Intrepid Potash: Funny Business?

I have been looking into this company Intrepid Potash (IPI) at the behest of a reader who felt that there may have been some hanky panky going on. I will leave it up to my readers to draw their own conclusions from what I have found - better yet if any of you can shed some light on this it would be helpful.

My Take on IPI
According to initial prospectus filed on April 07, 2008 (registered users can download it here as a zip file: Intrepid Potash Prospectus Apr 23, 2008 2009-02-23 14:39:12 491.91 Kb) the company offered 24 mn shares at price band of $24-$26 per share (P/E band of 96.0x -104.0x). Subsequently according to Free Writing Prospectus filed on April 17, 2008 shares offered were raised to 30 mn with price band of $27-$29 (P/E band of 108.0x-116.0x). Later, the company filed another to offer 30 mn shares to public at $32 per share (P/E of 128.0x).

According to prospectus, the company intended to use the proceeds to acquire Intrepid Mining for $757 mn and re-pay debt of $82.5 mn and the balance $60 mn towards general corporate expenses. As per the cash flow statements for subsequent periods, the company seems to have allocated the IPO proceeds in line with the objectives stated in IPO. The company had used $87 mn for repayment of its long term debt and $893 mn to Intrepid Mining LLC.

Although, technically, the proceeds of IPO were used according to stated objectives, it is interesting to note that Intrepid Mining was controlled by the promoters with Harvey Operating and Production Company, Intrepid Production Corporation and Potash Acquisition, each having 40%, 40% and 20% stake, respectively in the Intrepid Potash.
Robert P. Jornayvaz III, Chairman of the Board and Chief Executive Officer of Intrepid Potash, had 100% ownership interest in Intrepid Production Corporation
Hugh E. Harvey, Jr, Executive Vice President of Technology and Director of Intrepid Potash, had 100% ownership interest in Harvey Operating and Production Company.

The company offered 30 mn (40%) shares to the public while the balance 44.8 mn was held by 3 promoters - Harvey Operating and Production Co (24%), Intrepid Production Corporation (24%) and Potash Acquisition, LLC (12%). As of December 8, 2008 (last reported filings) Harvey Operating and Production Company and Intrepid Production Corporation both had reduced their holdings by 10% to 16.1 mn shares (each having 21.6% of total shares outstanding). On November 14, 2008, Potash Acquisition distributed 8.0 mn shares to its members and certain persons with indirect interests in Potash Acquisition according to pro rata interest in the company.

Insiders have sold a nominal amount of shares to the public worth $5.72 mn with an average price of $17.9 per share between November 24, 2008 to December 5, 2008.

As regards accounting shenanigans relating to inventory on the prima face, we believe the facts stated in your mail may not be correct. Although the company's inventory have increased marginally from $18.5 mn as of December 2007 to $$23.1 mn as of September 2008, its backed by 6% increase in sales. Inventory turnover days of the company as of September 2008 is also comparable at 37.2 compared with 31.6 as of December 2007.

Also, we wanted to highlight that the company's gross margins have increased substantially to 61% in 3Q2008 from 24.6% in FY07 on back of considerable increase in potash price. Average sale price of potash had increased 223% to $623 in 3Q2008 from $193 in 3Q2007...seeking alpha