Now that the potash industry is becoming more of a free market (cartels usually don't last for long... look up game theory) we are about to find out the real price of potash. Uralkali is one of the lowest cost producer of potash (~$93/tonne) whereas Intrepid hovers around ~$260/tonne for all in costs. Makes sense for Uralkali and others with the low cost advantage to produce full tilt knowing more low cost production is coming online.
With this over capacity hangover potash will probably be priced below the marginal cost of many producers and this is what Uralkali is aiming for. They want to run out the marginal producers out of the industry. Potash Corp (POT) will see their margins decline dramatically, but I think they will be fine once they cut out all unionized benefits in order to be above break even. Intrepid on the other hand have high fixed costs and while many people will be lured to the book value... it doesn't mean squat if potash prices go down to $300 or below for the next full cycle. Intrepid will hardly earn a respectable return on its cost of capital and the stock price must be readjusted to compensate investors. At $300/tonne we are talking about a $40/tonne margin on about 1 million tonnes of production... then throw in the 44 million for G&A... I don't see much value here.
If you want exposure to the potash industry then you should be holding the low cost producer (Uralkali). Anyone else is risky aside from POT (at a lower price). Good luck to everyone!
Sentiment: Strong Sell
The problem in fact is not Intrepids the problem is Potash oversupply,now check URALL ticker they are also down as Intrepid ,as Pot, as Mos. The problem is with the sector ..not just intrepid.Now by the way intrepid is not the smallest play ,there are a lot of microproducers ,those perhaps are the ones u are refering to in your apocaliptic cards.
URALL is currently at all-time lows and is about to be downgraded to junk status. For all we know, they might get black-balled by everybody else in the industry and slide into oblivion. What do you think that would do to potash prices if the biggest producer in the world goes into the tank? Here's another scenario -- URALL realizes they screwed up and they come back to the table, begging for the cartel to let them back in. Names like IPI would pop over 50% in one day and it would actually be much higher over the following days because of the ridiculous short interest. Oddly enough, Dr Doom has decided to leave those scenarios out of his equation. Wonder why?
I truly enjoyed your post. It is a bunch of cr-p but it sounds so good. You are an experienced short and I grant that you are smarter than the average long but there are numerous flaws in your statements. One of which is that Uralkali's goal is to wipe out the smaller players and become a bigger king. Nonsense. Their goal is to make money. If needed they will do what they must to keep prices from deflating too much. Another flaw if the cost of sales for IPI is less than anyone else in the USA. Another flaw is that IPI is lowering its production costs. It really #$%$ me off when sophisticated shorts convince smaller players to sell so they can make money and then later buy the stock for themselves. It is however they way that it works.
Neiljneil you should read up on the Prisoner's Dilemma.
Uralkali and others have the low cost advantage vs most potash producers. Uralkali can increase production from 10 million tonnes to 13+ million tonnes and they can price that extra capacity at $300 tonne or lower if they really want to move the product. They will suffer an overall $100 -$150 million loss in operating cash flow from $1.7 billion... not a bad deal if the end result is eroding everyone else's margins and preventing competition from entering the market. Remember potash only moat is having the reserves and capital to build... but capital in itself isn't much of a moat in the long term. Potash reserves are quite abundant, but no one bothered to explore since prices were low for so many decades.
Now you really think POT and others in North America are investing billions in new capacity and debottlenecking their operations to just let it sit on idle? I'm sure they will produce full tilt as long as the prices they can fetch for their product is above breakeven and I'm betting that breakeven price is really down there. Companies like Intrepid don't have the scale, hence why they are called marginal producers. You claim Intrepid is lowering their costs, but the last 5 years have shown costs have increased. Sure with the new solar process up and running their costs will go down, but I'm not convinced it will be that low. Remember Intrepid is running a lean operation, but their costs are still high whereas companies like POT have the ability to cut the fat from their operations (ie remove union benefits and toning down management compensation).
I'm not saying potash isn't a bad investment in the long term, but you should be in the low cost producer in any commodity sector.
Sentiment: Strong Sell
Are you aware of the technology that Intrepid is putting in place? How do you talk about their margins and then just ignore the massive solar mine that is almost complete?
How do you compare IPI to Uralkali when all of IPI's customers are in the US? Do you know how much it would cost the US customers to buy from Uralkali and then ship it across the world?
This completely leaves out the consolidation factor as well. In times like these when companies are seeing stock prices get cut in half, there are going to be plenty of big boys eying up strategic acquisition targets.
It's obvious you're short -- but at least try and be partial rather than posting some drive-by hit piece. Better hope you aren't still short when/if Uralkali decides to come back to the negotiating table or IPI gets bought out. Don't get greedy.....
For the record I'm not short. I could care less about this company, but the herd mentally of the markets and confirmation bias is what's intriguing.
The data I used are from the Annual reports. Go ahead and read them from 2008 to date. You should see the trend in operating costs. As for shipping costs take a look at the baltic dry index...
The big question is whether Canpotex will maintain volume discipline, but with all that new capacity coming online... I find it hard that they will idle all that production and let someone else eat their lunch. High fixed costs and low variable costs makes it very tempting to price out the last of your production... take a look at the airline industry!
This is classic microeconomics 101 playing out!
Sentiment: Strong Sell
I like Ipi, but I sold and switched to Pot because I believe Pot is more diversified and pays a nice dividend. So far the move looks good as Pot is climbing nicely today. Can't figure why Ipi is down though because it took such a big % hit last week. Good luck. I hope potash firms up and we all make some money or recover some loses. IMHO.