Sunday, 22 February 2009 23:00

Questions Abound Concerning Intrepid Potash

I have been looking into this company (Intrepid Potash, IPI) at the behest of a reader who felt that there may have been some hanky panky going on. I will leave it up to my readers to draw their own conclusions from what I have found - better yet if anyof you can shed some light on this it would be helpful.

My Take on IPI

According to initial prospectus filed on April 07, 2008 (registered users can download it here as a zip file: pdf Intrepid Potash Prospectus Apr 23, 2008 2009-02-23 14:39:12 491.91 Kb ) the company offered 24 mn shares at price band of $24-$26 per share (P/E band of 96.0x -104.0x). Subsequently according to Free Writing Prospectus filed on April 17, 2008 shares offered were raised to 30 mn with price band of $27-$29 (P/E band of 108.0x-116.0x). Later, the company filed another to offer 30 mn shares to public at $32 per share (P/E of 128.0x).

According to prospectus, the company intended to use the proceeds to acquire Intrepid Mining for $757 mn and re-pay debt of $82.5 mn and the balance $60 mn towards general corporate expenses. As per the cash flow statements for subsequent periods, the company seems to have allocated the IPO proceeds in line with the objectives stated in IPO. The company had used $87 mn for repayment of its long term debt and $893 mn to Intrepid Mining LLC.

o Although technically the proceeds of IPO were used according to stated objectives, it is interesting to note that Intrepid Mining was controlled by the promoters with Harvey Operating and Production Company, Intrepid Production Corporation and Potash Acquisition, each having 40%, 40% and 20% stake, respectively in the Intrepid Potash.

§ Robert P. Jornayvaz III, Chairman of the Board and Chief Executive Officer of Intrepid Potash, had 100% ownership interest in Intrepid Production Corporation

§ Hugh E. Harvey, Jr, Executive Vice President of Technology and Director of Intrepid Potash , had 100% ownership interest in Harvey Operating and Production Company.

  • The company offered 30 mn (40%) shares to the public while the balance 44.8 mn was held by 3 promoters - Harvey Operating and Production Co (24%), Intrepid Production Corporation (24%) and Potash Acquisition, LLC (12%). As of December 8, 2008 (last reported filings) Harvey Operating and Production Company and Intrepid Production Corporation both had reduced their holdings by 10% to 16.1 mn shares (each having 21.6% of total shares outstanding). On November 14, 2008, Potash Acquisition distributed 8.0 mn shares to its members and certain persons with indirect interests in Potash Acquisition according to pro rata interest in the company.
  • Insiders have sold a nominal amount of shares to the public worth $5.72 mn with an average price of $17.9 per share between November 24, 2008 to December 5, 2008.
  • As regards accounting shenanigans relating to inventory on the prima face, we believe the facts stated in your mail may not be correct. Although the company's inventory have increased marginally from $18.5 mn as of December 2007 to $$23.1 mn as of September 2008, its backed by 6% increase in sales. Inventory turnover days of the company as of September 2008 is also comparable at 37.2 compared with 31.6 as of December 2007.
  • Also, we wanted to highlight that the company's gross margins have increased substantially to 61% in 3Q2008 from 24.6% in FY07 on back of considerable increase in potash price. Average sale price of potash had increased 223% to $623 in 3Q2008 from $193 in 3Q2007.

Registered users can download the financial statistics and things of interest spreadsheet here: pdf Intrepid Potash Financial Statistics of Interest 2009-02-23 14:40:50 96.00 Kb

The company managed to raise 67% more than the initial expectations.
Date of filing Shares offered to public (mn) Price band P/E Band Expected amt to be raised ($ mn) Underwriters' option to purchase Shares O/S
(mn)
% increase (per share from initial minium offering) % increase in total offer from initial minium offering
Minimum Maximum Minimum Maximum Minimum Maximum
07-Apr-08 24.0 24.0 26.0 96.0x 104.0x 576 624 3.60 74.8
17-Apr-08 30.0 27.0 29.0 108.0x 116.0x 810 870 4.50 74.8 21% 51%
21-Apr-08 30.0 32.0 128.0x 960 4.50 74.8 33% 67%
$757.4 mn, or 84.4% of the net proceeds tol be paid to Intrepid Mining in exchange for all of Intrepid Mining's assets other than cash
$82.5 mn, or 9.2% of the net proceeds, to be used by for repayment of debt assumed from Intrepid Mining pursuant to the exchange agreement, leaving the company with no outstanding debt
$59.5 mn to be used to fund production expansions and other growth opportunities and for general corporate purposes.
Shareholding pattern Just after IPO Current Position
Public stockholders 40.1% 30.0 56.2% 42.1
Harvey Operating and Production Company 24.0% 17.9 21.6% 16.1
Intrepid Production Corporation 24.0% 17.9 21.6% 16.1
Potash Acquisition, LLC 11.9% 9.0 0.0% 0.0
Other propmoters 0.4% 0.3
Sissel 0.3% 0.2
Total 100.0% 74.8 100.0% 74.8
IPO Investors had immediate dilution impact of $29.78 per share after the offering
Pro forma combined net tangible BVPS as of Dec 31, 2007 0.12
Increase in net tangible BVPS attributable to new investors 11.99
Decrease in net tangible BVPS distributed to existing stockholders -9.89
Pro forma combined as adjusted net tangibleBVPS after the offering 2.22
Initial public offering price per share 32.00
Pro forma dilution per share to new investors -29.78
On November 14, 2008, PAL distributed 8,058,000 shares of Common Stock pro rata in accordance with its governing instruments to its members. The members of PAL and certain persons with indirect interests in PAL thereupon successively distributed substantially all of the shares received pro rata in accordance with their respective governing instruments to their partners and members

Additional observations from an astute BoomBustBlogger whose opinion I value:

"Still looking into this.
But I had a couple things which smelled a bit funny the first time through.

This
was a little weird - their Interim CFO was the primary owner of Quinn &
Associates, a really small accounting firm. In 2006, Q&A got a full
33% of their revenues Intrepid Mining. We've seen a few instances now where
small accounting firms are a "tell" that the quality of the old
accounting might not have been much good.

"Relationship with
Quinn & Associates, P.C.

Mr. Quinn,
our Interim Chief Financial Officer, is an independent contractor and performs
services for us through the accounting firm of Quinn & Associates, P.C., of
which he is the primary owner. In 2006, we paid Q&A $468,456 for services
rendered on our behalf by Mr. Quinn and other employees of Q&A,
$175,175 of which was attributable directly to services performed by
Mr. Quinn. In 2006, payments from Intrepid Mining represented
approximately one-third of Q&A's annual revenue.
" (source - 12/20/07)

It
also looks like management emptied out the piggy bank before getting Intrepid
Mining bought out, with "special distributions" and interests in
other entities:

"Intrepid Mining
Transactions with Members

Intrepid Mining declared
special distributions to its members of $3.9 million and $15.0 million in June
2007 and October 2007, respectively. These distributions were funded by draws
upon the existing revolving line of credit, and were permitted under the
existing senior credit facility.

In early 2007, Intrepid
Mining decided to distribute its remaining interests in Intrepid Oil and Gas,
LLC (IOG) to its members. The amount of the equity distribution was $0.8
million.

Intrepid
Mining made advances from time to time to its managing members. At
December 31, 2006 and 2005, the outstanding advances were approximately
$0.4 million and $0.2 million, respectively. All such advances have been repaid
to Intrepid Mining.
" (source - 12/20/07)

Regarding
Jornayvaz's fiduciary duty to Intrepid Potash, I totally agree with you.
At the same time though, while their contract specifies they must devote their
full time to the company, the contract also says basically "except they
can also manage their personal investments" [see red below]:

"We expect to enter into
employment agreements with Messrs. Jornayvaz and Harvey in connection with
the completion of this offering
in order to secure their
services on a long-term basis and to protect the company following their
termination of employment by securing their agreement not to compete with us.
The anticipated terms of the employment agreements were developed based on
recommendations by Towers Perrin and input from counsel and the principal
owners.

Pursuant
to the terms of these agreements, Mr. Jornayvaz will agree to serve as our
Chairman and Chief Executive Officer and Mr. Harvey will agree to serve as our
Executive Vice President of Technology. We expect that Messrs. Jornayvaz and
Harvey will devote substantially full-time attention to their employment with
us.
In addition, they may continue to manage
their personal investments owned in whole or in part by each executive,
including Intrepid Oil & Gas, provided the management of such
investments does not interfere substantially with the performance of their
duties for Intrepid Potash
. We expect the
employment agreements to be for initial terms of 18 months from the completion
of this offering, with automatic extensions for successive terms of 12 months
each, unless notice of termination is given by us or the executive 90 days
prior to the end of the initial or any successive term. The agreements will
provide for an annual base salary of $487,500, subject to annual review by the
compensation committee with adjustments to be consistent with salaries paid to
executives holding similar positions at peer group companies. We expect that
the agreements will provide for the executives to be eligible for all benefits
offered generally to senior management, for participation in the senior
management bonus programs established by the compensation committee, for grants
under the Intrepid Potash Inc. 2008 Equity Incentive Plan in such amounts and
subject to such terms and conditions as are established by our compensation
committee and for all perquisites available generally to senior management.
Each of Messrs. Jornayvaz and Harvey shall be entitled to a company-provided
automobile of his choice valued at under $75,000, to personal use of our
aircraft for 45 hours of flight time per year and the right to dry lease our
aircraft for personal use on the same terms as we dry lease the aircraft to
unrelated third parties.
" (source - 12/20/07)

This doesn't make his actions any less
slimy. But in terms of legality, he does seem to have some wiggle
room. He is clearly pushing it hard though.




I need more time to think through this special dividend, and just work out the
numbers."


Last modified on Sunday, 22 February 2009 23:00

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