Mosaic is a fertilizer company that we value at about $10-12 per share. From 2004 until about a year ago, the shares generally traded in the range of $12-18.  Since then, the shares climbed sharply to a recent high just over $40.  There are two apparent reasons for this spike: (1) fertilizer prices have reached unusually high levels due to strong demand and (2) fertilizer stocks are in favor because they are a “play” on gasohol.  Fertilizers are commodities.  It is logical that the current high prices will stimulate increased production and/or decreased demand – and that prices will then decline from their present extraordinary high levels.  In my thirty plus years as an investor, I have rarely seen commodity prices remain at peak levels for extended periods of time.

 

            Furthermore, Mosaic’s shares currently are selling at close to 15X current year EPS estimates of about $2.65.  The shares of commodity prices usually sell at low multiples of peak earnings.  To put current earnings in prospective, in the fiscal year that ended May 31, 2007, Mosaic’s recurring EPS were $.80 (reported EPS of $.95 included non-recurring gains).  In the year before, we estimate that recurring EPS were about $.45 (because of write-downs, the company actually reported a loss for the year).  In calendar years 2001-2003, Mosaic’s predecessor (then named IMC Global) reported losses for each year due to weak fertilizer prices and high costs.  Our best guess is that Mosaic’s earnings power (earnings given mid-cycle prices) is roughly $.65 per share.  Thus, we believe that the company’s shares currently are trading at more than 60X their trend-line earnings – a PE ratio that reminds us of a “bubble”.

 

            Mosaic’s predecessor, IMC Global, had a weak history.  IMC originally was a well-positioned producer of phosphate rock in Florida.  However, over the years, management erred by diversifying downstream into commodity fertilizer plants, particularly diammonium phosphate (DAP).  Then, a large mistake was made when the company paid too much for a producer of rock salt.  These mistakes, and low fertilizer prices, led to operating losses and a dangerously weak balance sheet.  On December 31, 2003, IMC had net debt of $2,040 million vs. a hard book value of only $237 million.  At the time, it appeared to us that the company would have to re-organize in or out of bankruptcy.  In fact, the company did re-organize out of bankruptcy in 2004 when it agreed to be acquired by the fertilizer subsidiary of Cargill.  At the time, Cargill’s operations were about half the size as IMC’s, but, in the acquisition, Cargill received 66.5% of the newly issued Mosaic shares.  Thus, IMC’s shareholders were heavily diluted.

 

            In the course of the acquisition, IMC’s assets were marked up to their appraised value.  After the write up, the new Mosaic’s hard book value was just under $1,000 million.  This value is with IMC’s assets at their appraised value and Cargill’s at their historical book.  Cargill’s assets at the time were carried on the books at about $1,000.  Most of the assets were fairly recently acquired or built.  We believe that they were worth no more than 150% of their stated value.  Therefore, we believe that an appraised valuation of Mosaic in late 2004 was about $1,500 million, or just under $4 per share.  Since that time, Mosaic has had some retained earnings – and the value of its mines likely has increased some.  Our current valuation is $10-12 per share, which is equal to roughly 17X our estimate of the company’s trend-line earnings.

 

            Mosaic has two key products: diammonium phosphate (DAP) and potash.  The company has a nameplate annual capacity of about 9.9 million tonnes of DAP and related products.  Production this year is expected to be about 9.0 million tones (due to scheduled and unscheduled maintenance, etc., the plants cannot produce at capacity).  Over the past 10 years, DAP prices have averaged about $175 per tonne.  The highest price was in 2006 (2007 is excluded) at about $245 per tonne and the lowest price was in 2000 at about $140 per ton.  We believe that the current trend-line (normal) price for DAP is about $250 per ton.  When projecting the earnings power of the DAP business, we can simplify our calculations by assuming that DAP is the only phosphate based product sold by Mosaic (this gives us an approximation of the earnings power that should be quite close to the actual earnings power).  We estimate that Mosaic’s fully allocated DAP costs are about $225 per ton and thus that normal profits are about $25 per tonne, or $225 million.  Currently, DAP prices have spiked to roughly $400 per ton and, mainly because of high energy costs, fully allocated costs have increased to about $245 per tonne.  Thus, we estimate that Mosaic’s DAP, etc. business currently is earning at a $1,395 million annual rate.

 

            Mosaic has a nameplate capacity to produce about 9.3 million of potash.  Production this year is expected to be about 9.0 million tones.  Over the past 10 years, potash prices have averaged about $100 per tonne.  We believe that the current trend-line (normal) price for potash is about $140 per ton.  We estimate that Mosaic’s fully allocated potash costs are about $100 per ton and thus normal profits are about $40 per tonne, or $360 million.  Currently, potash prices have increased to roughly $160 per ton and, mainly because of high energy costs, fully allocated costs have increased to about $110 per tonne.  Thus, we believe that Mosaic’s potash business currently is earning at a $450 million annual rate.

 

            Using the above estimates, we can estimate Mosaic’s current and trend-line earnings:

 

                                                            Current             Trend-line

            DAP and other phosphate         $1,395 mil        $   225 mil

            Potash                                           450                  360

            Nitrogen and all other                      60                    30

            Corporate expenses                        55                    55

            Interest expense                            130                  130

            Earnings before taxes                 1,720                  330

            Taxes at 35% rate                        600                   115

            Net earnings before below         1,120                   215

            Equity and minority interests           65                     65

            Net earnings                            $1,185                   280

 

            EPS (443 mil diluted shs)         $2.65                  $.65

 

            Since 1979, I have been a director of a world-wide company that sells a major commodity product.  Partially because of this involvement, we have followed commodities closely – and often have had the opportunity to purchase shares of a commodity producer at a depressed price when the market for the commodity is loose and then sell the shares at an overvalued price when the market is tight.  When markets are tight, we have often heard some investors say “this time it is different, the market will remain tight”.  But, our experience is that these investors have turned out to be wrong because of countervailing forces (increased supply and/or decreased demand because of conservation or substitution).  Such, we believe, will be the case with fertilizers.  While we cannot call the timing of a weakening of the market, Mosaic’s shares are selling at such a large premium to their estimated value (more than 3.5X) that we can afford to wait if necessary.