Summary
- Intrepid Potash's outperformance in 1H2022 to continue into 2H2022 and beyond according to latest investor presentation.
- Farmer economics and macro uncertainty supports continued high potash prices.
- IPI positioned to profit from underinvestment in energy and commodity markets in recent years.
We have been covering Intrepid Potash (IPI) since it was priced at a split-adjusted $11 per share in October 2016 . As a volatile, small cap name with a low ESG score, we believe the lack of institutional attention on the name creates a compelling opportunity for the rest of us. As value investors, we feel compelled due to its conservative net asset value, as well as strong cash flows. We are also writing this update to share a copy of its Investor Presentation, which the company just released after market on August 30, 2022, and a copy of which is included at the bottom of this article.
Net Asset Value
Currently, the company maintains $716 million of stockholders' equity compared to a market capitalization of $650 million. Not only is the market cap meaningfully below book value, we believe the accounting book value significantly understates the value of IPI's assets.
Accounting rules conservatively require companies to write down assets, but are not as accurate when it comes to writing up asset values when the market changes. In the midst of the last potash downturn at the end of 2015, IPI conservatively decreased the value of its assets from $1.17 billion down to $640 million, a 45% write down. Potash price per ton in 2015 was around $300 per ton, compared with $730+ in today's market.
Not only is the company's assets understated relative to the current market value of its property, plant and equipment, but there are hidden assets constantly being unlocked as well. For example, the company is currently planning to start sell as much as 600k tons of sand per year. At a market price of approximately $40/ton, this new opportunity is compelling relative to its overall market cap and cash flows.
Strong Cash Flows
While this year has been an extraordinary year for potash and energy, we believe that IPI's normalized earnings and cash flow potential more than justifies its current price and leaves lots of room for upside. In 1H2022, the company generated $83mm in cash flows. We believe the company can generate close to the same amount in 2H2022, even as Potash prices stabilize over time.
It is important to note that even with today's elevated Potash prices, given higher prices for many agricultural products the cost to farmers as a % of their operational costs are still in line with historic averages according to IPI's latest deck.
Assuming nearly $160 million in cash flows this year, the company expects to spend only $35 million on "Sustaining Capital," leaving around $125 million for Growth Capital and excess capital to further strengthen the balance sheet or return to shareholders.
IPI Investor Deck Summer 2022
Compared to its $650 million market cap as of writing this article, there is a lot of margin of safety and a lot of room for shareholders to profit as long as management continues to manage its balance sheet prudently.
A copy of the company's latest Investor Deck for Summer 2022 is included here .
What is Fair Value?
Earlier this year, we sold our IPI stock in the run-up from $80 to $120, which may give a sense of our estimate of fair value. As the company's share price fell to $36, we bought back in and can't believe our luck in getting a good price twice.
Even today with the significant increase in share price from 2016, and from our recent re-purchase of the stock, we believe there is compelling opportunity going forward.
Operationally speaking, IPI continues to grow its value with strong performance and cash flows every day. We like the upward trend of value creation and believe there is more to come.
Conclusion
Sometimes, simple cash flow and net asset value investing is best. We believe that there is a compelling opportunity for our times right in front of investors' noses, and that is IPI.
For further details see:
Intrepid Potash: Strong Farmer Economics And Energy Needs To Power This Stock Beyond 2022