Mosaic Earnings Highlights Possible Potash Corp. Buyout (MOS, POT, BHP, MOO, MON)

The Mosaic Company (NYSE: MOS) has just reported strong earnings growth and frankly it helps to highlight just why BHP Billiton plc (NYSE: BHP) is willing to pay so much to acquire Potash Corp. of Saskatchewan  (NYSE: POT).  Unfortunately, the earnings cycle here is not enough to insure that a merger will occur nor is there any assurance that Potash will even get a higher price that is being sought.  Today’s report also highlights Market Vectors Agribusiness ETF (NYSE: MOO), followed by previewing an earnings report from Monsanto Co. (NYSE: MON) due later this week.

Mosaic announced earnings of $297.7 million or $0.67 EPS on sales of right at $2.2 billion.  These results compare with net earnings of $100.6 million, or $0.23 EPS, and an increase from $1.5 billion in revenues from the same quarter a year ago.  Thomson Reuters has estimates of $0.72 EPS and $1.97 billion in revenues.

The company said that total phosphate sales were 3.1 million tonnes averaging $431 per tonne; Net sales in the Phosphates segment were $1.6 billion for the first quarter compared to $1.2 billion last year. Total potash sales were 1.7 million tonnes at an average selling price of $331 per tonne; Net sales in the Potash segment totaled $621.9 million for the first quarter compared to $333.3 million a year ago. Gross margin improved to 23% of sales from 15% in the same quarter a year ago and cash flow from operations was $556.2 million versus $172.4 million a year ago.

Total sales volumes for the Phosphates segment are expected to range from 3.3 to 3.6 million tonnes for the second quarter with an average unit price of $430 to $460 per tonne.  Total sales volumes for the Potash segment are expected to range from 1.6 to 1.9 million tonnes with an average price of $310 to $340 per tonne.

A federal district court issued a preliminary injunction temporarily preventing the Company from mining its South Fort Meade reserves in Hardee County and the company idled that mine before the end of the quarter.  Mosaic also sold its interest in Fosfertil, resulting in gross proceeds of about $1 billion, which will be recorded in the second quarter.  As far as improvements, the gross margin and earnings gains were attributed to much higher potash sales volumes and improved phosphate selling prices.  The negative part of the quarter was higher sulfur and ammonia costs and lower potash selling prices.

Mosaic commented that its sees the momentum of the past several quarters to continue as distributors replenish depleted inventories and farmers invest in crop nutrients to rebuild phosphate and potash levels in their soils.  Global shipments of finished phosphate products are projected to surge to a record-shattering level this year and increase further in 2011.  Further noted was that the demand for potash has increased and producer inventories have significantly declined.  In its guidance, the company noted that demand is strengthening and market sentiment has improved due to higher agricultural commodity prices and the need to refill a de-stocked global distribution pipeline.

Global phosphate shipments are projected to climb to record levels of 56 to 57 million tonnes in calendar 2010 and to 57 to 59 million tonnes in calendar 2011 led by India and Brazil.  Global potash shipments are projected to climb to 48 to 49 million tonnes in calendar 2010 and to 52 to 55 million tonnes in calendar 2011, led by Brazil, China, India and other Asian regions. Capital spending for fiscal 2011 is expected to range from $1.4 to $1.6 billion and SG&A are expected to be $360 to $380 million in fiscal 2011.

As far as how this earnings report from Mosaic pertains to Potash Corp., there are some takeaways that can be drawn.  For starters, the Canadian Minister of Industry has given a 30-day extension to a review of the BHP merger between BHP Billiton (NYSE: BHP) and Potash Corp.of Saskatchewan (NYSE: POT).  The Conference Board of Canada just issued a report recently showing that Saskatchewan’s tax revenue could be hurt by $2 billion over the 10-year period after a merger but it would be preferable to a potential competing bid from China’s state-owned Sinochem.

Mosaic is not currently involved in an acquisition.  Potash Corp. has stuck by the stance that BHP’s $130.00 per share cash offer is wholly inadequate.  Mosaic investors appear to be focused more on this net earnings number as shares closed down 1.4% at $58.79 and the after-hours reaction shows shares at $57.99.  Keep in mind that this earnings miss after a revenue gain may be tied to those issues during the quarter that analysts appear to have underestimated.  Potash Corp. of Saskatchewan shares closed up 1% at $144.05 and its shares are indicated marginally lower.

Market Vectors Agribusiness ETF (NYSE: MOO)  is the key ETF for the sector and its shares closed down 1% at $45.60 today.  Mosaic accounts for close to 7.5% of the weighting of the MOO, while Potash Corp of Saskatchewan is also close to 7.5% of the weighting.    Monsanto Co. (NYSE: MON) accounts now for about 6.7% of the weighting of the MOO and its results are due later this week.

The good news here is that Mosaic highlights some of the strengths of that BHP-Potash bid.  The bad news is that the Mosaic results are mixed enough that the bid process does not look like it is about to get out of control.

JON C.OGG