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Morningstar | Upping Mosaic's FVE to $37 on Higher Near-Term Phosphate Prices as Strong 2018 Performance Continues

Mosaic reported strong third-quarter results, as operating earnings grew roughly 84% year on year to $393 million, driven by higher fertilizer prices that led to greater profits across all segments. We've also increased our 2019 phosphate fertilizer price forecast on an FOB Morocco basis to $410 per metric ton from $400, as we see a slower pace of Chinese phosphate production restarts. This will support higher prices during the year. Our 2019 potash price forecast of $300 per metric ton remains intact. Due to our higher near-term phosphate price forecast and higher potash volumes, only partially offset by lower phosphate production volumes, we've raised our fair value estimate to $37 per share from $35 for no-moat Mosaic. The market reacted favorably to Mosaic's results, sending shares up 10% at the time of writing. At current prices, we view Mosaic as fairly valued on a risk-adjusted basis.

In potash, operating earnings grew 77% year on year to $136 million, driven by higher prices and volumes and lower unit production costs. Management raised potash production guidance to a midpoint of 8.85 million metric tons for 2018, up from 8.6 million metric tons. Because Mosaic typically produces potash at capacity utilization rates well below 100%, the company can increase production to take advantage of higher prices when demand exceeds supply.

With potash gross margins in the mid-20% range at current prices, Mosaic is well-positioned to grow profits in 2018 and 2019 as potash prices continue to be supported by lower production from SQM, K+S, and Israel Chemicals, combined with a slower-than-expected production ramp from EuroChem. We continue to forecast $300 per metric ton potash price in 2019, with a long-term potash price forecast of $310 per metric ton.

In phosphate, operating earnings grew 78% year on year to $157 million, driven primarily by higher prices. While we see higher near-term phosphate prices, we continue to see lower long-term prices. Out outlook is driven by greater Chinese production restarts and new low-cost capacity coming on line in both Morocco and the Middle East, driving out higher-cost, nonintegrated players and lowering the marginal cost of production to around $350 per metric ton in 2018 real terms.