Mosaic – A Necessary Move, But Value Unclear

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Graham Copley / Nick Lipinski



December 19th, 2016

Mosaic – A Necessary Move, But Value Unclear

  • MOS’ acquisition of Vale’s potash business brings consolidation to an industry that is fragmented and dominated by large scale producers. The industry benefitted from “structure” for a while, but recent disorganization has highlighted the intangible nature of oversupply.
    • Low cost producer behavior has until now allowed higher cost producers to stay in the market – effectively setting prices.
    • Many of the lower cost producers have considerable margins on this basis.
    • Capacity is a series of “bottomless pits” and is therefore not that helpful, particularly as others – like BHP – remain interested in creating additional “bottomless pits”.
  • It is likely that if all the low cost producers mined to capacity, the higher cost producers would be squeezed out – good for volume for the low cost guys, but very bad for margin.
    • One concern is that BHP has costs that are so much lower than the rest of the field that they might be happy to take out the high cost players and settle for the margin between themselves and the rest of the pack.
    • This would be a fatal move for companies like K&S and would greatly depress profits for MOS and POT. At this point the BHP timing and strategy is very unclear, but if we were producing potash we would be planning for the worst case.
  • The MOS/Vale deal is, in our view, partly offensive on the part of MOS and mostly defensive. No one can predict where the supply/demand balance goes from here, in part because of BHP, but also because of the unpredictable actions of Uralkali and its former partner and the lack of consistency in demand.
    • The deal gives MOS scale and the opportunity to reduce costs and rationalize production if needed – all good things in a good market – but also important in bad market.
  • While the deal may be sound, strategically, whether it is worth more or less to shareholders is very unclear, with demand growth and the actions of others far more likely to impact MOS’ fate than this move.
    • We still think that the stock is interesting on valuation metrics alone, but would prefer to play the Ag space through CF, MON and DOW/DD today.

Exhibit 1

Source: Capital IQ and SSR Analysis

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