Seeking Alpha: Can Mosaic Get The Sustainable Price Leverage It Needs?

Lower crop prices have a way of turning institutional investors and analysts into short-termers when it comes to ag input companies like Mosaic (NYSE:MOS), even though the long-term need to feed more people (and use more crop nutrients to do so) remains in place. Mosaic is one of the global leaders in both phosphates and potash, but its place on the cost curve makes it more sensitive to price than global rivals like Potash (NYSE:POT) or OCP and the markets are jittery about oncoming supply expansion (particularly in potash). Although I think Mosaic is basically an okay stock for the long haul, I'd rather get my exposure to ag through less price-sensitive companies Monsanto (NYSE:MON) (which I own) or cheaper nutrient plays like Yara (OTCPK:YARIY) (which I recently profiled here).

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Can Mosaic Get The Sustainable Price Leverage It Needs?

Investopedia: Yara Built To Last, But Looking At A Downturn In The Cycle

Norway's Yara International (Nasdaq:YARIY) is no run-of-the-mill commodity company. Not only is the largest supplier of mineral fertilizers in the world, holding 9% share of the global nitrogen fertilizers market, but Yara has a rare record of consistent double-digit returns on capital and assets.

While the quality of the company's assets, the benefits of nitrogen fertilizers, and the discipline of management speak well to the company's future, a surge in Chinese exports and energy costs is squeezing the company's profitability. Making matters worse, it's likely to get uglier from here, as the company could be looking at EBITDA bottoming out in the 2014/2015 timeframe. Although Yara is a little undervalued today and is likely to continuing paying a healthy dividend through the lows of the cycle, holding commodity stocks through the bottom of the cycle can be painful for shareholders.

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Seeking Alpha: Summer Can't Come Fast Enough For Potash Corp

Most observers seem to agree that the potash market is going to get better as the year progresses, but just how much better is the $64,000 question for Potash Corp (POT) and investors in competitors like Mosaic (MOS) or Intrepid Potash (IPI). Nobody's talking about another repeat of 2009, but the market continues to play a game of chicken with shipment numbers and second-half restocking assumptions.

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Summer Can't Come Fast Enough For Potash Corp.

Investopedia: Does CSX Have The Most Levers To Pull In 2012?

Broadly speaking, these are still good times for the major railroads in the U.S. The economic recovery continues to fuel a decent recovery in volume, while the price advantages of rail versus truck give the companies leverage on pricing. It also certainly isn't hurting that higher-margin intermodal business is growing (albeit still small) part of revenue.

Against this backdrop, almost any rail would be a decent option. Looking at 2012, CSX (NYSE:CSX) may be an underappreciated relative value play among the top rails. The question for CSX is largely about whether the company can achieve cost/efficiency improvements that could drive better earnings performance than its peers. (For related reading, see Rail Traffic Ends 2011 On A High Note.)

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Investopedia: Can Investors Grow Wealth With Mosaic?

Farming is an up-and-down business, and so too are the businesses for farming inputs like equipment and fertilizer. In the case of Mosaic (NYSE:MOS), investors have been trying to digest the news of production cuts across the sector and weighing that against what looks like a pretty healthy North American planting season. Although volatility means this is a poor candidate for long-term buy-and-hold investors, today's valuation on Mosaic makes it worth a look from investors seeking shorter-duration trading opportunities.


A Decent Fiscal Second Quarter
In many cases, Wall Street doesn't care much about what fertilizer companies like Mosaic or Potash (NYSE:POT) report for earnings, as so much attention is given to forward-looking comments on volume and pricing. Nevertheless, Mosaic did alright this time around. (For related reading, see 2011 Look Back At Agriculture.)

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http://stocks.investopedia.com/stock-analysis/2012/Can-Investors-Grow-Wealth-With-Mosaic-MOS-POT-DD-DE-IPI0106.aspx

Seeking Alpha: Monsanto Looks Forward To More Growth

Agribusiness concern Monsanto (MON) took another solid step forward in repairing its relationship with the Street on Thursday morning, reporting earnings that were nicely ahead of even the highest published estimates from the Wall Street community. With seed demand apparently running strong, the herbicide business stabilized, and a fast-developing pipeline, Monsanto is looking really good heading into 2012.

A Great Result In A Bad Quarter
Monsanto's first quarter is usually a seasonably OK one – a quarter where there is little activity in North America, but where Latin America is becoming increasingly important. This time around, though, results were good. Revenue jumped 33%, with 32% growth from seeds and 34% growth from the herbicide business.

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Monsanto Looks Forward To More Growth

Mosaic, Jackson Pollock-Style

As readers probably have seen by now, the very private Cargill and Mosaic (NYSE: MOS) are engaging a transaction whereby Cargill will basically divest its sizable holdings (64% of outstanding shares) in Mosaic over three years.

Given the presumption that Cargill would have happily sold Mosaic for the right price, a lot of people seem to be reading this deal as a sign that a willing buyer did not emerge (or would not / could not meet Cargill's particular needs). Unfortunately for Mosaic shareholders, the details of this transaction will make a deal quite a bit harder while it is in progress, so it may effectively mean that Mosaic is off the market until the deal is largely done.

All of that, in turn, led to a 10.5% drop in the stock in Wednesday's trading.

Cargill Shuffles Its Deck

From where I sit, this seems to largely be about Cargill wanting to alter its structure and give some shareholders a liquidity event without doing anything to jeopardize the intense privacy and closely-held structure with which Cargill conducts its affairs. In practice, Cargill will be exchanging 179 million of its 286 million Mosaic shares for Cargill stock held by various parties, including charitable trusts tied to the late Margaret Cargill. A further 107 million Mosaic shares will go in exchange for Cargill debt.

Unfortunately, there's more. As part of this deal, Mosaic will recapitalize into three classes of stock – common, Class A, and Class B. Class B stock will have special voting rights (10 votes per share), and neither the “A” or “B” will be publicly traded. All existing Mosaic shareholders who are not Cargill will just common stock on a one-for-one basis; Cargill's shares will be divvied up as 115M shares of “common”, 60M of “A”, and 111M of “B”. After the split, then, parties currently holding Cargill stock will control 81% of the votes and, thus, the board of directors.

There's still more... Mosaic will have a registered share offering 15 months later to sell 157M shares. The other 129M shares will be locked up for two and a half years and then sold off in three installments after that two and a half year waiting period, with Mosaic helping to register the shares and launch a secondary. So although this deal does not change the economic/accounting sharecount for Mosaic, the reality is that the public float will go much higher – to the tune of about 157 million shares in the next 15 months.

Along the way, Mosaic will also be constrained when it comes to share buybacks or special dividends.

Ugh, what a mess.

The bottom line here is that Cargill is doing what's best for Cargill – namely, letting some of its shareholders monetize their stakes without having to go public or let newcomers into the ownership of the company. For a very private (and in some respects, secretive) company, that's not a big surprise. This deal is not really a positive for Mosaic shareholders, but why would Cargill worry all that much about it? Mosaic is an asset that they control, and they will use it in whatever fashion that serves them best.

In the meantime, of course Mosaic management will praise and support this deal. After all, Cargill still owns and controls the company – if Mosaic management isn't willing to sing from the sheet music they provide, they'll find managers who will.

No Deal On The Way?

Will Mosaic get sold? Well, don't hold your breath. As I said earlier, I have to think that Cargill would have been happy to sell this asset for cash to Vale (Nasdaq: VALE), BHP Billiton (NYSE: BHP), Sinochem or any other well-heeled party. They probably would have also been willing (albeit less happy) to sell for a combination of cash and stock, since even mighty BHP would be hard-pressed to pay all cash for Mosaic.

That's not to say that it couldn't still happen. BHP would probably love to get its hands on a piece of Canpotex (a fertilizer distribution business jointly owned by Mosaic, Potash (NYSE: POT), and Agrium (NYSE: AGU)), but Mosaic wouldn't sell that cheaply (if at all).

All in all, though, Mosaic is more likely to be a buyer than a seller. Junior potash miners like Allana Mining, IC Potash, and Western Potash could come into play, though Mosaic has a lot of brownfield opportunities that would likely be more economical than an acquisition. But who knows – maybe Monsanto (NYSE: MON) decides that they want out of the fertilizer business and they sell it to Mosaic (or, conversely, maybe Monsanto buys one of those juniors to expand its fertilizer business …). Or maybe Mosaic thinks big and global and goes for Yara (Nasdaq: YARIY).

Clearly I'm just throwing ideas against the wall here in terms of wait Mosaic's plans might be.

But here's what I do know – Cargill is doing what's best for Cargill and Mosaic shareholders are getting hosed (or at least severely inconvenienced). After all, Mosaic shares are plenty liquid now and it's not like worries about Cargill's plans for the company have held the shares back too badly. With no compensation going to existing minority shareholders, I don't see how they are compensated for the inconveniences and complexities created in this deal.

While I wrote a little while ago on Mosaic and thought the stock was not cheap (but maybe still well-placed for momentum/secular players), now I'm not so sure. Who needs all of the headaches of this Cargill deal when there are so many other stocks out there?

I would AVOID Mosaic shares right now, but momentum/secular traders might still like it as an ag play

Disclosure: I own shares of Monsanto

Investopedia: Mosaic's Opportunities Still Look Fertile

Mosaic (NYSE:MOS), one of the largest fertilizer companies in the world, has already enjoyed a solid run of late, as the shares have doubled from late June. But with crop prices still very high, fertilizer inventories running low and an industry operating at a high level of capacity utilization, it may not be too late to make money off of another bull cycle in crop nutrition. 

The Quarter That Was
Mosaic reported a fiscal second quarter performance that was comfortably ahead of analyst expectations. Revenue jumped 56% in the period, though the inner workings were a bit confusing. Phosphate sales jumped 49% on a 10% increase in shipments (in metric tons) and a better-than-60% spike in average realized prices. The potash segment delivered even better growth (up 69%), as shipments jumped 75% but average selling prices fell about 11%. On a gross profit basis, both units were much better - phosphate gross profits rose 321%, while potash was up 59% and overall company-wide gross profit rose 150%.

Looking Towards a Tighter Market
Mosaic's CEO was rather optimistic about the outlook for 2011, talking about a potentially "outstanding" year to come. There's plenty of reason to buy into that. Crops prices are still quite high, and high prices have the tendency to encourage more planting. Elsewhere, inventory stocks of fertilizers are rather low. Going a step further, it looks like the major producers [including Potash (NYSE:POT), BHP Billiton (NYSE:BHP), Agrium (NYSE:AGU), Intrepid Potash (NYSE:IPI), and Yara (Nasdaq:YARIY)] are going to be running somewhere in the high-eighties to low-nineties as a percent of capacity - a level of production that suggests that any missteps or outages could lead to a spike in prices. (For more, see 5 Agriculture Stocks To Grow With.)

All in all, then, it looks like a year where demand will be strong and supply will be tight. Given that Potash, Mosaic, Vale (Nasdaq:VALE) and BHP control a lot of the new brownfield expansion opportunities, it seems reasonable that they will not crush their own market by bringing on too much capacity too quickly. Moreover, junior potash companies like Allana Mining, IC Potash, and Western Potash are many years away from production and cannot influence current supply. 


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