Sugar prices, which had been at a 30-year high at the beginning of this week, went through their biggest sell-off in 30 years on Thursday, November 11. That gives us a chance to pick up shares of Cosan (CZZ), Brazil’s big sugar processor and ethanol producer on the dip.
The company announced quarterly results on November 10—and those numbers should give you confidence that this is a company that can ride the ups and downs of this commodity
After the market close on November 10 Cosan SA Industria and Comercio, to give the company its full name, announced that profit for the fiscal second quarter of 2011 (which ended on September 30) climbed by 154% from the second quarter of fiscal 2010. Profit of 439 million reais (the plural for Brazil’s real), or $257 million, beat analyst projections of 221.3 million reais. Revenue climbed by 32%.
In August Cosan and Royal Dutch Shell (RDS) agreed to combine their sugar, ethanol production, and fuel distribution networks. Cosan will put in its 23 mills for crushing sugar cane, 1,730 gas stations, and eight power plants. Shell will contribute $1.95 billion and 2,740 gas stations.
Understanding the quarter is pretty simple. Cosan sold more sugar and more ethanol at higher prices. Sugar sales climbed by 43% in the quarter and ethanol sales by 62%. Cosan took advantage of higher sugar prices—sugar futures hit a 30-year high on November 11—by selling inventories stockpiled in the previous quarter.
Understanding Thursday’s drop in sugar futures is a little more complicated. Traders apparently took the granting of new export licenses by the government of the European Union as a sign to sell—even though the move had been expected for some time. In addition India’s agriculture minister said that the country’s sugar surplus in 2010-2011 could reach 3.5 million metric tons, up from an earlier projection of 2.5 million tons. India regularly swings from an importer of sugar to an exporter of sugar depending on weather. The New Delhi government hasn’t yet announced its quotas for sugar exports and even with the surplus there’s a good chance that India will authorize only limited exports. Soaring food prices have become a very hot political issue in India and the government could easily decide to keep more sugar at home as a kind of safety measure.
Now back to Cosan’s quarter. The company also got a one-time boost from the appreciation of the real. A higher real—and the currency was up 7% in the quarter—shaved the price of Cosan’s foreign debt when valued in reais. That gave Cosan a gain of 80 million reais in the quarter. Although that’s a one-time gain, these one-time gains have been very regular lately thanks to the steady appreciation of Brazil’s currency against the dollar. In the second quarter of fiscal 2010 Cosan gained 78.9 million reais from this same source.
The company’s guidance for the rest of the fiscal year that ends in March 2011 was less downbeat than it seemed. In a post-earnings release conference call Cosan said it will crush 4 million metric tons less of sugar cane than it had forecast in June 2010. (That’s would bring processing down to 54 million to 58 million tons.) Part of that is because of delays in getting two mills into operation. But part is due to a lack of rain that is cutting into Brazil’s sugar cane production. Although the weather-related reduction in crushing hurts Cosan’s volume, the expected drop in Brazil’s sugar cane production will support sugar prices. So less production, yes, but higher prices at the same time.
As of November 12 I’m adding New York traded shares of Cosan to Jubak’s Picks with a target price of $16 a share by June 2011.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this post. The fund did own a position in Cosan as of the end of its September 2010 quarter. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/