(By Mani) Mosaic Company (NYSE: MOS) is expected to be a potential take-out target, with the tax implications of the Cargill restrictions rolling off in May, and BHP Billiton Limited (NYSE: BHP) could be the potential suitor.
Mosaic, which was formed through the business combination of IMC Global and the Cargill Nutrition fertilizer businesses on October 22, 2004, is the second largest global producer of potash with current production capacity of 10.3 million tonnes (Mt). Mosaic is targeting 16.5 million tonnes of potash by 2020 with expansion plans underway at Belle Plaine, Colonsay, and Esterhazy.
Mosaic operates three mines in Saskatchewan, Canada, including Esterhazy, the world's largest potash mine, and two mines in the United States. Product from its Canadian mines is exported through Canpotex, an export association.
"We continue to view MOS as a potential take-out target once tax restrictions are lifted (in May 2013) or engaging in share repurchases (tenders between May 2013 and November 2013 or open market repurchases after November 2013). BHP the most likely suitor, in our view," CIBC analyst Jacob Bout wrote in a note to clients.
Cargill shareholders and trust own 129 million shares in Mosaic. The split-off transaction allows for Mosaic to grant early release from the lock-up after the two-year anniversary of the closing. Mosaic cannot engage in open market repurchases between May 2013 and November 2013 but can do public tenders for Cargill shares.
The company is organized into three business segments: Phosphate, Potash and Offshore. It is the world's leading producer of phosphate fertilizer and second largest producer (in terms of capacity) of potash fertilizer.
On the flip side, the Esterhazy mine has experienced brine inflow since December 1985 and currently poses the greatest risk of flooding among potash mines in North America. The risk of flooding may impact takeover valuation of Mosaic, but it is currently building K3, an insurance hedge to flooding.
Work continues on the shaft sinking of the K3 mine in Esterhazy. When K3 is complete, this will completely offset the flooding risk associated with K1 and K2.
As of Nov. 30, 2012, Mosaic has $2.4 billion net cash on the balance sheet, and the company has made no secret about its intention for buybacks.
"We estimate that repurchasing the first tranche of shares (43 million shares) would be ~10% accretive to our current estimates, which include no buybacks (assumes all cash repurchase)," Bout said.
For the second quarter of fiscal 2013, it reported net earnings of $629 million, compared to $624 million a year ago. Earnings per diluted share were $1.47 in the quarter compared to $1.40 last year. Operating earnings during the quarter were $560 million, down from $797 million a year ago, hurt by lower phosphate volumes and margins. Mosaic's net sales in the second quarter were $2.5 billion, down from $3.0 billion last year, driven by lower phosphate and potash volumes and lower phosphate prices.
Mosaic guided third quarter potash sales volumes of 1.5 Mt-1.8 Mt as the company expects to operate at more than 70 percent of operational capacity. Given the recent Canpotex/China contract settlement, realized potash pricing is expected to decline to $370-$400/t, reflecting a substantially higher proportion of standard product.
The recent Canpotex/Chinese potash agreement to supply 1 Mt of potash for H1/13 at $400/t cfr, is significant to MOS as offshore volumes booked in H1/13 occur when 1.3 Mt of potash will revert to Mosaic as part of the Esterhazy Tolling Agreement, effective January 1, 2013.
Within its phosphate segment, Mosaic is guiding to 2.5-2.8 Mt versus second quarter volumes of 3.0 Mt as gross margins are expected to be flat with the second quarter. Realized phosphate pricing is expected to fall, due to weak international markets, as Mosaic guides to a realized DAP price of $485-$515/t.