Intrepid Potash, Inc.
Q2 2013 Earnings Call Transcript

Published: 1 Aug 2013

[Operator:]

Good morning, and welcome to the Intrepid Potash 2013 Second Quarter Conference Call. [Operator Instructions] I would like to remind everyone that this conference is being recorded today, Thursday, August 1, 2013, at 8 a.m. Mountain Time. It is my pleasure to turn the conference over to Gary Kohn, Vice President, Investor Relations. Mr. Kohn, please go ahead.

[Gary Kohn:]

Thanks, Brock. Good morning. Thank you, all, for joining us for our second quarter 2013 earnings conference call. Presenting on the call today are Bob Jornayvaz, Executive Chairman of the Board; Dave Honeyfield, President and Chief Financial Officer; and Kelvin Feist, Senior Vice President of Sales and Marketing. Also in the room with us today are John Mansanti, Senior Vice President of Operations; Martin Litt, Executive Vice President and General Counsel; Brian Frantz, Vice President of Finance and Chief Accounting Officer; and Ken Taylor, Vice President of Business Development and Research. I would like to remind everyone that statements made on this call are not -- that are not historical facts or that express a belief, expectation or intention, including statements about our financial and operational outlook, are forward-looking statements within the meaning of the United States securities laws. These statements are not guarantees of future performance. 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 more information with respect to the risks, uncertainties and other factors, which could cause our actual results to differ from our forward-looking statements, we direct you to the news release we issued yesterday and the risk factors and management's discussion and analysis of financial condition and results of operations in our most recent annual report on Form 10-K as filed with the SEC. All forward-looking statements are qualified in their entirety by such factors. Also during today's call, we may reference certain non-GAAP financial measures, including adjusted EBITDA, adjusted net income and adjusted net income per diluted share, which we believe provide useful information to investors. Our earnings news release, which is posted on our website at intrepidpotash.com, includes reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures. I will now turn the call over to Bob.

[Robert P. Jornayvaz:]

Thanks, Gary. Good morning, and welcome to everyone. I know that Uralkali news is on everyone's mind. So let me take a moment to address it. First, we appreciate your understanding of our quiet period and your patience in waiting to hear from us. We're all well aware of this decade-old rivalry amongst these large Russian producers that seem to erupt from time-to-time and influences the market. Our sense is that it may take some time for the dust to settle from this most recent public airing of their differences. In the meantime, Intrepid remains well positioned to prosper regardless of how this all shakes out. First, Hugh and I have managed and thrive through $0.50 natural gas, $9 crude oil and $80 potash. We've seen adversity and recognized it for the opportunity it provides. We're not pollyannaish about today's realities, but we're prepared for them. We're experienced and hardened by previous similar times and, once again, are ready to prosper from the current confusion and fear. Second, we have the distinct advantage of participating in a local market. Third, we benefit from our ability to produce low cash cost tons from our existing and in-development Solar Solution Mines. This advantage is all the more critical in the event of increased pricing pressure. The additional low cash cost tons we're bringing online from our HB project could not be coming at a better time. Fourth, we have a very solid balance sheet and a capital structure that provides us with a great deal of flexibility. This did not happen by accident. We're prepared for this situation. In the event we need it, we also have access to our currently undrawn $250 million credit facility. Finally, and very importantly, our capital investment will decrease significantly after the third quarter, as the major projects wrap up. Going into the fourth quarter and 2014, we have a great deal of flexibility around our capital investment without having to delay any necessary upgrades or projects. Rest assured that we have and we'll continue to develop contingency plans around any number of outcomes from this most recent development in the world potash market, as Intrepid has proven time after time. Throughout our history, we have remained profitable and committed to our long-term strategy during a wide array of economic and competitive cycles. We have a solid foundation from which to operate that, including significantly modernized plants, a solid balance sheet and capital structure and the ability to strengthen our cash margin and cash flow. For more than a decade, we've been transforming our old outdated facilities to modern built-to-last facilities. Our 3 distinct goals in making these investments were to drive growth of lower cash cost tons, create flexibility and to increase cash margin opportunities and cash flow. We are just a few quarters away from completing this transformation and concluding the construction of our major capital projects. As we cross the finish line entering 2014, what is truly compelling is that we begin to realize the benefits of having come through the transformation. The complexity of this transformation has been immense. The activities have involved every facility and touched nearly every employee. Please keep in mind that all this activity was happening concurrently with the operating teams stewarding the old plants to the point where they're either going to be decommissioned or the upgrades were completed. The combination of our HB Solar Solution Mine, the West facility and our North Compaction projects is very powerful in their ability to produce incremental tons, lower our cash cost, create higher margin opportunities and increase our marketing flexibility. We have invested heavily in our milling and refining processes at West to increase throughput significantly and to increase recovery systems well beyond the original capabilities. These investments in the mill were made to complement the investments we made in the West mine that increase the amount of ore being brought to the surface. The result of this integrated investment and process refinement is going to be record amounts of material being recovered at West and being sent to North for compaction. We're developing a plant that is better suited over the long run to handle more variability in our ore, as we continue to expand into the area we are mining. At HB, we have most of the pond work done, and we have 15 of the 18 ponds filled with brine. Construction on the processing plant is progressing nicely, so we expect to produce our first tons before year end. All this activity is leading to the ramp-up of more meaningful tons in 2014, as we work towards full production. It is gratifying to see this multi-year project coming online, as we draw closer to replicating our successes at Moab and Wendover on a much larger scale. At the North site, we will use state-of-the-art compactors to handle more efficiently all of the materials being produced at West and HB. Importantly, these new compactors, as we have seen in Moab and Wendover, can process a wide array of material, including the previously difficult to handle fine material. This new facility will be more efficient, more reliable and give us the ability to be more flexible in our marketing and production mix to deliver an even higher quality product. We are ever so close to being through this transition. At this point, we've just a few short quarters to go in the final stages of the commissioning process of the last 2 major capital projects and recognize that these next 2 quarter will see some variations and we expect some reductions in our production rates because of the recurring starts and stops that occurs during the process of implementing the upgrades. I can say emphatically, however, that I now see all of this hard work and effort coming together fine. I'm excited to get to the finish line and enter 2014 confident that we have built an even stronger company. I'd like to remind you that none of these projects are online as we speak nor are they reflected in our current cost structure. As it comes on, you're going to see Intrepid produce much lower cost tons. Now Kelvin Feist, our Head of Sales and Marketing, will update you on our sales results and market conditions.

[Kelvin G. Feist:]

Thanks, Bob. Despite the limited demand caused by the compressed spring season, we were able to sell 184,000 tons of potash in the second quarter. Our ability to sell all of our production in the quarter was a direct result of how well we positioned ourselves and our product for the shortened season. Through our strong customer relationships, we effectively utilized warehouse space and benefited from having our production facilities being in close proximity to the end markets. As we look to the fall, we see ourselves as well positioned to benefit from a number of positive potash demand trends taking shape. First, farmers will need to replenish the potassium levels in the soil that are being depleted during this growing season. Second, farmer economics remain favorable, specifically potash pricing relative to commodity prices, even with the recent decreases in corn price. Third, farmers who typically do not apply potash in the fall may consider this option to balance workload and remove the risk of missing the application window next spring. We have all seen that potash pricing has been trending down in recent weeks, as reflected in the summer fill announcements. Based on recent sales activity and the Uralkali news, we foresee some downward pressure continuing as we fill out our order book with fall demand through the second half of 2013. We continue to be advantaged by being able to sell what we produce annually. We have a comfortable level of granular inventory, which will allow us to meet our customers' needs this fall. We're excited about the new HB production and North Compaction plant. We're already working hard to ensure that we have the relationships needed to place these new tons from our HB Solar Solution Mine. We're seeing early signs of success here and an encouraging degree of receptiveness in the market. As we've said before, the state-of-the-art compaction plant at North will create flexibility for us to compact up to 100% of the HB and West production, which will allow us to pursue the highest margin sales opportunities. We will also further improve customer satisfaction by delivering a higher-quality product into the marketplace. All in all, we are confident that farmers will farm, customers will buy fertilizer and Intrepid will be successful in selling all of our potash. Thanks, and I will now turn the call over to Dave.

[David W. Honeyfield:]

Thanks, Kelvin. There are several highlights in the second quarter that are worth noting. On the potash side, we produced 182,000 tons, an increase of 7% over last year's second quarter. The strong production results drove a cash operating cost of goods sold per ton of $186, in line with our expectations. For the first half of this year, cash operating cost per ton equaled $180, which is 4% better than the first half of 2012. The results for Trio continued to improve from the work we've done to optimize the plant and bring it closer to its design capacity. We produced 50,000 tons in the quarter, which is more than 80% of the maximum quarterly output and an improvement of more than 50% from last year's second quarter. We lowered our cash operating cost per ton by 14% to $177 per ton. We sold 35,000 tons at an average net realized sales price of $359 per ton, which is up year-over-year and sequentially yet again. We are very pleased to see these results, particularly the strong cash margin and cash flow contributions, affirming our decision to make the investment to produce and sell this high-value specialty product. Balance sheet strength, capital structure and effective use of long-term, low-cost capital continue to be essential components of our overall strategy. At quarter end, we had cash in investments totaling $129 million. And to-date, we have not drawn on our unsecured $250 million credit facility. The results this quarter include 3 items that are somewhat isolated that we've detailed in the reconciliations of net income and earnings per share in the earnings release. The net effect of these 3 items was a $1.4 million reduction of net income or $0.02 reduction in earnings per share. We have made great progress and are nearing completion on our major capital investment projects. Bringing the new elements into service at West requires that we stop and start the plant more than we would in a normal operating environment. As such, it's become clear that this will impact our production rates over the next 2 quarters as reflected in our updated outlook. We expect that this will result in a higher cash operating cost of goods sold per ton for potash in the back half of the year, which is mostly driven by this variability in our production forecast. As we look to 2014, cash operating cost per ton will begin to come down again as production increases. The payoff, which will be realized quickly as we enter 2014, is increased production, lower cash operating cost per ton and a plant that is more efficient and stable over the long term. In light of the market's singular focus on production cost relative to reset pricing, it's important to remind people that we currently operate 2 solution mines, Wendover and Moab, with a cash operating cost that is in the lowest quartile of cash cost per ton. Our West plant is in the middle of the pack; and East, from a potash-only perspective, is our highest cost facility. That, however, ignores the meaningful margin and cash flow contributions I described earlier with our production in Trio from East. The other compelling part of the equation is that we are bringing on significantly more tons from HB at a cash cost that will be in the $80 per ton range. This is happening at a time when most, if not all, of the expansion projects of other producers will be canceled because the cost per ton just does not make sense. So we seem to be painted with a very broad brush as a high-cost producer, but that's just not the case. This is a discussion about individual minds rather than a discussion about entire companies. We believe that we're at the cusp of delivering on our plan, and we're looking forward to having a more singular focus on operations, as these major capital projects are completed. Our strategy remains straightforward, pursuing the opportunities that increase our production and lower our cash cost per ton, marketing our products in a responsible manner, focusing on our relationships with our customers and achieving the highest average net realized sales prices in North America. Thus, at this point, we're ready for questions.

[Operator:]

[Operator Instructions] Our first question today comes from Vincent Andrews of Morgan Stanley.

[Vincent Andrews:]

Have you had -- or have your customer conversations changed at all, maybe it's too early in last couple of days, but are customers still willing to take fall ton to the current price or are they concerned that, that price is going to go lower? Any changing about their willingness to take product on price? Or how is that conversation evolving so far?

[Robert P. Jornayvaz:]

We're going to let Kelvin answer that. Thanks, Vince.

[Kelvin G. Feist:]

Sure, Vincent. Yes, I think it's a little bit early to be able to tell you exactly how this is going to go. We're having conversations with those folks. We had settled on a summer or a fall-fill program. And I guess, today, there's a number of things that are up in the air. So we're going to continue to ship. I guess our sense is that it's a wait-and-see approach to where the thing settles out today once this thing all comes and gets figured out.

[Vincent Andrews:]

And maybe, just as a follow-up, keeping in mind what you said about your different mine type, different COGS profile, in the event, over the next, say, 6 or 12 months, if there's a period of time where potash prices go below the cost of production at a particular mine, how would you think about the way you would operate that mine?

[Robert P. Jornayvaz:]

Yes. I mean, we've got a long way to go to get there. And so -- I mean, we have contingency plans for just about everything that we need to be thinking about. As we ramp up our langbeinite -- I mean, let's not forget that the Wendover facility has been in continuous operation since 1932. So it's seen lots of difficult times. Moab has been in continuous operation since 1962. Our West mine has been in continuous operation since 1932 as well. And our East mine is probably -- well, it is our highest cost facility, but as we continue to ramp up the langbeinite and improve the sylvite recovery systems over there, we're a long way away from getting there. So we have a contingency for everything. We understand where each facility fits in. The good news is that the HB will be producing tons at a very, very low cost. We just don't envision this disagreement between these Russian producers as being any different than the previous disagreements that we've seen from them. I think what we've seen lacking in some of the papers written is the historical perspective that this disagreement among these guys has been going on for decades. Slightly different players, but it's been the same argument. And every time, it's provided an opportunity for those of us that have facilities to add. So we look at it a little bit differently, having lived through commodity cycles and commodity disruptions. As I said earlier, you and I have thrived since $9 crude oil, $0.50 natural gas and $80 potash. So we tend to view this more as an opportunity. It is adversity. We're not pollyannaish about it. But we have contingency plans for it, and we're ready for it.

[Operator:]

The next question comes from Mark Connelly of the CLSA.

[Mark W. Connelly:]

Two questions. Your CapEx plans over the next couple of years include a lot of small stuff that, from previous conversations, sounds very discretionary. Can you give us a sense of what and how discretionary the 2014 and '15 numbers are?

[Robert P. Jornayvaz:]

Sure. Do you want to get your other question in there too, Mark, or do you want to...

[Mark W. Connelly:]

Sure. The other question was just an update on East. Are the operational improvements there complete? I'm just curious where the productivity is relative to where you expect it to get.

[Robert P. Jornayvaz:]

Yes. Going to the CapEx question, I think that's a fundamental part of the overall discussion here. And when we look at the major capital projects, what you have to keep in mind is that cash is in the bank to complete those. We expect that the bulk of that capital will be deployed here over the third quarter and the remaining portion of that in the fourth quarter. And you hit it right on the head, Mark, that there is an incredible amount of flexibility and discretion that is involved with our capital plans going forward. So you combine that with the balance sheet that we have, you combine that with our ability to flex the operations where we need to, and I think people really need to take that into consideration when they're considering Intrepid in the overall capital investment scheme. We had talked about last quarter that we would see that capital probably come down to that $150 million level. The world changed a couple of days ago, and the good news is, is that we have the ability to change that quite dramatically. And you're going to see a much lower capital number going forward. The good news of that, as I touched on earlier, is it provides our operating guys a singular focus on optimizing our operations, and I think we're seeing that. And kind of weaving into your next question on East, when we have given our guys the opportunity to do that, what we're seeing at East on the langbeinite recovery side is very strong performance, and we recognize that it takes a little bit of time to bring those new plants online as demonstrated here. But what we're seeing and what I expect to see is that we're going to be hitting those design rates. So, yes, all that is a very positive outcome for us as a company.

[Operator:]

The next question comes from Christopher Parkinson of Crédit Suisse.

[Christopher S. Parkinson:]

Just a quick follow-up on a question that was previously answered. In the previous discussions up until a few days ago, just out of curiosity, you mentioned the fall season is going to be much stronger than the spring season but what were you previously hearing in your distribution channels regarding about kind of the inventories and risk appetite prior to this announcement?

[Robert P. Jornayvaz:]

Well, I'll start with that. We know that the retail system is basically empty. When we look behind it, some of the warehouses and distributors have consignment tons in place where as you go into that market -- but the key part of that is that the retail portion is empty. So we see the fall as being extremely strong from a volume standpoint, and we still see that in the discussions that we're having. We still see it as being an extremely strong fall from an application standpoint. Kelvin, if you want to add some additional color?

[Kelvin G. Feist:]

Yes. Christopher, if I can add a couple of things. I think that customers are really looking for stability, and this latest impact has kind of scared everybody. And now, everyone's waiting for things to settle again. But I think stability is the word that I think about that. We also got to remember that the farm economics are real strong still, and I mentioned it in the previous comments. These guys are still going to farm, and so our sense is there's still really good demand for this fall, potentially a little bit of a compressed window this fall as well if we get cooler weather and we don't get harvest off in time. But I think everyone is gearing up for a significant fall, and that's been the conversation. We were just down at the Southwest Fertilizer Conference in San Antonio, 1,600 folks down there and we met with a goodly portion of those folks. And they're all speaking the same language, and they're all indicating a really good fall that they expect. So we're confident that the demand is there so long as the weather allows us to put the product on the ground.

[Operator:]

The next question comes from Joel Jackson of BMO Capital Markets.

[Adam Bredlo:]

This is actually Adam for Joel. I just had a quick question on potash cash cost. Obviously, it's a pretty hot topic right now. For 2014, I'm trying to figure out when you're not considering the HB tons that are coming on at $80 a ton, we know that's happening, so from the existing facilities. Are we going to be looking at production probably closer to 850,000 tons versus, say, for this year it's only 800,000 tons and costs more in line with your 170,000, 180,000 guidance that you had previously for 2013? Like, what does the 2014 cost profile look like, absent HB?

[David W. Honeyfield:]

Adam, this is Dave. The numbers you're describing, I think, are very directionally in line, and what I would tell you is that we'd probably be there in the third and fourth quarter if the timing elements around the West surface capital investments and the North Compaction. If those have synced up perfectly, you would see that higher recovery rate of feed going over to North. And so, we really anticipate that coming through in 2014. It does increase our overall production profile. It drives the unit cost, as you know. And then, the -- you can't ignore the HB tons, frankly, and I think it's appropriate for you to capture those. Clearly, there's a ramp-up phase at HB, as you guys know, with solution mine and solar evaporation. And so, most of that is -- there's going to be a heavier weighting to the back end of the year in '14 on HB to factor in. The point being that each one of these items continue to drive the cost exactly in the direction that you just described, which are to the left side of the cost curve.

[Robert P. Jornayvaz:]

Adam, this is Bob. I just want to reiterate that the new West mill has not been up and operating yet, and it's a new state-of-the-art design mill that will come on some time at the end of the third quarter, early in the fourth quarter. And that our current existing mills that's 40 to 50 years old that we've been upgrading, renovating and making significant changes to testing, experimenting with the different refining and milling processes, so that we can take all of that material, and it can now be compacted in our new compaction facility, where we couldn't compact that material before. So we have so many new changes that just none of which has been turned on yet. All of which is still in the testing, refining and commissioning stages that are the exciting part about Intrepid. I mean, our timing just couldn't be better given the light of what's going on in the marketplace.

[Adam Bredlo:]

Okay. And just one more quick -- other question here. It's on Trio. So given your Q3 guidance of 30,000, 40,000 tons, the implied Q4 given your full year guidance is about 60,000 tons at Trio, and that's up a lot considering what's happened in Q1 and Q2. Is that like a better run rate for 2014? Or what are your thoughts on 60,000 tons in Q4?

[Robert P. Jornayvaz:]

Yes. Adam, I think you're seeing the same trend that we're seeing on our operating side. You look at the ramp-up historically here at Q2 up to 50,000 tons. We've been making -- first quarter, we talked about some of the actual design changes that had taken place in the plant that showed the result. Second quarter here -- some of the operational and kind of maintenance timing questions have been sorted through. So you're seeing the numbers just as we're seeing them, and you extrapolate those and it shows you that we're getting right to where those design numbers are that we had talked about.

[Operator:]

The next question comes from Don Carson of Susquehanna Financial.

[Donald Carson:]

A couple of question on the domestic market. Everyone's focusing on offshore prices, but the Canadian producers are still seeing about a $3 price premium adjusted for grade in the domestic market, which is ironic since this is where the cartel doesn't operate. But with -- 2 things, one, are you worried that the Russians and Belarusians are going to up more product into the river system as they ramp-up production? And second, and more importantly, Agrium has mentioned that probably the one tangible evidence of synergy between the wholesale and retail is your ability to put more of the Vanscoy ton through the retail system as they ramp-up Vanscoy in 2015. So a, what impact do you think that has an overall pricing in the domestic marketplace in terms of the premium? And b, how does that affect you directly in terms of sales you might have through the Agrium retail system that would be backed out?

[David W. Honeyfield:]

This is Dave. Why don't I start with the first question and then, Kelvin, if you could address the second half, that'd be great. I think the way I think about the domestic market, I think you really have to consider what has transpired here over the last, probably, 18 months with the amount of warehouse space that has been put under consignment by Mosaic, by PotashCorp. We certainly have secured throughput arrangements with certain warehouse locations. So there is a question about where those tons would go because many of those are multiyear deals. And so the ability, frankly, to bring more tons in, that's a big part of what I think that strategy was that the larger Canadian producers really started to push over the last couple of years. So I think that's a piece that really does have to go into that question. I don't have a good answer for you in terms of what flex granular capacity there is from the Russian producers. I think that, that's an item that really needs to be explored because, as you know, the U.S. market is a granular market. And that's why our investments in things like Moab, things like Wendover, North and our ability to compact and really flex our production where we need to becomes so valuable. So with that, Kelvin, I'll turn it over to you on the Agrium question.

[Kelvin G. Feist:]

Sure. Actually, if I can touch on the river first, I think the first piece on the imports is that there's a lot of players on the river, and it's very competitive. I would say that the Canadians are much more aggressive on the river than they have been. You see a number of other players. So I wouldn't say it's easy to just add tons to the river for any one player. There's a number of different warehouses that get filled, and so it's a little bit challenging to just put the switch and add hundreds of thousands of tons. On the Agrium question, I guess everyone has key customers as we do. And certainly, they're a large producer of potash. So I guess there's places that we fit best into their system, and there's places where other producers would fit better for their retail system. So our strategy is really to grow our footprint with some of these new tons and go into some new geography and supply our old geography. So I guess we don't focus on one specific customer. We have a wide array of customers, and we're convinced we'll easily place the tons that we're going to produce here in the near future.

[Operator:]

The next question comes from Mark Gulley of BGC Financial.

[Mark R. Gulley:]

Bob, you talked about balance sheet flexibility, you talked about prospering in difficult times. So I'd like to ask you to maybe take that 1 or 2 steps further. One way to prosper in tough times would be to initiate a share repurchase program to take advantage of what might be viewed as a bit of an irrational drop in a share price. Can you address that first and I have a follow-up.

[Robert P. Jornayvaz:]

Well, from an Intrepid standpoint, I think retaining as much balance sheet flexibility is the smartest thing that we can do so that we can navigate through times. I hear what you say in terms of trying to repurchase shares. If I were to separate out Hugh and myself from Intrepid, I think we represent an incredible value right now. And so I think it's Intrepid's job to maintain its incredible balance sheet flexibility. So I don't think today until things settle out is the right thing for Intrepid to do in terms of being a share repurchase program. I think it's to make sure we see what's going to happen with this Russian situation. As I've said earlier, we've seen it before. And historically, the differences have provided an opportunity in the long term. This is not the first time that these guys have argued like this. It's probably one of the more public times, but it's not the first time. And so we've seen it. We're used to it. We understand it. And so I just don't think it's the appropriate use of our excess cash right now to be distributing it at this time when things are uncertain. I mean, some of the analysts were writing obituaries about Intrepid yesterday. So we're going to take our time and come up with a strategy that allows us to prosper as we always have.

[Mark R. Gulley:]

Okay. I guess, I'll take that as a no. And secondly, if I could extend it the other direction in terms of prospering through tough times. Are you suggesting that some of the potash juniors might be viewed as interesting if you could take advantage of what's happening in the markets to perhaps acquire more reserves for develop later? I'm just trying to understand what you mean by prospering in terms of -- during times of adversity. Can you add some more meat to the bones there?

[Robert P. Jornayvaz:]

Well, I think I did. I think Intrepid has balance sheet flexibility that allows it to wait and understand what's going on. We're going to continue our capital program. We've already enhanced our opportunities with our customers to expand our footprint, and we understand what that looks like. We really don't believe this diversity that we see or this adversity that we see with the Russians is going to be a long-term situation. We've heard this bluster before, and it's never really played out the way that we've seen it analyzed in the last few days. I'll leave it at that. We don't see any opportunities from any of the juniors. We've looked at all those projects before. We've analyzed them all. We've seen them all. And we don't see the opportunities there. I think Intrepid needs to keep its cash on its balance sheet, but we recognize that there's great value on our stock at these levels.

[Operator:]

The next question comes from Andrew Dunn of KeyBanc Capital Markets.

[Andrew Dunn:]

So I appreciate you guys have been in this business for a long time. I was hoping maybe you could let us benefit from your historical perspective a little bit, maybe give us an idea of -- from last time you saw something like this happened, where it looked like the market was kind of going to get kicked in the teeth and what happened and how long it took for the market to regain some normalcy after that?

[Robert P. Jornayvaz:]

Well, we can go back to the late '70s when the Canadians nationalized potash and then privatized potash. We can go to the early '90s when the Russians were flooding the market after the disintegration of the former Soviet Union. We can go to the '03, '04 period when we had a similar situation to this and literally, potash got down to $82. We've seen corn prices trade around $1 to $1.50, and potash prices still come back strong. I think people still underestimate the supply tons that are at risk around the world, and we've all been through our various brownfields and the green fields that have been discussed, how hard it is to actually produce potash, produce potash on a cost-effective basis. If you were to look at some of the North American competitors' cost structures, we've seen some of them rise as they deal with water inflow issues as they have for many, many years. We've seen floods. We've seen water incursions. We've seen a variety of different supply disruption problems that historically have happened. So when we go back and we look at this, it's not pretty. It's not fun. It's not an enjoyable time to live through. But as I said, we've been here before. We roll up our sleeves. We do a better job at operating, as we have always done through these times, and we get through. We try to invest in the right things that will provide return when the market stabilizes and then resumes an upward direction. I can remember $9 crude oil in the late '90s, and everyone felt like OPEC was going to come apart, and you persevere through these times. And so I've sold $0.50 gas on the Moxa Arch and we persevered, and we sold $13 natural gas in 2008. So we've been here. We understand what it's like to live through a cycle and balance sheet strength is so important and focus on your operations. It's hard to describe the anthill type of activity that we've have down in Carlsbad with all of these projects going on simultaneously. Besides having 1,000 employees when you have hundreds of additional contractors all operating on top of each other at the same time, it provides for difficulty in execution on the capital side, as well as focused on the day-to-day operations. And we're nearing the end of that. We see the huge light at the end of the tunnel, and the good news is we know exactly that it's daylight and that it's not a train. We're confident about that. So I don't know if I can give you anymore color other than that I've been here before. And historically, these times have provided opportunity. When there's confusion and fear in the marketplace, you just need to remain steady in what you're doing.

[Andrew Dunn:]

Okay. And then just one follow-up, if I may. You did comment that your production Outlooks have changed. I think, you did cite kind of upgrades, swap outs at your new facilities, and the upgrades there. I'm just curious is there something different about this process or some new data that you've gotten in the last quarter different from what you knew the quarter before that or is it just more certainty in the timing? And do you think there's -- it looks like the majority of this is in 3Q. Is there any risk, significant risk that any of that can spill over into 4Q?

[David W. Honeyfield:]

Adam, this is Dave. The clarity on it is just we're closer to that date. And like I touched on earlier, we're making a lot of changes in the West mill to really increase recoveries, which provides a different feedstock to our new North Compaction plant. Syncing that up with the timing and commissioning of the new plant, at the same time, we're still running the old plant that, just based on its age, requires a fairly specific feed. So as we go through that, those test phases and different pieces of equipment come in, I'd love to tell you that it's something other than just we're closer to it and we're recognizing that there's going to be more interruptions than we had first thought when we had set the budget. It's as straightforward as that, really. The majority of it is, in the third quarter as you've seen, I think there's a notion that if it gets wrapped up in September, if it gets wrapped up in October, the part that I think is helpful for people to understand is that we can build, basically, a feed that goes over to the North. And then because of the rate flexibility we have with that compactor, it actually gets made up in the -- when the North plant is up and running. So it may flex a little bit, but it doesn't change the overall production over that period of time. Hopefully, that helps.

[Operator:]

The next question comes from Michael Hoffman of Wunderlich.

[Michael E. Hoffman:]

On capital spending, can you help us with what your maintenance capital spending is? So take all the growth out, it's just maintenance.

[David W. Honeyfield:]

Yes. This is Dave. We've been at a point where we have, I would say, in a price environment that we've experienced over the last couple of years, where we've estimated it out to be somewhere in the $40 million room -- range or so. The point I would make is that there's a lot of flexibility in that. And maybe even back to Mark's question or Mark Connelly's question earlier, the amount of flexibility we have in our capital program is very significant. So if there is a -- if the price environment goes where so many of the research analysts have painted it to go, you can look back even to 2008, 2009, the first thing you do is you stop your capital, you look for areas where you can defer, you look at areas that are discretionary, and you tighten your belt around that. And we have that advantage. It's the benefit of, frankly, having made all the investment that we have over the last several years. So I don't see that as a number that I would draw a hard box around. I think recognizing that, that could be made smaller is a very real scenario.

[Michael E. Hoffman:]

Okay. But the point being you're spending at over $200 million. So there's a monster swing between '13 to '14 if you just had to do just maintenance.

[David W. Honeyfield:]

Yes. I mean, that's a great point. If you were to take the midpoint of the capital range for this year it's -- I think the midpoint is about $260 million. The bulk of that is HB. North is nearly complete. Moab is nearly complete. And the West upgrades are probably about halfway through. So we know where those big dollars are, and we also know the timing of wrapping that up. So your point is spot on, that it's -- it is a significantly different picture. And as I touched on earlier, the cash is in the bank for those projects that we're going to be completing here in the next few months.

[Michael E. Hoffman:]

Right. Okay. So on free cash flow, if you're given -- the question is can you be positive in 2014 without HB, but having the benefit of these upgrades you're doing at the West mill? And price -- as the price environment we're in right -- it's the Uralkali price environment.

[David W. Honeyfield:]

I think we can. Everything that we have run shows that we would be. And clearly, the capital component is a piece of that. And it just gives us a lot of choices at that point in time in terms of how we think about investments and the timing of those investments. So the fact that we've made the investment like -- I know I'm repeating myself here, but the fact that we've made the investment in the plants to this point just tells you that there's a much newer facility there that's probably got a lower load then you might have in a different environment.

[Michael E. Hoffman:]

Okay. And so I'm not asking for guidance as much. But am I hearing from you a realization and an appreciation that you should be free cash flow positive. So do whatever it takes to be in '14?

[David W. Honeyfield:]

I think that that's a very prudent operating model for us. And very intentionally, giving guys the opportunity to focus purely on operations, I think will have a huge benefit to us as a company as these new investments are brought to a close.

[Michael E. Hoffman:]

All right. And as I think about all these investments now and the cycling, when you look out over the next, call it, 1.5 years, when do you hit that run rate of 1 million tons of production at this point based on where you are and your understanding of everything coming online?

[David W. Honeyfield:]

Yes. Certainly on the potash side, I think that the -- as we move into 2015, that's really when we start to see the -- more of the full benefit from the HB tons. So that's the time period that I would anticipate at this point, Michael.

[Michael E. Hoffman:]

Okay. And then how late in this quarter can you shift so you can allow this price issue to settle out? What's the -- how much flexibility do you have on you can wait, wait, wait, and let some of the dust settle?

[David W. Honeyfield:]

Kelvin, do you want to address that one? That's a good question.

[Robert P. Jornayvaz:]

Yes. Let me start out by, first, we've got customers that want tons shipped in the very near future. I mean, we have customers that want tons now. And so some of those tons are going to get priced now because they want them now. And so we're going to see some clarity on where this pricing falls out pretty quickly. And then I assume that the Canadians are going to come out with some direction in terms of where they see things going. But we do have customers that are wanting shipments now, and those tons will get negotiated and priced now and that's going to -- it's all going to provide a very dynamic iterative pricing scenario, if you will. I don't think that we're looking at 1 day in the future where it all gets resolved. We're seeing customers that want tons as we speak. Kelvin, if you can add to that.

[Kelvin G. Feist:]

Michael, if I can just add a couple of things. I think our customers are very cognizant that logistics are very important especially in a compressed season. And I guess as we push back and whether it's 1 week or 2 weeks from now when we get resettled, I see them coming in and putting their orders in, especially the large guys that got a lot of volume to ship. So I think both from a farmer and a retailer perspective in the fertilizer side, they're thinking about this and they know that they need to take a position at some point in the very near future. So our stance is it will happen in the not-too-distant future, and we'll easily be able to supply their needs prior to the end of the quarter.

[Michael E. Hoffman:]

Okay. And then one more, the Uralkali supposedly has announced a 500,000 ton shipment into China, but didn't give any pricing. It's for delivery in the second half. Any sense on what that price is?

[David W. Honeyfield:]

Michael, this is Dave. What I have seen and it's really coming out of the research community and there've been...

[Michael E. Hoffman:]

We don't know what we're talking about.

[David W. Honeyfield:]

Yes. Well -- I'm not going to address that. What I have seen is that, that price is in the $350 to $360 range, which I think is kind of interesting given some of the, I don't know, frankly, inflammatory comments that have been made otherwise.

[Michael E. Hoffman:]

All right. And that standard, you're selling granular. Granular sells at a premium. So if I start connecting the dots, this is a head fake.

[David W. Honeyfield:]

I think, you -- I mean, now, I think we really just going to have to let time unfold a little bit. I don't know that I can add to that speculation, but you are addressing, I think, very important points.

[Robert P. Jornayvaz:]

The other thing to always remember is that China is buying in 0.5 million and 1 million tons increments. And our customers are buying in 1,000, 5,000 ton increments, and those things are priced very differently. And that's why we've seen, the North America market always have such a good strong premium. That there is still value placed on just-in-time inventory. There is still value placed on quality. There is still value placed on diversity of products, and we are in a diverse strong agricultural market, which is our home market. So we're going to keep our heads about us. And as I said, we see this as an opportunistic phase. It is adversity. I don't want to lead anyone to think that we're pollyannaish about it, we're very realistic about it. But I think you hit the nail on the head earlier that we'll get through this.

[Michael E. Hoffman:]

Okay. Last thing, when are you going to kick open the doors and let us come kick the tires and see the benefit all this money is spent?

[David W. Honeyfield:]

Michael, we'll follow-up with you outside of this call. But suffice it to say we're certainly trying to get that planned.

[Operator:]

The next question comes from Christopher Perrella of Bank of America Merrill Lynch.

[Christopher Perrella:]

The fall expectations, the robust demand that you and your customers are looking forward to, is that a catch-up from the spring farmers that missed trying to build back up? And then looking ahead for the spring of 2014, do you foresee that being a more normal application season or do you think some of that gets pulled forward into this robust demand scenario coming in a couple of months?

[David W. Honeyfield:]

Kelvin, why don't I start and then Bob or Kelvin, if you guys want to add to it, that'd be great. I think the -- the fact is, Chris, and many folks have recognized it, farmers really had to make a choice in the spring. They had to make a choice as to whether or not they were going to finish up their dry application work for P or K or they were going to get a seed -- get seed in the ground. So they took the only choice they could. What that is going to result to, frankly, is a higher level of depletion of nutrient in the soil. And we continue to see that situation as measured by university systems, by the extension offices show that K decreases. I think if there is a price impact that comes to the market it actually makes the demand side increase. Those have tended to have a very strong negative correlation to one another over the years. And you can kind of go back and look at summer -- or spring 2010 and then fall 2010 in terms of how quickly that demand can ramp-up. So as Kelvin touched on earlier, we think farm economics continue to be good. Obviously, input prices are a very small component overall. And looking across the complex, I think it would tell you that it may even be a smaller component making the economic argument even stronger. Kelvin, I don't know if you have anything else to add to that.

[Kelvin G. Feist:]

No, I don't think so.

[Christopher Perrella:]

All right. Just to follow-on to that. Is there any risk out there when you talk to your customers? Are they nervous about a tighter fall window, so to speak, with the late harvest coming off the field?

[Kelvin G. Feist:]

Chris, this is Kelvin here. I think there's always risk in farming. I think it's inherent. I think the reality is we've had some relatively normal weather through the last few weeks. We've gotten timely rains, which are encouraging to the farmers. They're looking at a pretty good crop out there. And I think there's -- it looks like a very good crop coming off. And so I would say there's a general positive attitude at the farm gate today, which really tells us that there's going to be some good application this fall. Beyond that, I really can't speak to it. I mean, there's always logistics challenges, but we demonstrated this spring that these guys can cover a lot of ground in a short period of time. And if they need to this fall, they'll do the same. So I think we're going to be positioned to apply product in a big way in a short period of time, and we'll have some success as a result.

[Christopher Perrella:]

All right. And then one final question. Dave, what is an optimal capital structure in a more normal pricing or more -- or less volatile pricing environment for you?

[David W. Honeyfield:]

Well, I think a big part of that really depends on what you've got ahead of you, Chris. And I think in our situation, we've had a very significant capital investment program. So making sure we had that cash on the balance sheet to fund it, so that if you are in a volatile commodity market and you see volatility, you can wrap up the projects that are very important to you. It shows that we probably have the right capital structure at this point. I think the -- several questions have kind of hinted around it, and I think step one here is to see where all this settles out. And as Bob mentioned, we've drawn up contingency plans, run a lot of different scenarios and they each have a different outcome, Chris. So I don't know that there's a singular answer to your question, frankly.

[Operator:]

The last question today is a follow-up from Mark Gulley of BGC Financial.

[Mark R. Gulley:]

Yes. Bob, a lot of discussion today about increasingly more sales on consignment of potash with the PotashCorp perhaps marginally accepting that that's the new model. How do you think about how that changes the pricing visibility for the industry and for you in North America?

[Robert P. Jornayvaz:]

It's a great question, Mark. I think consignment programs are in direct conflict with some of the production cutbacks that have been announced. So once again we're taking some time to understand what the Canadians are trying to do as they have announced some pretty significant production cutbacks yet they have allowed some consignment programs to stay in place. So we have a very empty retail system, yet we have some consignment tons behind them. I don't think that the consignment programs have been the best stewards of price. So it's going to be interesting to see how those programs play out. We do have a small percentage of our production that is on consignment. It's not a program that we like. It's not something that we think is the most optimum in terms of stewarding price, but it is what it is in today's environment. So as we look forward and we see production cutbacks, we're going to be interested and see where the market goes as it relates to this, because I think that those are kind of conflicting behaviors. Once again, I think that the next couple of quarters is going to play out a lot into where we're headed. We've seen situations similar to this in the past, back in the Mississippi Chemical days. I can remember when Mississippi Chemical was in financial trouble and they would literally take cash for an order upfront, and we had consignment back then. So we've lived through it before. This is a long answer to your question. I think it's -- I hope I've answered it or have given you some color. If you want to follow-up, I'm happy to take the question, but -- does that answer your question?

[Mark R. Gulley:]

It sure does provide a lot of color, and your frustration comes through pretty clearly.

[Robert P. Jornayvaz:]

Well, I think -- I appreciate everybody dialing in. We appreciate the questions. Hopefully, folks get a sense of what we're thinking and what we -- how we believe in what we've done here at Intrepid. And so at this point, I think we'll conclude the call. And again, appreciate everyone's interest in Intrepid.