With the supply-demand balance out of whack, Mosaic responded quickly – announcing as far back as December 2008 that it was prepared to significantly reduce its phosphate and potash output to combat weak demand.

 

Despite the sharp decline in total sales, margins and earnings per share, Mosaic’s financial position has remained strong. We believe the company will emerge strong from the economic downturn. Moreover, it will remain an essential company to own in the resource space as the world population (along with incomes and food demand in the developing world) continues to grow. Mosaic remains a market leader in North America in potash, with a nearly 40 percent market share. More importantly, it’s the second-largest global potash producer, with a global market share of 13%. Demand dynamics for potash, is beginning to improve, after a nearly 20 percent decline in 2008/2009.

 

Mosaic is also the world’s largest integrated phosphate producer. Its share of the world phosphate production in 13 percent; its share of the US production is 58 percent. The world phosphate demand is also recovering; this should lead to the recovery in pricing and, therefore, in profits for Mosaic.

 

With potash currently accounting for about a quarter of revenues (its share in future revenues is expected to increase to about 60 percent), is Mosaic out of the woods in terms of weathering the crisis? The market seems to think that it is. Increasing global demand for food, as well as trends towards more protein-rich diets in China and India, support a better environment for this fertilizer producer in the future. To produce the record crops needed to satisfy demand this year, fertilizer is an absolute necessity – both for crops and portfolios, alike.

 

Mosaic’s stock bottomed in January 2009, way before the lows set by the broader market in March. The recent credit crisis-induced drop in demand has resulted in significant de-stocking by farmers as they have increasingly drawn from their own inventories. This cannot go on forever, and as they start to rebuild those inventories in the near future, market demand should pick up significantly. As a result, we expect demand growth to continue to reaccelerate towards a longer-term rate, taking Mosaic shares higher.

 

Shareholders were recently rewarded with a special dividend of $1.30/share. In the future, given the volatility of its earnings and cash flows, special dividends may continue to be Mosaic’s primary way of rewarding shareholders. An industry leader, Mosaic deserves to trade at a higher-than-average multiple, and we expect the return of its glory days as economies across the globe recover.

 

Another factor that’s been in play for the sector is the ongoing industry consolidation we’ve seen. While companies in the industry may no longer look cheap on a P/E basis, many management teams clearly think that there are plenty of bargains to be found—particularly from a book value of assets perspective. Mosaic was rumored at one point to be the target of an acquisition by Brazil’s Vale SA (although Vale denies the rumor). Whether or not the rumors turn out to be true, these trends towards consolidation underscore the immense untapped value in the industry.