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OCI Resources LP (NYSE:OCIR) is offering 5,000,000 of its common units in the price range of $19.00 and $21.00 per common unit. Post offering the company intends to pay the minimum quarterly distribution of $0.5000 per unit ($2.00 per unit on an annualized basis). The expected listing date is 13 Sept. 2013 on NYSE. (Source: IPO prospectus)

Business overview:

The company is a limited partnership formed by OCI Holdings to operate the trona ore mining and soda ash production business of, OCI Wyoming. The company owns a controlling 40.98% general partner interest and 10.02% limited partner interest in OCI Wyoming. The company's facility has been in operation for more than 50 years.

Industry Overview:

Soda ash is an essential material in the manufacturing of several products, including flat glass, container glass, detergents, chemicals, paper and other consumer and industrial products.

The chart below shows soda ash consumption by end market (by volume):

"The global soda ash market in 2012 was approximately 59.4 million short tons in terms of volume, according to IHS. IHS estimates total global nameplate manufacturing capacity for 2012 at approximately 65.4 million metric tons (equivalent to 72.1 million short tons). According to IHS, global demand for soda ash grew 2.8% annually over the last five years and is expected to grow 5% annually through 2017, primarily as a result of growth in demand in China. IHS estimates that the seven largest global soda ash producers represent 39% of the total global soda ash production by global nameplate capacity." (Source: IPO prospectus)

The chart below shows the global capacity, demand and operating rate for soda ash industry:

Investment theme/thesis:

The company is a limited partnership. So, most of the free cash generated by it will be distributed among its unit holders. I would like to enter the company at offer price due to:

  1. Cost advantages of producing soda ash from trona.
  2. The company's strong safety record.
  3. The long-term visibility of its business.
  4. Growing demand for soda ash.
  5. Valuations and attractive payout (10% pre tax yield).

1. Cost advantages of producing soda ash from trona:

Soda ash can be produced from a mineral called trona or synthetically through chemical processes. Approximately one-quarter of global soda ash capacity is produced from trona ore, with the remainder being synthetic soda ash produced through chemical processes.

The manufacturing and processing costs for producing soda ash from trona are more cost competitive than other manufacturing techniques partly because the costs associated with procuring the materials needed for synthetic production. In addition, trona-based production consumes less energy and produces fewer undesirable byproducts than synthetic production. The average cost of production per short ton of soda ash (before freight and logistics costs) from trona is approximately one-third to one-half the cost per short ton of soda ash from synthetic production.

The company produces its soda ash from trona. Due to the cost advantages associated with trona base soda ash manufacturing process, in the future, the company should withstand the pricing pressure much more effectively as compared to the other producers and should perform reasonably well in the difficult/competitive business environment and during adverse economic conditions.

The chat below shows relative soda ash production costs by process (multiple of trona based production):

2. Strong Safety Record:

Mining is considered as one of the most dangerous industries. According to the Bureau of Labor Statistics, "Mining had the second-highest fatal injury rate among industry sectors, behind only the agriculture, forestry, fishing and hunting sector. The fatal injury rate for mining was more than five times higher than the figure for all private industry (3.6 fatal injuries per 100,000 full-time workers)."

The total of 172 workers were killed on the job in the mining industry in 2010, 155 in 2011, and 177 in 2012. Nonfatal occupational injuries and illnesses were much higher.

Soda ash production from trona involves a lot of mining work. Trona is the naturally-occurring soft mineral found at depths of 800 to 1100 feet, or more, below the surface. Trona is extracted from these depths normally through underground mining. The company holds an outstanding track record for safety, and the occurrence of workplace injury at its mines is among the lowest in the U.S. mining industry. According to the company:

"We have Our tradition of excellence in safety has been recognized by the Wyoming State Mine Inspector, which has awarded us its Safety Excellence Award for five consecutive years from 2008 to 2012. We also received three consecutive safety awards from the U.S. Industrial Minerals Association of North America and the Mine Safety and Health Administration from 2009 to 2011. In addition, the safety performance of our facilities, as measured by the number of citations, recordable injuries and lost work day injuries and accident incident rate, significantly exceeds that of our peers in the Green River Basin over the last five years, according to the Mine Safety and Health Administration." (Source: IPO prospectus)

The safety of the workers is one of the key needs for the sustainability of these mines in the long-run, as any mine considered unsafe for the workers is most likely to be shutdown. The past mine safety record of the company shows quality of the mines, which will be one of the most important and strongest factors behind the long-term sustainability of the company's mining operations.

3. The long-term visibility of its business (for proved and probable reserves see the table above):

The company holds enough proved reserves of trona to operate for another 33 years (if the company extracts the trona at the current rate). Further its probable reserves, if proved, will further allow it to operate for another 35 years.

The table below shows the amount of trona extracted by the company during the periods indicated:

(click to enlarge)

The following table presents its estimated proven and probable trona reserves as on March 31, 2013:

(click to enlarge)

These huge trona reserves should make it sure that the company will run its operation for the decades to come, and provides the long-term visibility for any potential investor.

4. Growing demand for soda ash:

The future profitability of the company depends upon the soda ash prices. Soda ash prices fluctuate according to the demand supply situation in the global market. Soda ash prices showed a lot of fluctuation in the past (see the chart below), and likely to behave as such in the future.

(click to enlarge)

The demand for soda ash is expected to grow 5% annually through 2017, but the capacity addition is expected to grow at a CAGR of about 4.5% from about 71 million short tons to about 90 million short tons, during the same period. The chart below shows the expected capacity addition in the years to come:

5. Valuations:

Yield:

The company intends to pay minimum quarterly distribution of $0.50 per unit ($2 per annum i.e. 10% taxable return at offer price of $20). Yield is attractive by any standard.

PE ratio:

At $20 per unit, the company's valuations stand at $399 million, this means the company is available at PE of about 7.6x (expected FY 2014 income of $52.12 million (for 51% share) with no tax payable by the company).

Risks:

The main risks associated with the company are:

  1. Fluctuation in soda ash prices.
  2. Govt. regulations.
  3. Mining lease related.
  4. Rise in production cost.
  5. Tax complications.

1. Fluctuation in soda ash prices:

Soda ash prices tend to fluctuate due to various factors like: economy, capacity additions, etc. Though the company is one of the lowest cost manufacturers of the soda ash, but still any steep decline in soda ash prices due to economic slowdown or over capacity will affect it negatively. Its average sales price decreased 10.8% to $177.00 per short ton for the six months ended June 30, 2013, as compared to $198.40 per short ton for the year ended June 30, 2012 due to the lower global demand that results for uncertain economic conditions in Europe and emerging economies. This decline in prices shows the relation between soda ash prices and global economic conditions.

2. Govt. regulations:

Due to its dangerous nature, the mining industry, particularly underground mining, it is one of the most regulated industries. The regulations are becoming tougher due to the safety and environmental concerns. The company will have to comply with the present and the future regulations which may lead to additional cost for its mining operations, lower production from mines, or even closure of its mines earlier than expected.

3. Mining lease & royalty:

The company is a party to nine mining leases and one license, which gives it subsurface mining rights, it also pays royalties (6-7%) for the said mining leases. Any increase in the royalty rates, or any failure by it to renew any of its leases and license, could have a material adverse impact on its results of operations and financial condition.

4. Rise in freight and energy costs:

Freight and energy costs form major part of the company's operating expenses. Any steep rise in these costs without the corresponding increase in prices of soda ash will affect the company negatively.

5. Tax complications:

Any investment in the units of a limited partnership company is vastly different from any other investment in normally traded financial instruments (shares), as far as tax treatment is concerned. Investment in a limited partnership may cause some tax-related complications for a new investor. As mentioned in the IPO prospectus:

"Each of our unitholders will take into account its respective share of our items of income, gain, loss and deduction in computing its U.S. federal income tax liability as if the unitholder had earned such income directly, even if we make no cash distributions to the unitholder."

Conclusion:

The company operates in soda ash industry. The fortune of the industry depends upon the global demand supply situation, which itself depends on things like: economy, capacity addition, etc. The company is one of the largest and lowest-cost producers of soda ash in the world as it produces the soda ash from trona, the most effective way to produce soda ash, further within trona based soda ash producers it is one of the most cost effective miner of trona due to the location and quality of its trona mines. Risks are there, but the company is much better equipped to counter these risks as compare to much of its competitors.

The intended $2 payout (per unit) is an excellent yield for any investor. I would like to enter the company at offer price. The company makes a strong base for long-term, attractive yield, portfolio investment.

Disclaimer: Investments in stock markets carry significant risk, stock prices can rise or fall without any understandable or fundamental reasons. Enter only if one has the appetite to take risk and heart to withstand the volatile nature of the stock markets.

This article reflects the personal views of the author about the company and one must read offer prospectus and consult its financial adviser before making any decision.

Source: OCI Resources: 10% Yield And Excellent Long-Term Visibility