Mosaic Earnings Set a Baseline for Fertilizers

Mosaic (NYSE: MOS  ) released fourth-quarter and full-year earnings today, which showed just how difficult the year has been for fertilizers. Earnings for the quarter were $179 million, down from last year's earnings of $463 million. Sales volumes were up for both phosphates and potash, but the increased volume could not make up for significantly lower realized prices for both commodities. Disappointing earnings across the industry are expected, and Mosaic's report today, paired with earnings reported by PotashCorp (NYSE: POT  ) at the end of January, gives investors a baseline for what to expect from Agrium (NYSE: AGU  ) and other fertilizer producers as the rest of the earnings season unfolds. Expectations are low, so beating guidance may give investors confidence regardless of the inevitable decreases in earnings year over year.

Earnings and operations
An increase in fertilizer prices could change the entire story for fertilizer companies across the industry for all major crop nutrients. Until price increases are realized, however, the industry is challenged with making money and appeasing investors in spite of lower margins. Mosaic was able to turn a slight profit despite lower prices for phosphate and potash by focusing on the only two major remaining variables: volume and costs.

Mosaic's fourth-quarter phosphate business was thriving in terms of sales volume, and had higher prices been realized the quarter could easily have ended with record earnings. A record volume of phosphates was shipped during the quarter, but the average price realized for diammonium phosphate amounted to only $381 per tonne, which was a huge drop from last year. The selling price was within the expected $370 to $400 range. By overachieving in sales volumes and matching phosphate price projections, Mosaic was able to deliver encouraging results that should make investors happy. Unfortunately, until phosphate prices approach the $532 per tonne realized a year ago, it will be difficult for Mosaic to capitalize on otherwise encouraging production numbers.

First quarter of 2014 guidance of $390 to $420 per tonne, though slightly higher than this past quarter, won't be enough on its own for Mosaic to realize the much-needed improvements in margins. However, the acquisition of CF Industries' phosphate holdings should further increase production volumes and hopefully enable further drops in operational costs, which according to the company should result in the phosphate gross margin percentage in the first quarter to reach the upper teens.

Mosaic's results in potash were less impressive than for phosphates, though sales volumes for the nutrient were also up from the previous year. The selling price for potash was within the guidance range, while sales volume reached 1.9 million tonnes, which was at the top end of the guidance. Operational capacity for potash continues to increase year over year, and record global potash shipments are expected for 2014. Pricing concerns continue to loom, with claims of a bottom in potash prices seeming blindingly optimistic. Guidance of $245 to $275 per tonne for the upcoming quarter falls below the realized sales prices from fourth quarter 2013.

The takeaway
Mosaic is making progress operationally that would, under normal pricing conditions, result in higher margins and impressive earnings. Unfortunately for Mosaic and the industry as a whole, until crop nutrient prices increase, companies will be forced to compensate by increasing volumes and operational efficiency. Long term, these operational improvements bode very well for Mosaic. In the short term, the fertilizer industry is stuck hoping for prices to rise.

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