Itafos Inc. (TSXV:IFOS) will continue to generate a lot of free cash if prices hold up
Keith Schaefer, Investing Whisperer | April 6, 2022 | SmallCapPower: When I see a bullish trend in the markets (like rising commodity prices) I go look for the most highly levered (or high “beta”) play to that trend.
(The following article was originally published on investingwhisperer.com)
Generally, I say the lowest cost intermediate producer in any commodity is the best beta. There are lots of junior gold, copper & oil producers. There is only ONE junior phosphate producer: Itafos Inc. (TSXV:IFOS). So early in this year, I bought a position at $1.50. Within three months, I was able to sell half at $3 and now I’m riding for free. I love free–especially in a cyclical industry.
Today, I’m sending you my initial report on Itafos from back then–so it’s dated now. While there is still a lot of upside in Itafos in the coming 12 months–paying down debt, re-negotiating debt, asset sales ($$$$), reducing the 70% shareholder–I’m just watching now.
I have now found a new junior fertilizer producer, with stunning growth and offtake deals with the majors that could see it increase production 500% in the coming 3-4 years and become one of the biggest successes in the history of my newsletter.
I have a report just like this one below–on my new #1 fertilizer stock. Fertilizer prices have skyrocketed as Russia banned exports. Itafos was just a double for me. I think this new pick–which trades under 50 cents a share–will be my biggest win of 2022.
This report gives you a flavour of how I write up my investments for my subscribers. I would urge you quickly download my report on my next fertilizer stock, where I lay out all the information in a similar manner.
COMPANY ANALYSIS:
Itafos is the only junior fertilizer producer I see–and that’s where The Big Beta is. As you will read, the large and expensive debt they carry is a big drag here, but commodity prices and asset sales can remedy that in the next couple quarters.
The 70% controlling shareholder means the stock will never be liquid, but experienced management who also understand finance to me says the business will improve over time. Actually, the business is doing GREAT now, it’s just the finance picture that will improve.
I do own a small bit of stock here—20,000 shares at $1.50. But the lack of liquidity says I can’t really own much more.
I see 4 Big Catalysts in 2022—#1 being asset sales that de-lever the company. And #2 is re-negotiate the debt package. Then #3 is just continued high cash flow from the bull market in phosphate will be a catalyst over time. Number 4 is in Q3 when their Idaho mine should get its permit for Life-Of-Mine extension. But from here, the stock could do nothing until one of these things happens.
This bull market is also happening in grain prices, which is helping farmers pay for higher phosphate prices.
QUICK FACTS
Trading Symbols: IFOS
Shares Outstanding: 185 million*
Market Capitalization: $250 million
Net Debt: $225 million
Enterprise Value: $475 million
* fully diluted
POSITIVES
– MANAGEMENT—former Potash Corp exec
– Cheapest valuation of a fertilizer producer in the public markets
– Cash cow right now. Will continue to generate A LOT of free cash if prices hold up (big de-lever)
– Top line is directly tied to the price of phosphate fertilizer
– US asset—located in Idaho
NEGATIVES
– BIG debt and it is not priced cheap
– Need to see permits granted for mine life extension
– Minimal float on stock/Castlelake owns 70% (so this will forever be a retail stock)
– Small fish in big pool competing against Nutrien (NTR-NYSE) and Mosaic (MOS-NYSE)
Investment Thesis
At less than 3x next year’s EBITDA, Itafos is the cheapest valuation fertilizer play on the market.
At current phosphate prices, FCF (Free Cash Flow) could reach nearly half the market cap next year.
Itafos is so cheap for a couple of reasons.
First, no one has heard of this stock. Limited analyst coverage. No institutional ownership.
Second, Itafos has no float. Float is what stock is available to trade (usually considered as all the stock NOT owned by management or 10% + shareholders). Itafos trades by appointment; it has no liquidity. And it may never have any because…
70% of the company is held by a private equity fund called Castlelake LP. Castlelake is a not a big player in the Ag business; far from it. And they also don’t appear in a hurry to divest their shares.
Third, Itafos is cheap because fertilizer stocks are cheap
Source: Company Disclosures
None of these companies trade at lofty multiples. In a market where stocks are far from “cheap”, here is a sector where you can say they are.
Investors are playing wait-and-see on the sector. Fertilizer prices have gone through the roof. Phosphate, which is the fertilizer of choice for Itafos, has seen an incredible price rise the last year, with DAP NOLA up 86% ytd 2021 ($400/st to $745/st) (DAP=Di-Ammonium Phosphate/NOLA=New Orleans Louisiana price hub)
Source: BMO Capital Markets
The question is, can prices stay here?
The work I’ve done says yes. Prices may not be going a lot higher, but I also don’t think they are going a lot lower, at least for another year or so.
The phosphate market is being driven by demand from India and reduced exports from China and Russia. This will continue for at least the first half of 2022. Strong US grain markets are keeping farmer affordability in line despite the current increases in the price of phosphate fertilizer.
Itafos is led by veterans. I spoke with their CEO David Delaney and Chief Strategy Officer David Brush a couple weeks ago. Delaney worked for Potash Corp for 30+ years, including 5 as COO. Brush has an equally long history in private equity.
The wind is at their back with fertilizer prices at multi-year highs. There should be plenty of cash to bring down debt. When they do the market should start to notice.
CONDA MINE AND PROCESSING FACILITY
Itafos main asset is Conda, a phosphate mine and processing facility located in Idaho.
Conda can produce up to 600,000 tonnes of fertilizer, or about 7% of production in the United States.
Two mines, Rasmussen Valley and Lanes Creek, deliver phosphate rock into the processing facility. Two additional mines, collectively referred to as H1/NDR, are at the permit stage and are expected to begin mining in 2024.
Source: Itafos Investor Presentation
Reserves at Rasmussen/Lanes Creek are enough to feed the plant until mid-2026. By that time, H1/NDR will be operating with enough ore for another 10+ years of production.
They are in the process of permitting H1/NDR. They submitted an Environmental Impact Statement (EIS) in October. They expect permits to be granted early next year.
Source: Itafos Investor Presentation
The Conda facility produces monoammonium phosphate (MAP), superphosphoric acid (SPA), and ammonium polyphosphate (APP).
MAP is the standard granulated phosphate fertilizer. It contains about 10% nitrogen and 50% phosphate.
SPA is a very high (~70%) phosphate concentrated liquid. It is an ingredient in APP, which is used in fertilizers, flame retardants and as a food additive.
By tonnage, Conda produces about 70% MAP, 25% SPA and 5% APP.
The MAP is sold to Nutrien through a long-term offtake agreement. This agreement is up for renewal in 2023.
The selling price is tied to the posted DAP fertilizer price (DAP is just a slightly different mix of phosphate/nitrogen than MAP). As you can see below, Conda’s revenue per ton follows closely to MAP prices.
Source: Itafos Filings
SPA and APP that is produced is sold directly to retail/blenders via an Itafos brand.
The facility requires a combination of phosphate rock, sulfuric acid and ammonia as inputs.
Ammonia is sourced from another long-term agreement with Nutrien. Like the MAP agreement, it comes up for renewal in 2023.
About 40% of the sulfuric acid is produced internally. The other 60% come from the Rio Tinto Kennecott mine, just southwest of Salt Lake City Utah.
Sulfuric acid supply has proven itself to be risk. Twice in the last two years, they have experienced “significant disruption” of the sulfuric acid supply, including Q4 21.
In September the Kennecott smelter was shutdown following the release of “molten copper materials”. Sulfuric acid shipments to Itafos were stopped until mid-November. The disruption will impact Q4 results, but not enough to keep the company from raising guidance when they announced Q3.
FOREIGN ASSETS FOR SALE
A few years ago the strategy was to become a global player in the fertilizer market. As part of that, Itafos purchased assets in South America.
But the debt burden became too much and with fertilizer prices in the dumps for the last decade, Itafos struggled to just keep them up to date. Now they plan to take advantage of the improved landscape and sell the international assets:
Source: Itafos Investor Presentation
Of the four, Arrais and Farim are the most likely near-term sales. Both are an EBITDA drain on the company ($4 million and $2 million respectively) and need larger capital to get back to full operation.
EXPECT DEBT BURDEN TO COME DOWN
As Itafos builds cash, expect that cash to go towards paying down some very expensive debt they are carrying.
Itafos has $250 million of debt. Most of the debt comes from a $206 million term loan (paying 8%) and a $42 million promissory note that is held by Castlelake.
The $42 million note is killing Itafos with interest. The loan pays 15% interest (increasing to 18% next year) with 4% of that paid in stock.
Sadly, Itafos can’t pay down the promissory note without first paying off the term debt. When I talked with Delaney and Brush, they said that one way around this would be to restructure the entire debt load in one swoop.
That would be ideal, but given that they just refinanced their term loan in August (it has a 3-year term) I’m not sure how easy it will be. Given that uncertainty, I have not modeled in any significant reduction in interest costs over the next year.
STOCK CHART
CONCLUSION
Itafos is a cash cow right now, but the stock in the last year reflects that—up 5x. (Many good commodity producers are up that much in the last 12 months)
Arguably, the stock will not have another Big Move up until that debt comes down, either by re-negotiating the terms or selling assets–or both.
But at current phosphate prices, this stock has big leverage–and a great operational team. It’s the ONLY junior phosphate producer. It’s in the US.
Part of it will come with results. Itafos should be able to cut debt by US$100 million next year if phosphate prices stay at this level.
In the last 3-quarters, 65% of EBITDA has translated to free-cash-flow. If that continues and if prices stay at the current level, debt should be under $50 million by YE 2023.
Source: Itafos Disclosures, Our Forecast
Another Big Catalyst–but not likely until Q2/Q3–is the permitting of the mine-life extensions at H1/DNR. That will check another box.
Firming up the mine extension will bring on new lenders, which will lower the cost of their debt. Another check.
Itafos has 185 million shares outstanding. Let’s assume the market gives them no multiple expansion over the next year.
If that happens (eg. A flat Enterprise Value) the debt reduction alone should give you a 50% gain on the stock.
A more bullish case is that the market recognizes Itafos and gives it a market multiple (maybe 4x EBITDA). If that happens, you are looking at more than a double.
The very bullish case is the market starts revaluing the fertilizer stocks overall. Instead of Mosaic trading at 4x EBITDA and a price to earnings of 7x, maybe the market gives them 6x and 12x. The same thing happens to Itafos and it is a triple from here.
You get the picture.
Nowhere am I talking about fertilizer prices moving higher.
Buy Itafos on where fertilizer prices are today. Watch the news and make sure they are staying there. As long as we remain at these levels, the stock has legs to go far higher.
EDITORS NOTE: I HAVE A NEW FERTILIZER STOCK PICK–and it has everything I could ask for
- Management team who has built and sold one agriculture related company already.
- They have a unique science, technology, and product–
- And it’s so good, they have offtake deals for up to 5x their current production.
- They did over $15 million in revenue last year and are growing quickly.
To get this company’s name and symbol before the institutions rush in, CLICK HERE
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 will continue to generate a lot of free cash if prices hold up. There is only ONE junior phosphate producer: Itafos Inc. (CVE:IFOS). So early in this year, I bought a position at $1.50. Within three months, I was able to sell half at $3 and now I’m riding for free.){kind=link}