Mosaic Earnings Call Insights: Cash to Spend, Contracts for India and China

Mosaic (NYSE:MOS) recently reported its second quarter earnings and discussed the following topics in its earnings conference call.

Cash to Spend

Vincent Andrews – Morgan Stanley: If you have $3.5 billion of cash more or less and I think the number is about $6.5 billion of debt capacity to stay investment grade, which you listed as a priority, how much organic growth in dollars do you already have laid out to spend, if you went ahead with the ammonia plant, we know roughly what that would cost, but when would you spend the bulk of that money? Would it be next year? Would it be three years from now? And then on strategic investments you haven’t really done much other than you’ve made some divestments and so forth, but how much is there really out there to do because I think ultimately it nets down to what should investors expect you to be capable of doing from return to shareholders’ perspective, both as it relates to potential dividend increases and ultimately how much stock you could buy back, both from the charitable trust and the family members of you, of course, can’t talk to right now, and then ultimately from the open market?

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Lawrence W. Stranghoener – EVP and CFO: There is a lot to respond to there. I’ll repeat what we said in our comments. We have a lot of financial flexibility and we have very deliberately built up this financial flexibility to deal with the expiration of our tax restrictions and the coming lockup expirations. We want to be able to deal with that situation in whatever way makes sense at the time. It’s a little bit situational. It’s a little bit hypothetical. We don’t know what we’re going to be dealing with next summer when those lockup expirations expire. We don’t know what those shareholders are going to be thinking with respect to what they want to do with their shares, and so it’s difficult for us to be as precise as you all would like us to be. Suffice it to say that we expect to be able to continue to fund our organic growth initiatives through operating cash flow, and beyond that we believe we’ve got extensive capability to pursue strategic alternatives if and when they arise and, as you point out, we have not seen anything yet that we’ve seen fit to invest in other than the Miski Mayo Mine, so we continue to exercise great discipline and to return cash to shareholders. I would note that when we’ve had the opportunity to buy back shares, we have done so. You’ll recall that when we did that early last year, we said at the time that was the single best investment opportunity we could find. We would continue to view share repurchase in that light comparing it to other investment alternatives when that time comes. So, we’re asking for continued patience. We don’t have full flexibility yet. We understand that come May, come this summer that investors are going to be looking for more detail about how we intend to deploy our capital, but except the fact that until we get to May, until we can start engaging with the shareholders whose lockups will expire, we can’t be more definitive than that at this point in time.

James T. Prokopanko – President and CEO: Vincent, it’s Jim Prokopanko and good morning and Happy New Year to you. I’ll just add an element to Larry’s comments and in regards to your question about strategic that how much is there, we really haven’t seen anything. And while I think that’s testament to Mosaic’s discipline about how we look at investments, we’re not impatient to make a move. We do have a lot of dry powder, but we are not going to blow a hole in our foot just because we have that. We are a natural party to be involved in any kind of acquisitions. There’s not many that would do anything without talking to Mosaic first, so I don’t feel at all that we’re going to miss anything here. So, just stay tuned. We are being disciplined; we are being very prudent and stay tuned.

India and China

Chris Perrella – Bank of America Merrill Lynch: Could you just elaborate with the India contract timing? Would that be held up by the need for more clarity on their subsidy regime for next year and what’s your thoughts Jim on going to more of a spot market for China and India?

James T. Prokopanko – President and CEO: Going to have Rick and possibly Mike Rahm, Dr. Mike Rahm, respond to the India and then I’ll add some comments about spot pricing.

Richard N. McLellan – SVP, Commercial: On India, the contract timing is going to be driven by primarily one thing and that is, inventories have been drawn down in country to some very low levels. So we expect something to get done in the first quarter for potash. The one thing that is really concerning to us in India is just this subsidy that is distorting the applications of both phosphates and potash. Potash, for instance, in 1996, the Indian government set out a plan to get to balanced P&K applications and they set targets of four units of nitrogen to one unit of potash at that time. Between then and 2009, they drove that value down to – on potash where they were at the target of 4-1. With the changes to the subsidy system and the focus on nitrogen, it is now back up to almost eight to one, so 15 years of very good work thrown out the window, and frankly, that’s equivalent to almost 3.5 million tonnes of needed extra potash in India. Phosphates is very similar. They set a target of two to one in that same period and over the next 15 years got it down from almost four to one to two to one and that was again in 2009. Today, they are back close to three to one. So 15 years of very positive impact on getting their nutrition programs balanced have been lost with this subsidy program and we think it needs to be changed in the country. People understand it needs to be changed and when it does, it will have a significant impact on nutrient markets.

James T. Prokopanko – President and CEO: Chris, you asked about the spot pricing. Understand that in China, right now, we still have one more year left to our MOU that we have with Sinofert. That will end in 12/31/13 and it’s a matter that gets continual discussion at our Canpotex meetings. Board members have, shareholders have a point of view and what drives that is we’ll do whatever we think is in the best interest of the member of producers of potash companies. We’ve gone from 12-month contracts in China now to six-month contracts. So, I think you can see the direction we’re headed.

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