Mosaic spends US$1.4B for CF Industries’ assets

Mosaic’s (NYSE: MOS) proposed acquisition of CF Industries Holdings’ (NYSE: CF) phosphate business will give it enough product to meet expected demand growth, mostly in North and South America; brings earnings accretion; and exceeds its risk-adjusted hurdle rates, while allowing it to save significant capital, says the world’s largest phosphate-fertilizer producer.

Under a definitive agreement unveiled on Oct. 28, Mosaic will acquire CF Industries’ phosphate assets for US$1.2 billion in cash, plus US$200 million to fund CF Industries’ asset-retirement escrow. CF Industries produces 1.8 million tonnes of phosphate fertilizer each year from its assets in Florida: the South Pasture phosphate mine and beneficiation plant in Hardee County, a phosphate-manufacturing facility in Plant City and an ammonia terminal, finished product-warehouse facilities and dock at the Port of Tampa. Under the deal, Mosaic will also assume CF Industries’ phosphate liabilities, including responsibility for the closure and long-term maintenance and monitoring of its phosphogypsum stacks at Plant City and at the site of the former Bartow phosphate complex.  

CF Industries’ South Pasture mine is close to Mosaic’s planned Ona phosphate mine in Hardee County, and by combining the assets, Mosaic says, it will not have to build a US$1-billion beneficiation plant. Instead, Mosaic will invest US$500 million of those savings into developing phosphate-rock reserves and improve existing mines.

The two companies have also signed strategic-supply agreements, under which CF Industries will provide Mosaic with up to 1 million tonnes a year of ammonia. The deal means that Mosaic won’t have to go ahead with its plans to build an ammonia-manufacturing plant at its phosphate facility in Faustina, La., which saves another US$1.1 billion in capital expenditures.

“Upon completion of the regulatory approval process, we will further expand our phosphate business in a way that makes perfect sense from a capital-deployment perspective,” Lawrence Stranghoener, Mosaic’s executive vice-president and chief financial officer, told analysts and investors on a conference call. “In short, we’ll invest US$1.4 billion to grow the business and capture net capital-expenditure savings of approximately US$1.4 billion.”

In addition to spending $500 million of the planned savings to develop phosphate-rock reserves and improve existing mines, Mosaic says it will need to spend US$200 million on marine assets to move ammonia from Louisiana to its Florida facilities.

Under one of the ammonia-supply agreements, Mosaic will buy up to 725,000 tonnes a year for 15 years from CF Industries’ Donaldsonville nitrogen complex for Mosaic phosphate production, at a price based on a formula for the prevailing natural gas price in the U.S. Under the second ammonia-supply agreement, Mosaic would buy 270,000 tonnes a year for three years from CF Industries’ 50%-owned Point Lisas Nitrogen and its ammonia-production facility in Trinidad and Tobago.  

“This is a perfect strategic fit for us,” Stranghoener said of CF Industries’ phosphate business. “It’s clearly a good deal for our shareholders. The proximity of CF assets gives us significant advantages and the transaction is appealing financially, both in terms of capital expenditures and earnings.”

CF Industries says that selling its phosphate operations would sharpen its strategic focus on its nitrogen business. “This agreement strengthens our confidence in the return we expect to generate from our Donaldsonville capacity expansion by providing a steady base demand for ammonia at a price that insulates us from movements in natural-gas costs,” CEO Stephen Wilson said in a press release.   

Mosaic expects that the acquisition — which is expected to close in the first half of 2014 — would add US30¢ per share to its 2015 earnings per share, excluding any debt-financing costs and changes to outstanding share count.

Stranghoener also noted on the conference call that the acquisition would not affect the company’s share-repurchase plans.

“We still plan to access debt markets in the near future and we continue to look forward to the end of November, after which we can repurchase shares without restriction,” he said.

“This is an excellent deal for Mosaic, our customers, our employees and our shareholders,” he continued. “The proximity of CF Industries’ assets give us a unique advantage in maximizing the value of these assets. The transaction is appealing financially . . . and it does not affect our share-repurchase plans.”

News of the acquisition prompted Keith Carpenter and Vitali Savitski of Canaccord Genuity to raise their target price on Mosaic by US$1 per share to US$43, but they maintain their “hold” rating on the stock. (Over the last year Mosaic’s shares have traded in a range of US$39.75 to US$64.65.)

They write in a research note that “while we view the announced transaction positively given the potential EPS accretion in 2015, capex neutrality and perfect strategic fit for Mosaic, we continue to prefer the non-potash equities, as we believe risk in the potash market remains to the downside of expectations in the near-term.”

In addition to being the world’s largest producer of phosphate fertilizer and phosphate-based animal feed ingredients in the U.S., the analysts point out that Mosaic is also the world’s fourth-largest potash-fertilizer producer.