Food Dividends from Mosaic

The agriculture sector struggles to compete with sexy technology investments.  Nonetheless, investors should not overlook the growth opportunities of companies addressing demand for the most basic of human needs  -  hunger.  Not every agriculture company will pass the sniff tests of investors concerned about the environment.  Industrial agriculture has been a culprit in habitat destruction, water pollution and greenhouse gas emissions. 

It is noteworthy then that in June 2020, The Mosaic Company (MOS:  NYSE) issued its first sustainability report with what appears to be serious intention to solve environmental problems.  While most of Mosaic’s sustainability goals address diversity and human resources, the company has set several targets that relate directly to the environment.

First off, Mosaic has set a goal of reducing its greenhouse gas emissions by 20% per metric ton of its products by 2025.  Mosaic produces concentrated phosphate and potash crop nutrients at plants in North America and around the world.  The company owns and operates phosphate mines in Florida and Brazil and mines potash in Saskatchewan, Canada.  Mosaic may get at least a temporary leg up on its greenhouse gas goal following a decision in later 2019, to reduce production of fertilizer products until markets improve.  In 2019, the company mined 16.2 million metric tons of phosphate rock and produced 3.9 million metric tons of phosphoric acid.  Additionally, the company mined 28.7 million metric tons of potash and produced 7.9 million metric tons of finished fertilizer. 

Mosaic has not revealed what its greenhouse gas emissions actually were as all these rocks and minerals were scratched out of the earth and made into crop nutrients.  Thus investors will have to rely on the company’s word as to whether this goal is achieved.

Mosiac workers fill drill bit on phosphate dredger at Wingate Mine 

Another Mosaic goal was to reduce freshwater use by 20% per ton of production by 2025.  Likewise, actual water usage is left to investors’ best guesses.  Some phosphate mining operations rely on high-pressure water guns to create a slurry from the materials scooped up at the mine.  The slurry is then pumped to beneficiation plants where clay and sand is separated from the slurry.  Water is also need to pump the waste clay and sand back to the mine area.  Best guess:  quite a bit of water is needed to process phosphate.   

Potash mining is also water-thirsty process.  It is a process that results in considerable water loss.  The potash refining process involves the mixing of chemicals with the potash material to make brine.  The brine is sent through a series of dryers and crystallizers.  Approximately 40% of the water used in a potash mill is lost with the residual brine.  Vapor from power boilers and water used for housekeeping purposes are the other major uses of water in potash operations.  No details from Mosaic on its water usage or even how much it spends on water.

A third goal that is noteworthy is Mosaic’s promise “empower farmers in key growing areas in North American to reduce the impact of crop nutrient products on the environment.”  Exactly how Mosaic intends to do this is uncertain, but it is clear the current state of industrial agriculture is not sustainable.  The U.S. Environmental Protection Agency has pointed at agriculture runoff as the leading cause of pollution in lakes and rivers.  Nitrogen and other nutrients from excessive fertilizer application leaches into ground water, contaminating potable water supplies.

By 2017, about 85% of the company included in the S&P 500 Index had published at least one sustainability report.  It is appropriate that Mosaic has finally joined the group.  For investors who are prepared to give Mosaic the benefit of the doubt on its goals, the company presents a mixed opportunity. 

After struggling with temporarily weak demand for agriculture products in the last year and then getting hit like so many other companies with the coronavirus pandemic, Mosaic is just returning to profitability.  The stock is trading at a whopping 90.1 times the 2020 consensus estimate.  MOS had typically traded at trailing earnings multiples in the low teens.  

Mosaic’s consistent dividend may be more interesting.  At the current price the stock offers a forward dividend yield of 1.12%.  Its dividend appears almost as certain as future demand for food.  Mosaic may have reported net losses in recent periods, but its operations were still able to convert 20% of its sales to operating cash flow in the twelve months ending June 2020.  Mosaic ended the June quarter with $1.1 billion in cash in the bank!

 

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.