**OPTION TRADE: Buy the MOS Jun 2013 62.500 call MOS130622C00062500) at or under $3.10, good for the day. Place a protective stop limit at $1.40 and a pre-determined sell at $6.20.
by Ian Harvey
January 31, 2013
The Mosaic Company (NYSE: MOS) experienced a 14-month consolidation from $50 to $62 following a breakdown from its high at over $87 made in February 2011. But last week, the consolidation was broken when it rallied through its October 2011 high of $62.65.
About The Mosaic Company
The Mosaic Company (Mosaic) is a producer and marketer of combined concentrated phosphate and potash crop nutrients for the global agriculture industry. It is a single source supplier of phosphate-and potash-based crops nutrients and animal feed ingredients. It operates in two segments: Phosphates and Potash. Its Phosphates segment owns and operates mines and production facilities in Florida. Its Potash segment owns and operates potash mines and production facilities in Canada and the United States, which produce potash-based crop nutrients, animal feed ingredients and industrial products.
The Company mines phosphate rock in Florida and processes rock into finished phosphate products at facilities in Florida and Louisiana. It mines potash in Saskatchewan, New Mexico and Michigan.
The Company has other production, blending or distribution operations in Brazil, China, India, Argentina, and Chile, and an equity investment in a new phosphate rock mine in the Bayovar region in Peru.
Reasons for Consolidation
One key reason for the slow-down for the past 14 months, was slumping international shipments caused by both India and China seeking lower prices for potash with Canpotex, the marketing arm for Potash Corporation (POT), Mosaic (MOS), and Agrium (AGU). Canpotex was unwilling to cede pricing until the end of Q4, when it agreed to a $400 per ton contract with China for 2013, which was $70 less than the previous contract.
Additionally, in a trend that began a year ago, fertilizer dealers in North America remain reluctant to accept inventory risk for both potash and phosphate at what they perceive as cyclically high price levels. After rising to a cyclical high of $453 per ton in Q3 fiscal 2011, potash prices fell about $20 a ton in Q4 of that year before firming throughout 2012. Producer reluctance to lower prices, combined with a global aversion to price risk, caused potash inventories to soar to well above their five-year average in 2012.The Chart
Note the bullish occurrence of high volume on the breakout compared with lower volume on the pullback of the past three days, and the bullish MACD.
The Mosaic Company last issued its quarterly earnings data on Friday, January 4th. The company reported $1.05 EPS for the quarter, beating the Thomson Reuters consensus estimate of $0.88 by $0.17. The company had revenue of $2.54 billion for the quarter, compared to the consensus estimate of $2.54 billion. During the same quarter in 2012, the company posted $1.40 earnings per share. The Mosaic Company’s revenue was down 15.9% compared to the same quarter last year.
The company also recently announced a quarterly dividend, which is scheduled for Thursday, February 21st. Shareholders of record on Thursday, February 7th will be paid a dividend of $0.25 per share. This represents a $1.00 annualized dividend and a dividend yield of 1.70%. The ex-dividend date is Tuesday, February 5th.
Credit Suisse assumed coverage on shares of The Mosaic Company in a report released on January 21, 2013,. The firm issued a neutral rating and a $68.00 target price on the stock.
A number of other firms have also recently commented on MOS. Analysts at JPMorgan Chase raised their price target on shares of The Mosaic Company to $64.00 in a research note to investors on Monday, January 14th. Separately, analysts at Deutsche Bank raised their price target on shares of The Mosaic Company from $60.00 to $62.00 in a research note to investors on Tuesday, January 8th. They now have a hold rating on the stock. Finally, analysts at BMO Capital Markets raised their price target on shares of The Mosaic Company from $57.00 to $61.00 in a research note to investors on Tuesday, January 8th. They now have a market perform rating on the stock.
Fifteen investment analysts have rated the stock with a buy rating, one has issued an overweight rating, and nine have issued a hold rating to the company. The stock has an average rating of overweight and an average price target of $66.10.
A Take-Over Target
The Mosaic Company is expected to be a potential take-out target, with the tax implications of the Cargill restrictions rolling off in May, and BHP Billiton Limited (NYSE: BHP) could be the potential suitor.
Mosaic, which was formed through the business combination of IMC Global and the Cargill Nutrition fertilizer businesses on October 22, 2004, is the second largest global producer of potash with current production capacity of 10.3 million tonnes (Mt). Mosaic is targeting 16.5 million tonnes of potash by 2020 with expansion plans underway at Belle Plaine, Colonsay, and Esterhazy.
Mosaic operates three mines in Saskatchewan, Canada, including Esterhazy, the world's largest potash mine, and two mines in the United States. Product from its Canadian mines is exported through Canpotex, an export association.
"We continue to view MOS as a potential take-out target once tax restrictions are lifted (in May 2013) or engaging in share repurchases (tenders between May 2013 and November 2013 or open market repurchases after November 2013). BHP the most likely suitor, in our view," CIBC analyst Jacob Bout wrote in a note to clients.
Cargill shareholders and trust own 129 million shares in Mosaic. The split-off transaction allows for Mosaic to grant early release from the lock-up after the two-year anniversary of the closing. Mosaic cannot engage in open market repurchases between May 2013 and November 2013 but can do public tenders for Cargill shares.
Antitrust Litigation Settlement
The Mosaic Company yesterday announced that it has agreed to settle previously reported potash antitrust litigation. The litigation has been pending in U.S. District Court in the Northern District of Illinois since 2008. Mosaic will pay $43.75 million to settle all claims with both putative classes. Mosaic chose to settle these claims to avoid the significant costs, burden, and distraction of protracted litigation.
Mosaic did not admit any wrongdoing and will be released from any liability in connection with the plaintiffs' claims. The settlement is subject to final court approval.
MOS is a standout among fertilizer companies. A short-term trading target of $70 is possible, but long-term investors could receive a much higher return.
Therefore, based on the facts above the following options trade is recommended…..
**OPTION TRADE: Buy the MOS Jun 2013 62.500 call MOS130622C00062500) at or under $3.10, good for the day. Place a protective stop limit at $1.40 and a pre-determined sell at $6.20