Fitch Ratings has affirmed the investment grade debt ratings of the Mosaic Company (Mosaic: MOS) and its subsidiaries based on the company’s low leverage, its strong cash position, conservative financial strategy and near-term business prospects. The Rating Outlook is Stable.
The Mosaic Company
–Issuer Default Rating (IDR) at ‘BBB’;
–Senior unsecured notes at ‘BBB’.
Mosaic Global Holdings
–IDR at ‘BBB’;
–Senior unsecured notes and debentures at ‘BBB’.
What very much looks to be a profitable harvest for farmers also appears to be a good season for Mosaic. Fertilizer shipments for diammonium phosphate, monoammonium phosphate and potash are well ahead in quarter-over-quarter comparisons of recently released first-quarter results. Average phosphate prices, which lag real-time markets, were higher, while those for potash are still catching up from the recession. Capacity utilization is high for both nutrients, but with pressure building in increasing feedstock costs. Despite strong retail demand, the fertilizer supply chain still appears fearful of stocking inventory, a situation that requires the full attention of producers. Mosaic earned a little over $500 million in EBITDA in the first quarter ending last August versus $226 million in the first quarter of last year. This is a reversal of full-year trends when Mosaic earned $1.7 billion in EBITDA in fiscal 2010 versus $3.1 billion in fiscal 2009.
Cash flow from operations was also significantly better in this past first quarter. Mosaic collected $556 million versus $172 million in the prior year. Mosaic also spent more, however, and after capital expenditures, dividends and a $385 million payment for a 35% interest in a Peruvian phosphate rock mine, free cash flow was negative $147 million. This second quarter’s sale of the company’s interest in Vale Fertilizantes S.A. for just over $1 billion plus cash flow from operations should more than finance the first quarter deficit plus the remaining year’s dividends and the remainder of up to $1.6 billion in capital expenditures for 2011, roughly half of which is going to expand the company’s potash mines in Canada. Fitch expects that Mosaic will earn between $2.6 billion and $2.8 billion in EBITDA this fiscal year, exiting the year with a debt/EBITDA leverage metric of around 0.5 times (x). This considers a loss in margin due to the phosphate rock mining hiatus at the company’s South Ft. Meade mine in Florida caused by an injunction on the expansion of operations there. Fitch expects free cash flow for 2011 will approach $800 million.
Mosaic’s capital expenditures are expected to increase moving into fiscal 2012 as potash mine expansion plans mature. The increase in Mosaic’s mine capacity is expected to be augmented by the coincidental expansion plans of Potash Corporation of Saskatchewan and Agrium, Inc. In concert these will shift the supply curve to the right which could adversely impact industry earnings absent a mirror shift in demand, which is expected by the producers. Although a mismatch of the two would eventually prove self-correcting, the timing has the potential to temporarily weaken Mosaic’s financial profile by an unknown magnitude, which should become clearer with time and lessened as Mosaic continues to build its liquidity. That liquidity included almost $2.4 billion in cash at the close of the first quarter plus an undrawn $500 million revolver. Any significant change in risk probability would be preceded by a change in Mosaic’s Rating Outlook.
The only other significant calls on Mosaic’s cash flow are maturing bonds in December of calendars 2014 and 2016. These amount to $455 million and $469 million, respectively. Bond covenants include typical restrictions on liens, sales and leaseback transactions and the sale of substantially all assets.
Mosaic’s $500 million unsecured revolver matures in 2012. Financial tests within the revolver preclude debt/EBITDA from rising above 2.5:1.0 and also require a minimum net worth that increases annually by 25% of positive net income.
Applicable Criteria and Related Research:
–‘Corporate Rating Methodology’, dated Aug. 16, 2010;
–‘Liquidity Considerations for Corporate Issuers’ dated June 12, 2007.
Applicable Criteria and Related Research:
Corporate Rating Methodology
Liquidity Considerations for Corporate Issuers