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Morningstar | Maintaining $35 FVE as Mosaic Announces Plant City Phosphate Production Closure; Shares Undervalued

On June 18, Mosaic announced the closure of the previously idled Plant City, Florida, phosphate plant. The plant had been idled since 2017, as Mosaic reduced its higher-cost production to support global phosphate prices. In our valuation model, we had previously assumed Plant City would restart production in 2021. The phosphate plant produced 1.3 million metric tons in 2017, the last year of operation. As a result of the plant's closure, we now forecast Mosaic to produce roughly 9 million metric tons per year in its phosphates segment, down from 10.3 million.

In addition to greater phosphate production, we had also assumed that the restarted production would weigh on medium-term phosphate prices. However, with Plant City remaining off line, we now forecast slightly higher medium-term phosphate prices. Having updated our model to incorporate these changes, we maintain our $35 fair value estimate for Mosaic as the lower phosphate volumes are offset by higher medium-term phosphate prices. Our no-moat rating is also unchanged.

At current prices, we view Mosaic as undervalued on a risk-adjusted basis, with shares trading in 4-star territory. We think the market is assuming lower phosphate prices as new low-cost supply comes on line from Moroccan state-owned producer OCP, but reduced production from North American producers, including Mosaic, supports our view that phosphate prices will stabilize and remain in line with our long-term forecast of $360 per metric ton in 2019 real terms.

In both phosphates and potash, Mosaic continues to act as a rational player, often reducing volumes to support prices. We are in favor of this move, especially in phosphates, where Mosaic is a higher-cost producer.