NTR - Nutrien And Intrepid To Benefit From Inflation Returning

2023-06-23 06:06:59 ET

Summary

• Drought conditions and the impact of war in Ukraine are causing concerns over rising food prices, which could drive inflation higher.
• Fertilizer stocks, such as Intrepid Potash and Nutrien, are considered good buying opportunities due to their low P/E multiples and potential for growth as grain prices increase.
• The Biden administration's plan to buy back oil for the Strategic Petroleum Reserve may provide some support for oil prices, but a return to $80 per barrel could cause energy prices to contribute to inflation again.

I show a 2 year chart of oil prices (OIL) below. The main observations show the down trend was broken but resistance around $82 has not been breached. There is solid support around $65 that has recently been tested 4 times. OPEC is not happy with Oil in the low $70s and they need it in the low $80s to support their budgets so we should see continued support there. Reuters reports that the Biden administration hopes to buy back at least 12 million barrels of oil for the Strategic Petroleum Reserve this year, including six million already announced. This will add a little support but more important it means no more releases from the SPR.

The CPI rose only 0.1% in May bringing inflation down to 4.0% and below expectations. However core CPI that the Fed watches more closely was higher than expected, up 0.43% to 5.3% in May. The headline figure was held down by a 5.6% decline in gas prices. This is the main factor helping headline inflation come down. Note on the chart of Oil above that YOY we are comparing about $72 oil in May to $115 oil last May. This positive effect on CPI will fade away in August/September time frame. If oil prices get back into the $80s, energy prices will be adding to inflation again. You can more easily see the effect on the chart next page showing energy in the green bars.

Most Fed members feel more hikes are needed and none foresee a cut in 2023. J Powell expressed concerns about inflation. He sees more upside risks and believes not enough progress has been made on core PCE, the indicator that the Fed favours. As you know, I am bullish on energy and believe that the climate policies will soon cause fossil fuel shortages, However, on the inflation front there is a bigger problem. A perfect storm of war, drought and climate policies is brewing that will drive food prices much higher.

Let's start with drought. Most of the US Midwest where most grain is grown is under very bad drought conditions. Kansas farmers expect the worst wheat crop in 60 years .

The National Drought Mitigation Center estimates 57% of domestic corn crop and 51% of soybeans are dealing with drought condition. The U.S. mid west is hit by worst drought in 30 years. Furthermore, Reuters reports the U.S. Beef cow herd is the smallest since 1962. Low demand from Covid lock downs, now drought and high feed costs drove producers to send animals to slaughter instead of keeping them for breeding. Pork and poultry do not show any big issues at this time.

And it is not only the U.S. as d ry weather is set to slash Australia's wheat crop by a third. China is the world's largest wheat producer and could lose 30 million tonnes this year because of wet weather. This is not a huge deal but does not help matters. Russia is the world's largest exporter and produces about the same as the U.S. and as we know with the war it has disrupted shipments. Ukraine is the bread basket of Europe and its grain crops are severely reduced because of the war. The Kakhovka hydroelectric dam that let loose was key for irrigation in that area so that will impact grain production, but the big problem is the front lines of the war is now in the key grain growing areas. Farmers cannot farm in a war zone. In the map below, the dark green are the areas that had the most wheat production on average in the past 5 years. I roughly drew lines in red that outline the current battle fronts.

And just at a time when we need more grain production, the far left climate alarmists are reducing the amount of fertilizer available for crops. For example , Special President Envoy For Climate John Kerry recently warned at a climate summit for the U.S. Department of Agriculture that the human race's need to produce food to survive creates 33% of the world's total greenhouse gasses. 'We can't get to net-zero. We don't get this job done unless agriculture is front and center as part of the solution,' Kerry said."

In December 2020, the Trudeau government unveiled their new climate plan, with a focus on reducing nitrous oxide emissions from fertilizer by 30% below 2020 levels by 2030. " Fertilizers play a major role in the agriculture sector's success and have contributed to record harvests in the last decade. They have helped drive increases in Canadian crop yields, grain sales, and exports ," a news release from Agriculture and Agri-Food Canada reads.

The Dutch government, unveiled its nitrogen plan on June 10, 2022 . The goal is ambitious: to reduce nitrogen emissions by 50% by 2030. And the government has released a budget of 24.3 billion euros to make it happen. Farmers will have to reduce their current high-intensity production and may eventually be expropriated.

T hese charts above show the various meat and poultry prices and while most have eased some, especially eggs, they are still well above 5-year averages.

Grain prices have come down from the 2022 peaks driven by Ukraine war fears, but most saw price spikes last Thursday and Friday and early this week. Prices have been rising as I put this report together in the last couple days. Below is a weekly chart on wheat and we have the first good up move since October 2022. A close above $800 would be very bullish and a higher high. I expect later this Fall season (harvesting) that prices will be a lot higher, adding to inflation more so.

Fertilizer stocks are the prime beneficiary to rising grain prices as farmers can afford more fertilizer and will apply it to get higher crop yields. All these stocks are hammered down from last year's high's and now provide a good buying opportunity. They are trading at low P/E multiples around 4.0. I am going with Intrepid Potash (IPI) because it is trading at just 0.51 book value and I like the chart. Nutrien Ltd. (NTR) is just 1.43 times book value and I like the yield around 3.6% so will add that to the Millennium Index as well. Here are some details.

Intrepid Potash Shares Outstanding - 12.7 million

Intrepid, together with its subsidiaries, engages in the extraction and production of the potash in the United States and internationally. It operates through three segments: Potash, Trio, and Oilfield Solutions.

Potash is the common name given to a group of minerals and chemicals that contain potassium (chemical symbol K), which is a basic nutrient for plants and an important ingredient in fertilizer. Most potash is produced as potassium chloride (KCl). Russia and Belarus account for 41% of the globally traded K and are the second and third largest producers.

The fertilizer stocks ran up in 2022 but what the market got wrong was the drop in demand these prices caused. Because of record-high fertilizer prices, farmers across the world cut back on these nutrients which caused much demand to fall. Farmers could not afford high diesel prices and fertilizer prices too along with some other supply constraints. This is coming back into equilibrium in 2023 with lower prices but still strong margins for producers.

Intrepid operates three solar evaporation mines in Wendover and Moab, Utah and Carlsbad, New Mexico. Solar evaporation ponds provide one of the safest, lowest cost, environmentally friendly production methods for potash and salt. These locations have the advantages of proximity to western markets and an arid climate, ensuring minimal weather-related delivery days by truck or rail.

Intrepid also operates an underground mine in Carlsbad, New Mexico for the extraction of langbeinite, the naturally-occurring mineral they sell as Intrepid Trio. Langbeinite, K ₂ Mg ₂ (SO ₄ ) ₃ , is a unique geological material found only in a few places in the world. Highly prized as an all-natural fertilizer with international demand, Intrepid's mine in Carlsbad sits on one of the world's largest known reserves of langbeinite.

Potash sales in Q1 2023 were 89,000 tons that were 40% of total 2022 sales and 69,000 tons Trio which was 30% of 2022 sales. Sales volume was down in 2022 because of high prices and you can see that sales volumes all already jumping up in 2023.

They have had some issues that have reduced Potash production, but these have been remedied and should start having an effect of increasing production in 2nd half 2023. This update on their operations is from their Q1 results and highlights the plans to improve operations.

East Facility in Carlsbad, New Mexico - The first of the two new continuous miners at their East plant has been delivered and is expected to improve operating efficiency in the coming months. The second new miner is scheduled for July delivery and should be operational by the middle of the third quarter.

HB Facility in Carlsbad, New Mexico - A new injection pipeline installation continues to make progress despite permitting delays. IPI expects the pipeline to be in place by the end of the second quarter with improved brine injection rates starting in the second half of 2023.

To target high-grade brine in the near-term, IPI is undertaking a new, lower-cost capital project to extract a pool of already-known, high-grade brine from the HB Eddy shaft. Permitting and construction are both underway with operations expected to commence in Q4/23. A replacement extraction well designed to have a long-term operational life to target brine from the HB mine system may get pushed to 2024 due to the HB Eddy shaft project.

Solar Solution Potash Mine in Moab, Utah - IPI s uccessfully drilled a new three-lateral potash cavern in Potash Bed 9, which is expected to be online in the second quarter. During the drilling process, IPI was able to stay in the target interval for longer than any of our previously drilled horizontal caverns, and initial measurements show good availability of high-grade potash.

After IPI completed the drilling of the new potash cavern, they moved the rig to drill into the original mine workings in Potash Bed 5 to target low spots ("sumps") that they believe contain high-grade brine pools. This brine was previously accessed by a vertical well, but by now using horizontal laterals, IPI can more effectively target the resource. The goal is for a July 2023 completion, which will allow IPI to pump this brine into our solar ponds for the latter part of the 2023 evaporation season.

Sand Resources at Intrepid South - IPI continues to work through the permitting process for the sand project and expects construction to begin by the end of 2023.

Financials and Conclusion

IPI had total sales in Q1 of $86.9 million, which compares to $104.4 million in the first quarter of 2022, as Potash and Trio® average net realized sales prices decreased to $485 and $344 per ton, respectively. Net income was $4.5 million (or $0.35 per diluted share), which compares to $31.4 million in the first quarter of 2022 (or $2.31 per diluted share).

Intrepid has no long-term debt, a rarity in the natural resources space. As of April 28, 2023, Intrepid had approximately $9.5 million in cash and cash equivalents and $150 million available under its revolving credit facility, for total liquidity of approximately $159.5 million. A debt-free balance sheet allows capital optionality, with the excess cash being available for growth projects or capital return to shareholders.

MarketWatch shows a 3.95 P/E, 4.32 times cash flow and 0.51 to book value. I believe the stock is oversold because of the volatile prices and the added problem IPL had with production down.

On the chart, the stock is down to lows last seen in 2016 and 2020. The stock bottomed with a doji morning star reversal pattern with a $17.23 low on June 1st. These are strong reversal patterns and I expect that was the bottom in the 1 and 1/2 year sell off. The pattern is not evident on this longer term chart but you can see on a 1 year or 6 month chart. There is not much resistance until the $26 area.

Nutrien Ltd. Shares Outstanding - 496 million, Dividend Yield 3.5%

Nutrien provides crop inputs and services. The company operates through Retail, Potash, Nitrogen, and Phosphate segments. Nutrien is the world's largest potash producer with over 20 million tonnes of potash capacity at their six lower-cost potash mines in Saskatchewan. NTR has decades of high-quality reserves and a multi-year expansions is complete. NTR is well positioned to meet the world's long-term potash needs.

Nutrien is the third-largest nitrogen producer in the world with over 7 million tonnes of gross ammonia capacity and the ability to produce more than 11 million tonnes of total nitrogen products in the US, Canada and Trinidad. Nutrien's nitrogen production network is low-cost and diversified, with opportunities to execute high-return and low-risk brownfield projects. They can expand production while significantly lowering their carbon footprint. As part of this effort of reducing the carbon footprint of the nitrogen operations, we NTR has focused around energy efficiency, carbon capture and CO2 abatement.

Nutrien operates two large integrated phosphate mining and processing facilities and four regional upgrading plants in the US. As the second largest phosphate producer in North America, Nutrien sells approximately 3 million tonnes of finished product annually. Nutrien is self-sufficient in phosphate rock, with access to high-quality, integrated phosphate rock reserves that allows for the production of a diverse and premium portfolio of phosphate products, including solid and liquid fertilizers, feed and industrial acids.

The NTR network of over 2,000 retail locations in seven countries provides a wide range of products and services to help growers around the world feed the future. We provide our customers with complete agriculture solutions including nutrients, crop protection products, seed, service and digital tools.

They are the dominant fertilizer company in North America as you can see in the map below from their website.

NTR reported their Q1 2023 results on May 10 th and naturally they were down from record levels in 2022:

• Nutrien Ag Solutions (retail) adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) declined to $(34)-million in the first quarter of 2023 primarily due to lower sales and gross margins for crop nutrients and crop protection products compared with the record levels achieved in 2022. Crop nutrient margins were below normalized levels in the first quarter as prices declined and the company worked through higher cost inventory;

• Potash adjusted EBITDA declined to $676-million in the first quarter of 2023 due to lower net realized selling prices and lower sales volumes. North American sales volumes were impacted by just-in-time buying. Lower offshore demand from customers in Asia was largely offset by record first quarter Canpotex sales volumes to Brazil;

• Nitrogen adjusted EBITDA declined to $676-million in the first quarter of 2023 due to lower net realized selling prices for all major nitrogen products. This was partially offset by lower natural gas costs and increased operating rates at the company's North American nitrogen plants;

• Nutrien repurchased 11.8 million shares year to date as of March 31, 2023, under its normal course issuer bid programs, for approximately $900-million. The company's total shares outstanding declined to 496 million as at the end of the first quarter of 2023, representing a 10-per-cent reduction compared with the same period in 2022;

• Nutrien full year 2023 adjusted EBITDA and adjusted net earnings per share guidance was revised to $6.5-billion to $8.0-billion and $5.50 to $7.50 per share, respectively.

NTR's financial guidance from their Q1 report

Based on market factors detailed herein, the company is revising full-year 2023 adjusted EBITDA guidance to $6.5-billion to $8.0-billion and full year 2023 adjusted net earnings guidance to $5.50 to $7.50 per share. The company now projects cash from operations of $5.0-billion to $5.8-billion, which is expected to be relatively stable due to an anticipated release in working capital.

" Crop input demand has strengthened as the spring planting season progresses in the northern hemisphere and higher cost inventory is moving through the channel. We are encouraged by the continued stabilization of fertilizer markets following a year of unprecedented volatility and anticipate increased demand in the second half of 2023 due to strong agriculture fundamentals, improved grower affordability and lower inventory levels. With fertilizer prices near mid-cycle levels, we expect to generate strong operating cash flows in 2023 and to maintain a balanced and disciplined approach to capital allocation, " said CEO Ken. Seitz.

Conclusion

Nutrien is now trading near a multiyear low after having reaching Cdn$148 in early 2022. The company reported lower-than-expected earnings in the first quarter as a result of lower selling prices in all areas, and lower sales volumes in retail, potash and phosphate. The company expects fertilizer prices to stabilize and expects increased demand in the second half of 2023 as a result of strong agricultural fundamentals. I expect we could even see fertilizer prices rise some.

MarketWatch shows the stock trading at a 4.2 current P/E, 5.06 times cash flow and 1.43 book value. I see 2023 EBITDA a little higher than the US$7.2-billion guidance midpoint and expect US$7.00 earnings per share which is about 8.7 P/E on the current stock price. NTR is now paying US$0.53 quarterly dividend and the record date for the current dividend is June 30th, so if you own the stock by then, you can catch the current quarterly dividend.

On the chart, it appears the stock bottomed at support levels going back to 2019. There is mild resistance around $60 and more significant resistance around the $70 area.

I looked at Call Options and the premiums are pretty high. However if you go out to January 2025 that is about 1.5 years, the premiums should not erode much if you trade out in 6 to 9 months or sooner. I like the January 2025 $70 Call for about $7.00, it has the highest open interest of over 1,000 contracts. If there are shortages and high prices in grains, as I expect, NTR could easily get back to the $85 to $100 area.

Summary

Fundamentals are pointing to much higher grain prices. With that, farmers can afford more fertilizer and will use to increase crop yields, hence profit. The fertilizer stocks are beaten down and given back all their gains, pricing in low fertilizer prices. They offer good value here and will likely surprise on the upside.

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