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Could the Worst Be Over for Mosaic Co?

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Fertilizer companies seem to be slowly recovering after last year's sharp drop in potash and phosphate prices. PotashCorp's (NYSE: POT  )  latest quarterly report revealed several positive signs for the company, while Mosaic's (NYSE: MOS  )  most recent report confirmed the positive trends for fertilizer producers. I think it's now time to be cautiously optimistic about the future of potash and phosphate producers.

Prices may start to improve
Weakness in potash and phosphate prices continued in the fourth quarter. Mosaic's average realized potash price dropped from $342 per ton in the third quarter to $303 in the fourth quarter. PotashCorp's pricing was even worse, as the company shipped its potash for an average of $282 per ton in the fourth quarter.

The situation with phosphate prices was similar – Mosaic's fourth quarter report revealed a 13% drop in the realized price compared to the previous quarter. However, the company stated that phosphate prices improved during December, and that it believed that this trend could continue.

On the positive side, phosphate sales volume achieved a quarterly record of 3.4 million tons for Mosaic. It's often a case that volumes increase ahead of the prices, so I see it as a positive sign. As a result, Mosaic expects that phosphate prices will range from $390 to $420 per ton, up from the disappointing $381 in the fourth quarter.

The company also expects record global potash shipments in 2014. Demand from China and India is expected to fuel almost half of the 4 million ton increase in demand. The depletion of inventories in India is also likely to contribute to rising demand.

However, I would not expect major improvements on the price front in the short term, as customers are likely to remain cautious after the recent price volatility. Fertilizer prices may have bottomed, but they need additional catalysts to demonstrate a solid gain.

Buyback is a positive for shareholders
Mosaic reported that the board authorized as much as $1 billion of additional share repurchases. The company looks ready to spend in 2014: After the $2 billion debt issuance in the fourth quarter, Mosaic finished the year with more than $5 billion cash on hand.

This cash is going to be spent on buybacks, as well as on the pending acquisition of CF Industries' (NYSE: CF  ) phosphates business. Mosaic will add 1.8 million tons of phosphate production capacity for $1.4 billion. The company stated that it expects to close the deal in the near future.

What's more, Mosaic is planning to issue short-duration debt to finance the CF acquisition, as it expects that it will receive attractive borrowing rates. This means that even after buyback and the acquisition, Mosaic will remain with a solid liquidity position.

Given the fact that Mosaic's 2.10% yield is inferior to Potash Corp's 4.20% yield, one can assume that a dividend increase could be possible at some point in time in the future. Otherwise, why would Mosaic need to finance the phosphate business acquisition with additional debt when it has the necessary cash on hand?

Bottom line
The situation is improving for potash and phosphates producers. There are multiple signs that prices may have already bottomed: Even at current price levels these companies are profitable. Mosaic's buyback is surely a positive for shareholders. Plus, the company has lots of cash and plans to issue more debt, so a dividend increase looks feasible. All in all, Mosaic is positioned for a successful year ahead.

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Vladimir Zernov

Vladimir Zernov believes that fundamental analysis works best with energy and materials stocks and covers them on Motley Fool.

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Related Tickers

8/27/2015 4:05 PM
CF $57.88 Up +1.77 +3.15%
CF Industries Hold… CAPS Rating: *****
MOS $40.55 Up +1.63 +4.19%
The Mosaic Company CAPS Rating: ****
POT $25.77 Up +0.99 +4.00%
PotashCorp CAPS Rating: ****