Intrepid Potash: Why am I buying into this company?

10 min readMay 31, 2022

Is it the right time to buy Intrepid Potash now?

Investment Thesis

Commodities have outperformed the market year to date which also provide a diversification opportunity in a rising inflation environment. Raw materials are currently in short supply with ongoing pending demands. Amongst all the commodities, agriculture nutrients are a necessity for crop yields.

Intrepid Potash Inc last recorded prices for Potash and Trio in Q1 2022 reached approximately $703/ton and $469/ton respectively. Both prices are up 141.13% and 101.29% from the year before respectively. Moving forward, prices are expected to reach $720/ton — $730/ton and $480/ton — $490/ton for Potash and Trio respectively in Q2 2022.

In terms of operations, IPI has a lower operating cost in how they obtain potash which is via their solar evaporating solution facility. This would mean lesser natural gas (which is rising in prices) required in obtaining potash.

Potash is amongst the three key nutrients required in agriculture as mentioned. Compared with nitrogen and phosphorus, potassium does not require additional chemical conversion to be used as a plant nutrient — the end product.

The ongoing supply chain disruption, rising commodities prices and geopolitical tension have resulted in an environment with a constant demand for fertiliser but a lower supply of them. This provides an opportunity for IPI to be selective in their market participation to yield the highest sales/ton.

Macro Perspective

Outlook

CRB Index and S&P GSCI Index have risen by approximately 35.45% and 42.66% respectively since the beginning of 2022. Corn and Soybeans have reached a price level not seen since 2012. Wheat has already surpassed their historical high for multiple reasons such as Russia — the world’s top exporter, could terminate exports of wheat in retaliation to the recent sanctions imposed. Additionally, India which has the potential to ease global shortage is considering export restrictions due to yields from their local harvest. Cotton and Coffee have reached a price level not seen since 2011.

The pandemic has resulted in supply chain disruption and has contributed to other issues faced within the agriculture industry. Labour shortage due to the pandemic has hindered agricultural production as well as packaging and transportation. Climate change has also become an issue for many farmers as their yields are being affected. These two factors alone have driven the prices of commodities up before the conflict between Ukraine and Russia.

Geopolitical Tension

The conflict between Ukraine and Russia has pushed the already rising commodity price higher, worsening the situation. Western sanctions on Russia, which is a major exporter of key fertilisers such as Urea, Potash and Ammonia have resulted in rising prices. The increasing fertiliser prices have put upward pressure on agriculture commodity prices. Both Belarus and Russia account for approximately 40% of global potash demand.

Belarusian potash miner accounts for a large volume of global potash supply and has declared a force majeure that was reported in late February. Belarus exports approximately 10–12 million tons annually, accounting for approximately a fifth of the global supply. They mainly export to Brazil, India and China. Belarusian potash accounts for approximately 7% of US demand. The US imports approximately 93% of the potash from other countries with Canada being the primary source.

In addition to the fertiliser prices, we have agriculture prices going up. Both Russia and Ukraine account for approximately 30% and 20% of global wheat and corn exports respectively. Both food and energy price shocks from the Ukraine war are likely to last for years. This spurs global food inflation which translates to food security which we will cover next.

Commodity Market Outlook report, The impact of the war in Ukraine on Commodity markets: Link.

Food Security

Global food security has become a rising concern for many countries. Higher fertiliser prices with/or shortage of supply lead to higher agriculture prices and ultimately higher food prices.

Global Report on Food Crises 2022: Link.

UN Secretary-General Antonio Guterres said on Wednesday (4th May) — “that the problem with global food security cannot be solved without restoring Ukrainian agricultural production and Russian food and fertiliser output to the world market.”

Hunger has been trending upwards even before the pandemic. Since the pandemic, 83 countries have shown a significant reduction in food consumption. Furthermore, data has shown a significant increase in the number of individuals facing acute food insecurity in 2021 from 2020. Approximately 161 million people experienced a “crisis” level of acute food insecurity in 2021, a 4% increase from 2020. And, 227 million are facing a “stressed” level of acute food insecurity, one step away from the “crisis” level.

At present, a report has indicated that more than 2 million adults in the UK cannot afford to eat daily. Approximately 1 in 7 adults has to cut back or skip over the first three months this year. 13.8% of UK households experienced food insecurity in April and 4.6% have gone a whole day without eating. This is the result of soaring energy, food and petrol prices.

Fertilisers

Nitrogen, Phosphate and Potassium are the main 3 primary fertilisers used by the agriculture industry. They are essential in agriculture, ensuring proper maturation in a plant’s health, and root strength, building resistance against diseases and climate changes and increasing yields. Without them, it is estimated by scientists that 35% of the world would face severe food shortages.

Nitrogen allows a healthy development of the crop’s growth as they are a major component of chlorophyll which enables photosynthesis. Nitrogen is essential in the formation of protein which is made up of tissues that are present in most living things.
Phosphate or phosphorus ensures optimal growth and maturity of the crop. It helps with the photosynthesis process and provides the crops with the energy to extract nutrients from the soil.
Potash or potassium helps the crop by strengthening the ability to resist disease and harsh weather conditions. It provides additional yield and improves the overall quality of the crop.

In the case of Potash, there are 7 uses for them. Fertiliser is of them one of the three main fertilisers mentioned. The remaining 6 includes animal feed, food products (additives), soaps, water softener, deicer (to clear snow) and glass manufacturing.

Business overview

Business Segments

Potash accounts for approximately 48.17% of Intrepid revenue in 2021. Operationally, they are obtained and mostly sold in the US. Approximately 78% of 2021 potash sales go to agriculture while 6% towards industrial (mainly O&G industry) and the remaining 16% to feed.

Intrepid obtain their Potash through a method known as solar evaporating which has a lower fixed cost per ton. Additionally, given the current macro environment, Intrepid has the upper hand in being selective in market participation in order to yield the highest sales per ton.

Production volume for Potash has reached 287,000 tons in 2021, slightly lower as compared to 2020 due to undesirable weather conditions. Sales volume has reached 331,000 tons, slightly higher as compared to 2020 sales volume. The average Potash sales price for 2021 is approximately $353 per ton. Quarterly, average Potash sales prices were $282, $319, $381 and $504 respectively from Q1 to Q4.

Trio accounts for approximately 33.71% of intrepid revenue in 2021. They are their speciality fertiliser which delivers potassium, sulphate, and magnesium in a single particle and has the added benefit of being low in chloride and can be used across diverse crops and geographies. 92% of Trio sales are conducted in the US and approximately 8% globally. They are obtained through conventional underground mines.

Production volume for Langbeinite or Trio has reached 228,000 tons in 2021. Sales volume has reached 239,000 tons in 2021, slightly higher as compared to 2020 sales volume. The average Trio sales price for 2021 is approximately $295 per ton. Quarterly, average Trio sales prices were $233, $271, $336and $388 respectively from Q1 to Q4.

Oilfield solutions segments account for approximately 8.42% of Intrepid revenue in 2021 an increase of 20% from the prior year. This segment is highly correlated to O&G activities.

Financials and Valuation

Financials

Intrepid has a market capitalization of approximately $883.87 million as of this writing. Revenue growth was only seen in 2021 as revenue has been declining since 2013. They are currently trading at an 11.82x PE ratio which is substantially lower than the industry average of 22x and their average historical multiples of 30.73x during their previous cycle.

Intrepid has announced an approved $35 million in share repurchase in Feb 2022. This is subjected to the market condition while adhering to security law. The management also has the say to suspend or discontinue the program anytime.

Q1 results and outlook

Intrepid has achieved the most profitable quarter since 2012. First-quarter revenue was $104.4 million, a 45.35% increase from the previous quarter. Operating margin and net income margin have reached 38.38% and 30.10% respectively.

The average sales price of Potash was $703 per ton in the first quarter of 2022, 149.29% higher compared to the prior year. Management expects the average sales per ton to reach between $720 to $730 in the following quarter. Prices of Potash in the US and Brazil are estimated to value at $800 per ton and $1200 per ton respectively.

The average sales price of Trio was $469 per ton in the first quarter of 2022, 101.29% higher compared to the prior year. Management expects the average sales per ton to reach between $480 per ton to $490 per ton in the following quarter.

Production volumes guidance for both fertilisers remain unchanged for the first half of 2022. Management has indicated an expected alleviated price level for the next 12 to 18 months based on the current macro environment. We are also expecting an improved cost per ton in the second half of 2022. Lastly, management has indicated their confidence in meeting all historical customers’ needs through flexibility in their operations and inventory management.

Intrepid has the liquidity to continue its operations, cash and cash equivalents are at $60.14 million in the first quarter of 2022. Additionally, their revolving credit facility has an additional $74 million for borrowing. They currently have zero debt obligations.

Valuations

Based on a conservation valuation approach. I have projected an approximately 30% revenue growth in 2022 for intrepid given the lack of fertiliser supply globally. Another factor for consideration is that we would only see a production improvement in the latter part of the year as mentioned by their management. Thirdly, there are many major players in the industry that deliver Potash such as Mosaic Co (NYSE: MOS) and Nutrien (TSE: NTR). I have utilised Multiples valuations and Discounted Cash Flow valuations to derive an intrinsic value of $115.77. This would provide an upside of more than 50% based on the closing price of $62.18.

Risks

Due to the increasing fertiliser prices, farmers are considering using fewer of them or growing crops which require lesser nutrients yet provide substantial yields or scaling back the amount of land they’re planting.

Secondly, if the conflict between Russia and Ukraine were to be resolved, we might see some correction in the prices of fertilisers.

Business Risk

Covid-19 pandemic impacts operations of Intrepid and companies supporting their operations such as transportation.
The cyclical industry is dependent on the commodity cycle.
A relatively competitive industry.
Their plans to expand their Trio business segment.
The weather which might hinder the production of potash
Compliance and regulatory related risk.

Industry Risk

Mining is a rather complex process and may face production disruption.
Mining is hazardous and is prone to accidents which may delay operations.
A capital intensive business may affect growth and profitability.

Financial Risk

The phasing out of LIBOR in 2022 and the switch to secured overnight financing rate (SOFR).
In 2021, they are under a revolving credit facility of up to $75million which expires in 2024.

Conclusion

Intrepid share price has soared 39.54% as compared to the SP500 Index which is down by 17.96% year to date (YTD). Based on their current earnings, if volume and prices for both Potash and Trio were to sustain, we are looking at approximately $162.24 million in income for 2022. This would allow us to purchase Intrepid at a forward PE ratio of 5.22x which is significantly lower than both the industrial and their historical range.

We are experiencing a substantial increase in commodities prices due to various factors such as geopolitical tension, supply chain disruption and the pandemic. Given the current macro outlook, Intrepid provides an attractive upside given the recent decline in their share price. Intrepid also provides a hedge in the current elevated inflation environment with further monetary tightening and possibly rising yield, offering a diversification opportunity.