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$IPI - Intrepid Potash Management Discusses Q3 2013 Results - Earnings Call Transcript
http://seekingalpha.com/article/1796322-intrepid-potash-management-discusses-q3-2013-results-earnings-call-transcript?source=email_portfolio&ifp=0
Operator
This is the conference operator. Welcome to the Intrepid Potash, Inc. 2013 Third Quarter Conference Call. [Operator Instructions] At this time, I'd like to turn the conference over to Gary Kohn, Vice President Investor Relations. Please go ahead.
Gary Kohn - Vice President of Investor Relations
Thanks, Brock. Good morning. Thank you, all, for joining us for our third quarter 2013 earnings conference call. Presenting on the call today are Dave Honeyfield, President and Chief Financial Officer; and Kelvin Feist, Senior Vice President of Sales and Marketing. Also in the room with us today are Hugh Harvey, Executive Vice Chairman of the Board; John Mansanti, Senior Vice President of Operations; Martin Litt, Executive Vice President and General Counsel; and Brian Frantz, Vice President of Finance and Chief Accounting Officer. Bob Jornayvaz, our Executive Chairman of the Board is traveling and unable to join us today.
I would like to remind everyone that statements made on this call that are not historical fact or that express our belief, expectation or intention, including statements about our financial operational outlook, are forward-looking statements within the meaning of the United States securities laws. These statements are not guarantees of future performance and are based on a number of assumptions, which we believe are reasonable.
Forward-looking statements involve risks and uncertainties that could cause actual results to differ from our expectations. You can find more information about these risks and uncertainties in our annual report on Form 10-K and subsequent quarterly reports on Form 10-Q as filed with the SEC.
Also during today's call, we may refer to certain non-GAAP financial measures such as adjusted EBITA, adjusted net income and adjusted net income per diluted share. Our earnings press release includes reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures. Our SEC filings and our press releases are available on our website at intrepidpotash.com.
I will now turn the call over to Dave.
David W. Honeyfield - President and Chief Financial Officer
Thanks, Gary. Good morning, and welcome to everyone who has joined us for today's call. The most important news for the third quarter is the progress we continue to make on our new and upgraded assets that will enhance our operations by lowering cash operating cost per ton, increasing production and providing more flexibility in our processes to allow us to pursue the best margin sales opportunities. This has been a planned multi-year program that is now reaching its desired end goals.
In the quarter, our teams brought each project closer to the finish line, setting us up to start realizing the benefits of the investments as we move through 2014. Specifically, we have recently placed the first 2 lines of our new North Compaction facility into service and are happy with the new capabilities that the plant offers. We completed construction of the HB wells, pipeline and pond and, beginning in August, we have filled all the solar evaporation ponds with potash-rich brine. We've continued construction of the HB mill, with the target of beginning our first harvest of potash and delivering first production near the end of this year. We completed the drilling of the third cavern system at Moab and we're set to begin circulating brine. And we continue to make upgrades for improved recovery at our West facility.
A Bitter ‘Fertilizer War’ Gripping Belarus and Russia Is Helping U.S. Farmers
http://www.nytimes.com/2013/09/17/business/global/potash-dispute-heightens-tension-between-russia-and-belarus.html
Potash Turmoil Creates Investment Opportunities
http://seekingalpha.com/article/1648062-potash-turmoil-creates-investment-opportunities?source=email_investing_ideas&ifp=0
The potash market imploded in turmoil on 7/30/2013 when Uralkali, one of the largest potash producers in the world, announced that it will leave the BPC cartel. In the financial markets, fortunes are made and lost amid chaos. Thus, the recent chaos in the potash market has made potash companies very interesting to fortunate seekers. This article evaluates how the new potash landscape will impact companies like Potash (POT), Agrium (AGU), Mosaic (MOS), and Intrepid Potash (IPI).
Potash Market 101 - Long-Term Predictable Demand
Potash is used primarily (~90% of current use) as an agricultural fertilizer (plant nutrient) because it is a source of soluble potassium, one of the three primary plant nutrients. Potash is a mined product and have no substitutes, but low-nutrient-content, alternative sources of plant nutrients, such as animal manure and guano, bone meal, compost, glauconite, and "tankage" from slaughterhouses, can be used.
If prices are too high, smaller farmers may substitute potash with low-nutrient-content fertilizers - we saw evidence of this in emerging markets when potash prices skyrocketed in 2008. However, there is evidence that larger farmers must pay the market price:
'"First the price doubled, and then it tripled,' says Brian Willott, who farms soybeans and corn near Palmas in Brazil. 'You feel kind of trapped because there's nothing else you can substitute for it."'
Some analysts spend an inordinate amount of energy trying to predict next year's demand by forecasting crop yields, prices, etc. However, as a long-term investor, I do not worry about small year-to-year fluctuations unless it will materially impact the company over the long-run. In the long-run, fields need to be fertilized, storages must be filled, and people will always eat.
Potash Market 101 - Long-run Predictable, Short-run Volatile
Long-term, supply will meet demand. Effectively, as far as I'm concerned, there is enough potash in the world to supply the world forever. If current mines cannot meet supply, price will increase and production capacity will expand to meet demand. New production capacity, however, takes years to bring to market since conventional Greenfield projects take a minimum of 7 years to complete and Brownfield projects usually take over 2 years to complete (of course, this can vary significantly depending on the extent of the construction and existing infrastructure). Bottom line: in the long-term, supply will meet demand and world-wide production capacity is highly predictable.
However, short-run supply can be volatile. Potash deposits that are economically minable are concentrated in only a handful of countries and dominated by a handful of producers. Big potash players formed cartels to support potash prices and reduce competition. As a result, potash companies that belong to one of the two large cartels have been producing below capacity. If any of these companies decides to produce at full capacity in order to capture market share (i.e. leave the cartel), then the market may be temporarily flooded with supply, driving potash prices down significantly. This is exactly what Uralkali is threatening to do.
Will Potash Prices Really Tank?
If you take the Uralkai CEO's words seriously, then yes, prices will most definitely tank in the near future to as low as $250/t. If prices actually do reach $250 per ton, the marginal producers will bleed money, and Greenfield and Brownfield projects will get shelved. Will prices go as low as $250/t? It is definitely possible, and maybe even lower. If Uralkali maximizes production, than Belaruskali Potash will as well. If both Uralkali and Potash maximizes production, global supply will increase significantly since both companies are producing under capacity and currently represent 43% of all global exports (source: my estimates based on various public disclosures). This changing landscape will force Cantoplex to reevaluate its current strategy as it faces decreasing market share by following the price-over-volume strategy. Remember, the average potash price in 2005-2008 lingered around $150/t.
What Are the Long-Term Impact of Uralkali - Belarusian Fallout?
Again, if we take Uralkali's CEO's words seriously, then potash prices should collapse in the short-run. Depending on how long the low-price environment will persist, marginal players will bleed money and some will face the risk of going out of business. Brownfield and Greenfield projects expected to hit the market in 2018 will get shelved, reducing the medium-term global capacity.
However, I highly doubt that Uralkali will pursue the new volume-over-price strategy for long. Why? The volume-over-price strategy simply doesn't make sense for anyone in the long-term. I believe Uralkali has three strategic reasons for maximizing volume in the short-run:
1. To discipline Belaruskali Potash and the Belarusian government. Uralkali's unilateral action to dissolve the BPC will show the Belarusian party that the cartel setup is extremely valuable to both parties and that without a cartel, both parties will suffer. After Belaruskali Potash suffers financially, the Belarusian government will likely reconsider the decree allowing Belaursian Potash to trade outside of the BPC. Per the interview cited above, Uralkali's sees consolidated trading sometimes in the future, which will push potash prices up to current levels - we just don't know when this will happen.
2. To grab market share. Uralkali is very sour on two facts: 1) Belaruskali Potash is cheating, and 2) they are losing market share to Cantoplex. Since Uralkali is a low price potash producer and since it geographically closer to China, a huge and growing market for potash, this new volume-over-price strategy will allow the company to grab market share and hopefully hold on to it after the future consolidation.
3. To clear the fields of capacity expansion and marginal players. Uralkali's actions won't put any of the big, low-cost producers out of business. However, since 2008, high potash prices have attracted outsiders, including the resource giant BHP Billiton (BHP). High-cost producers like K+S are also considering huge Greenfield projects. The logical question is "why maintain high potash prices that will attract new capacity and players, leading to more competition in the future?" Low potash prices now will "clear the field" before competition becomes a problem in the future. I estimate $300/t potash will do the job just fine.
After the three above goals are achieved, I believe Uralkali and Belaruskali Potash will form another cartel, one that is similar to the current BPC cartel. Prices will rise again and outside players will look to come in and marginal players will look to expand - history will repeat itself.
Is This The Right Time to Invest in Potash Companies?
Yes, but only if you have the three following attributes:
1. You have a long-time horizon - and I mean really long, like over 10-years.
2. You have a strong stomach.
3. You are willing to study the fundamentals of potash companies like POT, AGU, MOS, URALL, and IPI to determine who will come out stronger and who will come out weaker in the low potash price environment. (This article will not cover this since each individual company deserves an in-depth treatment. If there are any interests, I will cover a few in follow up articles.)
Conclusion
The way I see it, potash companies are currently trading at historically low P/E multiples. The reason for this is that the E of the P/E ratio is expected to drop significantly in the near future, which is probably a safe assumption. I believe most analysts out there are forecasting $300/t potash, which is what is driving current potash company valuations.
I believe potash companies were overvalued two months ago for the same reason I believe they are somewhat undervalued today:
1. Two months ago, potash companies are priced as if the historically high potash prices will persist indefinitely, ignoring all the potential competition that high prices are attracting.
2. Two months ago, potash companies are priced as if cartel members will never have disagreements and cartels will continue indefinitely.
3. Now, potash companies are priced as if potash prices will be $300/t forever, and as if potash prices will certainly drop to $300/t.
4. Now, potash companies are priced as if Uralkali and Belaruskali Potash will never speak to each other again, and that there is no possibly that Uralkali is just bluffing.
I don't think the market's reaction to Uralkali's announcement was too extreme, but the reaction leans towards the panic side of the spectrum, thus leading to somewhat - but not greatly - undervalued potash companies. As a result, I have personally taken a small position in Potash Corp , which is the low-cost producer and market leader in the world of potash. I believe there is risk of significant downside price movement for the stock, which is why I have taken a small position with room to increase my holdings as shares drop from the current $30/share to, say, $25/share and $20/share, effectively allowing me to average down during market turmoil. This is my current strategy, one that might not fit your profile, so please do not view this as an investment recommendation.
I would love to hear from you. Please leave your comments below or contact me through my website. Thanks for reading!
Potash And The Fertilizer And Agriculture Companies: Don't Panic Is Rule # 1
http://seekingalpha.com/article/1585912-potash-and-the-fertilizer-and-agriculture-companies-dont-panic-is-rule-1
The world is not coming to an end! That's a good start, and great news. I'll bet a large sum that many thousands of investors, farmers, and entire C-Level managers were feeling nausea during the last 3-5 hours. The immense volume before the opening bells rang around global stock exchanges tells a "Tale, full of sound and fury…" Sure, many cool-headed pros stepped in and promptly discounted a worst case scenario into all of the direct miners and suppliers of the vital commodity nutrients that keep the populace fed in every nation. Obviously, they were joined by a ton of fearful investors, all rushing to hit the exit ASAP, before everyone else. Equally as deft were the opportunistic traders exploiting this huge sell-off with futures, options, short bids, ETFs, options on futures, every weapon possible that traders can brandish to make a ton on the dropping price per tonne of the chemical stocks in question.
Thank you, and cheers to all of them! I also made some moves, and bought Potash (POT) at $29.19. I couldn't help but notice some headline with some ominous sounding threats promising to crash the fertilizer industry by parting ways, effectively busting an oligopolistic cartel that basically controls the large majority of potash supplies. These buccaneer cowboys in the Urals and Belarus not only disrupted the balance of agricultural dynamics, they went "nuclear" and promised a price war. Supposedly, this will drop bid prices and spot prices on global markets, ensuring "mutual destruction." This is directly from SA's Market Currents early this morning:
Tuesday, July 30
3:55 AM Potash producers plunge over Russian spat
Potash producers plunge in overseas trading after Russian potash producer Uralkali (URALL.PK) says it is leaving its JV with Belaruskali, accusing Belaruskali of violating the terms of their agreement. Uralkali will now export deliveries via its own Swiss-based Uralkali Trading. (statement) On a conference call, CEO Vladislav Baumgertner said the move could trigger a drop in global potash prices to below $300/tonne in H2, from a current $400/tonne. Uralkali and Belaruskali's JV, Belarus Potash Company (BPC), accounts for 43% of the global potash export market. Uralkali -14.2% on the MCX. Israel Chemicals (ISCHY.PK, ISCHF.PK) -10.7% in Tel Aviv. K S AG -16% in Paris. North American fertilizer stocks in play: POT, AGU, MOS
As if no one can fill the void, and the door to the dark and endless abyss is forever off the hinges, hellfire heading our way. Is this the way the future will play out? I don't think so.
I logged on to my account early, hashing out a game plan. It did not include selling! I wanted to find some other positions that I'd be willing to sell from, because the risk-reward scenario, today, is much better in any of the few public companies that supply this lifeblood to the grain crops, the "softs" agri-products.
I sold off some Starwood Hotels (HOT) and some Collectors Universe (CLCT), both long-term lots, and doubled-down on POT. During the five minutes I took to decide what to buy and sell, I had time to do several things, wrapping my head around the events, checking the futures prices on all the usual suspects. I went with Potash for now, simply because I already own shares. Nitrogen didn't enter the news, just potash. They all were temptingly low-a fire sale if there ever was one.
Thinking about why I own Potash is amazingly simple. Sure, they have market share, but so do Mosaic (MOS), Agrium (AGU), CF Industries (CF). I would have invested in any…I still might. That's why dry powder is important. But I own the stock because people have to eat. All of us eat. We all eat grain crops. All of us do. Corn, wheat, soy, rice, potatoes, all these are always in high demand, and demand keeps growing. They all don't require potash, but enough do. Every culture needs grain stock. I don't think that will change, at least not while we're here.
Crops will continue to yield larger harvests, to feed ever-increasing populations. They take up more land to live on and get buried in, and farmland shrinks in acres, hectares, square miles, and so on.
Potash has a decent dividend. They just increased the quarterly dividend paid. Maybe, in a prolonged drop in what they can charge for potash, dividends could be suspended or discontinued. Not great, but will that diminish the supply-demand balance for hungry crops and hungry people? No. If less potash gets sold, what happens to farmers' crops? They yield less, and get smaller. Demand for potash increases, and so does its costs. What happens if potash is less expensive for farmers? They can plant and harvest more, and profit more…for a time. When critical momentum ensures that enough farmers are planting and selling more, crop prices drop, because of too much supply. Farmers get paid less, can't invest in crops, labor, potash, machinery, etc. The end result is they grow less, and the circle of life continues to keep turning. That's why the stocks are called "cyclical." Yet people will still need to eat, every day, every season, every year. And it's more likely that populations will keep growing, as opposed to a potash catastrophe that triggers and sets in motion global thermonuclear war, and mutually-assured destruction. As least, it probably won't start in Belarus, or the Urals.
By now, you're no doubt thinking "Who's this simple moron, he writes like a child!" That was my intent (and I'm just a bit taller than I was back in the day). My intent is to bring something out in the simplest terms, because after thinking about the repercussions and implications to the stock, sectors, and all the middle and end customers, all the way down to our little tummies, we all need what potash helps to grow. I was a child when I grasped these concepts (including global thermonuclear war and mutually-assured destruction, unfortunately), and sometimes growing up brings with it some sophisticated, complicated thought processes to our complex grey matter. To compound the cerebral aspects are the visceral sensations. Part of those feeling, namely, stress, nausea, fear, and outright panic took hold of more than a few today. Price and volume, and sentiment, all of these resulted in a fast and fierce sell-off. Thanks again!
As a rational investor, I've learned basics that are now ingrained in my profiteering, capitalistic, wealth-seeking zeal. We call that "Animal Spirits." Like the "Love of the smell of napalm in the morning," The fertilizer stocks are in a skirmish, and investors smelled blood. Rule #1: Don't Panic! Rule two: think before acting. Rule three; with every problem comes a solution. Rule 4: Make lemonade if life throws you lemons. Again with the kid speak! On the other hand, despite the crushing nature of the ag stocks, the futures for the markets as a whole were up, they opened higher, and there's been no secular spillover effect. That's a positive. Corrections have been happening, but only rotating and cleansing a sector at a time. That's another positive and rational indicator.
Rule five is that in investing and business sudden change brings opportunities. Rule six: Can I think of both how to gain in the situation, and can I solve someone else's problem. And I conceived a few scenarios in a minute or two, certainly before the opening bell rang. No one is irreplaceable. Cartel controlling madmen in Russia are a dime a dozen. Better to lose it over potash than uranium warheads. How much of the world's potash do they own, and control? How can they stop other companies in other nations from selling their product outside of Russia, Belarus, or any of their territory? How?
Do they own an army? No. Do they own the American railroads? No. Do they control all the freight barges and ships on the rivers and seas? No. In Potash's case, can they embargo the Great Lakes, The Mississippi, The Suez or Erie Canals? Obviously not. How are they going to effectively ensure that potash can't be sold unless they control it. THEY CAN'T. If they are effective to a large enough degree, will that raise or lower potash prices. They'll increase. Can they drop enough of their own in volume sufficient enough to supply total demand worldwide? Will they dump it at such a cheap asking price that is tantamount to burning all their money up, and chopping off their Ural noses to spite their faces? Maybe.
Will they come to their senses and sit back down to the negotiation table, once they realize they can't eat potash. Maybe. Can't these other large and equally powerful potash and ag companies come together and reform a cooperative agreement, and get back to business in a reasonable time frame? I'm sure it can be done. Can they form their own cartel, get government aid, and/or other interests to also invest in a set of infrastructure solutions to fill the supply-demand void. Probably. Many other stakeholders have self-interests to protect.
Some of them are already on the phone, working up spreadsheets, trying to create a new line of business as we speak. Would investors like Warren Buffett and Wilber Ross, T. Boone Pickens, and who-know-who seize the opportunity to lease ships, consult with a dozen global ports, railroads, trucking companies, and logistics corporations, as well as warehouses in Turkey, England, China, Panama, etc.
Why don't we reach out to Monsanto (MON), Syngenta (SYT), Deere (DE), DuPont (DD), Kroger (KR), Kellogg (K), General Mills (GIS), and the other grocery chains, Wal-Mart (WMT), Target (TGT), Costco (COST), Panera (PNRA), Amazon (AMZN)… you get the picture.
Let's call the Department of Commerce, Dept. of Agriculture, The FDA, Homeland Security, The IMF, the Eurozone PMs and sovereign leaders, The Israeli govt., The Brazilian, Mexican, Argentinean, Peruvian, and Chilean governments, China and Japan, Ireland, Canadian administration. We can start a grass roots farmers' co-op., spur the Obama Administration restart talks on an infrastructure bank. Would the ethanol producers, refiners, and end customers help us with this project?
Since price imbalance at prolonged low rates could put us out of business, we need to assure any possible partnerships that, if they can help ensure the normalization of supply levels and resume the sales channels, we can shut operations, store lots of gross supply, and regulate the price structure the same way that is has been maintained, and business as usual. Food security is vital to all of us.
Good Lord, I have some basis of a plan of action!?! How in the …? Who would I want to run this by? Who's smarter than me on any one of the issues I can identify, that can do better? Can they help me with their contacts to put together a team of experts to develop new trade routes that can bypass the old supply pipeline, and outflank the dark territories, reaching the end markets, ensuring Farmer Joe can plant his crops.
This initial abstract was what I can come up with, and I'm in none of these businesses, but I am in business. Those men and women are seasoned experts. They have more contacts, resources, knowledge-everything to have already had three meetings and a game plan. They may be delayed by rain, but the game will go on. Hungry people solve potential food and crop threats. Who wants to climb in the Urals anyhow?
This temporary interruption is a choke hold, and risks and uncertainty are real, but the problem is temporary, and the core fundamentals that are basic and inert to the agriculture business remain intact. To those investors that had a chill today, please remember that rational thinking and prudent decision trumps reacting based on fear. If one experiences fear, they can rethink the level of risk they wish to take, become more risk-averse, or learn to react opposite of any understandably human condition we call fear. If indecisive, don't do anything, just stand there, as I read somewhere. That is contrarian investing, and all the greats like Buffett and Templeton have stated repeatedly, "Invest when there's blood in the streets," and "Buy when others are selling, sell when others are buying." Wise advice. Profitable advice. Don't panic is rule #1.
I bought POT at $29.19. I have cash on hand for more, or maybe CF, AGU, MOS. We'll see. I'm going back to watch and maybe trade, or invest, in some agriculture names. They're all on sale.
Disclaimer: Investment information contained within this article is not intended as investment advice. This content is not published with any intent to sell, promote, market, distribute, or advertise any company or investment products mentioned. These are the writer's opinions, and material facts contained within all the related content may differ materially, is subject to change, and disseminated from multiple sources. Past returns and performance are not indicative of future performance. All investors should do individual and suitable due diligence before making any investment decisions as a result of any facts, information, or opinions in this article.
Potash companies in the United States
http://www.miningfeeds.com/potash-mining-report-united-states-of-america
American Potash Companies Looking To Capitalize On Fertilizer Demand
http://seekingalpha.com/article/1072401-american-potash-companies-looking-to-capitalize-on-fertilizer-demand
... "As a number of permanent demand changes appear to be sustaining potash around $400 (well above its historical price range of $100), the potash deposits in the Holbrook Basin in Arizona have become economically feasible to develop. Prospect Global and Passport Potash are competing to take advantage of this opportunity by entering production within the next three to four years. Investors, looking for a way to gain exposure to potash exploration in the United States, may want to consider these two junior potash companies.
Despite their risks, both companies are legitimate options for highly risk-tolerant investors. Make no mistake about it- the risk of investing at this early stage is real, and both companies will need over $1 billion in project-level (non-dilutive) financing to actually build their potash mines. At this point, both companies are approximately four years away from any mining operations (lengthy preparation is typical in potash mining). However, both have the requisite resources for building a mine: supportive government, enthusiastic blue-collar labor force, no safety concerns, billions in potash deposits, and easy access to power, water, rail and highway. Exploration-stage potash companies are not the right investment option for every investor, but with the U.S. importing 90% of its consumption, there is an obvious need for new domestic producers.
Investing at an early stage is much riskier than waiting until closer to production, but only early shareholders can experience a full run-up in the thousands of percentage points. Risks to both companies are significant at this stage, as both need to raise money during 2013 for land payments and then attract project-level (non-dilutive) financing from a major producer like BHP in late 2013 or 2014." ...
What is Potash
http://www.pda.org.uk/what-is-potash.html
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