The Mosaic Company

Good morning, ladies and gentlemen, and welcome to the Mosaic Company's fourth quarter 2020 earnings conference call. At this time, all participants have been placed in a listen-only mode. After the company completes their prepared remarks, the lines will be open to take your questions. Your host for today's call is Laura Gagnon, Vice President, Investor Relations of the Mosaic Company. Ms. Gagnon, you may begin.

Thank you and welcome to our fourth quarter and full year 2020 earnings call. Opening comments will be provided by Jack O'Rourke, President and Chief Executive Officer, followed by a fireside chat as well as open Q&A. Clint Freeland, Senior Vice President and Chief Financial Officer, and Jenny Wang, Vice President, Global Strategic Marketing, will also be available to answer your questions. We will be making forward-looking statements during this conference call. The statements include but are not limited to statements about future financial and operating results. They are based on management's beliefs and expectations as of today's date and are subject to significant risks and uncertainties. Actual results may differ materially from projected results. Factors that could cause actual results to differ materially from those in the forward-looking statements are included in our press release furnished yesterday and in our reports filed with the Securities and Exchange Commission. We will also be presenting certain non-GAAP financial measures. Our fourth quarter press release performance data, attached as exhibits to yesterday's reform 8K filing, also contain important information on these non-GAAP measures. Now, I'd like to turn the call over to Jack for opening comments. Jack?

Thank you for joining us today for our fourth quarter earnings call. Before we get started, I would like to emphasize the key points from our quarterly earnings report. First, we are realizing the benefits of our extensive cost transformation work, and we are beginning to see the earnings leverage we have created. Second, agriculture and fertilizer markets around the globe are very strong. Phosphate prices are at seven-year highs, and potash prices have risen substantially. We expect the global supply and demand balance to remain tight in 2021. And third, we delivered...

great results for 2020 and we expect significantly higher earnings this year now we'll get to your questions laura jock the cdd filing is a hot topic and we've received a large number of questions about the case status and outlook can you bring us up to date with the case in your views thanks laura i'd be happy to

Last week, the Department of Commerce announced final duty rates in the CBD case, having adjusted them from the preliminary rates they announced in November. The final rates are about 20% for OCP, 9% for FOSAgro and 47% for Eurochem. We really appreciate the work the Department of Commerce has done in this investigation and its efforts to enforce our trade laws. We're closely reviewing their findings to determine whether additional upward adjustments are required. Also last week, the International Trade Commission held its public full-day hearing. The ITC is charged with determining whether the subject imports caused injury to the U.S. phosphate industry. We continue to believe that our injury case is compelling, especially given the undeniable surge in imports during the relevant period. the price effects of those imports, and the resulting harm to the U.S. industry, which manifests itself in plant curtailments and closures, job losses, and reduction in market share, production capacity, and revenue. We're thankful for the ITC's work on this case, and we look forward to its vote on or about March 11. In terms of the current and expected imports into the U.S., we've seen the expected trade flow shifts such that the U.S. market continues to be well served with phosphates. Our main concern is that wherever the supply comes from, it needs to be fairly priced and not priced based on highly subsidized production that comes at the expense of a free and fair market.

Jack, we have a related question from John Roberts at UBS who asks, Since the first quarter of 2021, U.S. phosphate imports should be flat year over year. Who has replaced Morocco and Russian imports?

Thank you, John. Importers that have increased their sales into the North American market include the Australians, the Jordanians, the Egyptians, the Saudis, and the Mexicans. All of these have also been excluded from this market due to the subsidized imports. And so now we're seeing freer and fairer trade. I'd encourage you to look at our market update deck published on our website where Andy provides some historical context as well.

Josh, we've had several questions related to our taxes. Specifically, Jonas Oxgaard at Bernstein asked, can you simplify what happened in the quarter and how should we think about both the gap and cash taxes going forward? And Artem Vladianikov from VTV asks if you can provide details on the tax benefit related to Vale acquisitions, how the reserve was formed and why it was reversed in the fourth quarter.

Thank you, Artem and Jonas. I'm going to hand this straight over to Clint to give you a little bit of a background on some of the moves in our taxation in the quarter.

Thanks, Jack. Maybe I'll start with the second question and then move back to Jonas' question afterwards. So related to the tax benefit associated with the Vale acquisitions, when we acquired the Brazil business in 2018, it came with certain tax assets that we ended up having to put a valuation allowance against given the historic profitability of that subsidiary, not just according to GAAP rules. What's now transpired is that the profitability of that subsidiary has improved to the point where, under GAAP accounting, we can now remove that valuation allowance and recognize those tax assets on our balance sheet. That was the $580 million valuation allowance that affected our GAAP earnings for the year. Now, to Jonas's question around our effective tax rate for the year, we actually realized some foreign tax benefits in the fourth quarter that we had originally thought would be temporary in nature and reported on the balance sheet. But as we concluded our analysis, we got our opinions and finished our work, it became apparent that those foreign tax benefits were going to be permanent. And when that's the case, You need to take it through the income statement, through P&L, on the tax line. When we look at where our earnings and earnings mix came out for the year, which provided quite a bit of volatility in our rate last year, all of that came out as expected. But as we, again, concluded our work on these foreign tax benefits and recognized that they were going to be permanent, we ended up needing to, again, run that through the tax line, and that's what brought our effective tax rate down to the level that we recorded. As we go forward into 2021, a couple of things to keep in mind. First, the foreign tax benefits that we recognized in 2020, we expect that to continue to benefit our rate in future years. The other thing to keep in mind is that the better our phosphate business does, the more income is generated in the United States, which is our lowest tax jurisdiction. So the better that business performs, the lower our rate should go.

Jock, our next question comes from PJ Juvicar from Citi, Vincent Andrews from Morgan Stanley, Mike Aiken from Cleveland, and Joel Jackson from B&O. They've all asked about our sales volume outlook for 2021. Specifically, can you help investors assess the implications of the strong demand, current production capabilities, and our view of channel and producer inventories as we think about volumes for 2021 in phosphates, potash, and mosaic fertilizantes, and how much of the fourth quarter volumes were pulled from 2021?

Thank you, folks. Soft commodity prices are at multi-year highs, and the expectation is that the strong ag economics will continue. So what that applies for us is continuing strong demand for fertilizers as farmers seek to maximize their production. Our quarter four shipments were definitely strong, and they lowered our inventories even further, which means that we will be constrained by production capacity as we move into 2021. That said, our phosphate volumes are expected to include up to 150,000 tons from our joint venture, MWSPC. We will bring to NOLA that as we work to meet the U.S. customer needs. As a result, we expect our quarter one shipments to be in line with historical performance as we work to meet what is pretty strong demand despite the strong volumes we saw in quarter four. A few extra things to consider. In both phosphates and potash, we will maximize our production at operating facilities, but we don't expect to be able to build our own inventories prior to the North American spring season. We believe channel inventories across products and regions are lower than normal, which minimizes the potential for deferrals of fertilizer needed for upcoming seasons. We expect to keep more of our U.S. phosphate production here in the U.S. to meet those customer needs.

Jack, our next question comes from Artem Bogiannikov from VTB, Vincent Andrews, and Ben Isaacson from Scotia, who've all asked questions related to asset optimization. Can you provide an update on the Colanzi mine and any thoughts on bringing idle capacity back online? Do you have any plans of expanding capacities or increasing operating rates in phosphates and potash amidst such strong pricing?

Thank you again, folks. Look, today we're running our assets and we're working hard to meet all of our customer needs. In terms of increasing production, we're going to meet the needs of the customers with our production. So we have places where we can probably de-bottleneck over time. Now, Colanzi remains idled, but we would consider bringing it back if the long-term economics and the demand was there to justify it. So, again, we're not going to bring production on that isn't required, but we do have some latent capacity that we can use if market conditions demand it.

Jack, Vincent and Artem also asked for some clarity on the incremental 400,000 tons in our fourth quarter volumes.

Thank you, Vincent and Artem. Two things are happening here. First, a large portion of these tons simply relate to a catch-up of sales through Campitex to meet our portion of full-year sales. And the remaining reflect a reduction of our Campitex inventory deferral. So, basically, pretty simple stuff. Remember, these are lower-priced, lower-margin tons compared to other sales. And when you net out all of our non-notable typical year-end noise in the quarter, The net impact to EBITDA was virtually nil.

Moving on to the next question, Jock. A number of analysts, including Duffy Fisher from Barclays, Chris Parkinson from Credit Suisse, Andrew Wong from RBC, and Steve Byrne from Bank of America, have all asked about the China and Indian contracts. Campotex and other producers have been publicly critical of the recent BPC contract settlements. Typically, in the past, for potash contract settlements with China or India, we've seen that when one producer settles at a certain price, other producers shortly follow at that same price. Can you talk about why that's the case? Why haven't other producers in the past held up for higher prices? And for this year specifically, will the situation end up differently? Do you expect others to hold? And how do you think of the economics at this price?

Thank you, folks. Look, I think the surprising outcome here is really centered around the India contract, where BPC was the first mover. And as you've heard from other suppliers, including Campotex, settled at a price that was what we believe lower than what market fundamentals were pointing towards. From our perspective... the price doesn't represent the reality we're seeing or the tightness of the market. And pricing and other jurisdictions highlights this. I can only speculate as to what motivated BPC to do that. But given the political uncertainty in Belarus over the last year, there may have been non-market drivers that played into it. In terms of Mosaic... Given that we sell internationally through Campotex, we're going to allow Campotex to do what it was set up to do. And therefore, we won't be negotiating contracts on our own or on calls like this. But it is important to keep in mind that contracts involve prices, volumes, grades, and durations, not to mention any number of other terms which can impact producer economics and which we believe will come into play given how tight the market is. We would expect Campotex to take a holistic view as it interacts with Chinese and Indian buyers.

Josh, we've had a number of similar questions from Mike Piken, Seth Goldstein from Morningstar, Ben Isaacson, and Mark Connolly from Stevens about Chinese phosphate production and exports. What is your expectation for exports for 2021, and how do they align with recoveries from COVID curtailments, potential demand destruction from high prices, and the government's latest initiative to increase phosphate operating rates?

Thank you. What we saw last year with regard to Chinese exports is they fell by approximately 800,000 tons, down to 9.3 million total tons. From a capacity standpoint, we believe capacity was reduced in 2020 by roughly a million tons year over year, both due to closures and product mix shifting. This was in line with our expectations, and we'd characterize that magnitude as significant. It is expected that in 2021, capacity is going to be stable. But at the same time, domestic demand is likely to increase once again. And our fairly conservative export forecast may be too high. The Chinese government has indicated the desire to increase phosphate operating rates. Our analysis already points to a relatively high operating rate in the Chinese effective capacity. So even if we were to assume a dramatic step higher in Chinese utilization of, say, five percentage points, that would increase export availability by no more than one million tons. And upside growth in domestic demand could easily absorb a portion of those tons.

Adam Samuelson and Joe Jackson are both asking about Mosaic for Lizanchi's outlook. Despite a quarter-over-quarter rise in selling prices, gross profit per ton declined in fertilizantes in the fourth quarter from the third quarter. Can you explain the key drivers of the decline in operating rate and increase in cost and how we should think about gross margins progressing into 2021?

Thanks, gentlemen. Look, historically, our quarter three margin per ton is the highest of the year in Brazil, reflecting the seasonality of demand and the economy of scale that we see in that quarter. It's normal to see a decline from quarter three to quarter four. This year, though, it's probably exacerbated by additional impact of delaying our turnarounds and the lower production volumes we saw in quarter four, which negatively impact our fixed cost absorption. The movement of the Brazilian REI from 5.6 at the beginning of the quarter to 5.1 at the end of the quarter also caused a non-cash, non-economic translational impact in the COGS, lowering gross margin by about $13 million. Looking ahead, we continue to make great progress towards our transformation goals, and we expect to see our margins continue to improve because of that over time.

Jack, we have more questions about Brazil from Steve Burns and Chris Parkinson. Namely, given the sharp spike in inland Brazilian phosphate prices, can you remind investors of your inland market share and domestic production capabilities? And how much of the 10% volume gained by fertilizantes in quarter four was overall market growth from acreage expansion and higher application rates in Brazil versus market share gains against imported products?

Thank you. Our market share in Brazil in 2020 was roughly 18%. But remember what is driving this, domestic production and a vast distribution network that gives us a dominant market access position. Our production rates are 3.5 million tons of phosphate concentrates in Brazil and about a half million tons of potash. Now, regarding quarter four specifically, we think it was a combination of factors, but market share growth was definitely part of it.

Jock, Andrew Wong and Chris Parkinson are asking about capital allocation. A few years ago, Mosaic cut dividend payments during some tough years for Potash and ThoughtSafe. Now that market conditions have improved and Vale's integration is mostly complete and SRAD K3 is around the corner, what are your thoughts on capital return to shareholders? Are dividend increases or share buybacks in the future? And if current conditions persist, you will have cash flow beyond debt pay down needs. What will you do with it?

Yes, thank you. Our capital allocation priorities are really unchanged. We're targeting a balanced approach and a balanced allocation of capital to pay down debt over time, return capital to shareholders, and invest in what we believe are high-return projects that grow our business and maximize value. We've talked about reducing debt by $1 billion, and that remains a priority. We're aiming to fortify our balance sheet for an entire cycle. Our growth capital spending on K3, as you mentioned, is winding down and highlights the types of return we're focused on when thinking about new investments. In terms of capital returns to shareholders, we are evaluating what is a sustainable return policy, taking into account our earnings profile, our capital spending needs, and especially as we continue to drive sustaining profit improvements through transformation. and our spending on major projects winds down. So we'll be hosting a call on March 11th, and we will, in that call, specifically address capital allocation in more depth. And I encourage you to listen in. Clint, would you want to add anything to that? No, I think that covers it, John. Thank you.

John, PJ Juvicar asks, despite improved volumes in the second half of 2020, why was your operating cash flow weak in the fourth quarter of 2020?

Thanks, PJ. If I'm going to sum it up, I think the biggest thing is work on capital swings. But I'm going to let Clint just give you a little bit of detail on that. Clint?

Yeah, thanks, Jack. And thanks, PJ. I think as we look at Last year, working capital was a source of about $80 million in cash as we liquidated our inventories during some of the idling of our facilities. This year, working capital was a use of about $140 million in cash, primarily because of an elevated level of receivables associated with higher sales.

Jock, Jonas Oxgaard and Ben Isaacson are both asking about phosphate pricing outlook. The U.S. phosphate price is well above global prices, which clearly isn't sustainable. Do you have a perspective on where they will both settle out and how long it will take? And what do we need to see in advance of prices moderating?

Thanks, Ben. Thanks, Jonas. Look, on the US specifically, as we've said before, we do expect the trade flows are going to adjust and find a new normal. after the final determination of the CBD petition next month. Now, U.S. and international prices will have to be basically at parity, adjusted for things like freight differentials. So, in other words, if the U.S. prices are high, it'll bring in new imports. And if U.S. prices are more parity with the markets, maybe people will be less inclined to import. So, prices will take care of it. Trade will work as trade is supposed to work. And we expect that that convergence will take place somewhere in 2021. More generally on global pricing, markets are efficient at finding equilibrium. It appears that demand is on very solid footing given the recent commodity, ag commodity prices. But a few seasons of above-trend yields could calm those markets and slow demand growth. And we can never forget the potential impact of weather on both yields and our ability to apply fertilizers. Now, we are expecting current prices to modestly lower demand in India given the current subsidy scheme.

Doc, Adam Samuelson asks, your guidance calls for the first quarter phosphate price to rise $40 to $50 per ton quarter over quarter would mean average realized prices would have risen less than half of the increase in benchmark prices over the past nine months. What explains this spread, and if current benchmark prices hold, should we expect a more sizable quarter-over-quarter increase in realized pricing for the second quarter?

Thank you, Adam. Look, the first thing to keep in mind is that some of the recent New Orleans pricing reported, you know, at the high end of the range was published in the trade publications. And there were very little volumes actually attached to them. So excluding those data points, the delta is actually quite a bit smaller. We have worked hard to meet our customer needs as well. And so in this rapidly moving market, this means we've committed to sales in some cases ahead of our production. This would push the lag between market prices and realized prices higher within our ranges of let's call it 45 to 60 days. But given the current price environment, you are absolutely right. If benchmark pricing holds, you will see further price increases realized in the second quarter.

Doc, our last fireside question comes from PJ Dubucar. He asks, With your phosphate mining costs of $37 per ton and conversion costs of $62 per ton, where do you fall on the global cost curve? And just to clarify, is this conversion cost all in, including sulfur?

Thank you, PJ. We believe in our third-party sources, such as CRU, really reflect this, that we are solidly within the second quartile on a cash cost of production basis. But as you know, we continue to strive to push ourselves lower on the curve. Now, conversion costs obviously don't include raw materials of sulfur or ammonia. So what I lead you to is we published a modeling deck in February 2020 where we are and we're in the process of updating that. The sensitivities have been updated in our recent earnings release. This deck also describes the impact of inputs on our production, and so you can follow up there with Laura or Paul for additional details. Thank you. That concludes our fireside chat part of this call. We'll now open it up to further questions. Operator, can you open it up to the audience?

Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone keypad. To answer a question, press the pound key. We will limit the question to one per participant to allow for other questions to be addressed. Thank you, and please stand by while we compile the Q&A roster. We have our first question comes from the line of Steve Baring from Bank of America. Your line is open. Please go ahead.

Yes, thank you. I would like to ask you a little bit about your understanding of what's going on in China right now. It appears that the government there is changing course on its previous plans to hold fertilizer use constant. Is that your understanding? And if so, do you see a potential change in application rates or consumption of fertilizer in China if if those limits were removed and the government wanted to drive crop production up to reduce the level of imports.

Sorry. Thank you, Steve. Let me just make a couple of comments. Yes, in fact, the federal government in China has said they will loosen their fertilizer restrictions and they've also said they want to increase the rate of fertilizer production and obviously those are to help their own food security. Let me ask Jenny Wong if she can give a little bit of details there.

Sure. Thanks, Jack. Thanks, Steve. I think the policy that you quoted was called zero fertilizer growth policy. That was set actually five years ago and with a very specific timeframe. And by end of 2020, the government has declared the goals have been achieved. So there's no new policies came out in 2021. Instead, the government basically shifted their focus to ensure production, core productions to meet the domestic demand and replacing part of the import as they attempted to. In terms of the fertilizer demand implication, based on the academic recommendation and also the recommendation from Minister of Agriculture, There's a very clear indication potash should be of interest in terms of the application in China, along with some of the secondary nutrients and the micronutrients. In terms of the indication to phosphate, there was a very clear indication that the farmers need to manage their application to phosphate. And we've seen phosphate demand reduced over the last five years. However, that responded in 2020. We foresee this is going to continue in 2021 onwards. Basically, the farmers are going to apply phosphate in a more appropriate way. Nitrogen is a different story. It's a very clear indication to reduce the supply. Back to the supply situation, China as a country, they are self-sufficient for the production of phosphate and nitrogen. We have not seen policy support from the government to encourage more capacity to be built in these two nutrients. Potash kind of needs to relay our input and they have limited reserve or have to explore reserve. So we believe as a country they still need to continue to import potash as they grow the demand and also to support their agricultural production.

We have our next question comes from the line of Chris Parkinson from Credit Suisse. Your line is open. Please go ahead.

Great. Thank you very much. So I guess let's stick with the China theme. Just taking a step back from all the debates around export flows, near-term price action, et cetera, et cetera. The fact is China is still the marginal cost exporter to the tune of plus or minus 9 million tons across the primary products. There has been a distinct inflationary and steepening of the global cost curve, which spans pretty much across all components of the production costs due to safety and environmental, NH3, sulfur, rock, especially in the Bay, et cetera. Can you just give us your own update on your current calculation of Chinese FOB rates, so at port, and how you believe this may compare to your outlook for both 22 and 23? So just really trying to get into the structural components of what we're seeing in the phosphate market. Thank you.

Thanks. Thanks, Chris. If I understand the question on the global cost curve and where China basically sits on it from their position, I think you're right. There's no question the Chinese represent, or some of the non-integrated producers particularly, represent the top end of that cost curve. And obviously those costs have been going up. Jenny, do you want to talk a little bit about where we sit on those cost curves or where they sit on those cost curves today?

Sure. So with the latest profit price rising globally, clearly the market expansion has occurred across the whole cost curve for all producers. specifically for Chinese producers. They are facing the raw material price increases like you mentioned on sulfur and also facing the increases of nitric gas related to ammonia prices as well. The foreign exchange rate and appreciation of Chinese RMB has also added cost to the FOB prices. So at this time, we believe the break-even FOB Chinese DAP price is about $400 per metric ton.

And, Chris, let me just add to that as well. The limit to Chinese export may well be structural as well as price because I think the – you know, the very top end producers will have costs higher than that, but also a lot will be redirected to or some of that will be redirected to the domestic market. So, you know, it's not quite as simple as a break even price.

We have our next question comes from the line of Jeff Sikowskis from JP Morgan. Your line is open. Please go ahead.

Thanks very much. Two questions. What's the relationship between the deliberations of the Department of Commerce and the International Trade Commission? And what I mean by that is, are some of the conclusions of the Department of Commerce taken as premises for the decisions that the ITC will make? Or is none of their analysis taken as a premise? And secondly, your equity loss really dropped in the fourth quarter. Do you expect your equity income to be positive in 2021?

sorry yes jeff thank you let me let me take that in two two pieces obviously first of all in terms of the department of commerce and the itc they are independent and their determination is is meant to be independent so the doc decides the level of um subsidization and the itc decides whether or not that um the presence of those imports has caused harm to the U.S. industry. So technically, I guess they're not related, but I suppose there's got to be some element of relationship that says, well, if you have subsidized material coming in and it harms you, that there's a problem. So technically, though, I don't believe they're related directly. In terms of the equity loss, most of that is modern. And I think we've talked about before where modern is delayed by one quarter. So we report our equity earnings or losses from modern a quarter in arrears. And so if you look at the global price of phosphates today, I would expect certainly a much lower equity loss or for that to turn to a gain at some point. But again, that would be my expectation.

Thank you so much.

We have our next question comes from the line of Adam Samuelson from Goldman Sachs. Your line is open. Please go ahead.

yes thanks good morning everyone um thinking about um about phosphate you gave um the comments on pricing uh certainly for for the first quarter and and point on kind of lagging the benchmark pricing is well taken can you talk about kind of the cost side i mean you should have pretty good on a site to how the ammonia sulfur input cost moves kind of would impact uh the first quarter kind of cash margin and help us think about how you'd frame the first half or even 2021, if you could, just from the ammonia, sulfur, kind of the movements on the input cost side so we can be thoughtful about calibrating to benchmark pricing. Thank you.

Yeah, thank you, Adam. Certainly, as you say, there is a lag, and we've talked about it. In terms of lag in sulfur, there's also a lag for both sulfur and ammonia. What I would point you to there, I guess, is just the stoichiometric requirement. Our need for ammonia represents about 0.21 tons per ton of DAP produced. Our use of sulfur represents about 0.4 tons of sulfur for every ton of DAP produced. you know, the $60 to the 90-some dollars that it's at today, a $30 increase in sulfur is going to add something like a $12 increase to our overall price. So, you know, in Salter, you should be able to take fairly much the Gulf price or our quarterly price and work that in. In terms of ammonia, you know, again, same thing, except that obviously we produce one-third of our ammonia, so that is at normal cost. one-third or so of our ammonia is produced by CF on a long-term contract. And then we only buy about a quarter to a third of our ammonia on spot. So on that one, it's much more dampened, if you will.

We have our next question. It comes from the line of Jonas Oxgrigg from Bernstein. Your line is open. Please go ahead.

Good morning. I wanted to ask about the deep freeze, if it has any effect on your operations or logistics of the river. And sort of as a follow-up on that, does the deep freeze limit availability of potash in the Midwest?

Yeah, okay. Well, let me talk both commodities. Let me start with phosphates. We've actually had some problems in our Faustina plant with freezing in Louisiana isn't a place that freezes very often. So we actually probably will have a couple of days shutdown of that plant in different parts of the plant. So it's definitely going to have an impact on that. The other area, interestingly enough, is moving ships and unloading and loading sulfur in the Gulf of Mexico and around Galveston and and uh different parts of the river are definitely um are definitely being impacted but again we kind of look at this as being you know just normal course of business uh these things happen no different than when you have to slow down for a hurricane or anything else so we're we're well prepared to deal with weather events in terms of potash you know i guess the good news there is um We deal with this every year in Canada with cold weather, and so the railways and everything else, the supply chains, are well equipped to deal with this kind of cold weather, although you will remember a few years ago where snow actually delayed the delivery of potash to the Midwest. Next question.

Our next question comes from the line of Joel Jackson from BMO Capital Markets. Your line is open. Please go ahead.

Hi. Good morning, Jock. I have two questions on Brazil. First, your crop input here is talking about elevated channel inventory in Brazil impacting some of the crop input volumes there. Can you just talk about the Fertilizante and the products that you sell? And then also in Brazil, I mean, we've seen the Belarusians or BPC You know, Ford sell potash about a year into Brazil at, you know, not much higher prices. How does that impact, you know, what campus tax comes down to Brazil and how Proto Volante deals with pricing too? Thanks.

Yeah. Can you help me with your first question about the channel inventory, Joel?

We've seen different crop input suppliers talk about larger inventories now in the channel, things like pesticides. And I wanted to see how you would comment on how you see channel inventories in Brazil and some of the nutrition.

Got it. Let me start by saying good morning, Joel. Thanks.

Good morning, Jack.

In terms of our main fertilizers being potash and phosphates, we haven't seen elevated inventories of those. I mean, if you look at last year, I think in the final analysis, the use of fertilizers is going to be another record year, and I think it's going to top 37 million tons in Brazil. So there really was a big, big... poll, particularly in the third and fourth quarter in the country. And so we don't see elevated or above normal elevated inventories right now. In terms of the Belarusians or anyone else selling fertilizer into Brazil, I guess what I would say is those sales once made are what they are, and they don't affect the rest of the S&D. So if they have below-market sales, and we're seeing this with the India-China, that it really has not impacted other sales because people need the product. they're willing to pay the market rate for those products, and the market rate has moved up. So normal supply and demand is demanding that people pay more for the potash, and particularly we're seeing that in Brazil, which is almost like a market leader in the potash markets.

Our next question comes from the line of John Roberts from UBS. Your line is open. Please go ahead.

Thank you. Congratulations on your making the Barron's 100 most sustainable companies list. I don't think we've ever had a fertilizer firm or even an ag firm on that list before. What do you think was the most important reason that you're the first to make that list?

Thanks, John. That's a really good question. I think, look, if anything, I suspect the reason for it is because we've been focused on it for a long time. And we've set very concrete goals. We just set new goals for both air and water recently in terms of CO2 emissions and water use. But those are followed from five years of goals that we achieved over the last five years. So I would say, first of all, in terms of the basic environmental goals, projects, we've been very focused on that for a long time. We certainly understand that as a resource company, we have to be more aware and more conscious of our impact on the environment. We believe we do an excellent job of running when we're running and then recovering and reclamation after the fact. And I assume that that is a big piece of what they are recognizing. And, again, while that's not why we do it, we are, of course, honored that they would recognize us in that way.

Thank you.

Once again, I would like to remind everyone to ask a question, you will need to press star and the number one on your telephone keypad. To answer your question, you may press the pound key. Once again, we will limit the question to one per participant to allow for other questions to be addressed. We have our next question comes from the line of Michael Python from Cleveland Research. Your line is open. Please go ahead.

Yeah, good morning. Just wanted to talk a little bit more about, you know, K3, and I know you guys talked about, you know, kind of potentially boosting your production from 1.2 to, three million tons this year can you uh sort of break out you know in terms of the cost savings how much is going to be you know brian inflow reductions versus you know actual savings you know on k3 and you know what the cadence might look like you know as we move into 2022 as well thanks yeah thanks michael that's a a great topic we

You know, we've talked about this before where the K-3 project has run, you know, significantly ahead of schedule. And, you know, it looks like, I think we'll be telling you soon, probably slightly under budget. So for a 10-year project or an 8-year project, that's a pretty pleasing outcome. We expected to produce an extra million tons of potash from K3 when it was at full production. That amounts to about 3 million tons of incremental ore. So when we say we'll be up to 3 million tons, that means we'll be running virtually the whole incremental capacity of K3. Now, what happens after that is K3 slowly takes over all production at the Esterhazy facility over the next couple of years. And what does that do for cost? The cost of, first of all, the cost of production, you know, instead of producing it, let's say, at a Colanzi where you have all the fixed costs, this is all coming in as incremental tons. And this is a good part of the reason why we believe our cash costs for mining at Esterhazy is going to end up somewhere below $60 a ton, probably in that $50 to $60 a ton range. And that'll really drive costs out of our system. And we've talked about $100 million this year from producing tons from Esterhazy versus Colanzi. So that'll continue. And it'll continue to go down slightly from here. The other one, of course, is brine costs. And brine costs, you know, I think peaked at 200 and some million dollars a year. They'll be basically immaterial by the end of 2021. So we think that's another big improvement. And don't forget as well, per Clint's comments, by pretty much by the end of 2021 we'll start ramping down the cost capital cost of esterhazy and that'll be another big move towards better cash conversion for the company we have our next question comes from the line of mark connelly from stevens your lines open please go ahead

Thanks. Jack, I just wanted to ask if you could help us a little bit understand how much is left in terms of the per ton cost benefits from the Integrated Operating Center versus what you've already accomplished and how soon that will be in place.

Yeah. Okay, Mark. What I would say from our Integrated Operations Center is that You know, it's really the first phase of it, and I wouldn't say that we've really seen, you know, in terms of our cost per ton yet, too much of what the – what that impact is going to be. But that is the basis of the Integrated Operations Center, and I think there's a picture of it in the slides. I mean, I got a chance to actually run one of the pit cars, and it's pretty exciting how remote mining and whatnot is going to start changing things. And what I will say is that that is the basis of our cost targets that we're talking about, But more importantly, I think we're going to find new things every day as we start automating that are going to continue to drive costs out of our system.

Okay. So most of the benefits are probably still ahead of us then.

Oh, absolutely. Yeah.

Perfect. Thank you.

And we have no questions at this time. Jeff, can you continue?

Okay. So if that's... A wrap here. I know you guys, as analysts, have had a very busy morning. But before I close, I'd just like to invite you to join us on March 11th at 8.30 a.m. Eastern for our in-depth presentation on optimizing our assets and our capital management that Clint Freeland and I will be doing. With that, I want to wrap up today's call. But let me say, Mosaic is performing well. We're increasing our global competitiveness by driving our costs down, and we're managing well through the challenges of COVID-19. With the tailwinds we expect to see from improving fertilizer and agricultural markets this year, we expect strong results to continue throughout 2021. So with that, thank you for joining us. Please have a safe and healthy day.

Ladies and gentlemen, that does conclude our conference for today. Thank you all for participating, and you may now disconnect. Have a great day.