The Mosaic Company (NYSE: MOS ) has been one of the most active North American fertilizer companies in the last year. The company issued $2 billion in new debt last November, completed the acquisition of CF Industries' (NYSE: CF ) Florida phosphate assets, executed an agreement to buy back a large number of shares, and agreed to acquire Archer Daniels Midland Co.'s fertilizer distribution business in Brazil and Paraguay for $350 million.
Despite the structural challenges that the nutrient markets have been facing after the break-up of Belarusian Potash Company (BPC), it's impressive what Mosaic has been able to pull off both strategically and financially in the last few quarters.
The company reported first quarter adjusted EPS of $0.52, missing sell side estimates of $0.60. While shipments for both phosphate and potash were stronger, higher S&G and interest expenses contributed to the earnings miss.
Improving global demand for potash and phosphate
Despite the earnings miss, the company saw better than expected shipments for both phosphate and potash, with phosphate shipments notably ahead of the company's guidance range. As highlighted by other fertilizer companies, improving global demand for potash and phosphate fertilizers was supportive and should be for the rest of the year.
After reaching a floor in late 2013, stability in pricing, particularly in potash, has brought buyers back to market. This has served as a tailwind for Mosaic and other potash producers including Potash Corporation (NYSE: POT ) and Agrium (NYSE: AGU ) . On the other hand higher grain prices have also been supportive. Going forward, the company believes that Chinese, Indian, and Brazilian demand is likely to stretch deep into the second half of 2014 and offer support to potash and phosphate netbacks.
Brazil the shining star
In a move aimed at tapping the promising Brazilian agriculture market, Mosaic announced last month its decision to buy Archer Daniel Midland's fertilizer distribution business in Brazil and Paraguay for $350 million. As part of the deal, the company will acquire four blending and warehousing facilities in Brazil, one in Paraguay, and additional warehousing and logistics service capabilities.
The acquisition will increase the company's distribution capacity in Brazil by 50% to 6 million tons, the majority of which are phosphate and potash. Brazil is one of the largest importers of fertilizers in the world. Due to the country's nutrient-deficient soil, the fertilizers needed for the country's huge annual crops of corn, soybeans, and sugar cane are largely met through imports. According to the company's CEO, James Prokopanko, the acquisition gives the company "a critical distribution platform in one of the world's fastest growing agricultural regions."
While the Brazilian agriculture market continues to grow at one of the fastest growing rates in the world, it can be difficult to move crops and nutrients in the country because the transportation system is prone to bottlenecks.
Prokopanko commented on the acquisition:
Brazil is a very challenging country to get product from an offshore position into the farmer's hands ... they have issues with logistics, they don't have a great rail system, they don't have a Mississippi flowing through the country, and having access into the direct farm markets or into the farming region is an important part of getting our product to the marketplace ... Having port access, which is just terribly congested in Brazil, having our own facilities, having control of our own facilities is important and the expansions that we've put in place, both our internal expansions and the ADM acquisition will allow us to get product and be assured of getting our product to the market.
Mosaic believes that given the structural constraints of the Brazilian fertilizer market the best way to gain additional market penetration is via build-out of storage, transport, and blending/bagging capacity. The company sees greater opportunity in phosphate in particular. Brazil is a heavy user of phosphates and has already become a good consumer of Mosaic's high-margin fertilizer, MicroEssentials. Additional production capacity for MicroEssentials (3.5 million tons by 2016) combined with greater distribution opportunity in Brazil is a healthy combination, as it would allow the company not only to capture the producer's share of profit but the distributor's share as well.
As mentioned earlier, keeping in mind the structural changes the fertilizer industry has gone through in the past few quarters, it is very impressive what Mosaic has pulled off both strategically and financially in the last few months.
While the potash market is expected to remain oversupplied in the foreseeable future, the most promising driver for better than expected earnings and a breakout for the company's stock would be material, consistent improvement in phosphate profitability via synergies with CF, market share opportunities in Brazil, and increasing volumes of higher-margin MicroEssentials blends.
Warren Buffett just bought nearly 9 million shares of this company
Imagine a company that rents a very specific and valuable piece of machinery for $41,000... per hour (that's almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company's can't-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report details this company that already has over 50% market share. Just click HERE to discover more about this industry-leading stock... and join Buffett in his quest for a veritable landslide of profits!