Description

BRIEF COMPANY BACKGROUND
========================

IMC Global is one of the world's largest producers of phosphate and potash crop fertilizers and animal feed ingredients. Potash has stable volume/margin characterisitcs (albeit they improving as well) so the main focus here is the Phosphate side of the business, which is much more cyclical. They are the world's largest producer of Phosphates and Potash. 33% domestic share in Phosphates, with 54% being exported to countries such as China, India, Brazil and Australia. Their Fla facilities are some of the lowest cost in the world. The Company recently announced an agreement to merge with Cargill's Crop Nutrition division, a large producer and distributor of phosphate and nitrogen fertilizer products.


NOTE
====

This idea was first written up on VIC in 6/01 by saralah54. Additional background information can be found there for those who are new to the company/industry. At that time, a lot of factors COULD go right, as was accurately pointed out. I believe they ARE going right currently, which makes this timely.

SUMMARY OF THESIS
=================

IMC Global is experiencing a cyclical upswing in its phosphate business (DAP/MAP) more rapidly than is broadly anticipated due to flat supply and a steadily increasing demand environment. As capacity utilization increases, margins will begin to rise (has already started) towards historical norms. This belief is based on several calls with independent industry consultants, customers and competitors, as well as current margin and pricing data. At <10x normalized fcf (fcf calculated as EBITDA-maint. capex-interest exp-taxes), IGL is an attractive long. Also worth noting that, based on Bloomberg, there are only 4 analysts with ratings and none are buys. Sentiment is clearly not positive, which I like.

KEY POINTS
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• DAP/MAP Supply: Very little new capacity has been added to the industry recently. Further, over the next 24 - 36 months, annual supply growth of < 1% is expected to be outpaced by annual demand growth close to 3% with additional upside potential (growth drivers discussed below => high plantings and inventory restocking).

• DAP/MAP Inventory Levels: Inventories of phosphate fertilizers are at very low levels in the U.S. The same situation appears to be true in China, the world's largest importer of DAP/MAP fertilizer, and India, which could be an important source of future demand growth. These figures are somewhat grey and we recommend you do your own work but we do have reasonable confidence based on our checks.

• Grain Prices/Stocks: Grain prices are a positive leading indicator for fertilizer demand. Recent strength in grain prices, particularly corn, the most important crop for phosphate fertilizer, and historically low inventories (corn is very low on a multi-decade basis) should boost plantings and fertilizer usage domestically.

• Reasonable Valuation: Valuation is inexpensive based on normal, mid-cycle DAP margins of approximately $35 - 40 per ton(trades at 9.9x normalized earnings and 8.0x normalized cash flows that we believe can be achieved in 2005). DAP margins have recently spiked into the $25 - 30 per ton range after years of weakness and only slightly better than breakeven levels in 2003.

• High Operational Leverage: The Company is the most leveraged to the phosphate fertilizer cycle of all the North American producers. While the announced merger with Cargill's Crop Nutrition division will reduce some of this exposure, there is still room for a large amount of upside with a recovery in DAP/MAP margins.

• High Financial Leverage: The proposed merger of the Company with Cargill's Crop Nutrition division will significantly reduce the balance sheet risk that IMC is facing given its current leverage. While leverage to the DAP cycle will be less, synergies and a stronger balance are offsets. I view the merger as slighlty positive but primarily because it reduces the number of players and should have a small positive impact on industry structure (i.e. pricing). As such, I haven't included a lengthy discussion of the merger -- it is not a key point of the thesis either way.

KEY ASSUMPTIONS AND SUMMARY FINANCIALS
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Common Shares 115.099
In-the-Money Options/Warrants 0.000
New Shares from PLP Exchange 10.681
Conversion of Preferred 17.721
FD Shares Outstanding 143.501

Share Price $12.25
Market Capitialization 1,757.9

Debt 2116.8
Cash (89.2)
Options Proceeds 0.0
Total Net Debt 2,027.6

Enterprise Value 3,785.5

2003 2004 2005 2006
Operating Assumptions
DAP Price $184 $160 $180
DAP Gross Margin 13 36 56
DAP EBITDA Margin 29 50 70

IMC Global Stand-Alone
Valuation Ratios
Revenues 2,190 2,416 2,463 2,610
Multiple 1.7x 1.6x 1.5x 1.5x

EBITDA 273.2 395.6 597.0 737.9
Multiple 13.9x 9.6x 6.3x 5.1x

EBIT 101.3 229.3 430.6 571.5
Multiple 37.4x 16.5x 8.8x 6.6x

EPS ($0.77) $0.16 $1.15 $1.86
Multiple NM 78.1x 10.6x 6.6x

Cash Flow (EBITDA - Capex) 152.9 285.6 477.0 607.9
Multiple 24.8x 13.3x 7.9x 6.2x

Leverage & Coverage Ratios
Total Net Debt / EBITDA 7.4x 5.1x 3.0x 2.0x
Interest Coverage (EBITDA / Int 1.5x 2.0x 3.1x 3.9x

Pro Forma NewCo (IMC's 33.5% portion of NewCo financials)
Valuation Ratios
Revenues 1,403 1,530 1,525 1,614
Multiple 2.7x 2.5x 2.5x 2.3x

EBITDA 149.2 232.2 352.8 451.7
Multiple 25.4x 16.3x 10.7x 8.4x

EBIT 51.4 133.2 255.1 351.5
Multiple 73.7x 28.4x 14.8x 10.8x

Earnings ($0.06) $0.32 $0.90 $1.37
Multiple NM 38.1x 13.5x 8.9x


POTENTIAL RISKS
===============
• New phosphate supply is added faster than we currently anticipate in China, thus decreasing its import needs. Data here is also soft but our work indicates it is growing much less fast on absolute terms than demand.

• Improving industry fundamentals depend, in part, on producers making sound economic decisions relating to their production levels. North American producers increasing output or restarting idle capacity could delay the beginning of the industry's recovery. This is very unlikely since IGL controls the large idled capacity.

• Freight rates and/or raw material inputs increase to such a point as to dampen demand for North American fertilizer products in foreign markets.

* While the next few years look positive from a supply/demand perspective, as well as valuation, this commodiity industry is far from a "great business:

Catalyst

Improving improving fundamentals will continue to driver higher than expected earnings, which will close the gap between current market value and intrinsic value.