The rumor mill is centered on Mosaic (MOS) again, as there is renewed interest in a possible takeover bid. In mid-July when we first wrote about this topic (Mosaic’s Potash Attracts Vale’s Eye), the rumors originated in a Brazilian newspaper that mining giant Vale SA (VALE) was looking to diversify into potash mines. There was also a side note, that BHP Billiton could potentially have an interest as well. After that double-digit rally in July, a spokesperson from Vale dismissed the possibility of a deal because of concerns it might strain relationships with the government, also saying that they would prefer to grow organically for the time being.
Wednesday, Mosaic is up about 2% even as the rest of the market is selling off. Options trading on Mosaic has been exceedingly bullish today as well with the September $60 calls accounting for about a third of contracts sold.
“Trading in Mosaic Co. options jumped to a six-week high on renewed speculation that North America’s second-largest potash producer will be acquired. The shares climbed as much as 4.8 percent, halting a seven-day retreat.
Volume in bullish call options rose to 92,419, more than quadruple the four-week average and six times the number of puts. Calls give the right to buy a security for a certain amount, the strike price, by a given date. Puts convey the right to sell. The stock gained 1.7 percent to $49.29 at 1 p.m. New York time, after losing 11 percent since Aug. 20.
The most-active contracts were September $60 calls, which more than doubled to $1.25 and accounted for more than a third of today’s trading. A buyer at that price is betting that the stock rises to at least $61.25 before the options expire Sept. 18. The stock hasn’t closed above $60 in 11 months.”– from Bloomberg.com
The Bloomberg article makes the case that the options activity and strength of the stock today is based solely on renewed takeover speculation. If that is the case, with Vale on the sidelines, the likely suitor would by BHP Billiton. At this point neither BHP nor Cargill (majority owner of Mosaic) have confirmed that talks have taken place. However, there is one other possible explanation, Potash’s (POT) CEO Norbert Steiner told Reuters that prices for potash fertilizer are likely “bottoming out”. This would likely give a boost to all potash firms, but Mosaic seems to be getting a particular bounce above the rest.
At this time we are reaffirming our Undervalued rating for Mosaic, and even though lower potash prices have eroded profitability the company still has a bright future. We reject the idea of investing on the basis of rumors, but we believe it is priced attractively so as to attract interest from bidders.
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