The Mosaic Company reported FQ3 2009 earnings after market close yesterday. The results were less than desirable, but most weren’t expecting anything more, as the stock traded higher throughout the day after the call on Wednesday morning. Mosaic reported FQ3 2009 EPS of $0.13 vs. consensus estimates of $0.22 and $1.05 in the FQ3 2008 period. Contributors to the weak earnings were volumes in potash and phosphates, which were down 63% and 50% yoy. Gross profits in phosphates yoy fell off a cliff, dropping from $453M last year to a loss of $66M in the quarter.

Key points from the Call and Earnings Release

·         MOS expects to cut potash production by 2M metric tons in FY 2009 compared to previous year, curtailing production until demand in the market recovers

·         Potash prices remain at record levels and have yet to offset lower volumes driven by purchasers closing orders, managing inventories

·         Potash prices increased from $529/mt in FQ2 09 to $565/mt in FQ3, which we believe creates even more weakness heading into FQ4 as demand has already been hammered

Outlook Going Forward

Expectations from management for the remainder of the year were also not exactly positive. Spring applications for potash are still dormant and current stores have yet to be tapped, which suggests demand projections will likely be lower heading into the planting season. MOS projections for FQ4 potash volumes are flat sequentially, which again is likely due to large stock stores domestically and expectations of limited use due to price. On the upside, international demand has been stronger as MOS has booked numerous shipments at $750/mt, which is higher than the average current price of $565/mt.

Phosphates are expected to perform better than potash as MOS management indicated that production volumes have returned to normal levels as demand has increased. Expectations for phosphate sales in FQ4 are expected to improve sequentially, but will still be significantly lower than last year.

One of the few positives for MOS going forward is that demand in phosphates and potash has fallen off so drastically that when a rebound comes the market will be so tight that the company will likely be in a position to maintain higher price levels supported by demand. This of course is something that we likely won’t see in the near term.

-GDH