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Published By: The Street
Mosaic's 'Phos-Fate': Florida Mine Battle Looms
NEW YORK (TheStreet) -- The future of the Florida phosphate industry could hang in the balance early next month when a federal appeals court in Atlanta convenes to hear a set of arguments that pits two ancient adversaries -- environmentalists vs. big business.
At the center of the dispute sits Mosaic(MOS_). Based in Plymouth, Minn. -- 1,400 miles from its operations in the Sunshine State -- the global fertilizer giant takes more phosphate out of Florida's rich peninsular loam than any other company by far, accounting for about half of the nutrient produced in the U.S. in recent years. (Potash (POT_), a distant No. 2, accounts for about 25%, though most of that comes from North Carolina, not Florida. CF Industries(CF_) is third, with 11% of U.S. production).
The phosphate industry in Florida has long been controversial. Since modern dragline excavation techniques, capable of eating acres each day, came into use in the 1940s, it has strip-mined hundred of square miles of watershed in the center of the state, mostly from a region dubbed the Bone Valley by locals -- excavations that have, on occasion, dried up rivers, critics and scientists claim. Its tailings have been poured into enormous, semi-toxic settling pools that have been known to spring leaks. The processing of phosphate rock into fertilizer produces radioactive gypsum, a byproduct that now covers about 3,400 acres, rendering it unusable.
But phosphate rock also happens to be the source of one of the world's most important and effective plant nutrients -- a substance that has taken on new relevance, rising to the level of national security, at a time of burgeoning fears over global food shortages. (Indeed, the element phosphorus is one of the fundamental building blocks of life).
For decades, the controversy in Florida remained little more than loud talk by local environmentalists who clashed in vain with Fortune 500 corporations. (The industry mined without any regulation at all until 1975.) But just within the last six months, all that seems to have changed. A series of lawsuits over mining permits has threatened to imperil Mosaic's financial health.
In July last year, several local environmental and community groups, including a Florida chapter of the Sierra Club, sued to block Mosaic's plan to expand its South Fort Meade mine. The company already has exhausted the rest of the plot. To lose the expansion then, would mean to lose between 4 million and 6 million metric tons per year of phosphate-rock production, or 32% of the company's total output in its fiscal 2010.
Page 2 of 4 Mosaic applied for permits to dig the nearly 11,000 acres of the South Fort Meade extension as far back as 2003. It took eight years to line most of them up, and by June 2010 it had received the last, from the Army Corps of Engineers, responsible for granting mining permits for areas delimited as wetlands.
For many years local environmentalists had urged the Corps to conduct an areawide impact study -- one that would examine the effects of phosphate mining on the whole region, from the central Bone Valley all the way to the coast, where the waters of the valley empty via the Peace River and its tributaries into an enormous estuary called Charlotte Harbor, just north of Fort Meyers. A large-scale study of this kind hadn't been done since 1978.
Environmentalists fear that the strip-mining has shredded the wetlands system that feeds those rivers -- and, thus, the harbor.
"That's our economic magnet down here," says Jim Cooper, a retired Air Force pilot and the head of a local environmental group called Protect Our Watersheds. "They've never truly looked at the impacts on the downstream counties."
When the Corps granted the permit without, once again, calling for a study, the group sued the Corps. According to the complaint, the environmentalists want the permit revoked until an areawide impact study yields its findings.
In July, a federal District Court in Jacksonville ruled partly in favor of the plaintiffs -- enough of a victory that the court also issued a preliminary injunction that blocked Mosaic from proceeding with the South Fort Meade extension while it considered the environmentalists' case. Within days, Mosaic appealed the injunction with the 11th Circuit court in Atlanta. The appellate will hear oral arguments from both sides in a one-day proceeding, scheduled for the week of April 4.
There has been at least some room for compromise. A settlement reached in October -- after the Atlanta court forced the parties to sit down in mediation -- allowed Mosaic to mine 200 acres of South Fort Meade, enough for about four months worth of mining, or 900,000 metric tons of phosphate rock. In return, the company agreed to leave a 40-acre piece of wetlands untouched. Mosaic is close to finishing those 200 acres.
Page 3 of 4 As it turns out, as well, Col. Alfred Pantano of the Jacksonville district of the Army Corps of Engineers ordered a new areawide study this past summer. It's expected to take a year and a half to complete.
Mosaic has long defended itself as you would expect a multibillion-dollar company to defend itself: with vigor and with a platoon of lawyers. In 2008, Manatee County in Florida denied the company a permit to mine on 2,000 acres -- an extension to Mosaic's other big mine in Bone Valley, called Four Corners. The county worried that the new operations would damage the community's primary source of drinking water. Mosaic sued Manatee County for $618 million. (That was the difference, the company said, between the value of the tract as a mineable and un-mineable piece of Bone Valley land.) Manatee County's board of commissioners soon reversed its position.
Mosaic's official public stance when it comes to South Fort Meade is that this will all break in its favor. "We will be mining at South Fort Meade, and we'll be at or close to full capacity there once we work through these legal issues," Mosaic's finance chief, Larry Stranghoener, told TheStreet in an interview. "That's our expectation."
Meanwhile, however, the company has pursued backup plans. Last year, it spent $385 million to buy a 35% stake in a new Peruvian phosphate mine majority owned by Vale(VALE). Mosaic is slated to receive only 1.5 million metric tons of phosphate rock from Peru this year -- not nearly enough to make up for the potential loss of South Fort Meade's 4 million to 6 million tons.
To meet customer demand for its phosphorus fertilizers, Mosaic would boost production at one of its other mines, such as Four Corners, which sits adjacent to the Fort Meade tract. Most likely, though, it would need to shop overseas, in Morocco, which has come to rival Florida as the most phosphate-rich patch in the world, and buying from third-party miners on the other side of an ocean is far more expensive than simply digging it out of the Bone Valley. Mosaic's profit margins would be squeezed.
Page 4 of 4 "It's critically important to us," Stranghoener said. "It's our largest and lowest cost rock mine. It produces about 35% of the rock we need. If we don't have access to rock from that mine -- which is not an outcome we expect -- it would have a significant impact on our operations. And we've been making that very clear to people.
"I would also say, though, that we have a lot of ways to ensure that we've got the rock we need to continue to produce phosphate product," he went on. "So I don't want to minimize it. It's a big deal. But we're confident in the outcome of the underlying legal case and that we'll move forward."
Some on Wall Street say that investors already have discounted Mosaic shares to account for the total loss of South Fort Meade. Edlain Rodriguez, a stock analyst for Gleacher & Co. in New York, says he's already removed the mine from his earnings estimates for Mosaic.
"You kind of assume the status quo, that they're not going to produce much from that mine. And if this thing goes away, it goes away," he said.
Depending on phosphate prices, he says, a fully functioning South Fort Meade extension would be worth 30 cents to 50 cents a share each year in net income. That would add about $5 to the company's share price, he estimated.
Others have a somewhat more jaundiced view. Chris Damas, a trader and analyst at BCMI Research in Toronto, who specializes in natural-resource and agricultural stocks, believes Mosaic's phosphate business in Florida has turned "toxic" because of the permitting problems as well as potential environmental liabilities.
Mosaic discusses these issues in the lengthy "legal proceedings" sections of its regulatory filings with the Securities and Exchange Commission. The company says it takes its "evironmental stewardship responsibilities very seriously." According to Stranghoener, "Once we're done mining, we restore the land to a better condition than what it was before we started mining. And we spend a great deal of money to do that."
More than just the fate of South Fort Meade hangs in the balance in Atlanta. The same Sierra Club-led group has sued the Army Corp of Engineers over its earlier granting of a permit for the expansion of Mosaic's Four Corners mine, which produced 5.6 million metric tons of phosphate rock in fiscal 2010, or 42% of the company's output that year. It's the same place that Mosaic forced Manatee County to back away from, through its $618 million lawsuit.
Though Mosaic has continued to mine there without interruption, the Sierra Club litigation is still pending. The court, in essence, has twinned the two cases -- South Fort Meade and Four Corners, which together make up 76% of the company's annual estimated phosphate capacity -- and has told everyone to sit tight, pending the appellate court decision in Atlanta. Whether Mosaic can mine in Florida at all may come down to the outcome of the hearings in April.
Until that decision is made, Mosaic investors will have Florida on their minds.
A Mosaic spokesman, however, offered this clarification: Even if the permit for the Four Corners expansion (called the Altman tract) were revoked, it wouldn't reduce the company's phosphate output at the mine. Mosaic would simply move the dragline at Altman to another, nearby phosphate reserve that is fully permitted and ready to go, of which the company has several.
-- Reported by Scott Eden in New York