Intrepid Potash Inc (IPI) 2009 Q2 法說會逐字稿

Good morning and welcome to the Intrepid Potash second-quarter 2009 earning conference call. At this time, all call-in participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. (Operator Instructions). I would like to remind everyone that this conference is being recorded Friday, August 7, 2009, at 7:30 a.m. mountain time.

It is my pleasure to turn the conference over to William Kent, Director of Investor Relations. Mr. Kent, please go ahead.

Thank you, Celeste, and thank you all for joining us for our second-quarter 2009 earnings conference call. I'd like to start by introducing today's participants from the Company. We have with us Bob Jornayvaz, Chairman and Chief Executive Officer, Hugh Harvey, Chief Technology Officer, David Honeyfield, Executive Vice President, Chief Financial Officer and Treasurer, and R.L. Moore, Senior Vice President of Marketing and Sales.

I would also lake to remind everyone that statements made in this call which express the belief, expectation, or intention as well as those that are not historical fact are forward-looking statements within the meaning of the United States Securities laws. A number of assumptions, which we believe are reasonable, were made in connection with the expectations reflected in such forward-looking statements. The forward-looking statements involve risks and uncertainties which could cause actual results to differ from our expectations. For material information respect to the risks, uncertainties, or factors that could cause our actual results to differ from our forward-looking statements, we direct you to our news release issued last night and the risk factors described in our filings with the SEC. All forward-looking statements are qualified in their entirety by such factors. The news release which is posted on our web sites includes a reconciliation of certain non-GAAP financial measures to the most directly comparable GAAP measures. All references to tons are to short tons of 2,000 pounds.

I'll now turn the call over to Bob Jornayvaz.

Thank you, and thanks to those who are taking time this morning to learn more about our second-quarter results. During the past quarter, the potash market in the United States continued to experience delves in demand for potash. Despite the demand headwinds we faced during the second quarter, which is one of the worst potash markets in decades, we continued to execute on our operating and capital plans. We earned $0.19 per diluted share on net income of $14.4 million, generated positive free cash flow and continued to make investments in our business that will benefit our operations in the long term. Our diluted earnings per share was net of a downward adjustment of $0.04 per share associated with our decision to operate at lower production rates.

For the quarter, we once again enjoyed the best net sales price among our North American competitors. Our net sales price advantage was $135 per ton, demonstrating the geographic and service advantages that our markets afford us. As many of you listening today know, certain key potash producers recently announced several sales to India at prices that may drive down overall prices in the potash market in the near term. Effective July 27, 2009, we here at Intrepid, adjusted our price for red granular potash to $482 per ton FOB Carlsbad. This price adjustment may stimulate additional demand, but it is still too early to tell what the outcome may be or where market prices will potentially settle. What we do know is the dealer inventories were substantially depleted during the second quarter, and that the sideways selling that was so prevalent from dealers and nontraditional suppliers has largely worked its way through the system. Despite the fact that dealer inventories have been drawn down, falling prices have created hesitancy among buyers. We believe dealers may remain cautious in the current market environment by limiting the amount of inventory they keep on hand and awaiting the new market pricing to firm. This action by the dealers has the potential to keep near-term sales levels a bit lower. As dealers attempt to reduce risk by matching their purchases to customer orders on an as-needed basis. As opposed to stocking up on product inventory and taking on additional price risk.

We have heard from dealers that for the most part the tons that are moving in the current market are tons that are going into the ground rather than into the inventory bins. To that end, we are finding resourceful ways to help our customers manage their price risk in this uncertain environment. We are working with our customers to move our products forward in the supply chain in order to be in a position to provide just-in-time delivery to the end users of our products as soon as demand returns to more normal levels. By doing this, we help to ensure that our customers are able to have inventory in their warehouses ready for delivery to meet demand. Additionally, through this cooperation with our customers, we're better positioned in the market so that when farmers are ready to purchase our tons are available on the front lines.

With the market conditions as a backdrop, we are making a number of conscious decisions as to how we are operating our business. And we believe these decisions will benefit Intrepid and our stockholders in the long term. We continue to invest capital into the business in order to both increase capacity and the efficiencies of our operations to produce more tons with higher recoveries, thereby lower per ton operating cost. We have also chosen to maintain normal staffing levels at our facilities so that when a demand returns to more historic levels we have the capability and the trained personnel already in place to begin producing at higher rates. At the same time, we are mindful to manage our production in view of the market demand that we have experienced. We expect that the remainer of 2009 will continue to be challenging. We believe that potash application rates will be down substantially during 2009, and we also believe that given the significant nutrient removal expected during 2009 we should eventually see a substantial recovery in the demand for potash.

I'd now like to turn the call over to my partner, Hugh Harvey, our chief technology officer and Intrepid co-founder. Hugh?

Thank you, Bob. We produced 131,000 tons of potash and sold 80,000 tons of potash during the second quarter of 2009. This compares to 210,000 tons produced and 213,000 tons sold in the second quarter of 2008. Production declined in the second quarter of 2009 relative to the prior year second quarter due primarily to our decision earlier this year to curtail production at three of our facilities in order to manage inventories in response to sales demand. We produced 45,000 tons of langbeinite which we market under the name Intrepid Trio. We also sold 45,000 tons of Intrepid Trio. Our langbeinite production was 28% lower than in the second quarter of last year, the decrease in langbeinite production was largely driven by previously mentioned production curtailment. Starting in the third quarter, however, we have begun operating our east mine at full capacity to restock our Intrepid Trio inventory since we have sold out of our granular product twice in recent months. We may choose to reduce operating rates in the future, but for now we anticipate the need to increase Intrepid Trio production to meet anticipated demand.

Capital investments in our operating facilities was approximately $25 million in the second quarter. The investments were used to fund projects already in progress and for sustaining and improvement capital projects. Total capital investment in 2009 is expected to be between $120 million and $135 million as we are taking advantage of the current period of slower production to complete our planned capital programs. We have a number of important projects that we anticipate will be on line prior to the end of the year that increase capacity and recoveries including the stacker project and course tails recovery at our west mine, and new thickeners at the east mine. In addition, we're moving forward on the engineering of a new langbeinite recovery circuit that is designed to increase our recoveries. Finally, we have begun the preliminary engineering on upgrading the north compaction facility. The strength of our balance sheet allows us the flexibility in the current market environment to invest in projects that, when completed, will lower our overall cost structure and will make Intrepid even more competitive when the potash market normalizes.

Now I'll turn the call over to R.L. Moore, our Senior Vice President of marketing and sales.

Thank you, Hugh. As Bob has highlighted, the Spring season was difficult and unlike any other planting season I have seen in my 35-plus-year history in this business. Many of you know that the other major North American potash producers have released new posted prices. We compete primarily with the other North American producers and have adjusted our pricing to be competitive, and we believe that our posted price is representative of the markets we serve. However, as this market has shown us over the last few quarters, there is a risk that the decrease in prices may not stimulate North American demand as customers may continue to order their requirements on a just-in-time basis.

Moving on to the industrial side of our business, we continue to see lackluster demand for our standard potash. The oil and gas rig count remains low compared to the peak levels achieved in 2008, and the price of potash resulted in some operators experimenting with alternatives to standard potash. This has been a decision by operators driven by price, although many acknowledge that potash is the preferred product.

Looking forward to the remainder of 2009, we anticipate industrial demand may not recover significantly due to continued weak commodity pricing, the use of KCL substitutes, or salt in place of potash, and the reduced drilling activity. As we have mentioned in previous calls, we have the ability to convert some of the potash produced for the industrial market into product for sale in the agricultural market by compacting our standard industrial product into granular form. As with last quarter, the fee component of our business has stayed steady. We continue to see consistent demand, but we note that had their has been a reduction in livestock that may eventually impact volumes to the Animal feed market.

I will now hand the call off to David Honeyfield, our Chief Financial Officer, to wrap up our prepared comments.

Thanks, R.L.. As a reminder, we continue to have prior period reporting on a pro forma basis in order to present information comparatively to the current year. The type of items in the prior period pro forma statements to which we've made adjustments relate to applying an income tax provision, accounting for stock compensation and considering the fact that all the debt was repaid at the time of the IPO.

Moving on to the actual results. The cash production cost per ton net of byproduct credits for potash sold in the second quarter of 2009 was $251 per ton, which includes $63 per ton or $0.04 per diluted share of expense that we recorded as a period cost to account for the decreased production rates at several of our mines. This accounting entry is required under FAS 151. Our largely fixed cost structure combined with our decision to operate our east and west mines at decreased capacity utilization drove the need to expense certain production costs directly rather than absorb them into inventory.

People should note that our income tax rate in the quarter was unusually high at 47.4%. This was driven by a change in the mix of our apportioned state income tax rate and the corresponding effect on both our current tax liability and the valuation of our deferred tax asset. We will routinely have some variability in our effective rate for such items, given the magnitude of our deferred tax asset. That being said, the 39% effective rate is a reasonable rate to use for modeling purposes. Additionally, given the relatively lower net income, we may see a smaller proportion of our tax liability be attributed to current period taxes in the next few quarters, which probably will be closer to a 50/50 mix of current and deferred taxes.

Managing our controllable costs continues to receive a lot of our attention. But until we see production operating rates and corresponding production levels return to more historically normal range, you should expect our cost per ton to remain at these higher levels. As noted previously, we are operating the east mine at full rates again which will serve to drive down our average per-ton production cost at that facility. I'd also like to note that we've maintained our operational staffing levels in order to allow us to go back to producing at full rates quickly when more robust demand returns.

As Hugh mentioned earlier, we're working to complete a number of our capital projects during this market lull. We expect that during the third quarter the lower sales volumes combined with our increased capital investment in several major projects will draw on our cash. That being said, we believe maintaining a strong balance sheet is important, and we will manage our cash to levels we believe are appropriate. The current market environment is unpredictable. In light of this lack of predictability and until we have more clarity on the market, we're not prepared to provide any forward guidance.

In closing we maintainor belief that the long-term outlook for our business is supported by macro trends. What we've experienced over the last three quarters has been challenging to say the least. We believe the market has begun to normalize around new pricing levels. We're committed to the continual improvement of our operations while at the same time being mind of the broader market environment. We believe that we have taken a proactive approach to managing our business during this difficult period, specifically we believe that by maintaining our strong balance sheet by working with our customers to address pricing risk, by actively managing our production levels, and by prudently investing capital in an effort to increase our production capabilities and to decrease our costs, that Intrepid is well positioned to benefit from the market rebound that should eventually occur.

We'd now like to open the lines for any questions.

(Operator Instructions). Your first question comes from the line of Steve Byrne with Merrill Lynch.

Hi, good morning. On your inventory build the last three quarters, looks like around 200,000 tons, and I know you're moving product into the channel. How much inventory do you now have on hand at the mines and in the channel?

Good morning, Steve. I'm going let Dave answer that.

Hi, Steve, I think your estimate on that is priss close. Steve, we have a certain amount of our tons that we have moved forward as we've mentioned into warehouses at customer locations. And I think we're doing that all in intent to make sure that we can keep moving forward on the production front. So overall, we believe that making that investment in the inventory is really the right thing for Intrepid and gives us the opportunity to earn the best return here when sales levels pick up. So, overall I think we're at the levels that you suggested are pretty reasonable.

And what would you say your effective production capacity for potash will be by year end with those projects that Hugh mentioned being on stream?

Hugh, you want to take that?

Sure. Companywide we should be somewhere between 900,000 and one million tons per year of potash capacity after the projects are all finished.

So just -- just taking this one more step, assuming robust demand recovery in 2010 or even a slight recovery given your market share position is relatively small, any reason why your sales volume in 2010 couldn't be upwards of, say, 1.2 million tons?

Steve, this is Bob. I appreciate your math, and I guess that's the case that Intrepid is managing for, hoping that the demand returns to the robust nature that we believe it will. Once again, by having our current tons as forward as we can possibly get them, by having inventory tons at our facilities and by improving our production capacity, when we look at the -- the nutrient removal that has occurred, history would tell us that 2010 should be a very good demand year, and that's what we're preparing ourselves for.

Okay. Thank you.

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

Thank you. Bob, I'm just wondering if you can maybe give us a different color on your comments regarding the buyer hesitation reporting potash pricing. What exactly are buyers thinking, given -- I'm curious because -- do they not see the pricing that India's contract price is being a floor, or do they see more downside on the spot pricing, just trying to get an understanding on that.

I think it's just typical risk management. when you're in a falling price environment, people believe that prices may go down further. Now the good news from Intrepid's standpoint is that we were at the southwest fertilizer conference, a lot of our customers -- the discussion wasn't so much around lower pricing as to how do they manage price risk. That's what our forward warehousing program is designed to do, to work with our customers to manage the price risk. So I think that we're clearly in a bottoming process. But it's no different than any other market that has seen lower prices. People believe that lower prices could occur. They're not necessarily out there, but they're concerned about managing their risk. So Intrepid is looking at how many different ways that we can participate with customers to manage their risk so that we can move tons forward. They moved those tons forward, they sell them, they make a profit on them. And the system kicks in. And so that's where we are. We just need to be creative in stimulating the system. And that's what we're doing.

Okay.

Go ahead.

Sorry. I don't mean to cut you off. I was also just wondering about how much of the -- how much of this is also impacted by a late harvest in the US because we are seeing I guess some tons being moved into Brazil, and I guess India, as well. It's just how much of this would be a late US harvest impact?

Are you talking about the 2008 late harvest or potential late harvest in '09?

Potential late harvest in '09.

I think there's the very real reality that we could have a very late harvest. And once again, that sets us up for bottles or potash, backing up in the system. But then when you look at what that does to the next season's demand, it really puts you into a pretty prolific demand profile. So we're doing everything that we can to move our tons as far forward in the system and in the chain as we can. To be ready for a potential late harvest and a short time window to get potash down and be ready for what we believe will be a very robust Spring season.

Okay. And just a quick question on the industrial market. There was comments about experimenting with other potentially I guess cheaper products. How much would potash prices have to decline in order to compete with these cheaper product?

Well, first and foremost, we're seeing the price of those products come up substantially. To create a more realistic market scenario. A lot of the gas wells that we're seeing being drilled in our regions are what we would call commitment wells. As you know, back in 2008 there were lots of large transactions done between oil companies and landowners where they were significant well commitments made. So what we're seeing are oil and gas drilling operators drilling wells to simply maintain lease terms and extend leases rather than optimize the well being drilled. So we're seeing lots of cases where they're scrimping and saving to get their well costs down to get the well down to hold the leases. So that takes an operator down a different path rather than one of production optimization which is where you would go and why you would use KCL because of the clay-inhibiting factors of KCL, it does a much, much better job. We see people scrimping and saving wherever they can, recognizing that they're giving up on the optimizing the production rate. So like we see everywhere else in the economy, people are optimizing, cutting costs, are -- not necessarily optimizing, but they're cutting costs just to keep moving forward just to get to the next quarter, the next year, etc. We don't think this is a long-term trend because when we talk -- it oil and gas operators, they clearly see and recognize the benefits from a production standpoint of what they get from KCL. But in this market, it would not make sense for us to go down and try to compete with the price of salt. Now they have to use eight to 10 times as much salt than KCL to get even a remotely similar type of well response. So they have a larger transportation cost, larger handling costs. But they save a little bit of money. I don't know if -- if I'm giving you enough color as to that situation, but that's how we see it.

No, that's perfect. Thank you very much.

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

Hi. Good morning, everybody.

Good morning.

I know you don't want to give guidance per se, but I'm just wondering if you can help us understand how we should be thinking about cost of goods sold for ton in potash for 2010. And maybe you can kind of frame it around where you've been the last several quarters relative to a normal environment and just how we should be thinking about that in our models.

Yes. Vince, it's fairly dynamic, and I'll talk about it maybe if you exclude that FAS 151. But I think if you look at where we're at for this quarter on a per-ton basis, we're at about $188 a ton after byproduct credit. And we're going to a full rate at our east mine, so I think if you, kind of average the first and second quarter numbers before that abnormal production adjustment, I think you're going to get to a pretty realistic cost per ton number for the remainder of the year because a lot of that's sitting in our inventory base right now.

Okay. Thanks. And maybe just a quick question on the tax rate. Can you remind us why your tax rate is so high? Is there anything you can do to bring that down?

Sure. The real driver of it, Vince, is that -- and this is going to sound a little contrary. But so bear with me for a second here. We have to look at what our state apportionment rates are by all the states we do business. And I mean, we're actively just working in different states than we have historically. Or there are certain states where we may not be doing as much business. So as that mix change, our state rate changes. And our state rate has actually come down a little bit here. So when we apply that to our current tax provision, we see a lower cash tax number. But keep in mind we have that $800 million deferred tax asset. And so when we lower our state tax rate that we apply against that deferred tax asset, it ends up being a decrease in the valuation. And that decrease has to come through in the expense line. So I think the important part is that, that 39%, 40% rate is -- you should think of that as a reasonable effective rate. We're trying to work with a lot of the accelerated depreciation that the IRS is allowing right now so we may actually see our cash taxes go, closer to that 50% of total tax liability from the 60% where we've been.

Okay. And maybe lastly, Bob, as you think about putting the tons out during the channel, I understand the advantageous argument you're making in terms of that. But can you classify what if any risk you believe there is to doing that? Like what's the -- the three, six months from now, what could have gone wrong with that decision?

Well, first we're very selective in the customers that we're putting the ton out with. We've got clear-cut and defined contracts. And from a financial standpoint, all the appropriate UCC filings, etc. to make sure that we're protected financially as to those being our tons. Those contract have -- have pricing mechanisms in there that really give us control over the pricing and -- and how we -- how those tons get to the market from a price standpoint. So we feel like we're in good shape. The product that we're shipping clearly there was good shelf life living from a quality standpoint. So we have a choice of either having tons in our warehouse in Mexico or warehouse necessary Utah. Or we would have ton significantly far forward significant so when the customer makes the decision to put down potash -- and let's be frank, I think farmers are making more last-minute decisions. And our thinking is that we want to be as far forward, as ready and prepared so that if and when that farmer makes that decision it's our potash that's right there ready to go on the ground.

Okay. But I understand. I guess maybe the last question I'd ask about that is just, if -- broadly speaking, do you think that just by doing that you kind of are encouraging a last-minute decision, though? I guess that's my question. The farmer knows it's there. The dealer knows that it's there. So doesn't that just kind of put everybody in -- we'll just wait until the last minute, or is that sort of the rules of engagement now and you have to cooperate with it?

I think we would be foolish to believe that 2009 isn't a very abnormal year in any -- in any category. Whether it's the financial markets, the car markets, computer markets, I think we just have to acknowledge that 2009 will go down in history as a very abnormal year. So at Intrepid we're trying to say that's the given. It's a different year, let's acknowledge it, and let's adapt and be ready so that we can take advantage of it. I don't believe we're going to change long-term buying patterns. I do think that the farmer has been on very much of a roller coaster, as has been many, many other industries. The good news is that the farmer is generally very, very healthy. But we'd like to acknowledge that he's on a roller coaster. And let's go forward and have the opportunity to make those sales rather than potentially holding back.

Okay. Thank you very much.

Your next question comes from the line of Mark Gulley with Soleil Security.

Good morning, guys. I have a couple of questions. I also wanted to focus on what normalized cost per sale, cost of goods sold per ton is. Hugh, when you talked about the expansion programs and your efficiency programs, how should we think about a normal 2010 cost of sales per ton for KCL?

Do you me to take that, Hugh?

Sure.

Mark, this is Dave. I think you should really look back to -- to early part of 2008 I think to get some guidelines around that because that was a period when we were producing at full rates. So the efficiency, the operations were there. And I mean we certainly continue to see competitive wage market in the mining industry. We continue to bring people on and invest the time in training them. So I think with the combination of the projects we're working on and offset a little bit by those other factors that 2008 sort of model might give you some good feel around that.

Okay. So just to be clear, the efficiency programs that Hugh referred to earlier be offset by higher wages, I guess is what I'm hearing?

I don't think it's going to be totally offset by higher wages. I think it's going to be, there are a lot of variable factors that go into that, Mark. So I'm just going to leave my comments where they were, that let's look back at 2008 when we were operating at a full capacity at the plants. And that will be indicative.

Okay. That's very helpful. Second, on inventories, in order for us to run the good old inventory equation, can you give us potash inventories at a point in time because we know what the difference is between production and shipments are so we can see what's happening with your producer inventories.

Sure. I think if you look back to Steve Byrne's question, his potash inventory number is very representative. We're probably not going to talk directly about what our specific inventory is. We also have, some inventories of our langbeinite product on the standard side that we have in the pipeline available. Hugh touched on the fact that our langbeinite granular sales have been very strong. But I think --

I'll pipe in here. At one point twice in the month of June we were sold out of granular inventory, which was a positive sign for that product.

Yes. Absolutely. So Mark, if you can maybe refer back to the part of the conversation that we had at the beginning of the call, that will give you a good feel for an inventory number.

Okay. And finally, sometimes you guys provide the mix of your potash sales once the three markets -- I wonder if you could update us on what those percentages were. Maybe the numbers for this quarter.

I have them handy here, Mark, if you can bare with me one second. Okay. So yes, for this quarter and this will come out in the 10-Q that gets published today, we're reporting at 63% of our sales went into the agricultural market, 20% went into the industrial market. And we stayed steady at 17% in the feed market.

Thank you.

Your next question comes from the line of David Silver with UBS Securities.

Yes, hi, good morning.

Good morning.

I have a question I guess -- I wanted to maybe just follow up on your discussion about the oil and gas side of the business. And, when I look at the futures market today, I mean, oil's north of 70 with an upward slope to the curve. And natural gas is certainly low in the near months. But within a couple of months and on into 2010 there's a -- high fives, low $6 kind of feel to the market. And historically, those I think are reasonable values. So could you just discuss I mean what the prospects are for a pickup in that part of your business where I think you have a little bit of a niche, and also parenthetically, I'm not aware of this, but once the rig counts start moving, would you say the potash orders come quickly? In other words, coincident kind of indicator? Is it a lagging indicator? How does -- how should we think about the timing of maybe the two, the recounts going up versus the truck showing up at your gate?

I'd say it's a -- very much a coincident kind of indicator. I would agree with you that in the oil and gas business we've been pleasantly surprised by the price of crude. I think it's come up here, it's shown resilience with these pricings. And when you do look at the natural gas strip, it's indicative of people's beliefs that the price of natural gas is going to go up, as well. That should stimulate more oil and gas drilling. I think pricing from an oil and gas standpoint is one of the best stimulative pieces of whether or not an operator chooses to drill an oil and gas well. So I would agree with your proposition that we're going to see a pickup in the oil and gas rig count, and by virtue of that each oil and gas well drilled will be a more profitable opportunity for the operator drilling that. And so that we see more optimization occurring in the choices they make to drill those wells, which means that KCL sales should pick up as the rig count picks up. So we would agree with that very basic thesis. That's why, we're focused on maintaining our capacities at high levels, maintaining our work forces because we think that this demand profile can turn around pretty quickly. Does that answer your question?

Yes. No, that's very helpful. It's all kind of absolute versus relative when I look at these numbers. 2009's unusual for a lot of industries. 2008, 2009. So just trying to get a better feel for that. Now on the trio business, I know it's not your bigger business, but, old out and potash are not used in the same sentence very often this year. So can I just ask -- I mean, we just had a conference call where there's a large SOP producer talking about holding the line on pricing or negotiating individually with customers. Is it, your view from the sales side or are you picking up some business there from people who might buy other types of potassium fertilizer but are willing to mix and match if they think the Trio product offers them better value, or is the market really too small for that to be apparent?

We're not seeing much SOP market switchover from SOP to our langbeinite trio product. That's clearly a market that we've identified that we would like to go after from a potassium contend standpoint. But we just haven't seen that much current switchover. What we have seen in our trio granular market is substantial demand. I mean, the good news is that we've gone out and that we have identified a lot of customers that we are now working with, and product works for them. The product works for them for a variety of reasons. Everything from needing the magnesium to liking the texture and quality of our granular product. And I think it just says a lot that in the month of June we were sold out of it twice. We were sweeping the floors. That's a very positive sign from our standpoint. We think that our overall langbeinite market has tremendous growth potential over the next several years, and that's something that we're focused on to continue to improve our langbeinite so volumes go down, improve the volumes available to us, improve the variety of products of langbeinite that we produce so we have a more diverse product base because we believe that's actually a market that we have significantly more potential to grow into. Does that answer your question?

Yes. No, that's very helpful. I mean, I appreciate your perspective there. And then one last question. You mentioned earlier in the call, in the prepared remarks a list price of FOB Carlsbad of 482. I'm scratching my head thinking about some of the other postings from other producers of 512, I think, or 515. And that was based of a midwest warehouse. You used the term I think competitive when you talked about your 482. Should we think -- is that kind of, allowing for the basis differential? Is 482 kind of in line with those other prices, or is that a little bit higher, little bit lower in your rough rule of thumb? Different for every customer certainly.

This is R.L. I'll answer that question. Historically what we've done on Carlsbad pricing is we look at the competition coming out of North America. And then we put a differential above their posted Canadian price that allows us to service our backyard market and get a little bit of a premium for the product that we sell into those markets. As we move away from Carlsbad, back toward the midwest, we certainly have to look at competitions' warehouse and rail delivery pricing. And at times back off of that 482 to be competitive.

Okay. So think about FOB Saskatchewan first, okay. Just real quick -- my phone cut out here. What of the number for CapEx for 2009? I just missed it in the prepared remarks.

This is Dave Honeyfield, we're thinking we'll be somewhere between $120 million to $135 million or the full year 2009.

Okay. Very good. Thanks. Thanks very much.

Thank you.

Your next question comes from the line of Costas Karathanos with Goldman Sachs.

Good morning, everyone.

Good morning.

Bob, it was good seeing you in San Antonio last week at the fertilizer conference. I had several meetings with dealers over there. They've said is they have enough inventory to last at least until the end of the full season. And they said even after that they will only buy as needed. You also had meetings with dealers and wholesalers over there. Could you share some of the information that you got out of those meetings? I'd appreciate it.

As I told you in San Antonio, we're seeing and hearing a little bit different story than what you heard. A lot of the inventory that we think you heard about was probably producer inventory. That's in those bins. I don't think that there is substantially more sideways or remaining inventory that was holdover inventory. So as we discussed in San Antonio, I disagree with your premise little bit. From an inventory holdover standpoint, I think we're all waiting to see what fall is going to look like. We're seeing as we tried to describe earlier, we're trying to move as much inventory forward, and we're having substantial success at working with our customers to move that product forward. So we're not seeing what you described.

Okay. And the other question that I was asking those wholesalers and dealer is where do you think price will come down in order to start placing orders? And, what they were saying is like the farmer, the customer is that the farmer looks at the price of corn, and he's like, with corn up $3.50, I'll spend $350 for potash, I'll buy close to 300. With corn at $5, I'll pay 500 that for potash. What do you think about that commentary?

Costas, just tossed out an awful lot of numbers with very large ranges. So I would agree that the farmer very smartly looks at his economics. And I think he's going to wait a little bit longer this year to better understand his economics as to what his corn price is going to look like in the future. So I would agree with that premise. I think that Intrepid has gone through substantial price discovery to where prices should be to establish demand for Intrepid. And that's a process that continues. And what happen is working for us is working with our warehousers, dealers, and some retailers to move our product forward. And at the kind of prices that we've been discussing this morning, we're seeing more demand for those products than we saw in the last quarter. So we're seeing improvement in movement. So I don't see the need for an erratic price lowering to try to stimulate a theoretic demand by being patient, by moving tons farther forward, by pricing them appropriate for today's market, and we are seeing more movement than we were before. We're not seeing it as robust as we would like, and we're not seeing it as robust as we did the year before. But the takeaway is that we're seeing improvement. A step-by-step process that is part of a game plan. And we're going to execute that game plan, and it seems to be working. So I guess that's how I would answer your question is that we're trying to be much more methodical about it. And from our standpoint, it's working.

As always, thanks for the color, Bob. Appreciate it.

You bet.

Your next question comes from the line of Mike Judd with Greenwich.

Good morning. I'm just looking at a chart -- it's probably pretty old. But I'm not sure if it was part of your IPO or an annual report or whatever. And it's got some of your capacities listed here. I just want to double check, make sure I understand the thousand thousand short ton number that you mentioned before. Because this shows a current annual nameplate capacity in potash product tons of 1.2 or 1,200. And then it has an effective of 966. And in the -- for the sulfate of potash magnesia, the corresponding numbers are 250 and 210. On that basis, are -- that thousand doesn't sound like it's much higher than the 966. I guess that's why I have a question.

Mike, this is Dave. Why don't I start and Hugh can certainly add additional comments to this. The numbers that you're pulling, the 1.2 million-ton nameplate capacity, that is I think in our annual report. I think it was in the IPO presentation. That's a theoretical capacity largely driven off of the surface operations last year. If you kind of normalize the first three quarters that we had where we were producing full bore, we were probably on base to produce about, I don't know, 825,000 tons, which was largely an effective capacity which takes into account certainly the scheduled turnaround costs. We were working through some, kind of operational issues on reliability, sustainability, so that's a lot of what we're moving toward. So I think when Hugh mentioned kind of 950 to a million ton number, that anticipates that that will be a production level that we're -- we feel comfortable we can get to with the investments that we've been making. So Hugh, do you want to add anything else to that?

Oh, that's all correct, Dave. And as in any mining operation, we're mining ore out there that mother nature's put in place, and we always have variations in ore grade to take place. That's why it's best for us to stick with a range of values as opposed to giving an absolutely number.

Okay. Then secondly, I apologize, maybe just missed this comment. I didn't write this down quickly enough. But in terms of the, the September quarter and December quarter of this year, you were making some commentary about the cost of production. And I thought you said sore of ignore the June quarter and maybe average the two proceeding quarters, meaning the December and March quarters. Is that what you were implying?

Mike, this is Dave. What I was driving at is that largely if you look at kind of an average of the first couple of quarters, that's about what our inventory cost per ton is. Clearly we have variations by plant. If you're looking at trying to model, for the second -- pardon me, for the third and fourth quarter, that's probably a reasonable place to start. We're not going to give specific cost per ton guidance, but --

But that included the 63, right? So in other words the -- what we're talking about is averaging 251 and 266. Is that what you're saying? It's not 266 and 188, right?

That does include the $63 that we mentioned earlier.

Okay. Great.

Keep in mind that we are back to full capacity at our east mine. So we're not going to have that same abnormal production variance at that location. So you need to temper that a little bit.

Okay. Thanks a lot for the help.

Thanks.

(Operator Instructions). Your next question comes from the line of Edward Yang with Oppenheimer.

Hi, good morning. Why were langbeinite prices up in the quarter and you provided the potash price of 482. What would be your current spot langbeinite price?

R.L., you want to give our current stock price?

We're currently posted at a 246 FOB Carlsbad.

Okay. And why were they up in the second quarter versus the first quarter in price?

I think overall, Ed, we were pretty flat. It was up a little bit. But we've seen continuing demand in that market as we've talked about particularly on the granular side. So really that's been the driver of some of the success on the langbeinite side of the business.

One other thing, we moved more granular product during that quarter which gives us a higher net back at Carlsbad. More of it going into our domestic market and less into the international.

Okay. Thank you. And I'd like to better understand the thinking behind the higher CAPEX guidance for 2009. In the first quarter you gave a very wide range. The low end of that range was $90 million. The high end was $120 million. Now you're looking at $120 million to $135 million. It seems like the level of business conditions haven't changed that you will materially. Why lift up the low end of that CapEx range so significantly?

This is Dave. I think the reason for the wide range really earlier in the year is our ability to manage that much capital and making sure that we help people wanted that there's potential variability there. As we have two quarters behind us, as we have more clarity in terms of scheduling on our projects, really it's just a fact that we know we can manage it, and that we were at certain stage of completion on projects. So, it makes send to keep moving forward with that program for the reasons that we've talked about increasing productive capacity, increasing recovery percentages, etc. So that's really the drive there if that makes sense.

What would be a good CapEx number you think for 2010, Dave?

It's probably a little early for us to put that out there. Just because we are looking at a number of projects out there, Hugh's touched on, particularly on the langbeinite recovery side, and we're starting engineering work on our north compaction facility. So until we get a more solid handle on engineering, I'd probably like to hold off on giving that number now.

Okay. And lastly on pricing, if you don't see a lot of new demand with the new price at 482, would you ever proactively tweak that further versus your larger competitors to get volumes up?

As we've always done we've tried to be competitive in the market to meet Intrepid's needs. I think we're going to focus on very specific markets. As we've talked about in calls past, we've had different pricing in different parts of the country based on different needs and our ability to deliver services in different markets. So we're going to remain ever vigilant to price our products appropriately to move them into the market as we deem appropriate. So part of the answer to that question is yes. But I'll make it clear we remain a margin-driven Company. And we're not going to go out and do something that we feel is not going to meet our objective of being a margin-driven Company.

Thank you for that color, Bob.

(Operator Instructions).

Celeste, this is Dave Honeyfield, I'm not seeing any other questions in the queue. I think at this time we'll just say thank you for joining our call and thanks for your interest in Intrepid.

Ladies and gentlemen, this concludes the Intrepid Potash second-quarter 2009 earnings conference call. You may disconnect.