Don’t Overlook Mosaic’s Challenges—They Might Spark Opportunity

The Mosaic Company (NYSE: MOS) is a global potash crop nutrients and concentrated phosphates producer. These nutrients are crucial in agriculture to enhance soil health, boost crop yields, and feed the world’s growing population. While potash is mainly used in plant fertilizers, it is also used in animal feed, plant-based meat products, and industrial processes for the production of soap, glass, and various chemicals.  

Mosaic operates in the basic materials sector, competing with Nutrien Ltd. (NYSE: NTR), CF Industries Holdings Inc. (NYSE: CF), and ICL Group Ltd. (NYSE: ICL).

What Are the Key Benefits of Potash?  

Potash commonly refers to the natural salts containing potassium. It is usually mined from underground deposits that can be thousands of meters underground. These deposit ore beds are left behind by evaporated sea beds from millions of years ago. Pink or red ore is converted to a form like potassium chloride, and plants can easily absorb it. Potash is a crucial nutrient used in fertilizers. Some of the key benefits include: 

• Enhanced crop yields: Potash enables plants to build strong roots and stems, which improves plant health and higher yields.
• Improves Resistance to Disease: Potash can strengthen plants' natural defenses, which improves their ability to resist pests and diseases.
• Enhances Drought Tolerance: Potash helps plants regulate water uptake, making them more resilient to drought conditions.
• Enhances Crop Quality: Potash can improve the quality of vegetables and fruits by improving their color, taste, and size.

Mosaic Has Been Trying to Stabilize

Mosaic reported its second-quarter 2024 EPS of 54 cents, missing analyst expectations by 12 cents. Revenues also missed consensus estimates, falling 17% YoY to $2.82 billion versus $2.90 expectations.

The company expects grains and oilseeds stock-to-use ratios to stay low. El Niño is expected to shift to La Niña, which will create a favorable backdrop in India, Brazil, and Southeast Asia.

Nutrients remain affordable while corn and soybean fundamentals have softened. This bodes well for fertilizer demand. Demand in North America remains robust, and Brazil's in-season demand is solid due to concern over low stocks.

Operational Challenges Will Reduce Mosaic's Production Volumes

On Sept. 16, 2024, Mosaic announced a reduction in potash and phosphate production and shipping volumes due to operational challenges.

The Colonsay and Esterhazy mines in Saskatchewan experienced electrical equipment failures, which will reduce their third-quarter potential production and shipment volume by 200,000 to 300,000 metric tons. Weather events, including Hurricane Francine, have negatively impacted phosphate production and shipment volumes by 80,000 to 110,000 tons.

Supply Disruptions Could Lift Mosaic's Prices

Historically, fertilizer demand increases in the third quarter as farmers prepare their soil for the fall or the next planting season. If demand meets historical patterns, the reduced supply could apply upward pressure on prices. However, the fertilizer market has had ample supply, resulting in stable pricing. It's also an opportunity for competitors to increase their production to compensate for Mosaic's shortfall.

MOS Stock Could Be Forming a Bear Flag Breakdown

A bear flag forms following a sharp drop in the stock, forming its flagpole. The dead cat bounce forms the flag comprised of parallel ascending upper and lower trendlines. The bear flag triggers when the stock falls below the lower rising trendline.

MOS bounced near its 52-week low of $24.12 on Sept. 11, 2024. It formed a market structure low (MSL) trigger on the breakout through $25.39 and proceeded to form a flag comprised of higher highs and higher lows. On Sept. 20, 2024, MOS fell under the ascending lower trendline at $26.09. The daily MSL trigger at $25.39 is attempting to hold support along with the daily anchored VWAP at $25.77. The daily relative strength index (RSI) slipped to the 42-band. Fibonacci (Fib) pullback support levels are at $24.15, $23.20, $20.15, and $18.52.

Mosaic’s average consensus price target is $34.91, and its highest analyst price target is $48.00.  

If the bear flag breakdown triggers, bullish investors can buy on pullbacks using cash-secured puts at the Fib pullback support levels to buy the dip. The consensus price target has a 33% upside along with a tasty 3.29% annual dividend yield. If assigned the shares, writing covered calls at upside Fib levels executes a wheel strategy for income in addition to the dividend.