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Morningstar | Maintaining Our $37 FVE for Mosaic With Long-Term Outlook Intact; Shares Undervalued

Mosaic reported solid 2018 results, as adjusted EBITDA grew 68% year on year to $2.0 billion, driven primarily by higher fertilizer prices in all three segments. Management expects further growth in 2019, with guidance of an adjusted EBITDA range of $2.2 billion to $2.4 billion, which is slightly above our expectations. However, management also expects higher capital expenditures over the next few years due to new investments in its Florida phosphate operations. Having updated our model to reflect these changes, we maintain our $37 per share fair value estimate for no-moat Mosaic.

Although we viewed management's guidance in a positive light, the market reacted negatively to the overall results, sending the stock down just over 4%. At current prices of just over $31 per share, we view Mosaic as slightly undervalued on a risk-adjusted basis but reiterate our very high uncertainty rating. Due to the company's middling cost position in phosphate, small movements in phosphate prices have an outsize effect on the company's results.

The market's negative reaction to earnings is likely due to to an expectation of lower phosphate prices. Mosaic plans to increase phosphate production in 2019, and Chinese production will increase from plant restarts. However, our fair value estimate assumes lower long-term phosphate prices of $360 per metric ton in 2019 real terms versus our 2019 price forecast of $390. Our lower price forecast is due to increased Chinese production and greater production from lower-cost sources, including OCP, which sits near the bottom of the phosphate cost curve. While lower prices will weigh on future profits, this should be offset by increased sales volumes from low-cost phosphate produced in the Middle East from Mosaic's joint venture with Ma'aden and greater sales of premium-priced products such as MicroEssentials.

In potash, adjusted EBITDA grew 65% year on year during the quarter to $256 million on higher prices and volumes. We continue to forecast 2019 potash prices of $300 per metric ton on a China-delivered basis. We expect the market to remain in balance as new supply from EuroChem ramps up slowly, and we forecast reduced potash production from both SQM and K+S. Our long-term potash price forecast of $310 per metric ton in nominal terms is also unchanged. We see continued demand growth at 2%-3% per year being large enough to require that higher-cost supply remains on line despite capacity expansions from lower-cost existing producers.

For Mosaic, stable potash prices around $300 per metric ton should drive profit growth due to declining unit production costs. As Mosaic ramps up the recently commissioned K3 potash mine, we forecast the company's cash production costs to fall from just over $90 per metric ton in 2018 to just over $60 in 2025. K3 will not have the additional brine inflow costs that Mosaic incurs at the K1 and K2 mines.