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This consumed a couple of weeks. Not sure why it was such a hard slog. Learning a lot about fertilizer though :)

Potash refers to various salts that are mined for the water soluble potassium that they contain. In historical times, pots full of ashes were washed to produce lye. The lye could be put in large iron pots and evaporated. The resultant white powder was called "pot ash". It was known to be an effective fertilizer for crops due to the potassium component.

In more modern times, potash has been found as mineral deposits left by ancient seabeds. Mines have been established to harvest potash from such deposits. Various extraction methods are used depending on the quantity of potash and the depth of the deposits. Potassium is also present in seawater but in very low concentration compared to the level of sodium.

While potassium is a very common element, it is highly reactive and is always bound with other materials forming compounds. Many of the compounds are very stable meaning that they cannot be broken down easily. Potash is water-soluble which allows the potassium to be easily extracted.

From an article


Strong potash demand for 2012 and beyond expected

Colleen Scherer, Managing Editor, Ag Professional | November 1, 2011

PotashCorp CEO Bill Doyle expects strong demand for potash throughout 2012 due to tight supplies, he said last week during the company’s third quarter earnings announcement. He said that potash production capacity was being constrained due to the uncertainty about other economic factors impacting farmers.

Potash inventories were run down as fertilizer purchases were put on hold until some economic stability could be seen. Doyle said those inventories will have to be restocked, and, given the soaring food prices this year, the farmers have the money in their pocket to buy the needed soil nutrients to ensure future crop strength.

As for demand past 2012, Doyle still expected tight supplies despite multiple countries announcing projected forecasts and increased production in recent weeks. China has said it would become potash independent by 2015, however, Doyle remained skeptical.

The following article does not pick Intrepid, but it should benefit for all the same reasons.


Two Top Stock Picks in Fertilizers

Credit Suisse likes Potash Corp. of Saskatchewan and Mosaic.

Despite the significant unease over the economy and European debt situation, agricultural fundamentals remain positive in our view.

Grain prices are still at profitable levels for farmers, and we see fundamental support for $5-plus per bushel corn prices looking out over the next one to two years. Demand is solid with record high U.S. ethanol production rates helping to offset sluggish U.S. corn export orders. Low inventory levels leave little cushion in the event of adverse weather conditions. At corn prices of $5 per bushel, farmers are incentivized to plant more acres and apply optimal amounts of fertilizer to maximize yields.

North American fertilizer stocks are more than factoring in potential downside risks. Given the economic uncertainty, distributors are exercising more caution and the lack of buying activity has lent a bearish tone to the market. Nitrogen prices have plummeted, and the Indians are requesting discounts on existing phosphate and potash contracts.

However, we anticipate volumes and prices will hold up better than the market expects due to favorable farmer economics, elevated costs for marginal nitrogen and phosphate producers, and strong industry discipline in potash. Based on valuations in the North American fertilizer sector, we estimate the market is pricing in 30% price declines and flat volumes for nitrogen, 30% price declines and 20% volume declines for phosphate, and 15% price declines and 20% volume declines for potash.

The risk/reward is most favorable for the potash and phosphate sectors in our view as the market is already factoring in overwhelmingly bearish scenarios.

-- Elaine Yip

Intrepid overview

Intrepid has only been a company for a decade. In 2000, it was formed for the sole purpose of acquiring a failing potash mine near Moab Utah –the Moab mine. The Moab mine was a solution mine and was experiencing sustained declining production.

The management team at the time stabilized production at twice the pre-acquisition levels by using horizontal drilling techniques. While we tend to think of this type of drilling as commonplace today, it was less so in 2000 and it had never been tried in a phosphate mine.

The company grew by acquiring other assets that shared the market for potash with Moab Utah. That led them to properties in Carlsbad, NM and Wendover UT. The close proximity of the mines to the markets offers operating synergies and consolidates marketing.

The company IPO’ed in 2008 by selling 34.5 million shares. There are 75 million shares outstanding. Part of the deal to come public involved exchanging stock for assets of the predecessor company. When the predecessor was dissolved the cash retained in it and the shares were distributed to its members.

Intrepid has one operating segment that mines and then produces potassium related products. The potash product goes to agriculture, oil and gas and animal feed.

Agricultural and animal feed uses are well understood, but the O&G use was new to me.


Fertilizers serve a fundamental role in global agriculture by providing essential nutrients that help sustain both the yield and the quality of crops. The three primary nutrients required for plant growthare nitrogen, phosphate and potassium, and there are no known substitutes for these nutrients. A proper balance of each of the three nutrients is necessary to maximize their effectiveness. Potassium helps regulate plants' physiological functions and improves plant durability, providing crops with protection from drought, disease, parasites and cold weather. Unlike nitrogen and phosphate, the potassium contained in naturally-occurring potash does not require additional chemical conversion to be used as a plant nutrient.

O&G application

In oil & gas, potash is used as a fluid additive to reduce the risk of swelling in clays in the formation. The positive benefit of potassium chloride in drilling and fracturing fluids has been well established in the oil and gas industry. The market for the industrial standard-sized potash used in fracture fluids is regional. The sale of frack fluid KCL is correlated with rig activity. Rig activity in NA is up lows in 2009 and back to levels at the IPO. To gauge demand and activity, the company follows rig count. Demand correlates with O&G prices and number of rigs working.

If rig activity and demand decline, Intrepid has the ability to change the standard size industrial potash to granular ag use.


This is a rather obscure product produced by IPI that has potassium, sulfur and magnesium. It is only produced in small quantities by IPI and MOS. It sells for far less than potash and the margins are thin. I have a question into the company why they continue to invest in it. It is a small part of overall production. They sold 159,000 tons of it in 2010 compared to 810,000 tons of potash fertilizer.

Langbeinite, also known as Sul-Po-Mag or K-Mag, occurs as a natural mineral. This soluble mineral fertilizer will not alter soil pH. It is a natural source of potassium, sulphur, and magnesium in a fast acting form. Potassium aids in the formation of carbohydrates (sugars and starches), improves quality of fruits and vegetables, and stiffens plant tissue by balancing resistance to disease and cold weather. Magnesium is the key element in chlorophyll formation. Sulphur is vital to plant life, it is a component of amino acids, which form proteins when hooked together. The combination of potassium, magnesium, and sulphur make Langbeinite an important fertilizer Langbeinite, a low-chloride source of potassium, is produced by Intrepid and Mosaic from the only known langbeinite reserves located in the Carlsbad, New Mexico region.

The demand for langbeinite has been limited due mostly to its limited supply and availability. It is difficult to determine how the supply, demand and pricing for langbeinite will develop.

Furthermore, additional competition in the market for langbeinite and comparable products exists and may increase in the future. A German company is currently producing a low-chloride fertilizer similar to langbeinite, and Chinese producers are working on a project to synthesize langbeinite from brines, with a goal of producing significant amounts. Intrepid’s plan is to sell in China to create growth for the product.

Potash sources, producers and moat

KCL pricing:

Potash is mined either from conventional underground mines or, less frequently, from surface or sub-surface brine from aquifers.

According to the International Fertilizer Industry Association and data published by potash mining companies, six countries accounted for approximately 89% of the world's aggregate potash production. The top seven potash producers supplied approximately 76% of world production. Five of the top ten producers are further concentrated into two marketing groups, which together supplied approximately 57% of global potash production.

Virtually all of the world's potash is currently extracted from approximately 20 commercial deposits, and the most recently constructed operating mine in the world was opened in 1987. There are substantial challenges to adding new potash production because economically recoverable potash deposits are scarce, deep in the earth and geographically concentrated. A further challenge is that the majority of unexploited mineralized deposits of potash existing outside the Canadian province of Saskatchewan are located in remote and/or politically unstable regions such as the Congo, Thailand, and Argentina.

With potash deposits concentrated in only a handful of countries (mainly Canada, Russia, and Belarus), potash production is also highly concentrated. The top seven potash makers control about 80% of global production capacity, led by Potash Corporation of Saskatchewan (POT).

Potash Corp estimates it takes seven years to fully develop and ramp up a greenfield potash project, several years longer than new projects for phosphate and nitrogen -- a measure of clarity for medium-term supply. The factors lead to an industry with some barriers to entry [unlike nitrogen]and something of a moat. A new mine consumes $4 billion to start up.

The potash industry benefits from lower raw material cost volatility when compared to phosphate and nitrogen. While moves in energy and labor costs have an impact on cash costs of production, the process to take ore out of the ground and make potash fertilizer does not require major purchases of additional feedstocks from third parties.

Recent oil and ag history

The reason corn is such a good indicator for the direction for fertilizer prices is the biofuel connection. Biofuel consumes a lot of corn and not wheat or soy beans. As demands for fuel decline, fertilizer demand also slackens. That holds true for its use in drilling also and IPI sees a double whammy when fuel demand drops and drilling activity is down.

After the highs in 2008, both agricultural and energy applications stalled. Rig counts dropped off a cliff. IPI was selling at $68 per share in late 2008 and potash was running up to high prices of over $870 per ton in 2008 and early 2009. As the recession set in, it didn’t take long for potash to get cut in half and it bottomed at around $300 in mid-2010 before making a slow recovery to around $470

The rebound in the potash market in 2010, contrasted with the below average demand levels that the industry experienced beginning in the fall of 2008 and continuing through most of 2009. Demand for potash began to decline in the fall of 2008 and persisted through much of 2009, due primarily to the interaction of historically high potash prices and the economic backdrop of falling prices for agricultural commodities. Variability in other input costs for the farmer, as well as uncertainty resulting from the recent U.S. and global financial market crisis and recession, were also contributing factors.

Ag demand in 2010 for potash was at its lowest level in the last 30 years and was driven by farmers who elected to apply potash at lower rates than historical application rates as well as fertilizer dealers' unwillingness to take inventory price risk by holding inventory. As the soil drops below 100-200 ppm, replacement potassium is a must. A recommended schedule lasts over 4 years. If there is soil depletion [and it would seem there is], 2012 and 2013 should see stable demand.

During this same period, standard-sized potash also declined from historically normal levels due to a decrease in oil and gas drilling and the delay in completion of oil and gas wells that was caused primarily by lower oil and gas commodity prices. Demand for standard-sized potash was also impacted by some drillers using alternatives to standard-sized potash or attempting to forego the use of potash altogether in drilling and completing their wells in an effort to reduce costs.

Prior to 2009, the global potash industry operated at or near the highest production rates during 2007 and much of 2008. As a result of increasing demand and tight supply during 2007 and a large portion of 2008, potash prices increased rapidly. At one point in 2008, prices were around $900 per ton.

Beginning in late 2008, the global financial crisis resulted in rapid declines in the price of corn, oil, nitrogen and phosphate fertilizers, and several key crops, that created uncertainty for farmers regarding their input costs and revenue potential heading into the 2009 planting season.

This uncertainty persisted for much of 2009, resulting in a decline in the demand for all fertilizers as farmers waited to see how the markets for crops would unfold and sought to reduce their variable costs. A number of global potash producers independently responded to the decrease in demand by curtailing production during 2009. The selling price for declined steadily to match market demand throughout much of 2009.

In the United States, demand for potash increased in the fourth quarter of 2009 and continued throughout 2010, based largely on weather that was conducive to harvesting and fertilization of soil.

Fertecon Limited, a fertilizer industry consultant, expects global potash consumption to grow approximately 7.6% from 2010 to 2011 and then by 4.2% annually from 2011 through 2015. Following the contracted potash consumption during 2009, driven primarily by returning global demand for agricultural commodities, that in turn is driven by the demand for food and alternative energy sources.

As populations grow, more food is needed from decreasing arable land per capita, requiring higher crop yields and, therefore, more plant nutrients.

As incomes grow in the developing world, people tend to consume more animal protein, which requires larger amounts of grain for feed. In addition, the U.S. desire for increased renewable energy and associated energy concerns have resulted in policies supportive of ethanol and bio-diesel production, which currently rely on agricultural products as feedstock.

Strengths of Intrepid

Intrepid as a potash only producer has combined margins that are at times slightly better than Mosaic. Phosphate margins are much lower than potassium [requires expensive feedstocks].

U.S. potash-only producer --- the largest producer of potash in the U.S., the second largest potash-consuming country in the world. As a dedicated potash producer and because potash prices have historically been subject to less volatility than prices for other fertilizers

The costs to mine and produce potash are relatively fixed and stable, whereas the costs to produce other fertilizers have significantly greater exposure to volatile raw material costs, such as natural gas used to produce nitrogen and sulfur used to produce phosphate products.

As a U.S. producer, the total production tax and royalty payments are lower than operators in Saskatchewan, Canada.

The Saskatchewan tax system for potash producers includes a capital tax and several potash mineral taxes, none of which are imposed on us as a U.S. producer.

This relative tax and royalty advantage for U.S. producers becomes more pronounced when profits per ton increase due primarily to the profit tax component of the Saskatchewan potash mineral tax

Assets are located near the primary customer base. Geograhic location allows them to target sales to the markets that have the greatest transportation advantage. Strategic rail destination points and locations along major agricultural trucking routes create the advantage. That applies both to ag and O&G.

The average net realized sales price per ton advantage over primary Canadian competitors was $61, $151, and $88 per product ton of potash for 2010, 2009, and 2008, respectively.

The calculations are based on the average net realized sales price for Potash Corporation of Saskatchewan Inc., The Mosaic Company, and Agrium Inc. for muriate of potash only.

Significant reserve life and water rights---- IPI potash and langbeinite reserves each have substantial life, with remaining reserve life ranging from 28 to 158 years, In addition they have valuable water rights and access to significant mineralized deposits of potash for potential future exploitation.

Proven and probable reserves
Years Probable
Product mine reserve tons tons
Muriate of potash
Carlsbad west underground 158 224,970 133,180
Carlsbad east underground 58 70,990 59,750
Carlsbad HB solution 28 15,400 710
Moab solution 125 16,010 14,770
Wendover brine evap 30 - -
Sulfate of potash magnesia
Carlsbad east underground 65 74,950 93,980

With IPI’s relatively long-lived proven and probable reserves, the company will not spend on exploration in the next 5 years. The focus will be on development of the conventional underground
Development of the solution mine and brine evaporation facility are expected to be enhanced by the drilling of additional wells.
Development of the idle North mine, previously operated as a conventional underground mine, is under consideration. They have invested significant capex to modernize and improve the plants and equipment.

Solar evaporation operations-- the Moab mine and the Wendover facility, both located in the Utah desert, utilize solar evaporation to crystallize potash from brines. Solar evaporation is a low-cost and energy-efficient method of producing potash.


Carlsbad, New Mexico

Sylvite and langbeinite ore at our Carlsbad locations is mined from a stacked ore body containing at least 10 different ore zones, seven of which contain proven and probable reserves.

The West mine has a current estimated productive capacity to produce approximately 420,000 tons of red potash compactor

East mine has a production capacity of 250,000 tons of white potash and approximately 200,000 tons of langbeinite annually

Moab, Utah

Potash ore is mined from two ore zones: the original mine workings in Potash 5 that were converted to a solution mine and the horizontal caverns in Potash 9.

The Moab mine has production capacity of approximately 100,000 tons of potash annually.

Wendover, Utah

Potash at Wendover is produced primarily from brine containing salt, potash and magnesium chloride that is collected in ditches from the shallow aquifers of the Bonneville Salt Flats. These materials are also collected from a deeper aquifer by means of deep brine wells.

The Wendover facility has a 100,000 ton capacity

Business in 2011, 2010 and 2009

Sales volume recovered from a slow 2009 to 810,000 tons of potash and Trio® sales of 204,000 tons. Agricultural demand returned to more normal levels compared to the low demand in the fall of 2008 and through most of 2009. The demand for fertilizer began to recover in late 2009 and continued in 2010 with increases in sales volumes for the spring application season and the fall planting season compared to those that occurred in 2009 [note the two planting seasons requiring product—- high demand this fall depleted stocks and presumably distributors will be restocking in early 2012 for spring]

However, fertilizer company prices have been dropping as the USDA revised storage numbers and yields up. FWIW, Mosaic disagrees with the implications of storage and yield and feels we are at 30-year lows for use vs. storage.

Here is the USDA revision:

The government unexpectedly increased its projection for U.S. corn supplies prior to the next harvest and said global production of the grain probably will reach an all-time high the coming year amid stronger crops in Canada, China and Europe. Domestic corn stockpiles at the end of the 2011-12 marketing year in August are expected to total 848 million bushels, the U.S. Department of Agriculture said in its monthly Supply and Demand update Dec. 9.

Foreign corn production is expected to be up 43.4 million tons from 2010/11. China 2011/12 production is raised 7.3 million tons this month based on the recently released estimate from the National Bureau of Statistics. Slightly higher area and a 3 percent increase in yields from the previous forecast boost this year's crop to a record 191.8 million tons. This year's yield estimate is up 3 percent (3 bushels per acre) from the previous record in 2008/09 and up 9 percent (8 bushels per acre) from the recent low in 2009/10.

Weather was generally favorable for this year's crop; record yields were reported despite summer conditions in the northeast growing areas that were somewhat warmer and drier than in 2008/09.

Farmers will reap a smaller wheat crop for a third consecutive year in 2012, and less corn for a second year, the USDA estimates. The nation's wheat exports are down 22 percent from a year earlier at 18.1 million tons, a sign that this year's record farm income of $100.9 billion predicted by the USDA may not be repeated next year.

Corn and soybeans prices are tumbling after farmers throughout the world responded to record-high prices by planting more crops. Combined output of wheat, corn and soy will jump 3.4 percent to a record 1.8 billion tons this season, 32 percent more than a decade ago, the USDA said last month. Wheat fell 25 percent to $5.95 on the Chicago Board of Trade this year, heading for the biggest annual drop since 2008.

The USDA report didn't forecast a massive drop in corn prices, but did say that average prices will be in a range between $5.90 and $6.90 per bushel, about 30 cents per bushel lower than projected last month. High corn prices have fueled a 28 percent rise in farm incomes this year and a farm land boom in Iowa, pushing up prices by more than 30 percent in the last 18 months. This week a sale in Sioux County produced a $20,000 per acre bid, a record for Iowa. Corn prices fell 8 cents per bushel to $5.92 for March delivery and soybeans were off 23 cents per bushel to $11.09 for January delivery on the Chicago Board of Trade Friday morning after the U.S. Department of Agriculture Friday said that world supplies of corn will be larger than projected earlier.

Crop prices moved up significantly during the second half of 2010 due to increased demand for grains worldwide as well as downward revisions in crop yields by the United States Department of Agriculture resulting in predictions of decreased world grain stocks from 198.2 million metric tons for 2010 to 158.8 million metric tons for 2011. Now that production has reached 191.8 million for 2011. Mosaics argument is that use will likely offset that production gain and storage will be low.

Potash prices began to climb in late September 2010 through the fourth quarter of 2010 as a result of the higher demand levels throughout the fall, the low inventory levels of potash available in the U.S. distribution channels and the overall strength of crop prices. Farmers were also concerned about the risk of yield losses resulting from large cuts in fertilizer applications during the prior two growing seasons and therefore attempted to replace the nutrients removed from the soil. That may still be a factor going forward as high yield strip potassium out of the fields and it needs to be replaced in the fall and spring

Oil and gas

Industrial demand for standard-sized potash increased in 2010 over 2009 – a 19% increase in sales volumes It did not compare to the boom seen in 2007 and 2008.

Some drillers have switched to alternatives to standard-sized potash or have attempted to forego the use of potash altogether in drilling and completing their wells in an effort to reduce costs. The market for the industrial standard-sized potash used in fracture fluids is somewhat regional

The Carlsbad operations, which predominately serve Texas, Oklahoma, Louisiana, and New Mexico, have experienced higher sales than Utah operations. In 2010 the low natural gas prices in the Rocky Mountain region resulted in a rig decrease of approximately 30 percent from the high in 2008

It looks like it was catch-up time for potash application in 2010 after a year of delay by farmers.

They sold 810,000 tons and 204,000 tons of potash and Trio, respectively in compared to 440,000 and 149,000 tons in 2009. The fertilizer applications in the spring of 2010 were strong compared to prior year application levels as the overall agricultural sector recovered and returned historically normal activity . Because fertilizer application can be postponed for a season if prices are high, the market does what it does best and low demand followed high prices in 2009 followed by higher demand as prices crumbled from $870 down to $354 in Jan 2010

The average net realized sales price of potash was $363 per ton in 2010, compared to $541 per ton in 2009. The decrease in average sales price was the result of discounting to stay competitive with the larger Canadian producers. Pricing was impacted by international competitors following new contract settlements at lower prices into larger potash consuming countries -- China, India and Brazil. Including costs associated with abnormal production, the average potash gross margin was 35% in 2010 45% in 2009, and was largely due to the lower average net realized sales price. Illustrating the second law of commodities—it’s all about the price. Farmers don’t care if it’s MOS potash or POT potash or IPI potash that lies under the KCL product—it’s all about the price.

As prices fell, IPI cut back production in 2009 to 504K tons.

As demand for granular-sized potash exceeded production, IPI was able to increase the price for red granular-sized potash several times during the fourth quarter of 2010. By Q4 2010 IPI increased the price to $485 per ton from $386 per ton in Q4 2009 and $343 Q3 2010. However, the average sales price in 2009 for potash was $541 compared to $363 in 2010. That impacted gross margins and even though costs per ton were down, it did not offset the pricing.

Strong per ton prices are key to expanding margins and increasing earnings. Pretty obvious but an “aha” moment in fertilizer for me. There is a balance between costs of goods, volume, and prices that allows for maximum margins and profits and 2010 was not that balanced —- volume and costs were good but prices were not good enough.

What is cost of goods in potash production and why do we care?

A lot of the production costs are fixed and costs of sales per ton move inversely with the number of tons produced. In the table that follows, you will see 2010 cash costs at and total costs are lower than 2009 and yet gross margins are lower because of the average sales price per ton. While keeping costs low is crucial for efficient operations and high margins, that high price per ton is crucial.

The principal production costs include:

• direct labor and employee benefits
• maintenance materials
• contract labor and materials for operating or maintenance projects

• natural gas
• electricity
• operating supplies
• chemicals
• depreciation and depletion
• royalties
• leasing costs
• plant overhead expenses

There are elements of the cost structure associated with contract labor, consumable operating supplies, and chemicals that are variable making up approximately 20 percent of the

Net sales are ex freight costs. Freight costs are billed to the customer and reimbursed to the company by the customer.

2010 2009
in thousands

potash sales tons 810 440
potash production tons 727 504
avg price per ton $363 $541

in millions

gross revenue $312 $251
net sales $294 $238

per ton

sales price $363 $541
cash cost per ton $184 $196
total cogs per ton $223 $234
average potash gross $129 $293
average gross margin 35.5% 54.2%

in thousands

sales tons 159 192
production tons 204 149

in millions

gross revenue $47 $51
net sales $36 $43

per ton

sales price $174 $286
cash cost $127 $141
total cogs $153 $168
average trio gross $11 $103
average gross margin 6.3% 36.0%

The good news for potash producers is that average realized sales prices have been steadily increasing over the past 12 months.

Average net realized potash and Trio sales price:

Potash Trio®
(Per ton)
September 2011 $489 $343
June 2011 $462 $222
March 2011 $442 $204
December 2010 $386 $222
September 2010 $343 $173
June 2010 $376 $162
March 2010 $354 $167
December 2009 $408 $190
September 2009 $458 $246
June 2009 $674 $338
March 2009 $727 $330

Potash Prices

The good news for IPI is the stabilizing prices with a potential increase in 2012.

The price for potash has been and will continue to be the most significant driver of profitability for business. The average net realized sales price of $489 per ton in Q3 was affected by overall market demand and IPI’s need to stay competitive with competitors.

The average net realized sales price increased in the third quarter sequentially from Q1 and Q2 in response to strong demand and favorable commodity prices for corn and other crops. IPI announced several price increases during the second quarter of 2011, with the current price quoted at $560 per ton effective July 8, 2011.

Potash pricing has stabilized the last few months. If demand remains stable, excess capacity across the industry doesn’t swamp demand and grain prices do not drop significantly [especially corn] IPI could continue to see $560 per ton. That would be good news for margins and earnings. Of course predicting futures prices is inexact.

Not many are expecting anything as high as $560, but a collapse is not anticipated either. Other produces are contracting with India at $490 per ton and China at $530 per ton. India has responded to the $490 with a 35% cut in imports. Uralkali has refused to lower pricing and is expecting sales will grow to 60 million metric tons in 2012 from 58 million tons in 2011 and does not see a need to cut prices. It will not raise prices in Q1 2012 but will be looking to raise them in Q2 2012.

If pricing can stabilize around $490, 2012 should look a lot better than 2010 and see some small improvement over 2011.

Annual 2010 by the numbers

By the numbers 2010 was not a good year. Margins contracted as average prices for potash kept sliding. Fertilizer cycles are interesting. The 2008 growth was remarkable and a perfect confluence of price and volume resulting in record margins. The high prices and the deep recession combined to make it the worst of all possible worlds for commodities and fertilizer in particular. Production dropped in 2009 but pricing lagged and did not bottom until 2010. The pricing brought farmers back to the market and volume increased and the costs per ton began to drop. In fertilizer that is not enough to restore margins. It’s going to take an acceptable price and bigger volume to combine and create a very good year for fertilizer companies—2012 may be it. The final piece of the profitability puzzle is the price of grain. That has to remain high enough to get farmers interested in planting. At the moment, with the USDA revision of corn, that is the critical piece keeping prices of these companies in a downward spiral.

As always in ag, there are the imponderable and incalculable acts of god and weather that can derail a good year —- droughts, floods, unseasonable temperatures.

2010 2009 2008
gross 29.5% 40.5% 55.8%
operating 21.0% 30.6% 48.7%
EBIT 20.9% 30.6% 48.7%
net 12.6% 18.3% 34.4%
Freight costs 8.3% 7.1% 5.6%
Warehousing and
handling costs 3.0% 2.8% 1.9%
cogs 58.9% 42.4% 36.7%
AR increase 8.5% 13.9% 7.1%
Revenue increase 19.1% -1.3% 43.3%
Avg DSO 30.7 32.9 29.4

Debt ratios? The company has no debt and all improvements and capex spending have been covered with cash flow and cash.

2010 2009 2008
Net Income 45.29 55.34 98.17
CFFO 123.29 81.06 131.97
Capex (88.39) (101.42) (68.79)
FCF 34.90 (20.35) 63.18
cffo/net 2.7X 1.4X 1.3X

2010 2009
Cash at Beginning of Period 89.79 116.57
Cash at End of Period 76.13 89.79
Marketable Securities 45.56 11.16

Rather than use debt some cash was spent to finance capex in 2009.

Positive CFFO all years
CFFO/net greater than one showing good use of receivables and inventory.

Q1, Q2, Q3 2011

Demand began to rise in Q1 to levels reminiscent of pre-crash 2008 levels. The drought in Texas was offset by strong demand in the Pacific Northwest. Production increased 36% to 234,000 tons. Corn and soy bean prices were high and inventories were tight. Spring demand was solid. IPI was able to sustain increased production rates more easily as the investments in de-bottlenecking and new compaction facilities began to pay off.

By Q2, they were able to raise the price sequentially by $20 and average pricing was $462. Grain prices remained high. Production was 209,000 tons [sold 225,000 tons] and increased 27% over 2010. Langbeinite production was 44,000 tons [sold 39,000 tons] compared to 39,000 in Q2 2010. IPI is investing in improving recovery of langbeinite and continued construction on the dense media separation plant and the granulation plant. IPI also began construction on a new compaction facility in Wendover. All of the capex on these projects will increase flexibility responding to demands for O&G and ag and increase recovery, production and decrease costs. They are paying for all investments in capex with cash flow. There is no debt. IPI continues work on the solution mining/ evaporation pond investment. They believe this will be a game-changing step forward as they will be able to produce potash for $75 to $80 per ton and significantly lower average costs. Production is expected to start in 2013 if approvals remain on track. It should produce 150,000 to 200,000 tons per year. The current near capacity 800,000 tons would turn into around 1 million tons and around 20% would be produced at $70 to $80. Margin and production will benefit making capex in the project a positive.

About the HB solar mining project

Located roughly 20 miles northeast of Carlsbad, the HB Solar Solution Mine Project would use solution mining and solar evaporation to extract potash already leased by Intrepid from previously mined areas. Solution mining and solar evaporation are proven technologies that are used around the world, including Intrepid’s facilities in Utah.

This project is important because the world’s growing population is increasing food demand and decreasing the amount of land for growing crops on a per capita basis. Potash plays a vital role in making sure that agricultural land is as productive as it can be. Moreover, the U.S. imports approximately 85 percent of its potash, and this project would increase the amount of potash produced domestically. This project would safely and economically allow maximum recovery of potash ore that was unable to be extracted from previous conventional underground mining. Without this project, millions of tons of potash in the underground works would remain in place, squandering this crucial resource and forgoing substantial economic benefits to the region.

The HB Project would involve injecting salt-saturated brine underground to selectively dissolve and recover potash in existing, idled mine workings. Once enriched with dissolved potash, the brine would be pumped through pipelines to above-ground lined, solar evaporation ponds where the potash would be recovered after evaporation. The project would entail a 12 to 18 month construction phase of the following facilities: water supply wells and associated piping, 6 injection wells and 5 extraction wells with 37 miles of associated pipelines (primarily on federal and state land), 520 acres of solar evaporation ponds on property owned by Intrepid and a new flotation plant adjacent to the existing processing facilities at Intrepid’s West Facility.

In Q3, IPI realized a $27 increase per ton for potash [Trio increased $29]. Grain prices remained high and it was expected that dealers would begin to turn over inventory as fall harvesting wound down and fields were prepped for spring. That means emptier shelves and restocking next year for spring. At present dealers are well-stocked and there will be no scramble for inventory over the next few months to replenish stock. Production was 173,000 tons [sold 190,000 tons]and was a 4% increase over Q3 2010. Langbeinite production was 35,000 tons[sold 54,000ons] up from 32,000 tons Q3 2010.Potash price was $489.

Quarterly numbers


09/2011 06/2011 03/2011 12/2010 09/2010
gross 41.3% 46.2% 39.3% 39.1% 29.3%
operating 36.7% 42.5% 44.4% 30.2% 21.8%
EBIT 36.9% 42.5% 44.9% 30.8% 21.6%
net 22.4% 25.7% 26.9% 18.9% 12.7%

09/2011 06/2011 03/2011 12/2010 09/2010
potash sales tons 190,000 225,000 196,000 216,000 221,000
potash production 173,000 209,000 234,000 224,000 166,000

avg price per ton $489 $462 $442 $386 $343
cash cost per ton $175 $160 $166 $166 $171
average potash gross $249 $230 $218 $169 $122
average gross margin 50.9% 49.8% 49.3% 43.8% 35.6%


sales tons 54,000 39,000 52,000 27,000 45,000
production tons 35,000 44,000 31,000 31,000 32,000
price per ton $251 $222 $204 $222 $173
cash cost $197 $160 $160 $141 $132
average trio gross $5 $6 -$3 $38 $3
average gross margin 2.0% 2.7% -1.5% 17.1% 1.7%
dso 36.1 32.8 35.2 23.7

Cash flow numbers

09/2011 06/2011 03/2011
CFFO 129.61 79.29 28.62
capx (101.72) (64.54) (29.15)
FCF 27.90 14.75 (0.52)
CFFO/net 1.5X 1.3X 1.0X

Cash Beginning 76.13 76.13 76.13
Cash at End 67.49 71.25 69.23
Securities 73.55 52.11 38.67

IPI used a small amount of cash for capex in Q1—still no debt but they are setting up a $250 million credit facility.

Positive CFFO last 3 Qs
CFFO/net greater than one ---good use of working capital.

Too long -- some impressions

Potash looks like a relatively stable commodity compared to both nitrogen and phosphate.

It is recovering from the crash in 2008-2009 and while it will never reach $800+ per ton pricing, it is recovering and expected to stay near $490-$500 over the next year. If the average is close to $500, IPI will continue to see margins improve.

The other two legs of this stool are grain prices and demand. While corn yields and storage have been updated and increased by the USDA, the price of corn is not forecasted to drop much—around 30¢. Farmers are expected to continue to plant to take advantage of the extremely favorable pricing that has reigned for the past year. Of course, revisions can happen and the yields and pricing can change by the month. Looks good for now.

Demand for potash will not escalate much but flat is OK if pricing improves even a few dollars. That will be enough to move the margins higher.

This is all short-term thinking and goes only into 2012. Over the long term, food demand will only increase in response to demographics and potash along with nitrogen and phosphate is integral in making it possible to meet that increased demand. Pricing and production will be variable, but demand can only rise over the decades.

Potash deposits are found in a limited geography and starting up a mine is a $4 billion venture. Established miners with proven reserves are going to reward investors more predictably than the junior miners. There are several of these new guys on the block that are interesting, but more speculative. At present I am inclined to look at known quantities. At prices for companies like Mosaic and Intrepid trending towards 52-week lows, there may be some buying opportunities especially as the market continues to move down in hysterical fits over the end of the world being brought about by the death of Europe. There will no doubt be periods of insanity that give us the chance to own companies with tangible products that are not consumer discretionary –we all have to eat.

Intrepid strikes me as a well-run company that has some capacity and production growth ahead. You can’t buy into a commodity at bubbly highs and you can’t expect to hold forever. At current prices, IPI may be good for the next couple of years as potash prices rise slightly and volume/production has the potential to increase in 2012-2013.
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