IPI - Intrepid Potash - A new small FFH holding

[FFHWatcher]

I don't think it has been discussed with FFH yet.

In March 2017 FFH participated in a secondary offering of IPI shares.

Intrepid's Potash sales are way down. Looks like they used equity to pay down debt and restructure a bit.

Looks like FFH took about a third of what was offered.

16,666,667 shares. 13% of shares o/s

$1.20 issue price

$20M investment (sprinkled it around to Brit, ORH, FFHL, etc.)

 

End of Q3 price of IPI $4.36 (Current price of IPI $3.83)

Unrealized gain at end of Q3 of $52M or 2.5x's in 6 months

Someone made a good (short-term) call

 

[ourkid8]

It's great to see their investments starting to fire on all cylinders, eventhough this is a rounding error but it all adds up. 

 

I don't think it has been discussed with FFH yet.

In March 2017 FFH participated in a secondary offering of IPI shares.

Intrepid's Potash sales are way down. Looks like they used equity to pay down debt and restructure a bit.

Looks like FFH took about a third of what was offered.

16,666,667 shares. 13% of shares o/s

$1.20 issue price

$20M investment (sprinkled it around to Brit, ORH, FFHL, etc.)

 

End of Q3 price of IPI $4.36 (Current price of IPI $3.83)

Unrealized gain at end of Q3 of $52M or 2.5x's in 6 months

Someone made a good (short-term) call

[John Hjorth]

... eventhough this is a rounding error but it all adds up.

 

Calls for a smile, ourkid ... - and yes, compounding isen't linear.

[Txvestor]

So true. Ask Pabrai 2016 v 2017.

It is linear only when viewed in the rear view mirror. Lol.

[Saluki]

According to GuruFocus, Prem has sold out his IPI shares at about $4.60. Given that he purchased at $1.20 less than a year ago, it seems like a great score.  Where did this info come from though?  He won't have to file his 13f for a couple of months, so what filing are they getting their info from?

 

https://www.gurufocus.com/news/693037/prem-watsa-cashes-in-on-intrepid-potash

 

I'm up about 70% on this (albeit a very small position for me) but I think it's still got room to move up, so I'm holding for now. The water sales should hit $30+ million with 90%+ margins so even at a 10X multiple, it should be worth at least $300mm for the water part of the business.

, and the potash operations are a bonus.  There are some nice NOLs in there, and it's impossible to kill this company because it's the low cost potash producer.

 

Canada produces more than 30% of the worlds potash and the 2 big companies in Canada sell it worldwide through a government sponsored cartel.

 

The Canadian producers, have to pay a royalty to the provinces and ship it to the US.  The price they produce it at is a blended rate of their costs from producing through conventional mining and solution mining (pumping water in, taking out the brine and drying it out)

 

IPI doesn't do conventional mining any more and only uses solution mining, but whereas the Canadians have to dry out the brine by boiling off the water using natural gas, IPI's mines are in the Utah and New Mexico desert, so they just throw it on the floor and let the sun do the evaporation for free.

 

Shipping is an issue too.  Potash prices fell off a cliff (from ~$900 a ton to ~$180) so it's less likely that you'll get people from Russia shipping there stuff halfway across the world to compete with you on price.  The prices fell because of fracking (you can make an imperfect substitute for potash using natural gas to make ammonia then ammonia to make fertilizer).  Although some crops do okay with other fertilizers, some crops like Corn and lots of fruit need potash because of the potassium, so it will always be around no matter how cheap natural gas is. 

 

Potash prices are over $200 now consistently, and since no one can make potash cheaper than IPI, I feel like this is the cockroach that can survive anything.  Anyone have any thoughts on this one?

[gfp]

According to GuruFocus, Prem has sold out his IPI shares at about $4.60. Given that he purchased at $1.20 less than a year ago, it seems like a great score.  Where did this info come from though?  He won't have to file his 13f for a couple of months, so what filing are they getting their info from?

 

They are getting their information from the SEC ->

 

https://www.sec.gov/cgi-bin/browse-edgar?CIK=IPI&owner=exclude&action=getcompany

 

The recent SC 13G/A filings show Fairfax reducing to zero.

 

Before they reduced their holdings below 10%, there were also more detailed Form 4s showing the trading prices ->

 

https://www.sec.gov/Archives/edgar/data/915191/000094787118000382/xslF345X03/ss90975_4.xml

https://www.sec.gov/Archives/edgar/data/915191/000094787118000394/xslF345X03/ss91496_4.xml

[dartmonkey]

Natural gas prices should have no influence on potash prices. Fertilizers basically supply one of 3 needs: nitrogen (N), phosphates (P) and potassium (K). Nitrogen is freely available (air is 80% nitrogen) but you need energy (natural gas) to fix the nitrogen in a form that plants can use, so the cost of N fertilizers is directly related to energy costs. Potash of course is the raw material for K fertilizers, but energy costs are only a small component of its cost of production.

 

But you can’t substitute N for K just because it’s cheaper, so falling energy prices should not affect the demand for potash.

[Saluki]

According to GuruFocus, Prem has sold out his IPI shares at about $4.60. Given that he purchased at $1.20 less than a year ago, it seems like a great score.  Where did this info come from though?  He won't have to file his 13f for a couple of months, so what filing are they getting their info from?

 

They are getting their information from the SEC ->

 

https://www.sec.gov/cgi-bin/browse-edgar?CIK=IPI&owner=exclude&action=getcompany

 

The recent SC 13G/A filings show Fairfax reducing to zero.

 

Before they reduced their holdings below 10%, there were also more detailed Form 4s showing the trading prices ->

 

https://www.sec.gov/Archives/edgar/data/915191/000094787118000382/xslF345X03/ss90975_4.xml

https://www.sec.gov/Archives/edgar/data/915191/000094787118000394/xslF345X03/ss91496_4.xml

 

Thanks GLOBALFINACEPARTNERS, I didn't realize they were a 10% owner and had to file 3 days after selling.

 

Thanks DARTMONKEY.  My understanding was that some plants need K, some don't, and some are indifferent, which is why the price drop coincided with falling natural gas prices when fracking became widespread.  If that's not the case, I'll do more research on this and see if the investment thesis still holds up.

[dartmonkey]

I think Nutrien may be quite a good investment, but I don’t believe it has anything to do with gas prices, and I don’t believe there is any causal connection between the gas price drop 5-6 years ago and the decrease in potash prices.

[Saluki]

I sold this just under $4.00 because I thought the good stuff was already baked into the price.  The price is now $3.26 a share and things have gotten better for them, so if it drops another 10% I may start buying again.  Their earnings call transcript is here:

 

https://www.fool.com/earnings/call-transcripts/2019/05/08/intrepid-potash-ipi-q1-2019-earnings-call-transcri.aspx

 

With the acquisition of the Dinwiddie ranch and the associated water rights, they have "a new 5.8 million barrels per year of permitted water rights perfectly located in the Northern Delaware Basin and ready for sale." They think they can repermit it and get 13mm barrels a year.  Even at the lower number, however,  they can get premium pricing since its closer to the wells that need it and can get $1.25 per barrel and $1.50 per barrel. At the 85% margins they have been getting, that's $6.1- $7.4 million a year in additional income. (double that if they can get it re-permitted).

 

Potash and Trio prices looking okay but still not great, but they are finding new sources of income along the way, like salt prodcution

 

"And to just to add a little color on that, our salt sales increased year over year almost by 90% with $3.3 million in Q1 of '19 versus $1.8 million in Q1 of '18."

 

The CEO owns a lot of stock so he eats his own cooking.

 

It's a $400mm market cap company but it's basically a growing water company (fully priced) with a free potash mine thrown in for good measure.

 

[Saluki]

FFH bought back a small amount during the great plunge during the pandemic when Intrepid was trading below $1 a share.  The did a reverse stock split (10:1) and it's tripled off the low.  Looks like it's firing on all cylinders again:

https://intrepidpotashinc.gcs-web.com/news-releases/news-release-details/intrepid-announces-first-quarter-2021-results

[Saluki]

Anyone looking at this now?  It was over $100 during the early days of the Ukraine/Russia war, now it's $35. It was trading at this price when Potash was ~$220  a ton    and they were breakeven on the Potash and making money selling water to frackers.  and now Potash at $ 562 a ton.  https://ycharts.com/indicators/potassium_chloride_muriate_of_potash_spot_price and their cost of production hasn't really changed a lot, so most of that goes to the bottom line. 

 

I also think that now that energy prices are higher, it should help their water business, which primarily sells to frackers.  The water sales make sense when gas/oil prices are high, because fracking uses a LOT of water and there aren't many people in the desert who have water to sell you. 

 

The risks are obviously that this is such a small company that they are price taker, not a price maker. Their market cap is a few hundred million vs the $53 billion entrerprise value for Nutrien. If the bigger competitors can increase output or the Ukraine war ends suddenly and the production there and Russia/Belarus that could cause the price to drop, that could kill demand.  

 

But on the other hand droughts and the disruption in the food supply from the war could cause a demand increase for Potash because rising food prices make fertilizers a necessary investment to meet demand.