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Morningstar | Raising Our Mosaic FVE to $34 Per Share on Increased Near-Term Phosphate and Potash Profits. See Updated Analyst Note from 07 Aug 2018

Mosaic reported strong second-quarter results as adjusted EBITDA grew nearly 60% year on year to $461 million during the quarter driven by higher fertilizer prices. In its earnings release, management increased adjusted EBITDA guidance from a range of $1.7 billion-$1.9 billion to a range of $1.8 billion-$1.95 billion, which we think is achievable. After updating our model for our increased near-term outlook, our Mosaic fair value estimate increases to $34 per share from $32. Our no-moat rating and positive moat trend rating based on the ramp up of Mosaic's K3 potash mine remain intact. The market reacted favorably to management's increased guidance, sending shares up roughly 6%. With shares trading slightly below our fair value estimate, we view Mosaic's stock as fairly valued on a risk-adjusted basis.

In the potash segment, adjusted EBITDA grew 17% year on year to $185 million on higher prices and volumes, partially offset by higher unit costs as the company sold higher cost volumes that were impacted by the weather-related rail issues that plagued Mosaic to begin the year. Mosaic is on track to begin production at the new low-cost K3 potash mine by the end of 2018. As potash production increases at K3 and decreases at the K1 and K2 mines, we expect lower unit production costs over the next several years. Much of the cost savings will come from lower brine inflow expenses as the K3 mine will not have this additional cost.

Our potash price forecast is unchanged. We continue to forecast 2018 prices to average $270 per metric ton. We also maintain our long-term potash price forecast of $270 per metric ton in real terms as we see supply and demand staying fairly stable in a midcycle environment.

In the phosphates segment, we've increased our near-term price forecast to $390 per metric ton from $380 as Chinese exports and lower production in India will support global prices through the rest of 2018 and into 2019. Our long-term phosphate price forecast remains at $350 per metric ton in 2018 real terms as we continue to see greater low-cost supply from OCP in Morocco continuing to push out higher-cost non-integrated producers and ultimately lowering the marginal cost of production. However, Mosaic should benefit from selling a greater proportion of specialty phosphate fertilizer products, such as MicroEssentials, which sell at a premium and carry higher margins.