Inflation Will Return Driven by Higher Food Prices, Helping Fertilizer Stocks
Struthers Report V29 # 8.0 - Intrepid Potash
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I show a 2 year chart of oil prices below. The main observations show the down trend was broken but resistance around $82 has not been breached. There is solid support around $65 that has recently been tested 4 times. OPEC is not happy with Oil in the low $70s and they need it in the low $80s to support their budgets so we should see continued support there. Reuters reports that the Biden administration hopes to buy back at least 12 million barrels of oil for the Strategic Petroleum Reserve this year, including six million already announced. This will add a little support but more important it means no more releases from the SPR.
The CPI rose only 0.1% in May bringing inflation down to 4.0% and below expectations. However core CPI that the Fed watches more closely was higher than expected, up 0.43% to 5.3% in May. The headline figure was held down by a 5.6% decline in gas prices. This is the main factor helping headline inflation come down. Note on the chart of Oil above that YOY we are comparing about $72 oil in May to $115 oil last May. This positive effect on CPI will fade away in August/September time frame. If oil prices get back into the $80s, energy prices will be adding to inflation again. You can more easily see the effect on the chart next page showing energy in the green bars.
Most Fed members feel more hikes are needed and none foresee a cut in 2023. J Powell expressed concerns about inflation. He sees more upside risks and believes not enough progress has been made on core PCE, the indicator that the Fed favours. As you know, I am bullish on energy and believe that the climate scam will soon cause fossil fuel shortages, However, on the inflation front there is a bigger problem. A perfect storm of war ,drought and climate scam is brewing that will drive food prices much higher.
Lets start with drought. Most of the US mid west where most grain is grown is under very bad drought conditions. Kansas farmers expect the worst wheat crop in 60 years.
The National Drought Mitigation Center estimates 57% of domestic corn crop and 51% of soybeans are dealing with drought condition. The U.S. mid west is hit by worst drought in 30 years. Furthermore, Reuters reports the U.S. Beef cow herd is the smallest since 1962. Low demand from Covid lock downs, now drought and high feed costs drove producers to send animals to slaughter instead of keeping them for breeding. Pork and poultry do not show any big issues at this time.
And it is not only the U.S. as dry weather is set to slash Australia's wheat crop by a third. China is the world's largest wheat producer and could lose 30 million tonnes this year because of wet weather. This is not a huge deal but does not help matters. Russia is the world's largest exporter and produces about the same as the U.S. and as we know with the war it has disrupted shipments. Ukraine is the bread basket of Europe and it's grain crops are severely reduced because of the war. The Kakhovka hydroelectric dam that let loose was key for irrigation in that area so that will impact grain production, but the big problem is the front lines of the war is now in the key grain growing areas. Farmers cannot farm in a war zone. In the map below, the dark green are the areas that had the most wheat production on average in the past 5 years. I roughly drew lines in red that outline the current battle fronts.
And just at a time when we need more grain production, the far left climate alarmists are reducing the amount of fertilizer available for crops. For example, Special President Envoy For Climate John Kerry recently warned at a climate summit for the U.S. Department of Agriculture that the human race’s need to produce food to survive creates 33% of the world’s total greenhouse gasses. ‘We can’t get to net-zero. We don’t get this job done unless agriculture is front and center as part of the solution,’ Kerry said.”
In December 2020, the Trudeau government unveiled their new climate plan, with a focus on reducing nitrous oxide emissions from fertilizer by 30% below 2020 levels by 2030. “Fertilizers play a major role in the agriculture sector’s success and have contributed to record harvests in the last decade. They have helped drive increases in Canadian crop yields, grain sales, and exports,” a news release from Agriculture and Agri-Food Canada reads.
The Dutch government, unveiled its nitrogen plan on June 10, 2022. The goal is ambitious: to reduce nitrogen emissions by 50% by 2030. And the government has released a budget of 24.3 billion euros to make it happen. Farmers will have to reduce their current high-intensity production and may eventually be expropriated.
Various meat and poultry prices have eased some, especially eggs, but they are still well above 5 year averages.
Grain prices have come down from the 2022 peaks driven by Ukraine war fears, but most saw price spikes last Thursday and Friday and early this week. Prices have been rising as I put this report together in the last couple days. Below is a weekly chart on wheat and we have the first good up move since October 2022. A close above $800 would be very bullish and a higher high. I expect later this Fall season (harvesting) that prices will be a lot higher, adding to inflation more so.
Fertilizer stocks are the prime beneficiary to rising grain prices as farmers can afford more fertilizer and will apply it to get higher crop yields. All these stocks are hammered down from last years highs and now provide a good buying opportunity. They are trading at low P/E multiples around 4.0. I am going with Intrepid Potash (IPI) because it is trading at just 0.51 book value and I like the chart. Nutrient (NTR) is just 1.43 times book value and I like the yield around 3.6% so will add that to the Millennium Index as well. Here is some detail.
Intrepid Potash - - - NY:IPI - - - Recent Price – US$21.00
Shares Outstanding - 12.7 million
Intrepid, together with its subsidiaries, engages in the extraction and production of the potash in the United States and internationally. It operates through three segments: Potash, Trio, and Oilfield Solutions.
Potash is the common name given to a group of minerals and chemicals that contain potassium (chemical symbol K), which is a basic nutrient for plants and an important ingredient in fertilizer. Most potash is produced as potassium chloride (KCl). Russia and Belarus account for 41% of the globally traded K and are the second and third largest producers.
The fertilizer stocks ran up in 2022 but what the market got wrong was the drop in demand these prices caused. Because of record-high fertilizer prices, farmers across the world cut back on these nutrients which caused much demand to fall. Farmers could not afford high diesel prices and fertilizer prices too along with some other supply constraints. This is coming back into equilibrium in 2023 with lower prices but still strong margins for producers.
Intrepid operates three solar evaporation mines in Wendover and Moab, Utah and Carlsbad, New Mexico. Solar evaporation ponds provide one of the safest, lowest cost, environmentally friendly production methods for potash and salt. These locations have the advantages of proximity to western markets and an arid climate, ensuring minimal weather-related delivery days by truck or rail.
Intrepid also operates an underground mine in Carlsbad, New Mexico for the extraction of langbeinite, the naturally-occurring mineral they sell as Intrepid Trio. Langbeinite, K2Mg2(SO4)3, is a unique geological material found only in a few places in the world. Highly prized as an all-natural fertilizer with international demand, Intrepid’s mine in Carlsbad sits on one of the world’s largest known reserves of langbeinite.
Potash sales in Q1 2023 were 89,000 tons that were 40% of total 2022 sales and 69,000 tons Trio which was 30% of 2022 sales. Sales volume was down in 2022 because of high prices and you can see that sales volumes all already jumping up in 2023.
They have had some issues that have reduced Potash production, but these have been remedied and should start having an effect of increasing production in 2nd half 2023. This update on their operations is from their Q1 results and highlights the plans to improve operations.
East Facility in Carlsbad, New Mexico - The first of the two new continuous miners at their East plant has been delivered and is expected to improve operating efficiency in the coming months. The second new miner is scheduled for July delivery and should be operational by the middle of the third quarter.
HB Facility in Carlsbad, New Mexico - A new injection pipeline installation continues to make progress despite permitting delays. IPI expects the pipeline to be in place by the end of the second quarter with improved brine injection rates starting in the second half of 2023.
To target high-grade brine in the near-term, IPI is undertaking a new, lower-cost capital project to extract a pool of already-known, high-grade brine from the HB Eddy shaft. Permitting and construction are both underway with operations expected to commence in Q4/23. A replacement extraction well designed to have a long-term operational life to target brine from the HB mine system may get pushed to 2024 due to the HB Eddy shaft project.
Solar Solution Potash Mine in Moab, Utah – IPI successfully drilled a new three-lateral potash cavern in Potash Bed 9, which is expected to be online in the second quarter. During the drilling process, IPI was able to stay in the target interval for longer than any of our previously drilled horizontal caverns, and initial measurements show good availability of high-grade potash.
Solar Solution Potash Mine in Moab, Utah – IPI successfully drilled a new three-lateral potash cavern in Potash Bed 9, which is expected to be online in the second quarter. During the drilling process, IPI was able to stay in the target interval for longer than any of our previously drilled horizontal caverns, and initial measurements show good availability of high-grade potash.
After IPI completed the drilling of the new potash cavern, they moved the rig to drill into the original mine workings in Potash Bed 5 to target low spots ("sumps") that they believe contain high-grade brine pools. This brine was previously accessed by a vertical well, but by now using horizontal laterals, IPI can more effectively target the resource. The goal is for a July 2023 completion, which will allow IPI to pump this brine into our solar ponds for the latter part of the 2023 evaporation season.
Sand Resources at Intrepid South – IPI continues to work through the permitting process for the sand project and expects construction to begin by the end of 2023. \
Financial
IPI had total sales in Q1 of $86.9 million, which compares to $104.4 million in the first quarter of 2022, as Potash and Trio® average net realized sales prices decreased to $485 and $344 per ton, respectively. Net income was $4.5 million (or $0.35 per diluted share), which compares to $31.4 million in the first quarter of 2022 (or $2.31 per diluted share).
Intrepid has no long-term debt, a rarity in the natural resources space. As of April 28, 2023, Intrepid had approximately $9.5 million in cash and cash equivalents and $150 million available under its revolving credit facility, for total liquidity of approximately $159.5 million. A debt-free balance sheet allows capital optionality, with the excess cash being available for growth projects or capital return to shareholders.
Marketwatch shows a 3.95 P/E, 4.32 times cash flow and 0.51 to book value. I believe the stock is oversold because of the volatile prices and the added problem IPL had with production down.
On the chart, the stock is down to lows last seen in 2016 and 2020. The stock bottomed with a doji morning star reversal pattern with a $17.23 low on June 1st. These are strong reversal patterns and I expect that was the bottom in the 1 and 1/2 year sell off. The pattern is not evident on this longer term chart but you can see on a 1 year or 6 month chart. There is not much resistance until the $26 area.
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