The Mosaic Company

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

The Mosaic Company is a leading producer and marketer of concentrated phosphate and potash, essential nutrients for the global agricultural industry.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

The following report provides a detailed analysis of The Mosaic Company (MOS) based on its latest financial documents and earnings calls, focusing on its competitive advantages, risks, financials, and overall business profile. Please note that most emphasis has been put on latest information.

Business Overview

Mosaic is the world’s leading producer and marketer of concentrated phosphate and potash, key ingredients for fertilizer. Its operations span across North America and South America, with a prominent presence in Florida, Brazil, and Canada.

  • Revenue Streams: The company’s revenues are primarily derived from the sale of phosphate and potash fertilizers, along with smaller contributions from other nutrients and animal feed ingredients. These are global commodity markets with prices tied to supply/demand dynamics.

  • Industry Trends: The fertilizer industry is influenced by factors like population growth, dietary changes (more meat-based diets), increasing demand for biofuels, and crop prices, all of which impact demand for fertilizers. These trends have caused a shift away from Nitrogen (which is derived from natural gas) to more Potassium and Phosphate based fertilizers, due to the energy crisis, which benefits MOS. There is significant consolidation in the fertilizer industry, which could bring both opportunities and challenges for MOS. Demand for fertilizers has seen an increase with price increases driven by low supply and increased need.

  • Margins: Historically, the margins of phosphate production have been higher than potash, because of the high costs of production for potash (mining is harder and there is a huge fixed cost component). However, recently we are seeing the price and margin power in both areas, although phosphate still takes the lead. The industry is also seeing a growth in demand, and hence better margins.

  • Competitive Landscape: The fertilizer industry is highly competitive, with global players vying for market share. Mosaic operates in a concentrated market alongside large players like Nutrien, and ICL. The industry landscape can be affected by various factors like trade tariffs, government regulations, and the increasing need for sustainability by agriculture.

  • What Makes Mosaic Different? Mosaic’s competitive advantages stem mainly from its ownership of large, cost-effective phosphate rock mines in Florida and a strong distribution and logistics infrastructure, which includes rail, transportation, warehouses, and shipping facilities. They also have large operations in Brazil where the rock is mined and beneficiated, and have a large part of the overall production (approximately 50%) that is distributed around the globe.

Financial Analysis

The financial analysis uses figures based on the latest reports and earnings call from the Mosaic company.

Income Statement

For 2022, total revenues were approximately $18 billion with operating expenses of ~ $13 billion for a net income of about $3.4 billion. These results are based on a combination of high prices for both potassium and phosphates coupled with a high level of demand.

  • Revenue Growth: The company’s revenues have been highly volatile, and tied to commodities prices. 2022 saw huge revenue increases due to prices increasing, and this could change any time.

  • Margins: Operating margins have been inconsistent, and are highly tied to prices. Margins have been increased with higher potash prices, and that makes the management confident about near term earnings.
  • Profitability: The company has been showing increased profits due to the increase in prices of its offerings, although this increase can be volatile and might not be stable in the longer run. It is important to analyze the factors that could keep these high prices sustainable.

Balance Sheet

  • Assets: Total assets at the end of 2022 are ~ $23 billion. This is due to a number of different factors. A high level of mineral reserves and inventories.
  • Liabilities: Total liabilities are ~ $13 billion, including long-term debt of ~ $4 billion.

  • Equity: Total Equity is at a decent level of ~ $10 billion.

  • Balance Sheet Health Rating: 4 / 5. MOS has a decent balance sheet overall. Their long term debt might become a problem in case of a prolonged industry downturn, but their assets are more than enough to weather that, combined with positive equity, giving a decent position.

Cash Flow Statement

  • Cash from Operations: They have generated a good level of cash from their operations in 2022, about $5.4 billion, which is due to higher profits from increased price.

  • Investing Activities: The company has invested a good amount in capital expenditures, about $1.3 billion, which is a high level of reinvestment.

  • Financing Activities: Mosaic is using the excess cash generated to buy back shares and increase dividend payments, making investors happy.

Moat Assessment

In this section I will evaluate the moat and give a rating of it based on the analysis.

  • Moat Rating: 2 / 5. Mosaic has a narrow moat due to location advantages (mines close to key demand centers) and scale. The scale benefits are mainly seen in production efficiencies and distribution networks. It has some advantages that makes it hard for competitors to compete against its pricing in the short term, but its long-term sustainability might not be very high, because the competitors could potentially replicate these moats and they are dependent on commodity prices and demand.
  • Intangible Assets: Strong brand recognition or patent protection is non-existent in this industry, so this moat cannot be considered.
  • Switching Costs: They are very low as commodities can be easily substituted by other suppliers of the same commodities.
  • Network Effects: These are generally non-existent.
  • Cost Advantages: They have both, economies of scale and cost advantages. Their distribution network gives the ability to produce more products while having more revenue streams. They are very efficient in their production process. Finally, their ownership of large phosphate and potash deposits gives a cost advantage.

Risks to the Moat and Resilience

There are several risks that might harm the moat and the company resilience in the future.

  • Commodity Price Risk: Prices of their goods are highly volatile and influenced by many external factors. A significant drop in prices might harm profitability.

  • Demand Fluctuations: Demand for fertilizers is tied to agriculture. A drought or other disasters could impact demand.

  • Regulatory Risk: Regulations on mining or the import/export of commodities, especially fertilizer, could have negative impacts. For example, environmental regulations could prevent the company from increasing production.
  • Trade Wars: Since most of their operations are outside the US, they are exposed to international conflicts and trade wars between nations, which would impact the business significantly.
  • Intense competition: The competition in this industry is very high. Many well established competitors could lower the pricing or come with a better quality offering.
  • Geopolitical risk: They have multiple international assets which could be affected by local political risks.

  • Dependence on a few regions: Most of their profits come from North America, a decline in demand from that region would cause a significant revenue reduction.

  • Resilience: The business can be resilient because fertilizers are a necessity for agriculture, and this will remain a constant. This means that even if the prices go down, the company will continue to sell its products. Also, as they are one of the lowest cost producers, their revenue will be less impacted compared to competitors in case of a downturn in prices.

Understandability

  • Understandability Rating: 3 / 5. Their operations are complex, involving several mining processes and transportation logistics that are not always easy to grasp. In addition the company’s financial statements are heavily affected by external factors such as commodity prices, which makes it hard to grasp. However, the underlying economics of the business are not very complicated as it is easily understandable what they do. Therefore I have given a rating of 3.

Management Commentary on Recent Events

There have been multiple positive and negative results as of recent.

  • Positive:

    • The prices for commodities have increased, as a result the company profits have risen.

    • The company is generating a high level of cash from its operations, allowing it to allocate more cash to shareholders.
    • They are improving their operations, and they are planning to further automate their production methods.
  • Negative:

    • The potash production is affected by Russia-Ukraine war, which has impacted supply chain, creating issues in transport of fertilizer.

    • They are expecting that the current inflated prices to return to normal levels in 2023 and 2024, although not clear when the process will be started.

The management seem highly confident in future profits, and they are using the excess cash flow to enhance the shareholder value by buying back shares and increasing dividends.