Intrepid Potash Inc (IPI) 2010 Q3 法說會逐字稿

Good morning and welcome to the Intrepid Potash Third Quarter 2010 Earnings 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 now like to remind everyone that this conference is being recorded today, Thursday, November 4, 2010 at 8 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.

Good morning and thank you all for joining us today for our third quarter 2010 earnings conference call. I'd like to start by introducing today's participants from the company. We have with us today on the call Bob Jornayvaz, Executive Chairman of the Board; Hugh Harvey, Executive Vice Chairman of the Board, Dave Honeyfield, the President and Chief Financial Officer; Martin Litt, Executive Vice President and General Counsel; R.L. Moore, Senior Vice President of Marketing and Sales; and John Mansanti, Vice President of Operations.

I'd also like to remind everyone that statements made on this call, which express a 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. These statements are not guarantees of the future performance. A number of assumptions, which we believe are reasonable, were made in connection with the expectations reflected in such forward-looking statements.

The forward-looking statements involve risks and uncertainties, which could cause actual results to differ from our expectations. For more information with respect to risks, uncertainties and other factors which could cause our actual results to differ from our forward-looking statements, we direct you to our news release issued last night and risk factors and management's discussion and analysis of financial condition and results of operation in our most recent annual report on Form 10-K and the most recent quarterly report on Form 10-Q as filed with the SEC. All forward-looking statements are qualified in their entirety by such factors.

Our earnings news release, which is posted on our website, intrepidpotash.com, includes a reconciliation of certain non-GAAP financial measures to the most directly comparable GAAP measures, including EBITDA which will be used on this call. All references to tons are to short tons of 2,000 pounds.

I will now turn the call over to Bob Jornayvaz.

Thanks, Will, and thank you to everyone for joining our discussion about Intrepid's third quarter 2010 results. The third quarter of 2010 was solid from both the demand and a market fundamental perspective. Dealers, after the announcement of a number of summer incentive programs from our North American competitors, began to buy for their own accounts in preparation for what has turned out to be one of the strongest fall demand periods in recent memory.

A number of fundamental factors, including healthy and greatly improved farmer incomes, lower forecasted crop yields and overall strong prices in the agricultural sector have propelled potash prices upward.

During the quarter, we earned $0.16 per diluted share on net income of $11.7 million. We generated $27.1 million in EBITDA, and maintained our solid cash position, exiting the quarter with $126.5 million in cash and investments.

The summer fill cycle did not begin in earnest until late July. At that time, commodity prices specifically for corn were hovering around $4 per bushel and there seemed to be a mildly positive sentiment among distributors that fall potash demand would be strong. As summer progressed, we saw that a number of factors come into play that have brought about a very bullish sentiment in the ag sector, and specifically in the fertilizer market.

The factors that I believe have brought us to this current point in the cycle include extremely low potash inventories at the dealer level. According to our customers, Canadian producers are 60 to 90 days behind on potash shipments, which would indicate to us that they are currently producing at or near full capacity. The announced ban of Russian wheat exports that was followed by not one but two forecasted corn yield downgrades by the USDA.

In the last two months, prices for nearly all ag commodities have moved higher. What is different from a few years ago is that it's not just corn and soybeans that have moved higher, but also cotton, cocoa, coffee, rice and sugar that are seeing dramatic increases. Cotton prices were at an all time high. Cocoa is trading significantly higher than the 2006 to 2008 market period and is at some of the highest prices since late '70s. World sugar stocks-to-use ratio is at its lowest level in 30 years, and its price too is significantly higher.

Rice prices seemed to have put in a solid bottom and are trending up. Wheat prices have bottomed, firmed, and are trending up significantly as well. Coffee stocks are at historically low levels and coffee prices are significantly higher. The market reflects these facts.

Stocks-to-use ratio for world coarse grains are forecasted to be at one of the lowest levels since 1973. US ending corn stocks are forecasted to be at the second lowest level in recent memory. World soybean demand continues to grow with prices rising to over $12 and trending strongly higher. And in addition to all these significant factors, population growth around the world, as does GDP, continues to grow. The agricultural markets are very, very strong and healthy.

When we examine the economic health of the US farmer, suffice to say they appear to be in excellent shape. They are earning great margins on their crops and are well positioned to profit from current commodity price movements. Based on our calculations using USDA data, the average farmer in the United States is on pace in 2010 to earn almost 25% more income than last year as the farm economy has moved to solid out of the recession.

In addition to these near record incomes, United States farmer is also seeing reduced input cost, most specifically diesel fuel, and lower prices for some of their nutrients when compared to 2008 and 2009, along with little indication on the horizon of a major price shock from nitrogen as the natural gas strip is essentially flat through 2011. This presents a great opportunity for potash to gain a greater share of the nutrient pie in terms of total dollars without having any detrimental economic effect on farmers. The result of all this is what we expect.

When the USDA crop intentions are announced later this year, farmers in the US will indicate an intention to plant a near record corn crop -- and near record corn crops in virtually every other agricultural commodity. We anticipate that farmers will be planting fence to fence to maximize yield and income in a great variety of crops, not just corn and soybeans. This in turn should lead to higher nutrient demand.

In terms of capital investment, we continue to execute on our previously announced projects. Our Moab compaction project, which is ahead of schedule and under budget, will provide us greater flexibility in marketing our product by allowing us to have more granular tons per sale in the ag market 2011. The langbeinite recovery improvement project at our Carlsbad, New Mexico East Mine will bring on additional granular tons of Trio by the end of 2011, a product for which we've had consistent demand in excess of our productive capacity. We are also moving the compaction projects in Carlsbad up in the queue to take advantage of the fact that we have granulation equipment already on the ground.

Granulation capacity is an important consideration in achieving our productive capacity potential for our granular products. It creates great market flexibility and provides the opportunity to solve potential operating issues. The increased mining and hoisting of tons from our West Mine we are achieving, is key to offsetting periodic lower ore grades to achieve historic production volumes. With the increases in tonnage, we are now grinding product in the mill more finely, which was somewhat unforeseen and, as a result, we need to move these granulation projects forward more quickly than we had originally anticipated in order to increase the efficiencies of our granular facilities and provide additional marketing flexibility.

These capital projects will allow us to bring more product to the market in the form that customers are demanding and are designed to reduce our per ton operating cost which is an important long-term goal of the company.

Our sales strategy is not complicated. We want to make sure that Intrepid is well positioned to fully and actively participate in what is already a bullish market. Our confidence in the current market is such that, unlike some of our competitors, we have decided to hold off on taking any new rail orders for delivery 'til we get caught up on our backlog of rail shipments in order to capitalize on the rising price environment as the spring season develops. To be clear, we are preparing to fully participate in this bullish market by producing tons to sell at competitive market prices which we believe, because of the fundamentals of the agricultural industry, has the opportunity to continue its upward pricing trend well into 2011 and potentially beyond.

Given that today's posted price for potash is $485 per ton, it's already a $125 per ton higher than our posted price during the third quarter of 2010. It has become very apparent that pricing will be much better on an average net realized basis in 2011.

To remind folks as to our leverage with respect to potash prices, when we are producing at full capacity, for every $10 increase in potash prices, Intrepid earns approximately $9.60 in average gross margin. Our goal in 2011 simply put is to run our business in a manner that allows to maximize this leverage to the potash prices and the opportunity that we see in the agricultural markets coming forward.

John Mansanti, our Vice President of Operations will take the call from here and give you a more detailed update on the status of our capital projects, give additional detail on our operational performance during the quarter. Thank you very much.

Thanks Bob. We produced 166,000 tons of potash during the third quarter of 2010 which was in line with our operating expectations. This compares to 112,000 tons of potash produced in the third quarter 2009. We also produced 32,000 tons of Trio during the third quarter 2010. This compares to 60,000 tons produced in the third quarter of last year.

The year-over-year decline in Trio production has mainly decreased availability of the langbeinite plant and some lower relative langbeinite grade associated with the current mixed ore zones. Decreased availability was due to the previously discussed decision to shut down our langbeinite plant for a total of 14 days due to unusually heavy rainfall during the month of July and also the scheduled downtime for the planned maintenance turnaround.

During our last call, we highlighted the weather-related issue. We believe we have taken the appropriate actions related to stormwater mitigation and process water handling. One of the main benefits of langbeinite recovery improvement project is that it will reduce process water usage at our East facility and is designed to resolve the water imbalance that we have experienced at this plant.

Potash production during the third quarter was relatively stable compared to the second quarter of the year. The consistent level of production is due to increased production at Carlsbad Moab largely offset by our normally scheduled mill downs at Moab during the summer evaporative season. The increased production at Carlsbad was a result of increased tons of material mined and processed, as we realized the benefits in completing many capital projects that we described at the time of the IPO.

Additionally, we achieved our planned third quarter staffing levels for miners and operators in Carlsbad, in addition to recent hires becoming more proficient in their new roles. Given that it takes time for new employees to get through their initial training and to reach full competencies in their respective positions, our focus for the mining staff for the remainder of the year in Carlsbad will be continued employee development.

As Bob mentioned, we are making great progress on our new compaction facility at Moab. The compactor building structure is erected and the compactor itself was installed during early October. Based on the current status of the project, we expect the compactor to be in service prior to the end of 2010, pending regulatory permits. We also expect it to be below budget. In response to favorable demand for the granular product, we are continuously operating the current compactor to convert as much standard product as possible into granular product.

I want to take a moment to highlight the annual maintenance turnaround which we performed at our Carlsbad East Mine and plant during late September and into early October. The shutdown allowed us to complete some important work in the process plant and compaction plant, to make certain surface preparations for the langbeinite recovery improvement processing facility. The East facility has been back running to planned utilization for a few weeks and we are seeing good performance from the underground and surface mill operations.

With the work we performed during the annual maintenance turnaround, we are making good progress on the langbeinite recovery improvement project. Much of the important site work, including relocating select utilities, has been completed. In addition, long lead time equipment purchases were made and fabrication of major equipment is underway. Due to limited capital investment in other sectors of the economy, we are experiencing favorable pricing for a number of these items. The project remains on track to be completed during the fourth quarter of 2011.

The HB Solar Solution Mine, a project that is designed to bring on between 150,000 and 200,000 tons of low cost potash is steadily moving forward as the BLM and the EIS contractor continue to work through the requirements of the EIS process. The current schedule reflects issuance of the record of decision, more commonly referred to as the permit, during the fourth quarter of next year.

Capital investment is a key component on how we continue to add to the long-term value of Intrepid. In the last two years, we have completed several important capital projects including the new wash thickener at our East Mine, the underground stacker reclaim and the coarse tails recovery circuit at our West Mine. I am pleased to say that these projects among others are working optimally as we have seen noticeable improvements in our mining and hoisting rates.

As we go through our budget in mine planning, we are also actively evaluating our near term mine plan to address our continuing need to develop mining areas ahead of our operations and the impact the development has on grade delivered to the mill. These pressures have resulted in somewhat lower trend grades than we anticipated. Yet our operational improvements have helped mitigate some of this effect.

Capital investment in our facilities was approximately $31 million in the third quarter. Capital investment for remaining of 2010 will remain at an elevated level as we move forward with the langbeinite recovery improvement project, complete the Moab compaction facility, improve our distributed control systems at our production facilities, as well as add new underground and surface equipment. Total capital investment for the year should be in the range of $110 million to $120 million.

Now I will turn the call over to R.L. Moore, our Senior VP of Marketing and Sales.

Thank you, John. We sold 221,000 tons of potash during the third quarter of 2010. This compares to 111,000 tons sold in the third quarter of 2009. We also sold 45,000 tons of Trio during the third quarter of 2010 compared to 40,000 tons of Trio sold in the third quarter of last year.

As highlighted previously, sales of potash in the quarter started out somewhat sluggish, but then picked up at a rapid pace as the agricultural markets improved and the demand for nutrients returned to a more normal seasonal level. As we mentioned in our last call, we have prepared for the expected fall, pickup in demand by building a modest amount of granular potash inventory.

During the quarter, we came close to fully depleting our granular inventory of potash except for tons that were set aside for our truck customers. We had a number of orders for rail shipments that were booked before the recent price increases and it will take us through the better part of November to get these order shipped.

As Bob mentioned, we stopped accepting rail orders in mid October and will continue to do so until we get caught up on shipments on having us to make sure that we are positioned to benefit from the upward momentum in domestic potash pricing.

Potash pricing has moved up in a healthy manner over the last eight weeks. We have raised the price of red granular potash in Carlsbad several times during this period, with our most recent price increase to $485 per ton FOB Carlsbad for our red granular product, effective this past Monday, November 1. We expect the impact of these price increases to be realized on an accelerating pace once we work through our backlog orders, but not significantly until at least December.

Because of the timing of the price announcements that were made in mid summer, we believe that the price increases have started to take effect on October 1, 2010 resulted in some sales in the third quarter of 2010 that may have occurred during the fourth quarter of 2010 as customers try to lock in pricing ahead of the price move. In addition, we expect the remainder of 2010 to be in line with historical norms in the form of higher sales volumes through the remainder of the fall season.

One area that has remained soft in terms of pricing is the standard potash market. We are seeing increased competition from the Canadian producers for sales of standard potash as they push more standard product into the US, based on what we believe was a lack of large export orders to countries such as India and China for their standard product. We believe that this market will lag the granular market until the Canadian producers work through their excess standard inventory. This has caused standard pricing, which typically has traded at parity, to lag granular potash pricing.

Our new Moab compaction facility will give us greater flexibility to convert that facility's tons into granular product and pursue the highest average net realized sales price for our production in the future. As I have said before, 2010 has presented a much more typical fertilizer application and growing cycle than in recent years. As we enter the heart of the fall season, we are encouraged to see dealers willing to step back into the market and put their balance sheets to work buying product for their own inventory.

I will now pass the call to Dave Honeyfield, our President and Chief Financial Officer to wrap up our prepared comments.

Thanks R.L. I want to review a few items that I think are essential to understanding our quarterly results as well as what we expect for the remainder of 2010.

Once again, during the third quarter, we realized a higher net realized sales price as compared to our North American competitors. Our net realized sales price advantage over the other North American producers was $52 per ton in the third quarter.

The average net realized sales price advantage is due to our geographic location, the corresponding transportation advantage that Intrepid enjoys and our overall marketing strategy. Further, we expect to realize the benefit of higher potash pricing sooner than our competitors because of our decision to stop taking new rail orders coupled with our ability to realize higher sales prices immediately because of our spot sales serving the truck market.

John touched on the East maintenance turnaround and its importance to improving our operations at East. We had originally expected that the maintenance turnaround would be completed in the third quarter. However, because of the timing of certain equipment deliveries for the turnaround, the schedule was shifted partially into the fourth quarter. Planned shutdowns such as this one generally result in a brief period of higher per ton costs as our fixed cost during maintenance turnarounds remain at least the same while maintenance expense increases and we simply are not producing tons during these brief periods.

As we enter the fourth quarter, it's important to consider the following. First, there is typically about a three month lag from the time we announce a posted price increase to the time we start fully realizing sales at a new pricing level as we often have a certain amount of product already committed for later rail delivery at the time we announced the price increase. We anticipate that we will realize approximately a $20 to $25 per ton improvement on our average net realized sales price in the fourth quarter as we work through our order backlog and sell spot truck tons at higher prices.

Second, we believe that approximately 20,000 to 25,000 tons of potash sales, that may have normally been sold in the fourth quarter, were pulled into the third quarter based on dealers buying ahead of announced price increases.

Third, our COGS in the fourth quarter will be slightly higher compared to the third quarter due to the completion of the East maintenance turnaround in October and ongoing mine development work. The important point on COGS however is that our overall unit costs are trending in the right direction at a time when we have strengthening pricing.

Fourth, the market for standard potash will remain challenging as we continue to see price and volume pressure from the Canadian producers.

Fifth, our Trio sales volumes will remain somewhat lower compared to prior quarters due to production constraints and less standard sales. Yet, we do remain fully committed to sell every ton of granular Trio through the remainder of the year with customers on an allocation basis.

And finally, please keep in mind as you build your models that historically our reported average net realized sales price per ton for potash and Trio has been lower than our posted granular sales price for our products because of a few reasons; the different competitive markets in which we sell products; the associated customer discounts that we offer; and the aforementioned periodic anomalies in standard potash and Trio market pricing.

To wrap up, the 2010 fall fertilizer season and the resulting nutrient demand has been very solid. We believe the fall activity is confirmation that we have returned to normal agricultural demand cycles in the United States. The recent price movements and our commitment to fully participate in this bullish market by investing capital dollars to increase our ability to produce more granular tons to sell at competitive market prices clearly demonstrates our marketing strategy. The capital investments that we are currently undertaking, including the Moab compaction project, the langbeinite recovery improvement project and the HB Solar Solution Mine are all designed to enhance Intrepid's position in the potash market in the future.

We remain focused as a company on executing on our major capital projects while keeping an eye on additional opportunities to invest in the business to achieve our goal of increased recovery, increased reliability, increased productivity, and reduced per ton cost.

Because our operations and our assets are located right here in the United States, we believe Intrepid is better positioned than any other potash producer to realize the benefits of the strengthening trend in domestic potash prices.

We will now open the line for any questions.

(Operator Instructions). Your first question comes from the line of Vincent Andrews with Morgan Stanley.

Thanks. Good afternoon everyone and congratulations on the quarter.

Thank you.

Sure, I guess it is morning still. Anyway, maybe you could touch on one of the things that we've been reading about is that there were still, I mean, you sort of help us understand, the imports that are coming into the US from Russia or other geographies, has that been playing a role over the last three or four months or has that dissipated now?

I think that's totally dissipated. If you were to read the November 1 or the Monday morning Green Markets, there is some interesting comments in there that I am going to read very quickly as it relates to potash. They referred to the Eastern corn belt that says it's difficult to find any potash tons from sale for prompt delivery. The Western corn belt says another context that potash and MAP were not to be found. And as to the Great Lakes region it says that no tons were available for immediate shipment. What that's telling us is that the potash pipeline is empty right now. Those imports have all gone through the system and are out on the field and I guess that's one of the things that we are most excited about is that the pipeline is truly empty.

And then I guess maybe as a follow-up to that. You talked about the channel building a little bit, pulled some tons from 4Q into 3Q and you feel good about that. But, do you think we're going to get back to a normal level of channel inventory over the next three to six months or is it going to be something shorter than that?

No, we think that we're going to try to get back there. But the point of the matter is that everyone is behind on shipments into an inventory that's empty. So it's going to take a long time to build up any inventory in the system. So, I guess I would once again just reiterate that what we are seeing in the marketplace is an empty system with producers behind on shipments. So it's going to take us a while to feed that demand.

I guess my last question then, which is a natural follow-up is where can pricing go given those circumstances? We've seen a lot of price moves in the last month or so, or last two months. But, when you talk to your customers, what do you think the appetite is for further price increases from here?

Vincent, I guess I'll just take you back to fact that we are in a very, very strong agricultural market. And so there is a very strong market across every crop that we can discuss cotton, sugar, corn, soybean, wheat, rice. What's different about the previous major up cycle is that we have demand from virtually every crop across the spectrum. So the agricultural fundamentals couldn't be set out any better so to speak.

The farmer has a great balance sheet. The farmer is making record income. The farmer is in great financial shape. He is paying a lot less for his diesel than he was paying before. Because the natural gas price strip is very flat, we don't think he is going to see any kind of a significant nitrogen price spike. He is paying 30% to 40% of what he was paying in this period in 2007, 2008. So, I guess the table is set for just very, very strong fundamentals in our market. So, the market is going to be what the market's going to be, and right now the table is set for a very positive scenario.

Okay, thanks very much. I will pass it along.

Your next question comes from the line of Don Carson with Susquehanna.

Thank you. I just want to talk a bit more about price. So you talk about getting $20, $25 incremental price improvement in the fourth quarter. Where would you expect first quarter pricing to be? I mean you think you can fully realize the $485 November 1 price increase less the normal discounts or what's the relative timing? And I guess one other issue in terms of how high prices can go? It seemed back in 2008 that we found a level of price elasticity when potash prices got above nitrogen and phosphate. So, I am just wondering how high you think pricing can go this cycle compared to the last cycle?

Let me address your first question. We have not taken any orders for tons to be sold in January. So when we sell tons starting in December and January, and even our truck market that we are selling today, we are selling at our current posted price plus any applicable discounts. For the trucks that pulled in all week long, they paid that $485 less any applicable discounts. So we anticipate in our truck markets, we are not anticipating we are already achieving. As we move forward, we'll capture more and more of that as we finish off our limited backlog of orders, we'll begin to see that.

The standard market is a little bit different. We're seeing the standard market has recovered very nicely. However, there's more volume out there at some of the Canadians that -- what we believe had excess inventory from the lack of standard shipments going into China and India pushed into our very good strong standard markets from the drilling market perspective down in Texas. So we are lagging. Typically that standard market has had parity with the ag market. We believe it can get back there because of the strength of the market. But today we are not seeing parity. But I want to put that in perspective. We have seen $125 in price increase in our granular market in the last 30 days. So it's typical that an industrial market would take a little bit of time to catch up. So we are hoping that in the relatively near future we can get those to parity which is where they have always been.

As we then go into 2011 as we tried to say in our comments, Intrepid is prepared to sell 2011 tons at 2011 prices and because of the ag fundamentals, we think that we have a great opportunity. Now addressing what happened in the spring of 2008, we clearly saw that prices got to a place where they affected demand. So there was demand destruction. We used to refer to in our calls that we had emotional demand destruction, but clearly people stopped buying potash at $800 to $1000 per ton. We can't deny the fact that that happened.

Having said that, agricultural economics are very, very different around the world than they were in 2007 and 2008 because of the diversity of crops that are seeing price strength, because of the fact that ethanol, not only in the United States, has continued to increase in terms of demand and capacity, but we are also seeing ethanol capacity of demand increasing around the rest of the world. So that is a global story, that's not just a United States story. So there are demand drivers that are fundamentally different and we believe much, much better than what we saw in 2007 leading to the 2008 price spike. So we get the fact that the high prices caused demand destruction, but there is a lot of room between where we are today and where we were in 2008.

And one follow-up. How much incremental volume do you think you'll have in 2011 versus 2010 with your capacity expansions?

I'm going to let Dave speak to the specific numbers, but philosophically we have talked to everyone of our plant managers we had everyone in last week and we are focused on producing every ton we can possibly produce at our facilities from a philosophical standpoint. And so, with that I'm going to let Dave talk to some of the specifics and then possibly let John know what we are doing to ramp up and speed up some of those potential production increases.

Thanks Bob. Don, I think the way that I would ask you to think about it is that we are just now getting back to the point of being at really full capacity in our mining shifts and our operating staff in the Carlsbad mine facilities. So I think what we see here in the fourth quarter will be pretty indicative of the short term. That means we will see increased tonnage on the production side relative to 2010 looking forward into 2011.

We are still going through that budget cycle right now. So I am little hesitant to start putting specific numbers on the table until we get through the mine planning and all the operational items. But I think what I'd ask you to reflect back on is the commitment to things like the Moab compaction projects, recognizing the strength in the ag sector that we can bring some of those additional standard tons that we have in inventory now to market by getting them compacted, by focusing on compaction at our Carlsbad facilities. So really those are the sorts of things that as we get into 2011 that it's going to be full stop ahead -- or full ahead to make sure that those things are coming online.

Thank you.

Your next question comes from the line of Mark Connelly with CLFA.

Thank you. Bob, I wonder if you can comment about langbeinite pricing. You sound pretty bullish on the potash side and lots of people do. But given that you are on allocation already, I wonder if you could give us the sense of what you are seeing today in terms of your pricing power there? And then as you look towards the de-bottlenecking and the project being completed at the end of next year, do you have an early sense of what the supply demand balance is going to look like then?

Right now we're the highest priced producer of langbeinite in the United States. We think that there is increasing strength in that product. It's a great product on the granular side and so, as we mentioned we are on allocation and that's why the outlet project is so important to us. And so, I would think that as whatever potash prices do, if they do continue their upward trend, that langbeinite has the opportunity to follow on a proportionate basis. Right now we are at $246 for granular langbeinite and we are on allocation. So any potential price moves up that we do see in the potash market we think that the granular market can follow it up.

One thing that's great is that any standard inventory that we do wind up with after the outlet project is completed is that we will have the ability to take 100% of whatever standard we might have in inventory and turn it into a granular product. So, once again we just want to continue to emphasize why we are so focused on adding compaction around our different facilities. Does that answer your question?

I am just curious whether you need to do a lot of work to keep that market tied as this new projects comes in line for the end of 2011 or whether you think the market already --

It's our impression and we ship to customers all around the world. The one thing that we really pride ourselves is that we went out and have focused on trying to grow that market in anticipation of bringing on capacity and we are seeing if we had more product to sell we could sell it all around the world. Langbeinite is a wonderful, wonderful product. The only thing is that it's the granular product that is in demand. But we could sell a lot more if we had it that's why we are adding additional capacity. As we described on previous calls, our (inaudible) project is in the initial stage that takes us up and we have already directed our engineering staff to begin working on the third step up stage which would allow us to produce even more langbeinite. So we are very, very bullish on the langbeinite market.

That's super. Thank you.

Your next question comes from the line of David Silver with Banc of America-Merrill Lynch.

Yes hi, good morning.

Good morning Dave.

Hey. I had a question may be a little bit of a twist on Dave Honeyfield's comments earlier about production potential for 2011 or next 12 months however you look at it. But, if I look back in your history, you've had a wide range of potash production levels as low as 0.5 million tons and well into the 800,000s. And given the upgrades and everything, I am going to ask you may be take another crack at it. But is a number in the mid 800,000s for next year production or the next 12 months is something like that, something we could think about and given that you guys are so confident that you can sell any ton you can make? I mean is 850,000 tons kind of a ball park number for what you think is achievable?

Okay. Dave, this is Dave Honeyfield. Like I said before, we're really are in the middle of the budget and forecast cycle right now. So I think it's a little early for us to put that number on the table. We are going through our mine planning which looks at what specific mine panels are we going to be mining from, what the grade is from one specific panel versus another. And the thing that I'd ask you to stay focused on is that we understand where the market opportunities are around bringing product to market in a very strong price environment and we're going to do everything we can to get all that product out there that we possibly can.

So, I don't intend to sound evasive, I just want to make sure that when we get numbers out to the street that we feel very confident in them. And you are right, we have seen variability in our production numbers. I would say the majority of that has been very intentional on peaks and on troughs where we have seen strong demand back in the '07, '08 period. We worked hard to focus our efforts to make sure we brought product to market and then when we saw a slowdown in the '08, '09 period, we slowed things down. So, I know that doesn't answer your question spot on, but it hopefully give you a sense of how we think about running the operation.

Okay. No, I was asking you to simplify something that's very hard to simplify. So, okay, couple other questions for Dave. Do you have a preliminary number for 2011 capital spending?

Directionally, I would say that the -- we've kind of said, look at that $125 million level plus or minus a little bit. If you look at 2011, we'd have the continuation of the langbeinite recovery project. The bulk of that CapEx will be in 2011. We anticipate getting permitting on the HP project in the fourth quarter of 2011 and we'll start construction immediately there. We have a level of sustaining CapEx that will be part of the budget. We have the compaction work that we intend to put into place in our Carlsbad facilities that will bring in with the 2011 plan. So I think directionally that gives you a good feel for where we're at.

Okay. And when I look at the cash flow statements for nine months, I would like to ask about the deferred tax number. I guess, your income tax accrual for the first nine months was around $18 million, but your deferred tax benefit was actually $19 million. And, I am just trying to figure out, I mean, that's a little bit higher, you do have some ongoing benefits from your deferred tax asset but it's a little bit higher run rate. Is that tied to some discrete tax event or should we expect you to get that tax saving benefit at about that rate that you have experienced this year?

I am going to answer the question in a way that I hope is most helpful to the majority of folks. What we saw right at the end of the third quarter was the extension of bonus depreciation for all of 2010 that was signed into law and if you think of all the CapEx projects that we put into service this year what that means is we are going to get a very significant benefit from that. So, in answer to your question, it was a fairly discrete event but what we did and you see it in the cash flow numbers and you also see it in our breakout of current and deferred taxes, is we really don't expect to have any current or cash taxes to speak of here in 2010. So, all that really gets transferred into deferred tax at that point in time.

So, right now, if you look at what percentage of our tax rate relates to cash taxes it's almost nil. As we go into 2011, we are back to a normal depreciation environment for tax law. So we just need to keep an eye on that. We will make sure we keep the market updated.

Thanks. And last question, I agree with Bob's comments that it's really hard to find any soft spots in the agricultural or crop outlook. I'm just wondering if you are noticing any reduction or any pressures on the customers you have there by potash for animal feed. So, maybe that's one of the areas where higher crop prices aren't an unmixed blessing. But for that portion of your business can you tell us what the trends seem to be?

We are not seeing any real price deterioration there, I guess, the one thing I would direct you to look at is look at the cattle herd size compared to '07 and '08 and you are looking at it historically. If you look at the herd size, it's really at a point that we believe it can go a whole lot lower. So, I do think that it's a little bit different this time when we look at the herd size and little bit on pork side, I can't speak to the poultry side. We don't think that as feed prices move up that we are going to see as much deterioration which is generally caused by herd liquidation. So, we are not seeing it now. We are seeing because that is a great market. There are always competitors that would like parts of our market share. So, it is a great market and we believe will continue to be a market because we provide all the testing that they require and the type of handling that they require to sell into the feed market. It's different than just selling flat bulk products. There is a handling requirement. We have met all those needs. So, we are not seeing any softening now, not to say that we might not see some but once again that's why we are so intent on building as much compaction equipment as we can throughout our entire system to provide incredible market flexibility.

Thanks very much.

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

Hi. Just had a couple of quick questions. The first is with respect to the CapEx budget for 2010 of $110 million to $120 million. It looks like you spent about almost $58 million year-to-date and you are going to spend another, I guess, $11 million to $13 million on the compaction project as well as $17 million to $22 million on the langbeinite recovery. There currently is about $25 million left. Is there anything specific to the remaining $25 million? Is that number of small projects or is there anything larger tied to that number?

I will give you a couple of overview items. And John, if I leave anything out, please hop in. We are working on -- we have got a number of projects in the queue. We have talked about our distributor control system. A fair amount of that work will be taking place here. timing of delivery of items could potentially swing that fourth quarter number. If some equipment comes in maybe for the Lang project in the very first part of 2011, trying to think some of other big projects, the warehousing project that we continue to wrap up in our Carlsbad area is also a decent size portion of that. We certainly look at that number quite similar to you and say that that's a pretty spend number for the fourth quarter and we are aware of it. But, it's pretty much on the pace that we thought it would be. John, are there other things that I missed?

In addition we are looking at -- there were some miners and some shell cars and equipment of that nature for the underground development we had in the 11th budget and this bonus depreciation gives us the opportunity to pull some of those investments forward. So, we are seeing some dollars there as well.

Okay, that's great. And you mentioned a discount between standard and granular and standard was lagging. What sort of discount are you seeing currently at this time?

Well, just once again to give you the perspective, the ag pricing has gone up $125 in roughly a month. And so, we are seeing less than that in standard pricing. What's our current FOB posted price for standard at Carlsbad?

Carlsbad, our rate standard is -- the new posted price is $480, and the watch standard I think is around $482.

But I want to make it clear, we are not achieving those prices yet. And so, we are going out to our customers and I think we will get them up there, but we are seeing $50 to $75 lag in the month of October and I would expect that in November as well. But those prices we believe can get back to parity which is where they have generally been.

Okay. That's why I'm confused because I guess some of the fertilizer trade publications are reporting your list price, and they are showing about $5 kind of difference and whereas it's probably on a realized basis it sounds like it's more significant than that?

Yes, it's definitely more significant. We just want to take people directionally that we have always been able to get to generally parity. There has been times where industrial pricing has exceed our ag pricing but those markets are a little bit different today because there is a little more volume in those markets. So, I just think we are trying everyone on notice that there is a lag right now. But, as has occurred in the past, those markets have gotten back to parity.

Okay.

Bob, I would like to comment. Anything that we are selling into the ag market as we go forward, we will bring this new ag pricing. It's strictly the industrial market right now that's lagging behind on the standard.

And once again, to give you more clarity. We are seeing great drilling activity in Texas, in Oklahoma, in Louisiana. So, the drilling activity has really picked up there with some of the shale plays there is more volume in those markets. When we look at our Rocky Mountain standard play because of the price of natural gas, we are not seeing as much drilling in the Piceance Basin and in the Western Region of the Rocky Mountain that's why Moab we are creating the ability to compact 100% of our product so that we don't have to have any reliance whatsoever on that industrial market. We can just produce the right amount of tons for the market.

Okay, thank you.

Your next question comes from the line of Robert Koort with Goldman Sachs.

Hi, good morning everyone it's [Lindsay Druckerman] filling in for Bob. I just wanted to dig a bit deeper on some of the issues you highlighted in standard. So, first maybe you could just help us better understand what the issues were in places like India and China where the big orders that were expected didn't come in?

Well, we all know China didn't buy as much potash last year, and China buys standard potash. And so, we know that the Canadian producers, as you produce potash, you produce a certain amount of standard and a certain amount of compaction in your normal production cycle. So, as standard did not get shipped to those countries they sought an outlet and they sought an outlet in our very strong industrial market that exists down in Texas, Oklahoma, and Louisiana. And so, historically we haven't seen as much standard product from the Canadians in those markets since we've been in business. So that's our theory. That's what it just appears to be. I don't know if that answers your question or not.

So, I guess following on that given the bullish outlook for pricing that all producers are endorsing, why do you think they're not holding on to those inventories and waiting for better momentum particularly to those end markets?

That's a better question to address to them.

Okay. And is this product that they would be able to convert into granular if they had the capacity to do so?

Not necessarily, that's the difference. Sometimes you don't have the ability, for example at our Moab facility, when you build a plant, you generally don't build a 100% compaction capacity. So, it's our understanding that several of those plants don't have the ability to compact 100% of their products. That's why we are trying to take every one of our plants to as high a percentage of capacity with compaction as we can so that you can always have that market flexibility to go into either market. So, once again I think that that's a question better directed at them.

Got you. And just lastly, curious if you saw any implication to your business from the news out of the Canadian government today on BHP potash?

Potash Corp has done a great job of running their company and we never really understood how BHP wanted to run Potash Corp if they were going to get it. So, because of the uncertainty as to how they may or may not have chosen to run it, we think it's great that Potash Corp who will continue to have it and run it as value creating fashion as they have done and there is no longer any -- as of today there is not as much uncertainty as to what BHP may or may not have done -- what their strategy was.

Okay. Thanks, that's helpful.

Your next question comes from the line of Charles Neivert with Dahlman Rose.

Thanks. One just quick question is, what is in your normal course of any quarter, how much of your business is done through truck and how much is done generally through rail?

R.L.?

Carlsbad is probably 70% rail and 30% truck.

Okay.

Our Utah operations I would say are probably pretty close to around 50/50.

Okay. Got it. Okay, and well that's helpful, thank you.

Your next question comes from the line of Farooq Hamed with Barclays Capital.

Thanks, good morning. Just a quick question I had on your costs in Q3. I saw that they were down roughly about $40 per ton from your Q2 cost. And I was just wondering how much of that is due to the fact that you had better efficiencies in Carlsbad, and how much is due to a production mix with more Moab product potentially being in those tons?

Hi Farooq, this is Dave. It's really a combination of those two. The product mix was not as big of a piece as maybe it was in prior quarters. What we really saw though was very, very strong pulls on granular product all throughout the Intrepid system. And as we've mentioned before, we've been compacting more product out of Moab than we have historically, so we had more to sell there, which has been one of the pieces that's driven cost.

The other part is exactly what you touched on, that as we've gotten our folks staffed back up and as we brought operations in Carlsbad back to full staffing, we've also seen the benefit of the per unit costs come down a little bit. So, I wouldn't again -- keep in mind what's happening here in the fourth quarter if you are trying to model quarter to quarter. I think the important part is that we're focused on cost, we're getting them down to where we think they need to be and directionally they're headed in the right place here. So, any other specific questions I have to try to answer too?

Okay. So maybe just a follow-up on that. Because in the call you noted that Q4 costs will be higher, and can I agree with you that longer term it looks like you were in the right direction, but you said Q4 costs are going to be higher than Q3. Is that, I mean because we are seeing that same efficiency, so is that just due to the turnaround at East being extending into Q4, or is that also because you don't get as much lower-cost production in the quarter?

The majority of it's the turnaround maintenance and that was a pretty significant turnaround for us. We really had not done one in two years at our East plant because we were -- that was the facility that because of the Trio demand that we ran all through 2009, so we did an awful lot of work there and you're going to see some pretty high maintenance dollars come through the system. So you're going to see a little bit of a bump here in the fourth quarter. But again I would just say that it's a bump, it's not indicative of any trends. I think you are starting to see the way the trends are going to shake out now.

Okay. And then last question, on your inventory heading into Q4, so your Q3 production was significantly lower than your Q3 sales level. I am just wondering, heading into Q4 do you have -- what's the inventory that you have, what the level look like or are you basically out and so whatever you sell in the quarter will be whatever you can produce?

We're pretty tied particularly on granular inventory. I don't expect that we're going to build any inventory through the end of the year. We have commitments like we touched on. We're still shipping some product that was priced before some of the price moves and that will take us through November and we've held back some product for truck tons. But demand is pretty good relative to what production capacity is, so I wouldn't see us building much inventory really into the spring aside from what Bob has already touched on and that's that we really haven't taken any orders to speak of at these higher prices for rail because we want to make sure we are participating in that. So, what that tells us is we're going to be pretty much selling the product we produce at current spot pricing.

Okay. And then the inventory that you have had heading into Q3, you've had it into Q4?

Again it was pretty tight and I think you hit the nail on the head there that I think our production tons, our sales tons were about 50,000 tons more than our production tons were.

Okay, thanks.

There are no further questions at this time.

As noted, I don't see any other questions in the queue, so we would like to thank everyone for joining today's call and taking the time to learn more about Intrepid. Have a good day.

This does conclude today's conference. You may now disconnect.