Joc O'Rourke
President and Chief Executive Officer at Mosaic
Good morning, thank you for joining our second quarter 2023 earnings call. Mosaic delivered revenues of $3.4 billion, adjusted EBITDA of $744 million, and adjusted earnings per share of $1.4.
First, I'd like to discuss the broader agricultural market where fundamentals remain constructive, global demand for crops is very strong and supply is struggling to keep up. Geopolitical events are having a major impact, the war in Ukraine continues to restrict supply from one of the world's most important agricultural regions. Last month, the Black Sea Grain Initiative collapsed and was followed by the bombing of several grain terminals. As a result, we expect to create exports of corn and wheat to be down by as much as 30% versus last year, which wasn't itself a down year but conflict is only one part of the supply problem.
Around the world, weather extremes are having a profound effect on crop production. North American yields this year could be negatively impacted by dry conditions and El Nino is hurting production across Southeast Asia and Australia. This situation is exacerbated by under application of nutrients especially potash, which is crucial for drought resistance and crop resilience. To maximize yields and meet global consumption needs growers need to increase cropping intensity which will mean increasing fertilizer applications.
The world counter forward multiple years of under-fertilization and crop production shortfalls. Today, China is importing record levels of soybean, wheat, and beef, roughly 5 million tonnes of China's corn imports over the last 12 months were sourced from the Black Sea Green deal. This is a supply that must be replaced by other regions. The shortfall extends beyond China countries across Europe, Africa, and Asia will need to replace lost Ukrainian supply. In India, the focus remains on food security on affordability. Recently the government responded by banning the export of non-Basmati white rice to ensure adequate domestic supply. Constrained supply and strong demand will continue to put pressure on global stock to use ratios which are already at multi-year lows. All these dynamics together continue to support the constructive ag market. The strong ag fundamentals should lead to strong fertilizer demand for the next several years and we're already seeing robust demand in several of our key markets.
Since the spring improved affordability channel inventory destocking and sustained demand for grain and oilseeds have brought customers back to the market. In North America, a strong spring application season depleted fertilizer inventories which customers are now looking to replenish. Logistical constraints associated with low water levels on the Mississippi River and limited trucking capacity persist, but favorable grower economics are leading retailers to secure supplies early to avoid any backups.
In Brazil, the market is beginning to move as we expected, like we saw in North America, demand was deferred late into the typical window, but customers have returned to the market. In-country inventories are well below the levels seen earlier this year and growers are trying to secure tonnes ahead of the fast-approaching sorghum season. In India, monsoon rains have been strong enough to drive grower demand for fertilizer. Phosphate imports are expected to be strong throughout the rest of the year.
Switching to potash supply sanctions continue to restrict Belarusian exports. After a surge earlier in the year, rail volumes to China started to level off. We continue to expect Belarusian Potash exports to be in the range of seven million tonnes to eight million tonnes, which is well below the historic 13 million tonnes.
In North America, port terminal capacity has been constrained by multiple events. Repairs at Canpotex's Portland terminal are ongoing and should be completed by the end of the year. In Vancouver, a 13-day strike resulted in a temporary curtailment of the Neptune Terminal but work continues to finalize a new labor deal and we hope this will be resolved shortly. Canpotex is making use of alternative ports in Canada and in the Southern and Eastern United States to mitigate some, but likely not all of the impact on international shipments. We expect a constrained phosphate supply as well.
Over the last several years, changes to China's environmental policy led to the permanent closure of 25% of their domestic capacity. China is also focusing on food security by ensuring adequate domestic supply, while also meeting rising industrial demand, both of which are expected to limit exports for the foreseeable future. Industrial demand, particularly in China's lithium iron phosphate production is expected to grow dramatically over the next several years. Last year LFT production more than doubled to 1.1 million tonnes of finished fertilizer equivalent and production is expected to grow by an additional 500,000 tonnes in 2023. This new market will continue to take phosphate volumes away from fertilizer production. We expect China's exports to be in the range of seven million tonnes to eight million tonnes this year or roughly 35% below 2021 export levels.
Overall, the fertilizer market recovery is playing out as we expected. In a tight market, volumes are moving and prices are following. Phosphate prices have risen over the last month, while potash prices have stabilized and are now beginning to move higher. This sets the stage for a constructive second half of the year and into 2024.
We believe our business is well-positioned to capitalize on this recovery. Over the last several years, we've invested in our business to maintain our position as a reliable supplier to customers. In addition to the work, we've done on our production assets, we've also invested in the infrastructure necessary to deliver that product. A few examples include the overhauling of our rail fleet, revitalizing our in-country distribution facilities, and our purchase of the remaining share of Gulf Sulphur Services to secure logistics around our sulphur supply. These investments are integral to our results.
In potash sales volumes for the second quarter reflected the benefit of a strong North American spring planting season. While prices reflected the bottoming of the global market. Markets are improving, a trend we expect to continue throughout the second half of 2023. Over the last year, Mosaic is met demand by carefully managing production and inventory, we have built a flexible, low-cost system that's able to capture market opportunities as they become available.
Last month, we temporarily restarted our Colonsay mine to replace Esterhazy production, which is currently undergoing its summer turnaround. In the third quarter, we expect total potash sales volumes of 2.1 million tonnes to 2.3 million tonnes. This guidance reflects the results of a very successful summer fill program in North America, which was oversubscribed by 30%. We currently expect MOP prices at the mine in the range of $250 to $300 per ton.
In phosphates, we reported strong sales volumes in the second quarter. Our average realized price was at the high end of our guidance range and our stripping margin benefited from lower raw materials costs. As we discussed last quarter, we are pushing ahead with increased investments in our phosphate business targeted at improving reliability. This may require short-term increases in maintenance like we experienced during the second quarter.
Looking ahead to the third quarter, we have a solid order book with 70% committed and priced today. We anticipate total sales to be in the range of 1.7 million tonnes to 1.9 million tonnes and DAP prices at the plant in the range of $475 to $525 per ton. In Brazil, we reported sequential improvements in our operating results, our distribution margins are recovering and we expect that trend to continue in the third quarter as Brazil demand moves higher, 90% of our third quarter volume is already committed and priced.
Finally, I'd like to spend some time on our capital allocation strategy. Our approach has not changed. We remain committed to investing in our business, maintaining a strong balance sheet, and returning capital to shareholders. In Potash, an independent audit of the K3 mine and K2 mill expansion was recently completed, which verified a total nameplate capacity of 7.8 million tonnes at our Esterhazy Potash complex. Esterhazy is now the largest potash operation in the world and certainly one of the most efficient. In addition to the underground optimization, we've also begun debottlenecking the K2 mill at Esterhazy by installing a new Hydroflow flotation process. This will add up to 400,000 tons of incremental production capacity with minimal additional operating costs. We're investing $55 million in this project, which has an unlevered after tax IRR in excess of 75%.
In phosphates, we continue to move production away from commodity products and towards differentiated value-added products through the expansion of MicroEssentials capacity at our River View facility. Following the expansion which is expected to be complete by the end of the year, about half of our North American phosphate sales volumes will be higher-value specialty products. This is a $34 million investment with an after-tax unlevered IRR in excess of 50%. This expansion comes just ahead of next year's launch of MicroEssentials Pro, which is the next generation of MicroEssentials. Our field trials in Brazil indicate the growers will see a yield bump on soybean acres of 3% or roughly two bushels per acre versus current generation of MicroEssentials.
Against traditional MOP solutions, MicroEssentials Pro provides an 8% yield advantage or nearly five bushels an acre. The patent on the new formulation extends through 2038. We are very excited about the launch of MicroEssentials Pro, which builds on an already-strong foundation of value-creation for the growers, our customers, and for our shareholders.
In addition to higher-grade phosphate fertilizer, we're also exploring entry into purified phosphoric acid for the lithium iron phosphate battery market. Our initial work has validated this opportunity and together with constructive and developing discussions with OEMs and battery manufacturers, our Board of Directors has approved an additional $60 million to commence engineering work on a commercial plant.
In our Mosaic Fertilizantes business, we're building a one million-ton blending and distribution facilities in Palmer Ranchi in the State of Tocantins in Northern Brazil. We currently don't have much presence in this region. So, the facility will extend our distribution footprint into an attractive high-growth area. This is an $80 million investment with an after-tax unlevered IRR in excess of 20%.
In total, our capital spending expectations this year remains unchanged at $1.3 billion to $1.4 billion. Our balance sheet is strong. During the quarter, we entered into a $700 million credit facility, which gives us additional flexibility to manage our capital. Our final focus is on capital return to shareholders. All excess cash will be returned to shareholders through dividends and share buybacks. Year-to-date, we're ahead of our target over the last 18 months, we've repurchased 50% of our float, and believe our share still represented good value. Our regular dividend today is $0.80 per share and our business positions us to consider further increases over time.
To sum up, Mosaic continues to demonstrate the earnings power and resilience we have created over the last several years. Our second quarter results were strong despite deferred fertilizer demand in many markets and our outlook for the remainder of the year and beyond is quite positive. The world's farmers have strong incentive to maximize crop production and meet global food demand. Fertilizer is critical to their success and Mosaic will continue to meet that need.
