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Intrepid Potash: My Top 5 Pick, My Colossal Failure

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About: Intrepid Potash, Inc. (IPI)
by: Michael Wiggins De Oliveira
Summary

Sold Intrepid Potash, My Top 5 Pick Wednesday.

The guide posts that kept changing.

What did I actually learn?

Executive Summary

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.

Then in Q3 2019, after the $53 million acquisition of Dinwiddie Jal Ranch on May 1, and Q2 2019 earnings call confirmed that water selling started immediately:

[...] 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.

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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.