Mosaic has perfect formula for growth

Even a novice investor noticed something unusual about Mosaic Inc. last year: For a big company, it grew -- by a lot.

The Plymouth-based fertilizer giant defied gravity as its stock price soared 342 percent, enriching its shareholders as it topped the charts as the fastest rising large-cap stock in the nation.

So, was it just the inflation of the latest bubble -- commodities becoming the new housing, which was the new tech stocks? Or has something more substantial changed?

The company is one of a handful of large fertilizer manufacturers in the nation, and its numbers reflect its market dominance.

Mosaic was created in 2004 in a merger of IMG Global Inc. and Cargill's crop nutrition business. (Cargill remains the 55 percent owner of the company, and last year saw its 245 million shares grow to a total value of $27.4 billion.)

The company reported revenue growth of 31 percent between 2005 and last year, from $4.4 billion to $5.8 billion. In the second quarter of fiscal 2008, phosphate sales were up 61 percent over the year-ago period; potash sales were up 23 percent.

The stock gained momentum toward the end of the year, swinging from about $60 a share in late November to $110 in a matter of weeks.

The company says it sees global fertilizer demand rising 13 percent from 2006 through the end of this year, a doubling of the historic rate of growth. Much of that has come from demand in new markets in Brazil and Asia, where strong agricultural growth has required more fertilizers. The weakening dollar, meanwhile, makes Mosaic's products more affordable for foreign buyers.

"We think the fundamentals in global agriculture look as good as they have for 30 or 40 years," said Mike Rahm, vice president of market analysis and strategic planning at Mosaic. "Biofuels capture a lot of the headlines, but I think the real important driver is what's happening in the developing world. The bottom line is that the world is simply developing."

Today's good times were preceded by rough years for fertilizer manufacturers, he said. Nitrogen plants, as many as two dozen, were shuttered, as the industry slowed after peak years in 1996 and 1997. The domestic industry was further hurt as China developed its own phosphate industry. About seven U.S. phosphate plants closed between 1999 and 2006, Rahm said.

Today, U.S. phosphate rock production is 30 percent less than what it was 10 years ago. Those conditions tightened supply and helped create last year's bubble, when higher crop prices, biofuels and demand abroad created a surge in demand.

Fertilizer is made of nitrogen, phosphate and potash. The first ingredient can come from natural gas, while the second two are mined.

The company needs new phosphate rock mines and has begun looking at locations where it could start mining, Rahm said. The permits are not easily won. County officials in central Florida, one of the handful of locations worldwide where phosphate can be mined, oppose the expansion of such mining, because it poses risks to local waterways.

(About 75 percent of fertilizer consumed in the U.S. contains phosphates mined from central Florida. Potash mineral deposits, a second ingredient for fertilizer, are found in about a dozen countries worldwide, the bulk of which comes from Canada, Russia, Belorussia, Germany, Israel and Jordan.)

Meanwhile, huge volumes of water, sulfur and natural gas must be consumed to process the raw materials that are mined. Sulfur costs are up: A year ago it cost $55 a ton and today is closer to $250 a ton; in India and China, prices are double that, or more, Rahm said. And natural gas prices are up: A nitrogen plant will use as much natural gas in one year as 128,000 homes in Minneapolis, according to Mosaic.

That helps explain why fertilizer prices have risen further than crop values since 1990, according to data from the Economic Research Service of the U.S. Department of Agriculture.

But Darin Newsom, a senior analyst with DTN, an electronic media company, points out that fertilizer prices rose before natural gas prices went up. He said he's not suggesting price-gouging on the part of Mosaic, but an aggressive business that saw an opportunity to make more money as crop prices rose.

"This is a boom time in agriculture. It's just one of those things where the money's there and demand is good and the market's going higher," he said.

The U.S. corn crop plays a major role in the company's profit as well, as the corn crop consumes more fertilizer than the cotton, soybean and wheat crops combined.

"The more acres that we plant to corn, the more fertilizer that we continue to need to push yields higher and higher and higher," said Newsom, who said his latest information was that the estimated corn crop this year would be smaller.

The corn picture has a lot to do with the future value of the company, agreed Gordy Elliott, a risk management consultant with FC Stone.

The size of this year's crop seems to change depending upon to whom you talk, Elliott said. But if ethanol mandates are left in place and if the dollar doesn't suddenly find new strength, it should be another good year for Mosaic, he added.

Citigroup upgraded its opinion of the company Feb. 5, from "hold" to "buy."

And, a report from Morgan Stanley last month said that higher fertilizer prices will help the company maintain healthy profit.

The company's year-over-year revenue growth of 44 percent was driven primarily by price increases, analyst Charles Neivert wrote.

"We expect fiscal 2008 to be [Mosaic's] best year to date, with F2009 going higher still," the report said.

Matt McKinney • 612-673-7329