Intrepid Potash: A Very Promising Prospect But Beware Of Price Volatility (NYSE:IPI)

Investment Thesis

Intrepid Potash, Inc. (NYSE:IPI) and its subsidiaries mine and produce potash in the United States and globally. The company provides muriate of potash to the agricultural market as a fertilizer input, among other uses. Both supply chain constraints and price hikes have contributed to the potash market’s extreme volatility over the past year. The political unrest caused by the conflict between Russia and Ukraine and the inflationary environment sparked this tumult.

Despite these headwinds, IPI still managed to post solid financial results and return some cash to investors via share repurchase, demonstrating the company’s dedication to its stockholders and its resilience in the face of a challenging macroenvironment. Although the company’s shares plummeted by more than 65% over the last year, I believe the market ignored these companies’ fundamentals in their valuation and focused on the industry’s mayhem.

I think IPI is solid, so I’m bullish on the company for the long haul. The long-term tailwinds for this company that I will discuss later in this article include its profitability and revenue growth in a very challenging business environment; its commitment to ECG; the vitality of its fertilizer; and the company’s operating leverage, among others.

A Look At The Fertilizer Market

After a challenging 2022 marked by high fertilizer prices and supply chain constraints, it is essential to examine the current state of the market to assess the development of these headwinds. From their highs in early 2022, the fertilizer price has come down, but they are still well above average. Farmers have reduced fertilizer field applications due to price and supply concerns, so the price drop is at least partially attributable to weak demand. Supply-side problems, such as a European production crunch, disruptions caused by sanctions on Russia and Belarus, and trade limitations in China, all impact the industry.

Sanctions were placed on Russia and Belarus, two major fertilizer producers, after Russia invaded Ukraine in February 2022. Trade sanctions have “carve-outs” for the food and fertilizer industries to protect global food stability. Russia has been allowed to keep exporting fertilizers thanks to these exemptions. However, due to the prohibition on using EU land for transit, potash exports from Belarus have dropped by more than half. Lithuania has blocked potash shipment from Belarus through its rail network to the port of Klaipeda, which usually receives 90% of Belarus’ exports. This encapsulates the magnitude of the supply constraint the potash market faces.

China’s extended export restrictions on fertilizers to keep domestic availability have added to supply concerns. In the first ten months of 2022, exports of DAP from China, the country responsible for 30% of worldwide trade in DAP, dropped by nearly 50% (y/y). Meanwhile, during this time frame, exports of Chinese urea fell by roughly 60% year-on-year.

Based on these tendencies, the challenges from 2022 will continue into 2023. Although they’re challenges for the sector, I see them as huge opportunities for IPI’s short-term growth and prosperity. Supply shocks provide a market for the company’s expected increased production, and high prices were the driving force behind the increased revenues the company saw last year. This chaos strains the industry, which is good news for IPI as it offers them an exciting opportunity.

The company’s CEO is confident that demand for their products, particularly those used in springtime applications, will increase at the current price (which has decreased but is still significantly higher than average).

Bob Jornayraz,” As for where we stand today, potash pricing is back at levels where buyers are finding good value and we have seen a strong start to 2023 as farmers prepare for the spring application season. During the back half of 2022, fertilizer affordability was a primary concern for farmers. However, their economics today are very good, particularly in the context of where futures have been trading.”

Investment In IPI: Justification

In my opinion, IPI is a compelling option for investors not only because of its promising financial results in 2022, marked by rising sales and profitability. Here are the reasons why I believe it’s a compelling investment;

• Its Fertilizers are Vital
• High Operating Leverage
• Commitment to ESG
• No long-term debt
• Enhancing Unit Economics
• Management Stake

Vital Fertilizers: Potash is used in a wide variety of contexts; as a fertilizer, muriate of potash and Trio (a compound of potassium, magnesium, and sulfate) are indispensable. These fertilizers are used by farmers all over the globe, not just in the United States, to improve the quality and quantity of their harvests. Products like potash and Trio that can boost crop yields will be crucial for the world’s food supply as the global population is expected to rise to 8.5 billion by 2030. In other words, these fertilizers are almost a “no-do without” in agricultural production. As such, they serve as a long-term revenue generator for this business, as there are few substitutes for these fertilizers even if prices skyrocket.

High Operating Leverage: Investments in the commodity sector were slowed by the pandemic, supply chains are still experiencing widespread disruption, and the unrest in Eastern Europe has further clouded the outlook for potash supply, with as much as 25%-30% of the world’s supply being unavailable or uncertain. Because of this, current potash prices are higher than their recent average. Potash-intensive crops like maize, soybeans, wheat, and palm oil are currently trading at high prices, which support healthy farmer economics and sustained interest in our flagship offerings. When fertilizer prices are high and demand is stable, it can significantly affect a company’s bottom lines: more significant fixed costs, reduced variable costs, and lower royalty rates. IPI has a good chance of gaining access to these perks because of its high operating leverage. It’s comforting to know that IPI’s operating leverage is greater than 10X.

ESG Commitment: Solar solution quarries in Carlsbad, New Mexico, Moab, Utah, and Wendover, Utah, provide all of Intrepid’s potash. Mining with solar solutions is a risk-free, low-cost, and eco-friendly option. Intrepid’s potash is crystallized from solar energy as the brine evaporates from surface ponds, with the water they use also being returned to the atmosphere, in contrast to conventional underground potash mining, which can require a significant amount of energy produced from hydrocarbons to mine the potash ore and recover the potash. Using solar solutions for mining lowers the amount of human labor and energy used in mining. The benefit of solar evaporation is accentuated in times of high inflation, rising labor costs, and disrupted supply networks, which describes the state of the macroenvironment right now. High operating leverage and a dedication to environmental, social, and governance [ESG] practices help make IPI viable in the face of rising production costs brought on by rising oil prices. The two together are reducing manufacturing costs and increasing profits for businesses.

No long-term debt: It is unusual for a natural resources company like Intrepid to have no long-term debt on the balance sheet. This safeguards the business during downturns and positions it to capitalize during booms. Having no outstanding debt also frees up money for investment in expansion or distribution to stockholders, something IPI is currently doing. They are scaling up production while returning cash to shareholders through share buybacks.

Enhancing Unit Economics: Against the backdrop of robust cash flow, Intrepid is putting money into a number of high-yield, organic growth initiatives. Its Carlsbad East Langbeinite mine in New Mexico has been running additional shifts, and two new continuous miners are scheduled to arrive within the next few quarters. They are installing a new injection pipeline at the HB Solar plant to sustain increased flow rates and expand underground brine storage. Permitted, engineered, and ready to dig another cavern in Moab, Utah, while upgraded brackish and deep-brine wells in Wendover, Utah, will increase output beginning this year. The primary goal of these expansion plans is to benefit from an extended time of higher commodity prices, which will boost their per-ton production costs, margins, and cash flow in the future.

Management Stake: By March 22, 2022, Intrepid’s management and board of directors held roughly 18% of the company’s common shares. This ownership shows that the insiders own a substantial share of the company, and thus they share the plight of the other shareholders and will be committed to giving the best for the company’s success.

Bottom Line

Although IPI operates in a tough market, the company can transform the current headwinds into opportunities thanks to its competitive advantages. I think the company’s solid fundamentals will lead to an upward trend in the stock price over the long term. As a result, I rate the company a buy. Still, since its revenue and profit are highly dependent on prices, potential investors should invest cautiously due to the market’s price volatility.