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IPI > SEC Filings for IPI > Form 10-Q on 31-Jul-2014All Recent SEC Filings

Show all filings for INTREPID POTASH, INC.



Quarterly Report


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 our subsequent Quarterly
             Reports 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.

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

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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 standard, granular and premium-sized 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 recently completed our first harvest of ore from the solar evaporation ponds. We began commissioning of the processing plant at the end of December 2013. Much of the commissioning activity took place through the initial harvest season, which was completed in early June 2014 and resulted in the production of 31,000 tons of finished product. Additional refinements to the facility operations will occur into the second harvest season, which is expected to begin in August 2014. As expected, there is a ramp-up of production with the HB Solar Solution mine, with the first harvest production at volumes substantially lower than the designed capacity of the plant. Accordingly, we had production costs in excess of market prices for potash, resulting in a lower-of-cost-or-market inventory adjustment of $4.0 million in the first half of 2014 related to the start up of the HB Solar Solution mine. 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 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

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 235,000 tons of potash in the second quarter of 2014, an increase of 51,000 tons compared with the second quarter of 2013. As the spring application season unfolded, our customers gained confidence around the price of potash and, as a result, purchasing activity increased. 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 many customers then placed orders ahead of the price 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 half of 2014.

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Our ability to supply tons to our customers on a timely basis was a fundamental element to our successful spring season in 2014 as rail logistics, including rail car availability, were very challenging. We expect rail car availability to remain an issue in the near future. We utilized our warehouse system effectively to position product closer to our customers. We also experienced solid demand in the industrial market during the second quarter of 2014, highlighting the diverse markets that we serve.
Potash sales volumes into the industrial segment increased in the second quarter of 2014 as compared to the same period a year ago. This increase in sales volumes 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 was $329 per ton in the second quarter of 2014 compared to $402 per ton in the second quarter of 2013. This decrease was due to the downward pressure on potash prices driven by the general view in the market that there was adequate global potash supply. This downward price pressure accelerated in the second half of 2013 after announcements by Uralkali in late July 2013 relating to its marketing and production strategies caused significant uncertainty in the global potash market. As a result of the intentional actions by the Canadian producers to curtail production in order to better manage inventory levels, current potash inventory levels in North America have decreased and are now approximating the ten-year average. Announcements of price increases by Canadian producers in 2014 combined with decreased inventories of granular-sized potash have resulted in higher prices beginning to be realized in 2014. Accordingly, our average net realized sales price in the second quarter of 2014 of $329 per ton was $12 higher than our average net realized sales price in the first quarter of 2014. We expect our average net realized price for the second half of 2014 to approximate the price achieved for the second quarter of 2014.
• Trio® prices and demand. The average net realized sales price of Trio® was $350 per ton in the second quarter of 2014 compared to $359 per ton in the second quarter of 2013. We realized a $10 per ton increase in our average net realized sales price for Trio® from the first quarter of 2014 to the second quarter of 2014 as we focused on the higher net realized prices being obtained in the domestic market. Trio® domestic pricing has historically tended to move in a relatively close correlation to potash pricing. In recent years, however, despite declining potash prices in 2012 and 2013, dealers and farmers have recognized the added value of magnesium and sulfate and the benefits of a low-chloride specialty product, which has helped support Trio® pricing. Demand for granular- and premium-sized Trio® continues to be strong in the domestic market. We have seen weaker demand and softer pricing for standard-sized Trio® in the export market. We expect that the general trends associated with potash pricing and volumes will have a similar directional impact on the pricing and volumes in the Trio® markets. 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. We expect the level of capital project investment to decrease significantly in 2014 as compared to 2013, as we have substantially completed our 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. In late 2013, we began commissioning of the HB Solar Solution processing plant and expect this work to continue through much of 2014. We have invested $240 million in the HB Solar Solution mine as of June 30, 2014. The start-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 $4.0 million of the lower-of-cost-or-market inventory adjustments recorded in the six months ended June 30, 2014. We have several ongoing recovery enhancement projects at the West facility that have been recently completed or are nearing completion, with total expected investment of approximately $30 million to $35 million, of which $28 million had been invested as of June 30, 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. We expect to wrap up the last of these projects during the third quarter of 2014. The West facility provides the majority of the feedstock for the North plant. The capabilities of the new North compaction facility allow us the flexibility to make design changes at the West facility, not previously possible, to increase recovery as well as to decrease our per-ton operating costs.

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The North compaction project was completed in June 2014. This plant processes concentrate tons produced from both the West facility and the HB Solar Solution mine. All three compaction lines are now in service. 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.
• East facility production. We have dedicated significant resources to the long-term improvement plan that we began in early 2012 to improve production from our 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 in the second quarter of 2014, as compared to the same period in 2013, as we experienced higher sylvite grade ore and greater recoveries in 2014. Our Trio® production from the East facility decreased in the second quarter of 2014 as compared to the comparable period in 2013 as a result of lower mixed and langbeinite ore grade in 2014. We also incurred increased product losses associated with converting standard-sized Trio® into premium-sized Trio®. Our total production costs at our East facility decreased in the second quarter of 2014 as compared to 2013. Accordingly, fewer production costs for potash were allocated over 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 half of 2014. Our production of premium-sized Trio® product improved during the second quarter as we continue to make modifications to the plant to improve the operating performance of the process.
• Other Operating Income. 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. Accordingly, in the first quarter of 2014, we reversed $2.6 million of the allowance associated with the previously reserved employment-related tax credits. We received the $5.9 million payment during the second quarter of 2014.
• 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 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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                                     Three Months Ended June 30,         Between
                                         2014             2013           Periods         % Change
Production volume (in thousands
of tons):
  Potash                                      190             182               8              4  %
  Langbeinite                                  43              50              (7 )          (14 )%
Sales volume (in thousands of
  Potash                                      235             184              51             28  %
  Trio®                                        62              35              27             77  %

Gross sales (in thousands):
  Potash                           $       84,804     $    78,195     $     6,609              8  %
  Trio®                                    26,145          14,485          11,660             80  %
  Total                                   110,949          92,680          18,269             20  %
Freight costs (in thousands):
  Potash                                    7,496           4,351           3,145             72  %
  Trio®                                     4,264           2,175           2,089             96  %
  Total                                    11,760           6,526           5,234             80  %
Net sales (in thousands)(1):
  Potash                                   77,308          73,844           3,464              5  %
  Trio®                                    21,881          12,310           9,571             78  %
  Total                            $       99,189     $    86,154     $    13,035             15  %

Potash statistics (per ton):
  Average net realized sales
price(1)                           $          329     $       402     $       (73 )          (18 )%
  Cash operating costs(1)(2)                  188             186               2              1  %
  Depreciation and depletion                   67              50              17             34  %
  Royalties                                    12              18              (6 )          (33 )%
   Total potash cost of goods
sold                               $          267     $       254     $        13              5  %
  Warehousing and handling costs               11              14              (3 )          (21 )%
  Average potash gross margin(1)   $           51     $       134     $       (83 )          (62 )%

Trio® statistics (per ton):
  Average net realized sales
price(1)                           $          350     $       359     $        (9 )           (3 )%
  Cash operating costs(1)                     192             177              15              8  %
  Depreciation and depletion                   57              48               9             19  %
  Royalties                                    17              18              (1 )           (6 )%
  Total Trio® cost of goods sold   $          266     $       243     $        23              9  %
  Warehousing and handling costs                8              15              (7 )          (47 )%
  Average Trio® gross margin(1)    $           76     $       101     $       (25 )          (25 )%

(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 $7 for each of the three months ended June 30, 2014, and 2013, respectively. By-product credits were $1.7 million and $1.3 million for the three months ended June 30, 2014, and 2013, respectively.

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                                        Six Months Ended June 30,          Between
                                           2014             2013           Periods         % Change
Production volume (in thousands of
  Potash                                        411             404               7             2  %
  Langbeinite                                    75              96             (21 )         (22 )%
Sales volume (in thousands of
  Potash                                        478             369             109            30  %
  Trio®                                          98              74              24            32  %

Gross sales (in thousands):
  Potash                             $      169,301     $   160,973     $     8,328             5  %
  Trio®                                      40,523          30,964           9,559            31  %
  Total                                     209,824         191,937          17,887             9  %
Freight costs (in thousands):
  Potash                                     15,156           9,817           5,339            54  %
  Trio®                                       6,535           4,806           1,729            36  %
  Total                                      21,691          14,623           7,068            48  %
Net sales (in thousands):
  Potash                                    154,145         151,156           2,989             2  %
  Trio®                                      33,988          26,158           7,830            30  %
  Total                              $      188,133     $   177,314     $    10,819             6  %

Potash statistics (per ton):
  Average net realized sales
price(1)                             $          323     $       409     $       (86 )         (21 )%
  Cash operating costs(1)(2)                    197             180              17             9  %
  Depreciation and depletion                     65              48              17            35  %
  Royalties                                      11              17              (6 )         (35 )%
   Total potash cost of goods sold   $          273     $       245     $        28            11  %
  Warehousing and handling costs                 10              15              (5 )         (33 )%
  Average potash gross margin(1)     $           40     $       149     $      (109 )         (73 )%

Trio® statistics (per ton):
  Average net realized sales
price(1)                             $          347     $       354     $        (7 )          (2 )%
  Cash operating costs(1)                       201             179              22            12  %
. . .
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