Thursday, Credit Suisse initiated coverage of Intrepid Potash, Inc. (IPI) stock with an Underperform rating and a price target of $23.
Analyst Yip believes that IPI management has done an admirable job in building a sustainable U.S. potash business by investing in inefficient or previously idled plants and, with minimal capital investment, using alternative mining techniques to run them more efficiently and profitably.
However, the analyst said that the downside risks to potash volumes and prices as well as the substantial capital expenditure required for internal growth projects are likely to limit the company's growth potential over the near to midterm. Based on the analyst's earnings estimates, IPI's valuation appears fully valued, with the stock currently trading at 10.7 times 2010 EV/EBITDA.
The analyst said that relative to Saskatchewan potash production costs, IPI's production costs are high owing to its lower-quality potash reserves. While there is room to improve the operations through debottlenecking and other efficiency projects, IPI's potash production will remain at a cost disadvantage although it is still highly profitable at current potash prices. IPI plans to invest in several major growth projects that offer favorable returns but require relatively large amounts of capital for a company of this size.
The analyst noted that IPI's mines are in Southwestern United States, providing it several advantages, including easier access compared with its Canadian competitors in serving the agricultural end markets in Southern and Western United States; close proximity to industrial potash customers in the oil and gas industry; favorable weather for low-cost solar evaporation potash production; and lower royalty taxes compared with its Canadian competitors.
Currently, IPI is up $0.32 or 1.13% and trading at $28.59.
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