THE MOSAIC COMPANY (NYSE: MOS) NOVEMBER 7, 2013 Dan Ballantine, Zige He, and Zuowei Xu
Agenda Introduction Macroeconomic Outlook Industry Overview Company Overview Financial Analysis Valuation Recommendation
The Mosaic Company (NYSE: MOS) Largest combined potash and phosphates producer Engages in the mining, production, and distribution of crop nutrients Formed through the combination of IMC Global and Cargill’s crop nutrient segment in 2004 Sector: Basic Materials Industry: Agricultural Chemical Source: Mosaic Company Website
Current Holding Information December 17, 2009: Purchased 200 shares at $55. 00/share ($11, 000 total investment) November 6, 2013 Price: $ 46. 35 Unrealized loss: 15. 73% ($1, 730) Total Position Value: $9, 270 Represents 5. 03% of total portfolio value Source: Yahoo Finance
Macroeconomic Outlook Population Crop Fertilizer Expected global population increases will lead to steady demand for fertilizers over the long-term Additional pressure for existing farmland to become more productive
Macroeconomic Outlook Expected global population increases combined with increased use of agricultural inputs Source: USDA, Mosaic, IHS Global Insight
Agricultural Chemical Industry Commodity Pricing Capital Intensive Highly Concentrated Price Cartel: Breaking Down
Agricultural Chemical Industry USDA: Price of potash and phosphates decreasing since the high prices in 2011 Retail Price of Potash: $400/ton, down 20% since last year q Source: USDA, Info. Mine
Industry Forces Analysis Buyers: High New Entrants: Low Rivalry: High Suppliers: Medium Substitutes: Low
Industry Forces Analysis Bargaining Power of Suppliers: MEDIUM Bargaining Power of Buyers: HIGH Large fertilizer companies have long-term contract with suppliers Commodity products with little differentiation and control over pricing Threat of New Entrants: LOW The 10 biggest companies cover more than 80% percent market share Economies of scale
Industry Forces Analysis Threat of Substitutes: LOW No substitute for potash Lack of cost-effective substitutes Rivalry among Competitors: HIGH Very competitive Dominated by large companies looking to increase market share
Industry Performance Analysis Industry index underperformed the S&P 500 in 2013 Source: Google Finance
Company Overview Leading producer and marketer of concentrated phosphate and potash crop nutrients and animal feed ingredients Serves customers in approximately 40 countries 8, 400 employees Phosphate Products: crop nutrients DAP and MAP, animal feed Potash Products: red MOP, white MOP (salts of potassium) Source: Mosaic FY 2013 10 -K
Company Overview q Financial Performance Source: Mosaic FY 2013 Annual Report
Company Overview q Product Segments: q q Potash: 13% of estimated global potash production; 42% of estimated North American potash production Phosphate: 12% of estimated global production; 59% of estimated North American production of concentrated phosphate crop nutrients Source: Mosaic FY 2013 10 -K
Company Overview q Potash Segment Three potash mines in Canada; two potash mines in the United States q Production: 7. 8 million tonnes q q Expansion plan Source: Mosaic FY 2013 10 -K
Company Overview q Phosphate Segment Owns and operates mines and production facilities in Florida; processing plants in Louisiana Production: 8. 2 million tonnes Low cost strategy Economic scale Vertical integration Innovation: Premium Product Micro. Essentials® (“ME”) Sales increased approximately 28% Source: Mosaic FY 2013 10 -K
Company Overview Distribution Potash Segment: Domestic and international sales Canpotex, Limited Phosphate Segment: Phosphate Chemicals Export Association, Inc Source: Mosaic FY 2013 10 -K
Business Risk Analysis Changing economic conditions and government policies Global Competition Weather Conditions Variations in crop nutrient application rates Significant levels of inventories Source: Mosaic FY 2013 10 -K
SWOT Analysis Strengths Weaknesses - - Decreasing sales volume - Declining margins - Multiple recent strategic changes Minimal long-term debt Strong cash position Diversified international sales Expanding production capacity Opportunities Threats - Lower raw material costs - International market access - Positive macroeconomic outlook with growing population - Commodity pricing Government policies Increased competition External demand factors
Cargill & Mosaic Relationship October 2004: Originally created from Cargill’s crop nutrient business division January 2011: Cargill family trust plans to liquidate its entire stake (64%) Could have been a sign the company was overvalued at the time (trading around $80/share) June 2013: stock buyback request blocked by Cargill trust holders Still hold 129 million shares of Mosaic common stock Source: New York Times, Bloomberg
Recent News MOS Reports Earnings: November 5, 2013 MOS Announces Acquisition: October 28, 2013 Difficulties due to lower phosphates and potash prices Diluted EPS of $0. 29/share versus $0. 98 last year Acquiring phosphates business from CF Industries $1. 4 billion for Florida-based phosphate assets Uralkali Cartel Fallout: Late July 2013 Breakup of a pricing cartel, potash prices plummet Uralkali plans to pursue higher volume strategy Source: Mosaic Investor Relations, Bloomberg
Management Outlook Concerned about short-term potash and phosphate prices, but considers price decreases a cyclical issue Believes industry will return to normal and continue to grow Recent strategic change: Shift from potash expansion to phosphates expansion Looking to expand North America potash operations Concerns about demand in emerging markets in the next year Source: Mosaic Calendar Year 2013 Q 3 Earnings Press Release
Recent Financial Information NOTE: Mosaic is changing its year-end from May 31 to December 31 * FY refers to year ended May 31 * Q 3 2013 reports Q 3 of Calendar 2013, meaning the quarter ending September 30, 2013 Source: Mosaic 2013 FY 10 -K, FY 2010 10 -K, CY 2013 Q 3 10 -Q
Recent Financial Information NOTE: Mosaic is changing its year-end from May 31 to December 31 * FY refers to year ended May 31 * Q 3 2013 reports Q 3 of Calendar 2013, meaning the quarter ending September 30, 2013 Source: Mosaic FY 2013 10 -K, FY 2010 10 -K, Q 3 CY 2013 10 -Q
Current Stock Information Metric Current Stock Price Trailing P/E Forward P/E Dividend Yield Market Cap ($ millions) Value $46. 35 10. 49 18. 11 2. 16% $19, 735. 8 Source: Capital IQ, Yahoo Finance
Financial Analysis NOTE: The years above refer to the fiscal years ending on May 31
Financial Analysis NOTE: The years above refer to the fiscal years ending on May 31
Comparable Companies Company Ticker Market Cap ($ millions) Agrium Inc. (TSX: AGU) $12, 795. 1 CF Industries Holdings, Inc. (NYSE: CF) $12, 127. 0 Israel Chemicals Ltd. (TASE: ICL) $10, 855. 3 K+S Aktiengesellschaft (DB: SDF) $5, 196. 5 Potash Corp. of Saskatchewan, Inc. (TSX: POT) $27, 840. 4 The Mosaic Company (NYSE: MOS) $19, 735. 8 Source: Capital IQ
Stock Performance Source: Yahoo Finance
Comparable Company Analysis Source: Capital IQ
Comparable Company Analysis Source: Capital IQ
Discount Rate Source: Yahoo Finance
Discount Rate
DCF Analysis
Decision Drivers Strengths Strong balance sheet Growing dividend yield Macroeconomic outlook Vertical integration Concerns Uncertainty over industry outlook in near future Recent strategic changes Significant uncertainties on product pricing Overly optimistic management outlook on industry and expansion plans
Recommendation Valuation Summary Current Stock Price: $46. 35 Comparable Companies Valuation: $40. 87 DCF Valuation: $33. 50 Recommendation: SELL Sell current holding of 200 shares at current market price resulting in a realized loss of approximately 15. 73%
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