Intrepid Potash, Inc.
Q3 2009 Earnings Call Transcript

Published: 6 Nov 2009

[Operator:]

Welcome to the Intrepid Potash third quarter 2009 earnings conference call. (Operator Instructions) It is my pleasure to turn the conference over to William Kent, Director of Investor Relations. Mr. Kent, please go ahead.

[William Kent:]

Good morning and thank you all for joining us for our third quarter 2009 earnings conference call. I'd like to start by introducing today's participants from the company. We have with us Bob Jornayvaz, the Chairman and Chief Executive Officer; Hugh Harvey, Chief Technology Officer; David Honeyfield, Executive Vice President, Chief Financial Officer and Treasurer; and R. L. Moore, Senior Vice President of Marketing and Sales; and John Mansanti, Vice President of Operations. John joined Intrepid on October 19, 2009. I would also like to remind everyone that statements made in this call which express a belief, expectation or intention as well as those that are not historical fact are forward-looking statements within the meeting of the United States securities laws. A number of assumptions which we believe are reasonable were made in connection with the expectations reflected in such forward-looking statements. The forward-looking statements involve risks and uncertainties which could cause actual results to differ from our expectations. For material information with respect to the risks, uncertainties and factors which would cause our actual results to differ from our forward-looking statements, we direct you to our news release issued last night and the risk factors described in our filings with the SEC. All forward-looking statements are qualified in their entirety by such factors. The news release, which is posted on our website, includes a reconciliation of certain non-GAAP financial measures to the most directly comparable GAAP measures. All references to tons are to short tons of 2,000 pounds. I'll now turn the call over to Bob Jornayvaz.

[Bob Jornayvaz:]

Thank you Will and thanks to those who are taking the time this morning to learn more about our third quarter results. Our third quarter sales although well below historic norms, began to show signs of life in the domestic potash market. Despite continued reluctance by dealers to take price risk and carry inventory on their balance sheet Intrepid was able to sell more than 100,000 tons of potash during the quarter, a level not achieved since the third quarter of 2008. We earned $0.13 per diluted share on net income of $9.5 million. During the latter half of the third quarter we saw a period of demand increase as there was some amount of early fall application. This demand increase has since abated as rains and snows in the Midwest and the resulting late harvest are contributing to what is likely to be a limited fall fertilizer season. Given the continued pressure on the fall fertilizer window we believe demand may remain at lower levels through at least the remainder of the year. The majority of potash purchases at the retail level remain just in time. We continue to work with a select number of our customers to move products forward into their warehouses, price risk is still at the top of mind for many dealers and through our forward warehousing program, we’ve been able to alleviate some of the hesitation in the system by moving our tons forward in the distribution system. We firmly believe in the long-term fundamentals of the potash market and the vital role potash plays in agricultural production. We expect application rates of potash in the United States to return to more historic norms. We just don’t know when exactly to expect it and whether it will occur all at once. We are emboldened in this belief by almost 30 years of potash application data in the United States and we believe that under application in the last two years together with the significant amount of nutrients that have been removed from the soils with this year’s crops should lead to more normalized application rates at some point in the near future. To this end, we conducted a farmer survey during the quarter with Doane Advisory Services to gauge farmer opinions on nutrient usage. The majority of farmers responding indicated that their potash applications in 2010 would increase over 2009. A large majority indicated that potassium was either important or critical to their yield potential and that they regularly monitor the fertility of their soils. Farmers indicated that the top factor in making their potash application decisions is recommendations from soil testing results. Although we are encouraged by the results from this survey which we believe highlight the agronomic benefit that potash provides to the farmer, there was an important takeaway for us in that farmers who responded indicated that potash prices are important to their buying decision. And that fields that test high in potassium may receive less fertilizer again in 2010. There was never any doubt in our mind as to the economic benefit of potash, or farmers recognition of same. But the survey showed us that we underestimated the emotional impact that the rapid increase in potash pricing we saw in 2008 would have on buying behavior. As we’ve said, the potash market has shown some promising signs of light that we believe signals a bottoming process is occurring. However, we expect that the remainder of 2009 will continue to be challenging as we contend with uncooperative weather and a narrowing fall application window. Given the significant nutrient removal that we expect to occur during 2009 coupled with rising global demand for grains and continued growth of global population, it leads us to the reasonable conclusion that we should see a recovery in domestic demand for potash in 2010. Hugh Harvey, our Chief Technology Officer, and Intrepid cofounder will take the call from here.

[Hugh Harvey:]

Thanks Bob, I want to take a brief moment to introduce John Mansanti, our new Vice President of Operations, who joined Intrepid in October and is with us this morning. John joined Intrepid from Barrick Gold, where most recently he was General Manager at the Goldstrike Mine, Barrick’s largest North American asset. He has a broad experience of operational and technical experience, having managed underground, open pit, and complex process operations. In addition to gold, he also has experience in copper, malignum, iron and lead and zinc operations. John is a world class mining and process industry operations leader and Intrepid is extremely fortunate to be able to bring on board to help continue to move our operations forward and to achieve our goals of increasing productivity, increasing recoveries, and to lower our per ton costs. Welcome John.

[John Mansanti:]

Thanks Hugh.

[Hugh Harvey:]

Now an update on our production, we produced 112,000 tons of potash and sold 111,000 tons of potash during the third quarter of 2009, nearly matching production with demand. This compares to 200,000 tons produced and 204,000 tons sold in the third quarter of 2008. Production was reduced in the third quarter of 2009 relative to the prior year due primarily to our decision to slow production in order to more closely align our supply with market demand. We produced 60,000 tons of langbeinite which we market under the name Trio. We also sold 40,000 tons of Trio. Our langbeinite production was 20% higher then the third quarter of 2008. The increase in langbeinite production is largely driven by our decision to focus on langbeinite production in order to keep up with granular Trio demand as we once again ran out of our granular Trio product in the third quarter. Now a few comments on our capital programs, capital investments in our operating facilities was approximately $33 million in the third quarter. The investments were used to fund opportunity and [inaudible] making projects already in process and for sustaining and [improvement] capital projects many of which are designed to meet our goal of making our plants more efficient and improving our recoveries that in turn lower our per ton operating costs. Total capital investment in 2009 is now expected to be between $100 and $110 million as we decided during the third quarter to slow down our capital spending in response to a slower then expected rebound in market demand. We continue to make investments in facilities, albeit now at a pace that we feel more appropriately reflects the current market conditions. One project that we have continued to move forward is the ongoing design and engineering of an improvement to our langbeinite recovery circuit that will not only increase our recoveries, and result in lower cost structure for the East Mine but will also add flexibility to our product mix. We expect final cost estimates for this project to be completed sometime in the fourth quarter allowing us to make a decision on the timing of this project early in 2010. Our balance sheet strength has provided us the capability to successfully navigate this difficult market environment over the last year while at the same time giving us the flexibility to invest in projects to position Intrepid for future success. Now I’ll turn the call over to R.L. Moore, our Senior Vice President of Marketing and Sales.

[R.L. Moore:]

Thank you Hugh, as Bob noted the fall fertilizer season has been very challenging. The late spring planting combined with adverse weather conditions this fall has led to the slowest harvest since at least 1986 when the government began tracking harvest progress. A farmer cannot apply fertilizer until his crop is harvested, his field is relatively dry, and he has an idea of what he plans to plant the following year. Needless to say the fall [fertile] application has yet to fully materialize and may be significantly deferred until next spring. This delay in application has continued the trend that we saw in the second quarter of dealers and farmers ordering their nutrient requirements on a just-in-time basis. Additionally dealers are holding limited amounts of inventory which may result in some logistical challenges when a more robust application window surfaces. On a positive note our phones are ringing, and we’re having price discussions with our customers which we believe is a key step that needs to occur for the market to return to a more normalized level. Additionally in areas where the weather is permitting, we’re seeing fall applications occurring and growers are putting down potash. Our current posted price for red granular potash is $482 per ton and for Trio is $246 per ton. With price discussions continuing to occur and a narrowing fall application window we believe that market pricing may trend downwards somewhat as we enter the fourth quarter. The industrial portion of our business continues to lag. North American drilling rig count has shown signs of stabilization but our industrial sales have remained slow. This may present Intrepid opportunities in the future but at this time we continue to convert some of the standard potash typically used in the industrial market and to product for sales into the agricultural market by compacting our standard industrial product into granular form. As with previous quarters the animal feed segment of our business remains steady. I will now hand the call off to David Honeyfield, our Chief Financial Officer, to wrap up our prepared comments.

[David Honeyfield:]

Thanks R.L., the cash production costs per ton of potash sold in the third quarter of 2009 net of by product credits was $177 per ton, a slight decrease over the $182 per ton in the third quarter of 2008. The result may surprise some folks and its important to keep in mind that we also expensed $5.8 million of production costs directly in the third quarter of 2009, and we’ve expensed $12.2 million on a year to date basis associated with lower production rates. The effect of expensing these production costs directly was that we did not include these costs in inventory and therefore the cost did not get captured in the cost of goods sold amount. You should expect that until more normalized production levels are resumed and current inventory is sold through, our cost per ton amounts will likely remain at these levels. Our net realized sales price for potash was $458 per ton in the third quarter. As R.L. mentioned our current posted price for red granular potash is $482 per ton, which has been the posted price since the end of July. Typically our net realized sales price will be some amount below our posted price as we sell into a variety of markets. Its important to note however that the Midwest granular price for potash as reported by green markets has declined approximately $40 since the end of August. Obviously our net realized sales price is a key driver of our overall results and this needs to be taken into account when building forecast models on the company. With the deferral of some of our capital projects we had forecast that our cash and investment balances would decrease from the end of the second quarter to the end of the third quarter. We believe that we have a capital investment plan that is flexible and permits us to complete our more critical in process projects while allowing us to maintain a degree of control over the pace of our capital investment. Currently our goal is to have our cash and investment balance remain at healthy levels as we enter 2010. As I’ve said before we will proactively manage our projects to invest our capital in the business while maintaining an appropriate level of cash on our balance sheet. A couple of other updates, we have no reason to believe that our sales volume will be much different this quarter from the last assuming completion of the fall harvest and farmers applying fertilizer before winter. On the production front, I’d like to note that we’re in the production phase of the year at our Moab operation following the summer evaporation season. We’re also planning on taking a scheduled maintenance shut down at our West Mine to tie in the underground stacker project. Otherwise we’re planning on operating at similar rates at our other facilities. The past 12 months have been challenging for all segments of the economy and certainly our business has been no exception. We believe that there are signs that the US potash market is entering a bottoming process. Price discussions are occurring and in some geographies, there is some appetite at the dealer level to take price risk at this point. The road ahead will likely have some bumps so we’re being prudent and making decisions today that we expect will benefit us over the long-term. We want to be prepared for the next up cycle in the potash market. To do so we will continue to invest in our business to improve the efficiency and recovery from operations in order to lower our per ton costs. We will work with our customers to find creative strategies to manage price risks and we will maintain a healthy balance sheet. The long-term fundamentals of potash remain unchanged and Intrepid is well positioned to profit in the future from the actions we’re taking today. We’ll now open the lines for any questions.

[Operator:]

(Operator Instructions) Your first question comes from the line of Robert Koort - Goldman Sachs

[Robert Koort:]

I just wanted to ask you if perhaps you could quantify the percentage of sales that came through your forward warehousing program this quarter.

[David Honeyfield:]

As we look at that over the course of the year its been about 20% of our sales have gone through that forward warehouse program.

[Robert Koort:]

And then also can you quantify the percentage of feed versus industrial sales that you had this quarter.

[David Honeyfield:]

Well actually, we’ll end up reporting these numbers in the 10-Q, but let me give that to you real quick. So for the quarter 70% of our sales were in the agricultural space, 17% were in the industrial space, and 13% were in the feed market.

[Operator:]

Your next question comes from the line of Vincent Andrews - Morgan Stanley

[Vincent Andrews:]

You discussed pricing a couple of times a couple of different ways, one in terms of what your posted price is now and the other obviously in terms of what green markets is reporting and then I guess in a third respect you talked about maybe there being some price reduction going in the fourth quarter, are you just trying to guide us to where the green markets price is or are you also indicating that there’s risks of where the green markets price currently is.

[Bob Jornayvaz:]

I guess the first point that we’d like to make is that we’ve always said that we do see more regional pricing throughout the United States so that there are pockets in certain markets that are more robust then others and are allowing us to achieve pricing much closer to our current posted price. We are seeing though some downward pressure on pricing from our competitors to the north and from the Russians. So that’s a reality that’s out there in the marketplace. So we just want to make it clear that in certain geographic pockets, we’re seeing more price stability. We’re seeing weather that allows fertilizer to actually go to the ground. For example in the Pacific Northwest, we’re seeing good solid movement of product going onto the ground. So we are seeing price disparity throughout the United States so we just want to make sure that people realize that its not just one system wide price for Intrepid and we’re trying to guide you, how would I put it, we’re seeing competition in the market and we want to make sure people are aware of it.

[Vincent Andrews:]

And if I could just follow-up to that, when you’re talking about price discussions, obviously there’s a bit of [asks] right here, how far apart are we, are we talking tens of dollars a ton or are we talking hundreds of dollars a ton.

[Bob Jornayvaz:]

Tens.

[Vincent Andrews:]

Okay, I’ll take that and pass it along.

[Operator:]

Your next question comes from the line of Steve Byrne – Bank of America

[Steve Byrne:]

Can you estimate where your production capacities will be for both the [Moab P] and langbeinite by the end of the year and also an estimate at year-end 2010.

[David Honeyfield:]

Given the tie in of the stacker project, the thickener project at the East Mine, the other recovery and enhancement projects, if things were running at a completely normalized sort of a rate, we think we’d probably be somewhere around 900 to 950,000 tons, and that’s for potash. Langbeinite would continue to be somewhere near that 225,000-ton number. So I think as you look forward into 2010 we’ll certainly have some, I expect some smaller recovery projects on the potash side and then langbeinite as we’ve talked about before, our langbeinite expansion plans, we need to get the final engineering on that here this quarter and then make a decision on timing. But those process enhancements on the langbeinite side have the potential to effectively double our langbeinite production at some point. Its just a matter of when we decide to pull the trigger on that.

[Steve Byrne:]

And is Carlsbad East running at full operating rate and if so, why are the lang unit costs still so well above historical levels.

[David Honeyfield:]

Yes, the East plant is still running at current rates and keep in mind the reason we’ve been running that at those rates is because our granular Trio demand has been so strong. So we’ve continued to produce and target langbeinite production. But as you look at overall cost structure we continue to have, since we’re producing more langbeinite, we allocate more cost to that langbeinite production. So some of it is really an allocation but overall the efficiency of the East plant is going quite well given the fact that we’re at full rates there.

[Bob Jornayvaz:]

The one thing I want to remind everybody is that when we say langbeinite are full production rates, we’re still only recovering 37% of the langbeinite that we’re mining and hoisting and processing. That’s the reason for the additional langbeinite recovery projects that we’ve got teed up and that we’re engineering. So always want to remind folks when we talk about langbeinite rates at full production rates, today, we’re still only recovering 37% and we intend to increase that pretty substantially.

[Steve Byrne:]

That next incremental step is above 50%.

[Bob Jornayvaz:]

Take us up close to 70%.

[Steve Byrne:]

And then can you comment on your, what appears to be an increase in your market share in North American potash shipments. It seems in recent quarters you’re more in the mid to high teens as opposed to high single-digits in the past, is that sustainable and what factors do you attribute that to.

[Bob Jornayvaz:]

Well a couple, there’s no question in our warehousing program early we reached out and that, I think what you’re probably seeing there is that because the potash market is so dramatically off from prior years that you’re seeing skewed data if you will. That would be my guess. We are dealing with certain customers who’s needs that we’ve picked up, we’re servicing and so we’ve also got certain geographical advantages that we’ve always had that we’re really trying to play into as strongly as we possibly can. So it’s a big combination of issues that we’ve tried to work to our benefit.

[Operator:]

Your next question comes from the line of Edlain Rodriguez - Broadpoint.AmTech

[Edlain Rodriguez:]

Just a quick clarification, with the [inaudible] of warehousing, products, distributors, is it helping you maintain a higher level of production. Because it was hard to tell, because you seemed to sell everything you’re producing or are you just selling out of inventories.

[Bob Jornayvaz:]

We really are trying to forecast our sales, get a good number as to what we believe sales will be and try to match production to what that sales level in this down period was going to be. We really tried to manage it. On a going forward basis we’ve tried to leave ourselves room to ramp back up and produce at the levels that we think are more appropriate for historic demand levels. So as we’ve managed through 2009 that was truly about trying to manage to a very unique market. As we look forward into 2010 we’ve got our plants ready to ramp back up and I think had we not seen the weather that we saw most recently in the Midwest, we would see even more significant sales. The one message that we want to convey is in so many of our markets, where weather has enabled farmers to get into the field, their putting down potash. So we are seeing the beginnings of a recovery process. Does that answer your question.

[Edlain Rodriguez:]

I wasn’t trying to get more then anything else, does the production that you have and what’s going into the distributor, where are they going. I’m assuming they’re not included in your sales numbers, right.

[Bob Jornayvaz:]

Do you mean how are we accounting for the forward warehousing in our inventory.

[Edlain Rodriguez:]

Yes.

[David Honeyfield:]

The way that works is we end up moving those tons into our customers’ warehouses but the inventory stays on our books. We also don’t recognize the sale until they have sold the tons. So those costs remain in our overall inventory balance.

[Edlain Rodriguez:]

Quick question on pricing, you’ve talked in your survey, the response, the emotional response that farmers had with high potash prices, are you getting a sense from them now that even though prices have come down quite a bit over the past few months, that they still believe that prices are still way too high for them to be comfortable.

[Bob Jornayvaz:]

I’m going to let R.L. answer the latter part of this but I think the best indication that we have is where they have the opportunity because of weather to get out in the fields and put down fertilizer, they’re doing it. And so nobody, our farmers in Texas and in California aren’t waiting on China, they’re buying potash and they’re actually putting it on the ground. So I think that we’re in areas where potash buyers are willing to buy potash. Now, what complicates that is that there is a belief out there because of China being out of the market, and seeing slack in potash pricing that if a farmer or someone, a dealer were to believe that prices might come down, that does create more hesitation. So that’s why we keep saying we’re in a bottoming process because we have lots of farmers out there that are buying potash and putting it down.

[R.L. Moore:]

The only thing I would say is that the wholesalers and the dealers that we actually are communicating with on a daily basis, we’ve got areas of the country where they’re taking potash. I’ll give you an example, a customer calls in last week and receives five cars and then calls me back yesterday and those five cars, that 500 tons has gone through his warehouse and gone out to a dealer and gone to the ground. There is areas of the country where the farmers are ready to make decisions and at current potash prices they’re willing to take it and put it back to the soil.

[Operator:]

Your next question comes from the line of Elaine Yip – Credit Suisse

[Elaine Yip:]

Just to follow-up on the questions on the farmers surveys, are the farmers that you surveyed relatively spread out across the country or are they focused in certain agricultural regions such as the ones that you serve in the south and the west and I guess what I’m getting at is are farmers who typically experience lower yields are the ones that are more price sensitive and therefore are psychologically impacted by high potash prices.

[Bob Jornayvaz:]

Well first it was a national survey and I would say that the response, call it an emotional response however we want to term it, was nation wide and as we travel around the world and talk to farmers, it was worldwide. So I don’t think it was limited to just farmers with lower yields that the higher price had an impact on, I think it applied to farmers around the world.

[Elaine Yip:]

And then with regard to the langbeinite recovery project, you talked about how you expect that final cost in early 2010, when would you expect to begin starting that type of project and what factors would drive the timing of that.

[Bob Jornayvaz:]

Well in a perfect world we would start it in the second or third quarter of 2010. The factors that will drive that decision are number one, monitoring the potash market to make sure that the potash market has returned to more historic norms. The one thing that we are absolutely going to do is maintain a strong balance sheet so before we undertake that significant project or multiple significant projects at one time, we’re going to make sure that our balance sheet is in great shape and that we have cash on hand and cash generation opportunities on hand with a more normalized demand profile to move forward. I think what we’ve seen in 2009 causes everyone to take pause before they move forward with large capital projects.

[Elaine Yip:]

And then finally on the industrial side are you seeing your markets begin to stabilize or your customers’ markets begin to stabilize, what do you attribute the lag in your own sales. Are your customers perhaps using other substitute products instead of potash.

[Bob Jornayvaz:]

No I think its strictly the rig count. We’ve seen, are you talking about on the oil and gas side?

[Elaine Yip:]

Yes.

[Bob Jornayvaz:]

Yes, I would say that we’re seeing, we’re really not having any price, I don’t want to say we’re not having any price discussions on the industrial, but given where drilling rig rate costs have come down, where potash prices have come down to now, price is nowhere near the factor that it was 18 months ago with the industrial side of our market. I think first and foremost, we’ve got to return to a slightly more robust rig count which we’re seeing happen on a weekly basis. So we fully expect our industrial business to pick back up to more historic levels. We’re seeing gradual increase month by month and we’re not feeling the same price sensitivity that we were 12 to 18 months ago on the industrial side.

[Operator:]

Your next question comes from the line of Don Carson – UBS

[Don Carson:]

I just had a follow-up question with regards to your forward warehousing program, are you seeing any of your competitors engaging in this practice and then in addition going forward do you see this becoming a wide spread practice or do you see this as a short-term step until potash prices settle out.

[Bob Jornayvaz:]

First as to our competitors, they all have their own programs that are slightly different and so I would urge you to talk to [Hagry] and Potash Corp, Mosaic about whatever their warehouse or consignment programs look like. But they all have something in some form or fashion. I don’t see this as being any kind of a long-term change in the potash market. We sat down in January of 2009 with our customers and simply acknowledged that 2009 was going to be a very challenging year for everybody given where the financial markets were, the ag markets, etc. and we were going to come up solutions that benefited both our customers and ourselves to be able to move product forward. And so the forward warehousing program was a project that we put together with our customers. Its worked well for us. Its helped us move product forward and never having got into any inventory issues at our plant sites. So I do not believe nor is it in our best interest to have these programs on a long-term basis. And so I think that you’ll see them for some period of time, but not for a significant period of time.

[Operator:]

Your next question comes from the line of Fai Lee - RBC Capital Markets

[Fai Lee:]

Just wanted to elaborate a bit more about your comments about pricing and your expectations in your target markets versus the bench market pricing in the US Midwest. For example, if the bench market price for granular potash in the US Midwest was say hypothetically to average $450 per short ton through a quarter, which is it about right now, what range of potential prices would you expect Intrepid to realize on a net basis for the same quarter.

[David Honeyfield:]

I think the point that we were really trying to drive home and this leverages I think a little bit off of Vince’s question to is we all would, our posted price of $482 is where things start. And we always are going to trade a little bit below that just because of a mix of product type and markets that we go into. So our net realized price for the quarter of $458, you need to take into account what kind of green market, and this is a good indicator, I think there is a range like Bob had mentioned earlier, but you really have to at the pressure that has been seen throughout the Midwest and through the mid part of the quarter in the third quarter till now, that Midwest price has come down another $40 or so. So really we’re just asking folks to be aware of that, recognize that its going to have an impact on our net realized price, but I think the important part to touch on is we continue to have sales in different markets that are different conditions that exist so that range is going to be pretty wide throughout the company and you get back to kind of net numbers as we talked about, but really we’d just you to be aware of those overall trends in the market.

[Fai Lee:]

So it sounds like, we can look at the bench market for trends but its hard to really translate that into potentially a net price for our models.

[Bob Jornayvaz:]

If I were still seeing pricing differentials all throughout the United States and so depending upon our ability to provide just-in-time service to certain customers, we’ve got great truck markets that we service where we’re selling potash by the truckload rather then a unit trainload and we get higher prices for those. So we continue to just want to remind people of the advantages that Intrepid has because of its locations.

[Fai Lee:]

And I don’t mean to harp on this, what I’m trying to figure out is that advantage relative to another market and I guess that’s in the case the US Midwest. Is there a price, do you expect a pricing advantage to be higher or the discount to the Midwest.

[David Honeyfield:]

I think we’ve been pretty consistent in that we really can’t give price guidance and what we’ve just asked folks to do is to recognize where we’ve been at relative to a published source out there and that’s green markets is a reasonable one and then ask folks to recognize that there continues to be pressure on that price so if you’re building a model for fourth quarter and you’re using the third quarter net realized price, and you’ve seen the green market price come down $40, that wouldn’t make a whole lot of sense to me. So I mean that’s really where we’re just trying to get folks to focus in on those sorts of metrics so that you come up with a reasonable number.

[Fai Lee:]

You mentioned that in some markets where weather is not an issue, farmers are putting on potash, is this happening at normal rates.

[R.L. Moore:]

I haven’t been in contact with the farmers that are going to the field with the product. Looking at what’s moving right now, as we stated in our comments potash movement is not back to normal levels for this time of the year. If a farmer is putting down his normal rates, its probably still early to say because we still probably got 75% to 80% of our harvest to go out there before we get into full swing application for the fall season. I think only time will tell if they’re going back at normal rates and then again they’re going to be looking at their soil samples and what the soil dictates as to how much they put out. I think they’re going to be more cautious in the future. I don’t think they’re going to be over applying until they get a better sense of what their costs are going to be in the future.

[Fai Lee:]

You mentioned in an ideal world you would start langbeinite project in Q2, Q3 construction in 2010, when would you expect to finish in an ideal—

[Bob Jornayvaz:]

That’s a great project and its got a pretty defined beginning and end. I think that’s a nine-month to 12-month project and its one that we could finish and actually have online operating within nine to 12 months.

[Operator:]

Your next question comes from the line of Mark Gulley - Soleil Securities

[Mark Gulley:]

I wonder if you could try to reconcile the comments regarding a recovering demand outlook together with the fact that prices seem to be trending downwards. Those two trends don’t seem to be consistent.

[Bob Jornayvaz:]

Well what I think it gets back to is you’ve got other producers that are out there in the market that have inventory that they’re trying to sell. And so those people are out in the marketplace aggressively trying to meet their own needs. What we’re seeing in our markets is what we’ve just expressed is that rising demand in our very specific markets is we would, for example we ran out of granular inventory three times this year, twice in the second quarter and once in the third quarter where we ran out of product. Yet the price has continued to come down for granular langbeinite. That’s an anomaly in the market that I don’t have a good explanation for you as to an anomaly like that. What we keep trying to drive people to is we’re seeing a bottoming process beginning. In order to have a bottoming process you’ve got to have a price that people feel comfortable actually stepping into the market and taking price risk and buying their product. You’ve got to have actual demand with people coming in and buying it and using it. So all of those factors we’re seeing the beginnings of that.

[Mark Gulley:]

Second, on the accounting side, I know you’ve been through this before and maybe I should do this offline, but it seems to be a little unusual to identify this unabsorbed production cost and then spike it out separately. It seems to me if you have lower operating rates, you have to absorb that unabsorbed production cost in the period. So can you take us through a little bit again why you seem to treat that a little bit differently from other companies that I do cover.

[David Honeyfield:]

I can’t address the other companies, I know that there’s a specific FASB statement that, its 151, FASB statement 151, that addresses abnormal production. And its very clear in the accounting requirements that whatever is deemed to be abnormal needs to be expensed directly rather then absorbed into inventory.

[Mark Gulley:]

Okay and then finally if I could wrap up, why don’t you simply reduce that posted price to reflect market conditions. Is the answer that you actually have some customers buying at the posted price and if you cut your posted price you would lose those higher price sales or is there a different answer as to why you don’t do that.

[Bob Jornayvaz:]

That’s the answer.

[Operator:]

Your next question comes from the line of Edward Yang - Oppenheimer & Co.

[Edward Yang:]

The $5.8 million that was expensed directly if you had included that in the cash COGS per ton for potash and langbeinite what would that have been.

[David Honeyfield:]

Keep in mind it’s a pretty hard thing to calculate because our inventory hasn’t turned over exactly every quarter as you know. But if you do kind of a pro forma number on that, you’d basically have a $229 price and the way I got there is you take that abnormal number of $5.8 million, you divide that by the sales tons for the quarter, and that gives you an additional $52.

[Edward Yang:]

So the $177 per short ton, that would have been $229 you’re saying approximately.

[David Honeyfield:]

Yes, if you follow the math that I just walked through, that’s where you get to.

[Edward Yang:]

And on the langbeinite side.

[David Honeyfield:]

Langbeinite it wouldn’t have had any impact because we produce langbeinite at our East Mine, and our East production rates, we were running that mine at full staffing.

[Edward Yang:]

And you mentioned a couple of times that you’re confident that fundamentals will return back to historical norms and certainly 2009 was an abnormal year in terms of volumes, but I would kind of argue that 2008 was not very typical either in that MOP prices quadrupled so in 2008 you earned about a $1.65, when do you expect Intrepid to be able to earn that amount again and was that a normal EPS number for you in your mind.

[Bob Jornayvaz:]

Well I think first let’s deal with volume, I think, and this is an opinion not guidance, I think we have every opportunity for volume to return to those previous levels if not a slightly above because of the improvements that we’ve made to our facilities, within the next 12 to 18 months. I think with price stability and long-term fundamentals returning that takes us to a more robust potash market. I think that puts us right back in the position to get to where we were in 2008. I don’t know that we’re going to see the same type or price spikes that we saw any time soon, but I do believe we’re going to return to a much firmer, more robust market in the next 15 to 18 months. We’re just seeing, we’re seeing all the preliminary signs that we would want to see. I don’t know if I’m answering your question or not but that’s how we see it today.

[Edward Yang:]

So basically if you see those firmer conditions you would be able to earn similar amounts that you did in 2008.

[David Honeyfield:]

I think its really important that if you look at the realized price piece and you’ve got two pieces that are the significant drivers of our business and one is the volume piece that Bob touched on, look at last year’s number 2009 we sold 724,000 tons. We were at 200,000 tons plus every quarter for Q1, Q2 and Q3, and this is in 2008. In 2007 we sold nearly 900,000 tons. So that’s really step one. Step two is the price piece and that’s really what you need to take a look at as well.

[Operator:]

Your final question comes from the line of Horst Hueniken - Thomas Weisel Partners

[Horst Hueniken:]

Regarding your production costs you have determined some are abnormal and some are normal, to eliminate the abnormal production costs, how much of an increase in short tons would you need to eliminate that FASB 151 treatment.

[David Honeyfield:]

There’s an awful lot of judgment that goes into that accounting calculation but overall we tend to just tell folks that we need to just get back to that normal production level which as we’ve said before in some ways we’re matching our production to demand in the market. So I think if you look back at those numbers and maybe go back to the fourth quarter of last year, third quarter last year, when we were producing at probably more normalized rates, that would give you an indication but its not going to be an absolute number like I said just because there is judgment involved and we use a range in order really to make that calculation. So its pretty hard for me to give you just a spot on number.

[Horst Hueniken:]

And one other thing, we’ve talked on this call about the average realized price potentially being lower in the fourth quarter then the third quarter, does that suggest that there is inventory write-downs coming in the fourth quarter.

[David Honeyfield:]

I don’t believe that that’s the case based on the pricing that’s in the market right now and I think you can probably back into the inventory tons that are sitting in the system. If you look at our production and sales numbers over the last fourth quarters and the difference there. And if you look at our cost of sales numbers relative to the sales price, there’s quite a bit of room there.

[Operator:]

There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.

[David Honeyfield:]

Really just want to say thank you for joining today’s call and taking the time to learn more about Intrepid.