The Mosaic Company (MOS) Stock Report
April 9, 2013
Student Analyst: Jon Koval
The Mosaic Company
NYSE: MOS - $59.14
BASIC MATERIALS
The Ohio State University SIM
Fund
Student Analyst: Jon Koval
Phone: (440) 213-7152
Email: koval_34@fisher.osu.edu
RATING: HOLD
12-Month Price Target: $66.00
Company Overview
The Mosaic Company is the world’s leading
producer and marketer of combined concentrated
phosphate and potash crop nutrients. Phosphate and
potash are two of the basic nutrients required for crop
growth. Mosaic is vertically integrated owning assets
from the actual phosphate and potash mines to the
fertilizer production facilities.
Investment Thesis
I am recommending a HOLD rating for The Mosaic Company (MOS) with a 12-month
price target of $66.00. This represents an 11.6% premium above the current stock price of
$59.14. Although Mosaic is in a highly cyclical sector and industry, its products are well
positioned to serve the increasing need for efficient food production. This is a need that is
likely to continue to increase in both magnitude and importance as the world’s population grows
and arable land decreases. In addition, Mosaic is able to take advantage of economies of
scale as the world’s largest producer of combined phosphate and potash crop nutrients. This
coupled with an extremely conservative balance sheet will allow Mosaic to create higher than
expected returns for its shareholders.
Risks






Highly cyclical  Extremely sensitive to economic conditions
Intense global competition creates price pressure
Seasonal business with high variability in crop nutrient demand creates difficulties in
forecasting demand accurately and maintaining reasonable inventory levels
Costs dependent on natural gas and ammonia spot prices
Potential for brine water damage in mines
Changes in government regulation
Market Cap: $25.18B
52 Week Range: $44.43 - $63.46
Beta: 1.57
Diluted Shares Outstanding: 425.75M
Dividend Yield: 1.70%
ROA: 8.82%
ROE: 15.32%
P/E: 13.22
Source: Yahoo! Finance, April 7, 2013, http://finance.yahoo.com/.
Page 1 of 20
The Mosaic Company (MOS) Stock Report
April 9, 2013
Student Analyst: Jon Koval
Table of Contents
Company Overview ………………………………………………………………………………….... 3
Overall Company Performance …………………………………………………………………… 3
Segment Analysis ………………………………………………………………………………….. 4
Summary ……………………………………………………………………………………………. 6
Investment Thesis …………………………………………………………………………………...... 8
Fundamental Drivers …………………………………………………………………………...….. 8
Financials ……………………………………………………………………………………..…… 12
Valuation and Price Target ………………………………………………………………………. 15
Risks/Concerns to Recommendation ……………………………………………………………. 18
Conclusion ……………………………………………………………………………………………. 19
Sources ……………………………………………………………………………………………...… 20
Page 2 of 20
The Mosaic Company (MOS) Stock Report
April 9, 2013
Student Analyst: Jon Koval
Company Overview
The Mosaic Company is the world’s leading producer and marketer of combined
concentrated phosphate and potash crop nutrients for the global agriculture industry.
Phosphate and potash are two of the basic nutrients required for crop growth and they
represent Mosaic’s two business segments. Mosaic serves customers in approximately 40
countries and is vertically integrated owning assets from the actual phosphate and potash mines
to the fertilizer production facilities. It was incorporated in March 2004 and was formed through
the October 2004 combination of IMC Global Inc. and the fertilizer business of Cargill1. Mosaic
is one of three S&P500 companies in the Chemicals – Agricultural/Fertilizer industry of the
Basic Materials sector.
Overall Company Performance
Mosaic’s performance is highly cyclical as it represents products that have a high
dependency on economic conditions. In 2012, Mosaic’s net sales increased for the second year
in a row while earnings remained relatively flat. In recent years, Mosaic has continued to invest
in its effort to expand the annual proven peaking capacity of its potash segment by five million
tons by the end of the decade. This is a great investment for the company, since the potash
segment provides high margins for Mosaic and has seen continued growth in demand.
Additionally, global fertilizer demand is expected to increase as a result of a projected strong
crop growing season and high corn price futures as a result of 2012’s dry growing season that
resulted in lower than expected crop production.
Currently Mosaic has an extremely conservative balance sheet with just over $3 billion in
cash and $1 billion in debt. Looking forward, Mosaic’s senior management has indicated that it
Page 3 of 20
The Mosaic Company (MOS) Stock Report
April 9, 2013
Student Analyst: Jon Koval
will aim for a more efficient balance sheet by spending some of its cash on hand and increasing
its leverage to provide increased returns to its shareholders.
Segment Analysis
Mosaic has two business segments: Phosphate and Potash. The FY2012 breakdown
of business segment sales volumes, net sales, and operating earnings are shown in the charts
below:
Source: The Mosaic Company 2012 Annual Report (10K), http://phx.corporateir.net/phoenix.zhtml?c=70455&p=quarterlyEarnings.
One of the standout characteristics of Mosaic’s two business segments is that
phosphates accounts for a majority of the company’s sales; however, potash accounts for a
majority of the company’s earnings. This is the result of the different business dynamics within
the segments that allows potash to earn much higher margins compared to phosphate. This
profile is expected to continue in the immediate future.
Phosphates Segment
Mosaic is the largest integrated phosphate producer in the world and one of the largest
producers of phosphate-based animal feed ingredients in the United States. In fiscal 2012,
Mosaic accounted for approximately 13% of estimated global production and 58% of estimated
North American production of concentrated phosphate crop nutrients1. The fact that Mosaic is
the world leading phosphate producer, but only accounts for 13% of global phosphate
production demonstrates how the phosphate industry is highly segmented with many different
producers. As a result, rivalry among the phosphate producers tends to force phosphate prices
down and greatly reduce the margins that companies can extract from their phosphate products.
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The Mosaic Company (MOS) Stock Report
April 9, 2013
Student Analyst: Jon Koval
Fortunately for Mosaic, as the world’s largest phosphate producer, it is able to enjoy
scale of economies allowing the company to keep production costs per unit low which is
essential when dealing with a commodity product. Phosphate margins are volatile having
ranged from 13% to 30%. For the 3rd quarter of FY2013, Mosaic’s phosphate margins were
18%. In addition, Mosaic’s phosphate production ran at 87% of operational capacity which was
well above the 75% hurdle rate that is needed for Mosaic to produce phosphate efficient with
reasonably low costs. Looking forward the company expects operational capacity to remain
above 85% which is a good sign for Mosaic’s phosphate segments sales and margins2.
In an effort to differentiate its concentrated phosphate products, Mosaic has created a
product it calls MicroEssentials® which uses a patented formula to increase the effectiveness of
its phosphate nutrients1. While it is a positive sign to investors that Mosaic is seeking
innovations in its phosphate segment to reduce volatility and increase margins, the company’s
efforts have not yet yielded those intended results.
Potash Segment
Mosaic is the fourth largest producer of potash in the world accounting for approximately
12% of estimated global potash production and 39% of estimated North American potash
production during fiscal 2012. Despite not being the largest potash producer, Mosaic is able to
enjoy much higher and less volatile margins as compared to their phosphate segment.
Mosaic’s potash margins have ranged from 47.6% to 53.5% in recent annual reports1. This
benefit of higher margins is largely due to the fact that most of the potash production is
accounted for by the top six producers which allow the potash industry to operate more like an
oligopoly. Most North American potash producers participate in Canpotex which handles most
of the world’s potash sales and distribution3. This essentially allows potash producers to pool
their production in order to achieve greater power when dealing with buyers and enables more
advantageous pricing.
Mosaic is currently engaged in a multi-billion dollar investment to increase its potash
production by more than five million tons by the end of the decade. This is a positive sign that
Mosaic is ensuring it will have the ability to keep up with the increasing demand for potash by
the world’s farmers.
Looking forward industry analysts are projecting that 2013 will be a strong year for the
potash industry4. This is largely due to a recent contract between Canpotex and China and
India that will have the two countries return to buying and importing potash from Canpotex. In
addition, 2013 is expected to be a strong year for farmers as a result of higher crop prices due
to last year’s poor growing season. These are positive signs that Mosaic will be able to
continue to grow its potash sales in the coming year.
Page 5 of 20
The Mosaic Company (MOS) Stock Report
April 9, 2013
Student Analyst: Jon Koval
Company Overview Summary
Phosphates
Potash
FY2012 Net Sales
$7,839
$3,301.3
North America Sales
International Sales
$4,367
$7,469
$3,054
$3,666
FY2012 Operating
Earnings
$1,179
$1,457.3
FY2012 Gross Margin
18.7%
49.1%
13%
12%
Crop Futures
Population Growth
Worldwide Economic Conditions
Household Incomes
Demand for Protein Rich Food
Weather
Crop Futures
Population Growth
Worldwide Economic Conditions
Household Incomes
Demand for Protein Rich Food
Weather
(US$ in millions)
Market Share
Growth Drivers
Source: The Mosaic Company 2012 Annual Report (10K), http://phx.corporateir.net/phoenix.zhtml?c=70455&p=quarterlyEarnings.
Competitive Advantages
 World’s largest phosphate producer enables enhanced economies of scale to reduce
costs per unit.
 Global reach with operations in 40 countries and production facilities in the four largest
crop nutrient markets (U.S., China, India, Brazil5).
 Vertically integrated to be able to manufacture a portion of its sulfur and ammonia (two
key costs in crop nutrient production).
 Over 100 years of expected potash reserves ensuring a sustainable supply of crop
nutrient ingredients.
 Extremely conservative balance sheet allowing flexibility in capital expenditures.
Main Issues Influencing Stock Price
 Future fertilizer demand, which is mostly determined by expected crop yields and prices,
have the largest impact on Mosaic’s stock price. Analysts are expecting a strong
growing season in 2013 as a result of lower yields in 2012 which should ensure strong
fertilizer demand.
 Mosaic’s conservative balance sheet ($3 billion in cash and only $1 billion in debt) have
been a major concern of institutional investors. In its third quarter earnings call,
Mosaic’s senior management finally commented on a plan to use up cash and add debt
in order to have a more efficient balance sheet. This is a positive sign for investors as
Page 6 of 20
The Mosaic Company (MOS) Stock Report
April 9, 2013
Student Analyst: Jon Koval

some portion of the spending will be returned directly to shareholders through share
buybacks.
Natural gas is the largest cost item in crop nutrient production and has been enjoying
low market prices as a result of the shale gas boom. This will continue to benefit
Mosaic’s cost structure.
Recent Important News & Events
 On December 31, 2012, North American potash producers, through Canpotex, signed
China to a 6-month contract to supply potash to the country. The contract was signed at
a price discount; however, it was a positive for potash producers since it secured
additional volumes that were missing since China’s last contract expired6.
 On February 7, 2013, North American potash producers, through Canpotex, signed India
contract to supply about 1.1 million tons of potash to the country up to January of 2014.
This should ensure, along with the contract with China, should ensure that potash
volumes increase in 20137.
 On March 28, 2013, Mosaic reported FY2013 Q3 earnings. Mosaic’s net sales and
earnings were both up over a year ago; however, they were both slightly short of
analysts’ expectations8.
 On March 28, 2013, Corn futures prices dropped due to projected higher than expected
crop stockpiles. Crop futures are a strong indicator of farmers’ profitability and
determine how much farmers will plant and as a result how much fertilizer demand there
will be. The drop in corn futures will lower fertilizer sales’ projections; however, the
prices are still high relative to the historical average9.
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The Mosaic Company (MOS) Stock Report
April 9, 2013
Student Analyst: Jon Koval
Investment Thesis
I am recommending a HOLD rating for The Mosaic Company (MOS) with a 12-month
price target of $66.00. This represents an 11.6% premium above the current stock price of
$59.14. My target price was determined using an average of a DCF analysis value of $65.88
and an average multiple value of $66.55 per share.
Price Target Comparison
Target Price
SIM Analyst
Consensus on
Yahoo! Finance
Consensus on
CNN Money
Deutsche Bank
$66
$85
$69
$64
10
Sources: Yahoo! Finance, http://finance.yahoo.com.
11
CNN Money, http://money.cnn.com/quote/forecast/forecast.html?symb=MOS.
12
http://seekingalpha.com/article/1314171-mosaic-is-ready-to-make-a-move?source=yahoo.
Although Mosaic is in a highly cyclical sector and industry, its products are well
positioned to serve the increasing need for efficient food production. This is a need that is likely
to continue to increase in both magnitude and importance as the world’s population grows and
arable land decreases. In addition, Mosaic is able to take advantage of economies of scale as
the world’s largest producer of combined phosphate and potash crop nutrients. This coupled
with an extremely conservative balance sheet will allow Mosaic to create higher than expected
returns for its shareholders.
Fundamental Drivers
Balance Sheet
I believe the current stock price fails to reflect Mosaic’s conservative balance sheet.
Mosaic currently has over $3 billion in cash on hand and only $1 billion in debt. Institutional
investors have been concerned over how Mosaic’s senior management would handle its excess
cash and debt capacity. In its third quarter earnings’ call on March 28, 2013, Mosaic’s senior
management indicated that it planned to create a more efficient balance sheet by using some of
its cash and increasing its leverage. While the specific plan and timeline are not going to be
announced until later this year, management was able to provide a basic format for investors to
use. Furthermore, management laid out the cash priorities for its capital allocation to be13:
1. Organic growth and to maintain their dividend
2. Strategic investments
3. Additional return to shareholders likely through share repurchases
Analyzing management’s comments and Mosaic’s balance sheet, I estimate that Mosaic
plans to use approximately $1.35 billion of its cash and add approximately $2.30 billion in debt
Page 8 of 20
The Mosaic Company (MOS) Stock Report
April 9, 2013
Student Analyst: Jon Koval
for a net of $3.65 billion in capital allocation. This represents $8.55 per share. While this
capital will not all be returned directly to shareholders through dividends and share repurchases,
the remaining will go to capital expenditures and strategic investments that are likely to increase
Mosaic’s revenue outlook.
Crop Futures
Crop futures provide a gauge for how profitable farmers will be in a given growing
season which in turn determines how much farmers will plant. The higher the crop prices, the
more farmers will plant, and the more fertilizer they will need to buy. In general crop prices have
increased at a rate faster than inflation which has in turn led to a consistent increase in fertilizer
demand. On March 28, 2013, corn futures dropped more than 5% due to higher than expected
corn stockpiles. However, prices still remain at historically high levels and are expected to
continue to increase in the near future based on a projected strong growing season and the
increasing demand for food by the world population. The chart below shows the steady
increase in monthly corn futures prices:
Monthly Corn Commodity Futures Price Chart
14
Source: http://futures.tradingcharts.com/chart/CN/M.
World Population Growth
The growth of the world population is creating higher demand for food while available
arable land continues to decrease continues to provide a sustainable growth in crop nutrient
demand. A study performed in a 2004 study by the UN estimated the world population to
increase from 6.1 billion people in 200 to 8.9 billion in 2050 which equates to a 47% increase15.
This reflects positively on the future demand for Mosaic’s products.
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The Mosaic Company (MOS) Stock Report
April 9, 2013
Student Analyst: Jon Koval
Household Income
As household incomes increase, people tend to purchase more protein rich foods such
as beef and pork. Since it takes roughly 2.5 to 5.0 lbs. of grain to produce a pound of beef or
pork, when beef and pork consumption increases grain consumption increases significantly.
This in turn increases the need for crop nutrients16.
The U.S. is currently in its mid-economic cycle which comes with increasing incomes. In
addition as developing countries like China, Brazil, and India continue to grow their middle
classes, the demand for protein rich foods in these countries will also grow. This reflects well
for crop nutrient demand.
Natural Gas Prices
Natural gas is the largest cost item in Mosaic’s cost structure. As a result, Mosaic’s
profitability is largely dependent on natural gas prices. So far this year, natural gas prices have
increased 23 percent due to cold weather that has helped erase stockpiles17. Looking forward, I
would expect natural gas prices to level off or decrease as the warm weather months arrive
which should alleviate some of pressure on Mosaic’s cost structure. Furthermore, I believe
recent gas price increases are already priced into Mosaic’s stock price.
Natural Gas Futures Price – 5 Year Price
Source: http://quotemedia.com/.
18
Sector Performance
As would be expected, Mosaic tends to follow the basic materials sector performance.
When considering the sector’s historical performance, basic materials has outperformed the
market during the early and late stages of the economic cycle, underperformed the market
during the middle stage of the cycle, and matched the market during the recession stage19.
I would consider the U.S. in the middle stage of the economic cycle and Europe in the
recession phase. Both of these would indicate that the sector is likely to underperform or match
the market in these regions. Fortunately, Mosaic is an extremely global corporation with a large
amount of business in the growing economies of China, Brazil, and India to help diversify some
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The Mosaic Company (MOS) Stock Report
April 9, 2013
Student Analyst: Jon Koval
of the risk of reduced output. In addition, I believe that Europe will not see another large dropoff and that it is near its bottom with its recessionary effects already priced into the market. As a
result, there is less of a downside risk when considering Europe impact on Mosaic’s
performance.
Typical Economic Cycle
19
Source: https://www.fidelity.com/viewpoints/how-to-use-business-cycle) .
Page 11 of 20
The Mosaic Company (MOS) Stock Report
April 9, 2013
Student Analyst: Jon Koval
Financials
Income Statement Projections
Mosaic Company
(in millions USD)
Revenues
Net Sales
Consensus
Operating Costs and Expenses
Costs of Goods Sold
Selling, General and
Administrative Expenses
Other Operating Expenses
Operating Costs and Expenses
Operating Earnings
Interest income (expense), net
Foreign currency transaction gain
(loss)
Gain on sale of equity investment
Other expenses
Earnings from consolidated
companies before taxes
Provision for income tax
Earnings from consolidated
companies
Equity in net earnings (loss) of
nonconsolidated companies
Less: Net earnings (loss)
attributable to non-controlling
interests
Net income (loss)
EPS – basic:
Net EPS
Shares outstanding - basic
EPS – diluted:
Net EPS
Consensus
Shares outstanding - diluted
FY ends May 31 of stated year (FY2013 ends May 31, 2013)
FY
FY
FY
FY
FY
2015E
2014E
2013E
2012
2011
12,284
11,680
10,700
10,382
10,100
11,108
9,938
8,835
8,316
7,646
8,023
6,816
436
420
415
410
373
61
9,333
58
8,795
62
8,123
64
8,497
85
7,274
2,951
2,885
2,258
2,611
2,664
21
18
21
19
(5)
(74)
(6)
(70)
(6)
(73)
(5)
17
(18)
(56)
686
(17)
2,966
2,897
2,274
2,629
3,271
741
724
568
711
753
2,224
2,172
1,705
1,918
2,519
13
(5)
1
(1)
-
-
-
2,224
2,172
1,705
1,930
2,515
5.23
5.10
4.01
4.44
5.64
425.7
425.7
425.7
435.2
446.0
5.21
5.09
4.95
3.99
4.30
4.42
5.62
427.0
427.0
427.0
436.5
447.5
Page 12 of 20
The Mosaic Company (MOS) Stock Report
April 9, 2013
Student Analyst: Jon Koval
The above estimates for revenue and EPS differ from consensus; however, since
Mosaic is in a highly cyclical industry the projections of different analysts can vary more than
they would for less cyclical companies. The projections above are actually within the range of
analysts’ forecasts that is used to determine the consensus estimate11.
The revenue projection above is higher than consensus because of the impact that the
recent potash contract between Canpotex and the countries of China and India will have on
Mosaic’s earnings. This should enable Mosaic to see a significant sales growth in 2014. The
projections above are also based on gas prices remaining low in the next few years due to the
shale gas boom and a reasonable strong growing season in FY2014 due to the high corn
futures prices.
The EPS estimate for FY2013 is lower than consensus mainly due to the uncertainty of
whether Mosaic’s senior management would use its excess cash to buy back shares. I made
the assumption that there would be no share buy backs since senior management has not yet
announced a plan to buy back shares. However, in its latest earnings call on March 28, 2013,
Mosaic’s senior management did announce that it is planning to spend a significant portion of its
cash on hand and add debt which could lead to share buy backs. Management indicated that
no official plan was set and more information would be available in the summer months.
Peer Comparison
Below is a comparison of Mosaic and some of its key competitors in its industry:
CF Industries
Mosaic
Potash
Agrium
Data from finance.yahoo.com on
Holdings, Inc.
4/7/2013
(MOS)
Corp. (POT)
(AGU)
(CF)
Market Cap
25.18B
34.10B
11.97B
14.32B
Qrtly Rev Growth (yoy)
2.30%
-14.10%
-13.80%
2.60%
Qrtly Earnings Growth (yoy)
26.10%
-38.40%
7.20%
87.30%
Revenue (ttm)
10.10B
7.43B
6.10B
16.69B
Operating Margin (ttm)
23.23%
39.85%
47.89%
12.70%
Net Income (ttm)
1.91B
2.08B
1.85B
1.49B
Diluted EPS (ttm)
4.47
2.37
28.59
9.55
P/E (ttm)
13.22
16.63
6.64
10.06
P/S (ttm)
2.50
4.61
1.96
0.86
Debt-to-Equity
8.16
41.17
25.55
57.24
8.82%
10.74%
19.09%
9.10%
15.32%
23.41%
34.30%
22.45%
Phosphate
& Potash
Potash
Potash
Phosphate
ROA
ROE
Main Product Segment
ttm = Trailing Twelve Months (as of Dec. 31, 2012)
yoy = Year Over Year (as of Dec. 31, 2012)
10
Source: Yahoo! Finance, http://finance.yahoo.com .
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The Mosaic Company (MOS) Stock Report
April 9, 2013
Student Analyst: Jon Koval
From reviewing this data, a few things are apparent. First, there is a clear difference in
revenue growth and operating margins between the companies that produce potash and the
companies that produce phosphate. The potash companies, Potash Corp. and CF Industries
Holdings Inc., both enjoy the higher margins that potash brings due to ‘oligopoly-like’ structure
of the potash industry. However, due to a period this past year in which both China and India
were not purchasing potash from Canpotex, these companies also saw a decrease in revenue
growth. On the other hand, the phosphate company, Agrium, has the lowest margins since the
phosphate industry is highly competitive which drives down prices, but it also enjoyed the
highest revenues growth since phosphate crop nutrients did reasonably well over the past
twelve months. This demonstrates another benefit that Mosaic brings offers to investors:
diversification. Since Mosaic is a large producer of both potash and phosphate, it is bettered
diversified if one of those two industries were to perform poorly for a given year. As a result, it
does have slightly reduced margins compared to the potash companies, but its revenue tends to
be less volatile than many of its peers.
The other item that stands out from the peer comparison is Mosaic’s extremely low debt
holdings. Mosaic has by far the lowest debt-to-equity ratio, which shows that it has plenty of
debt capacity to be able to take on new debt without much risk of changing its investment grade
status.
Page 14 of 20
The Mosaic Company (MOS) Stock Report
April 9, 2013
Student Analyst: Jon Koval
Valuation and Price Target
Multiples Analysis
Target E,
S, B,
etc./Share
Target
Price
Absolute
Valuation
High
Low
Median
Current
Target
Multiple
P/Forward E
25.6
3.4
14.6
13.4
14.6
4.25
62.05
P/S
8.0
0.7
2.3
2.6
2.3
24.76
56.95
P/B
12.9
1.6
2.4
2.1
2.4
29.61
71.06
P/EBITDA
48.74
4.09
10.06
10.40
10.06
6.82
68.61
P/CF
74.6
5.8
14.0
11.7
14.0
5.29
74.06
Information sourced from Thompson Reuters Baseline
From reviewing Mosaic’s multiples, the company appears to be currently priced at a
discount. By assuming that over time Mosaic’s multiples will converge on its historic median
values, the average multiple places the stock at $66.55 per share which places the current
share price of $59.14 at roughly a 12.5% discount. This is not considered a sufficient enough
margin of safety to recommend a BUY rating based on the following rating guidelines:
Rating
Margin of Safety
SELL
<5%
HOLD
5-15%
BUY
>15%
One item to note is that some of these multiples fail to capture the extremely attractive capital
structure of Mosaic – only $1B in debt and $3.3B in cash. The multiples that manage to capture
Mosaic’s cash more accurately, like historic P/CF and P/B, result in notably higher target prices
which are likely closer to the true intrinsic value.
Page 15 of 20
The Mosaic Company (MOS) Stock Report
April 9, 2013
Student Analyst: Jon Koval
Discounted Cash Flow Analysis
The Mosaic Company (MOS)
Analyst: Jon Koval
Date: 2/12/2013
Year
Terminal Discount Rate =
Terminal FCF Growth =
2012E
Revenue
10,382
% Grow th
2,258
Operating Margin
21.8%
Interest and Other
Interest % of Sales
Taxes
Tax Rate
Net Income
% of Sales
Plus/(minus) Changes WC
% of Sales
Subtract Cap Ex
3,083
24.0%
23.9%
13,517
4.8%
3,217
23.8%
14,139
4.6%
3,351
23.7%
2018E
14,761
4.4%
3,498
23.7%
2019E
15,410
4.4%
3,637
23.6%
2020E
16,073
4.3%
3,793
23.6%
2021E
16,764
4.3%
3,940
23.5%
2022E
17,477
4.25%
4,107
23.5%
(59)
(62)
(65)
(68)
(71)
(74)
(77)
(80)
(84)
-0.5%
-0.5%
-0.5%
-0.5%
-0.5%
-0.5%
-0.5%
-0.5%
-0.5%
568
724
741
755
788
821
857
891
929
965
25.0%
25.0%
25.0%
25.0%
25.0%
25.0%
25.0%
25.0%
25.0%
25.0%
2,172
2,224
2,266
2,364
2,462
2,571
2,672
2,787
2,894
1,006
25.0%
3,017
27.4%
2.4%
1.8%
4.4%
4.2%
4.4%
4.0%
498
526
565
645
676
778
886
925
4.8%
4.5%
4.6%
5.0%
5.0%
5.5%
6.0%
6.0%
7.0%
7.0%
(44)
(350)
(52)
(54)
(54)
(54)
(54)
(57)
(58)
(60)
(62)
-0.4%
-3.0%
-0.4%
-0.4%
-0.4%
-0.4%
-0.4%
-0.4%
-0.4%
-0.4%
-0.4%
15.5%
Free Cash Flow
584
% Grow th
9,035
16,084
25,119
2.31%
14.8
14.7
8.4
8.4
Shares Outstanding
2,951
5.0%
2017E
(58)
1,609
Current P/E
Projected P/E
Current EV/EBITDA
Projected EV/EBITDA
12,898
5.2%
2016E
-0.5%
Capex % of sales
NPV of Cash Flows
NPV of terminal value
Projected Equity Value
Free Cash Flow Yield
24.7%
12,284
2015E
(57)
1,705
Add Depreciation/Amort
2,885
2014E
-0.6%
% Grow th
Debt
Cash
Cash/share
Total Assets
Debt/Assets
Working Capital % of Growth
11,680
12.5%
Operating Income
Current Price
Implied equity value/share
Upside/(Downside) to DCF
2013E
11.00%
4.25%
1,694
14.5%
1,781
1,806
14.5%
699
994
19.6%
42.2%
14.0%
1,087
9.3%
1,757
13.0%
1,262
16.1%
36%
64%
100%
1,697
12.0%
1,518
20.2%
1,624
11.0%
1,802
18.7%
1,541
10.0%
2,019
12.1%
4.3%
1,125
1,447
9.0%
2,419
19.8%
3.8%
1,173
1,341
8.0%
2,673
10.5%
Terminal Value
Free Cash Yield
11.6
11.6
6.8
6.8
11.4
11.3
6.6
6.6
4.3%
1,398
8.0%
1,398
8.0%
2,957
10.6%
45,670
6.47%
Terminal P/E
15.1
Terminal EV/EBITDA
7.9
427
$
$
59.14
58.83
-0.5%
1,033
3,012
7.05
34,883
3.0%
8%
The discounted cash flow (DCF) analysis provides a bottom-up valuation of Mosaic and
initially results in a target price of $58.83. However, this target price only considers the
projected free cash flows of Mosaic and does not take into account Mosaic’s large amount of
cash and small amount of debt. These must be considered as having an impact on the share
price. So by adding the cash per share for Mosaic of $7.05 (does not include cash needed for
working capital), the actual target price for Mosaic is $65.88 (11.4% above the current market
price).
As with any DCF analysis, assumptions needed to be made on what discount rate and
terminal growth rate to use to value the cash flows. In the above analysis, a discount rate of
Page 16 of 20
The Mosaic Company (MOS) Stock Report
April 9, 2013
Student Analyst: Jon Koval
11% was used which is slightly higher than the average discount rate of 10% that is often used
to value the market. The assumptions for the higher discount rate are based on the fact that
Mosaic is a commodity business that is extremely cyclical. This means the cash flows are
uncertain and warrant a higher discount rate. However, Mosaic's products are a necessity for
farmers and lack a suitable replacement which ensures its continued growth, so the 11%
discount rate is still not as high as might expect for the basic materials sector and seems very
reasonable.
Additionally, a terminal growth rate of 4.25% was assumed since it represents an
expected growth rate for the market as a whole. Mosaic should be able to maintain the same
growth rate as the market based on the key factors of its business structure:
 Commodity business
 High barriers to entry (limited number of phosphate and potash mines that are
not already claimed)
 Consistent demand for more efficient use of farm land for food that will allow
continued growth in fertilizer sales
Although the assumptions are based on the key aspects of Mosaic’s business, it is still
important to consider how sensitive these assumptions are to the target share price. Below is
the sensitivity of the target price and upside/downside to the current share price as they relate to
various discount and terminal growth rates:
Terminal Growth Rate
Target Share Price:
0
2.75%
3.25%
3.75%
4.25%
4.75%
5.25%
5.75%
9.5%
72.53
76.16
80.42
85.48
91.62
99.20
108.80
Terminal Discount Rate
10.0%
10.5%
11.0%
11.5%
67.22
62.61
58.59
55.04
70.22
65.12
60.71
56.84
73.70
68.00
63.11
58.88
77.79
71.34
65.88
61.19
82.65
75.27
69.09
63.85
88.54
79.94
72.86
66.93
95.81
85.59
77.34
70.54
12.0%
51.90
53.44
55.17
57.12
59.34
61.90
64.86
12.5%
49.09
50.42
51.90
53.56
55.44
57.58
60.03
12.0%
-12.2%
-9.6%
-6.7%
-3.4%
0.3%
4.7%
9.7%
12.5%
-17.0%
-14.7%
-12.2%
-9.4%
-6.3%
-2.6%
1.5%
Terminal Growth Rate
Updside/Downside to Current Share Price:
0.0%
2.75%
3.25%
3.75%
4.25%
4.75%
5.25%
5.75%
9.5%
22.6%
28.8%
36.0%
44.5%
54.9%
67.7%
84.0%
Terminal Discount Rate
10.0%
10.5%
11.0%
11.5%
13.7%
5.9%
-0.9%
-6.9%
18.7%
10.1%
2.7%
-3.9%
24.6%
15.0%
6.7%
-0.4%
31.5%
20.6%
11.4%
3.5%
39.8%
27.3%
16.8%
8.0%
49.7%
35.2%
23.2%
13.2%
62.0%
44.7%
30.8%
19.3%
Page 17 of 20
The Mosaic Company (MOS) Stock Report
April 9, 2013
Student Analyst: Jon Koval
Risks/Concerns to Recommendation
Economic Conditions
Mosaic is in a highly cyclical industry and as a result its performance is extremely
sensitive to economic conditions. Should the U.S. fall into another recession or Europe fall into
a deeper recession, then Mosaic’s performance is likely to suffer.
Commodity Pricing
Mosaic’s products are commodities which mean that they lack differentiation and are
often subject to the current spot price in the market. This is especially the case for Mosaic’s
phosphate crop nutrients which compete with a lot of other companies that effectively drives
down their sales price. Fortunately, Mosaic’s potash products are more insulated to the
damaging effects of commodity pricing due the participation of potash producers with Canpotex.
This creates an oligopoly pricing model that allows Mosaic to earn higher margins.
Seasonal Business
Mosaic’s products are highly seasonal, since they are only used during the growing
seasons. As a result, it has high variability in its quarterly earnings and it is more difficult for
accurately forecasting demand to maintain reasonable inventory levels.
Increase in Natural Gas and Ammonia Prices
Natural gas and ammonia are the two main raw materials used to mine and produce
phosphate and potash crop nutrients. As a result, they represent the largest variable costs to
Mosaic. If the market prices for either natural gas or ammonia were to drastically increase it
would have a large negative impact on Mosaic’s earnings. Fortunately, Mosaic does produce
some of its own ammonia to protect itself; however, the company does not have the capacity to
produce its full ammonia needs.
Potential for Brine Water Damage to Mines
The phosphate and potash mines are always at risk of brine water seeping in and
causing damage which can make the mine unsafe to extract the phosphate and potash. Mosaic
has allocated $600-700m over the past two years as capital expenditures to sustain the mines.
However, if major brine water seepage were to occur in one of its mines it would require Mosaic
to stop production from that mine and invest significant capital to fix the issue.
Changes in Government Regulation
As with most production and mining businesses, Mosaic is in a highly regulated industry
due to its impact on the local environments. If stricter government regulation were put in place,
then it would significantly change Mosaic’s cost structure and operations.
Page 18 of 20
The Mosaic Company (MOS) Stock Report
April 9, 2013
Student Analyst: Jon Koval
Conclusion
I recommend a HOLD rating for The Mosaic Company (MOS) with a 12-month price
target of $66.00. This currently represents an 11.6% premium over the current market price of
$59.14 on April 7, 2013. This recommendation is based on Mosaic’s business fundamentals
that include high barrier to entry and consistent and sustainably growing demand for its
products. In addition, it also recognizes Mosaic’s conservative balance sheet and senior
management’s plans to make Mosaic’s balance sheet more efficient by spending approximately
$1.35B in cash and adding approximately $2.3B in debt. Once managements announces its
more detailed capital allocation plans sometime during the summer of 2013 it will be important
to adjust these estimates and to reassess the stock recommendation.
Page 19 of 20
The Mosaic Company (MOS) Stock Report
April 9, 2013
Student Analyst: Jon Koval
Sources
1
The Mosaic Company 2012 Annual Report (10K), http://phx.corporateir.net/phoenix.zhtml?c=70455&p=quarterlyEarnings.
2
The Mosaic Company 2013 Q3 Annual Report (10Q), http://phx.corporateir.net/phoenix.zhtml?c=70455&p=quarterlyEarnings.
3
Conpotex.com, http://www.canpotex.com/.
4
“Potash industry sales ‘to revive strongly in 2013’”, agrimoney.com, March 14, 2013,
http://www.agrimoney.com/news/potash-industry-sales-to-revive-strongly-in-2013-5622.html.
5
“Fertilizer Use by Crop at the Country Level (1990-2010)”, Francisco Rosas, Center for
Agricultural and Rural Development, December 2012,
http://www.card.iastate.edu/publications/synopsis.aspx?id=1178.
6
“UPDATE 2-Canpotex signs China potash supply deal at discount”, Rod Nickel, Reuters.com,
December 31, 2012, http://www.reuters.com/article/2012/12/31/potash-canpotex-chinaidUSL1E8NV13420121231.
7
“Canpotex snags supply deals with customers in India”, The Canadian Press, The Globe and
Mail, February 7, 2013, http://www.theglobeandmail.com/globe-investor/canpotex-snagssupply-deals-with-customers-in-india/article8357225/.
8
“Mosaic Q3 Sales, Net Increase”, Eric Volkman, The Motley Fool, March 28, 2013,
http://www.fool.com/investing/general/2013/03/28/mosaic-q3-sales-net-increase.aspx.
9
“U.S. corn futures fall after USDA says stockpiles high, WSJ reports”, Theflyonthewall.com,
March 28, 2013, http://finance.yahoo.com/news/u-corn-futures-fall-usda-173740978.html.
10
Yahoo! Finance, http://finance.yahoo.com.
11
CNN Money, http://money.cnn.com.
12
“Mosaic Is Ready To Make A Move”, Bret Jensen, Seeking Alpha, April 2, 2013,
http://seekingalpha.com/article/1314171-mosaic-is-ready-to-make-a-move?source=yahoo.
13
Mosaic 2012 Q3 Earnings Conference Call, http://phx.corporateir.net/phoenix.zhtml?c=70455&p=quarterlyEarnings.
14
TradingCharts.com, http://futures.tradingcharts.com/chart/CN/M.
15
“World Population to 2300”, United Nations,
http://www.un.org/esa/population/publications/longrange2/WorldPop2300final.pdf.
16
“How Much Corn is Actually Represented in Meat Products?”, Food and Fuel America.com,
http://www.foodandfuelamerica.com/2007/06/how-much-corn-is-acually-represented-in.html.
17
“Natural Gas Jumps to 20-Month High as Goldman Boosts Outlook”, Naureen S. Malik,
Bloomberg, April 5, 2013, http://www.bloomberg.com/news/2013-04-05/natural-gas-gainsfor-second-day-as-u-s-stockpiles-shrink.html.
18
quotemedia.com, http://quotemedia.com/.
19
“How to invest in sectors using the business cycle”, Lisa Emsbo-Mattingly, Fidelity, June 6,
2012, https://www.fidelity.com/viewpoints/how-to-use-business-cycle.
20
Thompson Reuters Baseline
Page 20 of 20