Value Line is regarded as the best independent research available. More than just recommendations, Value Line provides the rationale behind its picks for greater understanding.
- Don D., California
Shares of Intrepid Potash (IPI) Can Make Your Portfolio Grow
According to global trends, the world’s population is likely to increase 15%-25% by 2030, to between 8.0 billion-8.5 billion people. Not only are there going to be more consumers, but with a growing percentage of society now living above the poverty level, there is a rising need for food. In order to meet estimated growth in food demand, improvements in crop yields are needed. Growth in the population, rising incomes in emerging markets, and increasing use of food grains in the production of bio-fuels has led to auspicious operating conditions in the fertilizer market. In fact, in order to boost yields, nutrient applications would have to advance substantially.
Potash producers perhaps hold the most potential. The key input for this nutrient is potassium. Supply of this mined product is limited, and concentrated in a few countries (primarily Canada and Eastern Europe). What’s more, a small number of companies control a major portion of the global capacity, perhaps enabling them to control supply and coordinate pricing. Relatively strong prices for certain potash-consuming crops suggest that global markets for the nutrient should remain healthy, after rising sharply in the last year, to between $500 and $550 a ton.
Market fundamentals indicate these entities are ready to extract favorable terms from major agricultural countries, namely Brazil, India, and China, which account for roughly 45% of total demand. After reaching 55 million-60 million tons in 2011, global potash shipments should increase again this year, as farmers work to boost soil fertility.
Intrepid Potash (IPI) is one of the biggest fertilizer producers in the United States, selling potash and langbeinite (sulfate of potash magnesia), another mineral containing potassium. Since 2004, it has supplied, on average, 1.5% of world potash consumption and 8.5% of domestic consumption annually. IPI is one of two global producers of langbeinite, a chemical better suited for chloride-sensitive crops (potatoes, tobacco, onion, etc.). In all, this Colorado-based company’s five facilities have the capacity to produce 1,200,000 tons of potash and 250,000 tons of langbeinite. With the completion of expansion opportunities and the reopening of the idled HB mine, production is on pace to increase by 370,000 tons annually over the next five to seven years.
While smaller in capacity than many of the competing fertilizer makers in North America, the company has a major advantage. Intrepid Potash’s facilities are around the corner including the U.S. cornbelt, where farmers are arduously working to boost yields. The close proximity enables the company to deliver shipments at relatively lower shipping costs. What’s more, approximately one-third of this nutrient maker’s sales are to oil & gas drilling rigs (as additives in drilling fluids), where investments should continue to be heady.
The 2012 harvest is ahead of schedule, leading to expectations that applications will be generous during the upcoming season. However, given the murky macroeconomic picture (primarily in the euro zone) and extreme volatility recently displayed in grain prices, farmers have curtailed nutrient purchases. Too, the fact that dealer inventories of potash have increased in recent months bears watching. Due to these factors, many equities in the fertilizer sphere, including IPI, experienced weakness during the latter half of 2011.
This decline, though, may well serve as an excellent buying opportunity for long-term accounts. Population, income, and economic growth in the developing world are resulting in sharp declines in arable land per person. Moreover, demographic trends suggest demand for food, fuel, and feed for livestock will firm in the years ahead, necessitating greater applications of fertilizers. Given these factors, as well as long development times, potash producers, including Intrepid Potash, appears to have a bright future.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.