Intrepid closes West facility amid weak potash prices

Intrepid Potash (NYSE: IPI) is temporarily shutting its largest potash mine amid weak fundamentals, after swinging into a loss in the first quarter.

On May 9, the company posted an adjusted net loss of US$6.5 million, or US22¢ per diluted share, down from an adjusted profit of US$6.5 million, or 9¢ per diluted share, in the first quarter of 2015.

It sold 218,000 tons of potash in the first quarter, down 6% from a year ago. The average realized sales price was US$216 per ton, a 40% decrease from last year’s first quarter and 22% lower than the previous quarter.

The company attributes the depressed price to high levels of global supply and the stronger U.S. dollar, which benefits producers importing tonnage into the North American market.

Intrepid also sold 50,000 tons of specialty fertilizer Trio at average realized prices of US$316 per ton, compared to 62,000 tons averaging US$367 per ton in the earlier year. Trio contains three key nutrients — potassium, magnesium and sulfate — in a single particle.

Intrepid’s gross deficit came in at US$9.2 million, versus a gross margin of US$18.7 million, a year ago.

Given the soft potash prices and oversupply in the U.S. market, the company aims to lower its overall production and costs.

Earlier that day, it said it would place the West facility in Carlsbad, New Mexico, on care and maintenance and dismiss 300 employees. The mine should keeping producing until July.

“This decision was difficult but a necessary move given the current macro environment for potash,” Bob Jornayvaz, Intrepid’s executive chair, president and CEO, said on a conference call.

The West facility, which churned out 42% of Intrepid’s potash in 2015, has become “increasingly less profitable in recent months” due to the depressed potash prices.

The miner expects to incur a one-time charge of between US$1 million and US$3 million in severance and associated costs in the second quarter. The West facility should stay offline until potash fundamentals improve.

The company anticipates savings of US$4 million to US$5 million a year from the West closure and leveraging West’s assets to satisfy some of the maintenance capital needs at its nearby East facility.

However, it does not expect to see that benefit until 2017 given the cost of the transition. Also offsetting these savings is the estimated US$500,000 to US$750,000 in annual maintenance costs at West.

Meanwhile, the firm has converted its East facility to Trio-only production in April, ahead of schedule. The facility should finish ramping up by late 2016, Jornayvaz says.

“With these two strategic moves, we will effectively remove 625,000 tons of the highest cost and lowest margin potash from our sales mix at a critical time when the potash oversupply in the market has pressured profitability.”

Starting in July, Intrepid forecasts that its cash cost per ton per potash would “decline meaningfully” once it sells the remaining inventory from the West and East facilities, notes Brian Frantz, Intrepid’s senior vice president and chief accounting officer. Once sold, the miner anticipates that its potash costs from is three solar solution potash mines will be between US$110 and US$125 per ton.

Intrepid recently reached an agreement with lenders to extend its credit facility to the end of July. Its note holders have also agreed to waive the financial covenants until the end of June.

Jornayvaz says the extensions will allow it to consider replacing the current credit facility with an alternative. “We expect to have sufficient liquidity to meet our obligations as they come due,” he added.

Commenting on the changes, BMO analyst Joel Jackson notes the company “could transition into a smaller producer but with positive cash flow and not in breach of covenants by early 2017.”

That said, he cautions if potash and Trio prices continue lower, Intrepid will not be able to produce more Trio or reach its potash cost targets.

“Considering this risk and Intrepid’s liquidity, it’s hard to be constructive on IPI,” he concludes. Jackson maintains a market perform speculative rating, with no target price.

The company exited March with a total debt of roughly US$150 million.

Intrepid gained 18% to close May 10 at US$1.11 per share, after losing 8% in the previous day.