The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K. The following discussion and analysis contains forward?looking statements that involve risks, uncertainties, and assumptions as described under the heading "Cautionary Note Regarding Forward?Looking Statements," in Part I of this Annual Report on Form 10-K. Our actual results could differ materially from those anticipated by these forward?looking statements as a result of many factors, including those discussed under "Item 1A. Risk Factors" and elsewhere in this Annual Report on Form 10-K.
Overview
We produce potash and langbeinite, which we market and sell as Trio®. Our revenues are generated exclusively from the sale of potash and Trio®. Our potash is marketed for sale into three primary markets: the agricultural market as fertilizer, the industrial market as a component in drilling and fracturing fluids for oil and gas wells, and the animal feed market as a nutrient. Our primary regional markets include agricultural areas and feed manufacturers in the central and western United States, as well as oil and gas drilling areas in the Rocky Mountains and the greater Permian Basin. In addition to the agricultural regions noted above, we also have sales, primarily of Trio®, that go into the southeastern and eastern United States. Our production facilities all are located in the western United States, and therefore our operations are affected by weather and other conditions in this region.
We own five active production facilities-three in New Mexico (referenced collectively below as "Carlsbad" or individually as "West," "East," and "North") and two in Utah ("Moab" and "Wendover")-and we have a current estimated annual productive capacity of approximately 900,000 tons of potash, not including an estimated 200,000 tons of designed productive capacity for the HB Solar Solution mine, and based on current design, approximately 240,000 tons of langbeinite. We are not yet producing at an annual rate of 240,000 tons per year of langbeinite. We are continuing to commission the langbeinite recovery plant and will update productive capacity numbers as improvements are realized. Actual production is affected by operating rates, recoveries, mining rates, precipitation and evaporation rates at our solar solution operations, and the amount of development work that we do. Therefore, our production results tend to be lower than our productive capacity. The HB Solar Solution mine is under development in Carlsbad, New Mexico. Construction continues to progress on the HB Solar Solution mine, a project to apply solution mining and solar evaporation techniques to produce potash from previously idled mine workings close to our current underground operations near Carlsbad, New Mexico. We also have additional opportunities to develop mineralized deposits of potash in New Mexico which could include additional solar solution mining opportunities near our current operations in New Mexico, reopening of the North mine, which was operated as a traditional underground mine until the early 1980s, as well as the acceleration of production from our reserves and mineralized deposits of potash through new access points in the area and the potential construction of additional production facilities in the region.

Significant Business Trends and Activities Our financial results are impacted by several significant trends, which are described below. We expect that these trends will continue to affect our results of operations, cash flows or financial position.
• Construction of the HB Solar Solution mine and North compaction facility. We are making significant progress on the construction of the HB Solar Solution mine. Construction of the solar evaporation ponds continues to advance, and we have pumped potash-enriched brine from the underground mines into several of the evaporation ponds. We have also substantially completed all of the drilling activities associated with the injection, extraction, and water wells that were contemplated in our initial design. In addition, during the fourth quarter of 2012, we began construction of the processing mill, which is expected to be completed in the fourth quarter of 2013. The total expected investment for the project is between $225 million and $245 million, of which $128.3 million had been invested as of December 31, 2012. The construction of the new North Compaction facility is also progressing well with $55.4 million of the expected $95 million to $100 million investment made by December 31, 2012. This new facility expands our granulation capacity to accommodate the increased tonnage expected from the HB Solar Solution mine and ongoing expansions at our West mine. The new North Compaction plant will utilize state-of-the-art equipment providing us the tools to provide high quality granular production from this facility.

• Potash demand. We sold 839,000 tons of potash in 2012, approximately 43,000 tons more than the 796,000 tons of potash we produced during the year. Despite challenging weather and market conditions, we were able to sell approximately 46,000 more tons than we sold in 2011. Potash demand in North America for the 2011/2012 growing season was in line with historical levels. During 2012, the drought across much of the Midwest caused lower grain yields, which in turn tightened stocks-to-use ratios. There were, however, certain regions of the United States and Canada that saw above average crop yields, which partially offset the lower yields in the Midwest. The drought did have an overall net negative impact on crop yields and the resulting lower stocks-to-use ratio caused commodity prices for grains to increase during 2012. The outlook continues to be favorable for farmer economics in 2013 with expected continued tight stocks of grains. As a result, we expect that potash demand in North America for the 2012/2013 growing season will be in line with historical levels. Over the last several years, fertilizer dealers have sought to lower their risk profile, which has led to lower average inventory levels owned by dealers in the overall North American distribution system. It has also resulted in dealers carrying low inventory over summer and winter months, as they have sought to end the fall and spring seasons with minimal inventory levels, thereby reducing their working capital requirements. Potash producers have responded to this trend by increasing the amount of producer-owned inventory at dealer locations in an effort to get product closer to the end user. As in past years, the timing of farmer potash application in 2013 will remain weather dependent and soil specific for different growing regions. This is expected to lead to increased variability in potash demand at the distribution level of the supply chain, which makes the timing of dealer purchases of potash unpredictable, increasing volatility of sales volumes from quarter to quarter.
• Potash prices. Potash prices are a significant driver of profitability for our business. Our average net realized sales price decreased to $434 per ton in the fourth quarter of 2012 from $444 in the third quarter of 2012. For the full year, potash prices moved from an average net realized sales price of $472 per ton in 2011 to $454 per ton in 2012. Although we do not participate in the export market to China, India and Brazil, these markets have an impact on North American pricing. Concern around potash demand in China and India created uncertainty around potash production levels and pricing, prompting some North American producers to curtail production during the fourth quarter of 2012 and into the first quarter of 2013. Despite the curtailments, North American producers increased their inventory levels and, as a result, we have experienced greater price competition in North America, thus driving potash prices lower in North America. Moving into 2013, although China and India have signed contracts for the first half of 2013, we are seeing continued pressure on potash prices and ongoing uncertainty in the world economy which continues to further cloud the global potash market. If additional brownfield potash production is brought on line globally, adding additional production to the market, there could be further price erosion if global potash consumption does not increase.
• Trio® prices and demand. The average net realized sales price of Trio® has increased from $236 per ton in 2011 to $329 per ton in 2012. We continue to have strong demand for all sizes of our Trio® product. Trio® domestic pricing has historically tended to move in a relatively close relationship to potash, although, over the last year, dealers' and farmers' recognition of the added value of magnesium and sulfate from this specialty product has translated into higher prices. Demand in excess of production has also been supportive of Trio® pricing. Export Trio® pricing continues to show strength as international customers see value for Trio®. Trio® sales in 2013 are expected to essentially match production levels due to the low inventory levels we have available for sale as of the end of 2012.
• Operating efficiencies. We have dedicated significant resources to the long-term improvement plan we implemented in the beginning of 2012 to address production challenges at the East plant. Execution of the long-term improvement plan is expected to continue in 2013. We have seen steady and measurable improvement as we execute the plan, particularly for potash production. Specifically, our potash production from the East facility increased sequentially from the first quarter to the second quarter, from the second quarter to the third quarter, and from the third quarter to the fourth quarter in 2012, and is now approaching some of the highest historical levels on an annualized run rate basis. We expect langbeinite production levels in 2013 to be greater than those realized in 2012 as the increased recovery of product from the ore is a focus for our operations team. They have demonstrated an ability to make improvements in the facilities in a systematic and professional manner. Through 2013, we expect to see higher average production levels of both potash and Trio® as a result of our focus and dedication on the long-term improvement of the East facility. With higher operating rates and productivity from our East facility, we expect that our product mix will be more heavily weighted towards the East facility than it was in 2012. This may put pressure on our per ton costs; however, we expect to maintain our annual cash costs per ton at approximately the same level by closely managing overall costs and increasing production.
Selected Operating and Financial Data

The following table presents selected operating and financial data for the periods noted.

                                                       Year Ended December 31,
                                                    2012         2011       2010(1)
Production volume (in thousands of tons):
  Potash                                               796          813          727
  Langbeinite                                          131          141          159
Sales volume (in thousands of tons):
  Potash                                               839          793          810
  Trio®                                                125          173          204

Gross sales (in thousands):
  Potash                                         $ 402,382    $ 392,331    $ 312,088
  Trio®                                             48,934       50,623       47,216
  Total                                            451,316      442,954      359,304
Freight costs (in thousands):
  Potash                                            21,396       18,470       18,021
  Trio®                                              7,768        9,869       11,730
  Total                                             29,164       28,339       29,751
Net sales (in thousands):
  Potash                                           380,986      373,861      294,067
  Trio®                                             41,166       40,754       35,486
  Total                                          $ 422,152    $ 414,615    $ 329,553

Potash statistics (per ton):
  Average net realized sales price(2)            $     454    $     472    $     363
  Cash operating cost of goods sold, net of
by-product credits(3) (exclusive of items
shown separately below)                                180          173          184
  Depreciation, depletion, and amortization             43           33           26
  Royalties                                             17           17           13
   Total potash cost of goods sold               $     240    $     223    $     223
  Warehousing and handling costs                        15           14           11
   Average potash gross margin (exclusive
of costs associated with abnormal
production)                                      $     199    $     235    $     129

Trio® statistics (per ton):
  Average net realized sales price(2)            $     329    $     236    $     174
  Cash operating cost of goods sold (exclusive
of items shown separately below)                       209          176          127
  Depreciation, depletion, and amortization             61           22           17
  Royalties                                             16           12            9
   Total Trio® cost of goods sold                $     286    $     210    $     153
  Warehousing and handling costs                        16           15           10
   Average Trio® gross margin (exclusive
of costs associated with abnormal
production)                                      $      27    $      11    $      11

(1) Costs associated with abnormal production that occurred in 2010 are excluded from these amounts. No abnormal production costs have been incurred in 2012 or in 2011.

(2) Average net realized sales price is calculated by deducting freight costs from gross revenues and then by dividing this result by tons of product sold during the period.

(3) On a per ton basis, by-product credits were $8 for each of the years ended December 31, 2012, 2011, and 2010. By-product credits were $6.5 million, $6.0 million and $6.4 million for the years ended December 31, 2012, 2011, and 2010, respectively.

Results of Operations
Operating Highlights
Our 2012 net income was $87.4 million, or $1.16 per share with cash flows from operations of $187.8 million. We had capital investments of $253.0 million in 2012 and ended the year with $57.7 million of cash and investments with no debt outstanding. We also paid a cash dividend of $0.75 per share, or $56.5 million, in December 2012.
Potash
In 2012, we sold 839,000 tons of potash as compared to 793,000 tons in 2011. In the first half of 2012, dealers once again took a cautious approach to purchasing potash, exiting the spring and fall application seasons with low storage levels of inventory. In the second half of 2012, demand from dealers increased to meet demand from farmers who applied potash in the fall at better than expected levels. Our average net realized sales price of potash was $454 per ton in 2012, compared with $472 per ton in 2011. This decrease is due to the lower overall global demand for potash which resulted in lower North American prices.
We continue to focus on production flexibility to support the sales needs for the diverse markets, customers, and crops that we serve. This diversity of our sales helps us maximize the average net realized sales price for our products and helps us better manage our inventory levels. The investments we made in granulation capacity in Moab in late 2010 and Wendover in late 2011 have resulted in a better quality product and have given us the production flexibility to manage our inventory levels more effectively. These investments have also allowed us to expand our marketing into customer locations that we did not previously serve from these facilities. Our investments in granulation capacity provide us the added flexibility to better adjust the production rates to meet the demands of the specific markets. In making our production decisions, we evaluate the relative margins we can earn as well as the demand in a specific market to produce the appropriate product. We continue to focus on increasing our granulation capacity and efficiency with the construction of an upgraded and expanded granulation facility at our North plant in Carlsbad, New Mexico, where the first phase of construction is anticipated to be completed in mid-2013. The percentage of our sales in each of the markets we serve stayed relatively consistent from 2011 to 2012, with a slight increase in the percentage of agricultural sales. Sales of standard-sized potash for industrial use decreased in 2012 as compared with 2011. Rig counts in areas where we serve the oil and gas sector were down approximately 10% from December 31, 2011, to December 31, 2012. We expect industrial demand for our standard-sized product will correlate over the long term with oil and gas pricing, drilling, and well completion activities. We believe that potassium chloride is the most effective clay-swelling inhibitor available, and we are marketing potassium chloride as the drilling fluid additive of choice in our traditional industrial markets. The flexibility to produce as much granular-sized product as we can is important as we continue to see long-term trends that support utilization of potash in agriculture. Data generated by Fertecon Limited, a fertilizer industry consultant, shows that over the past 25 years, the domestic consumption for potash has averaged approximately 9.3 million tons with annual volatility of approximately 10%. These results have occurred through historical periods of low and high agricultural commodity prices, weather conditions, variability in oil and gas drilling, negative farmer margins, and a variety of other macro-economic factors. Continuing improvements in agriculture production technology, such as hybrid seeds and equipment advancements, now allow for the potential of higher yields per acre. These improvements need to be matched with potassium application rates to maximize agricultural productivity.
The replacement of potassium in the soil is critical to continue high-yielding agricultural production and to satisfy the demands placed on soils for plant nutrition. The International Plant Nutrition Institute has tracked historical soil potassium levels and trends show an increasing frequency of potassium deficient soils in North America. In order for the North American farmer to maximize yields, application of higher rates of potash will be necessary in the future.
Our potash sales mix was approximately as follows for the indicated periods.

                 2012          2011      2010
Agricultural      81 %          79 %      82 %
Industrial        12 %          14 %      11 %
Feed               7 %           7 %       7 %

Our average potash gross margin as a percentage of net sales was 44% in 2012, as compared with 50% in 2011, with the decrease being attributable to lower average net realized sales prices in 2012, combined with higher depreciation and depletion expenses resulting from the increased capital investment placed in service in 2011 and 2012. In 2012, our cash operating cost of goods sold, which we define as total cost of goods sold excluding depreciation, depletion, amortization and royalties, net of by-product credits, for potash increased to $180 per ton from $173 per ton in 2011. This increase was primarily driven by higher per ton costs from our East facility as operating time and availability at our East plant was reduced in part due to plant inefficiencies, which caused lower recoveries of potash in the first part of 2012. Our production volume of potash in 2012 was 796,000 tons, or 17,000 tons less than in 2011, primarily as a result of the poor early year performance of the East plant. Trio®
Our Trio® production and resulting inventory levels were lower in 2012 than they were in 2011. As a result, our sales of Trio® decreased from 173,000 tons of Trio® in 2011 to 125,000 tons of Trio® in 2012. Pricing and demand for this specialty product remain strong. Pricing gains offset the decreased sales volumes, resulting in consistent net sales revenues in 2012 compared with 2011. With continuing strong demand for this specialty product we expect sales demand will at least meet our production capabilities in 2013. Our average Trio® gross margins have increased in 2012 as our average net realized sales price for Trio® increased by $93 per ton, while our cost of goods sold for Trio® increased by $76 per ton, for 2012 as compared with 2011.
A key element of the long-term improvement plan at our East facility is the continuing commissioning work on the LRIP. Although we have seen improvement in our Trio® recoveries as a result of our work thus far on the long-term improvement plan, the expected production benefits from the LRIP have yet to be fully realized. We remain committed to continuing the long-term improvement plan and commissioning work on LRIP to obtain increased recoveries and therefore increased production levels of langbeinite. This will result in the need to invest additional capital to redesign specific elements of the plant; the determination of the amount of additional investment will be refined as we conclude our commissioning work and long-term improvement plan at the East facility.
Average Net Realized Sales Price
Domestic pricing of our potash is influenced principally by the price established by our competitors. The interaction of global potash supply and demand, ocean, land and barge freight rates, and currency fluctuations also influence pricing. Any of these factors could have a positive or negative impact on the price of our products. Our average net realized sales price for potash decreased in the fourth quarter of 2012 by $10 per ton from the third quarter of 2012, largely in response to the ongoing uncertainty surrounding production and consumption in the global potash market which kept buyers cautious in the short term. We believe potash buying and pricing will trade in a relatively narrow range, due to the strong corn and soybean commodity prices that support favorable farmer economics. We expect our average net realized sales price in the first quarter of 2013 to be slightly below the levels experienced in the fourth quarter of 2012, as a result of lower potash prices posted by our competitors for sales into North America.
We market Trio® as a specialty product. As farmers have increasingly recognized the agronomic value of the magnesium and sulfate delivered by this product, demand for the product has grown and we have enjoyed a higher market price through 2011 and 2012. This recognition, when combined with our lower inventory levels, has resulted in pricing that more closely reflects the agronomic value of the delivered nutrients.
The table below demonstrates the progression of our average net realized sales price for potash and Trio® from 2011 to 2012. We calculate average net realized sales price by deducting freight costs from gross revenues and then by dividing this result by tons of product sold during the period.

Average net realized sales price for the three months ended:   Potash   Trio®
                                                                 (Per ton)
December 31, 2012                                                $434    $347
September 30, 2012                                               $444    $336
June 30, 2012                                                    $465    $322
March 31, 2012                                                   $477    $302
December 31, 2011                                                $497    $287
September 30, 2011                                               $489    $251
June 30, 2011                                                    $462    $222
March 31, 2011                                                   $442    $204

Specific Factors Affecting Our Results
Sales
Our gross sales are derived from the sales of potash and Trio® and are determined by the quantities of product we sell and the sales prices we realize. We quote prices to customers both on a delivered basis and on the basis of pick-up at our plants and warehouses. Freight costs are incurred on only a portion of our sales as many of our customers arrange and pay for their own freight directly. When we arrange and pay for freight, our quotes and billings are based on expected freight costs to the points of delivery. Our gross sales include the freight that we bill, but we do not believe that gross sales provide a representative measure of our performance in the market due to variations caused by ongoing changes in the proportion of customers paying for their own freight, the geographic distribution of our products, and freight rates. We view net sales, which are gross sales less freight costs, as the key performance indicator of our revenue as it conveys the net sales price of the product that we realize. We manage our sales and marketing operations centrally and we work to achieve the highest average net realized sales price we can by evaluating the product needs of our customers and associated logistics and then determining which of our production facilities can best satisfy these needs.
The volume of product we sell is determined by demand for our products and by our production capabilities. We intend to operate our facilities at full production levels, which provides the greatest operating efficiencies. By having adequate warehouse capacity, we can maintain production levels during periods of fluctuating product demand.
Cost of Goods Sold
Our cost of goods sold reflects the costs to produce our potash and Trio® products, less credits generated from the sale of our by-products. Many of our production costs are largely fixed and, consequently, our costs of sales per ton on a facility-by-facility basis tend to move inversely with the number of tons we produce, within the context of normal production levels. Our principal production costs include labor and employee benefits, maintenance materials, contract labor, and materials for operating or maintenance projects, natural gas, electricity, operating supplies, chemicals, depreciation and depletion, royalties, and leasing costs. There are elements of our cost structure associated with contract labor, consumable operating supplies, and reagents and royalties that are variable, which make up a smaller component of our cost base. Our periodic production costs and costs of goods sold will not necessarily match one another from period-to-period based on the fluctuation of inventory and production levels.
Our production costs per ton are also impacted when our production levels change, due to factors such as changes in mine development, downtime, and annual maintenance turnarounds. Our labor and contract labor costs in Carlsbad, New Mexico, may continue to be influenced most directly by the demand for labor in the local Carlsbad, New Mexico region where we compete for labor with the potash, oil and gas, and nuclear waste storage industries. Additionally, the East mine has a complex mineralogy with a mixed ore body comprised of potash and langbeinite that is processed through a singular product flow at the surface facility. This complex mineralogy will influence the amount of product tons of . . .