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Mosaic (NYSE:MOS)
Q2 2019 Earnings Call
Aug 06, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good morning, and welcome to The Mosaic Company second-quarter 2019 earnings conference call. Your host for today's call is Laura Gagnon, vice president, investor relations of the Mosaic Company. Ms. Gagnon, you may begin.

Laura Gagnon -- Vice President, Investor Relations

Thank you, and welcome to our second-quarter 2019 earnings call. Presenting today will be Joc O'Rourke, president and chief executive officer; and Clint Freeland, senior vice president and chief financial officer. We also have other members of the senior leadership team available to answer your questions after our prepared remarks. The presentation slides we are using during the call or available on our website at mosaicco.com.

We will be making forward-looking statements during this conference call. The statements include, but are not limited to, statements about future financial and operating results. They are based on management's beliefs and expectations as of today's date and are subject to significant risks and uncertainties. Actual results may differ materially from those results.

Factors that could cause actual results to differ materially from those in the forward-looking statements are included in our press release issued this morning and in our reports filed with the Securities and Exchange Commission. We will also be presenting certain non-GAAP financial measures. Our first-quarter press release and performance data attached as exhibits to today's Form 8-K filings also contain important information of these non-GAAP measures. Now I'd like to turn the call over to Joc.

Joc O'Rourke -- President and Chief Executive Officer

Good morning. Thank you for joining our second-quarter earnings discussion. As you know, the spring planting season in North America was challenging. It was the wettest and latest season on record.

In fact, we believe U.S. farmers were prevented from planting at least 10 million acres. We now have seen two consecutive application seasons negatively impacted by weather, which in turn has driven grain prices to multiyear highs and incented farmers to make sure they are prepared to take advantage of those prices in 2020. Clearly, these same events have also impacted our first half results and tempered our full-year financial outlook.

Clint will give you the details to understand the factors that drove our second-quarter earnings. I will focus on the actions we're taking to adapt the progress we are continuing to make across the business and our longer-term outlook. Our key points today are, first, we expect the current North American inventories to be reduced sharply through an anticipated strong fall application season, and we see much stronger fundamentals for agriculture and fertilizer emerging in 2020. Second, our success in ramping up Esterhazy K3 combined with our inventory position has given us the flexibility to curtail our highest cost potash mine and focusing on lowest cost operations.

This action is expected to drive potash cost even lower in the second half of 2019, and save $40 million to $50 million in cash expenditures. Third, we expect to have all our Brazilian phosphate mines running in August ahead of schedule, and we are lowering the down related costs by $20 million from our previous estimates. Last, we've announced a permanent closure of our Plant City phosphates facility, which will improve our overall phosphate cost position and cash flow moving forward. The transformation we have driven across our business units has increased Mosaic's cross-cycle potential, and has allowed us to increase flexibility to adapt to changing environment.

The impact of our actions to increase our operating leverage is expected to coincide with improving market conditions. The North American crop, which received much less fertilizers than usual, will leave fields in serious need of nutrient replenishment. At the same time, higher grain prices will provide strong incentives for farmers to plant more acres and to maximize yields next spring. Of course,, North America is just one market.

Demand remains strong in Brazil where the farmers were seeking to maximize output in response to a favorable market condition and as we move into their peak planting season. In India, the monsoon is picking up in the recent government decision to leave phosphate subsidies unchanged is strongly positive for the long-term demand nature. In China, phosphate demand was down, offsetting some of the strong growth elsewhere. While the slower demand original drove exports, we're now seeing phosphate exports decline as lower prices impact phosphate producer economics.

While today's lower phosphate prices are challenging in the short term, we believe they can accelerate the restructuring of the Chinese industry. Year-end 2019 represents a milestone with investment required for many producers to maintain environmental compliance, and current lower prices are likely to provide some of those investments. It is our belief that marginal permission producers will cease production as we move into 2020. The larger Chinese producers have announced a coordinated curtailment of production, which we are closely watching.

Now I will turn to our execution, which is driving important benefits across the organization. I will start with potash. Our new Esterhazy K3 mine is performing exceptionally well. We believe it will produce 400,000 tonnes of potash in 2019 and will approach 1 million tonnes in 2020.

This incremental production at Esterhazy helped to facilitate the decision to temporarily idle Colonsay, and allows us to begin to realize the benefits of one of the most efficient mines in the world. We continue to drive cash cost of production lower in the potash business. In the second quarter of 2019, our cash cost to production excluding brine fell to $69 per ton, and we expect costs to continue to improve as operating rates increase. With the savings related to an idled Colonsay mine, we expect this cost to fall approximately $60 a ton in the fourth quarter.

That said, it will remain in a position to deliver 2.5 million tonnes of annual surge capacity, if necessary, to meet market demand. Our business in Brazil also continues to perform very well, and we are seeing momentum for the second half of the year and beyond. Mosaic fertilizantes is on track to achieve its $275 million synergy target ahead of schedule, and we expect to drive significant transformational savings after we complete the deal-related synergy work. In addition, we have made tremendous progress toward meeting the new mine tailings dam regulatory standard.

Mosaic has completed the first phase of dam remediation at the Tapira mine and has restarted mining at roughly 60% capacity. The mine is expected to resume full operations by the middle of August after completing remediation activities on the second dam. The company's also received an operating license for the B6 --, which is expected to allow that mine to start operations this month. Our teams in Brazil have done remarkable work to get us to this point, reducing the expected impact by $20 million for the full year.

In the Phosphates business, we are continuing to exert pressure on factors that we can control. The transformation of our phosphate business is ongoing, and it is driving significant operational and financial efficiency while simultaneously delivering excellent safety and environmental results. To be clear, our focus will remain on meeting the needs of our customers and maintaining our market position. That will not change.

External factors have impacted our results and near-term expectations and have led us to reduce our 2019 EBITDA guidance to $1.8 billion to $2 billion. However, we retained our key focus on execution and controlling within our power. Our ability to improve efficiency, lower costs and optimize assets has created significant operating leverage in our business. Our outlook for the second half remains strong, and we continue to expect broad strengthen our markets and our business in 2020 and the years ahead.

Now I'm going to turn it over to Clint to provide further detail.

Clint Freeland -- Senior Vice President and Chief Financial Officer

Thank you, Joc, and good morning, everyone. As noted earlier, adjusted EBITDA and adjusted EPS for the second quarter totaled $349 million and $0.12 per share, respectively, as solid results at the potash and fertilizantes business units were offset by difficult quarter in phosphates. Potash adjusted EBITDA totaled $254 million for the quarter, up 27% from $199 million last year as a modest reduction in sales volume resulting from the weak spring fertilizer application season in North America was more than offset by margin stronger margins. Mosaic fertilizantes adjusted EBITDA totaled $38 million during the quarter compared to $60 million for the second quarter of 2018.

Results this year include $36 million in nonrecurring costs to supplement rock and finished goods supply as our team work to bring our Brazilian mine tailings dams into compliance to the regulatory standard. Except for that, adjusted EBITDA would have been $74 million, up 23%. The Phosphates segment generated adjusted EBITDA of $74 million during the quarter compared to $251 million in the same quarter last year as sales prices, sales volume and mix, idle cost and raw material cost all pressured results. Additionally, equity earnings associated with our investment in Ma'aden flow through the phosphate segment and for the quarter were a loss of $11 million.

While the segments cash gross margin before DD&A and accretion was a positive $47 per ton, reported adjusted gross margin per ton for the quarter was negative $5, considerably lower than expected as a number of dynamics came together to impact results. As a result of weak spring demand and high level of imports trapped in the lower Mississippi River, market prices remained under pressure and the seasonal price improvement we typically see in the second quarter did not materialize. Additionally, while the Midwest warehouse premium in North America remained high, we didn't capture as much of that as anticipated as North American sales, including MicroEssentials products were 350,000 to 400,000 tonnes lower than expected. Lower market prices, along with the change in the mix of sales during the quarter and lower-than-expected production in sales volumes, impacted margins by $45 per tonne.

The volume in the mix shift includes the impact of redirecting approximately $150,000 incremental tonnes of fertilizer to our international distribution businesses, primarily Brazil and these intercompany international sales have lower margins than in North America. In addition, with the overall production volumes below expectations as a result of the opportunistic extension of two planned maintenance outages, we saw a higher conversion cost per tonne and slow decline in raw material costs during the period. These factors taken together led to the quarter's results. However, it's important to note that the volume and mix impacts in the second-quarter gross margin are transitory and are not expected to impact third-quarter results.

Additionally, as sales accelerated in the third quarter, we expect approximately $12 per tonne in raw material cost improvement relative to the second quarter. Offsetting a portion of these benefits is a decline in average selling prices compared to last quarter, reflecting recent market pricing levels. Third quarter gross margin per tonne expectations for the potash business reflect the $25 per tonne discount offered to customers as part of our North American summer fill program, as well as, expenses associated with scheduled turnaround activity during the period. And while we expect to realize significant cash savings from the idling of our Colonsay facility as John mentioned earlier, we expect only a small portion of that to impact the company's third-quarter earnings as we sell down existing inventory at the facility.

Margin benefits from migrating production to our lower cost K3 facility should be more significant in the fourth quarter of this year and into 2020. Finally, our margin guidance for Mosaic fertilizantes reflects the higher costs associated with purchase rock and finished product as part of our dam remediation activities. However, as mentioned earlier, we expect these to be transitory as operations return to normal. As we look out to the balance of the year, our expectations are for a robust fall application season given depleted soil nutrients in North America and higher grain prices benefit of farmer economics.

Outside of North America, we expect to see continued strong demand particularly in Brazil where farmer economics remain solid. As a result, we see total second half volumes for potash in the range of 4.7 million to 5.1 million tonnes, which would equal or break Mosaic's previous record second of sales levels. Phosphate shipments in the second half are expected to be 4.4 million to 4.8 million tonnes, the highest level since idling the Plant City. In addition to these strong sales volumes, we expect inventories in North America to be substantially drawn down.

One of the key things to watch as we get into the fall is the link of the application window in North America given the late spring planting and resulting later harvest. In Brazil, we continue to expect fertilizantes to is to deliver full year sales volumes of 9.4 million to 9.8 million tonnes reflecting continued market strength in our successful remediation of the issues created by the regulatory-driven closures of our Brazilian mines. With this strong demand as a backdrop in both North America and Brazil, keeping in mind existing inventory levels, we would expect market prices to remain stable, if noted improve somewhat over the balance of the year. But taking first half results into account and our expectations for the balance of the year, we've updated our adjusted EBITDA guidance range to $1.8 billion to $2 billion and earnings per share range to $1.10 to $1.50.

In addition to the volume assumptions outlined earlier, there are a number of factors that are incorporated into our forecast, including, first, from a pricing standpoint, the low end of our guidance range assumes market pricing at the beginning of the third quarter for all remaining unpriced tonnes this year, while the top end of the range reflects an average price increase of $25 per tonne across both phosphates and potash. Next, we expect raw material cost to improve, as noted earlier, as we realize the benefits from recent market price declines. Next, as Joc mentioned, we now expect our mines in Brazil to be back to full operation this month, reducing the total cost of managing through the dam issue this year from our original estimate of $100 million to $80 million. With Ma'aden slowly ramping up production, the weaker phosphate pricing environment coupled with the projects interest costs are now expected to result in equity earnings to Mosaic of approximately negative $50 million for the year.

And finally, expectations of cash taxes have declined from $75 million to $50 million. Our effective tax rate excluding discrete items is expected to remain in the mid-to high 20% range. The biggest impact of our effective rate is earnings mix, so that remains the added to watch going forward. Turning to our capex plans for the year.

We reduced our 2019 sustaining capital program by $80 million to $640 million in light of market conditions. We are, however, continuing to invest in modest high-return opportunities like the modifications to our dock in Louisiana that will allow us to use more of our own internally produced ammonia in our Florida operations, generating an unlevered after-tax return of over 40% and payback of right of two years. With that, I'll turn the call back over to Joc for his closing comments.

Joc O'Rourke -- President and Chief Executive Officer

Thank you, Clint. There's no question the market patients have been difficult for first half of this year and that the impact on the full year will be real. We have solid strategic momentum, markets notwithstanding. We've improved our cost base in our operating efficiency.

We have successfully integrated and transformed the compelling acquisition in the world's most promising agricultural market. We are just beginning to realize the very long-term benefit of the new Esterhazy K3 potash mine, and we are performing at a very high level across the organization. We expect the current supply and demand situation will come into balance. And as it does, Mosaic will remain in excellent position to benefit.

Now, we will take your questions.

Questions & Answers:


Operator

[Operator instructions] Your first question comes from Stephen Byrne.

Steve Byrne

Curious as to where you're seeing a behavior changed down in Brazil with the improving corn market. Are you -- are you seeing expectations of maybe a bigger second corn crop? Any increase buying patterns on fertilizer earlier than normal or a little more aggressive on volume?

Joc O'Rourke -- President and Chief Executive Officer

Thank you, Steve. Welcome. I'll hand this to Rick. We have the privilege of having Rick McLellan here in the room today, and he manages our Brazil business.

What I can tell you, I think the mode in Brazil to take advantage of some of the issues, higher -- higher current pricing and some of the trade issues that are now occurring, we expect will be very positive for Brazil. Rick, you want to talk about the season coming up?

Rick McLellan -- Analyst

Yeah. Good morning, Steve.  I -- So the season coming up, if you look across the main crops, if you look at corn, soybeans, cotton and centers, farmer returns are very, very good. And so we see a really good sales book on now for our distribution business. And we expect a very good main application period.

Your question was about Sufrenia, the second crop. And yes, we've seen the farmers in the last two to three weeks step in, and start to buy their fertilizer for the second crop corn. And that's a very positive indicator, but it also tells you that there is a market there for that corn and the farmers reacting, and the market is working.

Joc O'Rourke -- President and Chief Executive Officer

And let me just remind you that we're going to be bringing back Tapira and Araxa just in time for the big season coming up. So we think that our B2B business is going to be in a very good shape as well to take advantage.

Steve Byrne

And how you look at the growth potential for fertilizantes down there? You have 14 blending facilities. Would you prioritize expanding that, particularly as more rails get constructed in Brazil? Or could you envision a diversification of the product offering at these facilities such as moving in the more distribution of other products, crop, chemical, seed treatment, etc.?

Joc O'Rourke -- President and Chief Executive Officer

Thanks. I think both of those are really good opportunities for us. First one, expanding our description platform itself and capturing a bigger piece of that overall market is a really good opportunity for us but obviously expanding, and using those platforms for other commodities is another growth opportunity. We got into to Brazil on that basis, we believe it's one of the best agricultural region in the world growing at a great rate, and we fully think we're a first mover in there, we're going to take advantage of that first mover advantage.

Operator

Your next question comes from Vincent Andrews.

Vincent Andrews -- Analyst

Thank you. Joc, maybe I should ask you how you're thinking about sort of bridge of '19 to '20 in terms of volume. And I guess what I'm asking is obviously, we saw reduced usage in the U.S. this year and maybe in Europe as well.

So are you thinking we get that back and then you get normal growth on top of what should have been the underlying demand growth this year? Or if we rebase '19 volume of shipments and we'll just get growth off of that?

Joc O'Rourke -- President and Chief Executive Officer

Thanks, Vincent. I'll start this and hand it over to our market analysis people. But I think everyone understands that we have an unprecedented North American spring, but that's behind us today. And what it's left, is left to prevent planting up to 10 million acres so we expect coming out of the system to stock use ratio may be as low as 10%.

That's really going to push the grain prices and really going to push planting intentions up for the spring. So our expectation is we're going to have a big spring in North America, and we fully expect big volumes coming out in 2020. So if we bridge from '19 to '20, we expect to have much higher acreage or higher acreage, and we expect to have higher application to support that, and then the rest of the world will follow. Anything from you Corrine or Andy?

Andy Jung -- Director of Market and Strategic Analysis

I think just from a specificity standpoint, we won't make up all of the tonnes that didn't go down last year or in 2019. We'll make up some of them, but we'll just return to more broad-based, linear demand growth pattern in 2020 and beyond.

Operator

Your next question comes from John Roberts.

John Roberts -- Analyst

Thank you. How should we think about the fertilizantes split between the third and fourth quarter? The third quarter I think normally seasonally bigger but you still have full capability is back in the third quarter. So should we think about earnings being roughly equal between third and fourth quarter at fertilizantes rather than the normal seasonality?

Joc O'Rourke -- President and Chief Executive Officer

Yeah. Thanks, John. Look, the split between the third and fourth quarter, as you said, normally we would expect them to be just as last year, which is a third quarter slightly bigger than the fourth. But I think this year we have still another somewhere around $40 million of raw material pricing for rock and whatnot we had to import for the dams.

So overall, volumes are going to be up, but we're going to be still going to be absorbing a little bit of the dam cost for another quarter.

Operator

Your next question comes from Jonas Oxgaard.

Jonas Oxgaard -- Analyst

Good morning, guys. Question. In the first quarter, both you and your big African competitor shut down some capacity in phosphates. So the market didn't seem to need it.

In Q2, that -- it didn't seem that anyone did and I haven't heard any announcements that it's happening in Q3 either, yet pricing is continuing to be weak. Can you talk a little bit about the strategic backdrop of why not taking outages in Q2 and how you think about it going forward?

Joc O'Rourke -- President and Chief Executive Officer

Yeah. Thanks, Jonas. Let me -- I'll hand this to Corrine in a second here, but just let me give you a high level. Obviously, we did take capacity out in Q1 and into Q2.

What you see in our sales results as such, our inventory build probably isn't as big as some of the others, and also means that we want to be ready for what comes up in a big third and fourth quarters. So we thank for ourselves at least in our market position, those tonnes are needed. We don't believe that the demand pictures a long-term demand issue. It was a short-term driven by a bad U.S.

spring.

Corrine Ricard -- Senior Vice President Commercial and Supply Chain

Yes. So I would add, Jonas, that the logistics complications that we faced during the spring season have been -- were significant. And Mosaic's operating rate was maintained with lots of the shipment and shipment to upcountry warehouses that was difficult for us to replicate based on large positions. I think we have some of the same risks in a very large fall season that getting products out into the market that we did for fall are going to require rail loading and the kind of logistical capability that Mosaic is going to have.

And so I think will be operating at full rates for the very large fall season that we anticipate.

Operator

Your next question comes from Andrew Wong.

Andrew Wong -- Analyst

Hi, good morning. So maybe just following on that a little bit more on phosphates. I think it's fair to say that the prices in the market has been weaker this year than expected. So maybe just, first, can you talk about what's going to be the main factors driving that weakness? Is it supply? Is it demand? Maybe go through some of the various supply demand situations in the main regions like China, India, Brazil.

We know about U.S. obviously. And then just secondly, when do you expect prices to maybe start seeing a little bit of a bottom and a rebound? And what are some of the catalysts that we can watch for ahead of that? Thanks.

Joc O'Rourke -- President and Chief Executive Officer

OK. That's a bit of a doozy, Andrew. I'll get through it and I'll help -- we'll get Corrine to help me here. But let me at a high-level, say, we had 10 years of relatively year growth in our phosphate markets.

And for the first time, I think in probably half a dozen years, the issue with the supply and demand has been about demand, and it really is predicated on mostly on a U.S. bad spring, somewhat on a lowering Chinese demand, but really other than that, pretty much a normal linear growth for the demand for phosphates. So what that's meant is the equivalent of probably about a new mine coming on all of a sudden. New production is not great.

It's only about a million tonnes this year as I believe. And so if not for this displacement of the U.S. spring, I think the market would have continued to be quite balanced, and we do expect it to rebound as early as this fall and into the spring. Corrine, do you want to add any details that?

Corrine Ricard -- Senior Vice President Commercial and Supply Chain

In terms of what happened this spring, I think Joc has covered it. We had a fall, poor season and we had a disappointing spring season, probably about 800,000 tonnes of demand was lost. At the same time though, we had a million tonnes more export -- import into the U.S. And so that really exacerbated the problem along with the flooding along the river.

So these tonnes were trapped in the lower Mississippi, and traders started liquidating those positions very aggressively when they couldn't get tonnes up in country in time for spring season. And so that really caused very small amounts of trade prices to drop quickly. But that fundamental demand issue is really going to be largely overcome, as Andy noted, with what we think will be a large fall season and going into 2020. And so when we see prices turning, we'll work through the inventory levels that have been carried out in the end of the spring season, and we should see things tightening up as we get into 2020.

Joc O'Rourke -- President and Chief Executive Officer

And if I could just add, I mean, we're hearing numbers of corn plant maybe 95-plus million acres next spring. If we're going to have that level of planting, it'll suck up the inventory very quickly.

Operator

Your next question comes from Adam Samuelson.

Adam Samuelson -- Analyst

Yes. Thank you. Good morning, everyone. So couple of questions continuing in phosphates.

First, on the -- as we think about the price declines that we've seen year-to-date, I think talking about Russian and Moroccan tonnes of the -- just been cargoes that have been going on priced into NOLA and into Brazil have been an important contributing factor. Can you talk about just market structure? Any visibility that distribution patterns can change here? It seems like some of those cargoes are being pretty disruptive to market? And then secondly, can you talk about the cost curve a little bit, I just -- with the magnitude of price declines we're seeing today given with Sulfur having come down, the fact that Chinese kind of kept producing up until quite recently, and even then the cuts remained to be seen, but just kind of how you view the cost curve has evolved as the year progresses. Thank you.

Joc O'Rourke -- President and Chief Executive Officer

OK. Thanks, Adam. Let me say, yes, first of all, the cargoes from some of our competitors that kept coming into NOLA, I suppose some of that might be a misunderstanding or a misprediction of what the spring would do, but there's no question. These unpriced tonnes that are just shipped into these markets are pretty disruptive, and I think that's kind of the nature of that beast.

And so it really will take the tightening of the market to reverse that. But hopefully, the tightening will come soon and that's good. In terms of the cost curve, we don't have -- I don't think we have a good cost curve in this business, but let me give you a couple of benchmarks that I can kind of touch on. First of all, our main North American competitor reported a couple of weeks back or a week ago, they had in their phosphate business cash margin of zero.

The Chinese players, our calculations, they have negative cash margins right now. Ma'aden, at least on Ma'aden II, I think Clint mentioned, our equity earnings will be negative to about $50 million this year. I don't have information on the North Africans or the Russians, but clearly, a big, big chunk of the cost curve is either breaking even or losing money in this market. So that really tells you the pressure upwards on price is not far really away.

Operator

Your next question comes from Mark Connelly.

Unknown speaker

Good morning.

Joc O'Rourke -- President and Chief Executive Officer

Hello?

Unknown speaker

Good morning. This is actually Joan Tang on for Mark Connelly. How are you guys doing? A question of potash. Obviously, pretty strong results and performance there.

I'm just wondering, given the outlook on potash, how long you going to idle the Colonsay mine? Do you have an estimate there?

Joc O'Rourke -- President and Chief Executive Officer

Sure, Joan. We didn't really give a timeframe on what we would idle Colonsay from. Clearly, it's a temporary idling, and it's really more than anything, let's call it a cash preservation opportunity. Esterhazy K3 is ramping up very successfully, which will give us incremental tonnes.

We had some inventory and so we felt with existing predictions, we would make this year without needing any incremental tonnes from Colonsay. Now that can change if the markets in the fall are better than we think, Colonsay may come up earlier. But we have planned somewhere around the end of the year be kind of our target for what we felt comfortable with plans today that plant could be down. But let me highlight, Colonsay is a 2 million tonne, $100 a tonne cash cost producer, and that 2 million tonnes will be much better than that.

We've been running at less than capacity. So that represents an incredible level of flexibility in surge that we have available for us in a better market.

Unknown speaker

That's great. Thank you. And then just getting questions on China. And what are you seeing in China in terms of grain demand? Just wanted to understand it.

The African swine flu obviously, there are a lot of different view about how it's going to affect the grain demand, but we haven't seen grain demand falling off the cliff. Just wondering what you are seeing there? And also for China E10 program, how realistic they are really going to move forward with that? Thank you.

Joc O'Rourke -- President and Chief Executive Officer

Let me leave that one straight over to Corrine and Andy.

Andy Jung -- Director of Market and Strategic Analysis

All right. So what we've seen grain demand standpoint in China is like you said, it hasn't fallen of the cliff, and we wouldn't expect it to. I mean there's still a lot of people and those people still demand food. What we have seen is some switching of a big increase in animal protein imports.

For the month of June both beef and pork imports were up about 60% year over year. So while we might see some switching out or product mix changes there, we be don't expect that to be particularly meaningful to their global SMB in total. And then from E10 program, I think it's been relatively slow to be adopted, but it appears that there -- continuing down that road it just might take a little bit longer time horizon that one may have hoped for in the past.

Operator

And your next question comes from Christopher Parkins.

Christopher Parkins -- Analyst

Thank you. So there's been a lot of movement in the ammonia and sulfur prices for North America producers over the past few quarters. But there's obviously going to be delay in the realization of lower inputs. Can you just comment on the outlook for strip margins for the balance of the year, just the cadence realizing these benefits? And then just a quick update on your longer-term efforts to further reduce rock costs.

That will be incredibly helpful. Thank you.

Joc O'Rourke -- President and Chief Executive Officer

OK. Thanks, Chris. Let me start with both the price of ammonia in the market and the price of sulfur in the market has come down significantly. One of the challenges for us today is with the market being slower, it takes longer for that raw material to move through our product into goods for sale, and then finally, into our sales and cost of goods.

So that takes time and the best of time we figured that takes at least six weeks for ammonia and probably more like three months for sulfur. In this case, it's probably three months plus for both of them. So you got to take quite a while. If we look at next month's prices -- or sorry, next quarter's prices that we have seen today, I think we're expected to be down in the range of $20, $25 a tonne just on flow-through of these cost of goods.

But that's going to take some time, and that's going to take when the consumption comes through. So overall, we expect stripping margins to improve because of raw materials, but luckily that won't -- likely that won't come 'til the end of the third quarter or even into the fourth quarter before we see the meaningful drop that translated into cost of goods.

Operator

Your next question comes from Duffy Fisher.

Unknown speaker

Yes, good morning. Two questions about or two subjects on shutdowns. So, one, I thought that you say that the Plant City shutdown helps your cash flow, but because it's been idle for over a year, that struck me as strange though. Can you just walk through how shutting down Plant City both impacts your P&L going forward? And then what did that shutdown cost? How would it affect the cash flow? And then just on Colonsay, you said you been running under the 2 million.

What is LTM production for Colonsay? And when was that shutdown effective?

Joc O'Rourke -- President and Chief Executive Officer

OK. Let me start with Plant City. I think the issue there as we've been holding Plant City, while out in hot ready, we've been holding it in a ready mode, and we've continued to have it ready to be brought up, if required. The decision to finally move it into shutdown mode does two things.

One, it reduces and stops those costs. Obviously, from a noncash perspective, it stops the depreciation because the depreciation was moved into a writedown. And then while we will have ARO cost or asset retirement cost, those will be not P&L based cost. So hopefully that helps on that one.

And then, I'll hand it to Clint to give you maybe more detail on that. And then, Colonsay P&L, an effective date, effective date I think is early September or sorry, mid-August. And then the P&L impact, I've got a separate P&L impact. It's going to depend on when things are sold, but we do know it will be about a $50 million cash savings.

Clint, do you want to?

Clint Freeland -- Senior Vice President and Chief Financial Officer

Sure, hi, Duffy, this is Clint. So on Plant City, as that facility has been kept in idle status, the total idle cost associated with that has been about $50 million a year. About half of that is depreciation, half of that is cash. Now that it has been formally closed, and now we're going into ARO work, that $50 million running to the P&L will be reduced about $10 million.

Again, about half of that on depreciation, about half of that in cash. So certainly, will be beneficial into the P&L. As we go into ARO work, I think what we've said historically is that would be roughly an average of, call it, $20 million a year over the past five years. So I think from a cash standpoint, you're probably fairly flat.

From a P&L standpoint, you will see an improvement. And then back to Colonsay, again, I think you need to separate cash versus P&L impact. I think as we've talked about a little bit earlier, we will continue to sell down the inventory at that facility. And so while we do expect to see, call it, $40 million to $50 million in cash benefit this year.

As it relates to the P&L and the flow-through of costs, in the near term, we only thing that there will be about $5 million benefit. However, as that inventory is fully sold and then we switch to selling the inventory coming out of K3, that $40 million to $50 million cash benefit will now become P&L benefit. But that will be a little bit more delayed.

Operator

In our next question comes from Jeff Zekauskas.

Jeff Zekauskas -- Analyst

Thanks very much. Your ammonia costs came down a tiny bit, I think there were $337 a tonne. I think you've been buying them up, like in January -- you were buying ammonia to $285 a tonne and the last couple of months have been $215. Is there something unusual as to why your ammonia costs are so high, and they're coming down so slowly? I realized volumes are a little bit light, but is there something more than that?

Joc O'Rourke -- President and Chief Executive Officer

Yeah. Thanks, Jeff. I'll give the simple answer and hand it either Corrine or Clint. I think what you've got to take into account there is what our CF ammonia contract is a fixed volume, and basically, think of it as a fixed price contract probably today that $320 range.

So as the production goes down and ammonia consumption goes down, the ratio of CF contract, ammonia goes up. So actually, it dampen the price decline by quite a bit. We do expect that will go to a more normal one third, one third, one third where we've been, but I think last quarter we were something like 40-some percent of CF ammonia, which makes our cost structure a little higher than what it would have been on just market. Clint or Corrine?

Clint Freeland -- Senior Vice President and Chief Financial Officer

Yeah. The one thing I would add to that, Jeff, I think I alluded to it in my comments a little bit earlier. Is that one of the things that we're trying to do to improve that blended cost for ammonia is to be able to use more of our internally produced ammonia out of Louisiana. And so one of the things we're doing is we're making a modest investment in a dock in Louisiana that will allow us to transport more of that ammonia from Louisiana to Florida to use in our operations.

And again, it should allow us to bring down that average cost because that is the lowest cost source that we have. And we would expect that project to be done by the end of this year so we should start to see benefits from that in 2020.

Operator

Your next question comes from Joel Jackson.

Joel Jackson -- Analyst

Hi, good morning, everyone. I wanted to talk a little bit about the bear case to the low end of your guidance range for the year. So if I understand, you can see flat pricing in P&K for all price tonnes going on for the rest of the year. And I wonder why that is the low end of the range since the price trends for both commodities have not reversed band been falling for some months.

And maybe you -- what's different now? Were you expecting prices to rebound? As you think about Chinese production discipline, but those certain statements made some weeks age, we haven't seen anything really prevail yet. So maybe some little commentary on what can gives you conviction on why now is the time for both commodities to rebound.

Joc O'Rourke -- President and Chief Executive Officer

Well, let me give you two sides, two things on these to say prices move up, which is our expectation. First of all, your mix will change. If you think about first half year, more focused on Asia, less on U.S. for potash as an example -- well, potash and phosphates, probably.

But potash in particular, now we're going to have a big North American fall and Brazil coming into season, those are premium grades or whatever blend grades potash, which sells for higher price. In phosphates, we've just had a 10 million new acres or 10 million acres not planted -- so we expect the farmer to really be pushing for higher acreage and that will mean higher volumes, which really drives a positive price pressure for it. So we felt that was a reasonable level between the barricades in both case. And we were transparent about what the assumptions we use.

Operator

Your next question comes from Ben Isaacson.

Ben Isaacson -- Analyst

Good morning. Thank you. Two questions. First one is on your unallocated capital, which on your slide that shows $300 million to $500 million, down from $400 million to $700 million, and that's supposed to be weighted in the back half of the year.

So here we are. And maybe you can kind of run through how you're thinking about using that capital, Clint or Joc, among balance sheet buybacks, you've obviously doubled the dividends. Is there room for further increase there? Second question is on Plant City. Can you talk about the alternative uses that you're evaluating? What are they? Timing, capex, etc.? Thank you.

Joc O'Rourke -- President and Chief Executive Officer

Well, let me answer the first ones first-- second one first, Ben. No, I can't really talk about the alternative uses because we are in negotiations with other parties for what we might with that. Capex there would not be anything for us. It would be something for somebody else.

The idea would be that rather than tearing down the plant, we would actually repurpose the plant, and there are active negotiations there. In terms of unallocated capital, I think I'll just hand that straight over to Clint to give you a little background.

Clint Freeland -- Senior Vice President and Chief Financial Officer

Yeah. Ben, I don't think our thinking on that really has changed. I think as we look out to the balance of the year and even into 2020, I think we are going to look to certainly continue to look at different investments. We're going to take into consideration where our share price is, and look to be sure that we allocate capital to the highest risk-adjusted opportunities that are available.

I think our balance sheet is in a pretty good spot as we've spoken about before. So I think we can look at those other two alternatives, with that said. We have said that we want to have the cash on our balance sheet and available before we actually allocate it. So at this point, I would say that we're not there yet, but when we are there, those are the things that we would be looking at.

Operator

Your next question comes from PJ Juvekar.

PJ Juvekar -- Analyst

Yes. Hi, good morning. So we've seen numbers that P&K application can be down as much as 6% this year. Do you agree with that cancer? And how much do you think it can bounce back next year? Could it be more than 6%? And then secondly on debt China exports, I think they were up about 10% in the first half.

Where do see them going especially with the weaker Yuan? Thank you.

Joc O'Rourke -- President and Chief Executive Officer

Thanks, PJ. Let me touch on those and then I'll hand them over to Corrine again. Certainly, P&K applications were down if it's 10 million acres, that's certainly down at least 6%, probably closer to 10% in terms of application. So we do expect a bounce back.

But I guess if you took the normal 95 million acres instead of 91 million or 92 million, that would represent about a 3% to 5% bounce back. So while there's been a loss, we expect say half of that to come back in the spring. In terms of China exports, we're seeing those quickly come down. I think we were about 1 million tonnes ahead of last year at the start.

And now in two months, we're down to where we're maybe 100,000 over. Anything you can add to that, Corrine?

Corrine Ricard -- Senior Vice President Commercial and Supply Chain

No, I think that's right, Joc. We started the year at those higher margin levels. They were exporting a little more aggressively. They certainly started decreasing that pace of those exports in May, and we saw a further reduction in the pace of this exports in June.

With the weaker currency, it does help a little bit in terms of the margins, but there's still down very close to their cash -- what we believe our cash cost. And so we expect that we'll see a continued decrease in the pace of those exports. And we still do expect to see a lower number when the year ends from the prior year.

Joc O'Rourke -- President and Chief Executive Officer

And recognize, the weaker currency does help our cash cost slightly, but it incents them to grow more in country, which should incent in-country demand.

Operator

Your next question comes from Michael Piken.

Michael Piken -- Analyst

Yeah. Hi, I was wondering if you guys can provide an update. You guys mentioned that you expect to lose about $50 million from Ma'aden this year. Just your thoughts as we move into 2020.

And how much of that with market conditions versus [Inaudible] associated with this year's ramp up?

Joc O'Rourke -- President and Chief Executive Officer

Thanks, Michael. Look, I think in terms of Ma'aden, I believe the forecast this year is to be running somewhere in that 2 million to 2.5 million tonne mark from Ma'aden and those are questions that are asked of them obviously than us. But I think we that lower volume that they're making this year, their cash margins or their margins will be a little more pressured as they ramp up. But obviously, the market is the other factor.

I mean, and the low ammonia price means a normal advantage in ammonia is much less than it would be under a more normalized market conditions. Let me go back to a question from Chris Parkinson. I think we missed your rock cost question, Chris. So in the interest of helping out, let me -- so rock costs are weak component those between a couple of things.

We have the idling -- idle cost of the South Pasture Mine, which for now is down. We've had a number of turnarounds that we've done, which have impacted the near term rock cost, which also come down. And the other thing is, when we're using less, the ratio of Miski Mayo comes down or comes up, and that tends to add to our overall consumed rock cost. Our 2021 targets that we set in the spring and talked about in the spring have not changed, and you'll see an improvement in those rock costs as we move into the second half of the year.

Operator, are there any more questions?

Operator

There are no more questions.

Joc O'Rourke -- President and Chief Executive Officer

OK. If there are no more questions, I want to conclude our car -- our call. Let me emphasize a couple of key points. First, we are executing very well.

We have transformed our cost structures and operating efficiencies in each of our business unit, and that work is delivering meaningful benefits regardless of the markets. Mosaic today is stronger and more resilient than any time in our history. Secondly, we're making major progress on key initiatives. Our Brazilian mines will be mapped back in full operations this month, and our new K3 mine at Esterhazy is ramping up as expected, and that is giving us extremely good flexibility in our potash business.

Finally, we expect much stronger market fundamentals to emerge as we move into 2020, and we expect Mosaic and its shareholders to benefit from our work to strengthen the company as markets improve. Thank you for joining our call today, and have a great day.

Operator

[Operator signoff]

Duration: 55 minutes

Call participants:

Laura Gagnon -- Vice President, Investor Relations

Joc O'Rourke -- President and Chief Executive Officer

Clint Freeland -- Senior Vice President and Chief Financial Officer

Steve Byrne

Rick McLellan -- Analyst

Vincent Andrews -- Analyst

Andy Jung -- Director of Market and Strategic Analysis

John Roberts -- Analyst

Jonas Oxgaard -- Analyst

Corrine Ricard -- Senior Vice President Commercial and Supply Chain

Andrew Wong -- Analyst

Adam Samuelson -- Analyst

Unknown speaker

Christopher Parkins -- Analyst

Jeff Zekauskas -- Analyst

Joel Jackson -- Analyst

Ben Isaacson -- Analyst

PJ Juvekar -- Analyst

Michael Piken -- Analyst

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