Intrepid Potash Inc (IPI) 2011 Q2 法說會逐字稿

Good morning, and welcome to the Intrepid Potash second 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, August 4, 2011, at 8:00 a.m. Mountain Time.

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

Thank you, Brock, and thank you all for joining us for our second quarter 2011 earnings conference call. I would like to start by introducing today's participants from the company. Participants include 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; 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 the news release we 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 net income and adjusted EBITDA, both of which will be used on this call today. 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 thanks to everyone for joining us today to learn more about Intrepid's second quarter 2011 results. During the second quarter we saw continued strength in the overall commodities markets which helped us deliver a strong quarter of sales. Further, we continue to execute our operating plan and are realizing the benefits of our capital investments with both improved reliability and marketing flexibility.

During the quarter we earned $0.41 per diluted share on net income of $30.7 million and our adjusted EBITDA was $59.9 million. We grew our cash and investment positions from the first quarter to $158 million as of June 30. To put this in perspective our adjusted net income increased over seven times this quarter compared to the same quarter in 2010.

The outlook for potash continues to be one of confidence with strong crop prices for almost every agricultural commodity that are supportive of farmer economics. The current agricultural commodities markets are additionally supported by the forecast for global demand for both corn and soy beans and tight stocks-to-use ratios for these staples. To put it very simply, there is confidence all across the worldwide agricultural economy. This confidence can be seen at all levels of the supply chain, from producers to dealers to retailers and to the end-user, the farmer. The fundamentals for the agricultural economy are very good and we believe we have entered a period of sustained strength.

The overall market strength was clearly reflected in the price of potash during the second quarter. We realized a $20 per ton sequential improvement from the first quarter with our average net realized sales price results for potash coming in at $462 per ton for the second quarter. Our strong quarterly results, both as to volume and pricing, were achieved in spite of the fact there was flooding in the Midwest and severe drought conditions in the Southwest. As a result of the drought, very little product moved in areas such as Oklahoma, Kansas and Texas. It will eventually rain again in these states and we look forward to adding back sales in these high quality markets.

Our second quarter results demonstrate that the capital investments we have made to improve flexibility and increase our granulation capacity have improved our ability to respond to changing market conditions. Our successful Moab, Utah compactor project demonstrates the advantages of building flexibility into our operations which has allowed us to right-size our production to meet changing market demands. We are working diligently to build upon that success that we have realized with the Moab Compaction Project with planned projects to increase our granulation capacities at both our Carlsbad and Wendover operations.

As a result of the capital projects we have underway, which are focused on increasing recoveries and production while lowering our per-ton costs, the next 12 months have the potential to substantially enhance Intrepid's profile by better positioning us to compete in the domestic and global agricultural economy.

Finally, we are also seeing significant returns from the investments we have made in our operating management team. From Dave Honeyfield's role as President to John Mansanti as Vice President of Operations and Kelvin Feist as our VP of Marketing and Sales, we are seeing the rewards of hiring some of the best and the brightest. We have brought on numerous engineers who have also helped us to creatively solve problems, add value and execute consistently on our multi-year growth strategy. Hugh and I are very proud of this team. By far and away our employees continue to be our strongest asset.

I will now turn the call over to John Mansanti, our Vice President of Operations.

Thanks, Bob. Our potash production of 209,000 tons in the second quarter of 2011 represents a 27% increase relative to the second quarter of 2010. During the quarter we realized the benefit of our capital investments and our increased staffing, both of which enabled us to deliver strong production to all our sites.

In addition, our Moab production benefitted from a good solar evaporation cycle, which allowed a harvest season one month longer than normal. We have produced 44,000 of langbeinite during the second quarter 2011. This compares to 39,000 tons produced in the second quarter of last year. Langbeinite production was higher due to increased mill throughputs, higher grades and the restoration of our recoveries to near historical levels.

As we highlighted during the first quarter call, we began to see a sustained improvement in recoveries beginning in March 2011. And we will focus on maintaining this level of recovery in advance of commissioning the Langbeinite Recovery Improvement Project.

Now, a few comments on the significant progress on our 2011 capital investment program. Having received all of the necessary construction permits for the dense media separation plant and the granulation plant, the Langbeinite Recovery Improvement Project is progressing well. Construction remains on track, with concrete work complete, most of the structural steel in place and a significant amount of equipment delivered and being assembled.

Similar to 2010, we are commissioning one additional mine panel at each of our underground mines to increase overall mine production. The additional West mine panel is now operational and the additional East Mine panel is scheduled to be operational in the fourth quarter of 2011.

Also during the quarter we started construction on a new compaction facility in the new product warehouse in Wendover. We made significant progress. Foundations are complete for the compactor and compactor building. The excavation is complete and concrete work started for the new warehouse. These projects will enable us to better adapt to market fluctuations and to respond to specific demands. All of these projects are geared towards increasing recoveries, increasing production and decreasing per-ton costs.

In 2011 we expect to invest between $140 million and $165 million in our capital investment projects. Based on the receipt of permits for certain significant capital project, most specifically LRIP and the overall progress on our capital program, we believe that we will be closer to the top of this range in terms of capital investment for 2011.

I will turn the call over to Kelvin Feist, our Vice President of Marketing and Sales.

Thank you, John. As noted, our sales results from the second quarter were strong despite extreme drought in the southern markets and flooding across areas of the Midwest.

We sold 225,000 tons of potash during the second quarter. This compares to 129,000 tons of potash sold in the second quarter of 2010. We also sold 39,000 tons of Trio as compared to 63,000 tons of Trio sold in the second quarter of 2010. The year-over-year decrease in Trio sales is primarily the result of having more product available for sale a year ago than this year.

On June 1 our posted price for Carlsbad Red Granular Potash moved to $530 per ton FOB to mine. Based on continued steady demand for the product we raised our posted price for our Red Granular Potash on July 8 to the current price of $560 per ton. Demand for all grades of Trio remained during the quarter and we expect continued Trio strength through the balance of 2011.

Due to the strong demand for Trio we also raised our posted price for granular-size Trio on August 1 by $20 per ton to $291 per ton FOB to our Carlsbad Mine. We are seeing more confidence at the (inaudible) level in the market than a year ago. We started the Southwest Fertilizer Conference two weeks ago where the majority of the fertilizer dealers we met with were primarily focused on future product availability.

Many dealers entered the summer carrying inventory, which is a significant departure from the hand-to-mouth type of consumption that we saw from dealers in the spring of 2010. The distribution system confidence does not stop at the dealer level but extends all the way through the supply chain to retailers and farmers. Strong order activity has essentially sold-out for potash on a rail-delivered basis for the third quarter.

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

Thanks, Kelvin. Potash production at all of our facilities in the quarter was quite strong which benefited our cash operating cost of goods sold, demonstrating the benefit of improved reliability of the facilities. Please remember that the cash operating COGS number has some variability from quarter to quarter. These variances are somewhat driven by the location from which tons are sold as well as the timing of turnaround maintenance work.

Specifically, we anticipate higher cash operating cost of goods sold per ton in the third and fourth quarters this year based on scheduled plant down time for maintenance and the tie in of new plant and equipment. Consistent with our view expressed since the beginning of the year, we expect to deliver an annual cash operating cost of goods sold for potash in a range of $170 to $180 per ton.

I want to bring folks up to date as to the progress around our HB SolarSolution Mine. The current schedule for receiving the Record of Decision from the BLM remains in the first quarter of 2012. We also just received from the New Mexico Environment Department the Air Quality Permit associated with the mill for the HB project. As we move closer to the Record of Decision date on the project we continue to update the cost estimates based on the dynamic permitting process and consideration of project design refinements.

Further, we are not insulated from the cost escalation trends being experienced throughout the mining industry. Based on these factors we anticipate that the total capital investment requirements for the HB SolarSolution Mine will be higher, possibly significantly higher than the previously disclosed range of $120 million to $130 million. We have not finalized our estimate so I don't have an investment number today. Nonetheless, we continue to see the HB project as an important and very attractive financial investment that fits squarely within our overall capital strategy of increased productivity and decreased cash operating costs per ton.

On the modeling front, I want to reemphasize an item that I covered last quarter concerning depreciation, depletion and amortization. Over the next few years as we place new equipment into service, DD&A in total dollars and on a per-ton basis will increase for potash in proportion to our cumulative invested capital. Similarly for Trio you should also expect DD&A to be higher once the LRIP project is completed and we see the benefits of higher recoveries flow through lower cash cost of goods sold per ton.

I also want to remind folks as you are estimating net realized sales price that our reported average net realized sales price per ton for potash typically has been about 85% to 90% of our posted red 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. Additionally, it takes approximately 75 to 90 days to see the full effect of a new posted price on average net realized sales price.

Moving to the financing front, please note that we closed on a new, five-year revolving credit facility yesterday with $250 million of available capacity. The new facility not only represents a doubling of availability under the facility but also reflects a positive view of the market in that the facility is unsecured.

In closing, the second quarter of 2011 demonstrated how focusing on the reliability of our mines and plants and building flexibility into our production system allows us to quickly adapt to changing or challenging market conditions. Our focus is on continually driving our core goals of increased recoveries, increased reliability, increased productivity and reduced per ton costs. As highlighted previously, the next year should result in achieving a number of major milestones aligned with these objectives including the commissioning of the Langbeinite Recovery Improvement Project, the completion of the Wendover Compaction Project and importantly the permitting of the HB SolarSolution Mine.

These projects are all well within reach and should ultimately lead to increased volume of lower cost tons and the opportunity for increased margin. We believe that when you combine the advantages of our facilities' location and the strategic marketing of our products, together with the ability to effectively fund and execute on our significant capital investments, that we are well positioned to benefit from the strong agricultural fundamentals and to capitalize on future opportunities.

We will now open the line for any questions.

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

Thank you. Good morning, guys. Just a quick question on product prices. Are you lagging in terms of your pricing announcement in terms of the posted prices? Because some of the larger players are already at $590. They have already announced $590 price for the fourth quarter. Are you going to catch up with that? Especially given that you are saying there is like 75 to 90 days for those prices to take effect.

Edlain, good morning to you. I am going to let Kelvin address where we are on pricing and how we are quickly monitoring the market and keeping our flexibility to raise prices as the market allows us to. Kelvin, do you want to address that?

Sure. Good morning, Edlain. With regard to potash prices, what we saw is some of the stuff you are referencing I believe is a delivered price. Probably into the Midwest, Edlain, that is normally where people are looking. Some of those numbers in the $590 to $600 whether it be warehouse or rail-delivered. I guess I was referencing an FOB price out of Carlsbad so that is the differential that you are seeing.

Okay.

This is Dave. Just to make clear on that. We believe we're at least caught up to where the rest of the market is but like Kelvin said you really have to take what delivery point and make sure you are comparing apples-to-apples when you are looking at that posted price.

Okay, that makes sense. Now I have a question on potash production. If we were to assume that product demand comes in as strong as expected and you can sell everything that you produce, how much can you really produce for the year? I mean you already have like 443,000 tons. What is the production capacity for the full year?

This is Dave. Pretty consistent with what we have been saying since the beginning of the year. That number I think we referenced on the last call was approximately 800,000 tons. Please keep in mind the variability that we have and you will see it here in the third quarter where we don't have production numbers coming in from Moab because we are in the evaporation cycle. So we're certainly seeing the benefit of the plants running well, very good reliability, the plants operating at full capacity but I don't think I would get too far ahead of kind of where we've said right now.

John has already mentioned the additional mining panels that are coming online. We will start to see the benefit of that a little bit throughout the year here but I think just keep it in perspective that it is some new equipment coming in and I don't think we are ready to go out any further than we have at this point on some of those estimates.

The other thing to remember, Edlain, is as we bring on some of these new projects we have to turn things off to tie new projects in. So especially the LRIP project which is a project that is very significant to us. We want to make sure we get that right and that we get it up and installed.

We are going to do our best to do it in as short a time period as we can but we have tried to be very realistic. When you take a plant down to add new capacity the fact of the matter is you are taking something offline to bring a bigger project online.

That makes sense. Thank you.

The next question comes from Ben Isaacson of Scotia Capital. Please go ahead.

Thank you very much. My first question is just on your inventory levels. Your potash sales quarter-over-quarter increased by 15% and your production went down by 11%. So assuming that there was a bit of a draw on inventory, can you just let us know where you stand right now heading into the fall?

My second question is on Moab. You had what you called excellent brine levels and favorable harvest conditions. Can you just distinguish between the two and how much each one of those contributed to the extra production? Thanks.

This is Dave. I will take the question on inventory and John if you could touch on Moab that would be great. On the inventory piece I would say we feel very good about the inventory levels. One of the things we have been doing certainly on the sales side is making sure we have product available for truck deliveries at the plant and then scheduling out some of the larger rail shipments pretty consistent with the market demand and making sure we are getting the benefit of market pricing on that.

So, inventories are getting tighter at the producer level and I think you have seen that through some of the data that has been put out into the market right now. Overall I would say we still continue to believe we can take care of our customer needs and we feel pretty good about where we are at on inventory and production levels.

Could you repeat the question on the brine again for Moab?

You mentioned that the Moab SolarSolution might benefit through the quarter from both excellent brine levels and from favorable harvest conditions. I just wanted to understand how much each of those contributed to the improved level of production in the quarter.

I think the statement was we benefited from a better solar evaporation season and then the extended harvest. To have the extended harvest you have to have the beneficial season. Because they had a good solar year last year we put down more product which allowed us to extend our harvest season this spring.

Great, thank you.

The next question comes from Elaine Yip of Credit Suisse.

Hi. Good morning. On your HB SolarSolution Mine project can you provide a bit more color on what is driving the higher capital cost outlook? Is this simply about rising cost for equipment or is there something else to it whether or not the project is more complicated than you thought, or are there more regulatory requirements? If you could provide a bit more color that would be helpful.

You bet. This is Bob. Thanks for the question. It is a combination of all of the above. First, we are upsizing our pond size so part of that has been negotiations, for lack of a better term, with the BLM in terms of upsizing and increasing the pond capacity.

The second is kind of ongoing negotiations in terms of how much of the piping will be buried versus not buried. How much in the way of monitoring wells. How many monitoring wells we are going to have to provide. We have seen some inflation in some of the core costs.

So if everything goes right we are going to see slightly increased capacities and the ability to run at a higher level because of the larger sizing of the project. But please remember it is all iterative and part of an EIS process so there is negotiation. So we are not sure if we are going to have to bury all piping, some piping and so what we are trying to tell the market is as we get closer and closer to the final outcome we don't know what that answer is going to be.

We are trying to make you aware that if we had to do everything they might want us to do we are going to see potentially significantly higher costs but we are also trying to right-size or upsize the project within the confines of the EIS and trying to get it as big as we can within the confines of the EIS so that there will also be potential rewards from that.

Just keep in mind that when you are in an EIS process and you are negotiating with governmental regulatory agencies it is not as clear -- a black-and-white line until you kind of get closer to the Record of Decision. Dave or John would you like to add anything to that?

Elaine, even though I commented I don't have a number to give you right now I can tell you we have run an awful lot of sensitivities. And like I mentioned this is still a very, very strong financial return on the capital investment really throughout a range of costs. Given the production tons that will come on and the low-cost nature of those this is still just a darned good project for us. One that we are anxious to get permitted and get started on.

In the langbeinite business are the issues that drove the below-normal recovery rates fixed now or is there more room to improve? Then with respect to the LRIP project itself, are the capital costs still in line with your original estimate of, I believe, $85 million?

Elaine, this is Dave again. Really since March of this year we have seen a nice stabilization of the recovery rates. I think we have largely addressed what we need to to get back to kind of that historical production level. You shouldn't see too much variability through the remaining couple of quarters on that.

In terms of the LRIP project, like John touched on, we got the permit for the pelletization plant in the second quarter, construction is moving along very well. It's pretty incredible to see all of the steel that has been hung and the foundations and the electrical equipment that has been put in place and the number of pieces of processing equipment that are being delivered and on site.

We still anticipate that coming in on time in the fourth quarter like we have described. On the capital costs side we are squarely within that range that we provided. Staying on schedule is a big part of helping meet those objectives. Everything on that front is continuing to progress on a positive basis.

Great. Thank you very much.

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

Thank you. Two questions. First, last quarter you talked about weather impacting timing and location sales. It sounds like that was more or less true this quarter. I am curious if it is making much difference to your profitability? You talk about building in flexibility but has it made a meaningful difference or are you trying to just get your costs down and distribution flexibility in general?

Also curious if you are selling anything through Canpotex at this point? Then the second question, and I know that is a long question, with respect to Carlsbad, given the projects you have underway how close to what you would consider your own practical capacity are you running at this point? Are you pretty much doing everything that you could do there?

Thanks for the question. Let me handle a couple of different parts of it. First, Canpotex is an organization comprised of Canadian producers. So we don't have any affiliation whatsoever with Canpotex.

But you do sell some tons through them once in awhile on the export market, right?

No, we absolutely do not. Potash Corp. represents us outside of the United States. We don't sell -- we rarely sell any potash outside of the United States. We do sell Trio outside of the United States and it is through PCS Sales, not Canpotex.

Sorry about that.

No, no, no. We just need to make it clear. As to weather impacting us, I think the one thing that we have continued to do is to monitor the weather, monitor where farmers are farming the most and where we have the greatest margin opportunities. I think it is clearly the strength of our marketing staff -- clearly has done a great job and it is reflected in our realized net sales prices.

So weather will always impact our markets and I guess our location being proximate to the markets really helps us with that flexibility piece. Kelvin, do you want to add something to that as well?

Mark, I just wanted to add that our bigger challenge is really on the logistics side. There was a number of rail embargos, for example, in the Midwest where we are trying to work around and supply product just in time to those markets. So it was really a logistics challenge that we are dealing with when we refer to some of that weather impacting our business.

I guess what we're looking at from a net back perspective is we are looking at all of the markets. Certainly some are better net-backs than others and we continue to try and maximize our return based on what is available or what areas have strong demand.

I just want to emphasize what a great job the marketing team did because Texas, Oklahoma and Southern Kansas were basically out of the market. So yes we still had significant performance. As I said in my comments we believe it will eventually rain in Texas and then those markets will return. And we look forward to that because it just shows the strength of the overall markets in spite of the fact that those states didn't participate.

As to Carlsbad and our effective operating level, we continue to look at every place where we can tweak recoveries, tweak production, improve production but I just can't stress there is a whole list of small projects that we continue to add on to. And we don't describe that sometimes you take a plant down to keep adding something on to it. So we are still in that stage of bringing projects on.

Dave, I don't know if there is anything you would like to add as to current capacity levels?

No, I think that is pretty fair, Bob. Mark, we are running those plants at full staffing levels. Like I said before we're seeing the benefit of a very reliable production base and that in conjunction with the projects Bob described, I think it is helpful to appreciate the sheer number of projects. It is not a list of ten. It is a list of a couple hundred. I think sometimes when you take a step back and put that into perspective it gives you a good appreciation for all of the work that is going on day-to-day, particularly at the Carlsbad location. So, I think we are running at pretty full capacity right now and we'll start to see increasing benefits here as some of these things continue to get put in place.

Mark, did we cover your questions?

Yes. I still don't really have an answer to the first question about whether it affected your results. It sounds like your net-backs are all over the place and that is fine but I'm just trying to get a sense of whether it's hurting you. When I hear somebody say logistics and rail issues it sounds to me like your costs should be up and your net-backs should be down. But if you don't want to tell us that is alright.

Mark, I guess I would ask you to ask your question again because I felt like we had a very unique weather year in the floods in the Midwest, the rail embargos that occurred, the tracks that were actually washed out and the fact that we had droughts in some of our most localized markets yet we still had a great quarter of sales and we achieved higher net-backs than our competitors.

I don't really know that I understand your question.

I am just trying to understand how much those issues affected you. Clearly your results are good. The question is, are you being severely affected by these changes or is it minor? Is this masking how good they could have even been? We are just trying to get to what might be more normal when these issues go away.

I see where you are going. I guess I would just ask you to consider Texas is a great market for us in terms of being a very diverse agricultural market. They would have the same profitability opportunities to grow the various crops in Texas. Those are our truck markets. Had we had our truck market, which is typically our highest net-backs yes, the answer is we could have had a better quarter. Because we just simply didn't have a truck market this quarter.

We are very proud of the fact that we were able to work around the fact that our truck market, because of drought and flooding, didn't exist. So, maybe I'm not understanding your question right. But I hope that kind of gives you a feel for it.

That is very helpful. Thank you.

The next question is from Vincent Andrews of Morgan Stanley. Please go ahead.

Hi, this is Ted Drungle sitting in for Vincent. A couple of questions on the global supply/demand outlook. We have heard kind of from 55 million to 60 million metric tonnes which we are also starting to hear the high end of that range is probably not going to be achievable.

I guess first, where do you guys see 2011 shipments for potash shaking out? Then where do you see kind of nameplate and operational capacity as it stands as we get to the end of 2011 and maybe a little color on 2012 especially as it looks like there is going to be some flow-over of demand from India and possibly China?

Well, when we look at demand worldwide I think the first thing we want to look at is just underlying commodity price strength. Whether or not it is in sugar, coffee has seen a bit of a correction yet it has corrected to very, very significant, high levels. The cotton market is still quite strong. The corn market despite very, very significant volatility is still extremely strong by any historic standard.

Soy beans continue to be priced at the upper levels of historic ranges. Wheat we are going to see and have seen more of a correction as there is more wheat available on the market. The rice market has firmed. So we are seeing strength in the rice market. The palm oil market is quite strong.

So as we see this incredible spectrum of strength across the commodity markets there is every reason to believe that demand is going to stay strong again next year because farmers worldwide have great margin and profit opportunities. So we are not seeing anything out there on the worldwide horizon that leads us to believe that we are going to see a drop-off in the next 12 to 18 months. In fact, the indicators are pointing towards more continued fundamental strength.

As to a volume prediction, I am going to stay away from a worldwide volume prediction. The Canadian guys do a better job of providing those numbers because they are much more active in the world market. From our standpoint and the discussions we are having with the farmers in all of our markets we continue to believe that the balance of 2011 and looking into 2012 we are going to see continued strength in the potash market.

As to the second part of your question I think revolved around capacity. I will let Dave add any color to that he might add.

I think we have already really addressed that relative to Intrepid and I wasn't sure if that was tied into kind of global supply. My sense is that it was. So, again we probably don't have a response for you on that front but I think we have already addressed kind of our capacity and where we think we are going to be for the year here.

Great.

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

Thanks. Good morning everyone. I just wanted to follow-up on your comment that you are seeing some dealers having built inventory over the summer time. I am curious if you could just compare where you think inventory levels might be relative to historically what have been held? Also if you think that further inventory build might be a demand tailwind into next year if we're generally appropriate or maybe even overextended?

Lindsay, great question. I think the one thing that caught us by surprise going back to 2008 was all of the inventory that was stored away in every cubby hole. There was just so much more inventory if we go back and look at September of 2008.

One of the things we are trying to do is to monitor, trying to get out in the field as much as we can and poke our heads in as many warehouses as we can to make sure that we are not caught by surprise by any excess demand that exists out there. We are not seeing any right now. We are seeing product that is generally going straight from the dealer into the farmer's hands and I would say right now dealers are relatively empty but they are wanting to buy product and they are wanting to buy product into the fall. We are seeing our competitors willing to sell forward into the fall so we are going to -- not stay out of the market but we are going to participate in the market.

We are not seeing anything from an inventory level that would remotely concern us. We learned our lesson in 2008 by not monitoring inventories at all levels along the supply chain and this time we are doing it very closely. With that I will let Kelvin add any color.

Good morning, Lindsay. In 2010 I think most of the dealers and consequently the farmers got somewhat caught on lack of supply of potash specifically. I think in 2011 what we see them is taking positions because they really believe there is demand out there to fill for the fall season. So they are committing further forward than they did previously and I guess that is the comment.

In terms of physical inventory in the field out there, traditionally the dealer group or the inventory at the field level will be 100% by the time we hit fall. So there is some selling into that and some inventories are going to steadily increase until farmers get into the field which is likely October/November timeframe. So between now and then there will be a summer fill of all of the I guess warehouse space, if you will, at the field level.

Does that answer your question?

Yes. Just maybe following along those lines, I know it is still a bit early but what is your feel on the pace of price increases we might see sequentially into application season?

I think we are going to continue to see the price increases that have been announced realized. Everything that we have announced I don't think we are going to see any problem realizing. Once again, rather than talking about where our specific pricing is going. I just want to comment on the underlying fundamental strength of the ag markets and the markets we are serving in spite of the absence of very significant markets like Texas, southern Kansas and Oklahoma because of the drought. So we are seeing a very, very strong fundamental foundation in spite of the fact that big parts of the market are absent.

So we think that there is reason to believe we are just going to continue to see strength, assuming Texas, Oklahoma and Kansas see some rain. I just want to make it clear we are not relying on rain in those states. We are seeing a great market with those states out of the market.

Okay. Lastly, I know that it is early to give numbers around the HB Solution Mine CapEx, the ultimate number there. You talked about some of the reasons. Could you maybe just put some buckets around what the largest piece of the CapEx will be or something else to help us dimensionalize where the big pieces of spending or the big increases in spending relative to your expectations are going to be?

You know, we are going to get there pretty soon as we continue to negotiate with the BLM in terms of pond size. Let's not forget, if we get to increase pond capacity then we increase production. So let's always keep in mind it is not just a cost element but what additional production do we see from that.

So it is just a little premature. We don't know exactly how many monitoring wells, for example, we are going to have to drill. We don't know how much pipeline we are actually going to have to bury. It is just a little premature. We are trying to tell you what we know as quickly as we know it and you are just going to have to bear with us on that.

Okay, thanks.

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

Hi. Good morning. I have a question on pricing and then I have a question on kind of maybe hurdle rates and returns.

In the second quarter your average realized potash price was $462 and I guess that is always a big mix of prepay and spot tons, but I guess in the calendar third quarter my sense is there is not much prepay business. I am scratching my head and wondering how close to let's call it the $560 FOB Carlsbad price do you think we might see in the third quarter relative to the $462 you reported in the second quarter. Is that an apples-to-apples question or am I missing something there?

This is Dave Honeyfield. I think what we would ask you to look at are some of the comments we have said pretty consistently over the years. It usually takes about 75 to 90 days to start to see those price increases be reflected. Then we tend to be about 85% to 90%, just because of all of the reasons that I listed in my comments. Directionally, yes you should expect to see our net realized price improve from where it was here in the second quarter. You will see that continue to flow through in the fourth quarter as well as we start to see the benefit of the July 8 price increase that we talked about.

I think using those historical sideboards should give you a pretty good feel for where we can get to.

Thanks. I have just been hearing from folks that the normal summer discounting was not in effect this year just due to tight market conditions.

I think you are actually spot on on that front too. You didn't see what historically, and historically is always season-to-season it seems like, but if you look at last summer, for example, there was a price decrease that came through in summer fill. You didn't see that at all this year. Rather, you saw the increases take place. I think you did see a little bit steadier trajectory here.

Good. I know you have touched on it several times on this call. Now, the other thing I wanted to ask is maybe also related to some earlier answers but having to do with the LRIP and HB questions. I guess in particular maybe you could just refresh my memory on how you view hurdle rates or returns. Dave, you are the CFO but in the room there you have a couple of the founders and large shareholders and they might look at the investments or projects just slightly differently.

I'm trying to get away from somebody at a cubicle maybe looking at delays in the HB mine due to the permitting issues or increased labor costs and I'm just trying to get a sense of how comfortable you are or what kind of margin for error there is in your thinking about the LRIP and the HB mine project as there still are some remaining uncertainties before you can finalize the costs, estimates and I guess production expectations.

Dave, this is Bob. On the HB project let's not forget that when it is completed we are going to be producing potash at cash cost somewhere in the $75 to $85 per ton. Those are very, very potentially profitable tons to produce.

The HB project is a great project that we feel has -- is a great potential game changer for Intrepid to be able to produce tons that inexpensively. That's why we are so focused on getting the first phase as right as we can within the confines of the EIS agreement and in return very, very significant and very, very attractive returns that I would make and invest in any area of my business anywhere in the world. So from a founder's perspective we think it is a very significantly good project for us.

LRIP is the same way. Let's not forget at LRIP we are already spending the money to mine those tons, hoist those tons, process those tons and the LRIP project occurs on the back side of the process flow. So it is all about recovery. Once again it is also a very attractive investment because of the fact that you are already spending so much money to get the ore into the plant and to get it processed.

It is a very, very unique opportunity to pick up tons, produce tons from the recovery side of a plant. It is very unique. We are seeing the demand for Trio consistently get better and better. That market is just one of our best and most prolific markets if we had more product to sell into it. Once again, we believe it is one of the better projects we can invest in anywhere. We are very, very proud of that project.

We think that project has room for growth as well. The LRIP project handles water balance issues. It solves operating issues at the East plant that has significant synergistic benefits with how we run that plant. So it is halfway through completion. It is going along very well. It is on budget. Everything looks pretty darned good. From a founder's perspective and as a major stockholder I can't tell you how excited we are about those projects. I hope that's the kind of color you are looking for.

No, that is very helpful. Thanks a lot.

The next question comes from Horst Hueniken with Stifel Nicolaus & Company. Please go ahead.

Good morning. Are you able to quantify the effect of the scheduled turnarounds over the next two quarters potentially in the form of the number of weeks you will not be producing?

Horst, this is Dave. I think at the East plant you should expect it will be a couple of weeks, mostly towards the end of the third quarter here. You really don't see the effect of that on your cost of goods sold really until the next quarter.

Similarly, we will have the effect of turnaround from the West plant that will be reflected here in the third quarter. In terms of giving you spot-on numbers please don't forget the fact you are not going to see much in the way of Moab production coming in this quarter. So I wouldn't just take the math from East to West and extend it from there.

Then you have the commissioning of the LRIP Plant that will largely take place in the fourth quarter this year. We will see a little bit of a tie-in time as we tie those pieces of equipment in as well. So it is a little tricky to give you spot-on numbers for each one of those but just recognize that you will see a little bit of dip here on the production front here in the third quarter. We will get you updated on fourth quarter when we get closer to it.

Perfect. That's helpful.

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

Thanks. My question relates to the reopening of the idle North Mine. It has been described in the past as a market sensitive project with progress at kind of market conditions. I am just wondering where this project stands given the current market conditions? Thanks.

Fai, this is Dave. We have longer-term initiatives around a number of projects and one of them is the North Mine area. It continues to be in our evaluation sites and we are looking at a number of items around timing, the characterization of the ore, sizing the facility. So it certainly is on the task list and there is work going on around it.

As we sit here right now there is not a date certain or anything along those lines to I think update folks on. I think just recognize it is still on the sites and I think, like you mentioned, certainly when you see longer-term stability on the potash side these projects become more and more attractive. And a big part of our challenge and a big part of our charge is to figure out ways to accelerate the reserve life and bring some of that production on board sooner than later. It is just going to make all the sense in the world from a net present value perspective.

Maybe I will follow-up with a question regarding pricing. Are current market prices in your opinion sufficient to potentially justify reopening of the idle North mine? I know you have a lot of work to be done but I think at the time the comment was the project was almost put on hold because of pricing concerns. Have we seen a rebound in pricing that is sufficient to justify the project?

Let me jump in here and add, one of the things we are really trying to do at Carlsbad is to look at the Carlsbad Mine as an operating system. So if we look at how the North mine used to operate, let's not forget it closed down in 1982, it has several ore zones that are open to us and we are looking at if we were to reopen the North Mine with some of the production streams at the East mine to handle different ores that we are currently not mining in the capacity that we have.

So when we look at reopening the North Mine it is also in the context of how do we create an entire potash producing system given the whole variety of assets that exist within the fence down at Carlsbad? So, we don't view it as a stand-alone project. We view it as an integral puzzle piece to a much larger system that we are trying to create out there. And by doing it that way we think we can greatly reduce overall production costs over time. And I think that is a better way to view it than opening it as a stand-alone facility.

I know that sounds a bit esoteric but when you look at it from an engineering standpoint, and its proximity to our East and West mines and how it could potentially fit into the HB SolarSolution Mine system there is just tremendous opportunities in how you potentially design that. Technology has come a long way, especially potash processing technologies. So given the significant ores that exist out there, there is just a lot of opportunity.

Right now we are focused on the projects that are in front of us which are the stackers that we built, the thickeners that we have built, the new mine panels that we have added, the entire shaft system that we have rebuilt at West. We look at what we are doing with the new flow plant we built at West as well. Each one of these things is part of a much bigger, more integrated system. So as you hear every quarter we just keep executing on each one of those pieces of this giant puzzle.

I am glad you brought up the North Mine again because it too is a part of this big system, if you will, that continues to get moved forward. So thank you for bringing it up.

Okay. Thank you.

There are no further questions at this time. I will turn the call back over to Mr. David Honeyfield for any closing comments.

Thank you, Brock. Since we don't see any other questions at this time we would like to thank everyone for joining today's call and for your interest in Intrepid. Have a great rest of the day. Thanks.