Intrepid Potash Stock Snapshot
Intrepid Potash is a microcap potash mining company trading at a large discount to book value
Intrepid Potash (IPI) currently has a market cap of $333 million and has experienced dramatic price swings over the past few years. After a sharp run-up to $107 in 2022, it has since bounced around $18 and $27 and is currently trading around $25. Potash, a key mineral for fertilizers due to its potassium content, is primarily extracted through a process where hot water is pumped into the mine to create a brine, which is then transferred to man-made ponds for evaporation, leaving behind the minerals. As the largest U.S. potash producer, Intrepid operates in a highly cyclical industry, which has kept me away from mining stocks in the past. However, I have heard other value investors mention IPI and the stock trades at a significant discount to book value.
Potash prices surged after the Russia-Ukraine war disrupted supply from Russia and Belarus, which together produce about one-third of the global market. However, prices quickly declined to current low levels. Also, potash prices seem to correlate with corn and soybean prices, which were high in 2022 but are now struggling. These price swings explain why IPI is out of favor with investors. In its latest investor presentation, Intrepid outlined capital expenditure projects aimed at improving mining efficiency, which could enhance gross margins once potash prices recover. Additionally, the company is exploring lithium mining, given its similar extraction process, though management has shared few details beyond noting its higher margins. I’m not counting on lithium being a major revenue source anytime soon, but it could develop into a nice side income stream.
Another potential upside comes from oil drilling agreements. Intrepid entered a deal with an Exxon subsidiary, receiving an initial $50 million payment at the end of 2023. If drilling continues, the company could receive an additional $150 million—an amount equal to nearly half of its current market cap. However, the timing and likelihood of this payment is uncertain.
Financially, Intrepid generates revenue from three segments: about 45% from potash sales, another 45% from its proprietary mineral blend “Trio,” and the remaining 10% from selling brine water to oil frackers. Sales have fluctuated widely, from a low of $150 million in 2020 to a peak of $293 million in 2022, with trailing twelve-month revenue at $206 million, averaging around $212 million. Gross margins have ranged from 9.7% to 48.1%, while operating income has been negative in weaker years like 2020 and the past twelve months. The company’s best year, 2022, saw $103 million in operating income—three times higher than 2021. Interestingly, net income peaked in 2021 rather than 2022 due to a favorable $209 million tax adjustment. As expected, Intrepid’s inconsistent earnings have led to poor return on assets, often falling below its cost of capital.
Given its volatile earnings, I think valuing Intrepid based on assets rather than earnings power makes more sense. The company is currently trading at just 0.44x book value. It holds $40 million in cash and short-term investments, $110 million in inventory, $355 million in property, plant, and equipment (PP&E), and a $195 million deferred tax asset, totaling $806 million in assets. With liabilities of $126 million and no debt (which is good for a commodity-based company) its equity stands at $681 million, or a book value of $56.52 per share. While I may not fully understand all the nuances of valuing mining assets, the lack of red flags like excessive debt or goodwill suggests a relatively solid balance sheet.
The assets appear to be on sale, but that alone isn’t enough to justify buying the stock. If potash prices rebound and Intrepid can generate even modest profits, sentiment could shift. Additionally, if the company reaches a point where it can return cash to shareholders, the stock could trade closer to book value. A $150 million special dividend from the oil deal would be mouth watering. Also, meaningful lithium production could further change the company’s narrative. While I don’t love Intrepid’s inconsistent earnings, with further research, I might come around to liking the stock.
Stocks mentioned: IPI 0.00%↑
