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Mosaic: Why Exit Nitrogen?
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:
Jun 27, 2008. 04:50 PM
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The Agriculture Bull Keeps Getting Stronger
BPC (Belarusian Potash Company) has indeed set $1000 prices for July. Canpotex is at $750 because they don't want to shock the market too much with rapid increases. PotashCorp's full year guidance of $9.50-10.50 a share doesn't even take $1000 potash prices into account, but I think we will get there.
A good quote by PotashCorp CEO during the latest conference call on his reasoning: “We’d rather drink out of the drinking fountain than the fire hose”
May 27, 2008. 11:49 PM
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