Mosaic Q1 net income nearly quadruples, cuts phos production by 500,000-1 million mt

The Mosaic Co. reported net earnings of $1.2 billion ($2.65 per diluted share) for the first quarter ending Aug. 31, 2008, nearly quadrupling the year-ago number of $305.5 million ($.69 per share). First-quarter sales more than doubled to $4.3 billion versus the year-ago $2 billion.

“We delivered another quarter of record results,” said Jim Prokopanko, Mosaic president and CEO. “Against the backdrop of volatile global markets, we are well positioned financially, strategically, and operationally to serve our customers worldwide and execute on the strong, long-term fundamentals in the agricultural sector.

“We expect strong earnings growth to continue in upcoming quarters,” he continued. “Momentum remains strong in the potash market with healthy demand, low inventory levels, and various industry supply disruptions. Momentum has slowed in the phosphates business near-term due to the combined effects of soft seasonal demand, higher customer inventory levels, and falling raw material costs. Accordingly, to better balance inventory levels and supply chain demands, we will reduce planned phosphate production by 500,000 to 1 million mt over the next several months. We remain optimistic about the second half for phosphates and will be well positioned to capitalize on that outlook.”

Mosaic told analysts it expects the phosphate cuts will come from Florida production facilities and does not expect to actually take down any plants. It noted that some 30 days of production was lost in Louisiana due to Hurricane Gustav.

Phosphate sales volume guidance for fiscal 2009 has been reduced to a range of 8-9 million mt, with the majority of the reduction expected in the second fiscal quarter. Mosaic’s average DAP selling price FOB plant for the second quarter is expected to be $1,020-$1,080/mt.

Dr. Michael Rahm, Mosaic vice president, market and economic analysis, told analysts that agricultural fundamentals still look rock-solid. He said Mosaic’s analysis indicates that another bumper crop is required next year to meet the demands for food and fuel, as well as to build stocks to more secure levels, meaning that farmers will need to plant more area and intensify cropping practices in order to increase yields. He noted that U.S. net cash farm income is expected to be $101 billion in 2008, according to the USDA. Discounting fears of a national credit crunch, Prokopanko noted that farmers are a solid place for banks to invest.

Rahm said the fundamental drivers for phosphates still look positive, though a number of factors have combined to slow new sales. “Many customers have stepped out of the market in order to assess how the recent decline in sulfur prices and an expected decline in ammonia prices will impact phosphate prices,” said Rahm. “Many buyers, especially those in the Americas, have that luxury, given a full distribution pipeline.” He also reiterated that changes in pipeline inventory should not be confused with changes in consumption.

“We continue to advise our customers to monitor three fundamental factors, grain and oilseed prices, raw material costs, and Chinese export policies for a cue on the direction of the phosphate market?Ǫour crystal ball is clouded a bit, but at this point it looks to us like each of these drivers points in a positive direction in the medium term.”

Rahm said the potash market is tight, and he expects demand from major importing nations will keep potash moving at a breakneck pace for the rest of 2008 and through 2009. He expects domestic shipments to be flat in 2008-2009. He used a forecast assuming 91 million and 76 million acres of corn and soybeans, respectively, with a decline in wheat acreage to 60.5 million acres.

“What I’d suggest is that the focus needs to be on margins, not on sales price, and that’s what’s driving our bottom line, is the very strong margins we’re seeing,” said Prokopanko. “So although we may miss and could possibly be wrong with what our sales forecast is, we’re comfortable and confident in our margins. If we see input costs go down, the drive to reduce sales price, we will see good margins in this business.”

As for why the phosphate pipeline is full, Prokopanko noted that phosphate prices escalated faster than potash, so buyers quickly filled up inventories, fearing further price increases. He indicated that the Chinese pipeline for potash is now low and they are going to have to come back into that market to fill up. “It’s potash’s turn to sort of be out of balance in terms of supply and demand.”

While Mosaic stressed margins and medium term prospects to analysts, they were not hearing it. Instead, they were looking at falling phosphate prices and near-term results, which they saw as below expectations. As a result, Mosaic and many other fertilizer companies were downgraded last week and stock prices plummeted (see page 9).

First-quarter phosphate operating earnings were up 207 percent to $950.8 million on net sales of $2.6 billion, up from the year-ago $310.2 million and $1.18 billion. Margins were up 184 percent to $1 billion, up from $353.5 million.

First-quarter potash operating earnings were up 334 percent to $477.8 million on sales of $976.4 million, up from the year-ago $110.2 million and $411.9 million, respectively. Margins were up 297 percent to $503.2 million from $126.6 million.

* millions U.S. dollars