Intrepid Potash (IPI)

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The Stock Market Could be Underestimating This Company’s Value

http://centsandsense.com/investment/intrepid-potash-1/

By Jason In INVESTMENT, MAKING CENTS 25 Sep 2016
Before going into today’s post, I want to remind you not only about the disclosures of this site, but also that you should always do your own due diligence when making your own investment decisions.

One of the main holdings in my personal portfolio is a small company called Intrepid Potash (IPI). IPI produces potash and langbeinite — both primarily used in the agricultural industry as a fertilizer but which also has other uses in the animal feed and oil and gas drilling markets.

I heard about this company from a close college friend, Tarik, who conducted his own original research on the company and I subsequently ran through my own diligence process.

At a very high level, the company’s financial statements indicate an accounting value to shareholders of $396 million, and yet the current market capitalization is only $81 million. In theory, if you were to buy the stock at the current market price of $1.06 per share, you would be receiving 4.89x that in shareholder value (one heck of a safety or profit margin).

However, potash prices are at multi-year lows and the company has been losing money as it seeks to reduce its costs. The question is — will the company lose $300 million or more for shareholders to lose equity in the company from today’s market prices?

There are a couple interesting points about the company.

1. The shareholder accounting value (aka “book value”) of $5.22/share was written down from $12.47/share in December 31, 2014. As potash prices have fallen, the company wrote down or wrote off over $6.83/share in net property, plant, equipment and mineral properties, and non-current deferred tax assets alone.

This write down potentially indicates that the company’s assets are valued conservatively — and that there is potential to add back lost value if potash prices improve and/or the company becomes profitable and realizes lost value in its $150 million in lost deferred tax assets or $450 million in reduced value of its net property, plant, equipment and mineral properties.

2. With such a huge discount to book value, the market is implying that 1) the company’s assets are still overblown despite a huge write down in 2015, 2) the company may never achieve profitability, and/or 3) that the company should be priced for bankruptcy.

I find it hard to believe that the company could rationally have zero other options except losing over $300 million before returning capital to shareholders. Even if the company sold its current properties for half its accounting value, at these levels shareholders could make a 100% or more return after all liabilities are paid off.

Interestingly, on the liabilities front, major debt payments aren’t due until 2020, giving the company more than 3.25 years to find a path to profitability, monetize its inventory or other assets, or for potash prices to recover, although the company does need to renegotiate some debt covenants (more on this later).

And on the point about potash prices, there are indications that potash prices could have hit a bottom — having increased in price these past couple weeks, as producers shutter or idle production facilities, and as players in the industry consolidate or take steps to rationalize supply and demand.

3. Interestingly, the CEO, President and Executive Chair of the company has been a huge buyer of IPI shares since September 2015 when the stock was trading at $7.29 per share. If this insider has been purchasing shares at multiples of the current stock price, and continues to purchase shares (most recently in May 2016), then perhaps he is signaling that he believes the stock is worth more than what the market price is at and he is willing to back it up with personal capital. In my mind, actions speak louder than words.

On a side note, there is a potential catalyst this week that could alleviate the market’s concerns over any bankruptcy possibility. The company has announced that it anticipates revising the terms of its senior notes by September 30, 2016.

Other positive catalysts include: continued increase in potash prices, further cost cutting initiatives from the company, improvement in the agricultural or oil and gas drilling industries, or a potential acquisition or merger offer.

That said, smaller companies have a greater likelihood for fraud compared to larger corporations who are more prominently followed by analysts and major news outlets, potash prices can continue to decrease, the company could be mismanaged, or the company can issue a capital raise and severely dilute existing shareholders.

However, not to downplay the potential downside, but a capital raise would strengthen the company financially and reduce bankruptcy concerns and the fact that the CEO has been acquiring shares gives him less incentive to lie or mismanage the company.

In future posts I will continue to monitor the performance of IPI and may include more components of my investment research process.