Intrepid Potash: An investor's guide to the American producer (Part 5 of 8)
Over the past couple of years, Intrepid Potash, Inc. (IPI) has invested heavily in increasing its potash production capacity through capital projects. CAPEX (capital expenditure) is the money a company invests in capital, usually machinery, equipment, and mines. In 2012, IPI invested $253 million, or 23.4% of its market cap, and in 2013, the company is expected to have invested $231 million, or 21.4% of its market cap.
As we can see from the graph, IPI has invested in capital more aggressively than its peers. IN 2008, 2009, and 2012, IPI has invested almost half of its net fix assets values. In 2013, this ration will most likely be similar.
The largest investments over the last 2 years have been in the HB Solar Solution Mine, the North Compaction facility, and the drilling of a new cavern in Moab, a mine located in Utah. The HB Solar Solution Mine accounts for almost half of the capital expenditure, while the North Compaction facility will take up a quarter of the invested capital, and the drilling around 6%. The remaining is divided between many other small projects.
However, in the current year, IPI is planning on decreasing its capital expenditure to $70 million. IPI’s goal for 2014 is to take advantage of the previous investments and produce positive free cash flow. In more intuitive words, IPI will stop spending money in order to produce more.
Where did all this money come from?
Capital expenditure almost doubled itself in 2012 from 2011, and it is expected to remain as high for 2013. In 2012, the invested money was partially offset by cash earnings; however, IPI used almost $40 million of its cash to cover for this expense. In 2013, IPI took a loan to pay half of its capital expenditure. The rest was paid with cash from the earnings.
Looking into the future
There are two main opportunities for IPI that come from its capital expenditure. The first one is to further reduce the price of production by taking advantage of economies of scale. Most competitors already enjoy the earnings that come from high economies of scale, while IPI can still take advantage of it. The second opportunity comes from investing in a market that imports 85% of potash. By increasing production capacity, IPI will be able to offer more potash to the local market.
Browse this series on Market Realist:
- Part 1 - An introduction to Intrepid Potash
- Part 2 - Intrepid Potash’s solar solution mining process
- Part 3 - US: One location for all of IPI’s assets
- Personal Investing Ideas & Strategies
- Finance Trading
- Intrepid Potash
- capital projects