Rentech: Pulp, Pellets and Fertilizer

by Debra Fiakas CFA

A shareholder group has taken aim at alternative energy and fertilizer producer Rentech, Inc. (RTK:  Nasdaq), offering a slate of nominees for the next election of directors.  They claim Rentech management is overpaid and doing a very poor job of executing on the company’s strategic plans.  The nominees were a focus of discussion in the last post.  Now we will take a closer look at Rentech’s operations.

The majority of Rentech’s revenue is generated from the sale of fertilizer products from the Company’s plants in Dubuque, Iowa and Pasadena, California.  Rentech earns a 47.6% operating profit margin at its Dubuque ammonia plant, but its ammonium sulfate plant in Pasadena operates at a loss.  Indeed, in the first nine months of 2013, Pasadena lost $38.5 million on $110 million in sales.  The Pasadena operation was a part of the Agrifos acquisition in November 2012.  Things have not gone smoothly since low-cost ammonium supplies from China have put downward pressure on prices.  What is more a wet planting season reduced demand in North America.

Approximately 13% of sales are generated by one of Rentech’s recent acquisitions.  Fulghum Fibres, which was bought in May 2013.  Fulghum processes wood fibers and sells wood chips and bark to the pulp and paper industry.  The group generated an 8.0% operating profit margin in the first nine months of 2013.

Rentech is developing additional interests in wood pellets, which it has named the Atikokan and Wawa Projects.  The company came by both projects through acquisitions in May and June 2013.  The company expects to produce 125,000 metric tons of wood pellets annually at Atikokan and another 360,000 metric tons at Wawa, Ontario, Canada.  Neither plants are producing revenue, and so turned up a $4.2 million operating loss in the first nine months of 2013.

Although Rentech is no longer producing biofuel, the company owns a fistful of energy technologies such as gasification methods for biofuel production.  The company earns the odd license or consulting fee  –  $300,000 in the first nine months of 2013.  That is unfortunately not enough to cover the costs of research and development.  The operating loss reported so far in 2013 is $5.0 million.

There are no big success stories in Rentech’s various operations.  The company has used a fair bit of cash for acquisitions  –  $65.6 million in the first nine months of 2013.  Rentech has also sunk some money in building out the Atikokan and Wawa facilities among other projects.  Capital spending climbed to $60.5 million so far in 2013.  There is another $120 million in construction projects lined up for 2014, most of which is for expansion and upgrades at the Dubuque fertilizer plant.  There is $180.4 million in cash in the bank and another $4.6 million in assets up for sale that can be used to pay the bills. 

If nothing else these few paragraphs should alert investors to a busy, complicated business model at Rentech.  Concede that point to the shareholder group criticizing Rentech leadership.  Keeping the ship on an even keel takes some management skills.  Perhaps that is why management has demanded the sort of paychecks at that shareholder group has labeled excessive.   

Figuring out if the current stock priced near $1.80 per share is a bargain, requires quite a bit of figuring  –  asset values, future cash flow potential. Alternatively, investors can simply use their better judgment and wait until the shareholder meeting is concluded and see who is still standing after shareholders vote on director nominees.

Debra Fiakas is the Managing Director of Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.