Koch Industries talks with its money. Lately it's been talking a lot about its interest in this American company— Intrepid Potash (NYSE: IPI). As of September 30, it owns 5.2 million shares, or 6.9% of the business. That's about $83 million worth. Interesting enough, while Koch Industries was doing its buying, Neuberger Berman, State Street, and American Century funds were selling, getting rid of every last share they owned.
What are they missing about Intrepid Potash?
If anything, it could be normal end of year loss-taking, maybe even just poor timing and/or lack of patience on the manager's behalf. Better yet, they probably bought Intrepid Potash at the dead lows of August (post breakup) and now they're locking in fat profits. Then again, maybe it's just a silly coincidence.
As far as I can tell, there are three fundamental reasons the world's richest brothers like Intrepid Potash:
1) Strategic Assets: the groundwork has been laid, the lion's share of capital-intensive investments are sunk. For Intrepid, execution and commodity prices are its biggest risks. Koch Industries has experience scaling operations. The only other risk (commodity) is out of everyone's control. Sadly, the vast majority of potash reserves are not located in beautiful and friendly places like Saskatchewan, Canada. Large potash deposits tend to be located outside of most people's comfort zone.
Economically mineable deposits are few and far between. Russia is thought to sit on 35% of the world's potash reserves, while Potash Corp. (NYSE: POT), Agrium (NYSE: AGU), and Mosaic, all members of the Canadian consortium (Canpotex), control 46%. As the world's largest fertilizer supplier by capacity, Potash Corp. is a very important company on the world's food pyramid. It meets about 20% of the world's potash needs each year.
Indeed, Potash Corp. is a heavy-hitter in the crop nutrients business. In fact, its assets are so strategic the government of Canada had to rise up, smacking down a $40 billion hostile bid from BHP Billiton in 2010. Potash Corp. is like Canada's baby -- they're not giving it up for anything. Right now investors can buy as much POT as they want for under $30 billion (no pun intended). Those rules don't apply to Intrepid. While its assets are strategic (and it's the largest U.S. producer with almost 10% market share), they aren't too strategic. I don't see the government protecting it from a takeover bid. Did I mention Intrepid's HB Solar Solution mine? When this new facility is up and running it should increase its production by 25%.
2) Langbeinite: Intrepid is one of two global producers of langbeinite (sulfate of potash magnesia), a specialty fertilizer that contains potassium, magnesium, and sulfate. It offers its product under the Trio and Intrepid Trio brand names. I'm no agronomist, but magnesium and sulfate must add quite a boost to a plant's diet when the soil needs it. Or else langbeinite is in short supply, because Trio prices have increased steadily for two years (potash prices haven't), and Intrepid seems to always sell 100% of its production.
3) The Agriculture Story: It's like the song that doesn't end...it just keeps on playing in cyclical rhythm. People have to eat. Crops have to eat. I'm thinking crop nutrients are even more important than that first cup of coffee in the morning.
As you can see from their dense distribution network, Agrium's locations are right in the heart of farm town. With improving technology, Agrium can know what crop nutrients farmers need on an acre-by-acre basis. This knowledge makes it a value added consultant: Farmers trust Agrium's seed and fertilizer recommendations. Its fleet of 2,800 applicators can even help the farmers with putting it down. Positioned this way, vertically integrated from mine to retail, Agrium is less levered to commodity prices, compared to Potash Corp. and Intrepid. Two chapters (analyst favorites) of the agriculture story are about population growth and crop yields, with the main characters being China and India. Over the long-haul, needs tend to make for solid investments, as long as you don't pay a ridiculous price. While potash stocks have bounced back a bit recently, the last three years have been ugly, so it's tough to argue the group is way overpriced.
When people talk with their money they are normally quite serious. The Koch Brothers have a longer-term "buy the whole business" mentality. For that reason alone, odds favor them buying IPI into weakness (not to mention CEO Robert P. Jornayvaz III owns 14%). As a new shareholder, one could feel pretty comfortable about doing the same, especially with a multi-year mind-set.
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