IB Equity Research

August 14th, 2013

THE MOSAIC COMPANY Thesis Overview

Fertilizer stocks plummeted on July 30 on the heels of the announcement that Russias Uralkali was quitting the Belarusian Potash Company cartel, which prompted investors to fear that potash pricing would plummet due to increased competition. The Mosaic Company (MOS) stock dropped 22%. My views are the market overreacted on this sudden news (which I defend in this report), and MOS has some real catalysts on the horizon that should drive the stock higher. High level list of value-driving items include: (1) Cargill Class A ownership overhang coming to end (2) Esterhazy tolling agreement expiration (3) MOS management shareholder-friendly strategies (4) Lower cost structure re Fort Meade (5) Attractive valuation & replacement value support
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Stock Rating Catalyst Category Price Target Price (8/14/13): $43.50 Upside/(Downside): 15% Ticker: MOS Exchange: NYSE Industry: Agriculture Trading Stats ($USD millions) Market Cap: $18,523 Enterprise Value: $15,473 Price / Book: 1.4x Dividend Yield: 2.4% Price / FY2014E EPS: 12.2x Price / FY2015E EPS: 11.4x EV / FY2014E EBITDA: 6.1x EV / FY2015E EBITDA: 6.4x
Source: Company filings, Wall Street Consensus

BUY Value $50.00

Price Performance 52 Week range: $39.75 - $64.65 Analyst Details IB Username: S. Nguyen Employer: Private Equity Job Title: Vice President Analyst Disclosure MOS Position Held: Yes

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August 14th, 2013

Company Overview
Mosaic (MOS) is the largest producer of phosphate fertilizer and is the second-largest behind Potash Corporation in terms of nameplate capacity in potash. MOS mines phosphate rock in Florida and processes rock into finished phosphate products at facilities in Florida and Louisiana. MOS mines potash in Saskatchewan, New Mexico and Michigan. The company has other production, blending or distribution operations in Brazil, China, India, Argentina, and Chile, and a strategic equity investment in a phosphate rock mine in the Bayovar region in Peru.

The company was formed in October 2004 from the combination of the former IMC Global and the fertilizer division of privately-held Cargill Inc.

Phosphate Segment
As described in MOSs 10-K: We are the largest integrated phosphate producer in the world and the largest producer and marketer of phosphate-based animal feed ingredients in the United States. We sell phosphate-based crop nutrients and animal feed ingredients throughout North America and internationally. Our Phosphates segment also includes our international distribution activities. Our distribution activities include sales offices, port terminals and warehouses in the United States, Canada, and several other key international countries. In addition, the international distribution activities include blending,

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August 14th, 2013

bagging and production facilities in Brazil, China, India, Argentina and Chile. We accounted for approximately 12% of estimated global production and 59% of estimated North American production of concentrated phosphate crop nutrients during fiscal 2013. Details on MOSs FY2013 annual phosphate capacity and production volumes are as follows:
Phosphoric Acid Operational Capacity Production 0.9 1.7 0.9 3.5 0.0 0.8 0.8 4.3 0.9 1.5 0.8 3.2 0.0 0.6 0.6 3.8 Util Rate 88.4% Processed Phosphate Operational Capacity Production 2.2 4.1 1.8 8.1 1.6 0.0 1.6 9.7 2.0 3.3 1.8 7.1 1.1 0.0 1.1 8.2 Util Rate 84.5%

(tonnes in millions) Florida: Bartow New Wales Riverview Louisiana: Faustina Uncle Sam

Total

MOS touts itself as the low cost integrated producer of phosphate-based crop nutrients, due in part to the companys scale, vertical integration and network of production and distribution facilities. MOS is the worlds largest producer of concentrated phosphates, as well as the second largest miner of phosphate rock in the world and the largest in the United States.

Potash Segment
As described in MOSs 10-K: We are the fourth-largest producer of potash in the world. We sell potash throughout North America and internationally, principally as fertilizer, but also for use in industrial applications and, to a lesser degree, as animal feed ingredients. We accounted for approximately 13% of estimated global potash production and 42% of estimated North American potash production during fiscal 2013. Details on MOSs FY2013 annual potash capacity as well as finished product production are as follows:
Operational Finished Capacity Product 2.4 1.5 5.3 9.2 0.5 1.0 0.0 1.5 10.7 2.1 1.1 4.0 7.2 0.3 0.7 0.1 1.1 8.3 7.8 Util Rate 77.6%

(tonnes in millions) Canada: Bell Plaine Colonsay Esterhazy United States: Carlsbad - MOP Carlsbad - K-Mag Hersey

Total Total excluding toll production

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August 14th, 2013

Market Overview
Phosphate
The following is a snapshot of global finished phosphate capacity by company:

The phosphate market is a global market, with developing countries (specifically China and India) becoming a much larger part of the demand pie. Most market experts expect long-term phosphate demand to trend at a 2.5-3.0% global growth rate.

Source: Mosaic company presentation

MOS management outlines a number phosphate market facts, some specific to MOS and others relating to the phosphate market as a whole. The following are, at a high level, the main talking points when it comes to MOS and the phosphate industry: Sedimentary and igneous formations Large economically viable reserves: North Africa, Western China, Central Florida, and Russia Largest producer of concentrated phosphate crop nutrients accounting for 12% of global output Over 35 years of rock reserves Low cost manufacturer Premium products

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August 14th, 2013

Global distribution facilities JV in Peru and announced Saudi Arabia JV

Potash
The following is a snapshot of global potash production by company:

The potash market is as well a global market, with developing countries becoming a much larger part of the demand pie. However, because potash implementation on agriculture land can be skipped every now and again, it can be a discretionary nutrient for farmers during cost-conscious times (such as 2009). Most market experts expect long-term potash demand to trend at a 2.5-3.5% global growth rate.

Source: Mosaic company presentation

MOS managements potash market facts, are as follows: Obtained through underground or solution mining 80% of reserved in Canada and Russia Over a century of reserves 10.7 million tonnes of operational capacity

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August 14th, 2013

One of the largest potash producers in the world Potash expansion plants: o $3 billion in capital, 3 million tonnes o One time, on scope, on budget o Delaying future 2 million tonne projects

The Global Food Story

The global fertilizer story is a compelling one over the long term due to two overarching themes: (1) World grain and oilseed use to increase driven by population growth and advancing dietary habits in developing countries (further protein, meat, etc. consumption) (2) With limited land available, crop yields must increase to feed all these people. Crop yields improve with more fertilizer implementation and use The below two charts outline the long-term expected (and arguably needed) grain usage and yield improvement around the world:

Competition
The below comp set outlines other publicly-traded ag producers as well as valuation levels:
($ in millio ns, except per share data)

Stock Price 8/14/13 The Mosaic Company Potash Corp of Saskatchew an Agrium CF Industries Intrepid Potash $43.50 $30.88 $86.64 $187.96 $12.51

% of 52-high 67.3% 68.9% 75.1% 80.5% 50.6%

Market Cap $18,523 $26,771 $12,736 $10,767 $948

Enterprise Value $15,473 $27,593 $15,139 $11,397 $968 High Average Median Low

EV / EBITDA 2013E 2014E 6.1x 6.8x 5.9x 4.5x 7.9x 7.9x 6.2x 6.1x 4.5x 6.4x 6.5x 5.8x 4.5x 8.0x 8.0x 6.2x 6.4x 4.5x

Price / EPS 2013E 2014E 12.2x 10.9x 9.0x 8.5x 17.4x 17.4x 11.6x 10.9x 8.5x 11.4x 10.3x 9.1x 7.7x 17.4x 17.4x 11.2x 10.3x 7.7x

Price / Book 1.4x 2.6x 1.7x 2.2x 1.0x 2.6x 1.8x 1.7x 1.0x

Div Yield 2.4% 4.7% 2.3% 0.8% 0.0% 4.7% 2.0% 2.3% 0.0%

No te: M OS 201 3E = FY201 4E, and 201 4E = FY201 5E, as fiscal year ends M ay

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August 14th, 2013

Main Risks to the MOS Story

Uralkali breaks up Belarusian Potash Company
On July 30th, Russias Uralkali quit one of the two largest potash cartels, Belarusian Potash Company (BPC), as cooperation with the BPCs partner, Belaruskali, reached a deadlock. The market perceived this as a large competitive risk to potash pricing, as a breakup of the BPC means Uralkali could ship potash fertilizer to China at a lower price. Thus, shares of POT, MOS, AGU, and others all traded down steeply with the expectation of lower prices means much lower profitability for these big fertilizer companies. Canpotex and BPC historically were the behemoths in the fertilizer market (together controlling 70% of the potash export market) and negotiated large shipments to countries like India, China and Brazil, typically in similar price ranges as some perceived the market to be a duopoly. Mitigant: Some perceive Uralkalis move as simply posturing, and th e end result will not be a full-on BPC breakup. Although there might be a threat to shipments to China, India has already signed a 4 million tonne import deal. Much of the market reaction is an overreaction (which is typical for Mr. Market), as we do not know the full impact nor the end result of this BPC drama. Fertilizer stock prices are baking in a very drastic outcome. This news could also prompt a halt in planned potash capacity expansion, which should partially support fertilizer prices. Russian and Ukrainian wheat slashed prices in 2011 to gain market share as wheat prices were at record highs; the associated drop in global wheat pricing lasted ~12 months then rebound to pre-2011 levelsPoint being: weve see Russia do this before.

Future capacity expansions risks oversupply

Planned capacity expansions for potash and DAP (phosphate) could lead to lower fertilizer prices. Significant DAP capacity could come on stream from Saudi Arabia and Morocco over the coming 2-4 years. This capacity could lead the phosphate market into conditions of oversupply reducing product prices and volume for Mosaic, and leading to a lower share price. Meaningful potash capacity could come on stream over the coming 3-5 year period, placing pressure on Mosaic's potash volumes and prices. A key event that has yet to be determined is whether BHP proceeds with construction of its large Jansen potash project in Canada. Mitigants: (1) Both scheduled and unscheduled production curtailments have already begun in 2013. In early July, Potash Corp, for example, announced it will reduce potash production by 1 million tons through August; in addition, an extra 2.5 million tons of unexpected shutdowns will occur through December of this year for the company. If the biggest player in the market is taking more downtime than expected, then the likelihood of further green- or brown-field capacity expansions by Potash Corp or other players to be pushed back is fairly good. In addition, these production downtime announcements should support fert prices. (2) Even if plans for new capacity additions are not pushed back, the long-term supply/demand impact on the fertilizer is not out-of-whack. The near term could experience some fertilizer pricing volatility as capacity does not come online perfectly vis--vis demand, however as the below chart shows, demand for phosphate will grow comfortably into the additional supply coming online:

IB Equity Research
August 14th, 2013

Source: MOS company presentation

Idiosyncratic mishaps at MOS has historically threated earnings results

MOS has had a history of various one-time items hitting the company (usually on the cost line) that surprises to the downside on quarterly earnings. This is one of the main reasons why MOS has typically traded at a 1-2x multiple discount to its peers. Mitigant: Over the past ~6 months however, MOS has resolved a couple of these main issues which were typically behind the earnings misses. I go into more detail about these items in the Catalyst Overview section of this report, but specifically they are the Esterhazy tolling agreement and the Fort Meade mine.

Overview of Catalysts / Key Value Drivers

Cargill Class A ownership overhang close to being over
Cargills ownership of 128.8 million Class A shares comes with certain restrictions pertaining to MOS share buybacks. The conversion of these Class A shares into common stock occurs in three equal installments, the first of which occurs on November 26, 2013. MOS is not permitted to engage in open market or negotiated share repurchases until after November 26 th. This has been an overhang for years (after the partial spin-off from Cargill) on the MOS stock price, with many investors blaming this partial ownership as the main reasons for the multiple discount between Potash Corp (POT) and Mosaic. This overhang is very close to being over.

Esterhazy tolling agreement expiration

For years, MOS was subject to a Tolling Agreement at its Esterhazy mine, which essentially forced the company to sell 1.1+ million tonnes of potash each year to Potash Corp essentially at cost. This, obviously, was a drain on gross margin since ~10% of potash volume was being sold at 0% margin. Said Tolling Agreement expired on December 31, 2012, which enables MOS to now sell over a million tonnes of potash at market price. The company only received 5 months of benefit of this added margin in FY2013, so margins will increase from here (all else equal) as MOS gets a full years benefit . As capacity utilization rates increase, this will, again, add more of a positive impact re Esterhazy.

Shareholder-friendly strategies
MOS is on the precipice of some impactful share repurchases (re: November 26th date above). About 30% (128.8 million shares) of currently shares have been locked up for years, and the first batch can be repurchased (at MOSs discretion) come November.

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August 14th, 2013

Over the next few years, MOS can deploy ~$5.5 billion (based on todays share price) in cash to buyback roughly a third of al l the companys shares. MOS currently has $3.7 billion of cash on the books, churns out ~$1 billion in cash per year, and also has a revolving line of credit. This has been a pent-up strategy that management can finally start deploying, and at these depressed levels of MOS stock, these buybacks will be a great use of capital, especially if capacity expansions are delayed. MOS has also grown its dividend very impressively over the past few years, which now equates to a ~2.4% yield. Nothing to write home about, but still in the range of treasury yields.

Lower cost structure re Fort Meade

Last year the company reached a settlement agreement with the Sierra Club over permitting for mining phosphate rock at the large South Fort Meade mine in Florida, thereby lowering its purchased rock requirements and reducing its cost of phosphate rock meaningfully for several years. The Fort Meade facility is one of the most efficient and cost effective phosphate mining operations in the world, which had historically accounted for nearly 20% of U.S. phosphate rock production. The full impact of this lower cost rock procurement will be fully baked into FY2014 result, hence benefiting MOS margins.

Long term thesis makes sense

The longer-term thesis for MOS just makes sense from a global demand perspective. The evidence and demographics are there, and if you are comfortable putting your money away for a while to jump on these compelling global trends, then MOS is an appropriate investment. As both MOS and POT management highlights, the 3 keys to the global fertilizer thesis are: (1) Population Growth World population is expected to reach 9+ billion people by 2050 (2) Need to Improve Yield Limited arable land Crop nutrients directly account for 40-60% of crop yields (3) Long-Term Sustainability Optimum use of crop nutrients is essential to growing the food the world needs today and tomorrow

Attractive valuation & replacement value support

MOS currently trades at ~6x forward EV/EBITDA. For reference, the long-term average for this stock is 8x forward EV/EBITDA, with it bottoming at just under 5x forward back in 2009. The 22% drop in price on July 29th (down to $41/share) was a reaction by the market when Uralkalis CEO warned that potash prices could suffer a 25% drop from current levels. However, its interesting to note that the last time potash prices were 25% lower than they are today was in 2010, and MOS stock touched a low of $40/share (very briefly during the summer), but traded pretty regularly in the $50-60/share range. Although I have not been able to model our proprietary thoughts on replacement value of MOS s assets since I do not have the resources nor the time, Wall Street (specifically JPMorgan and Morgan Stanley) estimate the replacement value of MOSs assets are about $100 per share. There is clearly a value gap between market value and asset value here. Not to mention, if there were further M&A in this space, I doubt MOS shareholders would agree to a takeover price that is below replacement value. Near-term fertilizer volumes and pricing will be volatile, however I do feel that the market has overreacted (as per usual) in a recent panic selloff. What youve got on your side are irreplaceable assets with large replacement value, pending share buyback support in a matter of months, operational improvements that still have a couple more quarters to show themselves in results, and a compelling secular story. I have a $50/share MOS target in mind based on a ~7x forward EBITDA multiple which is still a ~15% discount to its long-term multiple average. Also, any type of relatively positive compromise on the Uralkali drama will provide an instant pop to fertilizer stocks across the board.

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August 14th, 2013

Financial Overview
Phosphates Average Phosphates selling prices were lower in FY2013 than the prior year Phosphate fertilizer prices have remained below those in the prior year due to a market recalibration that occurred in the third quarter of fiscal 2012 Phosphate sales volumes decreased from the prior year due primarily to lack of product availability as a result of entering fiscal 2013 with lower inventory levels and lower shipments to India Lower raw material costs, including sulfur, ammonia and phosphate rock, partially offset the decrease in selling prices for phosphates products o The lower costs for ammonia were the result of internal production of ammonia at MOSs Faustina ammonia facility which was operating at near full capacity in fiscal 2013, but was temporarily shut down during the first half of the prior fiscal year due to an unplanned outage o The lower phosphate rock costs were due to increased production from MOSs South Fort Meade mine in fiscal 2013 compared to the prior year when it operated on a limited basis

Potash In FY2013, average Potash selling prices were lower than the prior year primarily due to cautious customer purchasing behavior leading up to the signing of significant supply contracts with customers in both China and India in the third quarter of fiscal 2013 The impact of lower selling prices was more than offset by higher Potash sales volumes compared to the prior year North American sales volumes increased in the second half of fiscal 2013 compared to the prior year due primarily due to robust spring demand and continuing strong farmer economics International potash sales through Canpotex also increased in the second half of fiscal 2013 due to an increase in allocation of annual sales by Canpotex combined with the signing of supply contracts with India and China

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August 14th, 2013
May-11 2011 May-12 2012 May-13 2013

($ in millions, unless otherwise labeled) PHOSPATES Sales Volumes (000s metric tonnes): Crop Nutrients - NA Crop Nutrients - Int'l Crop Nutrient Blends Feed Phosphates Other Total % Growth yoy Avg Selling Price per tonne: DAP (FOB plant) % Growth yoy Crop Nutrient Blends (FOB destination) % Growth yoy Avg Cost per unit: Ammonia (metric tonne) % Growth yoy Sulfur (long ton) % Growth yoy Net Sales: North America International Total % Growth yoy Revenue per ton Gross Profit Gross Margin % POTASH Sales Volumes (000s metric tonnes): Crop Nutrients - NA Crop Nutrients - Int'l Non-Agricultural Total % Growth yoy Avg Selling Price per tonne: MOP average % Growth yoy Net Sales: North America International Total % Growth yoy Revenue per ton Gross Profit Gross Margin %

3,441 4,116 2,636 567 1,188 11,948 8.3%

3,746 3,810 2,620 621 1,039 11,836 (0.9%)

3,803 3,126 2,651 534 1,092 11,206 (5.3%)

$491 50.2% $475 19.9% $407 53.6% $162 128.2%

$555 13.0% $579 21.9% $528 29.7% $223 37.7%

$512 (7.7%) $555 (4.1%) $524 (0.8%) $184 (17.5%)

$2,186 $4,710 $6,895 45.7% $577 $1,654 24.0%

$2,553 $5,286 $7,839 13.7% $662 $1,467 18.7%

$2,468 $4,027 $6,495 (17.2%) $580 $1,162 17.9%

3,263 3,626 634 7,523 35.9%

2,350 3,666 704 6,720 (10.7%)

3,139 3,966 666 7,771 15.6%

$359 2.0%

$448 24.8%

$405 (9.6%)

$1,950 $1,111 $3,061 40.8% $407 $1,469 48.0%

$1,852 $1,449 $3,301 7.9% $491 $1,622 49.1%

$2,108 $1,421 $3,529 6.9% $454 $1,611 45.7%

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August 14th, 2013
May-11 2011 $9,938 47.0% $3,122 31.4% $373 $2,749 $447 $3,197 32.2% 87.5% May-12 2012 $11,108 11.8% $3,085 27.8% $410 $2,675 $508 $3,183 28.7% (0.4%) May-13 2013 $9,974 (10.2%) $2,760 27.7% $427 $2,333 $605 $2,938 29.5% (7.7%)

($ in millions) COMBINED Net Sales % Growth yoy Gross Profit Margin % SG&A EBIT D&A EBITDA Margin % Growth % Less: Capex Cash Interest Cash Taxes Free Cash Flow Cash Total Debt

(1,263) (100) (535) $1,298

(1,639) (77) (516) $951 $3,811 $1,053

(1,588) (52) (300) $998 $3,697 $1,078

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August 14th, 2013

($ in millions) GEOGRAPHIC REVENUE CONTRIBUTION Revenue: U.S. Brazil Canpotex Canada India Argentina Japan Australia China Colombia Mexico Chile Thailand Peru Other % Growth yoy: U.S. Brazil Canpotex Canada India Argentina Japan Australia China Colombia Mexico Chile Thailand Peru Other % Contribution: U.S. Brazil Canpotex Canada India Argentina Japan Australia China Colombia Mexico Chile Thailand Peru Other

May-11 2011

May-12 2012

May-13 2013

$3,519 $1,810 $993 $630 $1,566 $233 $166 $238 $116 $158 $102 $116 $91 $7 $194

$3,621 $2,162 $1,299 $786 $1,580 $267 $178 $290 $160 $156 $91 $121 $94 $95 $209

$3,900 $2,069 $1,240 $686 $475 $258 $188 $178 $173 $144 $129 $117 $89 $57 $272

50.3% 65.7% 64.9% 81.6% 41.6% 70.3% 118.0% 41.9% (39.6%) 72.8% (16.5%) 7.2% (26.1%)

2.9% 19.4% 30.8% 24.8% 0.9% 14.3% 6.9% 22.0% 38.4% (1.1%) (11.0%) 4.5% 3.2% 1340.9% 8.1%

7.7% (4.3%) (4.6%) (12.7%) (69.9%) (3.1%) 6.0% (38.8%) 8.0% (8.0%) 42.4% (3.8%) (5.4%) (40.2%) 29.8%

32.6% 19.5% 11.7% 7.1% 14.2% 2.4% 1.6% 2.6% 1.4% 1.4% 0.8% 1.1% 0.8% 0.9% 1.9%

39.1% 20.7% 12.4% 6.9% 4.8% 2.6% 1.9% 1.8% 1.7% 1.4% 1.3% 1.2% 0.9% 0.6% 2.7%