5 Underlying Trends Supporting This Fertilizer Company
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Analysts adjust what they are guiding—as potash prices continue sliding.
Perhaps it’s time to start buy-buy buying?
The USDA expects farm-income in 2013 to be the highest in 40 years. Unless they lose it all speculating in the future’s market, farmers across the world will be using a portion of their earnings to put nutrients back into the ground.
Bottom Line: Analysts have already begun lowering their estimates. Only the die-hard potash bulls are still involved. Over the past two years, the hot-money has all but given up on the agricultural super-cycle.
5 Underlying Trends Supporting IPI:
1) HB Solar Solution Mine
Intrepid Potash (NYSE: IPI) has 5 active facilities, the 6th will increase production by 25%. When combined: potash will be produced from the sun’s energy, an idle potash mine, and a non-potable aquifer.
The HB Solar Solution Mine ramp-up is scheduled to look like this:
a) 2013 = a modest amount of production, beginning in November
b) 2014 = producing 100,000 to 150,000 additional tons
c) 2015 = ramping up to 150,000 to 200,000 tons
Intrepid expects / predicts a production cost of $60 - $80 per ton. While there are no guarantees, they believe they have 5 million tons in reserves.
Intrepid is 1 of 2 producers of “Langbenite” (sulfate of potash magnesia), a specialty fertilizer that contains potassium, magnesium and sulfate. They offer their product under the Trio TM and Intrepid Trio ® brands.
Dealers' and farmers' recognition of the added value of magnesium and sulfate from this specialty product has translated into higher prices in 8 consecutive quarters. Trio® has increased from $236 per ton in 2011 to $329 per ton in 2012.
Trio was selling for $347 per ton in Q4; production was 43,000 tons versus 28,000 in the comparable quarter. Intrepid expects to sell 100% of the Trio they produce in 2013.
3) Strategic Asset
Economic potash deposits are scarce, deep in the earth, and geographically concentrated.
Virtually all of the world’s potash is currently extracted from 20 commercial deposits. At present, many of the un-exploited deposits are in Argentina, Ethiopia, Congo, and Kazakhstan. When you think “politically friendly,” these are not the countries that come to mind.
Intrepid pitches itself as a “geographically advantaged” potash company. They’re good for about 9.4% of USA’s production. Intrepid’s close proximity to their largest customers has helped them become North America’s highest margin producer. Compared to their NA peers— Intrepid is making about 15% ($68) more per ton, for three years in a row.
4) India’s Crop Yields Suck
According to a Potash Corp. (NYSE: POT) presentation highlighting crop yields:
*tons of grain per ton of fertilizer
30 to 1 = US
25 to 1 = World
15 to 1 = India
Potash believes that pressure is building for India to take measures that will improve its crop yield; perhaps a change in subsidies. It’s positive spin, but softer potash prices have the potential to increase customer engagement globally. India consumed 6 ½ million tons of potash at the peak and 3 million tons in 2012. Potash Corp. is predicting a 50% increase in purchases from India this year—somewhere in the 4 ½ to 5 million range.
Credit Agricole estimates that every $10 drop in potash reduces POT’s earnings by $0.07. Canpotex most recent six month contract to sell up to 1.1 million tons at $400 is down from $520 in Q1 2012.
Ultimately, with Potash and Mosaic sending increasing amounts to India and abroad… Intrepid has more room to breathe in the US as International buyers return to the market.
5) The Food Story
Mosaic (NYSE: MOS) took the opportunity to remind analysts about the food story at Citi’s Basic Materials Symposium; and who better to tell that story than the company “Helping the World Grow the Food It Needs”.
Without crop nutrients, plants will not grow the way they do today. In fact, Mosaic’s Joc O’Rourke says that 40 – 60% of a crops overall yield is attributable to nutrients. With little to no new arable land being created, the world’s population will continue to rely on advancements in seed quality and a plentiful amount of crop nutrients to help put food on the table.
Mosaic shareholders should be aware that in May 2013 members of the Cargill family have the right to dispose up to 43 million shares of MOS. If they head for the exits, expect some softness in the share price.
Intrepid, weighing in at a mere $1.5 billion market cap is punching above its weight class when compared to heavyweights like Mosaic ($25 billion) and Potash ($35 billion).
Since 2007, Intrepid has invested $500 million into their facilities to improve evaporation rates, recovery rates, and operating rates. With the M&A market heating up… Intrepid would be an easy nutrient to digest for practically any player interested in securing a position in the potash game. CEO Robert P. Jornayvaz III does own a respectable 14% of Intrepid Potash— enough to lend confidence to passive investors and not enough to derail a takeover.
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