Morningstar | Maintaining Our $37 FVE as Mosaic Announces Idling of Two Phosphate Rock Mines in Brazil. See Updated Analyst Note from 12 Apr 2019
On April 11, Mosaic announced it will idle its two largest phosphate rock mines in Brazil. The company is awaiting regulatory approval that the tailings dams at its mines comply with new Brazilian regulations. The new regulations were enacted after the Vale tailings dam collapse earlier this year.The two mines being idled accounted for nearly 70% of total phosphate rock production in the Mosaic Fertilizantes segment in 2018. Mosaic's management team indicated that the company has enough phosphate rock to meet near-term phosphate fertilizer production requirements for the segment. However, if the mines stay idle for an extended period, Mosaic will have to ship phosphate rock mined in either the United States or Peru, which will increase costs.
Mosaic's tailings dams at the two idled mines are classified as the lowest risk of emergency based on the rating system. Our base-case assumption is that the company will receive regulatory approval later this year to resume production. However, we have increased our 2019 unit production cost assumption for the Mosaic Fertilizantes segment to account for higher phosphate rock costs in the near term. Our 2019 earnings per share forecast now sits at the bottom of management's guidance range of $2.10-$2.50 versus our previous estimate near the midpoint. While this would slightly lower our fair value estimate in isolation, we maintain our $37 fair value estimate for no-moat Mosaic as our reduced near-term forecast is offset by the time value of money since our last update.
At the current share price, we view Mosaic as undervalued with the stock trading in 4-star territory. However, we reiterate our very high uncertainty rating, as the company's higher-cost position in phosphate production makes profits more sensitive to phosphate price movements.
Mosaic will have a few months of leeway as Brazil is entering the harvest and dry season in the annual farming cycle, when the company typically produces and sells lower phosphate fertilizer volume. However, if the phosphate rock mines do not receive regulatory approval by the third quarter, which is typically the largest production quarter, Mosaic would face higher costs that would weigh more heavily on earnings. We have included a higher cost assumption in our bear-case scenario. As a result, our bear-case fair value estimate falls to $17 per share from $20.
Mosaic is a producer and marketer of concentrated phosphate and potash crop nutrients. The company is organized into three reportable business segments: Phosphates, which owns and operates mines and production facilities in Florida that produce concentrated phosphate crop nutrients and phosphate-based animal feed ingredients, and processing plants in Louisiana that produce concentrated phosphate crop nutrients; Potash, which mines and processes potash in Canada and the United States and sells potash in North America and internationally; and Mosaic Fertilizantes, which produces and sells concentrated phosphates crop nutrients, phosphate-based animal feed ingredients and potash fertilizer.
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