The Mosaic Company MOS
May 31, 2020 - 8:51pm EST by
2020 2021
Price: 12.09 EPS 0.14 0.821
Shares Out. (in M): 379 P/E 82 14.726
Market Cap (in $M): 4,582 P/FCF NA 29
Net Debt (in $M): 4,500 EBIT 330 705
TEV ($): 8,400 TEV/EBIT 25.5 12

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Finding value in today’s market is difficult. Most stocks fall into stock down significantly
but Massively COVID affected and uncertainty not well discounted, or COVID unaffected
and price inexplicably at new highs despite a concerning macro backdrop.
Seeking businesses where the COVID impact is small and/or is overestimated combined
with significant negative stock price action that persists despite the recent market rally, we
present The Mosaic Company (NYSE: MOS) which we believe is a business with an
improving outlook with a stock still near the lows.
Mosaic is one of the world's largest producers and marketers of concentrated
phosphate and potash nutrients. Globally, Mosaic is the #2 in phosphate, #4 in
potash, and #1 in premium fertilizers. Mosaic mines phosphate in Florida, Brazil, Peru
(JV) and Saudi Arabia (JV). They process phosphate rock into finished phosphate products
in Florida, Louisiana and Brazil. One of the four largest potash producers in the world, they
mine potash in Saskatchewan, New Mexico, and Brazil with production and blending and
distribution operations in Brazil, China, India, and Paraguay.
Pessimism around agricultural commodities in general and Mosaic in particular are at
extremes and were pessimistic prior to COVID-19. Ignoring some liquidity driven March
2020 all-time price lows, Mosaic remains -44% for the year and -67% from late 2018 highs.
Agricultural commodity fundamentals had been weak in 2019 as fertilizer prices fell due to
weak supply and demand dynamics, but the Mosaic’s stock had some support from
expectations that demand trends would reverse, inventories would draw down, resulting in
improved pricing and profitability.
However, investor hopes deflated as COVID-19 drove a general liquidation of commodity
names and as concerns arose around some real and some perceived impacts COVID-19
impacts on agricultural economics. The falling price of oil has had a real impact on demand
and pricing for biofuel additives such as palm oil in Asia and corn for ethanol in the U.S.
collapsed. With 40% of the corn crop slated for ethanol production, the sharp gasoline
demand destruction has deflated expectations for corn demand for next year’s planting
season. However this is more perception than reality, as COVID-19 related farmer
subsidies should support farmer economics, and Mosaic is actually indifferent between the
planting of corn or soybeans.
Contrary to recent price action, we see Mosaic as a well-run company, with a manageable
capital structure (both we and management would like to see debt reduced by 25%, debt
trades above par) with significant self-help opportunities (acquisition synergies,
technology and process improvement can drive EBITDA 50%) and an improving
fundamental outlook.
Phosphate Market at Bottom
(36% of Sales, 10% of EBITDA)
The challenging price environment in the last year has been driven by a pre-COVID
demand shock much of which was circumstantial. 2019 saw particularly wet
weather which delayed planting twice, China’s pig herd was culled due to African
swine flu. These demand shocks combined with production capacity increases from
Ma’aden (a 2 million tonne Saudi Arabian project of which Mosaic has right to 25%
of production), OCP (Morocco’s state phosphate company), and Russia’s Phosagro.
As a result, DAP (the primary fertilizer product derived from phosphate) has been
selling below the marginal cost of production. Demand was expected to rebound
this year with a strong spring planting season in North America and an associated
drawdown in inventories. However, while the spring planting season and inventory
drawdowns proceeded as expected concern about the health of the corn market (see
above) prevented inventories being rebuilt, limiting any rebound in pricing. A more
normalized S&D environment should emerge in the near term as the market comes
to understand farmers will be able to invest in fertilizers next year (due to
subsidies) and will want to invest in fertilizers to drive yield as they look forward to
a resumption in demand for ethanol. Should this not manifest itself, the alternative
to corn (soybeans) is neutral to phosphate demand and as such, Mosaic’s economics.
Longer term, high cost non-integrated producers (India) will not be able to operate
at negative margins for a sustained time frame and supply increases globally are
limited without significant capital investments (which we view as unlikely for
sometime). While Ma’aden and OCP each have planned phosphate production
increases of 1 million tonnes annually (in a 72 million tonne global market) over the
next couple of years, increases beyond that would require significant capital
projects. DAP and MAP margins should recover from breakeven at year end 2019 to
prices at or above 2019 averages of $60.
Potash Market at Bottom
(21% of Sales, 53% of EBITDA
Like Phosphate, circumstantial drivers (such as the aforementioned wet weather in
North America, the trade war with China, Swine flu, and weak palm oil prices) cut
global demand in 2019, resulting in inventory builds, steep price declines and
eventually production cuts on the order of 3mt by all the major potash producers.
With prices already close to 10 year lows ($240/mt versus $350/mt in mid 2019),
China recently agreeing to a new benchmark contract at $220 at the end of April
(prices apparently jumped >$20 the next week),and producer inventories having
drawn down elevated inventories (Canpotex, the Canadian export monopoly, is sold
out through July), we expect a more balanced market going and eventually price
increases. Following price declines in 2015, it took potash ~ 2 years to rise above
$300 again, which Mosaic CEO Joc O’Rouke, called out as a sweet spot price at which
producers would earn cash margins in excess of their maintenance capex without
attracting new capacity. He thought it would take 3 years to rise above $300 again. I
don’t think anyone knows as I find commodity industry insiders are often the most
bullish at the tops and most pessimistic at the bottoms.
Mosaic Fertilizantes, Brazil Farmer Economics Very Strong
(45% of Sales, 40% of EBITDA)
Currently, farmers in Brazil are enjoying very strong economics as demand for Soybeans
from China has skyrocketed. This should support pricing and volume growth for Mosaic’s
fertilizer distribution business in Brazil.
Benefit from Significant Efficiency Gains
With the prices of phosphate, phosphate products and potash weak the past five years,
Mosaic’s significant cost reduction focus has gone unappreciated. Since 2015, Mosaic has
reduced phosphate cash costs per tonne by 8%, potash costs per tonne by 7%, and SG&A
per tonne by 20%. Significant additional potash cost savings will be achieved as Mosaic’s
Esterhazy mine shifts productions from Esterhazy’s K1 and K2 shafts to the automated
Esterhazy K3.
Including Mosaic’s Vale acquisition synergies, initial impacts from Esterhazy K3, and other
operational changes, MOS expects EBITDA benefits to be $225 million in 2020. In total
EBITDA should grow by $600-$700 million over the next five years as Esterhazy K3 comes
into full production, and Vale transformation savings are achieved. This would imply a
50% increase in EBITDA from 2019 levels without any improvements in commodity
pricing and volumes for both DAP and MOP which are both near all-time lows.
$4.6b market cap
$1.07b in cash (3/31/2020 BS)
0.74b in investments in non-consolidated companies
$5.58b in debt
$8.4b Enterprise Value
$1.2b LTM trailing EBITDA
$1.1b-1.4b consensus estimates for 2020 EBITDA
$1.6b-2.2b consensus estimates for 2021 EBITDA
6.5-7x 2020 EV/EBITDA
4.4x midpoint of estimates of 2021 EBITDA
With a return to 2018 price levels + $700m of EBITDA improvements due to Esterhazy K3
and Vale synergies would imply $2.7 in EBITDA. At a historical average 8x multiple
(Ma’aden stake valued at cost), $2.7b in EBITDA would imply $47 or a 4 bagger over 4 years.
A 6x multiple on $2.05b of EBITDA, (2019 profitability + costs saves) would imply $22.50 or an 85% return over 4 years.
>$1 billion in cash
$1.5 billion unused line of credit
No Long term debt payments until Nov 2021
Capital Allocation
$700m main cap ex guidance
$75m in one-time 2020 cap ex
$400m in growth cap ex
"Ability to scale down growth cap ex rapidly"
Management has a target to reduce debt by $1 billion over time.
MOS has been an active purchaser of its own shares in the past.  A return to repurchases after debt reduction is more likely than a significant increase in the dividend under current management.
-Significant depopulation due to recurring pandemics
-Demand destruction to meat consumption due to mass poverty which would have a knock-
on effect on grain consumption by cattle, etc.


I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


Esterhazy K3 mine ramp up
Increases in corn prices due to increases ethanol demand
Summer 2020 planting season in Brazil


Inventory restocking in North America
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