Intrepid Potash Inc (IPI) 2011 Q1 法說會逐字稿

Good morning, and welcome to the Intrepid Potash first quarter 2011 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 like to remind everyone that this conference is being recorded today, Thursday, May 5th, 2011, at eight a.m. Mountain Time.

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

Good morning. Thank you all for joining us for our first quarter 2011 earnings conference call.

I'd like to start by introducing today's participants from the company. We have on the call with us today, Bob Jornayvaz, Executive Chairman of the Board; Hugh Harvey, Executive Vice Chairman; David Honeyfield, President and Chief Financial Officer; Martin Litt, Executive Vice President and General Counsel; R.L. Moore, Senior Vice President of Marketing and Sales; John Mansanti, Vice President of Operations; and Kelvin Feist, Vice President of Marketing and Sales.

I would 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 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 the 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 conditions and results of operation in our most recent annual report on form 10-K and subsequent quarterly reports 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 at intrepidpotash.com, includes a reconciliation of certain non-GAAP financial measures to the most directly comparable GAAP measures, including adjusted EBITDA, which will be used on this call. All references to tons are to short tons of 2,000 pounds.

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

Thanks, Will, and thanks to everyone for joining us today to learn more about Intrepid's first quarter 2011 results.

During the first quarter of 2011, we delivered solid results on the production, sales, and capital investment fronts. As spring planting got underway, we leveraged our strategic location, advantaged to maximize margin, and deliver the best average net realized sales price when compared to our North American peers.

During the quarter, we earned $0.38 per diluted share on a net income of $28.3 million. Our adjusted EBITDA was $55.8 million, and we maintained our cash and investment positions from the end of the year at $143 million as of March 31st.

Demand in the potash market in the United States during the first quarter was reminiscent of demand prior to the 2008 financial crisis. We saw dealer and distributor buying patterns that were much more consistent with normal spring purchasing levels. We believe there were important macro factors that positively influenced spring demand, including tightening crop inventories that contributed to the continued strength and agricultural commodity prices across a wide variety of crops. The strong commodity price environment provides a positive outlook for farmer income in the United States.

We believe the profit opportunities for farmers will drive them to maximize yield through balance fertilization, as yield levels ultimately drive overall profitability.

While commodity prices remain strong, we cannot ignore that weather conditions are clearly having an impact on the timing of fertilizer applications in many regions of the country. The continued rain and wet weather and the resulting flooding have delayed field work in many areas. Given the wet weather pattern that has been in place over the last few weeks in the Midwest, farmers in these areas may not be able to get into their fields for weeks to come.

On the other extreme, Texas is in the midst of one of the worst droughts in many decades. Fortunately, our Pacific Northwest market is seeing a more normal weather pattern with strong demand. We are monitoring these situations closely and will continue to evaluate markets to strategically place product to maximize our sales opportunities.

The locations of our facilities give Intrepid a strategic advantage that allow us the flexibility to supply numerous fertilizer markets in different geographies as demonstrated by the quality of our first quarter results. The Moab compactor that we recently installed is running better than we had expected in terms of rate, volume, and product quality. This has allowed us to expand into additional granular markets from our Moab operations, reducing our dependence on any singular end market.

We are focused on enhancing our marketing flexibility and increasing our margin opportunity as evidenced by the numerous granulation projects that we have undertaken. Clearly, the Moab compaction project has been successful and is being followed by several other granulation projects. The granulation program includes the expansion of compaction capacity in Wendover, the addition of a pelletization plant in Carlsbad that will allow us the ability to produce all of our Trio production in granular size. And the expanded granular capacity we're planning to add at our North facility to accommodate our anticipated production from the HB Solar Solution Mine.

From the beginning, we have communicated to our stakeholders that we would take a build-as-you-go approach to improve and grow our operations. If you look at the significant projects we have already brought online and are in the midst of constructing or planning, it is clear that we are executing on this commitment. A great example of this operational progress is evident at our West Mine. With the installation and commissioning of the stacker re-claim project last year, we have increased operational stability at West and achieved repeated record hoisting rates.

When you look at the significant capital investments that we have recently made, it should be noted that the production rates at our facilities remained within normal historical ranges, which demonstrates our ability to improve operations without sacrificing production. The fact is that we still have significantly more impact-type capital investment projects to accomplish that will improve and grow our operations. Our current and future projects show a clear path to increased recoveries and increased production at a lower per-ton cost and leverage off our previous investments.

A significant milestone that I want to highlight before passing the call over to John Mansanti is the publication of the draft Environment Impact Statement related to our proposed HB Solar Solution Mine. The Bureau of Land Management published the draft EIS in the federal register on April 15th, 2011, which initiated the 60-day public comment period for this important growth project. I am pleased that we are continuing to move forward, and the current schedule for receiving the record of decision on the project remains in the first quarter of 2012.

The HB Solar Solution Mine is a project that is designed to bring between 150,000 and 200,000 tons of new potash production online for Intrepid, to lower overall costs for Intrepid, and to allow us to better serve our customers. Solution mining, when coupled with solar evaporation is one of the lowest cost methods to produce potash. And our location in Southeast New Mexico is optimal for this opportunity.

John Mansanti, our Vice President of Operations, will take the call from here.

Thanks, Bob. We produced 234,000 tons of potash during the first quarter of 2011, which included our usual seasonal increase in production from our Moab, Utah operations, solid potash production from our Wendover, Utah operations, and especially solid potash production from our Carlsbad operations.

The improved Carlsbad results are due to the effective capital investments we have made and the increased staffing that occurred over the last 12 to 18 months, as we ramped up mine production following the staffing reductions we made in response to the 2009 market. Each mine in Carlsbad is realizing the benefit of one additional mine panel, which were commissioned in 2010, and we are preparing to add one additional mining panel again to the East and West mines this year.

First quarter 2011 production compares to 172,000 tons of potash produced in the first quarter 2010, a 36% increase over last year. We also produced 31,000 tons of Trio during the first quarter of 2011. This compares to 57,000 tons produced in the first quarter of last year. During the first part of this quarter, we continued to experience lower-than-planned recoveries of Trio.

As we touched on during the last earnings call, we organized a team of engineering, production and maintenance personnel, to review the original design and process drawings, consult with equipment manufacturers, and to analyze plant data to increase recoveries. We turned the process [upside] down, made plant modifications. As a result, we are seeing sustained improvements and recoveries beginning in March. We will continue to make adjustments to improve recoveries ahead of the completion of the Langbeinite Recovery Improvement Project.

In 2011, we expect to invest between $140 and $165 million towards our capital investment projects which are a key component to the Intrepid growth story. A highlight of how our capital investments are paying off can be seen in our Moab operations where the recent increase in our production of granular size product reported by the new compactor, together with the recent increase in loading capacity, has allowed us to expand into new agricultural markets and has allowed us to complete our first ever [UniTrain] shipment from Moab.

With respect to this year's capital projects, we continue to look for opportunities to advance our permits and to expedite labor and equipment in efforts to accelerate completion of projects. In March, we began construction of the Dense Media Separation Plant within our Langbeinite Recovery Improvement Project and the permit application for the granulation plant associated with this project has declared administratively complete by the New Mexico Environment Department. We are prepared to begin construction on the granulation plant immediately upon receipt of this permit.

In addition, we completed and commissioned our product storage warehouse at the East Facility in February, and we continue the installation of the distributor control systems at our West Underground and the East Surface Facilities. We expect to have each of these significant capital projects online in the next few months.

In Utah, we completed the engineering for a new compaction facility at Wendover and are finalizing the permit applications. Also at Wendover, we completed engineering for additional warehouse capacity and started construction. Finally, in Moab, we initiated the engineering and design work on additional drilling to increase the horizontal solution mining caverns. The additional caverns will provide access to additional potash ore and increase production.

Now I'll turn the call over the Kelvin Feist, our Vice President of Marketing and Sales.

Thank you, John. The first quarter was, on all accounts, solid from a sales standpoint. Strong commodity prices persisted throughout the quarter that were backstopped by tight corn and soybean inventories and a positive USDA planting report.

As a follow-up on the strong fall application season, we were able to ship our fall backlog of rail orders in January. Our truck market in the quarter saw healthy demand that allowed us to increase our average net realized sales price for potash over last quarter. We sold 196,000 tons of potash during the first quarter of 2011. This compares to 243,000 tons sold in the first quarter of 2010. We also sold 52,000 tons of Trio, compared to 70,000 tons of Trio sold in the first quarter of 2010.

The posted price for our red granular potash was $485 per ton during the first quarter, and we raised this posted price to $500 per ton effective April 1st. Subsequent price increases of $15 per ton in May and June will put our posted price for red granular potash at $530 per ton effective June 1st. Given the strength of the agriculture commodity markets and the financial health of the farmer, we believe that farmers will make every effort this growing season to maximize their yields through balanced fertilization.

Demand for granular Trio remains strong and continues to exceed our forecasted production levels, requiring us to allocate granular product to our customer. Because of this strong demand and strong agriculture commodity market, we raised the posted price for our granular Trio by $15 per ton to $271 per ton FOB Carlsbad on April 1st.

We have seen solid spring demand in markets where farmers have been able to get into their fields. As an example, our sales in the Pacific Northwest, which is a key market for Intrepid, have been strong in part due to good planting conditions. In contrast, planting has been delayed in many parts of the Midwest due to cold, wet weather conditions, and in Texas due to severe drought. Based on data from the USDA, a number of these areas are behind in planting when compared to historical trends. At this time, we do not believe that this delay in planting will have a material impact on our 2011 sales volume, rather, these weather-related challenges may have an impact on timing and location of our sales.

We believe the majority of our dealers and distributors have built up sufficient product inventory to handle a portion of the spring demand. However, in certain regions that we serve, we expect additional demand for potash to finish out the spring season. Further, we believe that some dealers will choose to exit the spring season with potash in their warehouses. This type of commitment from dealers is a departure from a much more conservative consumption behavior observed in 2010.

What is occurring this spring in terms of weather is really not new, but just represents the typical challenges that the agriculture and fertilizer industries face from time to time. What is different in 2011, however, is the strength of the commodity pricing, which should encourage farmers to maximize planted acres and application rates as soon as the weather window allows.

Dave Honeyfield will take the call from here and wrap up our prepared comments.

Thanks, Kelvin. Our first quarter results really highlight how the investments we've made in the business over the last few years are beginning to pay off. We're seeing evidence of this through higher sustained production rates and better than expected returns on our debottlenecking and productivity enhancement projects.

First quarter potash production was very good at all our facilities, and our cash operating cost of goods sold saw the benefit of these production results. Operating our assets to maximize production allows us to realize cost benefits throughout the system and has us on track to deliver a cash, cost of goods sold for potash this year in the range of $170 to $180 per ton. We should be able to achieve this range even with the variability in costs that we see from quarter to quarter as we execute and manage planned maintenance programs and scheduled down days to tie in new plant and equipment.

Before going too much further, there are a couple of items that appear to need some clarification related to our results. The first has to do with our Langbeinite production and Trio cost of sales. Under our current production design, which should be thought of as our pilot project that got us into the Langbeinite market, the Trio we produce results in a stream of production that is approximately a 50/50 mix of natural granular and standard product. We use a screening process to separate our granular and standard production.

We do not have any ability with our current plant to compact or granulate product, but rather, we rely on the natural size distribution to separate the products. As a result, the granular and standard products carry the same per-ton costs.

As we mentioned before, our low overall production results for Trio in the latter part of 2010 and through the beginning of the first quarter meant that we had higher per-unit cost for all the Trio that was produced. The low recovery rates meant that we simply had less granular production than expected available for sale. We continue sell every ton of granular product into the strong demand market for Trio, and, as a result, we continue to be sold out of granular products.

At the same time, we continue to sell the standard size product we produce with a fairly significant amount of the total sales going into the export market, as well as new offshore markets that we are building, not buying. This is a distinction that we are proud of. Because of the need to match competitive pricing, the standard export market historically has resulted in a lower per-ton sales price.

So when you step back what really becomes clear in what the Langbeinite Recovery Improvement Project delivers to Intrepid is more overall production following the commissioning of the higher recovery Dense Media Separation Plant where we will still produce nearly half of the total product stream in a natural granular form. But with the commissioning of the granulation plant that is part of the LRIP, we will have the new capability to granulate all of our standard production and have it available for sale into the higher value granular market.

Another item that warrants pointing out is the fact that our depreciation in total dollars and on a per-ton basis does increase for both potash and Trio over the next few years as we place new equipment into service in order to realize the returns on our capital investments. The significant capital investments coupled with the very low initial cost basis of the assets results in the fact that DD&A will grow accordingly. You should expect DD&A per ton to grow in proportion to our cumulative invested capital as we move forward.

Similarly, for Trio, you should expect DD&A to be higher once the LRIP project is completed and we see the benefits flow through to our cash cost of goods sold per ton, with higher recoveries and the availability to have all of our Trio sales going into the higher value granular market.

As we mentioned earlier, the strength of the current commodities market and the resulting profitability to farmers, coupled with the recognized value of potassium, allows us to successfully raise the price of potash and Trio. Historically we've seen that our reported average net realized sales price per ton for potash has been about 85% to 90% of our posted granular sales price because of the different markets in which we sell our products, competitive customer discounts, and the mix between standard and granular sales.

In conclusion, the first quarter of 2011 was solid overall. As an organization, we remain focused on achieving our core goals of increased recoveries, increased reliability, increased productivity, and reduced per-ton costs. Our first quarter results reflected the benefits of our successfully executed capital investment projects which when coupled with our prudent operating philosophy increases production and decreases costs.

We've demonstrated that we can execute on complex capital investment projects, while at the same time running our operations and delivering margin to our stockholders. We believe that we are well positioned in the market to maximize the advantages that our locations and investments afford us, so that our stockholders can enjoy the benefit of the robust agricultural market.

We will continue to execute on the operating and sales strategies and the capital investment projects that we've identified to drive long-term value to our stockholders.

We'll now open the lines for any questions.

Thank you. We will now begin the question-and-answer session. (Operator Instructions) The first question today comes from Edlain Rodriguez of Gleacher and Company. Please go ahead.

Thank you. Good morning, guys. Just a quick question on potash. If the weather and delays in planting become an issue for the spring, can you give us a sense of how much volume could be at risk? Because -- the reason I'm asking, because typically you do take advantage of spot sales. So what if you do have a delay, then those spot sales might not be there anymore. I mean, just want to get a sense of like how much of your sales tend to be spot versus contract.

Good morning, Edlain, and thanks for the question. We really don't have a percentage. I think what we're going to see is as we get some improved weather in the state of Texas, which hopefully will happen in the next few weeks, there's still a tremendous amount of planting that is yet to occur. And the Texas season hasn't gone too far to where we're not going to still see a great amount of activity there. In the Midwest, you're right. The flooding has caused delays not only of potash getting in, but of farmers either having to delay plantings or potentially replant.

So I think it's too early right now to tell what kind of damage that would cause or might cause. I'll let Kelvin address that a little bit. But percentage-wise, I just think it's too early to give you a feel for what that might -- what impact that might have.

Yes. Edlain, it's Kelvin here. It's really a regional question. There's going to be areas that are going to get started in a week and there's going to be areas that are not going to be able to seed for a number of weeks. So it's really watching the weather and I guess seeing what will happen in terms of our weather forecast. And if they're able to get some sunshine and some wind, they'll likely be able to get into the fields sooner and much less impact. But I guess we really don't have a percentage impact or how this might play out in the next couple weeks.

Okay. Just a little too early to tell. Another quick question on Langbeinite, just simple question. I mean, looking into Q2 and Q3, should we expect production costs to remain at the same high levels they were in Q1 and for prices to be -- and also, will prices be closer to the posted prices or should we -- are we going to see the same big delta we saw in Q1?

Edlain, this is Dave. And, John, if you need to supplement, please do. Overall, as John touched on, we've really started to see a very nice improvement in our Langbeinite production starting in March after all the work that John described. And you'll probably remember us commenting on that back at the call -- the last analyst call as well, that that was something we'd identified and we were putting a team on it.

So that being said, we will have more product available. That means we'll probably be able to spread some costs out a little different. We also have the price increase that Kelvin had mentioned earlier, that we've been able to get into the market on our granular product. So overall we'll continue to see more product available for sale which means that overall we'll see -- we should see an improvement on the margin side there.

One thing, Edlain, that I want to talk about with potash pricing that you've got to remember is that some of the export sales that we are choosing to take are in the markets that we are building. These are new markets. And so we're selling product not in the markets that we're buying, but ones that we're building. And as we build out our Langbeinite production and especially our granular capacity, our ability to go back into those markets with premium granular product and achieve higher prices, is something that we're very confident in our ability to achieve.

But when you're building markets, not buying markets, it takes a little bit of time. And we would just ask you to continue to look towards the future as it relates to Langbeinite.

Okay. Thank you.

The next question comes from Vincent Andrews of Morgan Stanley. Please go ahead. Mr. Andrews, your line is open, please begin.

We can go to the next call.

Thank you. The next question comes from Mark Connelly of the CLSA. Please go ahead.

Thank you. Just two questions. John, the design changes and the refinements you're making on the Langbeinite recovery, is that going to change materially the capacity that you're targeting to get?

The changes we're making allow -- relative to where we're at first quarter, yes. Relative to where we have been historically, no. It allows us to get back to some of those historical recovery rates. We're hoping we can do a little bit better than that. And again, we're trying to bridge that. We'll be commissioning the LRIP plant later in the year which, just due to the nature of the Dense Media Plant, will increase that recovery overall.

Mark, this is Dave. One thing just to make sure that, and I think we've talked about this maybe broadly before. But just to make sure people are aware. Our current process design has us targeting about a 30% to 35% recovery of product. And the Dense Media Plant that'll be commissioned with the LRIP project takes us to 50% recovery. And then the other piece of that project is the granulation or pelletizer plant which allows us to granulate 100% of that standard production. So really what we go to is having higher recovery and the ability to have all of that product in a granular form with the LRIP.

But as John mentioned, the changes and improvements really are relative to what we'd seen over the last, really the end of last quarter and the first month or two of this quarter.

And Mark, this is Bob. Not to make it sound too complicated, but let's not forget that we're mining a mixed ore body that has both Langbeinite and sylvite in the ore. And so as we make tweaks and improvements to the potash side of the recovery from the mixed ore body, it has an impact on the Langbeinite side.

Right.

And so as we work to get these plants running as efficiently as we can to optimize recoveries on both side of the production stream, it's a little more complicated sometime. And so the addition of the Dense Media Separation Plant, as well as some of the recovery changes are going to continually just improve and improve upon this mixed ore body recovery system.

That's very clear. Just back to the weather impact, and I'm sorry to keep asking on this. But if the timing and location of sales change materially in the quarter, could we anticipate a meaningful change in the costs? All in costs or are transportation not going to be affected all that much, even if you're shipping around quite a bit?

Mark, this is Dave. I think you've probably heard us say it before. But really, we focus on things on kind of a long-term and annual basis. And we're going to continue to run the plants in as full a manner as we can. We have lots of storage capacity. So if we have some short periods of maybe this month's slower than what next month will be or you might see some variation from quarter to quarter. But I don't really anticipate that we'll be outside of that 170 to 180 number on the cash cost side of things for the year.

I mean, we'll see some aberrations. I think we've got scheduled maintenance coming up at one of our facilities in the second quarter and one in the third quarter. And that'll also include tying in some plant and equipment. So we'll have a little variation. But overall we think we've got plenty of capacity and we really think about this on an annual basis and believe we'll be able to sell all the granular production that we -- that we're able to produce from the plants.

That's helpful. Thank you.

The next question comes from Lindsay Drucker-Mann of Goldman Sachs. Please go ahead.

Hey. Good morning, everyone. Just first on your expectations for production. In the event that because of weather-related issues you do get some softness in demand in the first part of the year, would you expect to run your facilities full out and build some inventory for fall?

That's the expectation, Lindsay. I think, like we've touched on, we see the benefit on the unit cost when we're able to do that. We got staff back up at the mines and the plants really in November last year. So our expectation is that we will -- we'll produce those plants at maximum rates and make sure that we've got product available for what we really see to be a pretty darn strong commodity environment and ag market for a period of time here.

Okay. Thanks. And on an earlier earnings report you had talked about some pressure on standard potash prices because of some excess selling from your Canadian competitors. I was just hoping you could give us an update anecdotally on what you're seeing from them today.

Well, the first thing that we've done that has made a big difference is the addition of additional -- of granulation capacity so that we can take product that was standard product that might have needed to go into an industrial market and it can now go into an agricultural market, so the ability to right-size our product stream so that we can most effectively do what we need to do.

When we look at the oil and gas market down in the state of Texas and Oklahoma and the activity that we're seeing, we're seeing our industrial sales pick up. With the increase in the price of oil and natural gas, we're seeing firming in the pricing of our industrial products. We continue to work with oil and gas operators to explain the benefits of KCL and drilling fluids and completion fluid.

So Intrepid is working its tail off to make sure the oil and gas operators are intimately aware, as well as the Halliburtons of the world who recommend our product can convey that message to their oil and gas operators. So we're seeing activity in those markets pick up and firming in those markets pick up.

Maybe just let me ask that a different way. That's helpful, but in light of some of the softer sales we're seeing at retail and perhaps an inventory build in anticipation of when the growing season kicks into gear with these weather delays, are you seeing any of your large competitors getting more aggressive to move product?

Well, fortunately, what we're seeing is that as the Indian market and the Chinese market and the Asian markets that are big standard markets have picked up, we're seeing more standard, more Canadian standard go offshore. And so we're not seeing the kind of pressure that we had seen before because those standard outlets have reopened, if you will. And it's our impression that the Canadians are shipping significantly more standard into the Asian markets and then [end] market.

Great. Thanks very much.

The next question comes from Elaine Yip of Credit Suisse. Please go ahead.

Hi. Good morning.

Morning.

A question on your announced price increases. In contrast to other North American producers, you've chosen to raise prices in $15 increments. What drove that type of pricing approach? And what has been the customer response to the price increases?

Well, the first was that we learned back in 2000 and 2008, that the price shocks aren't necessarily beneficial to our customers. So we wanted to give our customers plenty of time to prepare for the price increases. We wanted to do it in an incremental fashion so that we could achieve the increases, as well as not put as much pressure as was put on customers in the 2007, 2008 price run-up.

So from our perspective, we're just simply trying to learn from what were potentially mistakes in the past and turn them into benefits and that we fully believe we're going to achieve the full $45 and it's not going to be as painful on our customers, it gave them time to plan.

Kelvin, would you like to add anything to that, as you were part of that decision process?

Yes. Elaine, I think the other thing that was important is a big piece of our business is the truck market. And $50 increases, of course, we see this big run of trucks or orders at the end of a certain month. And with smaller increases, we don't seem to see that. So it's really balanced off our shipping patterns and I think beneficial both to the customer who's responded positively to the $15 increases and ourselves which we're able better to manage our business with smaller increases.

And then are you realizing then the full $45 per ton increase? Have you seen -- how have the customers reacted [to] the new price lists? Are they looking to book the nearer term deliveries or are they more focused a bit on inventories and just willing to wait until they really need the product before placing the order?

I guess we -- it's Kelvin again. We haven't seen -- June 1st is the full $45, so I guess that part remains to be seen. But we haven't seen the pushback to date. And I guess it's really more a weather question than a pricing question today.

Okay. Great. Thank you very much.

The next question comes from David Silver of Bank of America/Merrill Lynch. Please go ahead.

Yes. Hi. I had a couple questions I guess focused mainly on the production side, so maybe John or Bob. When I look back to other high volume production periods for your company in 2005 and 2007, the cash production cost number, in other words, just production cost, no DD&A, no royalties, no byproduct revenues, $172 was the number I'm thinking about for 1Q. But if you go back to '05 and '07 for stretches, the numbers were in the 110s or 120s. And thinking about investments, you understand your assets very well, where the low-hanging fruit is.

Is there an opportunity if we're looking out to 2013 or so, for the New Mexico operations to move down the cost curve significantly from here? Just thinking about 800,000 tons of sales, maybe $40 to $50 per ton difference there, I mean, it seems like a significant profit opportunity. If you could just comment on that. Thank you.

Yes. This is Bob. Thanks for the question, Dave. I guess the first thing that I draw your attention to is that in that same period of time labor costs have continued to increase in the Southeast New Mexico area because it's a very competitive labor market with the oil and gas industry and with other mining industries. So it's a very, very competitive labor market.

We've seen other costs, mining equipment costs, chemical reagent costs, costs up and down our cost structure, have gone up significantly. So it's not just simply about volume and tons of (inaudible). If you look at -- if we look at other producers of commodities, whether they're gold producers, coal producers, they're seeing the same kind of impacts on their cost structure that we've seen.

The biggest impact that we're going to make to our cost structure is methodology of mining. And that's why solution mining combined with solar evaporation really is where Intrepid is trying to take itself from a cost standpoint. As we've pointed out many times, we believe the new HB Solar Solution Mine is going to produce tons in the $75 to $80 per ton range. That's how you make a significant impact. We continue to manage labor costs, manage chemical reagent costs, manage mining equipment costs in the same fashion that other mining companies are having to mine them, but we can't ignore the fact that those costs continue to creep up just like they are for everybody else in the mining industry.

So we're very aware of it. We see it. We look back at it in the same fashion that you do. And so, well, we get the biggest bang for our buck of where we make significant changes, like the LRIP project. And then by adding the compaction piece it gets -- allows us to get a higher margin once that product is made, just like we're seeing at Moab. By creating that marketing flexibility, we're now in marketing -- we're now marketing that product in regions that previously we didn't have the product quality to even get into. It wasn't about reaching out. It was that the product quality wasn't there to get us into certain markets.

So there are a lot of different ways to focus on your margin and your bottom line. It's not just costs. The way we look at it is all about margin.

John, is there anything you'd like to add to that?

I think that covers it, Bob. I mean, the only other piece I would add is that we continue to manage the amount of development, and during that period of time we were probably doing a smaller amount of development. The mine was very well developed. We're in position, as we look forward to -- our ratio of development to ore has changed. That means we move a little lower grade. As a result, we're focusing on moving more tons to offset that. And so you'll see that if you look at our overall tons of material processed and mined, those figures are moving up dramatically. Unfortunately, the grade due to development has actually decreased a bit, giving us kind of a flattening effect on actual potash production.

Okay. Thank you for that. And if I could just follow-up maybe on John's last comment. But I believe one or -- one quarter ago in discussing the production, potash production expectation for calendar 2011, you kind of guided us maybe towards a certain level, I thought closer to 800,000 short tons for the year. And I look at the production rate, which I believe was an all-time record for your company in the first quarter. And then allowing for there's some apples to oranges things with the Moab harvest, I guess. But it does seem like if you can continue at this kind of rough rate, you'd be higher on a full-year basis, maybe significantly so than maybe what you were discussing one quarter ago.

Has anything changed in your production view for 2011, from last quarter to this quarter? And should we think of your production, potash production potential as higher than what you were thinking about last conference call?

David, this is Dave Honeyfield. I think the comments, if I remember right from the last quarter, were, and I think Fai Lee actually called it out pretty well, that we really do see higher production numbers in the first quarter of each year and the fourth quarter of each year because of the seasonality of Moab, the plants are running well. But I think those numbers are still where we think people should look to for 2011 here.

The expectation would be that as the harvest cycle in Moab completes here in the second quarter, that we'll have a little bit lower production numbers in Q2 and Q3, and then we'll see that pick back up in Q4. At the same time, we've enumerated the projects that are out there and what they're doing on a long-term basis. So directionally, yes, if you look down the road, you're going to see improvements. But I think those numbers are still the right ones to use for this year.

Okay. Thank you very much.

The next question comes from Don Carson of Susquehanna Financial. Please go ahead.

Thank you. Yes, just want to go back to this inventory, your field inventories. You had mentioned that the dealers seem to want to hold inventory, although, obviously there's the risk that they may not be able to sell everything they have in inventory now. And then, of course, yesterday the largest distributor in the US indicated they want to run their inventories down by the end of the season. So I'm wondering whether this latest price increase is really designed to encourage some buying to beat the price increase or whether you think we'll see a replay of last year when we had an announced price increase this summer, but pricing still went down and inventories were down as well.

Don, thanks for the question. As you know, the weather is changing daily and weekly and that the weather's having an impact on peoples' plans. So when we talk to our dealers, I would say that there's a fundamental underlying belief that the price of potash has the opportunity to get stronger and to be higher.

And so when you talk to most dealers and you look at kind of the fundamental philosophy, if you will, that's the underlying belief. Now, day-to-day weather changes are going to change and affect the philosophy of certain suppliers. So where we were clearly feeling, as recently as a week or two ago, dealers bullish on potash for the long term, there are certain dealers that have different balance sheet situations, different credit situations, different board decision making situations. And so there's no doubt that we're going to see individual changes or micro changes within a macro picture.

And so we're still seeing dealers that are bullish on potash. But, and I know that you work hard to talk to a lot of people, and you're going to find those one-off dealers and distributors that are different than the macro picture. Now, if the weather continues to be what it is, then we could see a shift in that for the summer. But what we're seeing commodity pricewise, is very strong commodity pricing. And so we don't anticipate seeing a major fundamental shift in the overall agricultural macro picture.

So, yes, we're going to see speed bumps just like we're seeing, and I think you're describing a speed bump, and that's why we continue to try to manage our business on a long-term basis.

And, Bob, I'll follow up on your pricing strategy. You know you mentioned that one of the lessons of 2008 was you didn't want to surprise customers by bumping prices up too aggressively and you seem to be creeping them up now. What do you think the constraint is on pricing? Does potash have to stay below nitrogen, because it seemed in 2008, that as potash got above ammonia prices in the corn belt but that seemed to bring about some price resistance on the part of growers.

Well, we're not having significant pricing discussions with end users about the price of potash, where it is today. As Kelvin mentioned, the discussion right now is really not about price, it's more about timing and movement, inventories, what's going to happen. So it's a different discussion, so it feels very different.

And so that's why I believe in the macro picture, in the near-term foreseeable future, I think we're going to see firm and strong pricing of our product because the demand is there and most importantly the economics are there. So we haven't even begun to touch any kind of a range where potash is priced too high to affect farmers' economics across the broad spectrum of farmers that use potash. So we're a long way away from that price point where we're affecting their economics.

So it's a different discussion today than it was in, say '08. And it's just a more fundamentally long-term story for the price of potash today than it was in 2007 and 2008, and we're trying to manage our business accordingly.

Thank you.

(Operator Instructions) The next question comes from Fai Lee, an independent analyst. Please go ahead.

Thank you. David, I just want to talk to you about maybe the Langbeinite Recovery Improvement Project. You gave some guidance and it was very good. I just want to better understand that. So you're going to have higher volumes once the project comes into place and you're going to realize higher prices from selling more granular. And I think your cost of production will decrease with higher recovery. But you're going to also have higher DD&A.

So on the gross margin aspect of the project, do you expect margins to come down a bit with the higher DD&A or stay relatively flat because the pricing and the lower cost reduction will offset that?

I think on the cost side on that, Fai, what you'll see is, and I think you've captured it pretty well, our overall production cost for the Langbeinite circuit will be effectively the same as it is today, but we'll have more tonnage coming through that. Clearly there is the capital investment that goes along with that.

So for a period of time what you'll see is essentially a tradeoff of cash operating costs for DD&A costs on a per-ton basis. That's no different than any other capital investment project that you have along the way. And what we try to keep people focused on is our cash operating cost, because that's really how you generate the returns on the capital dollars that we're putting to use.

So overall, we expect to see that cash operating cost decrease. And like I said, we will see an uptick on the DD&A piece with the capital investment.

Okay. And so if your cash operating cost offsets your DD&A but you're still going to sell price -- more granular, which would be higher priced, then you should get some gross margin expansion as well, is that correct?

I think you hit it right on the head. Again, the ability to sell all that product into the granular market that based on historical numbers has achieved a $55 to $65 advantage on a per-ton basis over that standard export market, makes the economics of the project, together with the per-ton cash operating costs very significant.

Thank you.

Thank you.

This concludes the time allocated for questions on today's call. I will now turn the call back to Mr. David Honeyfield for any closing comments.

We'd really just like to thank everyone for joining today's call and making the effort and taking the time to learn more about Intrepid. Have a great day, and thanks again.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect your lines. Thank you for participating and have a pleasant day.