the mosaic company (click here to view in scribd format)

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IB Equity ResearchAugust 14th, 2013

THE MOSAIC COMPANY

Thesis Overview

Fertilizer stocks plummeted on July 30th on the heels of the announcement that Russias

Uralkali wasquitting the Belarusian Potash Company cartel, which prompted investors to fear

that potash pricing would plummet due to increased competition. The Mosaic Company

(MOS) stock dropped 22%. My views are the market overreacted on this sudden news (which

I defend in this report), and MOS has some real catalysts on the horizon that should drive the

stock higher. High level list of value-driving items include:

(1) Cargill Class A ownership overhang coming to end

(2) Esterhazy tolling agreement expiration

(3) MOS management shareholder-friendly strategies

(4) Lower cost structure re Fort Meade

(5) Attractive valuation & replacement value support

Stock Rating BU

Catalyst Category Val

Price Target $50.

Price (8/14/13): $43.50

Upside/(Downside): 15%

Ticker: MOS

Exchange: NYSE

Industry: Agriculture

Trading Stats ($USD millions)

Market Cap: $18,523

Enterprise Value: $15,473

Price / Book: 1.4x

Dividend Yield: 2.4%

Price / FY2014E EPS: 12.2xPrice / FY2015E EPS: 11.4x

EV / FY2014E EBITDA: 6.1x

EV / FY2015E EBITDA: 6.4x

Source: Company filings, Wall Street Consensus

Price Performance

52 Week range:

$39.75 - $64.65

Analyst Details

IB Username: S. Nguyen

Employer: Private Equity

Job Title: Vice President

Analyst Disclosure

MOS Position Held: Yes
http://www.reuters.com/article/2013/07/30/russia-uralkali-idUSL6N0G013H20130730?feedType=RSS&feedName=marketsNews&rpc=43http://www.reuters.com/article/2013/07/30/russia-uralkali-idUSL6N0G013H20130730?feedType=RSS&feedName=marketsNews&rpc=43http://www.reuters.com/article/2013/07/30/russia-uralkali-idUSL6N0G013H20130730?feedType=RSS&feedName=marketsNews&rpc=43http://www.reuters.com/article/2013/07/30/russia-uralkali-idUSL6N0G013H20130730?feedType=RSS&feedName=marketsNews&rpc=43


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bagging and production facilities in Brazil, China, India, Argentina and Chile. We accounted for approximately 12% of estimated

global production and 59% of estimated North American production of concentrated phosphate crop nutrients during fiscal 2013.

Details on MOSs FY2013 annual phosphate capacity and production volumes are as follows:

MOS touts itself as the low cost integrated producer of phosphate-based crop nutrients, due in part to the companys scale,

vertical integration and network of production and distribution facilities. MOS is the worlds largest producer of concentrated

phosphates, as well as the second largest miner of phosphate rock in the world and the largest in the United States .

Potash Segment

As described in MOSs 10-K: We are the fourth-largest producer of potash in the world. We sell potash throughout North

America and internationally, principally as fertilizer, but also for use in industrial applications and, to a lesser degree, as animal

feed ingredients. We accounted for approximately 13% of estimated global potash production and 42% of estimated North

American potash production during fiscal 2013.

Details on MOSs FY2013 annual potash capacity as well as finished product production are as follows:

Phosphoric Acid Processed PhosphateOperational Operational

(tonnes in millions) Capacity Production Capacity Production

Florida:

Bartow 0.9 0.9 2.2 2.0

New Wales 1.7 1.5 4.1 3.3

Riverview 0.9 0.8 1.8 1.8

3.5 3.2 8.1 7.1

Louisiana:

Faustina 0.0 0.0 1.6 1.1

Uncle Sam 0.8 0.6 0.0 0.0

0.8 0.6 1.6 1.1

Util Rate Util Rate

Total 4.3 3.8 88.4% 9.7 8.2 84.5%

Operational Finished

(tonnes in millions) Capacity Product

Canada:

Bell Plaine 2.4 2.1

Colonsay 1.5 1.1

Esterhazy 5.3 4.0

9.2 7.2

United States:

Carlsbad - MOP 0.5 0.3

Carlsbad - K-Mag 1.0 0.7

Hersey 0.0 0.1

1.5 1.1

Util RateTotal 10.7 8.3 77.6%

Total excluding toll production 7.8


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Market Overview

Phosphate

The following is a snapshot of global finished phosphate capacity by company:

The phosphate market is a global market, with developing countries (specifically China and India) becoming a much larger partof the demand pie. Most market experts expect long-term phosphate demand to trend at a 2.5-3.0% global growth rate.

Source: Mosaic company presentation

MOS management outlines a number phosphate market facts, some specific to MOS and others relating to the phosphate market

as a whole. The following are, at a high level, the main talking points when it comes to MOS and the phosphate industry:

Sedimentary and igneous formations Large economically viable reserves: North Africa, Western China, Central Florida, and Russia Largest producer of concentrated phosphate crop nutrients accounting for 12% of global output Over 35 years of rock reserves Low cost manufacturer Premium products


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Global distribution facilities JV in Peru and announced Saudi Arabia JV

Potash

The following is a snapshot of global potash production by company:

The potash market is as well a global market, with developing countries becoming a much larger part of the demand pie.

However, because potash implementation on agriculture land can be skipped every now and again, it can be a discretionary

nutrient for farmers during cost-conscious times (such as 2009). Most market experts expect long-term potash demand to trend at

a 2.5-3.5% global growth rate.

Source: Mosaic company presentation

MOS managements potash market facts, are as follows:

Obtained through underground or solution mining 80% of reserved in Canada and Russia Over a century of reserves 10.7 million tonnes of operational capacity


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One of the largest potash producers in the world Potash expansion plants:

o $3 billion in capital, 3 million tonneso One time, on scope, on budgeto Delaying future 2 million tonne projects

The Global Food Story

The global fertilizer story is a compelling one over the long term due to two overarching themes:

(1) World grain and oilseed use to increase driven by population growth and advancing dietary habits in developing

countries (further protein, meat, etc. consumption)

(2) With limited land available, crop yields must increase to feed all these people. Crop yields improve with more

fertilizer implementation and use

The below two charts outline the long-term expected (and arguably needed) grain usage and yield improvement around the

world:

Competition

The below comp set outlines other publicly-traded ag producers as well as valuation levels:

($ in millions, except per share data)

Stock Pr ice % of M arke t Ente rpr is e EV / EBITDA Pr ice / EPS Pr ice / Div

8/14/13 52-high Cap Value 2013E 2014E 2013E 2014E Book Yield

The Mosaic Company $43.50 67.3% $18,523 $15,473 6.1x 6.4x 12.2x 11.4x 1.4x 2.4%

Potash Corp of Saskatchew an $30.88 68.9% $26,771 $27,593 6.8x 6.5x 10.9x 10.3x 2.6x 4.7%

Agrium $86.64 75.1% $12,736 $15,139 5.9x 5.8x 9.0x 9.1x 1.7x 2.3%

CF Industries $187.96 80.5% $10,767 $11,397 4.5x 4.5x 8.5x 7.7x 2.2x 0.8%

Intrepid Potash $12.51 50.6% $948 $968 7.9x 8.0x 17.4x 17.4x 1.0x 0.0%

High 7.9x 8.0x 17.4x 17.4x 2.6x 4.7%Average 6.2x 6.2x 11.6x 11.2x 1.8x 2.0%

Median 6.1x 6.4x 10.9x 10.3x 1.7x 2.3%

Low 4.5x 4.5x 8.5x 7.7x 1.0x 0.0%

No te: M OS 2013E = FY2014E, and 2014E = FY2015E, as fiscal year ends M ay


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Main Risks to the MOS Story

Uralkali breaks up Belarusian Potash Company

On July 30th, Russias Uralkali quit one of the two largest potash cartels, Belarusian Potash Company (BPC), as cooperation with

the BPCs partner, Belaruskali, reached a deadlock. The market perceived this as a large competitive risk to potash pricing, as a

breakup of the BPC means Uralkali could ship potash fertilizer to China at a lower price. Thus, shares of POT, MOS, AGU, and

others all traded down steeply with the expectation of lower prices means much lower profitability for these big fertilizer

companies. Canpotex and BPC historically were the behemoths in the fertilizer market (together controlling 70% of the potash

export market) and negotiated large shipments to countries like India, China and Brazil, typically in similar price ranges as some

perceived the market to be a duopoly.

Mitigant: Some perceive Uralkalis move as simply posturing, and the end result will not be a full-on BPC breakup.

Although there might be a threat to shipments to China, India has already signed a 4 million tonne import deal. Much

of the market reaction is an overreaction (which is typical for Mr. Market), as we do not know the full impact nor the

end result of this BPC drama. Fertilizer stock prices are baking in a very drastic outcome. This news could also prompt

a halt in planned potash capacity expansion, which should partially support fertilizer prices.

Russian and Ukrainian wheat slashed prices in 2011 to gain market share as wheat prices were at record highs; the

associated drop in global wheat pricing lasted ~12 months then rebound to pre- 2011 levelsPoint being: weve see

Russia do this before.

Future capacity expansions risks oversupply

Planned capacity expansions for potash and DAP (phosphate) could lead to lower fertilizer prices.

Significant DAP capacity could come on stream from Saudi Arabia and Morocco over the coming 2-4 years. Thiscapacity could lead the phosphate market into conditions of oversupply reducing product prices and volume for

Mosaic, and leading to a lower share price.

Meaningful potash capacity could come on stream over the coming 3-5 year period, placing pressure on Mosaic'spotash volumes and prices. A key event that has yet to be determined is whether BHP proceeds with construction of its

large Jansen potash project in Canada.

Mitigants:(1) Both scheduled and unscheduled production curtailments have already begun in 2013. In early July, Potash Corp,

for example, announced it will reduce potash production by 1 million tons through August; in addition, an extra 2.5

million tons of unexpected shutdowns will occur through December of this year for the company. If the biggest player

in the market is taking more downtime than expected, then the likelihood of further green- or brown-field capacity

expansions by Potash Corp or other players to be pushed back is fairly good. In addition, these production downtime

announcements should support fert prices.

(2) Even if plans for new capacity additions are not pushed back, the long-term supply/demand impact on the fertilizer

is not out-of-whack. The near term could experience some fertilizer pricing volatility as capacity does not come online

perfectly vis--vis demand, however as the below chart shows, demand for phosphate will grow comfortably into the

additional supply coming online:


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Source: MOS company presentation

Idiosyncratic mishaps at MOS has historically threated earnings results

MOS has had a history of various one-time items hitting the company (usually on the cost line) that surprises to the downside on

quarterly earnings. This is one of the main reasons why MOS has typically traded at a 1-2x multiple discount to its peers.

Mitigant: Over the past ~6 months however, MOS has resolved a couple of these main issues which were typically

behind the earnings misses. I go into more detail about these items in the Catalyst Overview section of this report, but

specifically they are the Esterhazy tolling agreement and the Fort Meade mine.

Overview of Catalysts / Key Value Drivers

Cargill Class A ownership overhang close to being over

Cargills ownership of 128.8 million Class A shares comes with certain restrictions pertaining to MOS share buybacks. The

conversion of these Class A shares into common stock occurs in three equal installments, the first of which occurs on November

26, 2013. MOS is not permitted to engage in open market or negotiated share repurchases until after November 26 th. This has

been an overhang for years (after the partial spin-off from Cargill) on the MOS stock price, with many investors blaming this

partial ownership as the main reasons for the multiple discount between Potash Corp (POT) and Mosaic. This overhang is very

close to being over.

Esterhazy tolling agreement expiration

For years, MOS was subject to a Tolling Agreement at its Esterhazy mine, which essentially forced the company to sell 1.1+

million tonnes of potash each year to Potash Corp essentially at cost. This, obviously, was a drain on gross margin since ~10% of

potash volume was being sold at 0% margin. Said Tolling Agreement expired on December 31, 2012, which enables MOS to

now sell over a million tonnes of potash at market price. The company only received 5 months of benefit of this added margin in

FY2013, so margins will increase from here (all else equal) as MOS gets a full years benefit . As capacity utilization rates

increase, this will, again, add more of a positive impact re Esterhazy.

Shareholder-friendly strategies

MOS is on the precipice of some impactful share repurchases (re: November 26 th date above). About 30% (128.8 million shares)

of currently shares have been locked up for years, and the first batch can be repurchased (at MOSs discretion) come November.


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Over the next few years, MOS can deploy ~$5.5 billion (based on todays share price) in cash to buyback roughly a third of al l

the companys shares. MOS currently has $3.7 billion of cash on the books, churns out ~$1 billion in cash per year, and also has

a revolving line of credit. This has been a pent-up strategy that management can finally start deploying, and at these depressed

levels of MOS stock, these buybacks will be a great use of capital, especially if capacity expansions are delayed.

MOS has also grown its dividend very impressively over the past few years, which now equates to a ~2.4% yield. Nothing to

write home about, but still in the range of treasury yields.

Lower cost structure re Fort Meade

Last year the company reached a settlement agreement with the Sierra Club over permitting for mining phosphate rock at the

large South Fort Meade mine in Florida, thereby lowering its purchased rock requirements and reducing its cost of phosphate

rock meaningfully for several years. The Fort Meade facility is one of the most efficient and cost effective phosphate mining

operations in the world, which had historically accounted for nearly 20% of U.S. phosphate rock production. The full impact of

this lower cost rock procurement will be fully baked into FY2014 result, hence benefiting MOS margins.

Long term thesis makes sense

The longer-term thesis for MOS just makes sense from a global demand perspective. The evidence and demographics are there,

and if you are comfortable putting your money away for a while to jump on these compelling global trends, then MOS is anappropriate investment. As both MOS and POT management highlights, the 3 keys to the global fertilizer thesis are:

(1) Population Growth

World population is expected to reach 9+ billion people by 2050(2) Need to Improve Yield

Limited arable land Crop nutrients directly account for 40-60% of crop yields

(3) Long-Term Sustainability

Optimum use of crop nutrients is essential to growing the food the world needs today and tomorrow

Attractive valuation & replacement value supportMOS currently trades at ~6x forward EV/EBITDA. For reference, the long-term average for this stock is 8x forward

EV/EBITDA, with it bottoming at just under 5x forward back in 2009. The 22% drop in price on July 29 th (down to $41/share)

was a reaction by the market when Uralkalis CEO warned that potash prices could suffer a 25% drop from current levels.

However, its interesting to note that the last time potash prices were 25% lower than they are today was in 2010, and MOS stock

touched a low of $40/share (verybriefly during the summer), but traded pretty regularly in the $50-60/share range.

Although I have not been able to model our proprietary thoughts on replacement value of MOS s assets since I do not have the

resources nor the time, Wall Street (specifically JPMorgan and Morgan Stanley) estimate the replacement value of MOSs assets

are about $100 per share. There is clearly a value gap between market value and asset value here. Not to mention, if there were

further M&A in this space, I doubt MOS shareholders would agree to a takeover price that is below replacement value.

Near-term fertilizer volumes and pricing will be volatile, however I do feel that the market has overreacted (as per usual) in a

recent panic selloff. What youve got on your side are irreplaceable assets with large replacement value, pending share buybacksupport in a matter of months, operational improvements that still have a couple more quarters to show themselves in results, and

a compelling secular story. I have a $50/share MOS target in mind based on a ~7x forward EBITDA multiple which is still a

~15% discount to its long-term multiple average. Also, any type of relatively positive compromise on the Uralkali drama will

provide an instant pop to fertilizer stocks across the board.


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Financial Overview

Phosphates

Average Phosphates selling prices were lower in FY2013 than the prior year Phosphate fertilizer prices have remained below those in the prior year due to a market recalibration that occurred in

the third quarter of fiscal 2012

Phosphate sales volumes decreased from the prior year due primarily to lack of product availability as a result ofentering fiscal 2013 with lower inventory levels and lower shipments to India

Lower raw material costs, including sulfur, ammonia and phosphate rock, partially offset the decrease in selling pricesfor phosphates products

o The lower costs for ammonia were the result of internal production of ammonia at MOSs Faustina ammoniafacility which was operating at near full capacity in fiscal 2013, but was temporarily shut down during the

first half of the prior fiscal year due to an unplanned outage

o The lower phosphate rock costs were due to increased production from MOSs South Fort Meade mine infiscal 2013 compared to the prior year when it operated on a limited basis

Potash

In FY2013, average Potash selling prices were lower than the prior year primarily due to cautious customer purchasingbehavior leading up to the signing of significant supply contracts with customers in both China and India in the third

quarter of fiscal 2013

The impact of lower selling prices was more than offset by higher Potash sales volumes compared to the prior year North American sales volumes increased in the second half of fiscal 2013 compared to the prior year due primarily due

to robust spring demand and continuing strong farmer economics

International potash sales through Canpotex also increased in the second half of fiscal 2013 due to an increase inallocation of annual sales by Canpotex combined with the signing of supply contracts with India and China


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May-11 May-12 May-13

($ in mil lions, unless otherwise labeled) 2011 2012 2013

PHOSPATES

Sales Volumes (000s metric tonnes):

Crop Nutrients - NA 3,441 3,746 3,803

Crop Nutrients - Int'l 4,116 3,810 3,126Crop Nutrient Blends 2,636 2,620 2,651

Feed Phosphates 567 621 534

Other 1,188 1,039 1,092

Total 11,948 11,836 11,206

% Growth yoy 8.3% (0.9%) (5.3%)

Avg Selling Price per tonne:

DAP (FOB plant) $491 $555 $512

% Growth yoy 50.2% 13.0% (7.7%)

Crop Nutrient Blends (FOB destination) $475 $579 $555

% Growth yoy 19.9% 21.9% (4.1%)

Avg Cost per unit:

Ammonia (metric tonne) $407 $528 $524

% Growth yoy 53.6% 29.7% (0.8%)

Sulfur (long ton) $162 $223 $184% Growth yoy 128.2% 37.7% (17.5%)

Net Sales:

North America $2,186 $2,553 $2,468

International $4,710 $5,286 $4,027

Total $6,895 $7,839 $6,495

% Growth yoy 45.7% 13.7% (17.2%)

Revenue per ton $577 $662 $580

Gross Profit $1,654 $1,467 $1,162

Gross Margin % 24.0% 18.7% 17.9%

POTASH

Sales Volumes (000s metric tonnes):Crop Nutrients - NA 3,263 2,350 3,139

Crop Nutrients - Int'l 3,626 3,666 3,966

Non-Agricultural 634 704 666

Total 7,523 6,720 7,771

% Growth yoy 35.9% (10.7%) 15.6%

Avg Selling Price per tonne:

MOP average $359 $448 $405

% Growth yoy 2.0% 24.8% (9.6%)

Net Sales:

North America $1,950 $1,852 $2,108

International $1,111 $1,449 $1,421

Total $3,061 $3,301 $3,529

% Growth yoy 40.8% 7.9% 6.9%

Revenue per ton $407 $491 $454

Gross Profit $1,469 $1,622 $1,611

Gross Margin % 48.0% 49.1% 45.7%


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($ in millions) 2011 2012 2013

COMBINED

Net Sales $9,938 $11,108 $9,974

% Growth yoy 47.0% 11.8% (10.2%)

Gross Profit $3,122 $3,085 $2,760

Margin % 31.4% 27.8% 27.7%

SG&A $373 $410 $427

EBIT $2,749 $2,675 $2,333

D&A $447 $508 $605

EBITDA $3,197 $3,183 $2,938

Margin % 32.2% 28.7% 29.5%

Growth % 87.5% (0.4%) (7.7%)

Less:

Capex (1,263) (1,639) (1,588)

Cash Interest (100) (77) (52)Cash Taxes (535) (516) (300)

Free Cash Flow $1,298 $951 $998

Cash $3,811 $3,697

Total Debt $1,053 $1,078


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($ in millions) 2011 2012 2013

GEOGRAPHIC REVENUE CONTRIBUTION

Revenue:

U.S. $3,519 $3,621 $3,900

Brazil $1,810 $2,162 $2,069Canpotex $993 $1,299 $1,240

Canada $630 $786 $686

India $1,566 $1,580 $475

Argentina $233 $267 $258

Japan $166 $178 $188

Australia $238 $290 $178

China $116 $160 $173

Colombia $158 $156 $144

Mexico $102 $91 $129

Chile $116 $121 $117

Thailand $91 $94 $89

Peru $7 $95 $57

Other $194 $209 $272

% Growth yoy:

U.S. 50.3% 2.9% 7.7%

Brazil 65.7% 19.4% (4.3%)

Canpotex 64.9% 30.8% (4.6%)

Canada 81.6% 24.8% (12.7%)

India 41.6% 0.9% (69.9%)

Argentina 70.3% 14.3% (3.1%)

Japan 118.0% 6.9% 6.0%

Australia 41.9% 22.0% (38.8%)

China (39.6%) 38.4% 8.0%

Colombia 72.8% (1.1%) (8.0%)

Mexico (16.5%) (11.0%) 42.4%

Chile 7.2% 4.5% (3.8%)Thailand (26.1%) 3.2% (5.4%)

Peru 1340.9% (40.2%)

Other 8.1% 29.8%

% Contribution:

U.S. 32.6% 39.1%

Brazil 19.5% 20.7%

Canpotex 11.7% 12.4%

Canada 7.1% 6.9%

India 14.2% 4.8%

Argentina 2.4% 2.6%

Japan 1.6% 1.9%

Australia 2.6% 1.8%

China 1.4% 1.7%Colombia 1.4% 1.4%

Mexico 0.8% 1.3%

Chile 1.1% 1.2%

Thailand 0.8% 0.9%

Peru 0.9% 0.6%

Other 1.9% 2.7%

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