[10Q Detective] Readying for Stock Implosion at Intrepid Potash

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David J. Phillips

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Mar 4, 2009, 7:03:37 AM3/4/09

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One does not need to see wires dangling from C-4 plastic explosive attached to any of the five potash production facilities owned by Intrepid Potash (IPI-$20.07) to sense that the common stock of the largest U.S. producer of potash is heading for an implosion. My friend—and convicted felon turned fraud fighter—Barry Minkow, co-founder of the Fraud Discovery Institute (FDI), has disclosed that a background check by FDI found that Intrepid Potash’ President and Chief Operating Officer Patrick Avery did not earn at least two of three degrees claimed in the registration prospectus filed with the Securities and Exchange Commission prior to the fertilizer maker’s IPO in April 2008.

That got the 10Q Detective to wonder what other ticking bombs might be buried in the potash mines at Intrepid Potash. Like Minkow, we have unearthed additional loose wires that lead back to Intrepid Potash, too:

1. Intrepid Potash has $335 million in deferred tax assets on its books, which represent approximately 48.4% of total assets. The company must generate enough taxable income in future years—with more than a 50 percent probability of doing so—to take advantage of this intangible asset—in accounting circles known as a pre-tax payment—or else it must write down the value of that asset.

On Dec. 18, management predicted fourth-quarter sales would be less than half of the $146.3 million it posted in the third-quarter ended September 30. Slow fertilizer demand, the global credit crisis, and growing potash inventories will likely adversely impact sales and profitable in the first-half of 2009, too. The company closed two plants for two weeks in February and one facility will temporarily close March 9. Upon re-opening, the plants will witness reduce shift hours for workers.

Almost 30 percent of sales are made to oil & gas drillers in the Permian Basin and Rocky Mountain regions, who use standard potash for use in oil and gas drilling fluids. As most of the company’s domestic customers have curtailed drilling activities in 2009, the 10Q Detective anticipates year-on-year declines in industrial sales.

While secondary to the impact of global demand and supply dynamics, U.S. potash prices have tended to increase when the U.S. dollar weakens because as the ruble and loonie appreciate there is upward pricing pressure from the Russian and Canadian producers to maintain their profit margins on U.S. sales. At March 3, 2009, the ruble and loonie have lost (year-over-year) 35 percent and 21 percent, respectively, to $0.02761 U.S. Dollar(s) and $0.7735 U.S. Dollar(s). This weakening in comparison to the U.S. dollar suggests that foreign competitors may choose to lower potash prices significantly to increase their sales volumes. Intrepid might be forced to lower the sales price of its own potash to maintain market share.

Given the aforementioned headwinds, we expect, stockholder value, which totaled $620 million, or $8.28 a share, to take a hit when the company reports potential losses in the first-half of 2009. Deferred tax asset write-downs will show up on the balance sheet as a negative valuation adjustment to shareholder net worth.

2. Another dangling red wire is Patrick A. Quinn, CPA, who started with the company since Intrepid Mining’s inception in 2000, and served as Interim Chief Financial Officer until March 24, 2008. Another dangling red wire for stockholders to examine is that Quinn also is the primary owner of the accounting firm Quinn & Associates (Q&A), which provides services—including auditing—to Intrepid Potash.

In 2007, Intrepid Potash paid Q&A $567,769 for services rendered on Intrepid’s behalf by Quinn and other employees of Q&A, $240,638 of which was attributable directly to services performed by Mr. Quinn. In 2007, payments from Intrepid Mining represented approximately 39 percent of Q&A’s annual revenue!

The average man is a conformist, accepting miseries and disasters with the stoicism of a cow standing in the rain. ~ British writer Colin Wilson

Intrepid Potash investors: Are you men, women, or cows standing in the rain?

Editor David J Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.