Just like its bigger peers Mosaic (NYSE:MOS) and PotashCorp (NYSE:POT), Intrepid Potash (NYSE:IPI) was hit by the downturn in potash prices. This year, shares of Intrepid Potash lack direction and are up just 2% year to date. Lately, most potash producers stated that they thought a bottom was hit in potash pricing. If so, will this bring upside to Intrepid Potash?
Better pricing didn't help first-quarter earnings
Intrepid Potash, which is focused on the domestic market, enjoyed a solid premium on its average realized potash price in the first quarter. The company sold its potash for $317 per ton. In comparison, PotashCorp's average realized potash price was a disappointing $250 per ton. Mosaic did better with an average first quarter realized potash price of $267 per ton. However, this price is still well below the level reached by Intrepid Potash.
Lower transportation costs, as well as supply constraints due to transportation problems caused by winter weather, surely helped Intrepid Potash in the first quarter. Unfortunately, this was not enough to bring Intrepid Potash earnings into positive territory, and the company reported its second quarterly loss in a row.
Intrepid Potash stated that it expected to gain a few more dollars per ton on the average realized sales price for potash in the second quarter. What's more, the company expects to drive down potash cash operating costs by approximately 10% per ton in the second half of the year. If the company's cost-cutting efforts succeed, Intrepid Potash will come closer to achieving positive free cash flow for this year.
Is the premium justified?
Intrepid Potash trades at a significant premium to PotashCorp and Mosaic if judged by forward P/E. At current prices, Intrepid Potash sells at 47 times its future earnings. Forward P/E numbers for PotashCorp and Mosaic are significantly more modest -- 18 and 14 respectively.
Such a difference typically implies anticipation of growth for the company that trades at a premium to its peers. Yet, Intrepid Potash's first-quarter production of potash was flat compared to the first quarter of 2013. The company also produces a sulfate fertilizer langbeinite, which is marketed as Trio. Trio sales and production were down compared to the first quarter of 2013. However, Intrepid Potash expects to increase Trio production in the second half of the year.
Going forward, Intrepid Potash expects production growth from its HB Solar Solution mine. The mine produced 13,000 tons of potash in the first quarter, and is expected to produce 50,000–100,000 tons of potash this year. When the mine reaches full annual production rates, it will produce 150,000–200,000 tons of potash at cash operating costs of $80-$100 per ton. This will increase Intrepid Potash's production of potash by almost 12%.
Yet, these growth plans are scarcely enough to trigger big upside in Intrepid Potash stock. In addition, the company does not attract income-oriented investors, as it pays no dividend. In comparison, PotashCorp yields a hefty 3.85% at current prices, while Mosaic yields 2.00%.
Intrepid Potash is unlikely to have significant upside without major improvements on the potash price front. While the company receives better pricing than its bigger peers, this is already reflected in its share price. At this time, dividend-paying PotashCorp and Mosaic look like better businesses to dig into.