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IPI > SEC Filings for IPI > Form 10-Q on 1-May-2014All Recent SEC Filings

Show all filings for INTREPID POTASH, INC.

Form 10-Q for INTREPID POTASH, INC.


1-May-2014

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

This Quarterly Report on Form 10-Q contains forward­looking statements within the meaning of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the Securities Act of 1933, as amended (the "Securities Act"). These forward­looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. All statements in this Quarterly Report on Form 10-Q other than statements of historical fact are forward­looking statements. Forward-looking statements include statements about our future results of operations and financial position, our business strategy and plans, and our objectives for future operations, among other things. In some cases, you can identify these statements by forward­looking words, such as "estimate," "expect," "anticipate," "project," "plan," "intend," "believe," "forecast," "foresee," "likely," "may," "should," "goal," "target," "might," "will," "could," "predict," and "continue." Forward­looking statements are only predictions based on our current knowledge, expectations, and projections about future events.
These forward-looking statements are subject to a number of risks, uncertainties, and assumptions, including the following:
• changes in the price, demand, or supply of potash or Trio®/langbeinite

•            circumstances that disrupt or limit our production, including
             operational difficulties or operational variances due to geological
             or geotechnical variances


•            interruptions in rail or truck transportation services, or
             fluctuations in the costs of these services


•            increased labor costs or difficulties in hiring and retaining
             qualified employees and contractors, including workers with mining,
             mineral processing, or construction expertise


•            the costs of, and our ability to successfully construct, commission,
             and execute, any of our strategic projects, including our HB Solar
             Solution mine, our North compaction plant, our West plant upgrades,
             and our Moab cavern systems


•            adverse weather events, including events affecting precipitation and
             evaporation rates at our solar solution mines


•            changes in the prices of raw materials, including chemicals, natural
             gas, and power


•            the impact of federal, state, or local governmental regulations,
             including environmental and mining regulations; the enforcement of
             those regulations; and governmental policy changes


•            our ability to obtain any necessary governmental permits relating to
             the construction and operation of assets

• changes in our reserve estimates

• competition in the fertilizer industry

•            declines or changes in U.S. or world agricultural production or
             fertilizer application rates


•            declines in the use of potash products by oil and gas companies in
             their drilling operations

• changes in economic conditions

•            our ability to comply with covenants in our debt-related agreements
             to avoid a default under those agreements, or the total amount
             available to us under our credit facility is reduced, in whole or in
             part, because of covenant limitations

• disruption in the credit markets

•            our ability to secure additional federal and state potash leases to
             expand our existing mining operations


•            the other risks, uncertainties, and assumptions described in Item
             1A. Risk Factors of our Annual Report on Form 10-K for the year
             ended December 31, 2013, as updated by this Quarterly Report on Form
             10-Q

In addition, new risks emerge from time to time. It is not possible for our management to predict all risks that may cause actual results to differ materially from those contained in any forward-looking statements we may make.


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In light of these risks, uncertainties, and assumptions, the future events and trends discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in these forward-looking statements. As a result, you should not place undue reliance on these forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, except as required by law.

Our Company
We are the largest producer of muriate of potash ("potassium chloride" or "potash") in the United States and are one of two producers of langbeinite ("sulfate of potash magnesia"). Langbeinite is a low-chloride potassium fertilizer with the additional benefits of sulfate and magnesium. We generally describe this multi-nutrient specialty product as langbeinite when we refer to production and as Trio® when we refer to sales and marketing. Our revenues are generated exclusively from the sale of potash and Trio®. Potassium is one of the three primary macronutrients essential to plant formation and growth. Since 2005, we have supplied, on average, approximately 1.5% of annual world potassium consumption and 9.1% of annual U.S. potassium consumption. We also produce salt and magnesium chloride from our potash mining processes, the sales of which are accounted for as by-product credits to our cost of sales. These by-product credits have represented approximately 3% to 4% of total cost of goods sold in each of the last three years.
Our potash is marketed for sale into three primary markets, which are the agricultural market as a fertilizer input, the industrial market as a component in drilling and fracturing fluids for oil and gas wells and the feedstock for other processes, and the animal feed market as a supplemental nutrient. The agricultural market is predominately a user of granular-sized potash and Trio®, while the industrial and animal feed markets largely consume standard- and fine standard-sized product. Each of our operating facilities supplies these markets. Additionally, we have the capability to supply customers from our different locations due to the relatively homogeneous nature of our products. The flexibility to compact all of our production into granular form allows us to meet demand and maximize our average net realized sales price. Our investments in granulation capacity have allowed us to expand our geographical reach for granular product sales that would otherwise be unavailable. This flexibility also allows us to adjust our production to more closely align with specific market needs, thereby decreasing our dependence on sales of any one particular size of potash.
Our sales of potash tend to focus on agricultural areas, feed manufacturers in the central and western United States, and oil and gas drilling areas in the Rocky Mountains and the greater Permian Basin area. We also have domestic agricultural sales, primarily of Trio®, in the southeastern and eastern United States, with a focus on areas with specific agricultural nutrition requirements of crops in those regions. We manage our sales and marketing operations centrally, including our freight and logistics planning. This allows us to evaluate the product needs of our customers and then determine which of our production facilities can be used to fill customer orders, all with the goal of realizing the highest average net realized sales price for our potash. We own six active potash production facilities-four in New Mexico and two in Utah. One of our four active potash production facilities in New Mexico is our newly constructed HB Solar Solution mine near Carlsbad, New Mexico. The HB Solar Solution mine applies solution mining and solar evaporation techniques to produce potash from previously idled mine workings. We are currently processing our first harvest of ore from the solar evaporation ponds. We began commissioning of the processing plant at the end of December 2013, and we expect that commissioning activities will continue through much of 2014. Because the first harvest production was at volumes substantially lower than design, we have production costs in excess of market prices for potash, resulting in a lower-of-cost-or-market inventory adjustment of $2.9 million in the first quarter of 2014 related to the HB Solar Solution mine. This scenario was expected, and the start-up of the processing plant is progressing as we had anticipated in terms of start-up volumes and ongoing optimization of operations of this new facility. We expect production from the HB Solar Solution mine to increase as we ramp up production through 2016. We have additional opportunities to develop mineralized deposits of potash in New Mexico as well as to improve recoveries in our processing plants. These opportunities potentially include additional solution mining activities and additional recoveries of our langbeinite. Longer-term opportunities include the potential reopening of the North mine, which was operated as a conventional underground mine until the early 1980s, or the acceleration of production from our reserves. We routinely post important information about Intrepid and our business, including information about upcoming investor presentations, on our website under the Investor Relations tab. We encourage investors and other interested parties to enroll on our website to receive automatic email alerts or Really Simple Syndication (RSS) feeds regarding new postings. Our website is www.intrepidpotash.com.


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Significant Business Trends and Activities Our financial results have been impacted by several significant trends, which are described below. We expect that these trends will continue to drive our results of operations, cash flows, and financial position.
• Potash demand. We sold 242,000 tons of potash in the first quarter of 2014, an increase of 57,000 tons compared with the first quarter of 2013. As is often the case, the timing of spring purchasing by customers and the start of the application season were significant drivers of our sales volumes. The early February announcements by Canadian producers of a $20 per ton increase in their list price for potash in North America spurred purchasing of potash as buyers gained confidence in potash pricing. Many customers then placed orders ahead of the increase to meet the needs of their spring application season. We benefited from this increased demand, which resulted in strong sales volumes during the first quarter of 2014. In certain areas that we serve, farmers begin the application of fertilizer during the first quarter of 2014, which also contributed to the increased potash sales volumes. In comparison, during the first quarter of 2013, there was heightened concern over the drought conditions in certain areas of the country that led to cautious buying in the early part of the spring application season. Our industry is currently facing transportation limitations due to reduced rail car availability from railroad operators. In particular, we experienced reduced rail car availability to our Carlsbad, New Mexico, facilities. We were able to achieve increased sales volume in the first quarter of 2014, compared to the first quarter of 2013 by having product inventory well positioned in our field warehouses to supply our agricultural customers. We also benefited in 2014 by selling more tons in the industrial market, highlighting the diverse markets that we serve. We anticipate the 2014 spring application season for fertilizer will be healthy, assuming favorable weather conditions across our key agricultural markets and the availability of rail cars to ship our products. The availability of rail cars to our Carlsbad, New Mexico, facilities may limit our ability to supply our customers during the second quarter of 2014. Potash sales into the industrial segment increased in the first quarter of 2014 as compared to the same period a year ago and as a percentage of our total sales volumes. This increase was partially driven by continued strong activity in the oil and gas drilling markets. The specific timing of when farmers apply potash remains highly weather dependent and varies across the numerous growing regions within the United States. In addition, potash demand is significantly influenced by dealer storage volumes and the marketing programs of potash producers and retailers. The combination of these items results in variability in potash sales and shipments, thereby increasing volatility of sales volumes from quarter to quarter and season to season.

• Potash prices. Potash prices are a significant driver of profitability for our business. Our average net realized sales price decreased to $317 per ton in the first quarter of 2014 from $417 per ton in the first quarter of 2013. This decrease was due to the continued downward pressure on potash prices driven by the general view in the market that there is currently adequate global potash supply. Specifically, in the first quarter, several actions positively impacted both the domestic and international price of potash. Contracts for a portion of the expected demand for both China and India were announced during the first quarter of 2014, which seems to have created some stability and customer confidence in pricing for the short term. Further, as a result of the increased pricing announced by the Canadian producers in February, potash prices are currently higher than they were in January 2014. However, North American potash inventory levels remain above the five-year average, which creates some level of uncertainty as to potash pricing after the spring application season. We anticipate global suppliers of potash will continue to balance global supply and demand as we move through 2014.

• Trio® prices and demand. The average net realized sales price of Trio® decreased to $340 per ton in the first quarter of 2014 from $351 per ton in the first quarter of 2013. Trio® domestic pricing has historically tended to move in a relatively close correlation to potash pricing. Despite sequentially lower potash prices over the last two years, dealers' and farmers' recognition of the added value of magnesium and sulfate and the benefits of a low-chloride specialty product have helped support Trio® pricing. Despite the decreases in potash pricing, we have seen Trio® pricing show resilience over the last nine months. Demand for granular- and premium-sized Trio® continues to be strong in selected markets. Demand for standard-sized Trio®, however, has been weaker, particularly in the export market. We expect that the general trends associated with potash pricing and volumes will have a directional impact on the sales volumes into the Trio® markets. More specifically, should we choose to manage our Trio® inventory levels by increasing our mix of export sales, we would likely see a lower net realized price for Trio®.
• Major capital projects. In late 2013, we began commissioning of the HB Solar Solution processing plant and expect this work to continue through much of 2014. The total expected investment for the HB Solar Solution mine project is estimated to be approximately $240 million to $245 million, of which $239 million had been invested as of March 31, 2014. The start-


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up production from our initial harvest has a higher per-ton cost due to the relatively low volumes of product being processed and accounted for $2.9 million of the lower-of-cost-or-market inventory adjustments recorded in the quarter ended March 31, 2014.
We have several ongoing recovery enhancement projects at the West facility with total expected investment of approximately $30 million to $35 million, of which $25 million had been invested as of March 31, 2014. The series of projects underway at the West facility, some of which began in 2012, are intended to sustain and increase production by improving recoveries at the West facility as we transition into different ore zones. The majority of these projects are expected to be completed in the first half of 2014. The capabilities of the new North compaction facility allow us the flexibility to make design changes at the West facility to increase recovery as well as to decrease our per-ton operating costs.
The North compaction project is complete and is processing tons produced from both the West facility and the HB Solar Solution mine. The third compaction line was placed into service during the first quarter of 2014. The new facility enables us to produce high quality granular product and expands our granulation capacity to accommodate the increased tonnage expected from the HB Solar Solution mine and ongoing upgrades at our West facility. Capital expenditures for this project totaled $98 million as of March 31, 2014.
We expect the level of capital project investment to decrease significantly in 2014 as compared to 2013, as we have substantially completed these major capital projects over the last two years. During 2014, we intend to continue focusing on optimizing and gaining the efficiencies from these projects, which are intended to increase production, decrease our per-ton operating costs and increase our overall marketing flexibility.
• East facility production. We have dedicated significant resources to the long-term improvement plan that we began in early 2012 to address production challenges at the East facility. Our recovery and production of both potash and langbeinite are directionally impacted by the ore grade and the development work we do. Our production and recovery results historically have had a positive correlation to ore grade. Our production results are also influenced by the amount of development activity we perform. Our potash production from the East facility increased slightly in the first quarter of 2014 as compared to the same period in 2013. Our Trio® production from the East facility decreased in the first three months of 2014 as compared to the comparable period in 2013 as a result of ore grade. Our total production costs at our East facility were flat in the first quarter of 2014 as compared to 2013. Accordingly, production costs for potash were allocated over slightly more tons, resulting in lower per-ton costs for potash from our East facility. Even with this improvement, the relatively lower potash price required that we record lower-of-cost-or-market inventory adjustments of approximately $0.4 million from our East facility during the first quarter of 2014.
• Other (Income) Expense. In the third quarter of 2013, our application for certain New Mexico employment-related tax credits was denied, and we recorded an allowance of approximately $2.8 million for tax credits relating to the denied credits. As a result of our efforts working with the State of New Mexico, in March 2014 we received notice that $5.9 million of employment tax credits, a significant portion of which had previously been denied, had been approved for payment. We expect to receive this payment during the second quarter of 2014 for the approved credits. Accordingly, in the first quarter of 2014 we reversed $2.6 million of the allowance associated with the previously reserved employment-related tax credits.
• Restructuring expense. In January 2014, in response to the acceleration of declining potash prices since mid-2013 and the substantial completion of our major capital projects, we undertook a number of cost saving actions that are intended to better align our cost structure with the current business environment. These initiatives include the elimination of approximately 7% of the workforce, including capital project related support associated with the our major capital projects, temporary decreases in executive and senior management compensation, reduction in the use of outside professionals, and cutbacks in other general and administrative areas. We estimate that these measures will result in annual savings of approximately $12 million to $15 million, with the majority being in general and administrative expense and the remainder being cost of goods sold. The workforce reduction occurred in January of 2014, generating a pre-tax restructuring charge of approximately $1.8 million, which is comprised primarily of severance-related payments. Selected Operating and Financial Data
The following tables present selected operations data for the periods noted. Analysis of the details of this information is contained throughout this discussion. We present this table as a summary of information relating to key indicators of financial condition and operating performance that we believe are important. 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.


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                                                                          Change
                                     Three Months Ended March 31,         Between
                                         2014              2013           Periods         % Change
Production volume (in thousands
of tons):
  Potash                                       220             222              (2 )           (1 )%
  Langbeinite                                   32              46             (14 )          (30 )%
Sales volume (in thousands of
tons):
  Potash                                       242             185              57             31  %
  Trio®                                         36              39              (3 )           (8 )%

Gross sales (in thousands):
  Potash                           $        84,497     $    82,778     $     1,719              2  %
  Trio®                                     14,378          16,479          (2,101 )          (13 )%
  Total                                     98,875          99,257            (382 )            -  %
Freight costs (in thousands):
  Potash                                     7,661           5,466           2,195             40  %
  Trio®                                      2,271           2,631            (360 )          (14 )%
  Total                                      9,932           8,097           1,835             23  %
Net sales (in thousands)(1):
  Potash                                    76,836          77,312            (476 )           (1 )%
  Trio®                                     12,107          13,848          (1,741 )          (13 )%
  Total                            $        88,943     $    91,160     $    (2,217 )           (2 )%

Potash statistics (per ton):
  Average net realized sales
price(1)                           $           317     $       417     $      (100 )          (24 )%
  Cash operating costs(1)(2)                   205             174              31             18  %
  Depreciation and depletion                    64              46              18             39  %
  Royalties                                     11              16              (5 )          (31 )%
   Total potash cost of goods
sold                               $           280     $       236     $        44             19  %
  Warehousing and handling costs                10              16              (6 )          (38 )%
  Average potash gross margin(1)   $            27     $       165     $      (138 )          (84 )%

Trio® statistics (per ton):
  Average net realized sales
price(1)                           $           340     $       351     $       (11 )           (3 )%
  Cash operating costs(1)                      216             180              36             20  %
  Depreciation and depletion                    68              54              14             26  %
  Royalties                                     17              18              (1 )           (6 )%
  Total Trio® cost of goods sold   $           301     $       252     $        49             19  %
  Warehousing and handling costs                10              14              (4 )          (29 )%
  Average Trio® gross margin (1)   $            29     $        85     $       (56 )          (66 )%

(1) Additional information about our non-GAAP financial measures is set forth under the heading "Non-GAAP Financial Measures."

(2) Amounts are presented net of by-product credits. On a per-ton basis, by-product credits were $6 and $10 for the three months ended March 31, 2014, and 2013, respectively. By-product credits were $1.4 million and $1.9 million for the three months ended March 31, 2014, and 2013, respectively.


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Results of Operations
Operating Highlights
Net loss for the first quarter of 2014 was $0.4 million, or $0.00 per basic share, and cash flows from operating activities were $17.3 million. During the quarter ended March 31, 2014, we sold 242,000 tons of potash at a net realized sales price of $317 per ton and 36,000 tons of Trio® at a net realized sales price of $340 per ton. We made capital investments of $16.2 in the first three months of 2014, and ended the quarter with $9.8 million of cash and investments. We produced 220,000 tons of potash and 32,000 tons of langbeinite in the three months ended March 31, 2014.
We incurred a loss from operations for the three months ended March 31, 2014 of $2.0 million. The loss from operations includes depreciation, depletion, and accretion of $19.6 million. Although we have implemented various cost savings initiatives as described above under the heading "Significant Business Trends and Activities," if potash prices remain at or decline below current levels, we expect to incur additional losses from operations in 2014. These losses are expected to continue until prices increase or until we begin to realize the expected lower-cost production benefits from our HB Solar Solution mine and our West facility.
Potash
The 242,000 tons of potash we sold in the first quarter of 2014 compared with 185,000 tons sold in the first quarter of 2013. The increase in sales volumes was driven by increased confidence from buyers and our agricultural customers' need to position product for sale into the spring season after the relatively modest sales volumes from the fall of 2013. In addition, we experienced strong industrial sales in the quarter resulting from ongoing strength in the energy sector. Our average net realized sales price of potash was $317 per ton in the first quarter of 2014, compared with $417 per ton in the first quarter of 2013. Potash pricing continued to come under pressure due to uncertainty surrounding increased global potash supply and North American inventory levels that were above the five-year average.
The table below shows our potash sales mix for the three months ended March 31, 2014, and 2013. The percentage of sales into the industrial market increased in 2014 compared with 2013, as use in the oil and gas industry has increased.

Three Months Ended March 31,
                   2014               2013
Agricultural        77%                79%
Industrial          19%                14%
Feed                4%                 7%

We continue to focus on increasing the flexibility of our operations to produce the right amount of product for the demands of our specific markets. For example, we have invested in granulation facilities at each of our operations. . . .

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