Court order extracts pain from Mosaic

A legal challenge to mining operations planned by The Mosaic Co. threatens a huge hit to the income statements of Mosaic’s suppliers and vendors.

Friday, August 20, 2010

Court order extracts pain from Mosaic^3829151

A legal challenge to mining operations planned by The Mosaic Co. threatens a huge hit to the income statements of Mosaic’s suppliers and vendors.

At least 18 companies that do business with Mosaic would be out at minimum of $80 million in combined annual revenue, and about 400 of their employees would lose their jobs, in addition to the 221 Mosaic workers who would be laid off if a preliminary injunction barring Mosaic from mining in federal wetlands in Hardee County is made permanent.

United Maritime Group LLC in Tampa, which ships product for Mosaic, could lose nearly $30 million, about 10 percent of its annual revenue. Tampa construction firms such as Kimmins Contracting Corp. and JVS Contracting Inc., already hard hit by the economic downturn, would feel a further pinch. Contractor Bul-Hed Corp. in Bartow could face a death knell.

“If Mosaic is prohibited from further mining, it will mean that Bul-Hed Corporation would cease to exist sometime in the near future,” Ronnie Hedrick, president, said in a court filing.

Mining opponents have their own concerns about the economic impact on the hospitality industry.

Allowing Mosaic to go forward would hurt Charlotte County because its tourism-based economy is dependent on the health of Charlotte Harbor, said Percy Angelo, chair of the phosphate committee for Sierra Club Florida.

Contract under scrutiny

Mining would cause environmental damage to the headwaters of the Peace River and other streams that drain into the Charlotte Harbor estuary, according to a June 30 complaint brought by the Sierra Club and other groups against the U.S. Army Corps of Engineers. The groups challenged the issuance of a federal permit that would allow Mosaic (NYSE: MOS) to expand mining for phosphate rock in its South Fort Meade mine, which straddles the Polk and Hardee county borders.

On July 30, U.S. District Judge Henry Lee Adams Jr. in Jacksonville issued a preliminary injunction against the expansion, saying the Army Corps had failed to adequately explore alternative plans that would cause less environmental damage to the area. Mosaic appealed the decision and asked for a stay of the injunction.

Mosaic has been mining in Polk County since 1995 and said it is close to fully exhausting the available phosphate ore in the area so it needs to access reserves in the Hardee County extension, where there are about 48 million tonnes of ore, representing about 10 years of active mining operations, said Rich Mack, executive vice president, during an Aug. 2 conference call with analysts.

Although Mosaic has four other mines in Florida, their output would not offset the impact of a shutdown at South Fort Meade, the company said.

“We’re very disappointed that this will adversely impact our employees, as well as other stakeholders, including our suppliers and the local communities, such as Hardee, Polk and Hillsborough counties where we operate,” Jim Prokopanko, president and CEO of Mosaic, said in the conference call.

One week later, United Maritime received a letter from Mosaic calling the preliminary injunction a “force majeure” event, a clause in contracts that essentially frees both parties from liability or obligation in extraordinary circumstances beyond their control.

United Maritime, whose ships carry phosphate rock mined in Florida to Louisiana where it is turned into finished fertilizer, is evaluating the notice, said Walt Bromfield, senior vice president of finance.

There’s eight years left on the contract between Mosaic and United Maritime, which said about 10 percent of its $296 million in revenue in 2009 came from Mosaic.

Ripple effect

Mosaic is one of the biggest customers of Progress Energy (NYSE: PGN), which provides electricity for draglines at the mine. However, Cherie Jacobs, a spokeswoman for Progress Energy Florida in St. Petersburg declined to estimate the potential impact of mining curtailment, citing customer confidentiality.

CSX Corp. (NYSE: CSX), which ships all the rock out of the mine by rail, already has cut two workers and could cut six more if the current level of operations is further reduced, said Jon Haselwood, director of sales, chemicals and fertilizer for CSX Transportation Inc. in Jacksonville.

A reduced level of operations since the temporary injunction was handed down has cost CSX direct revenue of $17,000 a day, and would jump to $26,000 a day if mining operations cease, Haselwood said in a court filing.

For smaller firms, such as JVS Contracting, construction work done for Mosaic makes up a significant part of their total business. JVS, which has made capital expenditures specifically for the South Fort Meade mine, would have to lay off about 20 workers if mining at the site is stopped, John Simon Jr., president, said in a court statement.

The impact goes beyond Mosaic’s direct vendors, said Joe Williams, president of Kimmins Contracting, which gets about 25 percent of its revenue from Mosaic. Subcontractors hired by Kimmins to do concrete, electrical and sod work also would be hurt, Williams said.

“We would shrink and sell equipment and lay people off,” Williams said. “Would we survive? Yes. We would grow again, but we won’t replace that work in a quick period of time.”

Assessing the impact

Mosaic has estimated it would lose $250 million to $300 million in operating earnings in a worst-case scenario.
In its fiscal year ended May 31, Mosaic had earnings of $1.75 billion before interest, taxes, depreciation and amortization on net sales of $6.76 billion, said Fitch Ratings. Fitch said potential losses from the mining disruption in Hardee County would not impact Mosaic’s debt ratings, currently “BBB,” or a low investment-grade rating.
None of the 400 jobs at Mosaic’s Florida headquarters in FishHawk Ranch have been impacted at this time, said spokesman Russell Schweiss.
— Margie Manning | 813.342.2473
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