TEXT-Fitch revises Mosaic Co rating outlook to positive
Oct 4 - Fitch Ratings has affirmed the 'BBB' investment grade debt ratings and Issuer Default Ratings (IDR) of The Mosaic Company (Mosaic) and its subsidiaries. The Rating Outlook has been revised to Positive from Stable. The favorable change in the Rating Outlook is based on encouraging business conditions which Fitch expects will yield a repeat of fiscal 2012's record sales, better earnings and strong cash flow. The genesis for the improved results will come from a growing demand for phosphate and potash fertilizers needed for larger quantities of grains for feed and ethanol-from-corn, the latter for higher renewable fuel requirements. Demand will be enhanced by the drought and heat damage to this season's crops, particularly in the U.S. but also in Russia and India. The USDA has recently estimated that the poor weather will result in an 8% fall in total grain harvests in the U.S., increasing pressures for higher production with no apparent cooling of demand. Last year increases in average phosphate prices, 13.0%, and potash prices, 24.9%, combined with flat phosphate sales volumes and lower potash sales volumes to produce an 11.8% gain in sales over fiscal 2011. Higher production costs for feedstock sulfur and ammonia, higher brine inflow costs at the Esterhazy potash mine, and the higher costs to purchase phosphate rock from outside the company cancelled sales gains to yield a flattish but still robust EBIT and EBITDA of around $2.6 billion and $3.1 billion, respectively. In the first quarter of fiscal 2013, sales were down year over year by almost 19%. Potash sales, volumes and earnings were all higher, but scheduled plant turnarounds and inclement weather prevented Mosaic from shipping phosphate fertilizers up the Mississippi for delivery to the domestic market and to South America. As a result phosphate fertilizer shipments were down 16%, sales were off almost 30%, and segment operating earnings were down 38%. EBIT for the quarter was 16% lower year over year with EBITDA 12% lower. Second quarter results are expected to make whole some portion of the decline. Mosaic has resolved two operating issues that were costing the company marginal profits. In February Mosaic reached an agreement with the Sierra Club ending litigation and an injunction against mining phosphate rock at the company's South Fort Meade mine in Florida. That mine produces around 20% of the phosphate rock mined in the U.S. The injunction forced Mosaic to purchase a portion of its rock needs on the open market at a higher cost. The South Fort Meade mine is now fully operational. Mosaic also settled a long-standing dispute between itself and Potash Corporation of Saskatchewan (PCS). Effective with the start of calendar 2013, approximately 1.0 million metric tonnes of annual capacity that was being mined for the benefit of PCS under a tolling agreement will permanently revert to Mosaic for resale. Both of these events should have a positive impact on earnings in fiscal 2013. For the current year Fitch estimates that Mosaic will again earn around $3.0 billion in EBITDA, and funds flow from operations should again exceed $2.5 billion. Capital expenditures are forecast by the company at $1.5 - $1.8 billion, a probable increase over fiscal 2012 as the company progresses in its potash expansion plans at its three Saskatchewan mines. FCF for the fiscal year is expected to be almost neutral, owing to the increased common dividend of $1.00 per share plus the higher capital expenditures. Mosaic's year-end cash balances are still expected to be around $4.0 billion. No appreciable change in debt at just over $1.0 billion is expected as there are no significant debt maturities before the company's revolver matures in 2016 and no need to borrow. Alternate uses for cash on the balance sheet could include share repurchases. In November 2011 Mosaic repurchased 21.3 million of its Class A Common shares from the Margaret A. Cargill foundation (MAC Trusts) for approximately $1.2 billion. Cargill shareholders still hold 128.8 million shares subject to transfer restrictions which will be released in three equal annual installments beginning in November 2013, unless sold prior to the release date. By agreement with Cargill Incorporated, Mosaic is prevented from repurchasing its common stock (from other than the Cargill shareholders) prior to November 2013. The Positive Outlook does not envision an increase in leverage owing to share repurchases. In addition to cash on hand Mosaic keeps a $750 million unsecured revolver, available to both it and its subsidiary, MOS Holdings Inc. The revolver is guaranteed by MOS Holdings Inc. and certain operating subsidiaries. Principal financial tests include a minimum EBITDA/interest cover of 3.50 times (x) and a maximum debt/LTM EBITDA of 3x. The revolver was undrawn at the end of last August. Fitch affirms the following ratings: The Mosaic Company (parent) --IDR at 'BBB'; --Senior unsecured guaranteed revolver at 'BBB'; --Senior unsecured notes at 'BBB'; MOS Holdings Inc. --IDR at 'BBB'; Mosaic Global Holdings --IDR at 'BBB'; --Senior unsecured notes at 'BBB'. The Rating Outlook is Positive. WHAT COULD TRIGGER A RATING ACTION Positive: Future developments that may, individually or collectively, lead to a positive rating action include: --Further permanent improvements in Mosaic's cost structure; --Continued favorable agricultural economics that lead to an increase in free cash flow (FCF). Negative: Future developments that may, individually or collectively, lead to a negative rating action include: --Negative FCF which in combination with stock repurchases significantly erodes liquidity. --A very sharp and sustained reduction in the sales prices or sales volumes of Mosaic's fertilizers.
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