Mosaic's Moon Shot

In Mosaic's (NYSE: MOS  ) last time out of the gate, the fertilizer company increased its earnings by nearly sixfold. Well, you can take that increase -- and double it. Yep, we're looking at a 12-fold increase in earnings for the company's third quarter.

The reversal of fortune is particularly stark in Mosaic's phosphates division, which is more than twice the size of the potash segment by sales. In last year's comparable period, phosphates actually turned in a modest operating loss. This time around, those earnings approached half a billion dollars. So what's behind the boom?

The world is hooked on the phosphate rock sold by Mosaic, Agrium (NYSE: AGU  ) , and CF Industries (NYSE: CF  ) . With the price of grains and oilseeds soaring, farmers are scrambling to plant more. Global production of these crops hit 2.5 billion metric tons last year, and that requires a lot of fertilizer. Mosaic's realized phosphate prices doubled from last year, and potash prices were up more than 50%.

There's more where that came from. Mosaic's estimates for prices during the current quarter represent another giant leap, and foretell fireworks. But here's a question: With these huge price moves, why don't new companies just swoop in and open up new mines?

Well, this is no easy feat, for two reasons. First, to take the example of potash, it would probably be at least five years before a new operation could get up and running.

Second, such a project would be extremely expensive. Potash  (NYSE: POT  ) puts a $2 billion price tag on a "greenfield" mine that is 2 million metric tons. In contrast, established players with untapped resources face significantly lower capital costs. Mosaic just announced a roughly 50% capacity expansion to its Canadian potash operations that will cost a bit more than $600 per metric ton, or nearly 40% lower than the hypothetical per-ton cost of a greenfield mine.

In short, it doesn't take a fertile imagination to see robust profits. When it comes to the stock's potential, my crystal ball fogs over.


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