Intrepid Potash: Pressure From All Sides

Shares of Intrepid Potash Inc. (IPI) have dropped sharply this week as pressures have mounted in various forms. For starters, the Dow has dropped 8.1% in just the last 5 trading days. It’s tough for any growth stock to avoid losses in that environment. At the same time, the company announced earnings this week. Numbers for the fourth quarter weren’t particularly bad, but there was little reassurance that management could give investors for the coming months. Finally, the potash industry took another blow when Russian miner Uralkali officially cut prices of potash to Brazil by 25%.

Looking closely at the earnings report, it was a bit refreshing to see management acknowledging the tough environment and taking steps to protect shareholders. While earnings were quite high compared to last year’s numbers, the picture for Q1 2009 and following remains cloudy. IPI was able to report sharp profit gains while selling only 94,000 short tons of potash compared to the 215,000 tons it sold in the fourth quarter of 2007. The difference is the realized price of $762 per short ton in 2008 compared to $224 realized in 2007.

In order to maintain financial health in a market with waning demand the company has several options on its plate:

Mine Shutdowns - Closing locations would result in decreased potash production, but would allow the company to save on costs. The resources would be preserved for a later date when presumably prices are more attractive.
Deferrals of Capital Expenditures - Intrepid has many projects that are expensive to maintain, but result in discovery or new production of product. Reducing the capital for these projects would again decrease production but save costs until the market turns
Reduce Operation Levels - Short of actually closing mines, the company could simply “tone down” its level of production and spend less on labor, maintenance, and supplies.
Management made no attempts to assure investors of better days ahead but instead categorized the current market as “erratic and unpredictable.” Much of the production that had been sold to oil and natural gas markets is now being converted for agricultural use. IPI is being forced to adapt to a new environment and appears willing and able to make such transitions.

In 2009, the company intends to spend anywhere from $100 million to $140 million on capex projects. The range is quite wide because the spending depends on exactly how the year progresses. $45 to $65 million of this will be earmarked for sustainability and improvement projects while the remaining $55 to $75 million will be for investments in opportunistic projects. Since the company is sitting on cash of $116.6 million (as of 12/31), no debt, and has access to a $125 million line of credit, the budget should be adequately funded.

With consensus earnings expectations of $2.54 per share in 2009, and $2.84 in 2010, the shares appear to be a good value near $15. The ZachStocks Growth Model has a position in IPI and while obviously I wish we had waited until today to make that investment, the long-term potential for this stock remains attractive. I remain optimistic that this position will realize gains over the coming 6 to 12 months...seeking alpha