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Intrepid Potash: Only Pure Potash Play in the Western World

Jan. 20, 2011 12:53 AM ETIPI
Michael Filloon profile picture
Michael Filloon's Blog
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Agricultural commodities like corn, wheat and soybeans have seen big increases in price since July. Fertilizer price increases have also been realized. Phosphorous, nitrogen, and potash have show good demand fundamentals. Since a farmer can get more for what he is selling (if he isn't hedged), he will pay more for tractors, fertilizer, and other items that will increase yield. Of the three nutrients in fertilizer I think potassium could be the winner. It is my guess in the intermediate to long time frames potassium will outperform both nitrogen and phosphorous.

Potassium is mined in the form of potash. Since increasing production of potash requires large capital expenditures, either through opening a new or expanding a current mine’s production, they generally have better ability to increase prices when inventories decrease. Generally, materials that are difficult to increase production will see faster price increases. The last time potash prices increased, it was very fast. There are several companies that deal in potash. Potash (POT), Agrium (AGU), and Intrepid Potash (IPI) just to name a few. I like all three of these companies, but like Intrepid more.

Intrepid Potash(IPI) is a potash only company. They are the largest United States producer of potassium fertilizer. They currently provide 1.5% of world demand and 9.4% of United States demand. Their five production facilities currently produce .9 million tons of potash and .2 million tons of sulfate of potash magnesia. They can increase production easily as their mines are operating at 85% to 90% efficiency. Their capital expenditures should provide an increase in production in the short term also. This coupled with their ability to increase price in the short term lead me to believe that they will be increasing company estimates. As of September 30th they had $126 million in cash and investments with zero debt. In 2010, Intrepid made $.52 per share. The estimate for this year is $1.52. Their last quarter they reported $.16 per share versus the street's estimate of $.10.

Intrepid has a large backlog of orders. Companies are stocking up on supplies of potassium for a couple of reasons. It is estimated there will be a very large application season this year. Since demand is high, Intrepid was able to delay booking of anymore rail deliveries, and sell all excess on the spot market. Potassium prices have increased. In the 3rd quarter of last year potash sold for $343/ton. The November 1st price was increased to $485/ton. The last time inventories were tight potash went to almost $900/ton in November of 2008. I expect going forward we will continue to see price spikes in potash. Since their are very few producers, and few deposits, any decreased production can cause a shortage. Potash production will need to be increased over the long term. Population growth creates more mouths to feed. Since there are very few countries that can increase farmland, many will be forced to apply more fertilizer to increase yield. With the world's middle class getting larger, there will be an increase in the world's need of crops. Historically, the middle class consumes more meat. For every pound of meat a person eats, ten pounds of grain are needed to feed the animal before it goes to slaughter. The ratio of farm land to the number of people has also steadily decreased since 1970. Since 1980, world grain production has increased 50%. The stock to use ratio has decreased almost 20% from 1984.

The fundamentals for fertilizer are strong this year. Potash application was low 2008-2009 planting season. The lower application and a very large crop depleted the stored nutrients in the soil for both 2009 and 2010 planting seasons. Application should be high on the base acres. Since supplies of many crops are low, farmers will bring out additional acres to farm. All of this could lead to a very large application rate for this year. Ethanol could also increase corn usage. When an economy comes out of recession they tend to use more gas. Going on trips, eating out more, or just shopping, families generally drive. The USDA states that ethanol will grow to 35% of all corn use. The CAGR of ethanol usage from 1999-2010 is 22.2%. If current ethanol mandates are met solely by the United States, an extra 200 to 400 million bushels of corn will be needed each year. By 2015, it is estimated total corn production will be 5.3 billion bushels.

There are several variables the distinguish Intepid Potash (IPI) from other players in the space. They are a pure play on potash and the only one in the western world. Intrepid also has attractive growth possibilities with better margins, with respect to their type of potash. Their location places them very close to states that use large amounts. When compared to their North American competitors, Intrepid averaged $151 more per ton in 2009. Their gross margin advantage over their competitors was $114. Every year since 2007, they have increased their gross sales price advantage. They serve three markets. The first is agricultural. The second is animal feed. Potash for animal feed is much cheaper to produce. The last is industrial uses for delivery to oil and gas companies. This part of their business constitutes 30% of sales. Almost all of this sector is done on the spot market and is needed right away. Spot prices are usually higher and sales are done quickly without contract. Intrepid is also decreasing costs and increasing productivity through capital spending . They have reinvested $300 million since 2000. Last year they invested in the company to decrease bottle necking. Their new compaction system will granulate 100% of the Moab mine as opposed to 40%. Intrepid is also in the process of expanding into the langbeinite fertilizer business. They are also expect increased utilization of their Trio brand fertilizer. Trio incorporates potassium, magnesium and sulfur. They believe they will have premium pricing power with respect to the Trio brand. Trio mine recoveries are expected to increase from 30%-35% to 50% this year. They are already working to decrease water usage. Their HB solar solution mine was done at half the price of current greenfield projects. Their production costs per ton are estimated to be $65 to $75. This mine will produce 150000 to 200000 tons per year. Fertilizer stocks are one of the three sectors I am bullish. I think this entire sector should outperform, but I like the fundamentals of potash much better.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in IPI, SQM, CMP over the next 72 hours.

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