Discounted Cash Flow DCF Tutorial

1
Mosaic (MOS)
Recommendation BUY
Share Price (as of 10/29/08) 33.65
Matt Ferrel Jeff Holycross Thomas Robb Amarpreet
Jhita
2
Overview

• We rate Mosaic as a BUY with fairly high risk
• Price Target of 60 a share
• Why we like it
• Very favorable valuation
• Current growth
• Worldwide agricultural trends
• Risk factors
• Sensitivity to commodities prices
• Potential changes in government policies
• Cargill owns a 65 stake in company

3
Business Model

• Formed by merger between Cargill Crop Nutrition
  and IMC Global in 2004
• Mining, manufacturing, marketing and distributing
  fertilizer around the world
• Vertically integrated producer
• Agriculture Supplement Producer
• Potash
• Phosphates
• Nitrogen
• Specialty Fertilizer (K-Mag and
  MicroEssentialsTM S15)

4
Business Model

• Largest processed phosphate producer
• Operates in 40 countries
• Operates value chain terminals in nine countries
• Operates 16 phosphate rock mines and plants, 5
  potash production facilities and 1 nitrogen
  production facility

5
Business Segments
6
Business Model

• Fertilizers are commodities
• No product differentiation
• Prices depend on raw materials prices, crop
  demand
• Sells most product at market prices at time of
  sale enters into some forward pricing contracts
• Fairly high fixed costs and operating leverage
• Stems from vertical integration and
  capital-intensive nature of industry

7
Relevant Industry Info

• Heavy competition in both domestic and
  international markets
• International trade is large because phosphate
  rock and potash are available in few places
• Business is heavily dependent on a variety of
  events
• Grain Prices
• Subsidies
• Weather Patterns

8
Trends

• Increasing prices for phosphates (DAP) and potash
• Phosphates 1,013/mt Q1 09 vs. 407/mt Q1 08
• Potash 488/mt Q1 09 vs. 160/mt Q1 08
• Phosphate pricing has been weak over last several
  months analysts predict a bottom in next two
  months
• High prices have led to extremely strong cash
  flow for Mosaic

9
Trends

• Strong export growth
• Exports of agricultural chemicals grew 71 in
  first 6 months of 2008 compared to year earlier
• Shipments to India increased 600
• India, China, Latin America are consuming more
  fertilizer than they produce
• Farmers becoming more sophisticated, using more
  fertilizer to increase yield
• Standard of living rising more meat in diet
• U.S. farmers flush with cash from recent strong
  crop pricing

10
Stock Performance

High of 163
Falls 46 in week
11
Current Events

• The Mosaic Company announces Canpotex Potash
  Contracts with Indian and Chinese customers
  March/April 2008
• Fitch Inc. and Standard and Poor's Ratings
  Services upgrade Mosaic's unsecured debt ratings
  to investment grade status June 2008
• Mosaic announced quarterly dividend of 0.05
  7/17/08

12
Current Events

• The Mosaic Company announced the completion of
  the sale of Saskferco Products, a producer of
  nitrogen fertilizer, to a subsidiary of Yara
  International for approximately 1.6 billion
  10/1/08
• Management The timely sale of Saskferco will
  allow us to focus on our core potash and
  phosphate businesses, with the proceeds from the
  sale to be used for the planned expansions of our
  Saskatchewan potash mines and other non-U.S.
  assets.
• Reported Q1 09 earnings which tripled
  year-earlier numbers but disappointed the Street
  10/2/08
• Soleil Securities analyst speculates Cargill may
  boost its ownership stake in Mosaic 10/21/08

13
Turmoil in Financial Markets

• Institutional investors such as hedge funds have
  been rushing to cash over past two months,
  creating severe downward pressure on commodities
  prices
• Current prices may not reflect fundamentals of
  supply and demand
• Mosaic was heavily held by hedge funds
• Heavy selloff may have been induced by margin
  calls, redemptions

14
Why We Like It

• Very Favorable Valuation
• Current Growth
• Financial Structure
• Worldwide Agricultural Trends

15
Current Growth

• Earnings Per Share
• 390 increase between 2007-2008
• Net Sales
• 70 increase between 2007-2008
• Cash Flow
• 140 increase between 2006-2007
• 260 increase between 2007-2008

16
Debt and Equity

• Highlights
• Just received investment grade status
• Prepaid 1 billion of long-term debt

17
World-Wide Exposure

• 67 of sales outside of US
• Potash
• 2nd largest producer by annual capacity
• Phosphate
• Worlds largest producer by annual capacity
• Larger then next three producers combined
• Offshore
• Operations in Brazil, Argentina, Chile, Mexico,
  India,
• Thailand and China

18
Risk Factors

• Sensitivity to Material Prices
• Grains
• Potash/Phosphate
• Natural Gas
• Government Policies
• Global Competition
• Few Key Suppliers
• Cargill owns 65

19
DCF Model

• Very conservative estimates for revenue and
  profitability
• Phosphates and potash prices have been very
  volatile
• Fairly large increase in capital expenditures and
  net working capital
• Expansion of capacity and inventories
• High discount rate

20
Price/Earnings Ratio
21
Price/Earnings Ratio

• TTM P/E Ratio 5.04
• Forward P/E Ratio 2.96
• If we apply an 8x P/E multiple to our
  conservative FY 2009 EPS estimate of 7.95/share,
  we obtain a fair value of 63.60/share

22
Relationship with Corn Prices
23
Relationship with Corn Prices
24
Sensitivities to Fertilizer Prices

• Each 100/mt change in DAP pricing affects
  Mosaics annual EPS by 1.30
• Each 100/mt change in potash pricing affects
  Mosaics annual EPS by 1.00
• According to recent research report
• Using the 8x multiple we applied previously, each
  100/mt change in product pricing changes MOS
  fair value by 8.00-10.40/share

25
Conclusion

• We rate Mosaic a BUY with moderate-to-high risk
• Price target 60.00
• Why we like it
• Valuation
• Agricultural trends
• Growth
• Risks
• Sensitivity to commodities prices
• Disclosure Thomas owns shares of MOS

26
Questions?
27
Appendix
28
Current GrowthEarnings per Share
2006-2007 Increase of 1.60 2007-2008
Increase of 3.72 or 390.
29
Current GrowthNet Sales (in Millions)
2006-2007 Increase of 460,000,000 or
8.8 2007-2008 Increase of 4,039,000,000 or
70
30
Current GrowthCash Flow (in Millions)
2006-2007 Increase of 413,500,000 or
140 2007-2008 Increase of 1,838,700,000 or
260
31
Low P/E Ratio
70
50
Current P/E ratio is 4.52
32
Grain Prices
Week Mosaic reach 52-week high
One-year grain prices
33
World-Wide ExposureBusiness Segments
Potash
Phosphate
Annual Capacity World Ranking Sales outside
US 2008 Production World
10.4 Million Tonnes 2nd Largest 55 7.9 Million
Tonnes 14
10.3 Million Tonnes World Largest 54 8.9 Million
Tonnes 15

• Distribution network in key agricultural markets
  around the world
• Competitive Differentiator
• Includes approximately one million tonnes of
  storage capacity
• Operations in Brazil, Argentina, Chile, Mexico,
  India, Thailand and China

Offshore
34
World-Wide ExposureDemographic Locations Asia

• China
• Two bulk-blending facilities
• Sales team
• 60 NPK Plan
• 35 Equity Interest in a DAP granulation plant
• Thailand
• Storage facility
• India
• Distribution facilities
• Deep water port facility to import fertilizer

35
World-Wide ExposureDemographic Locations South
America

• Brazil
• Bulk blending facilities and warehouses
• Deep water import terminal
• Two GSSP plans
• 20 share in Fosfertil S.A., the largest producer
  of phosphates in South America
• Argentina
• GSSP facility
• Deep water port

36
World-Wide ExposureDemographic Locations North
America

• Florida
• Five mines and three concentrate plans
• Produce phosphate fertilizer and feed phosphate
• Louisiana
• Manufacturing operations that produce phosphate
  fertilizer
• Potash Operations
• Three mines in Saskatchewan (Canada)
• One mine in New Mexico
• One mine in Michigan