Intrepid Potash Inc (IPI) 2013 Q2 法說會逐字稿

Good morning, and welcome to the Intrepid Potash 2013 second quarter conference call. (Operator Instructions).

It is my pleasure to turn the conference over to Gary Kohn, Vice President, Investor Relations. Mr. Kohn, please go ahead.

Thanks, Brock. Good morning. Thank you all for joining us for our second quarter 2013 earnings conference call. Presenting on the call today are Bob Jornayvaz, Executive Chairman of the Board, Dave Honeyfield, President and Chief Financial Officer, and Kelvin Feist, Senior Vice President of Sales and Marketing. Also in the room with us today are John Mansanti, Senior Vice President of Operations; Martin Litt, Executive Vice President and General Counsel; Brian Frantz, Vice President of Finance and Chief Accounting Officer; and Ken Taylor, Vice President of Business Development and Research.

I would like to remind everyone that statements made on this call that are not historical facts or that express a belief, expectation, or intention, including statements about our financial and operational outlook, 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. 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 yesterday and the risk factors and management discussion and analysis of financial condition and results of operations and our most recent annual report on Form 10-K as filed with the SEC.

All forward-looking statements are qualified in their entirety by such factors. Also during today's call we may reference certain non-GAAP measures including adjusted EBIDTA, adjusted net income, and adjusted net income per diluted share which we believe provide useful information to investors. Our earnings news release, which is posted on our website at intrepidpotash.com includes reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures. I will now turn the call over to Bob.

Good morning and welcome to everyone. I know that the Urikali news is on everyone's mind, so let me take a moment to address it. First, we appreciate your understanding of our quiet period and your patience in waiting to hear from us. We are all well aware of this decade old rivalry amongst these large Russian producers that seem to erupt from time to time and influence the market. Our sense is that it may take some time for the dust to settle from this most recent public airing of their differences. In the meantime Intrepid remains well positioned to prosper regardless of how this all shakes out. First, Hugh and I have managed and thrived through $0.50 natural gas, $9.00 crude oil, and $80.00 potash. We have seen adversity, and recognized it for the opportunity it provides. We are not Pollyannaish about today's reality.

But we are prepared for them. We are experienced and heartened by previous similar times. And once again, are ready to prosper from the current confusion and fear. Second, we have the distinct advantage of participating in a local market. Third, we benefit from our ability to produce low cash cost tons from our existing and in development Solar Solution mines. This advantage is all the more critical in the event of increased pricing pressure. The additional low cash cost tons we are bringing online from our HB project could not be coming at a better time. Fourth we have a very solid balance sheet and a capital structure that provides us with a great deal of flexibility.

This did not happen by accident. We are prepared for this situation. In the event we need it, we also have access to our currently undrawn $250 million credit facility. Finally, and very importantly, our capital investment will decrease significantly after the third quarter as the major projects wrap up. Going into the fourth quarter and 2014, we have a great deal of flexibility around our capital investment without having to delay any necessary upgrades or projects. Rest assured that we have and will continue to develop contingency plans around any number of outcomes from this most recent development in the world potash market as Intrepid has proven time after time.

Throughout our history we have remained profitable and committed to our long-term strategy during a wide array of economic and competitive cycles. We have a solid foundation from which to operate that includes significantly modernized plants, a solid balance sheet and capital structure and the ability to strengthen our cash margin and cash flow. For more than a decade, we have been transforming our old, out dated facilities to modern build-to-last facilities. Our three distinct goals in making these investments were to drive growth of lower cash cost tons, create flexibility and to increase cash margin opportunities in cash flow. We are just a few quarters away from completing this transformation and concluding the construction of our major capital projects.

As we cross the finish line entering 2014 what is truly compelling is that when we begin to realize the benefits of having come through the transformation. The complexity of this transformation has been immense. The activities have involved every facility, and touched nearly every employee. Please keep in mind that all of this activity was happening concurrently with the operating teams stewarding the old plants to the point where they are either going to be decommissioned or the upgrades were completed. The combination of our HB Solar Solution line, the West facility and our North compaction project is very powerful in their ability to produce incremental tons, lower our cash costs, create higher margin opportunities and increase our marketing flexibility.

We have invested heavily in our milling and refining processes at West to increase throughput significantly, and to increase recovery systems well beyond the original capabilities. These investments in the mill were made to complement the investments we made in the West Mine, that increased the amount of ore being brought to the surface. The results of this integrated investment and process refinement is going to be record amounts of material being recovered at West and being sent to North for compaction. We are developing a plant that is better suited over the long run to handle more variability in our ore as we continue to expand into the area we are mining. At HB we have most of the pond work done and we have 15 of the 18 ponds filled with brine. Construction on the processing plant is progressing nicely so we expect the first tons before year end.

All this activity is leading to the ramp up of more meaningful tons in 2014 as we work towards full production. It is gratifying to see this multi-year project coming online as we draw closer to replicating our successes at Moab and Windover on a much larger scale. At the North site we will use state of the art compactors to handle more efficiently all of the material being produced at West and HB. Importantly, these new compactors, as we have seen in Moab and Windover, can process a wide array of material including the previously difficult to handle fine material. This new facility will be more efficient, more reliable and give us the ability to be more flexible in our marketing and production mix to deliver an even higher quality product. We are ever so close to being through this transition.

At this point we have just a few short quarters to go in the final stages of the commissioning process of the last two major capital projects and recognize that these next two quarters will see variations and we expect some reductions in our production rates because of the recurring starts and stops that occurs during the process of implementing the upgrades.

I can say emphatically, however, that I now see all of this hard work and effort coming together finally. I am excited to get to the finish line and enter 2014 confident that we have built an even stronger company. I would like to remind you that none of these projects are online as we speak nor are they reflected in our current cost structure. As it comes on, you are going to see Intrepid produce much lower cost tons. Now Kelvin Feist, our head of Sales and Marketing, will update you on our sales results and market conditions.

Thanks, Bob. Despite the limited demand caused by the compressed spring season, we were able to sell 184,000 tons of potash in the second quarter. Our ability to sell all of our production in the quarter was a direct result of how well we positioned ourselves and our product for the shortened season. Through our strong customer relationships we effectively utilized warehouse space and benefited from having our production facilities being in close proximity to the end markets. As we look to the fall, we see ourselves as well positioned to benefit from a number of positive potash demand trends taking shape. First, farmers will need to replenish the potassium levels in the soil that are being depleted during this growing season.

Second, farmer economics remain favorable, specifically potash pricing relative to commodity prices, even with the recent decreases in corn prices. Third, farmers who typically do not apply potash in the fall may consider this option to balance workload and remove the risk of missing the application window next spring. We have all seen that potash pricing has been trending down in recent weeks as reflected in the summer-fall announcements. Based on recent sales activity and the Urikali news, we foresee some downward pressure continuing as we fill out our order book with fall demands through the second half of 2013. We continue to be advantaged by being able to sell what we produce annually. We have a comfortable level of granular inventory which will allow us to meet our customer's needs this fall.

We are excited about the new HB production and North compaction plant. We are already working hard to ensure that we have the relationships needed to place these new tons from our HB Solar Solution mine. We have seen early signs of success here, and encouraging degree of receptiveness in the market. As we have said before, the state of the art compaction plant at North will create flexibility for us to compact up to 100% of the HB and West production, which will allow us to pursue the highest margin sales opportunities. We will also further improve customer satisfaction by delivering a higher quality product into the marketplace. All in all, we are confident that farmers will farm, customers will buy fertilizer and Intrepid will be successful in selling all of our potash. Thanks, and I will now turn the call over to Dave.

Thanks, Kelvin. There are several highlights in the second quarter that are worth noting. On the potash side, we produced 182,000 tons, an increase of 7% over last year's second quarter. The strong production results drove a cash operating cost of goods sold per ton of $186, in line with our expectations. For the first half of this year, cash operating cost per ton equaled $180, which is 4% better than the first half of 2012. The results for Trio continue to improve, from the work we have done to optimize the plant and bring it closer to its design capacity. We produced 50,000 tons in the quarter, which is more than 80% of the maximum quarterly output and an improvement of more than 50% from last year's second quarter.

We lowered our cash operating cost per ton by 14% to $177 per ton. We sold 35,000 tons at an average net realized sales price of $359 per ton, which is up year-over-year and sequentially yet again. We are very pleased to see these results, particularly the strong cash margin and cash flow contributions, affirming our decision to make the investment to produce and sell this high value specialty product. Balance sheet strength, capital structure and effective use of long-term low-cost capital continue to be essential components of our overall strategy.

At quarter end, we had cash and investments totaling $129 million. And to date we have not drawn on our unsecured $250 million credit facility. The results this quarter include three items that are somewhat isolated that we have detailed in the reconciliations of net income and earnings per share in the earnings release. The net effect of these three items was a $1.4 million reduction of net income or $0.02 reduction in earnings per share. We have made great progress and are nearing completion on our major capital investment projects. Bringing the new elements into service at West requires that we stop and start the plant more than we would in a normal operating environment.

As such, it has become clear that this will impact our production rates over the next two quarters as reflected in our updated outlook. We expect this will result in a higher cash operating cost of goods sold per ton for potash in the back half of the year which is mostly driven by this variability in our production forecast. As we look to 2014, cash operating costs per ton will begin to come down again as production increases. The payoff, which will be realized quickly as we enter 2014, is increased production, lower cash operating costs per ton, and a plant that is more efficient and stable over the long-term. In light of the market's singular focus on production costs relative to reset pricing, it is important to remind people that we currently operate two solution mines, Windover and Moab, with a cash operating cost that is in the lowest quartile of cash costs per ton.

Our West plant is in the middle of the pack and East from a potash only perspective is our highest cost facility. That however ignores the meaningful margin and cash flow contributions I described earlier with our production of Trio from East. The other compelling part of the equation is that we are bringing on significantly more tons from HB at a cash cost that will be in the $80 per ton range. This is happening at a time when most if not all of the expansion projects of other producers will be cancelled because the cost per ton just does not make sense. So we seem to be painted with a very broad brush as a high cost producer.

But that is just not the case. This is a discussion about individual mines rather than a discussion about entire companies. We believe that we are at the cusp of delivering on our plan. And we are looking forward to having a more singular focus on operations as these major capital projects are completed. Our strategy remains straightforward. Pursuing the opportunities that increase our production and lower our cash cost per ton, marketing our products in a responsible manner, focusing on relationships with our customers and achieving the highest average net realized sales prices in North America. At this point, we are ready for questions.

Thank you. We will now begin the question and answer session. (Operator Instructions). First question today comes from Vincent Andrews of Morgan Stanley. Please go ahead.

Thanks and good morning everybody. Have you had or have your customer conversations changed at all? Maybe it's too early from the last couple of days, but are customers still willing to take fall tons at the current price or are they concerned that price is going to go lower? Any change about their willingness to take product unpriced, or how is that conversation evolving so far.

We are going to let Kelvin answer that. Thanks Vince.

Sure, Vincent. I think it is a little bit early to be able to tell you exactly how this is going to go. We are having conversations with those folks. We had settled on a fall fill program and I guess today there is a number of things that are up in the air. We are going to continue to ship. Our sense is that it is a wait and see approach to where the thing settles out today once this thing all gets figured out.

Maybe just as follow-up keeping in mind what you said about your different mines have different COGS profiles, in the event over the next six or 12 months that there is a period of time where potash prices go below the cost of production at a particular mine, how would you think about the way you would operate that mine.

I mean we have got a long way to go to get there and so I mean we have contingency plans for just about everything that we need to be thinking about. As we ramp up our line (inaudible), let's not forget that the Windover facility has been in continuous operation since 1932. So it has seen lots of difficult times. Moab's been in continuous operation since 1962. Our West mine's been in continuous operation since 1932 as well. And our East mine is probably -- well it is our highest cost facility, but as we continue to ramp up the langbeinite and improve the sylvite recovery systems over there we are long way away from getting there. So we have a contingency for everything.

We understand where each facility fits in. The good news is the HB will be producing tons at a very, very low cost. We just don't envision this disagreement between these Russian producers as being any different than the previous disagreements we have seen from them. I think what we have seen lacking in some of the papers written is the historical perspective. This disagreement among these guys has been going on for decades. Slightly different players but it's been the same argument. And every time, it has provided an opportunity for those of us that have facilities and to add. We look at it a little bit differently having lived through commodity cycles and commodity disruptions, as I said earlier. Hugh and I have thrived since $9.00 crude oil, $0.50 natural gas, and $80.00 potash. So we tend to view this more as an opportunity. It is adversity, we are not Pollyannaish about it, but we have contingency plans for it and we are ready for it.

Okay. Well I hope we don't get there, and I'll pass it along.

Next question from Mark Connelly of the CLSA. Please go ahead.

Thanks. Two questions. Your CapEx plans over the next couple of years include a lot of small stuff that from previous conversations sounds very discretionary. Can you give us a sense what and how discretionary the 2014 and 2015 numbers are?

Sure. Do you want to get your other question in there too, Mark, or do you want to --

Sure. The other question is just an update on East. Are the operational improvements there complete and just curious where the productivity is relative to where you expected to get. That was all.

Going to the CapEx question. I think that is a fundamental part of the overall discussion here. And when we look at the major capital projects, what you have to keep in mind is that cash is in the bank to complete those. We expect that the bulk of that capital will be deployed here over the third quarter and the remaining portion of that in the fourth quarter. You hit it on right the head, Mark. There is an incredible amount of flexibility and discretion that is involved with our capital plans going forward. So, you combine that with the balance sheet that we have, you combine that with our ability to flex the operations where we need to, and I think people really need to take that into consideration when they are considering Intrepid and the overall capital investment scheme. I know we had talked about last quarter that we would see that capital probably come down to that $150 million level. The world changed a couple days ago. And the good news is that we have the ability to change that quite dramatically, and you are going to see a much lower capital number going forward. The good news of that as I touched on earlier is it provides our operating guys a singular focus on optimizing our operations. I think we are seeing that and kind of weaving into your next question on East. When we have given our guys the opportunity to do that, what we are seeing at East on the langbeinite recovery side is very strong performance. We recognize that it takes a little bit of time to bring those new plants online as demonstrated here, but what we are seeing and what I expect to see is that we are going to be hitting those design rates. All of that is a very positive outcome for us as a Company.

Thank you.

Your next question comes from Christopher Parkinson of Credit Suisse. Please go ahead.

Good morning, guys. Just a quick follow up on a question that was previously answered. In the previous discussions, up until a few days ago, just out of curiosity, you mentioned the fall season is mostly going to be much stronger than the spring season. But what were you previously hearing in your distribution channels regarding about inventories and risk appetite prior to this announcement.

I will start with that. We know the retail system is basically empty. When we look behind it, some of the warehouses and distributors have consignment tons in place ready to go into that market. But the key part of that is that the retail portion is empty. So we see the fall as being extremely strong from a volume standpoint. We still see that in the discussions that we are having. We still see it as being an extremely strong fall from an application standpoint. Kelvin, if you want to add some additional color.

Yes, Christopher, if I can add a couple things. I think that customers are really looking for stability and this latest impact has kind of scared everybody. Now everyone is waiting for things to settle again. So I think stability is the word that I think about there. We also have got to remember that the farm economics are strong still. I mentioned it in the previous comments. These guys are still going to farm. Our sense is there is still really good demand for this fall. Potentially a little bit of a compressed window this fall as well if we get cooler weather and we don't get harvest off in time. But I think everyone is gearing up for a significant fall, and that has been the conversation. We were just down at the Southwest Fertilizer Conference in San Antonio. 1,600 folks down there, and we met with a goodly portion of those folks and they are all speaking the same language and they are all indicating a really good fall that they expect. So we are confident that the demand is there. So long as the weather allows us to put the product on the ground.

Perfect. Thank you very much.

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

Hi, this is actually Adam for Joel. I just had a quick question on potash cash costs. Obviously it's a pretty hot topic right now. For 2014, I am trying to figure out -- when you are not considering the HB tons that are coming on at $80 a ton. We know that is happening. So from the existing facilities are we going to be looking at production probably closer to 850,000 tons versus for this year it's only 800,000 tons and costs more in line with your $170 to $180 guidance that you had previously for 2013. What does the 2014 cost profile look like absent HB.

Adam, this is Dave. The numbers that you are describing I think are very directionally in line. What I would tell you is that we would probably be there in the third and fourth quarter if the timing elements around the West surface capital investment and the North compaction if those had synched up perfectly. You would see that higher recovery rate of feed going over to North and so we really anticipate that coming through in 2014. It does increase our overall production profile.

It drives the unit costs as you know and then you can't ignore the HB tons, frankly, and I think it is appropriate for you to capture those. Clearly, there is a ramp up phase at HB as you guys know with Solution mine and Solar Evaporation. So most of that, there is going to be a heavier weighting to the back end of the year in 2014 on HB to factor in. The point being that each one of these items continue to drive the cost exactly in the direction that you just described which are to the left side of the cost curve.

Adam, this is Bob. I just want to reiterate that the new West mill has not been up and operating yet in its new state of the art design mill that will come on some time at the end of the third quarter or early in the fourth quarter. And that our current existing mill that is 40 or 50 years old that we have been upgrading, renovating, and making significant changes to. testing and experimenting with different milling processes so that we can take all of that material and it can now be compacted in our new compaction facility.

We couldn't compact that material before. We have so many new changes, none of which is has been turned on yet, all of which is still in the testing, refining, and commissioning stages, that are the exciting part of about Intrepid. I mean our timing just couldn't be better given the light of what is going on in the marketplace.

Okay, thanks. And just one more quick other question here. It is on Trio. Given your Q3 guidance of 30,000 to 40,000 tons, the implied Q4 given your full year guidance is about 60,000 tons at Trio. That is up a lot considering what's happened in Q1 and Q2. Is that a better run rate for 2014? Or what are your thoughts on 60,000 tons in Q4.

Yes, Adam, I think you are seeing the same trend that we are seeing on our operating side. You look at the ramp up historically here at Q2 up to 50,000 tons. We have been making -- first quarter we talked about some of the actual design changes that had taken place in the plant that showed the results. The second quarter here some of the operational and maintenance timing questions have been sorted through so you are seeing the numbers just as we are seeing them. You extrapolate those and it shows you that we are getting right to where those design numbers were that we had talked about.

Okay, perfect. Thanks.

You bet.

Next question from Don Carson of Susquehanna Financial. Please go ahead.

Thank you. A couple questions on the domestic market. Everyone is focusing on offshore prices. The Canadian producers are seeing about a $30 price premium adjusted for grade in the domestic market, which is ironic since this is where the cartel doesn't operate. But with two things. One, are you worried that the Russians and Belarussians are going more product into the river system as they ramp up production? Second, and more importantly, Agrium has mentioned that probably the one tangible evidence of synergy between wholesale and retail is your ability to put more of the advanced (inaudible) tons through the retail system as they ramp up Vanscoy in 2015. So A, what impact do you think that has on overall pricing in the domestic marketplace in terms of the premium and B, how does that affect you directly in terms of sales you might have through the Agrium retail system that would be backed out.

This is Dave. Why don't I start with the first question and then Kelvin, if you could address the second half that would be great. I think the way I think about the domestic market, I think you really have to consider what has transpired here over the last probably 18 months with the amount of warehouse space that has been put under consignment by Mosaic, by Potash Corp. We certainly have secured throughput arrangements with certain warehouse locations so there is a question about where those tons would go. Because many of those are multi-year deals.

And so the ability frankly to bring more tons in that is a big part of what that strategy was that the larger Canadian producers really started to push over the last couple of years. I think that is a piece that really does have to go into that question. I don't have a good answer for you in terms of what flex granular capacity there is from the Russian producers. I think that is an item that really needs to be explored because as you know the US market is a granular market. And that is why our investments in things like Moab, things like Windover, North, and our ability to compact and really flex our production where we need to become so valuable. With that, Kelvin, I will turn it over to you on the Agrium question.

Sure. Actually, if I can touch on the river first. I think the first piece on the imports is that there is a lot of players on the river and it is very competitive. I would say the Canadians are much more aggressive on the river than they have been. You see a number of other players. I wouldn't say it is easy to just add tons to the river for any one player. It is -- there is a number of different warehouses that get filled and it is a little bit challenging to just flip a switch and add hundreds of thousands of tons. On the Agrium question, I guess everyone has key customers as we do and certainly they are a large purchaser of potash.

I guess there are places where we fit best into their system and there are places where other producers would fit better for their retail system. Our strategy is really to grow our footprint with some of these new tons and go into some new geography and supply our old geography. I guess we don't focus on one specific customer. We have a wide array of customers. We are convinced we will easily place the tons that we are going to produce here in the near future.

Thank you.

The next question comes from Mark Gulley of BGC Financial. Please go ahead.

Good morning guys. Bob, you talked about balance sheet flexibility, you talked about prospering in difficult times. So I'd like to ask you to maybe take that one or two steps further. One way to prosper in tough times would be to initiate a share repurchase program to take advantage of what might be viewed as a bit of an irrational drop in the share price. Can you address that first and then I have a follow-up.

Well, from an Intrepid standpoint, I think retaining as much balance sheet flexibility is the smartest thing that we can do so that we can navigate through times. I hear what you say in terms of trying to repurchase shares. If I were to separate out Hugh and myself from Intrepid, I think we represent an incredible value right now. So I think it's Intrepid's job to maintain its incredible balance sheet flexibility. So I don't think today until things settle out it's the right thing for Intrepid to do in terms of being a share repurchase program.

I think it's to make sure we see what is going to happen with this Russian situation. As I said earlier, we have seen it before and historically the differences have provided an opportunity in the long-term. This is not the first time that these guys have argued like this. It is probably one of the more public times but it's not the first time. We have seen it. We are used to it. We understand it. And so, I just don't think it is the appropriate use of our excess cash right now to be distributing it at this time when things are uncertain. I mean some of the analysts were writing obituaries about Intrepid yesterday. So we are going to take our time and come up with a strategy that allows us to prosper as we always have.

I guess I will take that as a no. Secondly, if I could extend it the other direction in terms of prospering from tough times, are you suggesting that some of the potash juniors might be viewed as interesting if you could take advantage of what is happening in the markets to perhaps acquire more reserves for development later? I am just trying to understand what do you mean by prospering during times of adversity. Can you add some more meat to the bones there.

Well. I think I did. I think Intrepid has balance sheet flexibility that allows it to wait and understand what is going on. We are going to continue our capital program. We have already enhanced our opportunities with our customers to expand our footprint. We understand what that looks like. We really don't believe this diversity that we see -- or this adversity that we see with the Russians is going to be a long term situation. We have heard this bluster before and it's never really played out the way that we have seen it analyzed in the last few days. I will leave it at that.

We don't see any opportunities from any of the juniors. We have looked at all of those projects before, we have analyzed them all, we've seen them all. And we don't see the opportunities there. I think Intrepid needs to keep its cash on its balance sheet, but we recognize that there is great value in our stock at these levels.

Okay. Thanks for the color.

Next question from Andrew Dunn of Keybanc Capital Markets. Please go ahead

Good morning, guys. I appreciate you guys have been in this business for a long time. I was hoping maybe you could let us benefit from your historical perspective a little bit. Maybe give us an idea of when the last time you saw something like this happen where it looked like the market was going to get kicked in the teeth, what happened and how long it took for the market to regain some normalcy after that.

Well, we can go back to the late 1970s when the Canadians nationalized potash and the privatized potash. We can go to the early 1990s when the Russians were flooding the market after the disintegration of the former Soviet Union. We can go to the 2003-2004 period when we had a similar situation to this and literally potash got down to $82. We have seen corn prices trade around $1.00 to $1.50 and potash prices still come back strong. I think people still underestimate the supply tons that are at risk around the world and we have all seen through our various brownfields and the greenfields that have been discussed how hard it is to actually produce potash, produce potash on a cost-effective basis. If you were to look at some of the North American competitors' cost structures, we have seen some of them rise as they deal with water in-flow issues as they have for many, many years. We have seen floods, we have seen water incursions, we have seen a variety of different supply disruption problems that historically have happened. So when we go back and we look at this, it is not pretty. It is not fun. It is not an enjoyable time to live through. But as I said we have been here before.

We roll up our leaves, we do a better job at operating as we have always done through these times and we get through. We try to invest in the right things that will provide return when the market stabilizes and then resumes an upward direction. I can remember $9.00 crude oil in the late 1990s. Everyone felt like OPEC was going to come apart. You persevere through these times. I have sold $0.50 gas on the Moxa Arch. And we persevered, and we sold $13.00 natural gas in 2008. We have been here. We understand what it is like to live through a cycle and balance sheet strength is so important and focus on your operations. It is hard to describe the anthill type of activity that we've had down in Carlsbad with all of these projects going on simultaneously.

Besides having a thousand employees when you have hundreds of additional contractors all operating on top of each other at the same time, it provides for difficulty in execution on the capital side as well as focus on the day-to-day operations. We are nearing the end of that. We see the huge light at the end of the tunnel. And the good news is we know exactly that it is daylight and it's not a train. We are confident about that. I don't know if I can give you any more color, other than I have been here before and historically these times have provided opportunity when there is confusion and fear in the marketplace. You just need to remain steady at what you are doing.

Okay, thanks for that. And just one follow-up if I may. You did comment that your production outlooks have changed. You did cite the upgrade swapouts at your new facilities and the upgrades there. I am just curious is there something different about this process? Some new data that you've gotten in the last quarter different from what you knew the quarter before that or is it just more certainty in the timing? And do you think there's -- it looks like the majority of this is in 3Q? Is there any risk, significant risk that any of that can spill over into 4Q.

Adam (sic), this is Dave. The clarity on it is just we are closer to that date. Like I touched on earlier, we are making a lot of changes in the West mill to really increase recoveries which provides a different feed stock to our new North compaction plant. Synching that up with the timing of commissioning at the new plant at the same time we are still running the old plant that just based on its age requires a fairly specific feed so as we go through those test phases and different pieces of equipment come in, I would love to tell you that it is something other than just we are closer to it and we are recognizing that there is going to be more interruptions than we had first thought when we had set the budget.

It is as straightforward as that really. The majority of it is in the third quarter as you have seen. I think there is a notion that if it gets wrapped up in September or if it gets wrapped up in October the part that I think is helpful for people to understand is that we can build basically the feed that goes over to the North and then because of the rate flexibility we have with that compactor it actually gets made up when the North plant is up and running. It may flex a little bit, but it doesn't change the overall production over that period of time if that -- hopefully that helps.

Okay. Thanks again, guys, I'll hop back in queue.

Next question from Michael Hoffman of Wunderlich. Please go ahead.

Good morning and thank you for taking my questions. On capital spending can you help us with what your maintenance capital spending is? So take all the growth out, it's just maintenance?

This is Dave. We have been at a point where we have, I would say in a price environment that we have experienced over the last of couple years where we have estimated it out to be somewhere in the $40 million range or so. The point I would make is that there is a lot of flexibility in that. Maybe even back to Mark's -- Mark Connelly's question earlier. The amount of flexibility we have in our capital program is very significant. So if there is a -- if price environment goes where so many of the research analysts have painted it to go, you can look back even to 2008, 2009.

The first thing you do is you stop your capital. You look for areas where you can defer. You look at areas that are discretionary and you tighten your belt around that. And we have that advantage. It is the benefit of frankly having made all the investment that we have over the last several years. I don't see that as a number that I would draw a hard box around. I think recognizing that could be made smaller is a very real scenario.

Okay, but the point being, you are spending at over $200 million. So there is a monstrous swing between 2013 to 2014 if you just had to do just maintenance.

That is a great point. If you were to take the midpoint of the capital range for this year it is -- I think the midpoint is about $260 million. The bulk of that is HB. North is nearly complete. Moab is nearly complete. The West upgrades are probably about halfway through. We know where those big dollars are. We also know the timing of wrapping that up. So your point is spot on. It is a significantly different picture. As I touched on earlier, the cash is in the bank for those projects that we are going to be completing here in the next few months.

Okay. So on free cash flow, if you are given -- the question is can you be positive in 2014 without HB but having the benefit of these upgrades you are doing at the West mill (inaudible - overlapping speakers) and the price environment we are in. It is the Urikali price environment.

I think we can. Everything that we have run shows that we would be. Clearly the capital component is a piece of that. It gives us a lot of choices at that point in time in terms of how we think about investments and the timing of those investments. The fact that we have made the investment. I'm repeating myself here, but the fact that we have made the investment in the plants to this point just tells you that there is a much newer facility there that has probably got a lower load than you might have in a different environment.

I am not asking for guidance as much. But am I hearing from you a realization and an appreciation that you should be free cash flow positive so do whatever it takes to be in 2014?

I think that is a very prudent operating model for us. Very intentionally giving guys the opportunities to focus purely on operations I think will have a huge benefit to us as a Company as these new investments are brought to a close.

All right. And as I think about all of these investments now and the cycling. When you look out over the next year and-a-half, when do you hit that run rate of a million tons of production at this point, based on where you are in your understanding of everything coming online.

Certainly on the potash side, I think as we move into 2015, that is really when we start to see more of the full benefit from the HB tons. That is the time period that I would anticipate at this point, Michael.

Okay. And then how late in this quarter can you ship so you can allow this price issue to settle out? How much flexibility can you have on -- you can wait and wait and wait and let some of the dust settle.

Kelvin, do you want to address that one? Yes, that's a good question.

Let me start out by first, we have got customers that want tons shipped in the very near future. We have customers that want tons now. And so some of those tons are going to get priced now because they want them now. And so we are going to see some clarity on where this pricing falls out pretty quickly. And then I assume that the Canadians are going to come out with some direction in terms of where they see things going. But we do have customers that are wanting shipments now and those tons will get negotiated and priced now. And that is all going to provide a very dynamic, iterative pricing scenario. I don't think we are looking at one day in the future where it all gets resolved. We are seeing customers that want tons as we speak. Kelvin, if you can add to that.

Michael, if I could just add a couple things. I think our customers are very cognizant that logistics are very important especially in a compressed season. I guess as we push back, and whether it's a week or two weeks when we get resettled I see them coming in and putting their orders in especially the large guys that have got a lot of volume to ship. I think both from a farmer and a retailer perspective in the fertilizer side they are thinking about this and they know that they need to take a position at some point in the very near future. Our sense it will happen in the not too distant future and we will easily be able to supply their needs prior to the end of the quarter.

Okay. And then one more. The Urikali supposedly has announced a 500,000 ton shipment into China but didn't get any pricing, it's for delivery in the second half. Any sense on what that price is?

Michael, this is Dave. What I have seen and it is really coming out of the research community, there have been --

But we don't know what we're talking about.

Yes, well, I am not going to address that. (inaudible - laughter)What I have seen is that price is in the $350 to $360 range. Which I think is kind of interesting given some of the, frankly, inflammatory comments that have been made otherwise.

That is standard. You are selling granular. Granular sells at a premium. If I start connecting the dots, this is a (headfake).

I think you -- well, that, I think we are really just going to have to let time unfold a little bit. I don't know that I can add to that speculation. But you are addressing I think very important points.

The other thing to always remember is that China is buying in half million and million ton increments. And our customers are buying in 1,000 or 5,000 ton increments. Those things are very priced differently. That's why we've seen the North American market always have such a good strong premium. There is still value placed on just in time inventory. There is still value placed on quality. There is still value placed on diversity of products. We are in a diverse strong agricultural market which is our home market. We are going to keep our heads about us. As I said we see this as an opportunistic phase. It is adversity. I don't want to lead anyone to think that we're Pollyannaish about it. We are very realistic about it. But I think you hit the nail on the head earlier. We will get through this.

Okay. Last thing. When are you going to kick open the doors and let us come kick the tires and see the benefit all of this money you have spent?

Michael, we follow up with you outside of this call on that. Suffice it to say we are certainly trying to get that planned.

All right. Thanks very much.

The next question comes from Christopher Perille of Bank of America Merrill Lynch. Please go ahead.

Good morning, guys. The full expectations, the robust demand that you and your customers are looking forward to, is that a catch up from the spring, farmers that missed trying to build back up? Looking ahead, for the Spring of 2014, do you foresee that being more a normal application season or do you think some of that gets pulled forward into this robust demand scenario coming in a couple of months.

Why don't I start and then Bob or Kelvin if you guys want to add to it, that would be great. I think the fact is, Chris, and many folks have recognized it, farmers really had to make a choice in the spring. They had to make a choice as to whether or not they were going to finish up their dry application work for P or K or they were going to get seed in the ground. And so they took the only choice they could. What that is going to result in, frankly, is a higher level of depletion of nutrient in the soil.

We continue to see that situation as measured by university systems, by the extension offices, show net K decreases. I think if there is a price impact that comes through the market it actually makes the demand side increase. Those have tended to have a very strong negative correlation to one another over the years. You can go back and look at summer -- or spring 2010 and then fall 2010 in terms of how quickly that demand can ramp up. As Kelvin touched on earlier we think farm economics continue to be good. Obviously input prices are a small component overall. Looking across the complex I think it would tell you that it may even be a smaller component making the economic argument even stronger. I don't know if you have anything else to add to that.

No, I don't think so.

All right. Just a follow on to that. Is there any risk out there when you talk to your customers? Are they nervous about a tighter fall window with the late harvest coming off the field.

Christopher, it's Kelvin here. I think there is always risk in farming. I think that it is inherent. The reality is we have had relatively normal weather through the last few weeks. We have gotten timely rains which are encouraging to the farmers. They are looking at a pretty good crop out there. I think it looks like a very good crop coming off. I would say there is a general positive attitude at the farm gate today which really tells us that there is going to be some good application this fall. Beyond that, I really can't speak to it. I mean, there is always logistics challenges. We demonstrated this spring that these guys can cover a lot of ground in a short period of time. If they need to this fall, they will do the same. I think we are going to be positioned to apply product in a big way in a short period of time and we'll have some success as a result.

All right. And then one final question. Dave, what is the optimal capital structure in a more normal or less volatile pricing -- or less volatile pricing environment for you.

I think a big part of that really depends on what you have got ahead of you, Chris, and I think in our situation we have had a very significant capital investment program so making sure we had that cash on the balance sheet to fund it so that if you are in a volatile commodity market and you see volatility you can wrap up the projects that are very important to you, it shows that we probably have the right capital structure at this point. I think several questions have hinted around it. I think step one here is to see where all of this settles out. As Bob mentioned we have drawn up contingency plans around a lot of different scenarios, and they each have a different outcome, Chris, so I don't know there is a singular answer to your question, frankly.

I appreciate that. Thank you guys and good luck.

Hey Brock, this is Gary. It looks like we have time for one last question, please.

Okay, thank you. The last question today is a follow up from Mark Gulley of BGC Financial. Please go ahead.

Yes, thanks for taking the follow up. Bob, a lot of discussion today about increasingly more sales on consignment of potash with the potash [corp rep] grudgingly accepting that is the new model. How do you think about how that changes the pricing visibility for the industry and for you in North America.

It is a great question, Mark. I think consignment programs are in direct conflict with some of the production cutbacks that have been announced. Once again, we are taking some time to understand what the Canadians are trying to do as they have announced some pretty significant production cutbacks yet they have allowed some consignment programs to stay in place. We have a very empty retail system yet we have some consignment tons behind them. I don't think that the consignment programs have been the best stewards of price. So it is going to be interesting to see how those programs play out. We do have a small percentage of our production that is on consignment. It is not a program that we like.

It is not something that we think is the most optimum in terms of stewarding price, but it is what it is in today's environment. So as we look forward and we see production cutbacks, we are going to be interested to see where the market goes as it relates to this. Because I think that those are kind of conflicting behaviors. Once again, I think the next couple of quarters is going to play out a lot into where we are headed. We have seen situations similar to this in the past. Back in the Mississippi Chemical days, I can remember when Mississippi Chemical was in financial trouble and they would literally take cash for an order upfront and we had consignment back then. So we have lived through it before.

This is a long answer to your question. I hope I have answered it or given you some color. If you want to follow up, I am happy to take the question but does that answer your question?

It sure does provide a lot of color and your frustration comes through pretty clearly.

I think -- I appreciate everybody dialing in. We appreciate the questions. Hopefully, folks get a sense of what we are thinking and how we believe in what we have done at Intrepid. At this point, I think we will conclude the call and again I appreciate everyone's interest in Intrepid.