After a year of declining sales and increasing costs, management seems much more optimistic regarding potash as well as Langbeinite. Investors should keep in mind that these are IPI’s management’s expectations. They’re subject to change and can differ from actual results.
Potash: Low production, high sales
Compared to 2013, sales volume is expected to increase 26%, while production volumes should increase only 9%. In 2013, IPI sold 89% of the potash it produced, while the remaining 11%, along with accumulated inventory, will be used to cover some of the expected sales for 2014.
It’s difficult to predict fertilizer prices. However, IPI hinted at recovering fertilizer prices for 2014 based on hypothetical floor prices set early this year—something Potash Corp. (POT) and Mosaic Co. (MOS) have recently noted in their earnings calls as well.
IPI’s surprisingly high potash costs to recover
On a year-to-year basis, the cost of producing potash is expected to increase 3%, to $267.5 per ton compared to an average potash COGS of $260 per ton in 2013. The reason for the slight rise is that the 2013 fourth quarter results showed potash COGS of $296 per ton due to a production inconvenience. The unusually high number raised the yearly average in 2013. Without the production inconvenience and the addition of low-cost production facilities, potash COGS for 2014 is expected to decrease 10%.
HB, the new low-cost production facility, is expected to start operating at full capacity between 2015 and 2016. So investors should expect IPI’s cost to fall over the next two years, if everything else stays the same. One competitive advantage that IPI enjoys is that it operates at full capacity and sells what it produces. Due to its small production volumes compared to its peers, when IPI increases supply, the price of fertilizers isn’t significantly affected. This low-cost production facility will decrease overall production costs.
Langbeinite is expected to continue its positive improvement
For the past couple of years, Langbeinite has performed well relative to a decaying fertilizer market. Sales volumes were 37% lower during the last quarter of 2013 compared to the same period in 2012, but this was due to unusually high expectations.
The company has enough cash flow
After years of investments, management said it will reduce capital expenditure by more than $200 million in 2014. Investors should see this as a positive, because it means IPI has the ability to weather out current industry weakness. In 2013, the company spent ~$250 million in capital expenditures and earned $65 million in operating cash flow. For the last two quarters, when potash prices have been really weak, the company generated $16 million in operating cash flow. A reduction of $200 million of capital expenditure provides IPI positive free cash flow. Since the company has $68 in short-term liabilities that are mostly in accounts payable, and ~$78 million in quick assets (current assets minus inventory), IPI is capable of weathering the current weakness. If potash prices fall further, the story would be different, of course.
Where’s the share price going?
Investors should be aware that IPI stock is much more volatile than the stocks of its peers, since it’s one of the more expensive producers out there. IPI’s short interest, the percentage of floating shares that are held short, was 20%, as of February, 2013. A high ratio shows there are a lot of people betting the stock would fall. But if the potash industry further shows signs of recovery, you could see them cover their shorts. Subsequently, shares should rise.