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Mosaic: The Leading Global Potash Producer in the Oligopoly Industry

January 03, 2012 | About:
Mosaic (MOS) is the producer and marketer of concentrated phosphate and potash crop nutrients for the global agriculture industry. The company mined phosphate rock in Florida and processed rock into finished products in Florida and Louisiana, In addition, it mined potash in famous Saskatchewan area, New Mexico and Michigan. There are two segments in Mosaic’s business: phosphates and potash. In terms of revenue share in fiscal 2011, phosphates took 69% of the total revenue, and potash was only 31%. But in terms of operating earnings, the two segments were equivalent to each other.

Over a 10-year period, MOS's share price experienced an extreme boom in 2007-2008 where the share shot up from around $20 in the beginning of 2007 to more than $150 in the middle of 2008. Then it plunged immediately to the $27 range at the end of 2008. Year to date, MOS has dropped nearly 50% from the $90 area to $47, and now it is staying at the $50 level.

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Recently, analysts have become bearish on MOS. The consensus analyst estimate has reduced five cents of earnings from $1.35 to $1.30 per share. However, it was more than a 27% increase from the last year when MOS reported earnings of $1.02 per share. Maybe because of that the share has kept declining further over the year. However, looking over the long-term horizon historically, MOS's business has grown quite fast in both the top line and bottom line. Revenue increased from $2 billion to nearly $10 billion within 10 years, and net income has fluctuated in the negative figures and now already topped $2.5 billion.

The interesting things for MOS are their very conservative financial structure and the cash flow generator. Over the years, from the D/A was huge at nearly 90% and more than 50% of total asset in the long-term debt, now the D/A stays at only 25% and the long-term debt has been reduced to nearly 5%. Currently, MOS has $4 billion in cash but only $900 million in total debt. So with the market capitalization of $22.5 billion, the enterprise value is only $19.4 billion.

USD million 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
OCF -157 7 39 334 280 708 2547 1243 1356 2427
CAPEX -123 -140 -120 -255 -390 -292 -372 -781 -911 -1263
FCF -280 -133 -81 78 -110 416 2174 462 445 1164


Being the cash flow generator, MOS has used it to gradually pay off debt, bringing the company to a sounder and stronger financial foundation. The free cash flow has turned positive for the last five years.

MOS can be considered a producer as well as the miner, so the performance of the business would be quite dependent on the potash price, and the potash price has been quite volatile during the 10-year history, from nearly $200 to nearly $1,000, and it dropped to nearly $500 currently.

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However, potash producers seem to have advantages over other commodities because the industry is like an oligarchy. Potash production is a concentrated industry with the top six producers taking an 80% share of the world market’s capacity. So the producers have the advantage of maintaining the commodity price over the marginal cost of the production.

MOS is held by quite a few gurus, including George Soros, Ken Fisher, John Paulson, etc.

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As for insider trading, MOS executives had consistently sold MOS stocks out with the price range of $75-$86 per share.

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Currently, MOS is trading at only single-digit valuation — 8.2x P/E, 1.8x P/B and 9.3x P/CF — equivalent to only around a third of the five-year averages. Personally I think it was quite undervalued, and it was a big-cap stock for the big funds which can deploy a large amount of cash to invest in undervalued positions. Even though a big gain might not occur in the short-run, for the smaller and risk-adverse investors, the stock can be safe to purchase at this price, if there is not a sudden free fall in the potash price.

This is the subjective viewpoint of the author, and it is not the recommendation to buy, hold or sell the stocks mentioned in this analysis. Anyone who wishes to buy, hold or sell the stocks has to do his/her own analysis at his/her own risk.

About the author:

Anh Hoang
Money manager into global equities, especially with US and Vietnam markets. CFA level 3 candidate. Lecturer for Stalla - CFA course in Vietnam

Visit Anh Hoang's Website


Rating: 3.6/5 (14 votes)

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