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Mosaic’s Potash Segment: Why a Negative Gross Margin Outlook?

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Potash segment’s gross margins

Previously in this series, we saw that Mosaic’s (MOS) Potash segment’s shipments and average realized prices declined in 4Q15. But unlike the Phosphate segment, the Potash segment enjoys a high gross margin rate.

The gross margin rate for Mosaic’s Potash segment declined in 4Q15 to 37% from 43% in 4Q14. In absolute numbers, the company reported gross profits of $121 million in 4Q15 compared to $383 million in 4Q14.

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The weakness in margins was due primarily to the weakness in average realized prices and weaker shipments. This overall weakness has also impacted Potash Corporation (POT), which reported a decline in margins of 58% in 4Q15. To learn more, you can read Sufferin’ Potash! Your Key to PotashCorp’s 4Q15 Earnings.

Instead of investing directly in Mosaic, you can access Mosaic through the VanEck Vectors Agribusiness ETF (MOO), which invests about 14% of its portfolio in Mosaic, Potash Corporation (POT), CF Industries Holdings (CF), and Agrium (AGU).

Outlook

The 4Q15 weakness for Mosaic’s Potash segment will continue in 1Q16. Management’s guidance of a gross margin rate of low to mid 20% will also continue. This is significantly lower compared to 37% in 1Q15.

As for the costs associated with potash production, management stated that its Esterhazy K3 mine will be “amongst the lowest-cost, most efficient mines in the world.” The company further added that the mine remains on budget and on schedule for completion in 2017.

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