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Morningstar | Reducing Our Mosaic FVE to $35 on Lower Near-Term Phosphate Prices; Shares Undervalued

Mosaic reported weak results to begin the year, as lower phosphate volume and higher fertilizantes unit production costs weighed on profits in the first quarter. These headwinds were only partially offset by strong potash results. Mosaic should be able to make up the soft phosphate volume that stemmed from a late start to the North American planting season. However, we have reduced our 2019 phosphate price forecast to $360 per metric ton from $390 as higher Chinese exports will weigh on prices. We maintain our long-term phosphate price forecast of $360 per metric ton. Having updated our model, we reduce our Mosaic fair value estimate to $35 per share from $37 on lower near-term profits. Our no-moat rating is intact. At current prices, we view Mosaic as undervalued, with shares trading in 4-star territory.

In the Mosaic fertilizantes segment, Mosaic's Brazilian phosphate rock production has been temporarily shut down as the company works to meet new tailings dam regulations that resulted from the Vale tailings dam collapse earlier this year. In the earnings release, management outlined its plan to restart full phosphate rock production by the third quarter of 2019. Management estimates a $100 million impact from the production shutdown this year. This is roughly in line with our prior assumption.

In potash, operating earnings nearly doubled year on year to $176 million due to higher prices and higher volume. We maintain our long-term potash price forecast of around $300 per metric ton (on a China delivered basis) as new supply grows in line with demand. As Mosaic ramps up its K3 production over the next several years, we expect unit production costs to fall as the brine inflow expenses that are unique to Mosaic (versus other Canadian producers) are eliminated. Declining potash production costs underpin our positive moat trend rating.