice in India.

Global grain and oil seed stocks are dropping quickly and reaching dangerously low levels. Farmers know this well, and they will once again have strong incentive to maximize yields in the coming seasons. It will likely take two years of trend yields to get stocks back to secure the levels.

As a result, prices have climbed dramatically, if the fall harvest continues various potential for grain and oil seed prices to go even higher in order to balance demand with supply. Given the current (inaudible) balance in grain and oil seeds prices are going to remain highly sensitive to weather events. Any indication of a potential negative impact of weather on yields in South America is likely to drive prices still higher. In fact, spring corn planting in Brazil is only 7% complete versus 15% at this point last year due to a prolong dry period.

As a result of the historically high grain and oil seed prices, crop nutrients are as affordable as they’ve ever been, as the slide makes clear. Remember it was only a few months ago when experts were predicting some $4 dollar corn, even if grain and oil seed prices were to drop significantly, we would expect to continue to deliver strong results.

Financial returns on the farm in many parts of the world are at record levels. The USDA predicts U.S. farmers will realize record cash income and gain in 2012, for the third consecutive year or even part by payouts of crop insurance.

In India, cash payouts and farmer returns are increasing along with higher on farm prices for nutrients. And in Brazil, economics remained strong and farmers there are expected to plant record acres of beans and corns.

We expect the markets to remain temperamental for the near future. So I’ll focus there for a few minutes. We are often asked, why crop nutrient prices have lost the historical correlation to grain and oil seed prices. The short answer is sentiment and risk aversion. Our own Dr. Mike Rahm, recently published in depth commentary on this subject in our Market Mosaic, publication, which you can find on our website that I’ll summarize briefly here.

When fertilizer prices spiked in 2008, the commodity markets in general were reaching new heights. Remember that oil hit a $145 a barrel and demand for oil persisted. The macro economic environment today is considerably weaker. Because of that and other external factors including weather and uncertainty of North American application rates, we’re seeing a continued high level of risk aversion from our customers to distributors.

They don’t want to get stuck on the wrong side of a potential price decline. So they are keeping the fertilizer bins nearly empty.

For potash, shipments are being impacted by the delayed China and India contracts along with more production capacity coming on line. This has led the market to assume there will be readily available supply later in the season, which in turn makes it easy for distributors to differ purchase decisions.

It’s important to distinguish between sentiment impacting recent food market trends which continues rapidly and economic fundamentals which will drive long-term performance. A change in sentiment usually starts with a catalyst. Let me describe a few possibilities.

In potash, standard grade is plentiful, with granular have different story. Producer inventories of standard grade potash were high because of delayed shipments to India and China. Once these shipments materialize and believe me they will, inventories are likely to drop, thus changing market sentiment.

In phosphates, supply uncertainties remain, with low and declining North American producer inventories, some Mosaic production constraints, continued delays with the modern startup and 30% lower exports from China.

And finally, uncertainties surrounding farmer demand resulting from the 2012 drought is already beginning to resolve favorably. The impact of accelerating demand maybe exacerbated by logistical issues presented by the low river levels which may lead to issues with timely delivery for raw fertilizer demand in North America.

Any of these factors can create customer concerns about availability and price which could change sentiment very quickly, in which case sentiment will catch up with a very favorable fundamentals I described earlier.

Now, I’ll move on to the potash market. As you’re well aware, our expansion then the tolling agreement reversion will give us significantly increased capacity. And we are confident that long-term demand for the product will grow. The current dip in demand we believe is essentially a timing issue and we’re beginning to see improving dealer sentiment North America and elsewhere.

In fact, I was with our global sales team late last month and I heard a very positive tone from that group, representing all the major agricultural markets. Dealers are going to fill their beans at some point and we will have the product ready for them. And next year, we expect record demand for potash, with global demand reaching 58 million tons to 60 million tons. To meet the long-term demand, we are continuing to execute our potash expansion projects and they remain on budget and on time.

As an example, and as you can see in our slides, our Esterhazy K3 head frame is now in place, claiming the title as the tallest structure in Saskatchewan. While we expect demand to pick up, we are also aware of new supply coming on line. Over the next few years, we expect the operating rates across the industry to remain high as new capacity lags increasing demand. At Mosaic, we will continue to meet that demand.

The phosphates market in contrast with potash is very tight. We and producers have low inventories of finished product because of high demand, the situation that has been exacerbated by plant turnarounds and production and logistics disruptions.

Global supply uncertainty continues to tighten the market. We expect a 6% to 8% increase in global phosphate shipments in calendar 2012, followed by a 3% to 5% increase in 2013 to a record level of 64 million to 66 million tons.

Overall, our two business units generated solid performance given the market conditions and various operating challenges during the quarter. It’s clear that our results are benefiting from our diversification with leadership positions in two essential crop nutrients. More important, we continue to make good progress on our strategy and Mosaic is positioned for long term success.

With that, I’ll ask Larry Stranghoener to take you through our financial performance and outlook. After that, I’ll conclude with some further thoughts on the market center future. Larry?

Lawrence W. Stranghoener

Thank you, Jim, and good morning everyone. We delivered solid results despite weak market sentiment and the logistical issues that Jim mentioned. As you can see on my first slide, revenues were down year-over-year. Phosphate revenues were down 30% due to both lower volume and pricing. Potash revenues were up 10% reflecting flat year-over-year average pricing and higher volumes. That said, the year-over-year comparisons mask the divergence we’ve seen between the potash and phosphate markets over the past six months.

As Jim said, tight phosphate markets are driving higher pricing and slower potash markets are leaving prices flat to slightly down. Net operating earnings were down in the quarter as a result of lower revenues. Note that our consolidated gross margin rate increased year-over-year from 28% to 30%.

Moving to the potash segment, operating earnings were up as a result of higher revenues. Our margin rate was down due to higher brine management expenses, and the impact of planned maintenance shutdowns, partially offset by a $34 million benefit from an unrealized gain on derivatives.

During the quarter, the potash operating rate was low at 65%, primarily as a result of extended plant shutdowns to tie and new expansion projects. Given the weakness in international demand, we took the opportunity to take extra days for turnarounds resulting in 119 turnaround days this quarter compared to 76 a year ago. These dynamics lead to our lowest quarterly production levels in over two years.

Sales volumes met our expectations, while pricing was higher than our guidance. Though North American producer inventory levels remained higher than average, we have seen declines three months in a row.

For Mosaic, there was a notable difference by type and grade of product. Much of our inventory is standard grade and blend grade product is much more limited. Brine management cost was $67 million for the quarter considerably higher than the year ago, but consistent with last quarter. Most of the incremental spent continues to go toward advanced technologies including horizontal drilling.

We expect second fiscal quarter cost to be similar to the first. We also expect fiscal 2013 cost to exceed the fiscal 2012 level although we expect the quarterly run rate to decline in the second half of fiscal 2013. While costs have been elevated, I should remind you that our production at Esterhazy has never been effected by brine inflow and Esterhazy remains cost competitive.

Before I move on to phosphates, I want to explain the dynamics of our tolling agreement and our Canpotex allocation process. The tolling agreement reversion goes into effect in January and all else being equal that would increase our Canpotex allocation from 37% to 43%.

To-date, these tolling tons, approximately 1 million annually have not been included in our tons sold metric. We sell these tons at costs and both the revenue and the cost of good sold income statement lines reflect this. Based on the tons shipped to PCS and market prices we received during fiscal 2012, selling these tons for our own account would have increased fiscal 2012 gross margin by over $200 million.

Going forward, the impact will depend upon prices and volume sold which in turn could be impacted by further changes in Canpotex allocations. Canpotex allocations are subject to change on January 1 or July 1 of each year, but only a number brings expansion projects online after conducting an audited proving run substantiating the increased capacity. If the new peaking capacity is higher than the old capacity, the Canpotex allocation is modified accordingly.

In the phosphate segment, both volumes and prices were down year-over-year. Shipments to major export markets especially India were down and shipments were also effected by the production, logistical and weather issues we’ve mentioned.

We began the quarter with very low inventories, and during the quarter our chemicals plant were down roughly twice as long as in prior years due to more extensive planned annual maintenance, as well as delays due to tropical storm Debby.

Additionally our facilities in Louisiana lost to weaker production due to hurricane Isaac. As a result our chemical plant operating rate during the quarter was 81%. Prices rebounded from our fourth quarter with an average selling price increase of $35 per ton which was inline with our expectations and guidance.

Our gross margin rate was flat sequentially as expected. Lower rock costs were offset by higher ammonia costs, lower concentrated operating rates, and a seasonally higher proportion of lower margin blend products. Blends constituted 28% of sales tons in this segment versus 18% last quarter. As in the past, we’ve included raw material cost in the appendix to our earnings presentation.

Next quarter, we expect to continuing positive impact from lower rock costs and a lower proportion of blend volumes offset by higher ammonia costs. We expect the second quarter gross margin rate for this segment to be relatively flat with the first fiscal quarter rates.

Phosphate mine productivity remains a highlight. South Fort Meade is now back to full operation and we have replenished our rock inventories. Phosphate rock production in Florida was 3.8 million metric tons in the quarter compared to 2.8 million tons last year. We expect to resume shipping Florida rock across the Gulf of Mexico to our Louisiana operations later this month, which will lower the use of third party purchased rock.

During the quarter, our Florida team achieved significant sustainability improvements in water use allowing us to cancel a $50 million investment in treatment facilities. That win resulted in a $7 million asset write-down related to frontend engineering for the project.

Before concluding, I’ll provide updates to our guidance. We expect second quarter potash volumes to range from 1.6 million tons to 1.9 million tons. To reach the upper-end of the range we would need a return of demand from India and China. Given current demand we are experiencing price pressure, but we expect prices to remain in the range of $420 to $450 per ton.

We expect operating rates to be above 70% assuming no benefit from foreign exchange in the potash segment cost of good sold, continued low operating rates will pressure the gross margin rate in the second quarter.

In phosphates, second quarter sales volumes are expected to range from 3.0 million to 3.4 million tons. Our ability to reach the high-end of that range depends on a strong fall application season as well as highly effective operating execution in our phosphates facilities. Tight markets are likely to continue, increasing our expected average price to a range of $520 to $550 per ton. Operating rates should improve sequentially.

We continue to expect our capital expenditures to be in our guidance range of $1.5 billion to $1.8 billion even with additional capital we have committed to conduct front-end engineering technology and permitting work to expand our ammonia facilities. We expect to reach a decision on this project by the end of this calendar year.

Now back to Jim for his concluding comments.

James T. Prokopanko

Thanks Larry. This year’s global harvest is coming in much smaller than expected. You’ll recall that spring in North America started with great expectations for a record corn crop with 96 million acres planted. The rain necessary to nourish all that corn never arrived and wide swaths of the crop withered, hot and dry conditions were a norm across the globe, with crops damaged from the Black Sea nations to India and China.

The harsh climates and commodity prices are a powerful rally, and ultimately these conditions will drive strong demand for crop nutrients in the coming 18 months.

This summer reminds us once again that food security is very fragile. You heard me speak on the subject before, but it is worthy of repetition.

The world will go to 9 million people by 2050, and human prosperity is also rising, bringing with it demand for higher quality food. Many estimate state that a billion people are now under nourished, so global agriculture challenge is great. We have to vastly increase food production with very little additional land devoted to farming, which means crop yields must increase.

Farmers simply cannot meet the demand without balanced crop nutrition, and Mosaic is here to help them raise to that challenge. Mosaic has unique strengths, our global reach, our innovation, our capital and our assets not only to make an important contribution to feeding the world, but also to outperform of competitors and deliver value to our shareholders. Our story is long in the future, because the future is enormously promising for Mosaic.

We continue to make important strides so that we can realize that promise. Our programs to achieve operating excellence are bearing fruit. Our phosphate mines are delivering record productivity, our safety performance continues to build on our excellent 2012 results and our sustainability work continues to deliver meaningful value for our communities and shareholders.

Our innovation lead is increasing, micro essentials has gaining and ever growing share with the phosphate market and we continue to make progress in our process technologies.

Our potash expansions are on time and on budget. During our planned turnaround at Esterhazy, we integrated our new K2 plant. Over the next few months, this capacity will be available to meet our customers’ needs when demand rebounds and our capital strength continues to differentiate Mosaic.

We have the capital and cash flow to withstand market swings, to seize compelling growth opportunities as they arise, to fund our ongoing potash expansion projects, and to return capital to shareholders.

Overall, we feel great about the foundation we’ve built in eight years as a public company and we feel even better about our ability to fulfill our mission to help the world grow the food it needs.

Now, we’ll take your questions.

Question-and-Answer Session


(Operator Instructions) And your first question comes from the line of Vincent Andrews from Morgan Stanley, your line is open.

Vincent Andrews – Morgan Stanley & Co. LLC

Thank you and good morning everyone. I just have a couple of questions about China. First, if we look at where retail prices have gone in China, in recent weeks it have been going down and the present prices looks like it was very difficult for the importers to roll the contract over at a flat price and actually make any profit filling the product in country. So it is what we are looking at that we need the inventory levels in China to come down so that local prices can go up there in order for you to settle or how should we be thinking about that dynamic?

James T. Prokopanko

Hello, good morning, Vincent. You got it about right. There is a good inventories of potash and you are referring to potash of course…

Vincent Andrews – Morgan Stanley & Co. LLC


James T. Prokopanko

Good inventories of potash in China and that is – and so that’s given the cushion to differ moving on a nearby contract. What will happen over the next few months is that, NPK production is going to start building, inventory is going to start drawing down, and they are going to be faced with having to replenish their potash pipeline. So this market will clear, we’ve got to find that price, it hasn’t happened yet, but it’s just the matter of weeks or couple of months before that will happen. I’m going to ask Richard McLellan to add some color on the China market if he would like to. Rick?

Richard N. McLellan

Yeah. Thanks Jim. Good morning Vincent. In China, we’re seeing the domestic prices decrease, so the retail prices to the farmer and this is reflected from lower import prices coming in by (inaudible) into the north. There’s no contract, but spot prices have decreased above $20 a ton. And part of that I think is the – is an indication that we will be able to roll over the existing price in today’s market situation, but we still will find the clearing price to go to China as soon as inventories are cleaned up.

Vincent Andrews – Morgan Stanley & Co. LLC

So just to follow-up, I guess it sounds like you’re saying you’re expecting to settle China not flat but actually down. It’s just the question of when you do that. Is that correct?

Richard N. McLellan

The market situation right now would tell us that prices we look forward will be difficult at this time. I won’t make the comment about what we expect to close it at, we just know that they will have to clean those inventory.

Vincent Andrews – Morgan Stanley & Co. LLC

Okay, and just as lastly, as a follow-up, and your guidance for the first quarter when you talk about the high end being a function of when you settle India and China, we’re obviously already a month into the quarter and you’re talking about weeks or maybe months before you settle India, so can you just give us a sense of what that volume guidance range would be ex India and China.

James T. Prokopanko

Frankly we’ve got in our guidance, tons going to India, and India and China at the end of the quarter. And our guidance range would, if nothing happens in both markets, would move to the lower end of the guidance, closer to the mid point.


Your next question comes from the line of Joel Jackson from BMO Capital Market. Your line is open.

Joel D. Jackson – BMO Capital Markets

Hi, good morning thank you. I just want to talk about your cost, maybe you can give a bit of guidance or your trend (inaudible), ammonia pricing on – you mentioned some commentary on your rock purchases, so maybe give some commentary on how you see rock purchases going forward and meet the possibility to send the rock market. And finally also if the current – is the current brine management cost at Esterhazy, is that a good run rate going forward?

James T. Prokopanko

Yeah, good day Joel. So you have two questions, one on the input cost and brine management cost. So I am going to have Joc O'Rourke speak to that or operations related.

James C. O'Rourke

Okay, Joel good morning.

Joel D. Jackson – BMO Capital Markets

Good morning.

James C. O'Rourke

I’ll take these one at a time, first of all ammonia price, we’ve seen ammonia price increasing over the last couple of quarters. We expect that be flat or slightly up over the next few quarters. Rock purchases, importantly as we’ve increased our rock production in Florida, we’re now on a situation where later this month we’ll start exporting from Florida to Louisiana which will bring down our net cost of rock fairly significantly as we stop using – or stop, use a lot less import rocks than we have in the past. So that expects prices there to come down. Sulphur flat probably over the next couple of quarters. In terms of brine management, as Larry mentioned in his text, we expect cost to be similar for the next quarter and then declining for the second half of this fiscal year.

Lawrence W. Stranghoener

And Joel, it’s Larry Stranghoener, if I could just clarify a comment Joc made, when Joc referred to flat ammonia prices, he was referring to current purchase prices for ammonia. The cost of ammonia we actually realized in the first quarter will likely go up substantially in the second quarter and then remain sort of at those levels for the rest of the year.


Your next question comes from the line of Ben Isaacson from Scotiabank, your line is now open.

Ben Isaacson – Scotiabank GBM

Thank you very much. I was hoping we could spend a little bit more time on MicroEssentials just understanding how it’s progressing in the various markets and what the strategy is going forward.

James T. Prokopanko

Thanks, Ben. Thanks for asking that question. MicroEssentials has been a real success – innovation success story at Mosaic. It’s a product that’s between ourselves and our legacy company. It’s been worked on for 10 years and we are really quite thrilled with the take-up that we are seeing in the market. We’ve expanded our production to now with capacity of almost 2.3 million tons of MicroEssential product production capacity, that’s nearly a quarter of our phosphate capacity and I think the numbers of phosphate tons that we are selling, 1 ton in 10 tons of phosphate sold in the U.S. is a MicroEssentials ton. So in a really short period of time, we’ve really brought a value added product to the market really benefitting the farmers. I’m going to ask Rick to give some details on what’s happening in terms of margins and cost production of that material.

Richard N. McLellan

Yeah. Good morning, Ben. As Jim said, we are seeing very good market penetration in North America, but we’re also focusing on South America as well. We’ve seen a consistent increase in Brazil of the amount of product being used and I think the most important piece to take away is farmers are using these products and dealers are selling them because they are increasing yield, and this is about creating more value for the dealer as well as ourselves and the farmer, and that’s where our focus is on. Our pricing, we’re generating more margins on a per ton basis as well as we’re growing our business with those customers that we do MicroEssentials with. So it’s been a significant component of our phosphate go to market strategy and we continue to see that increasing and we’ll be looking for other opportunities to expand production.


Your next question comes from the line of P.J. Juvekar from Citi. Your line is open.

P.J. Juvekar – Citigroup Global Markets

Yes, hi good morning. Jim what is the impact of any residual P&K that is left in the soil in the U.S. after low yields? And do you believe that growers are likely to test their soils first and then possibly delay the fertilizer application to the spring?

James T. Prokopanko

Well good day. Good day P.J., good to hear from you. Yeah it’s a topical question getting much discussion in the industry in the farm markets. First, the question about residual P&K in the soil, P&K, I think you’re aware unlike nitrogen is residual in the soil for some period after it’s been applied. So when you apply a ton or 100 pounds of these to a field it’s going to be there for a couple of years. But at the same time, when you apply it, it is not all readily available to the plant. So if you apply 100 pounds of phosphate to a field, it’s going to take three to five years for that to be completely available to the farm field. So yes, the droughts in some badly effected drought areas, the P&K take up by the plants might not have been as much they were in a normal year. However, most soils in the U.S. don’t have the necessary levels of P&K in the soil. So farmers have been drawing down on the P&K banks in many parts of the country and they didn’t start with a healthy balance.

So we believe that they’ll be in the worst effected areas, Indiana, Illinois, where we saw some pretty dramatic yield reductions. We’re seeing – we would see a bit of a tail or drop-off on the phosphate and potash application. But they didn’t have a surplus to start. So we think that this coming year in some areas we can see a reduced – reduction of P&K. However, offsetting that is we went into the summer season following this past spring with warehouse stocks very much depleted, there is nothing to pull on.

So the pipelines after we feel some farmers may use a little less P&K this year, the net result for us is that our sales that should be similar this coming fall season as they were last year. Now farmers, now do testing, they test, it’s a good agronomic practice once every three years. I think it would be good to, smart for farmers to test the soil, see with the P&K is, but with the high-high grain prices, oil seeds, corn, wheat the incentive is strong for farmers to plan to maximum yielding crops and that is going to take strong fertilizer application rates to get there. [Audio Gap] I’ll turn it over to Rick to talk about what’s happening from his perspective with dealers as a result of this drought.

Richard N. McLellan

Yeah, good morning. I think one of the things I just add on to Jim’s comment on soil testing. It happened to be at a lunch and sat with a guy that operates a major Midwestern soil testing lab and he has never been busy. So farmers are going to test to see what’s in the soil, but I think we are getting feedback from the dealers now as harvesters getting to the midway point that because of strong commodity prices improved in some areas rains after Hurricane Isaac as well as demand for winter wheat planting. We are seeing growers, our dealers move from what had been planned to be a very conservative fall application season moving back to one that at least at average if not slightly above.


Your next question comes from the line of Jeff Zekauskas from JPMorgan. Your line is open.

Jeffrey Zekauskas – JPMorgan

Thanks, two-part question. I think your original estimate of brine info cost that you made in February was 170 to 180 for fiscal ‘12 and you came in at 206 and now you’re annualizing at roughly call it 270. So what happened? Why are the costs greater?

And second, I think China has imported something like 5.5 million tons so far this year versus 4 million last year, so they are up 32% and I guess pretty much all the other potash producers other than Canpotex have really lifted their volumes into China and Canpotex is down about 20%. So can you talk about the dynamic such that Canpotex [seems to be doing] a lot less business in the China market and then what that might mean for trying to purchases to the end of the year.

James T. Prokopanko

Okay, Jeff, thank you. I’m going to have [Jeff] talk about what’s happened with the brine cost and what some of the new actions we are taking in (inaudible) and then I’ll return to your China potash performing.

Unidentified Company Representative

Thanks, Jeff. In terms of our brine, we have increased our spending and particularly that’s our new technology such as horizontal drilling. More recently we’ve been using some latex growth et cetera to really aggressively manage our brine, but we do expect this cost to decrease in the second half of fiscal year as Larry mentioned. Remember also, we had never affected production in the 25 years that we’ve been managing this brine, so we think we’re doing everything we can to aggressively fix the problem. And I’ll hand it over back to Jim.

James T. Prokopanko

Jeff, the potash question, which I know is a good question, yes we were down, we’re seeing China imports up 32%, 33% over the year, and that as Rick mentioned is coming from northern borders rail shipments into China. So although Canpotex has lost some tons in China, we’ve had that made up in other parts of Asia, Indonesia, Malaysia we’re seeing very strong sales into those markets. And so in the end, we’re not seeing a net-net, we’re looking at a year for Canpotex its going to be largely unchanged, products moved around a bit, little bit more into Brazil, good bit more into Southeast Asia, and the economics are working at this point in time for some of the Russian product to be a better fit into the Chinese market.


Your next question comes from the line of Don Carson from Susquehanna Financial. Your line is open.

Don Carson – Susquehanna Financial Group

Thank you. Jim, a question on your potash slide on 9, where I guess you get a rather bullish case for fiscal ‘13 that the shipments will rebound. Question would be where have you seen the most destocking and is your forecast for shipment increase in ‘13 driven by higher consumption or a rebuilding of inventories or some combination of both?

James T. Prokopanko

Good day, Don. Good to hear from you. What we’re seeing on destocking question is North America this past spring has really destocked that pipeline. Recall that going into the spring, we had a huge crop expected lot of acreage planted and people were getting ready for sub $4 corn and as a result people were careful about not being stuck with inventory going into the summer, so the inventories were low there.

We’re seeing [in India destocking] of the pipeline as a result of the government subsidy program, the farmers haven’t been changed were the subsidy payment for potash and phosphate was reduced, netting in a result of higher fertilizer prices to farmers, farmers reduced PNK use and they just put more nitrogen. And now it’s interesting you see the fertilizer industry in India starting to lobby for lower subsidy payments to farmers on nitrogen to get it back into balance. They’ve just gotten so far out of whack in balance. And those are the principle markets where we seem to destocking, North America and India. And I’m going to just ask Rick, if he’d like to add to that answer.

Richard N. McLellan

Good morning, Don. I can’t add much more Jim other than we see the market in Brazil pretty brisk demand. They started with inventory to begin the year and they’re on a record phase for shipments to continue from the first half and we expect their inventories to be drawn down as well. And then if you look in the phase of strong agricultural fundamentals for 2013 that will in turn dry up the demand side. So we’re going to see supply clean out and we’re going to see demand increase.


Your next question comes from the line of Jacob Bout from CIBC. Your line is open.

Jacob Bout – CIBC World Markets

Good morning. Maybe just a follow-on on slide 9 there. So looking at the growth and your forecasted demand from 2012 to 2013, looks like you are seeing basically going from 53 million to 59 million tons. What is your assumption on the potash pricing there? And effectively, what I’m trying to get out here is, how sensitive do you think the potash demand in 2013 is going to be to potash pricing? And maybe you can talk specifically on your thoughts on that sensitivity in Brazil, India and U.S.?

James T. Prokopanko

Good day, Jacob. That is an excellent question for our Dr. Michael Rahm to answer.

Mike Rahm

Good morning, Jacob. You are right that we have about a 6 million ton increase projected for 2013. About two-thirds of that comes from India, North America, and Indonesia, Malaysia. And so in terms of pricing, when you look at farm economics, particularly in India as well as North America, rice economics in India are at record highs. Wheat economics are probably the second best ever and in North America very strong economics. So I think as Jim alluded to earlier with potential modifications in the subsidy in India, we expect a very good rebound there.

And in the case of North America, we’re seeing 18% rebound in shipments in North America due to swings in the pipeline and for the first two months of the year, we’ve seen shipments increase 17%. So I think in terms of the price assumptions, we see fairly stable outlook for prices and given strong farm economics, we think that translates into a big increase in potash shipments in 2013.


And your next question comes from the line of David Begleiter from Deutsche Bank. Your line is open.

David Begleiter – Deutsche Bank Securities

Good morning. Mike, on a similar question on pricing and the hopeful convergence of North American, Chinese and the Indian prices, you are trying to sell down 20,000 ton this year. Does that have to – in the near term bring down U.S. prices or is that just delay the eventual convergence of those two metrics. And just lastly on Brazil despite the strong demand, we’ve seen price (inaudible) function of increased competition, globally weak supply demand or is there something else underlying that why [are billion] prices high given the strong demand.

James T. Prokopanko

Hello David, we have Dr. Rahm answer your first question and Rick McLellan will answer the second question about Brazil pricing.

Mike Rahm

Yeah, I think it’s important to, as we alluded to in the commentary that you have to distinguish between standard and granular product. Standard product in terms of the large Asian markets, there is simply more inventory of that product than granular. So I think there is a distinction between those two prices. In the case of Brazil, we have a situation where given the slower movement in some of the other markets, there has been a strong competition for demand in that particular market. Rick, I’ll pass it over to you in terms of other comments.

Richard N. McLellan

Yeah, I think David, if you want to think about where you need to see convergence, we need to see convergence of import blend grade in the Brazil market. And as we came into this quarter, they were fairly close to be in even and so looking at prices because standard product goes into different markets, it can show this international price to be larger than what it really is. So we’ve seen pressure in Brazil. Mike did a good job of describing just what’s happening there, it’s a time period. We’ve seen prices slide there about $30 a ton. We had planned a price increase in North America of about $25 a ton and that is not going to take place. So we are going to continue to see the Brazil market and the North America market find a price where it’s going to operate at and they are relatively close as they are today.


Your next question comes from the line of Kevin Mccarthy from Bank of America Merrill Lynch. Your line is open.

Kevin Mccarthy – BofA Merrill Lynch

Yes, good morning. I guess my question relates to prospects for international potash shipments, maybe two parts. First part on Canpotex allocation, you’ve indicated the step-up from 37% to 43% in January. Could you comment on how that 43% is likely to change over the next year or two as various industry participants prove out capacity.

And then second piece, I take the 43% versus 37%, it implies something like 16% step-up on a tonnage basis or else how constant? Your forecast obviously is that we’ll see growth in places like India, Indonesia, Malaysia et cetera. So if I boil all that down, would it be reasonable to expect growth in the 20% plus range from January for Mosaic in international markets?

James T. Prokopanko

Good day, Kevin. Sorry, I got your first question but I didn’t quite catch the full second question, second part of your question. So we will allow you to ask that one more time, but I’ll first address the 37% to 43%, that you got the math right and that is correct assuming there will be no other member of Canpotex is undertaking approving run which we wouldn’t know about, that usually is fairly confidential and kept in-house. So we don't know if somebody else is running a mine, but we are not aware of that being the case. So with the reversion of the tons, we go from 37% to 43% and I know what we have coming is our Esterhazy expansion.

We are on the edge of doing a proving run that. We don't expect that to be completed this calendar year, so we won’t make the January date. So once we get that [done which will be] some time next year, we will have the opportunity to increase again our Canpotex share whatever we approved above our current peaking capacity in Canpotex. If other members have a proving one that they are running more accurate in the gate one of those. So, also I know is fairly confident that beginning January 1, we will have a 43% share of Canpotex. And I am going to ask you just to ask that question one more time.

Kevin Mccarthy – BofA Merrill Lynch

Yeah, apologizes for my inelegantly stated second piece of it. I’m just trying to get at the compounding effect of a rising Canpotex allocation coupled with what looks to be forecast for rising demand as well in the international markets that Canpotex serves. So for example, if I look at Mike’s forecast for something [like 59 million] tons on a base of 53 million tons, that looks to be a 11% growth globally. I think there is a strong contribution within that from the international markets that Canpotex would serve as well. So, if I couple the two of the higher allocation rate and the growth overseas might that imply something on the order of 20% growth for Mosaic’s specifically in international potash nutrient.

James T. Prokopanko

Sorry, all are being equal Kevin, your math is, your math is generally correct.

Kevin Mccarthy – BofA Merrill Lynch

Okay, thank you very much.


Your next question comes from the line of Mark Connelly from CSLA. Your line is open.

Mark Connelly – Credit Agricole Securities

Thank you Jim, just one question, as we watch ammonia prices by [cal] concern should we be that, it isn’t moving into DAP faster, and given your comments on DAP it seems like that market should be skin tight and we ought to be able to take advantages of these rising ammonia prices are at least past from through more quickly, I’m just wondering how much concern we should have about next quarter maybe getting a little bit squeezed?

James T. Prokopanko

Good day Mark. Good question, right now we are just on the crust of the fall season for North America. So yes we’ve seen ammonia prices have strengthened, getting that pass through we have inventory of course, so we have to work that down first. But until we really see the North American market product go from dealers to the farms, dealers replenishing their inventories, and we believe that is coming, we’ll start seeing some strengthening to phosphate prices, and we’re showing increasing phosphate prices in our guidance going forward. Larry, would you do…

Lawrence W. Stranghoener

Yeah, I would just add that. Mark, when we see some headwinds from ammonia cost (inaudible). But on the other hand see some benefits from continuing reductions at rock costs, which is a very good new story. And we’ll see more percentage of plans on our phosphate sales going forward. So all in all, we would expect to see a gross margin in the second quarter, similar to the first. And then with some of these trends and continuing positive pricing momentum, continuing into the second half of late period and improved gross margin in the second half of (inaudible).


Your next question comes from the line of Michael Cowen from Barclays. Your line is open.

Matthew Cowen – Barclays

Hey good morning, it’s Matthew Cowen. Could you just talk a little bit about the potential impact of the lower levels through the end of the rest of the calendar year on phosphate shipments and whether that’s just a matter of being able to procure the trucks and the rail needed to bypass the river? Whether that’s something that you are able to do? And then what kind of additional cost that would add to the delivered price and if there is any worry about demand may be not being robust enough to face the additional cost? Thanks.

James T. Prokopanko

Hello Matthew, those three question for Rick McLellan, our commercial leader to answer.

Richard N. McLellan

Hey good morning Matthew. What we’re seeing on the frankly barge movements up the river, is their move being slower, their toes are smaller, and barges are getting field later, so all that makes the trip up the river fairly lengthy trip. We are seeing is that product is getting, we’re moving product in by rail into our warehouse system. And that’s catching up, but the rail cost is probably $10 slightly higher a ton on a delivered basis, if you wanted to take look at to most markets. But the offset is that is a product in warehouses isn’t unsold then it will see stronger pricing on a warehouse is up country then may be as reflect it at the Gulf or in Central Florida.


Your next question comes from the line of Bill Carroll from UBS. Your line is open.

Bill Carroll – UBS

Good morning, thank you. As you continue your feasibility study for an ammonia plant? Can you share some of what you learn so far in terms of costs and [setting] issues, timing et cetera? And how they might compare with what you had expected going in?

James T. Prokopanko

Good morning Bill, good question. With these ammonia prices you can well see in the cost of gas, you can see the attraction that ammonia has had to investors and despite some resistance by current producers saying it was not going to happen when you’re making $400 to $500 ton gross margin on ammonia production, you’re going to track new facilities. And so there is been of a bit of gold rush to building nitrogen plants, everybody has to have won and no wonder when you have 350 gas and $700, $800 ammonia that’s which you’re going to get.

So we expect that with the rash of announcements that we’ve seen. We will see more ammonia plants being built. We believe the further step ahead in our deliberations and analysis of this were best equipped I think to make use that ammonia being our self short about million tons of ammonia. So it looks like a very good project to us, lot of lot of attention and it looks like the very attractive kind of investment. So I’m going to ask Joc, our work operations leader who’s reviewing this project to tell you what is learned in last year of assessment.

James C. O'Rourke

Thanks Bill. Carrying on from more Jim is, I think we are three parts, you’re asking capital cost, operating cost, and locations, clearly from a capital cost perspective. There is demand, because there is as Jim mentioned, bit of a gold rush for these plants. So there’s probably a little bit of an extra demand for contractors and stuffs, so we may see a small escalation in cost of what we originally looked at, but in terms of operating costs 80% of the cost of making ammonia is straight from natural gas. So that we’re pretty comfortable that’s no change. In terms of location where we’re going to be, and we’ve got a number of options still open to us and that will depend on the cost of building in those places are permitting and just the overall, what would you say, overall feasibility of each of those locations compared to each other.


Your next question comes from the line of the Michael Piken from Cleveland Research. Your line is open.

Michael Piken – Cleveland Research

Hi good morning. Just a quick question on Brazil and understanding the logistics there, we talked a little bit about the river levels here in the U.S. but that we felt that there’s been a back up 30 to 60 days at some of the ports, and do you think that’s going to impact the policies in that all and in terms of being able to get the farmers everything they need, and we’re going to able to get everything in through the (inaudible) season as well and kind of what you can due to address that in the future? Thanks

James T. Prokopanko

Good morning Mike, we are raid on with the – concerning the question about Brazil logistics Rick McLellan, will give you some color on that.

Richard N. McLellan

Yeah, good morning Michael, it’s a timely question, I just came back a week from visiting our port facility at Paranagua, Brazil, the public ports there had above 45 days of weight for product coming in our own port was more or like 15. So couple of questions; the first one will this impact deliveries into Brazilian country for planting. Right now it’s – it’s close to just in time as I’ve ever seen it, and planting would have started at the first of September, I think you could have honestly said, we are going to experience some delayed deliveries. As it is, we’ve got to the 1 of October until we’ve seen significant kind of moves on bean planting. Everything is going to have to work right into Brazil to get the product into place, a lot of it is bought and paid for and farmers are going to be waiting for it to arrive.

As far as future, we are looking and expanding our port facilities in Paranagua type of project to do just that. I think the key thing to remember is, these farmers need it, they can’t plant the crop without having the fertilizer. Its soil test levels are very low and they need PNK to grow soybeans.

James T. Prokopanko

With that I’m going to wrap up our call with these comments. Our first quarter results were impacted by very wide range of factors. Hurricane, drought, skittish markets, weak demand in India and China, low water in the Mississippi and I can go on from there. But I’d like to leave you with this thought. Well we can precisely predict the timing, global demand for potash and phosphates is going to increase and Mosaic is in an excellent position to meet the demand. Thank you all for joining us and have a safe morning. Good day.


And this concludes today’s conference call. You may now disconnect.

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