Sold Intrepid Potash, My Top 5 Pick Wednesday.
The guide posts that kept changing.
What did I actually learn?
Intrepid Potash (IPI) did not work out anywhere near what I expected.
I suspect that given enough time, it could have a strong potential, but given that one's returns correlate with the length of time invested, I'm calling it a day here.
I've lost confidence that over the next 12 months, Intrepid Potash could be valued at $1 billion market cap.
Was It Me? Was It Them?
Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks. - Warren Buffett
I don't wish to blame Intrepid CEO Robert Jornayvaz and his team. They tried to do the best they could with what they had.
But I do believe I was slightly led on. For example, this was the water guidance in Q4 2018:
For the full year 2019, [...] revenue of between $20 and $30 million
Then in Q2 2019:
We continue to expect total water sales for the year towards the high end of the $20 million to $30 million range.
[...] We expect to deliver total 2019 water sales of between $25 million and $28 million.
Wait, hold on? Even after the acquisition, the water guidance remains unchanged? That's odd. Then on the analyst day back in August 2019, this was highlighted.
Source: Slide 20
Similarly, this was shown at the same analyst day:
So I was not particularly interested in the potash side of the equation in Intrepid Potash, but I was interested in "significant growth in water".
During the Q3 2019 earnings call (yesterday),
Guidance for 2020 water sales between $32 million and $45 million.
Even if Intrepid's water sales hit $40 million for the year, that sort of growth (43%) is no way supportive of a company worth $500 million market cap, let alone $1 billion. Because this growth got a one-off bump from the Dinwiddie Jal Ranch.
If Water's Prospects Take Slightly Longer, What's Left?
Not much! Intrepid's premium potash product is called Trio.
Trio was supposed to be a high-quality and high-margin product. Yet, for whatever reason, it actually is priced significantly cheaper than the commoditized potash at $204 compared with the standard potash which is priced at $266.
What's more insightful is that not only is Trio priced cheaper than standard potash, but also compared with the same period a year ago, the gross margin loss from Trio is actually worse than the same period a year ago.
What About Cash Flows?
Again the same as the rest of its results, cash flow from operations came in at $6 million for Q3 2019 compared with $15 million in the same period a year ago.
Altogether, is this in any way indicative of a company that could be valued at $1 billion market cap anytime soon? I fail to see this as the case.
To be fair, cash flows from operations are on target to hit $50 million for the year. But then you have to factor in the expected ramp-up in growth capex next year, which is evidently not getting the sorts of returns on invested capital I would expect.
So, What Lessons Did I Learn?
If an investor is right 2 out of 3 times in the investment decisions they make, they would hit the ball so far out of the park, it would be amazing. - Mohnish Pabrai
I tell anyone that listens to me that to be a successful investor you are only going to be correct 6 out of 10 times. This means you are going to have a 40% failure rate. This is a fact. And that is if you are amazing.
Consequently, seeing as though failure is part of this business, I think that careful reflection needs to be part of the investors' tool kit.
Because avoiding losses is really the way to compound huge returns. As you know well, a 30% loss means next time you need a 43% gain, just to be able to start again! However, a 15% loss you only need 18% to start again.
So the game is really about minimizing losses rather than maximizing gains.
Succinctly said, I believe my biggest failure in Intrepid Potash was in believing in management's words of "strong cash flow" and "high-margins".
The Bottom Line
Again, I'm not blaming Jornayvaz, what else could he do? He had already taken a salary cut, taking home the lowest amount of cash amongst his c-suit executives:
Meanwhile, he had already spent several millions of dollars buying shares in the open market since 2017. Thus, I know that he has all the stakeholders' hearts in his mind, but ultimately I believe that my capital can be best deployed elsewhere.
When I first approached Intrepid Potash three years ago, the feedback from readers was at odds with my LONG thesis. I suspect that today, the feedback will once again be at odds with my own perception of this company. All the best to everyone.
***Marketplace members got an early view of this article.
Looking For Strong Returns?
By being extremely selective and investing in less popular companies, your chances substantially improve.
Investment strategy inspired by Buffett, Pabrai, and Greenblatt that can help you generate between 50% and 200% potential upside in just a few years, then sign up for your two-week free trial with Deep Value Returns today!
SKIN IN THE GAME: I'm always invested alongside you in My TOP 5 STOCKS!
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.