Mosaic Co. (MOS)
Presented by:
Akrati Johari, Phil Nguyen, Iordanis Thomaidis,
Charles Gambino and Michael Bellisario
Date: 18th March, 2010
Agenda
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Industry Overview
Financial Ratios
Competitor Analysis
Multiples Valuation
Pro-forma Assumptions
DCF and WACC Calculation
Macroeconomic Analysis
Recommendation
Industry Overview
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Agriculture chemicals industry1
3 main competitors2
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Mosaic (phosphate) – $6.1B sales
Potash (potash) – $3.7B sales
Agrium (nitrogen) – $9.1B sales
Consolidation
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CF Industries to acquire Terra, bidding war with Yara
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1from
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finance.yahoo.com
2data from trailing twelve months
Company Overview
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Based in Plymouth, MN
One of the three largest potash producers
World’s largest phosphate producer
13% share of global production
$10.3B in sales last fiscal year
Company Overview
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Fertilizer – primary macronutrients
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Improve/add nutrients to soil
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Phosphorous and potassium
Increase crop yield
“More from less”
Most potash mines are deep shaft mines up
to 3,300 feet underground
Business Segments
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Realignment 2Q2010
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Phosphates (77% of sales)
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Combined Offshore segment with Phosphates segment
“to more clearly reflect evolving business model”
Produce concentrated phosphate crop nutrients and
phosphate-based animal feed ingredients
Potash (23% of sales)
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Produce potash-based crop nutrients, animal feed
ingredients, and industrial products
Strengths
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High barriers to entry – capital intensive &
claim on natural resources and mines
100 years of high-quality ore reserves
40% market share of North American
production
$2.7B in cash – expansion, additional
capacity, acquisitions
Products marketed in 40 countries
Weaknesses
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Cross-border risks associated with
international operations
Seasonality in business that results in
needing significant amounts of inventory
Cargill’s majority ownership and
representation on the Board of Directors
Sell a commodity product – difficult to
differentiate
Threats
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Decline in oil and other commodity prices
Competitors look to add capacity/expand
into new markets
Governmental policies (subsidies) affecting
the agricultural industry
Opportunities
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75 million more people in the world every
year to feed
Ethanol production expected to increase
~50% by 2015
Growing middle class in developing countries
consuming more protein-rich diets
People will always have to eat
DuPont Analysis
ROE
2.11%
-0.88%
2.57%
8.71%
7.16%
ROA Decomposition
ROA = OIBI,AT / Sales
x
Sales / Av. Tot. Assets
Ratio Analysis – Recent
Financial Position
Ratios
Profitability
EBIT Margin
Liquidity
Current Ratio
Leverage
Coverage
Debt to Equity
Payout Policy
Dividend Payout
2008
Average 2010 2009
2015
28.6%
23.3%
14.4%
2.2
3.3
3.9
31.0
23.0%
55.4
16.4%
39.4
11.5%
NA
3.80%
3.80%
Industry Competitors
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Potash Corp. of Saskatchewan
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Largest manufacturer of potash fertilizers
Third largest producer of nitrogen
Third largest producer of phosphate
Revenue breakdown: 43% potash, 31%
nitrogen, 26% phosphate
Claim of production capacity greater than
50% of closest rival
Industry Competitors
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Agrium
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Second largest producer of nitrogenous
fertilizers
Third largest North American producer of
potash and fifth largest for phosphate
Attempted to purchase CF Industries
Industry Competitors
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Terra Industries
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Leading North American producer of
nitrogen based products
Accepted takeover bid by CF Industries for
$4.7 billion
Fertilizer Industry Breakdown
Data provided by
Relative Sector Performance
Financial data provided by
Financial Comparison
Company Comp Set
Company Name
Market Cap
Revenue
Net
Income
EPS
EBITDA
Margin %
LTM
Mosaic Co. (NYSE:MOS)
28,401.3
6,135.9
414.1
0.9
16.4
6.7
Potash Corp. (NYSE:POT)
37,092.3
3,657.6
987.8
3.2
32.7
27.0
Agrium Inc. (TSX:AGU)
11,354.9
9,129.0
366.0
2.3
8.3
4.0
CF Industries (NYSE:CF)
4,699.0
2,608.4
365.6
7.4
32.1
14.0
Terra Industries (NYSE:TRA)
4,637.9
1,581.4
152.6
1.5
23.5
9.7
Financial data provided by
Net
Income
Margin %
LTM
Multiples Valuation
Company
03/12/10 Stock Price
Market
Cap (MM)
Forward
P/E
Price/Sales
Price/
Book
Trailing
P/E
Mosaic Co. (NYSE:MOS)
63.80
28401.31
18.73x
4.43x
4.39x
68.5x
Agrium Inc. (TSX:AGU)
72.19
11354.90
15.28x
1.33x
5.21x
30.97x
Potash Corp. of
Saskatchewan, Inc.
(NYSE:POT)
125.27
37092.32
23.99x
11.14x
5.81x
38.55x
Terra Industries Inc.
(NYSE:TRA)
46.33
4637.91
15.59x
3.06x
9.43x
30.58x
CF Industries Holdings, Inc.
(NYSE:CF)
96.73
4698.95
14.24x
1.47x
2.72x
13.02x
Multiples Valuation
Stock Price Calculation Forward P/E
P/S
P/B
Trailing P/E
Min
37.99
18.34
75.79
163.12
Mean
48.82
85.96
80.11
183.08
Max
59.65
153.58
84.43
203.04
21.67
135.24
8.64
39.92
Management Assessment
In 2006 Management Claimed:
 Sales volumes for Potash will improve due to a supply contract with a key
customer in China.
Result: Sales Volumes for next 3 years:
2007: 1478.9
2008: 2251.2
2009: 2817.2
 The Phosphates business will show increased gross margins due to
increased industry supply and demand fundamentals and our Phosphates
restructuring actions
Result: Gross Margins for next 3 years:
2007: 13.5%
2008: 36.5%
2009: 22.0%
 Mosaic will begin restructuring the Phosphate segment
Result: Mosaic combined the Nitrogen segment into their Phosphate
segment in 2008 and the Offshore segment into their Phosphate segment in
2009
Revenue Assumptions
Revenues
Phosphate
% of Total Revenue
Potash
% of Total Revenue
Nitrogen
% of Total Revenue
Offshore
% of Total Revenue
Other
% of Total Revenue
Total Revenues
Revenue Growth
2007
2008
2009
2010
2011
2012
3203.9
5706.2
5780.6
5730.837
6561.62815
7564.70484
55.49%
58.15%
56.13%
79.50%
82.75%
79.50%
1478.9
2251.2
2817.2
1712.0425
1645.36295
2307.47286
25.61%
22.94%
27.36%
23.75%
20.75%
24.25%
129.1
N/A
N/A
N/A
N/A
N/A
2.24%
N/A
N/A
N/A
N/A
N/A
1355.6
2223.8
2349.2
N/A
N/A
N/A
23.48%
22.66%
22.81%
N/A
N/A
N/A
(393.80)
(368.60)
(649.00)
(234.28)
(277.53)
(356.83)
-6.82%
-3.76%
-6.30%
-3.25%
-3.50%
-3.75%
5773.70
9812.60
10298.00
7208.6
7929.46
9515.352
8.82%
69.95%
4.95%
-30.00%
10.00%
20.00%
Revenue Assumptions-Potash
Summarized from 10K:
 By the start of the 3rd quarter in 2010, Potash demand
improving but still below historical levels.
 Potash segment still operating at reduced production
volumes.
 Despite the improved demand however, Potash selling
prices in 3rd quarter will be below 2nd quarter levels
Revenue Assumptions-Potash
 Recovery in Potash segment reflects recovery of selling
prices and worldwide demand. Higher % of revenues is a
result of management's plan:
“We continued the expansion of capacity in our Potash
segment, in line with our views of the long-term
fundamentals of that business. The planned expansions
are expected to increase our annual capacity for finished
product over the next eleven years”
Revenue AssumptionsPhosphate
 Mosaic’s results for the second quarter of fiscal 2010
compared to the prior year period reflected a recovery in
Phosphates segment volumes and significant declines in
phosphate selling prices.
 Although the Phosphates segment’s prices stabilized in
the first quarter of fiscal 2010, they have not returned to
the historical highs of the prior year period that resulted
from strong demand for crop nutrients.
Revenue AssumptionsOffshore
 In 2010 Mosaic has again realigned their business
segments and moved from three total segments to two
by merging the Offshore segment into the Phosphate
segment
Other Assumptions
 COGS: Increase sharply in 2009 due to higher fixed costs as a result of
decreased production. After production increases, COGS will start returning
to historical levels.
 SGA: Sharp increase in 2009 due to same reasons as COGS.
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Cost Of Goods Sold
3840.90 4668.40 4847.60 6652.10 7531.30 6163.35 6660.75 7707.44 8268.84 9509.17 10797.12
% of Total Revenue
87.36%
87.99%
83.96%
67.79%
73.13%
85.50%
84.00%
81.00%
79.00%
79.00%
78.00%
SG&A
207.00
241.30
309.80
323.80
321.40
346.01
380.61
428.19
471.01
565.74
622.91
% of Total Revenue
4.71%
4.55%
5.37%
3.30%
3.12%
4.80%
4.80%
4.50%
4.50%
4.70%
4.50%
WACC Calculation
Cost of Equity:
Return on Equity Investment
CAPM
Beta
1.48
Risk-free
3.70%
Equity Premium
5.00%
CAPM
11.11%
ROE
S&P500
59.48%
1.93%
WACC Calculation
Cost of Debt:
As of May 31, 2009
Rate
% of Debt Weighted Average
Term Loans
3.92%
1.01%
0.04%
Industrial Revenue Bonds
6.64%
3.18%
0.21%
Other Secured Notes
7.32%
1.37%
0.10%
Unsecured Notes
7.46%
71.62%
5.34%
Unsecured Debentures
7.15%
19.72%
1.41%
Capital Leases and Other
6.94%
3.11%
0.22%
Cost of Debt
7.32%
WACC Calculation
Weight of equity
Weight of debt
Tax rate
91.79%
8.21%
21.60%
Rate
CAPM WACC
10.67%
90%
ROE WACC
55.07%
10%
Goal Post WACC
DCF Valuation
PV of FCF
13,519.27
Less: Debt
2,540.40
Equity Value
10,978.87
# of shares
444.54
Intrinsic Value
$29.20
Value +/-10%
$26.28
Wt
$32.12
15.11%
Triangulation
Triangulation
Forward P/E
Price/Sales
Price/Book
Trailing P/E
DCF
Price
48.82
Weight
30%
85.96
80.11
20%
30%
183.08
0%
29.20
20%
$57.51
Football Chart
Macroeconomic Review
 Gross Domestic Product
 GDP of countries that MOS exports its goods
 Sensitive to fluctuation in prices of raw materials→
Adversely affect Sales
 Inputs = Natural Gas, Phosphate rock , Ammonia , Sulfur
 Outputs = Phosphate , Potash , Nitrogen
 Strong International Presence
 70% of net sales from customers located outside the US.
 Brazil – Argentina – Chile – China - India
Macroeconomic Review
 Regulations + Transportation costs
 Further restriction on greenhouse gas emissions →
increase operating costs.
 Cost of delivery → adversely affect sales volume and
prices
 Currency Risk
 Most significant impact from CAD and BRL →
Periodically hedge against exposure to foreign currency
risk
Raw Material and Products
Projected Prices 2010 - 2020
2008
2009
2010
2011
2015
2020
DAP,
$/mt
967
323
300
310
360
400
Potash,
$/mt
570
630
400
300
255
220
Source : World Bank ( www.worldbank.org)
Fertilizer Consumption
Source : Potash Corp.com
Gross Domestic Product
Source : Bloomberg
GDP vs Sales Growth
Source : Bloomberg
Oil Prices lead to rising fertilizer
prices
Source : FAO State of Commodities markets
Oil Prices – Mosaic’s Stock
Price : Highly Correlated
160
140
Oil Prices
Mosaic
120
100
80
60
40
20
0
Source : U.S. Energy Information Administration
Forecasted Crude Oil Prices
Source : Source : U.S. Energy Information Administration
Portfolio Correlation
MOS
American Eagle
-0.2104
Diamond Offshore
0.8553
Jack Henry
0.4721
McDonalds
0.6805
Walgreens
-0.4337
MEMC Electronics
0.4998
Recommendation
We currently own 200 shares bought at $55 on
12/18/2009
 DCF Intrinsic Value = $29.20
 Triangulated Value = $57.51
 Current Stock Price @ 3/17 = $61.91
 Hedge against inflation
 Growth in emerging markets such as India and
Brazil will drive sales growth
=> We recommend a HOLD for the 200 shares
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