MOS

Business Context and Reporting Period

Company: The Mosaic Company (Mosaic)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: February 28, 2010 (Third Quarter of Fiscal 2010)
Business Overview: Mosaic is a leading global producer and marketer of concentrated phosphate and potash crop nutrients. During the second quarter of fiscal 2010, the company realigned its reporting structure, combining the former Offshore segment into the Phosphates segment, resulting in two primary reportable segments: Phosphates and Potash.

Key Financial Metrics

Material Changes vs. Prior Comparable Period

• Revenue and Profitability: Net sales increased 26% year-over-year for the quarter to $1.73 billion, driven by a 52% increase in sales volumes. Net earnings attributable to Mosaic surged 279% to $222.6 million ($0.50 EPS) compared to $58.8 million ($0.13 EPS) in the prior year quarter. This recovery contrasts with the nine-month period, where net earnings declined 80% to $431.0 million due to significantly lower selling prices and a $673.4 million gain on the sale of an equity investment in the prior year.
• Segment Performance:
  • Phosphates: Sales volumes recovered to 2.5 million tonnes (up 52% vs. prior year). Gross margin improved to $114.0 million (11% margin) from a loss of $70.1 million in the prior year, aided by lower raw material costs (sulfur and ammonia) and the absence of inventory write-downs recorded in the prior year.
  • Potash: Sales volumes increased 140% to 1.9 million tonnes. Gross margin rose 70% to $352.0 million, driven by volume recovery despite a 37% decline in average selling prices.
• Inventory Write-downs: The company recorded no "lower of cost or market" write-downs in the current quarter or nine-month period, compared to $28.3 million and $321.8 million, respectively, in the prior year periods.
• Foreign Currency: The company incurred a foreign currency transaction loss of $22.3 million for the quarter, reversing a gain of $47.1 million in the prior year, primarily due to the weakening of the U.S. dollar against the Canadian dollar.

Guidance, Outlook, and Risks

Management Commentary and Outlook:

• Management notes a continued recovery in sales volumes, particularly in the North American crop nutrient market, with improved application rates and restocking of distribution channels.
• While selling prices remain lower than the prior year, there has been some recovery in phosphate prices from the lows seen in the first half of fiscal 2010.
• The company expects planned potash expansions to increase annual capacity by more than five million tonnes over the next ten years.

Strategic Transactions:

• Vale Agreement: Entered into agreements with Vale S.A. granting call/put options to sell Mosaic's minority stakes in Fertifos and Fosfertil and its Cubatão facility in Brazil. The aggregate sales price is expected to exceed $1 billion, with a sizable gain anticipated in fiscal 2011.
• Bayovar Joint Venture: Entered into an agreement to form a joint venture for the Bayovar phosphate rock mine in Peru, acquiring a 35% economic interest for $385 million.

Risks and Contingencies:

• Legal Proceedings: Significant litigation includes the "Potash Antitrust Cases" (alleged price-fixing), the "Esterhazy Potash Mine Tolling Contract Disputes" with Potash Corporation of Saskatchewan (PCS), and environmental matters including EPA RCRA and Clean Air Act initiatives.
• Permitting: Operations depend on governmental permits. Delays in obtaining a federal wetlands permit for the Hardee County Extension of the South Fort Meade mine could impact future mining plans.
• Regulatory: Potential impacts from climate change regulations (greenhouse gas emissions) in the U.S. and Canada, and proposed numeric nutrient discharge criteria in Florida.

Key Facts for Investor Verification

• Dividend Policy: Verify the sustainability of the $1.45 per share dividend paid during the nine-month period ($645.7 million total) against the $2.2 billion in available distribution capacity under credit facility covenants.
• Asset Sale Timing: Confirm the closing conditions and expected timing for the sale of Brazilian assets to Vale, which is contingent on Vale's acquisition of Bunge's fertilizer business.
• Raw Material Costs: Monitor sulfur and ammonia prices; while currently lower than the prior year, management notes tightening world demand for sulfur which could increase costs in the fourth quarter.
• Legal Exposure: Assess the potential financial impact of the Potash Antitrust litigation and the PCS tolling contract dispute, where damages claimed by PCS exceed $1 billion.
• Inventory Valuation: Verify that the absence of inventory write-downs in the current period reflects stable market prices relative to inventory costs, given the volatility in commodity markets.