RBC Capital Markets upgraded its rating on shares of Intrepid Potash, Inc. (NYSE: IPI) to outperform from sector perform and increased its price target to $44 from $38, on higher potash price forecast.
We increased our price target for Intrepid from $38.00 to $44.00. The change reflects an upward revision to our 2012 realized potash price assumption from $500/ton to $550/ton. We believe the increase to our 2012 price forecast is supported by new pricing announcements from PotashCorp and the Belarusian Potash Co. (BPC), said Fai Lee, an analyst at RBC Capital Markets.
Lee upgraded Intrepid to outperform, based on the implied all-in return to his price target of 19 percent. Historically, fertilizer company valuations have been correlated with fertilizer prices. Lee believes his outlook for rising potash prices will translate into a higher valuation for Intrepid.
PotashCorp has increased its posted price for granular potash in the U.S. Midwest by $45 per short ton (8.7 percent) from $515/ton to $560/ton. Lee expects Intrepid to follow suit and post higher prices for its customers.
If the new pricing represents summer fill pricing designed to encourage orders over the seasonally slower summer demand period, Lee could see additional price increases for North America this fall that are not reflected in his current forecast.
For 2011, Intrepid Potash's management indicated that potash production levels will be close to the annualized second half of 2008 levels (i.e., about 800,000 tons). Overall sales volumes are expected to be in line with production levels. Lee has lowered his 2011 potash sales volume forecast from 890,000 tons to 810,000 tons.
Potash operating cost of goods sold, net of byproduct credits, are expected to be in the range of $170-$180/ton in 2011. Lee has increased his estimate from $166/ton to $175/ton for 2011, net of byproduct credits.
Separately, Belarusian Potash raised its granular potash price for Brazil by $50/tonne (10.5 percent) to $520/tonne CFR for large buyers and $530/tonne CFR for small buyers effective May 1. Lee believes higher offshore prices are supportive of North American potash pricing.
The brokerage lowered its 2011 EPS estimate for Intrepid Potash to $1.26 from $1.31 while increasing its 2012 estimate to $2.31 from $2.10, to reflect its revised potash pricing assumptions.
Management's expectations for potash production levels in 2011 are lower than Lee's previous forecast and he expects to see improved operational performance in 2012.
Our price target of $44.00 for Intrepid implies a 2012 EV/EBITDA multiple of 10.0 times. We believe the modest premium price target multiple to its peer group is reasonable given that Intrepid is solely focused on the production of potash-related products and our belief that the potash industry has a better structure fundamentally than the nitrogen and phosphate industries, said Lee.
Denver, Colorado-based Intrepid Potash engages in the production and marketing of muriate of potash or potassium chloride, and langbeinite under the Trio brand name primarily in the United States. It also offers by-products, including salt, magnesium chloride, and metal recovery salts. Intrepid serves agricultural, industrial, and feed markets.
Intrepid Potash stock rose 4.34 percent to $38.67 on the NYSE at 9:50 am EST.