macquarie retains $4.04 for ipl

For IPL posters
Tuesday, 6 April 2010

Incitec Pivot Limited
Mosaic gives strong Fourth Quarter DAP price guidance
Volatility Index: High
Recommendation: Outperform

Price 31 Mar 10 $3.47

Event

Mosaic, the world's largest diammonium phosphate (DAP) producer reported Third Quarter earnings of US$0.50 cents per share versus prior corresponding period of $0.13 cents per share. This is lower than Macquarie's estimate of US$0.56 and consensus average of 62 cents per share. Foreign exchange (FX) losses, higher tax expense net of derivative gains reduced eps by $0.04 cents per share and explains some of this difference (Mosaic, MOS US, Outperform, US$71.00 price target).

Mosaic noted that US farmers intend to plant the same acreage versus a year ago but the mix is shifting towards more corn and soybean and less wheat. This is positive for crop nutrient demand in the US spring. Corn is more nutrient hungry than soy and wheat (requires more NPK - nitrogen, phosphate and potash) whilst soy uses minimal nitrogen (N but requires more P and K. Larger than expected inventories have seen soft commodity prices under pressure but the outlook "will still hinge on yields achieved in upcoming growing season".

Impact

Positive DAP commentary. Mosaic sold 2.5mt of phosphate in period +52% on prior corresponding period due to stronger North American and export demand. Fourth Quarter phosphate sales are forecast at 2.4-2.8mt. Fourth Quarter (March-May) realised DAP price expected to be US$420-460/t free on board (FOB) ex-plant which is up substantially on the US$336/t FOB Third Quarter selling price. The mid-point is the same as what we factor in for IPL's realised DAP price in current Second Half to September (US$438/t).

Mosaic highlighted that "customers have met the rapid price increases for phosphates during the quarter with some caution and margin expansion may be constrained by higher raw material costs". Sulphur prices in particular have increased substantially in last six months (Vancouver spot sulphur up from US$40/t to US$160/t) and this alone is likely to increase Mosaic's cost of production by around US$50/t on our estimates.

Strong Indian buying remains the key story in DAP markets. India's total imported tons booked for the current season is now 5.725mt and Fertecon reports that despite this, there remains additional demand for DAP. US$500/t CFR represents US$435/t FOB (net of freight) for US producers but a higher US$460-470/t net-back for IPL given its relative freight advantage to Asia.

Mosaic is acquiring a 35% interest in the Bayovar phosphate rock mine in Peru along with a supply agreement for 35% of off-take to be used in Mosaic's global phosphate operations. Total consideration to be paid to Vale for its stake is $385m. Phosphate rock production at Bayovar is expected to begin in the Second Half of 2010.Bayovar's expected production capacity will be 3.9mt, once full project capacity is reached. Global rock production was 174mt in 2008 with a traded market of 30mt.

Earnings and target price revision

No change.

Price catalyst

12-month price target: $4.04.

Catalyst: First Half 2010 result on 10 May; April to June rainfall re winter planting

Action and recommendation

Outperform with a $4.04 price target.