Knowing the cost to mine potash is just as important as knowing the company’s selling price and shipment volume. This is particularly true in a commodity industry where the lowest cost producer has a higher chance of survival. This cost, plus other expenses, will also affect a company’s profitability and determine its earnings. Some costs, such as depreciation, royalties, and selling and administrative costs are generally fixed and are an irrelevant part of total expenses; others, like production costs, represent large portions of total expenses and can fluctuate as much as revenue does.
How profitable is potash?
Potash is different from other fertilizers in that there are not many inputs necessary for its production. For this reason, the cost of production is small and relatively stable. The principal production costs include wages, maintenance materials, natural gas, and electricity. None of these elements eat much of potash sales, and so, potash profitability is particularly high. In 2012, IPI’s gross margin for potash sales was 48.3%. Since September 2013, gross margin has decreased to 35.4% due to lower selling price.
Even though IPI has a premium on the average selling price of potash compared to its peers, competitors such as Mosaic (MOS), Agrium (AGU), and Potash Corp (POT) achieved, in 2012, gross margins of 45.7%, 55.3%, and 64%, respectively, for their potash sales. The reason these margins are so close to or higher than those of IPI’s, is that the company has a higher production cost.
As we can see from the graph above, IPI experiences a much higher cash production cost compared to its peers. As of September 2013, IPI has managed to decrease its cash cost of goods sold (or COGS) to $180 per ton. The new HB Solar Solution Mine will produce potash at a cost of $80 per ton. With the implementation of this new mine, production will increase to 935 tons per year, and overall costs will decrease by 11%, to $172 per ton.
Langbeinite has a much lower profitability. Production costs include all the materials required for the production of potash, plus chemicals such as magnesium and sulfur. In 2012, the gross margin for langbeinite was 8.3%. Since September 2013, profit margin has risen to 18.3% due to higher product price and lower production costs.
© 2013 Market Realist, Inc.
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