The Mosaic Company (MOS) Earnings Call Transcript & Summary

So we'll stay at fertilizer again. So we're going to -- next session with Mosaic, who's, of course, North America's leading phosphate producer and large producer of potash as well, of course. So joining us today from Mosaic is Joc O'Rourke, the CEO. And Joc's going to walk us through about 10 minutes or more, 5, 10 minutes of remarks, and then we'll go to Q&A. [Operator Instructions] We got some ready, and then we'll have a conversation. Thank you.

Okay. So -- if I can get this thing running here. Yes, better. Please read the forward-looking statements, it's on our website. And I think I believe this is webcast. So the reason I wanted to put forward a couple of slides is, normally I wouldn't do that for a fireside chat and we move straight into question and answering. But it seems that the big question today is, with the restrictions in both potash and phosphates supply, why isn't the market moving faster than it is today. And so I just want to put a couple of things forward and give you why we strongly believe, while there is some deferral, there certainly is no demand loss, if you will, or demand destruction. So it starts with -- our markets and every other fertilizer ag market starts with the grain prices. We believe there is strong support for grain prices because the stocks-to-use ratio globally for grains and oilseeds, for instance, is below 15%. That is extremely bullish for corn, for soybeans. So today, corn and soybean prices are reasonably high, but they're also well supported and probably in a bullish mode. So what we expect to see is those prices to at least hold and probably improve over time as demand uses the product that's available from last year's harvest. If I -- what does that mean from a fertilizer perspective? It means that the fertilizer price, which has come down significantly, and the grain price, which has held, means the cost of fertilizer in terms of a farmer is quite affordable again. So in the green here is what we call the affordable zone and less affordable as we get out. So if you look at the top of that graph where you've seen last year and whatnot, fertilizer became quite expensive compared to the price of the crops, or in Brazil, the barter ratio, if you will, so bags of fertilizer compared to bags of beans. And now that's come back into a much more affordable range. And what that means is demand should follow. And so do we see that in real life? Yes. If we look at North America, which is sort of the first season to come for us -- Brazil won't come until the safrinha gets ready, which is really the end of this month, sort of getting ready for a July planting of their safrinha season. And then markets like India and stuff are preparing for post-monsoon. So they're preparing now, but those markets don't have to move yet. So they're deferring. And they'll go soon. But what do we see? In phosphates and potash, we've seen the best April we've seen in 5 years in North America. That means the North American farmers are buying. And then our dealers are buying from us. And what we've also seen -- so this is just April, but I think it highlights where things are going. We always say, first, you need volume, price follows. So what we're seeing in North America is we're not only seeing volume but we're seeing price movements that would encourage us. So if you look at this from a Midwest price perspective, for instance, DAP, the phosphate fertilizer, is selling for $766 a metric ton right now. A lot has been said recently because publications are writing down what's going on in NOLA. And just to put it in perspective from that last table, we're selling 0.5 million tonnes a month in the Midwest at $765, and they're probably selling a couple of thousand tons at most at NOLA. So from the perspective of what's really going on in the market, this is just a couple of traders playing games. It just doesn't matter to the market. And I agree it hurt sentiment. But there will be a Saudi ship coming in, in a couple of weeks and -- on formula pricing and credit to the traders that they've been able to drive that price down. But you know darn well, if that gets up country, they'll be selling it for the high price. And recognize $200 difference between those, there's only a $40 transport fee. So normally, your up-country price should be $40 to $60 above the NOLA price if it were truly trading in [ Unison ]. Same we're seeing in potash. We've got $470 price mid up-country. So what that says is, it gives us great confidence that what's happening in North America is going to soon happen in Brazil, and it will soon happen in rest of the world. And frankly, if it doesn't, as a second year of -- or if we have a second year of low application, we're going to start to see drops in yield. That's been proven in the '70s by Norman Borlaug and the Green Revolution. This isn't any kind of -- you can put it off like buying an iPhone, you don't put your fertilizer down, you don't grow the crops. 50% of crop growth is dependent on fertilizer. We've had 1 year of lower usage, you can't do that over and over again. So for that reason, we think that we're in a really good position. And in terms of our business itself, just a couple of highlights. We had a really good production quarter in phosphates. We have been recovering from Hurricane Ian. It did a lot of damage not only to our plants but to our minds. We've seen that come back and had a pretty darn good quarter. If you look at that other chart you'll see, because of where we were, we focused on North American sales, so the price realization was pretty good. First quarter shipments in potash, you see that potash in the first quarter, we gained -- the market grew significantly. We gained 2%, and we also gained 2% with the highest price realization in the North American market. So that -- I can't talk about who we took market share from probably. I think we took at least all of what was the deficit of the imports and the growth. So in terms of -- a real testament to our own salespeople. They had the right time, place, utility. They were there when the product was needed, giving the service to our customers, reliable, et cetera. So I think that helped. And then Fertilizantes, we had a lot -- we've had high-priced inventory. We've now moved through that high-priced inventory and we're back into sort of normal things. And so as the Brazil market picks up, we should be doing well there. And again, last thing I just want to mention quickly is capital allocation. We continue to invest in the business. We've got some great projects out there. The next generation of MicroEssentials, the expansion of our Brazil distribution business, the next phase of MicroEssentials, the last ramp-up of the Esterhazy mine, new flotation at Esterhazy. There's just lots of fantastic projects with 1- to 2-year payback. And while -- you always want to be careful on capital, you -- at the same time, I want to make sure if we've got these fantastic opportunity projects, that we don't stop doing them. We -- our balance sheet is in a great position right now. We have a $900 million bond coming up at the end of the year. We will refinance that. We don't feel any need to continue to take down debt, and then we will continue to return all our excess cash to shareholders. So with all of that, I just thought it was worth probably saying a couple of words because normally, I'd just open it straight up to questions from Joel here, but I think there were some things that you just needed to be clarified at the start.

Okay. So this is interesting. So you started to speak for 9, 10 minutes on this because when you think of the investor base right now, the investor base is quite bearish on the fertilizer names because the producers have been very positive on projections and shipments and pricing 9 months ago, 6 months ago, a few months ago. They haven't worked out. It's been weaker than expected. People have guided down numbers and expectations. And now those of you in a more just-in-time environment that even some of the summer fill programs are going to be delayed, and people are going to wait the last minute to buy. So what are you seeing in terms of buyer reticence right now? Like, you have a -- you presented a very strong view and a lot of reasons why you'll be right. How concerned are you that the channel, the buyers, will push back and make us a tougher year than you hope?

Well, I think the U.S. is a perfect example of -- I mean, in March -- February, the U.S. buyers were pushing back. They had high-priced inventory. And the one public company that reported on the retail in North America, you saw they lost money. Why did they lose money? They probably had high-priced inventory they had to work through, no different than our Brazil business. So in that sense, they want to sell that high-priced inventory. They're reluctant to bring on new product until they have a farmer coming to the market. But once the farmers came to the market, the U.S., it's been a rush. We've been pushing hard. And we've seen this every year, Brazil is much the same. We've seen this before where Brazil puts off until June. And then once they start, there's going to be a mad rush because people are going to be in a rush to get their product there in time. So I don't feel that in any way we've been -- that we are bullish for unreasonable reasons. Now we know that prices have come down. We know that what will happen. We have to move the volume before the price moves. And so people said our guidance for price in potash, for instance, was weaker than they might have expected. But as the ratio of domestic to international moves that way, we would expect that our netbacks will go down, and it's just a product mix and a market mix thing. But overall, we're still in a position of believing and for, I think, good fundamental reasons that in both potash and phosphates, potash because no tonnes or less tonnes out of Belarus and probably at best, the same number of tonnes out of Russia, we're going to have a restricted market. And then in phosphates, we still expect the Chinese to restrict exports. And so with a growing market and restrictions, we see both of those markets to be supply constrained.

So your Canpotex competitor Nutrien gives a little more formal full year guidance. What they've got baked into guidance is there'll be a seaborne contract or a contract with a buying consortium in China second half of the year. It seems like they're modeling -- so 3 million, 4 million tonnes of seaborne exports, maybe a little more than 1 million goes to Canpotex. Is that your view that we'll see second half contracts, maybe 1 million more go to Canpotex -- 1 million of that go to Canpotex?

Yes. I think you have to look at China and look at the fundamental change that has been driven by the -- well, by the rail, basically. So you have a couple of things that make the seaborne trade in China a little less relevant than it used to be. You have -- you've always had about 1.8 million to 2 million tonnes of product that can come across the Euro mountain range from Russia. We now have seen the Belarus, BPC, is back choosing backhaul to ship all the way from Belarus through to Kazakhstan and into the western side of China. And so now you have that. It's another 2 million tonnes that used to be seaborne. You have Qinghai Lake, which is actually seemingly pushing a little more towards potash where they've been pushing towards lithium before. And so that balance, I think, last year, they would have been over 6 million tonnes, which leads to -- and then you have Laos, which is coming across by rail. And they are not a large tonnage yet, but I think they're pushing up towards 1 million tonnes this year. So now the seaborne is -- yes, 3 million tonnes might be a reasonable number for seaborne. And I think Canpotex probably would get that 1 million tonnes of that. That's probably not unreasonable. But I mean that's yet to be done. And even our own distribution business will take a bunch of tonnes from Canpotex. So I think it's quite reasonable that they'll get that tonnage.

As a lithium analyst, I'm like, why you're going to sell potash at $400. We can sell lithium at $30,000 a tonne.

Last year, last year. It might reverse that. I'm not sure.

Okay. It's even better. Do you think then that -- so one of your competitors have been very clear to say, well, we think India $422 a tonne, that's a new base price. And of course, Brazil in potash trades at a premium to India, so price have to go up. Some of your other large competitors saying, no, prices will be kind of stable, maybe flat, flat to down. Sort of where do you shake out on the market price right now?

So maybe this is -- the problem is we've got a whole bunch of people who are predicting price. I know whatever price I give you is going to be wrong. All I can tell you is what normally happens is, once the market starts moving, the fundamentals take over and prices tend to move up in season as they have in North America, and we keep seeing that. So I have seen it before where -- I think it was in probably '19 or something like that, where the Brazil price actually was what the Chinese use to negotiate their price. So the Brazil doesn't always trade at a premium to China. It probably should, but it doesn't. They're all individual markets and they all play out as they play out. So can Brazil though support a $422 and moving up price, I think so. But right now, it's trading below that. So we'll have to just get the market moving and see where it goes.

You've used the Colonsay mine in Saskatchewan, [ as you ] mine for many, many, many years. It's been down now since I think in December, maybe 6 months plus or 6 months. It's been something that's come up a lot in the last 6 months. What are the conditions for Colonsay when it's time to restart it? And I think -- I think the people are there, they're ready to go. Is it just when you turn the switch back [ and unlock ] there?

It's pretty simple math from our perspective. If the international market starts moving, and we expect and think it will, Colonsay would be needed. If Canpotex does more, and here's a simple math, if Canpotex -- U.S. domestic is kind of fixed, if Canpotex does more than about 14 million, 14.5 million tonnes, you need Colonsay. If Canpotex doesn't do that, we don't need Colonsay. So it's kind of that simple. And I'm talking about run rate. So you got to get -- the export run rate has to be over basically 1.1 million, 1.2 million tonnes, and then you need Colonsay. We can produce 500,000 tonnes a month at Esterhazy now, and we can probably produce 300,000 tonnes at Belle Plaine. So if you think about what the domestic summer fill will be and then add to it what the -- the thing is that turnover point is, I don't know, somewhere around 14 million tonnes of Canpotex.

So I did get a question about K3 or Esterhazy, so when will it be complete, in 2024? And when will you completely shift over production at Esterhazy from the K1 and K2 shafts to K3?

Well, I can -- that's a pretty straightforward answer. We have now sealed, filled concrete pillars on the top of both K1 and K2. They're gone.

So it sounds like it's closed. Is that what you're saying, closed...

They're gone. We pulled all the facilities out. We filled it with concrete. We put a plug-in on the top. So you can pretty much walk over the top of it.

Have you done it?

No, I have not. But -- so that is done. Today, Esterhazy is producing in the range of 15,000 or whatever tonnes per day, all from K3 -- sorry, that's probably just into K2. But it's running full. And we have 12 miners running. We have 1 left to go, but it can -- it's basically at its capacity today.

So obviously, like the market hasn't developed. So your Canpotex -- Nutrien started saying we're going to add more mining machines and miners and conveyor belts to try to ramp up, your realization rates at their operations, it hasn't really gone the way they wanted, so it's sort of going slower. If they eventually feel the need to go to 14 million, 15 million, 16 million, 17 million, 18 million tonnes, they can't get more allocation from Canpotex. Those tonnes have to go into North America, true? Unless you agree talk to them about the allocation.

Yes. Look, North American market has peaked at a point. It's -- there's no more huge number of acres of land. So at 94 million tonnes -- or 94 million acres of corn and whatever it is, 87 million, 88 million acres of beans, there's not a lot of other land there. So unless you're going to use a lot more fertilizer per acre, North America is a fixed market.

So then you would have to agree inside Canpotex that give them greater than their nameplate, allocate your baseline nameplate capacities, right? So you'd have to agree to let them have a greater than, I don't know, 67%, if it is, a greater allocation with offshore Canpotex sales and what they're normally getting now.

I'm not going to answer this question, but you know what the answer should be.

No.

Okay. Well, let me ask you a question. Let me put it back to you. Why would we do that?

Well, it would increase Canpotex's -- it would help make Canpotex at least keep the share going forward, so you -- Canpotex take share. And it doesn't hurt your earnings.

We have almost 2 million tonnes of excess capacity today sitting in Colonsay. So unless Canpotex goes up by -- if it's 2/3, 1/3 for easy numbers, and we're at -- let's call it 1.5 million, unless Canpotex goes up another 4.5 million tonnes, we have enough tonnes to supply it. It is not Mosaic slowing down Canpotex. It is the market. If there is a market for Canpotex to sell 17 million tonnes at a reasonable price, then we're in it. I mean why would you sell bulk -- again, I'm going to go back to -- and I apologize for being careful here how I say this. Go back to 2012, 2013 at the BPC breakup, Bug Martell who is the CEO said, we're going to ship, what, 12 million tonnes versus 11 million tonnes this year, but the price is going to go down. They shipped 12 million tonnes at $300 where, the year before, they shipped 11 million tonnes at $400. You don't have to do the math. If the market doesn't need it, pushing it into the market just destroys price. So they gained 100 -- I think they gained like 0.1% global market share and destroyed about $3 billion on their own revenue alone, plus the rest of the market.

But I'm not modeling 18 million tonnes for Nutrien. I'm modeling 13 million tonnes going forward. But the premise of my question is they can't really push those tonnes.

No, they can't push those tonnes.

To do what they need you to agree, and you told me you're not going to agree.

Well, no, I'm saying we will agree to a reasonable market. And we're not going to push tonnes where they're not needed.