Intrepid Potash Inc (IPI) 2011 Q3 法說會逐字稿

Good morning and welcome to the Intrepid Potash third-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, November 3, 2011, at 8.00 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, and thank you all for joining us for our third quarter 2011 earnings conference call.

I'd like to start by introducing today's participants from the company.

Participants include Hugh Harvey, Executive Vice Chairman; David Honeyfield, President and Chief Financial Officer; Martin Litt, Executive Vice President and General Counsel; and Kelvin Feist, Senior Vice President of Marketing and Sales. Bob Jornayvaz, Executive Chairman of the Board will not be in the call with us today, as he is currently out of the country, and he will rejoin us for the fourth-quarter and year-end call.

Hugh Harvey will be covering the operations for ArcelorMittal for John Mansanti, our Senior Vice President of Operations, as John is on voice rest, recovering from voice surgery.

I would like to remind everyone that statements made on this call, which express the beliefs, expectations or intentions, as well as those that are not historical facts, 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 we issued last night and the risk factors and management's discussion and analysis of financial conditions and results of operations 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, 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.

All references to tons are short tons of 2,000 pounds.

I'll now turn the call over to Dave Honeyfield.

Thanks, Will, and thanks to those joining us today to learn more about Intrepid's third quarter 2011 results.

The third quarter was good for us, as we continued to make progress on our large capital projects and we continued to strengthen our operating practices. During the third quarter, we realized a $27 per ton improvement to our net realized sales price for potash and $29 per ton improvement for Trio, and had solid sales of both potash and Trio.

During the quarter, we earned $0.34 per diluted share on net income of $25.5 million and our adjusted EBITDA was $51 million, which helped fund our capital investments, as well as grow our cash and investment position to $169 million as of September 30.

The outlook for potash remains positive, as we see fall harvest drawing to a close and farmers beginning to prepare their soils for the 2012 season.

Crop economics for US farmers has remained in strong, in light of the continued tight domestic stock to use ratios for both corn and soybeans.

Dealers entered the fall with healthy inventory positions and should be turning over their inventories during the fall application window. The current market scenario is completely different from what we saw last year at this time, when dealers entered the fall of 2010 short of inventories and scrambling to get caught up to meet farmer demand. Dealers presently are well-stocked with inventory and there is some sideways selling among a handful of traders seeking liquidity of their positions.

That being said, potash pricing from a producer perspective is flat, which we would expect until replacement of inventory by the dealers resumes and ultimately the fundamentals of the positive crop economics are reflected in the market. The value of balanced fertilization is well understood and is acknowledged by farmers as the key to generating strong yields on their investments in land, equipment, seed and fertilizer.

An increase in our average net realized sales price for potash to $489 per ton in the third quarter was achieved despite the weather challenges faced by some of our customers. In particular, we faced continuing drought conditions in Texas and delays in shipment of several committed orders, due to high water on the Missouri River.

Our sales and marketing team has done a great job of expanding our reach and leveraging the flexibility of our production assets to keep tons moving, albeit with some higher freight costs in certain cases.

We believe that strong cross-economics will continue to incentivize farmers to apply nutrients at a normal rate this fall, in preparation for the 2012 season. The marketing flexibility we've created, through our ongoing investments in granulation capacity, positions Intrepid to meet what we believe will be strong domestic, agricultural demand over the next year.

During the quarter, we made great progress on our capital investments, with our langbeinite recovery improvement project moving closer to completion, with progress being made on our Wendover compaction plant and warehouse and the continued forward movement on HB Solar Solution mine project.

The consistent objective of our capital investment program is to deliver a reliable production stream of high-quality product and to grow our production with incrementally lower cost tons. We're within three months of seeing an increase in our langbeinite production through improved recoveries at a time when the demand for our Trio product is as good as ever.

Hugh will go into more detail on some of the projects, but before he does, I just want to reiterate that each of our projects, whether they're the headline projects listed above or smaller projects, such as the installation and commissioning of the distributed control system that occurred in Carlsbad during the third quarter, are each building blocks that provide the foundation for growing our production and driving efficiencies throughout our business.

Hugh Harvey will take the call from here.

Thanks, Dave.

Our potash production of 173,000 tons in the third quarter of 2011 represents a 4% increase relative to the third quarter of 2010 and was in line with our expectations.

During the quarter, we had very good performance from our West and Wendover facilities. We also began the harvest in mid-September from our Moab Solar Solution mine, following the summer evaporation season.

At our East facility, we performed the annual scheduled turnaround maintenance, during which we tied in the new fluidized bed dryer, a portion of the [Eldred] project, to the existing plant. We are pleased to report that the new drying system will be handed over from the engineering department to the operations group very soon.

At our East plant, we experienced some reduced production ahead of the scheduled turnaround. There were a couple of pieces of equipment that required maintenance ahead of the planned work. There's -- the result was higher than anticipated production costs from our East mine during the quarter.

Going forward, we continue to anticipate that our annual cash cost of goods sold, net of byproduct credits, will be in the range of $170 to $180 per ton as we have said throughout the year.

We produced 35,000 tons of langbeinite during the third quarter of 2011. This -- excuse me, 35,000 tons of langbeinite during the third quarter. This compares to 32,000 tons produced in the third quarter of last year.

We are looking forward to increasing our recoveries of Trio with the commissioning of the dense media separation portion of the plant, during the fourth quarter. We also anticipate having the granulation plant placed into service during -- early 2012.

I am pleased to report that we are right on budget with the Eldred project.

As we described in our earlier press release, we will continue to invest in and build increased capacity and flexibility into our production system with the approval of the new North compaction plant. This new, more efficient plant was designed to accommodate all of the production from the expansion of our mining and milling operations in our West facility, together with the anticipated production from the HB Solar Solution mines.

The current schedule for receiving the record of decision from the BLM for the HB Solar Solution mine remains on track for the first quarter of 2012. As we move closer to the expected record of decision date, we have updated the project cost estimates to incorporate the changes in scope, to accommodate alternatives described in the draft EIS, as well as to consider cost updates for labor, piping, equipment and numerous other elements of the project.

The Board of Directors recently approved the updated authorization for expenditure associated with the HB mine to an estimated $200 million to $230 million of capital investment. Of this, $30.5 million has been invested to date.

The capital authorization was based on the evaluation and conclusion that the product continues to be an important and financially attractive investment that fits within our overall business strategy of increasing productivity and decreasing our cash operating costs per ton.

During the third quarter, we also commissioned a new mine panel at our West mine, when -- which increased the capacity of their underground mine. We expect to see similar benefits from our new mine panel at the East mine, in the first quarter of 2012.

As touched on earlier, we also completed the installation and commissioning of our distributed control systems and related instrumentation at both our West underground mine and our surface mill at the East plant.

In Wendover, Utah, we are progressing with the construction of a new compaction granulation plant, which has the designed capacity to compact all of our production from this facility. The majority of the steel has been erected and we expect the new system will be in service by the end of the year as planned. In addition, the construction of the new product warehouse in Wendover is progressing on budget and should be in service in early 2012.

Our total capital investments for 2011 is expected to be towards the top end of our previously disclosed range of $140 million to $165 million.

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

Thank you, Hugh.

As noted in our sales results, the third quarter was very good. We sold 190,000 tons of potash, which compares to 221,000 tons of potash sold in the third quarter of 2010, a time when dealers were stocking a nearly empty supply chain.

Additionally, due to the success of the Moab compactor project and the increased granular capacity, we have been able to expand our supply to new markets and strengthen relationships with customers in these regions.

We also sold 54,000 tons of Trio as compared with 45,000 tons of Trio sold in the third quarter of 2010. The strong sales volumes for Trio and the strong demand that we are operating with -- with virtually no inventory cushion.

The benefits of the increased recoveries and increased granulation capacity from Eldred come at a great time, as there is growing demand both domestically and internationally for our sulfate of potash magnesia product that we market as Trio.

As Dave highlighted, the potash market has been stable over the last couple of months. The average net realized sales price we earned in the third quarter for our potash was $489 per ton and $251 per ton for our Trio.

Harvest in the United States began in earnest in the first half of October and has intensified in recent weeks. We understand that many of our customers purchase their potash requirements for the fall season during the summer, as dealers demonstrate a willingness to build a potash inventory into the fall of 2011. We also expect that these inventories will be drawn down as farmers prepare their fields for the 2012 crop.

Given the economic returns that farmers should realize this year, we expect farmers will apply the necessary potash during the fall application window, to maximize yields.

With that, I will turn the call back over to Dave to provide some final remarks.

Thanks, Kelvin.

The third quarter of 2011 showed that the investments we've made in improving the flexibility of our business are paying off. As we've highlighted earlier, the next couple of quarters for Intrepid will be extremely important for the growth of our business going forward. The completion of the langbeinite recovery improvement project and the receipt of the record of decision for the HB Solar Solution mine will put Intrepid on the trajectory of continued success by growing our production with incrementally lower cost tons.

We believe that our ability to effectively fund and execute on our significant capital investments, together with the strength we've shown in our marketing and have built into our operations, positions us well to benefit from the strong agricultural environment.

We'll now open up the lines for any questions.

Thank you. We will now begin the question-and-answer session.

(Operator Instructions).

The first question today comes from Phil Carroll of UBS. Please go ahead.

Thanks. Good morning.

Good morning.

How does the increased level of capital spending for the first phase of the HB mine expansion affect future capacity expansion costs there?

That is, is there a certain amount of up-front infrastructure spending related to this first phase that won't need to be spent as you further expand the mine in future years?

Phil, I think what we've described before is that we have increased the amount of our pond capacities, is one of the items that we've touched on with regards to HB. And clearly the cost estimates include the piping, the pumps to all areas. And we'll have the mill already built. So I think we've got the appropriate infrastructure, certainly, looking forward there.

But as we mentioned, we've really contemplated some of that pond capacity expansion, which I think sets up well for us.

And in the event that operating cash flow doesn't cover CapEx over the next few quarters, how would you expect to finance the shortfall? Would you draw down cash or tap your revolver, or a combination of both? And are there any limits on CapEx in your revolver covenants?

The -- certainly it's a fair question and I think if you look at the cash balances and investment balances, that we have, and you look at cash flows, that's what we're expecting to utilize to fund the capital investment.

So as we look forward, we think that those are covered, by cash on hand and by cash flows. And as you know, we finalized the updated credit facility. That's a $250 million credit facility. They're very typical financial covenants in there. But certainly no limitation on capital, providing that the financial ratios are adequate, which we -- the amount of cushion there is pretty darn significant right now.

Great. Thanks.

The next question comes from Edlain Rodriguez of Lazard Capital Markets. Please go ahead.

Good morning, guys.

Good morning.

Dave, a quick question.

I mean, in terms of like the inventories, the dealers' inventories, how closely are you monitoring those customers' inventories, to the extent that you can? And also, do you get a sense that they're stocking inventories ahead of price increases? Or just more confident that the end demand is going to be strong?

Edlain, I'll take that one. It's Kelvin Feist here.

In terms of inventories, we do monitor it with our large customers. I guess we're just getting into our application season, so they -- they were very full and we're just starting to see a draw down on some of those inventories as we've moving forward here.

I guess, from our perspective, we are watching these, because we're seeing a fair bit of, it's called, sideways trade, with some of these dealers and resellers in the marketplace and that inventory needs to go to ground and then we're going to start seeing a replenishment. And I guess that's really what we're waiting on here, to allow us to move forward here and get closer to our reference pricing that we have on our 560 out of Carlsbad FOB.

Edlain, this is Dave as well.

I think what I'd add is we still get -- we're still getting very positive feedback from dealers that they expect this to be a good fall. So what I would try to take away from our comments is that it's -- we're passing along information. And there's still a high level of confidence and we're just making sure that you all know what we're seeing out there.

Okay.

And another quick question on langbeinite. I mean, production costs went up quite a bit this quarter. I mean, remind us again what caused the big increase? And also, should we expect those higher production costs to stay around for the next several quarters or so?

Edlain, this is Dave.

We touched on it a little bit in our press release and then also in the call here. We had the scheduled turnaround at the East mine and if you remember, all of our langbeinite production comes from the East facility. So when we're down for a period of weeks at the East mine, we still end up incurring a lot of the costs. And actually, increased maintenance costs during those turnaround cycles.

The other thing we touched on, and I'd ask you to focus on, is that we really sold through virtually all of our langbeinite inventory as of the end of the third quarter. So the 54,000 tons that we sold included quite a bit of standard product, at very good prices, as the export market has strengthened, so there's not very much inventory that carries into the future periods.

So we fully expect to be at pretty normal rates again, here, during the fourth quarter and we'll see the benefit of some of the increased recovery from the dense media plant. So I'd really look back to the first couple of quarters of 2011, and that should be a much more normal type cost of goods sold for the company.

Okay. Thank you for the color.

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

Thank you. Just a couple of things.

Obviously the costs with the East maintenance were up a little bit and that's not really much of a big deal and you did point out that they'll trickle through with inventory and all that. But are the actual costs of productions back down to where they were at this point?

I'm sorry, Mark, what reference point are you talking about?

I'm sorry. I'm looking -- I'm just looking at East before and after the maintenance here. Are we back down to where we would have been prior to that project on costs or is there any escalation in costs?

No. I think the -- any escalation on costs that you see is going to be purely inflationary related and we expect to see the ninth mining panel come in during the fourth quarter. It'll be late in the quarter, so we'll really start to see that, that benefit coming through next year.

I think we'll put -- I would ask people to focus on, when you're building your models, is as Hugh mentioned, we still anticipate that our annual cash cost of goods sold for potash will be somewhere in that $170 to $180 range.

The numbers for the first couple of quarters were significantly -- were below that. We're pretty close to that number net of byproduct credit here in the third quarter. So what that tells you, Mark, I think, like you recognize, is that we will have higher cash cost of goods sold in the third quarter as some of that inventory moves through the system. But it's not something that I expect to see on a go-forward basis. So hopefully that answers your question.

Yes, no, that's perfect. And it answered my second question, which was about when that panel was coming in. So that's perfect. Just one more question. I'm not asking you to forecast prices in Trio, but I'm just curious how tight you see that market versus regular potash?

Kelvin?

Yes, I guess, Mark, there's -- it's very tight. I guess we, as Dave indicated, sold down to a very low level, lowest in history. We have demand from both international and domestic that's extremely strong today. So we're really working hand-to-mouth here, whatever we produce, we're able to sell. And so it's much tighter.

I think we've done a great job of creating the demand in some key markets. And it's, I guess, more of a specialty product that seems to be gaining some traction. So very popular in today's economics, with some of these farmers and I think we're going to continue to see that strength as we move forward into the fourth quarter and beyond.

Super. That's what we want to hear. Thank you.

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

Thank you. This is Sandy Klugman sitting in for Don. A couple of quick questions.

One, are you finding that your Canadian competitors are acting more aggressively in the domestic market? Given the significant delta between domestic and offshore potash prices? And two, could you estimate to what extent the drought in the southern plains and flood related rail disruptions decreased third quarter shipments?

Sandy, this is Dave. I'll start and Kelvin, if there are additional items to cover, please jump in.

The -- it's always been a very competitive market. And I think as you see certain capacities come on with the Canadian producers, I would expect to see that competition probably increase throughout the United States. I don't know really that there's a whole lot more to add on that front.

And then on -- Kelvin, do you want to take the second half of that?

Sure.

I'll take the third quarter question and the weather situation. I guess the way I see it, it was more testing our abilities on our transportation logistics side of things as we increased our footprint into a, I'll call it, an expanded geography, this last quarter.

I guess it's a small impact on our realized price, but really it's a weight-average calculation, so it's not easy if you think to get to a specific number for us. But I think it's fair to say that we probably expanded our rail freight by $10 in order to -- compared to our other rail options, in order to move that tonnage. So I mean, both Texas and the Missouri River, did have some impacts, but they're hard to get a specific calculation on.

Okay. Great. Thank you.

And one piece I will -- the one piece I will add is that if you look at net realized -- average net realized sales price, we've continued to maintain a very significant advantage overall against the -- our Canadian -- or North American competitors. And our estimate is that that's about $75 for the third quarter. And that's in light of all of the items that Kelvin's touched on.

Okay. Thank you.

The next question comes from Vincent Andrew of Morgan Stanley. Please go ahead.

Thanks. Wondering if you can sort of provide a little bit more insight sort on the dealer conversations? And I guess, maybe in particular, what I'm thinking about is just farmers, as we get out of this year, and look into next year, is there a sense -- I mean, are dealers telling you that the farmers are coming in with orders in spring and December that they would be willing to forward those orders to you? Or do you think dealers would go net short? I mean how -- what is their level of concern here?

Yes, thanks for the question, Vincent. It's Kelvin Feist again.

I think what we've seen, and last year maybe, and it's pretty fresh -- or a couple of years ago, when we had some challenges, I would say there's fewer dealers that are out there taking a speculative position. They want to see the demand from the farm gate before they take a real strong position on inventories. So I would say that there is a closer relationship there.

And so I think so long as the farmers are taking, the dealers are very interested in taking. And I would say that we're going to get through a fall season and we're expecting a decent application fall because we are ahead of our harvest right now. So it's relatively open and we think there'll be a good plow-down in the corn belt, etcetera.

Sure.

I guess maybe part of what I'm also asking is, is sort of, are the dealers telling you, from their customer perspective, that they don't think they're going to get spring orders until the turn of the calendar year? Or do they think the typical tax sheltering activity is going to take place as we get out of the fall?

Okay. Yes, I think most of the guys are focused on the fall today. We have asked the questions about when the demand for spring and is it there. We believe that it is. We think that farmers have a reason and a tax reason to purchase. So I think what we're going to see is a draw-down of inventory, a purchase of inventory, as farmers come in and actually buy for anything they need for spring.

Okay. Thanks so much. I'll leave it there.

The next question comes from Joel Jackson of BMO Capital Markets. Please go ahead.

Hi. Good morning.

Good morning.

I wanted to check. So the turnaround at Carlsbad East finished in September or it was some carryover to October?

No, Joel, all of that was wrapped up in about the third week of September. So the East plant is back and operating at normal levels at this time.

You're back at full capacity today?

That's accurate. Yes, Joel.

Okay. Can you maybe review maybe what your turnaround schedules are for your various plants, for next year? And maybe for 2013, if you can?

I can give you a very general sense of that. It is one of the -- it's an item that we're always looking at. Historically, we've taken anywhere from a week to two weeks at each of our West facility and our East facility. They tend to come in either the second or the third quarter.

Our Moab facility, if you remember, because of the fact that we are not harvesting during the summer, that's when the evaporation season's ongoing, maintenance just tends to take place over the summer, it's not necessarily a turnaround type situation.

And then Wendover has that spread in smaller pieces throughout the year. So a piece that I think is really important to understand is it's not only turnaround on the maintenance pieces, but as Hugh highlighted, we tied in two parts of the langbeinite recovery improvement project, the de-brine out area and then the fluidized bed dryer. So those types of activities are occurring. And we'll see a few days of that as well, here, in the fourth quarter at East as we get the DMF circuit tied in and then the pelletization plant.

The -- it's an item that we're always looking at, Joel. I can't give you a specific date and number of days, because that'll really be based on the needs and the schedule as we lay that out. But that's -- should be representative.

Okay. What is the typical time to bring up a new mining panel to full capacity, once it's installed and what is the incremental capacity you would expect from a new mining panel, in general?

Let's see. The way we're operating right now, let's use West as an example, and, Hugh, certainly jump in here.

Yes.

If I don't cover it fully. West, we've gone from eight mining panels to nine mining panels. The time associated with that is getting some of the advanced electrical cabling, conveyor system, minor shuttle cars in service and from bringing the equipment down the shaft to getting it in service, you're probably talking a couple of months.

Hugh?

Yes. Typically 60 to 90-days' time period involved there. Both from the logistical standpoint as well as the construction time of utilities and training of new crew. And oftentimes, we look at this both as capacity increase directly from that mine or online as well as being able to use it -- our hoisting capacity more efficiently because we have more panels to draw from and greater reliability underground.

Right. I think another piece to add to that too, Joel, is that it gives us the capacity to increase some of our development tons, which are really preparing areas for future mining. And that's one of the things that we're going to take advantage of, with some increased underground capacity, is trying to increase the ratio of some of our development work.

Okay. And finally, could you review what your current granular capacity is and what you'll expect that to be at the end of 2012, once Wendover starts coming in?

Let's see. I'm trying to remember the numbers that we reported on that. I think we said we're about 75% in terms of granulation capacity. And that'll go up to about 80% or so at -- with Wendover coming online. And then the piece that we'd also ask you to focus on is our expectation is that all of the additional capacity coming on with the mining panel additions through 2011, '12 and '13 at West, plus all of the capacity that will come on from HB will be able to be processed into granular, with the North compaction project that we announced last month.

Thank you very much.

The next question comes from Mark Gulley of Ticonderoga Securities. Please go ahead.

Yes, I want to go back to the marketing side for a second, if I may. Given you're -- the geographic mix of markets you sell to, is it possible you're a little bit more effected by the drought condition and that may be affecting demand, pricing and those kind of dynamics as compared to maybe producers that are a little bit more focused on the central corn belt?

I'll take the question, Mark.

In terms of our geographical mix, I think we demonstrated that we are able to have a larger footprint and expand our geography. So I guess I don't believe that we're impacted any different than other producers.

Obviously they're selling into all of North America. And we can do that. But we're choosing to -- a chance to maximize the returns and stay closer to home and that's what our driver is. But we've demonstrated that we can add geography if necessary.

(multiple speakers)

-- that the truck markets and that maybe you've benefited from strong local demand previously and that sort of is not as good now with the drought conditions nearby?

Yes. A fair comment, Mark, and I guess we're going to have to deal with these kind of weather events from time to time and I think we've successfully dealt with them. But there is an impact, there's no doubt about it. We've enjoyed that decent truck market over the years. Specifically, last year was very good for us and this year, because of the drought, we haven't seen near the traffic that typically comes from that region.

I think, Mark, this is Dave again. This is really the part of the point of the fact that we've continued, even in light of some of the shifting of some of our marketing efforts, we continue to have that net realized sales price advantage. So certainly there's potential to get there and it really gives us a geographical advantage, we think, relative to our competitors.

So I really think that the flexibility of adding granulation capacity in places like Wendover and Moab really allow us to have that reach. And frankly, we see customers looking to make sure that they have multiple suppliers and that's just a piece of the market that exists today.

Okay. Secondly, on the pricing side, if I can, both you and a large Canadian supplier of potash, today, both commented that they sort of see flat pricing consequentially, fourth quarter, as compared to third.

Given the strong profit economics, prospects for good fall application, all those kinds of positive tailwinds, I guess I'm a little surprised that you're as cautious as you are with respect at least to the short-term pricing outlook. And then maybe you can comment on whether or not that changes as we move into the spring?

I guess it's difficult for us to predict too far out on the pricing, obviously. I made the comment that we haven't realized the full benefit of our last price increase. I think as we draw down inventories, we're going to get -- we're going to see that move closer to our reference price list and I think that will happen in the back end of this next quarter.

Right now, there's lots of inventory out there and I guess what we're seeing is some of this trading going on that is putting some pressure on pricing.

And then finally, if I may, maybe we can do this better offline, the HB Solution mine appears to be your largest single project on a go-forward basis. It maybe -- just remind you, some of the key parameters of the increase in capacity, the on-stream date, those kinds of key highlight selling points for that particular project?

Mark, this is Dave. I'm happy to touch on that now. Just as a reminder, the project is going through the environmental impact statement with the Bureau of Land Management. That process remains on track and the latest schedule provided to us by the BLM's contractor is that we'll receive the record of decision in the first quarter of 2012.

At that point in time, we start construction of the pond system, of the injection wells, the extraction wells. We'll start construction of the mill a little bit later, in 2012. And then we anticipate seeing first production at the end of 2013, after the benefit of an evaporation season.

That'll be a fairly moderate amount of production that comes online, albeit meaningful. And then we anticipate being at full production benefit, which we estimate somewhere -- anywhere from 150,000 to 200,000 tons a year. And our initial estimates are that we'll -- we should be closer to the top end of that range.

And I think the important piece to keep in mind is that the cash operating costs associated with those tons are estimated somewhere in the $70 to $80 per ton range, is the information that we've been disclosing.

So the margin opportunity associated with those tons, the increase in productive capacity by 20% to 25%, those are the scale numbers that we have and it makes the capital investment very meaningful. It has an excellent rate of return associated with it. And like we said, it covers off all the bases of things that we know are important to us and then continue to improve our competitive position.

That was perfect. Thanks, Dave.

(Operator Instructions). The next question comes from Ben Isaacson of Scotia Capital. Please go ahead.

Thank you very much.

Just a quick question on the evolution of your sales mix between industrial and agricultural potash. Can you just give me a reminder in terms of how that mix has changed over the last five years and where you think it's going? And what is the margin delta, typically, between the two segments? Thanks.

This is Dave, I'll start on it and Kelvin, please feel free to add to it.

The mix that we have currently and will report in our 10-Q, it'll come out this afternoon, is that 78% of our sales went into the agricultural area. 16% went to industrial, which is predominantly the oil and gas area. And then 6% went into the feed markets. The feed component remains a very important part of our business, and pretty steady and predictable. So that hasn't necessarily changed.

What we saw a couple of years ago, in the 2006, 2007, 2008 time period, when you saw that significant in oil and gas pricing, was an expansion of the amount of tonnage that we were selling into the oil and gas fields, through -- again, keep in mind it's for oil and gas drilling fluids and frac fluids. When you saw the 2000 -- at the end of 2008, 2009 period, a lot of the oil and gas guys closed down some of their capital programs, greatly reduced them. So you saw that percentage shift pretty significantly to the single or low teens. So I think right now, we're -- we feel comfortable with where the levels are, the piece. And maybe Kelvin can talk a little bit more about this, is the way we're marketing today and the flexibility we have, and we just go through the math on whether it makes more sense for us to sell a granular ton or a standard ton, based on the demand.

And so we've gotten to the point where we have that flexibility and we can make the economic decision based on what the demand is. Because we can build whichever product we think gives us the best margin.

And, Kelvin, anything to add to that?

Yes, Ben, I'll just add a couple of things. In terms of comparing the two markets, you were asking questions about the industrial versus our, I'll call it, our fertilizer market, or ag market, we're really comparing a standard product versus the granular. But I'll just talk to our reference price.

We're roughly $25 for short ton differential in reference price between the two products, with the standard being a lower price.

The one thing that you have to keep in mind with the industrial is it tends to be longer contracts in that business area or segment and what we're typically doing is looking at 90- or 180-day contracts in the industrial side.

Okay. So, I guess what I can take from that is that even in an environment of flat pricing in Q4, it certainly wouldn't be unreasonable to see a slight uptick in pricing, just on the industrial side. Is that correct?

Well, I think, as I mentioned, we're moving towards our reference pricing, so that's fair to say across the board.

Okay. That's helpful. Thanks so much.

The next question comes from Farooq Hamed of Barclays Capital. Please go ahead.

Hey. Good morning, guys. I wanted to spend a little bit more time on these new panels at East and West. My understanding of the grades that you have in those mines is kind of somewhere in the range of 8% to 12%. And I'm just wondering, with these new panels, are they going to be in that range? And if so, kind of where are they going to be, at towards the top or the bottom of that range?

I just want to get an idea, to see how that might impact production and costs for next year?

Farooq, this is Dave.

I think the piece to keep in mind is that it gives us a lot of flexibility in our underground mining operations. We certainly anticipate seeing an uptick in our tons mined. And that'll be in a variety of ore grades.

Keep in mind, we have the mixed ore body at East. And there are elements of the mine that are higher in the Trio -- or in the langbeinite grade than others. So to say that it's going to be X number of tons at X grade, I think, is a little bit of a challenge because we really run our mine plan as a system. And we know what we're trying to get out. We're always doing development work. And like I mentioned earlier, we're going to likely see a little bit higher ratio of development tons.

I think you can do a really simple math on it and say that we should see approximately a one-ninth increase in the tons mined, based on that math. But you may see it at different grades because of the development activity.

So our goal, as you know, is to hold the line on our cost piece. Certainly we'll start to see the real benefit of that come through on HB. So hopefully that gives you a little bit of color around it. It's just -- it's a question that's probably more of a detailed answer and one that has to do with our day-to-day mine planning that will be at a level that I don't know that we can get into here on the call.

Okay. No, that's fair. That's still helpful. Thanks.

Just one follow-up as well on HB, your cash costs at $70 to $80 per ton. Can you remind me, does that include the compaction costs?

Let's see. We -- I don't believe we've included compaction costs, largely because we've included the price benefit of granular products and the compaction costs in our economics for the North mine.

Okay.

Or pardon me, the North, the North compaction project. Pardon me.

Right. So like for an operating going forward, what do you think, on a per ton basis, the compaction costs for the HB standard product will be? Or do you have a range?

Let me check here real quick. We're probably somewhere in that $10 to $20 per ton range, Farooq.

Okay. Great. That's helpful. Thank you.

You bet.

The next question comes from Fai Lee of Odlum Brown. Please go ahead.

Thank you.

Dave, I just wanted to get your thoughts on the optimal long-term capital structure for the company, after the major capital spend requirements are finished. Interest rates are pretty low and you've always had a pretty conservative balance sheet. So I was just wondering what do you think about that, maybe, in in the longer term.

Sure, Farooq. Or sure, Fai.

I think we feel pretty good about the balance sheet we have right now. And I think if you look at the returns on the investments we have, having that cash and having the certainty that we can move forward with those capital projects, we think, is frankly a pretty envious position.

I can certainly appreciate the financial aspect of leverage. And it's one that, I'll let you know, we're not afraid to go down that path, to some degree. But having a very solid, having a predictable balance sheet, frankly, allows us to weather situations like you might -- we might -- we saw back in 2000 -- the end of 2008, 2009.

And frankly, for the foreseeable future, I expect that you'll see a very strong balance sheet position for the company.

So 2012 will be a year of significant capital investment. And as we touched on earlier, we should expect to see the cash and investment we have on our balance sheet put to use on the capital project. And keep in mind, I think there are a number of projects that come behind that.

So it's just an ongoing assessment of what's the rate of return on the project relative to the capitalization of the company.

Okay. Thank you.

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

I would really just like to say thank you to everyone for joining today's call and for making the effort and taking the time to learn more about Intrepid.

I hope you all have a great day and thanks again.