Intrepid Potash Inc (IPI) 2013 Q3 法說會逐字稿

Welcome to the Intrepid Potash, Inc. 2013 third quarter conference call. As a reminder, participants are in a listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. (Operator Instructions). At this time I would like to turn the conference over to Gary Kohn, Vice President, Investor Relations. Please go ahead.

Thanks, Brock. Good morning. Thank you all for joining us for our 2013 third quarter earnings call. Presenting on the call today are 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 Hugh Harvey, Executive Vice Chairman of the Board, John Mansanti, Senior Vice President of Operations, Martin Litt, Executive Vice President and General Counsel, and Brian Frantz, Vice President of Finance and Chief Accounting Officer. Bob Jornayvaz, our Executive Chairman of the Board, is traveling is unable to join us today.

I would like to remind everyone that statements made on this call that are not historical fact or that express a belief, expectation, or intention, including statements about our financial or operational outlook, are forward-looking statements within the meaning of United States securities laws. These statements are not guarantees of future performance and are based on a number of assumptions which we believe are reasonable. Forward-looking statements involve risks and uncertainties that could cause actual results to differ from our expectations. You can find more information about these risks and uncertainties in our annual report on Form 10-K and subsequent quarterly reports on Form 10-Q as filed with the SEC.

Also during today's call we may refer to certain non-GAAP financial measures, such as adjusted EBITDA, adjusted net income, and adjusted net income per diluted shares. Our earnings press release includes reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures. Our SEC filings and our press releases are available on our website at intrepidpotash.com . I will now turn the call over to Dave.

Thanks, Gary. Good morning and welcome to everyone who has joined us for today's call. The most important news for the third quarter is the progress we continue to make on our new and upgraded assets that will enhance our operations by lowering cash operators costs per ton, increasing production, and providing more flexibility in our processes to allow us to pursue the best margin sales opportunities. This has been a planned, multiyear program that is now reaching its desired end goals.

In the quarter, our teams brought each project closer to the finish line setting us up to start realizing the benefits of the investments as we move to 2014. Specifically, we have recently placed the first two lines of our new North compaction facility into service, and are happy with the new capabilities that the plant offers. We completed construction of the HB wells, pipeline, and ponds and beginning in August, we have filled all the solar evaporation ponds with potash-rich brine. We've continued construction of the HB mill with a the target of beginning our first harvest of potash and delivering first production near the end of this year. We completed the drilling of the third cavern system at Moab and we're set to begin circulating brine, and we continue to make upgrades for improved recovery at our West facility.

As we bring these projects into operation, the opportunity to lower our cash operating costs becomes more apparent. As the HB solar solution mine progresses, we expect to see increased production and proportionally more of our tons delivered by low-cost solar evaporation, which better positions us for the long-term opportunities. Importantly, the capital to bring these investments to completion has already been earned and raised. Through this phase of substantial capital investment, we've maintained a strong balance sheet in a prudent capital structure. We finished the quarter with cash and investments totaling $81 million and we have full availability of our recently amended and extended $250 million unsecured credit facility.

In the third quarter, we earned $2 million of net income, or $0.03 per share and $20 million of adjusted EBITDA. In the first nine months, we have delivered net income of $28 million or $0.37 a share and $91 million of adjusted EBITDA. Third quarter's net income was reduced by $3 million, or $0.04 per share due to a lower cost to market adjustment, and a reserve reported against previously booked high-wage tax credits in the state of New Mexico. We've detailed these items in last night's press release and in our 10-Q, which will be available later today.

Despite softer pricing and the expected temporary decrease in production that led to an increase in per ton cash operating costs of goods sold, we generated cash flow from operations of nearly $15 million in the third quarter, bringing the nine-month total to $62 million. Importantly, each of our operating facilities contributed positive operating cash flow during the quarter.

As we announced in August, our quarterly production levels and as a result, our cost of goods sold for the third and fourth quarters, are affected by our continuing implementation of recover upgrades at West. The upgrade underway accommodate our mining in our different ore zones, and are designed to maximize recoveries through the mill. Investing in these recovery enhancements is both financially prudent and timely, given that our new compaction lives at north are designed to handle a broader array of sizes to produce granular potash. Reduced and Trio production levels at East also added impact to cost of goods sold. While the improvements we have made in recent years to the East mill have improved its performance, the delivered ore grade has been lower than we expected, reducing production.

During the first nine months of the year, we produced 571,000 tons of potash, roughly flat compared with last year. We also produced 136,000 tons of Trio, a 39% increase from the first nine months of last year. As we move into 2014 and commission all the upgrades, we expect first to sustain and then to improve our production levels, which in turn will reduce our per ton operating costs.

Our cash margin on Trio for the first nine months of this year was 36%. This is up nicely from the 25% we earned through the first nine months of last year. Through this margin improvement, we generated $47 more cash per ton for Trio on a price increase of only $34 per ton in the comparative nine month period. Our solar solution mines in Moab and Wendover continue to earn the highest potash cash margin in our portfolio of mines. This fact underscores the very reason we've been investing to expand our solar solution footprint.

The opening of HB near year end and the ramp-up of production over the next few years will drove a meaningful shift to the left on the cash cost curve. At full capacity of 150,000 to 200,000 tons annually, our HB mine will nearly double the number of our solar solution tons that we produce today at a very attractive cash operating cost per ton. We will continue investing in assets that take advantage of solution mining with geographically advantaged solar evaporation. We see future opportunities for solar solution mining in the existing HB acreage as well as the acreage we acquired last year in the nearby Amax Horizon mine and we're in the early stages of planning around this development project.

Our investments to enhance our sales flexibility by increasing our capacity to make granulated potash are nearing completion as well. The last of our projects on this front is the construction of the three new compactor lines at our north facility. In the quarter, we commissioned the first two lines which are now producing high quality granulated potash. It's great to have these new production lines in service and we're looking forward to completing the work at North when we bring the third line on early next year. This investment allows maximum flexibility to pursue the highest margin sales opportunities in the marketplace now that we can granulate 100% of our potash production.

This is a time of opportunity for Intrepid. As we move through this transitional period, we see Intrepid emerging as a stronger, better-positioned company. Of course we know that potash pricing will fluctuate and we understand that this volatility is outside of our control. What we can control, however, and what we've been investing to do is lowering our per ton cash operating costs in order to maximize our cash margin opportunity on every ton we sell.

Looking out over the next several years, we plan to take the steps necessary to maximize our financial performance from the investments that we have made. In 2014, we expect to be free cash flow positive from the confluence of completing many of our large capital projects, and decreasing the capital intensity to levels that are more in the $50 million to $75 million range. Another key benefit of completing the capital projects is that we will now have a more singular attention focused on optimizing the operations of our newly constructed plants.

With that, I'll now turn the call over to Kelvin.

Thanks, Dave. The long-term drivers of the potash market remain in place. However, and not surprisingly, we were not immune to the recent conditions that have impacted the industry.

Our third quarter results was a 37% decline in potash sales volume compared with the same period last year, and a 19% decline in Trio sales volumes. Looking at the nine-month results, potash sales volumes were down 17% while Trio sales volumes improved 17%. We do not believe that these sales are lost, but merely postponed. Given the market disruption, and the resulting pricing environment, dealers are waiting to place orders many in farmers begin making purchases. The positive here is that product demand still exists as farmers continue to apply potash, recognizing that it has a key role in the maximization of yields.

Today farmers are busy harvesting their crops and in the near future, we anticipate that they will complete this task and direct their attention toward field work and fertilizer application. We believe that we are well positioned in the market to meet the surge in demand with just in time delivery of our potash products.

We were able to offset some of the potash weakness in the agriculture market through our diversified channels including the industrial and feed markets. For this reason, we have made a concerted effort during the last few years to grow and diversify our end markets, expand our product flexibility, and build on our strong customer relationships.

In the third quarter, our net average realized sales price for potash was $363 per ton. We expect ongoing market pressures to continue to move prices downward in the fourth quarter. What won't change, however, is our expectation that we will continue to be the net average realized potash price leader in North America.

The keys to our price advantage remain unchanged and intact. Our strong customer relationships, our geographic advantage, our diversified customer base and crops we serve, our freight advantage, and our flexible approach to serving the market.

We sold Trio at an average net realized sales price of $353 per ton in the third quarter, which is up from the same quarter of last year. Trio, which is recognized as a specialty fertilizer on the market, has held its value well despite the lower prices for sulfur and potassium, two of its components. Our granular and pelletized forms of Trio typically earn a price premium, and customer demand exceed our current production rates. We will continue to focus on meeting this demand.

The worldwide and domestic agricultural fundamentals continue to support positive potash demand trends beyond the current environment. First, potassium is removed from the soil based on the yield and should be replenished to promote soil nutrition. Second, economics for farmers remains strong, and we believe farmers under that applying nutrients in a balanced manner is an essential part of increasing yields and ultimately maximizing their own profitability. Third, farmers certainly are going to look to reduce some of the inherent risk that weather brings and may look to perform their field work, including applying potash this fall. And finally, over the long term, the need to continually increase yields from the available acre in order to meet the ever-increasing food demands of an expanding population. All in all, we're confident that farmers will farm, customers will buy fertilizer and Intrepid will be successful in selling all of our potash and Trio.

Thanks, and I will now turn the call over to Dave.

in summary, our strategy remains straightforward and it's aimed at margin expansion opportunity by focusing on expanding our low-cost production footprint with additional tons ruled through the combination of solution mining and solar evaporation, by completing our investments in major capital projects to increase production and lower cash costs, by creating the capacity to granulate 100% of our potash to increase our marketing flexibility, and by marketing our products in a responsible manner, focusing on our relationships with our customers and achieving the highest average net realized sales prices in North America.

With that, we're ready to turn the call over for questions.

Thank you. We will now begin the question and answer session. (Operator Instructions). Our first question today calls from Mark Connelly of the CLSA. Please go ahead.

Thank you. Two things. First, with respect to the modifications you're doing at East, can you give us a sense of what you're doing now and how it relates to what you were doing before, and any rough impact on what the total impact that's going to be on total production is going to be in 2014?

And a second question. You mentioned the $50 million to $75 million spend range, which is not new. But as you think about these incremental opportunities down the line at HB, have you started to think about the timing of those projects yet, or is it just too early?

Thanks, Mark. I think maybe a clarification would be helpful. With regard to what's going on at East right now, most of the work at East is actually complete. And I think you'll recall that we had quite a bit of discussion over the last year about the -- really the operating improvements that have been taking place, and the East mill is actually running pretty well right now.

What we're focusing on at East right now is the ore grade that's being delivered to the mill, and that ore grade that's been delivered a little bit lower percentages than we had put into our budget at the beginning of the year. We're working through mine plans on that right now, and expect to see some stabilization around that as we move through 2014.

We are making the modifications at the West facility, and that's really a combination of what's going on with the mining capacity we've added over the recent years and the ability to compact that product through the new North mill because East -- pardon me, West and North are really a combined system. So I think that's a little bit helpful to understand.

On the base production, I think as we look forward, I expect -- I would expect to really see things stay fairly steady through 2014 with the exception of the new HB tons that we expect to see coming on during the year. And that will really be set up through the two harvests that occur -- the one that happens starting this winter and then the one that will happen starting next fall. So we'll see a little bit of additional production coming through the first half of the year and then more of that will be back end loaded.

And then with regard to your second question on the capital range and the timing around the additional solar solution mining, we're really going through an evaluation phase right now. I would expect that that work would probably start sometime during 2015 right now, but again if we can move that forward, we certainly will based on what we think to be very positive operating characteristics of that associated with solution mining.

Super. Thank you.

The next question comes from Michael Hoffman of Wunderlich. Please go ahead.

Good morning, and thank you for taking my question. Dave, I think if I understood the last one, I wanted to knit into it how should we model or think about the improvement in cash cost on potash based on your ramp from HB solar, first half of 2014 and then second half 2014. How would you think about how we should look at that modeling? And I'm assuming I'm taking a 198 from the third quarter and trending that.

Yeah, I think on that front, Michael, that as we look at cash costs for next year, there's really probably two major items that I would look at. One is clearly we're going through this tie-in phase at our existing operations, which is really largely affected by what's happening at West and focus in on the recoveries there. So actually see us improving on our cash operating costs from our base properties and probably getting back closer to where our original guidance was at the beginning of the year which was somewhere in that 185 to 195 range on that. So that would be step one.

Our initial harvest from HB, again that will happen over probably up through March or April of 2014. And with that being a little built lower operating rate, that should come in we hope a little bit lower than where our average is. But certainly the $80 per ton cash cost that we have described, I really see that gradually getting there as we get to full harvest, full solar evaporation season, the ability to have brine circulating in the mines. So that really starts to come into play later in 2015 in the second half year which is effectively our third harvest if you think through it. So we'll see improvements coming through as those additional tons come online. But it will really -- that improvement will be a little bit gradual.

okay. So let me repeat so I think I understand it. If you get back to 185 to 195, the first half 2014 you would see below that modestly benefiting from the initial harvest, and then there's this sort of continual gradual improvement as you do second harvest and then you get the max benefit by the third harvest?

I think that that's a great way to sum it up.

Okay. And then with regard to the cash flow, how do we think about the timing of evidence of this improvement in cash flow? When do we get the first real indication that okay, it really is turning?

I think the most significant benefit of that will probably start to show in third to fourth quarter of 2014, Michael. Because what will happen is we'll start harvesting second harvest sometime around August/September timeframe so clearly those tons will start to get sold in the fourth quarter of 2014, is where you'll start to see the most significant impact.

okay. So from a pure free cash flow standpoint, then what I'm hearing is you'll still be negative in 4Q, 1Q, 2Q and then you turn positive 3Q, 4Q? Or will you turn positive before that? This is on free cash basis?

I expect we'll be -- keep in mind that each of our operating facilities continue to be net positive cash flow right now. And when we think of free cash flow, the capital investment will have a little bit of carryover I think into the first quarter as we wrap up North, we'll probably have a couple of small items coming on at HB and that's when first and second quarter is when more of our West improvements happen. I would actually see us and hope to be at a free cash flow situation in the second quarter and see that continuing through third and fourth quarter. Clearly pricing and sales levels are going to have an impact on that. We all know that impact. There's just something that we're going to have to manage too, but our expectation is we're going to manage to a free cash flow number to 2014.

Last question for me. Your sales projection for the quarter is a nice improvement sequentially. What indications are you getting from distributors that somebody's going to make the first move and push through the prisoner's dilemma issue and start buying?

Kelvin, can you respond to that one, please?

Sure, let me try. I guess what we're seeing, and we've been seeing it here for a week or two now, as I have indicated, the harvest is just kind of beyond halfway I guess in the Midwest and so what we're seeing is some pretty strong demand going to the field right now on a plow-down scenario on both phosphates and potash. So our expectation is that that will continue. And so long as we don't have weather issues, we expect that there's going to be a pretty strong fall application season.

The fact that we delayed relative to last year, if you remember last year was very, very, early because of drought and quick dry-down of their crop -- this year we actually got a lot of moisture and they're delayed in their harvest. So now that they're completing that, we expect that they're going to get to fertilizer application, and all indications are that they plan to do a similar or slightly more than they've done historically.

Okay. Thank you very much for answering my questions.

Thank you.

Thanks.

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

Thank you very much. Just two questions. Dave, when we go to the out year, let call it 2016, can you talk a little bit about the variability in your cash costs? What will the low be? What will the high be? And what will the proportions of that be?

And then my second question would be for Kelvin. Maybe just some commentary on whether you're seeing increased imports the potash into the Gulf, and if so, you know, by who and where is that product moving and is that a threat to your netback advantage? Thank you.

Ben, this is Dave. With regards to your first question, when we look forward to 2016, what we envision at that point in time is that about 35% to 40% of our tons will be delivered by solar solution mining. And those tons as you know are most profitable tons with a cash cost. If you factor in the HB tons, I think in our most recent investor presentation, we had shown kind of an indicative example of what that looks like and I think it took our midpoint down by was it 17%?

Around 11% or so.

Around 11%. The variability on that, variability there's clearly variability and in any mining operation and then we always see variability in terms of the evaporation seasons based on was it a really dry year? Was there some moisture involved? And that's, what we have each said historically is that's a plus or minus 20%. And it's just an inherent variability that we need to manage to and accept. But on average, like I said, we'll see 35% to 40% of those tons coming in in the form of solar solution mines. So an overall very positive effect on cash flows. Kelvin, if you want to take the second half of that

sure. Let me try this, Ben.

Just with regard to imports, we've seen several vessels recently show up in New Orleans. Our expectation is it's a similar volume to other years that we're going to see come in as imports. The river's a very competitive environment and lower return than many other markets that we play in. That's partly why we don't ship a whole bunch of product to the river. Certainly the Canadians participate with barge sales on the river. You've got some Russian product and some Israeli product there. And I think everyone is competing for that same opportunity. As I said, very competitive.

I think the way I see our business is we try to spread our tons across a pretty big geography when you think about Utah, we're really playing in the Pacific Northwest, and specifically there's quite a bit of industrial business that up way. But I think all our -- all of our tons we have got a pretty good diverse plan there participating in the feed business, the industrial business, and then the ag business. And that's Texas, that's western Corn Belt, that's a number of different areas. So as we spread our tons, we don't see a significant change in terms of keeping that advantage relative to our competitors.

Okay. And maybe just a point of clarification, Dave, in terms of the first question. Sorry, I wasn't asking about the variability of solution mining cash costs. I wanted to know the variability of overall. In 2016, are you highest cost tons going to be 20% higher than the solution mining or how should we think about that?

Well, Ben, I really do think that that indicative model that we put together in our IR presentation does a reasonable job of showing what that looks like because if you look at our overall cash cost per ton over the past couple years, I mean it's been relatively flat. And the composition of where those tons come from has been pretty consistent. Clearly, with some of the work we're doing at West, we have an expectation that we will see a lower cash cost associated with an overall improvement in per ton economics. And then we'll be -- we've got the Solution mine tons that come in. So I think that that model actually gives a pretty good example of what things look like going forward.

great. Okay, thanks, Dave.

You bet, thanks.

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

Good morning. This is Tom Ackerman filling in for Chris. As a follow up to the cash cost questions, for Trio specifically you cited a lower ore rate as a primary reason for the increased production costs. Could you provide additional information as to what run rate we should be looking at for Trio going into 2014?

Yes, Tom. I think right now I would probably model in somewhere close to about 50,000 tons a quarter. Like I said, we're going through some of that work in our mine plan and the piece that we're really trying to drive towards is what's the most effective model for our East facility if you think about we do have a little bit of flexibility whether we had our miners, whether we are into more intense sylvite areas or more intense potash areas or more intense Trio areas. That's where would I look to.

If you put those rates on relative to some of the past quarters, I think you can get a feel for where that takes cash costs associated with that facility. So I don't know that necessarily third quarter's indicative of that run rate. I would say second quarter is probably a little bit more indicative of where we expect to see Trio costs.

Okay, great. And also can you comment on what you're hearing from your customers recording product movement, particularly looking at the shorter fall application window versus a lack of future pricing visibility?

Kelvin, do you mind touching on that a little bit?

Sure, Tom. We typically see the farmer having to step in and start applying before we start recharging some of those bins. So right of today we're hearing a good response at the, I'll call it the farm gate, but we have not seen a significant amount of movement back into those warehouses. So it's starting but it's just on the very early stages of that.

So the other part of your question was relative to timing, and I guess if you look at traditional, we're really not late today. We are late relative to last year. But there's a lot of application that tends to happen after Thanksgiving or in that timeframe. So I guess we're hoping that we have an open window from here through Thanksgiving and beyond, and that will allow all farmers to get the product on that they want. But that's really an unknown that I really can't guess at today. They do have a significant amount of moisture that they've gotten so the drought risk or concerns in many of the areas are somewhat abated. And so things are looking pretty positive at the farm gate today and so as long as we have decent weather, we're going to have a good run this fall.

Okay. Thanks for taking my questions.

Thanks.

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

Dave, question on the expansions. You know, with more product coming out of Canada with expansions there particularly in 2015 when Vance goes up and running, do you think you'll be able to have to shut in some of your existing capacity or basically with these expansions, who do you think you'll be displacing from the market?

Don, this is Dave. Thanks for the question. Without a doubt and I think Kelvin touched on elements of that earlier, competition is, you know, very robust in the US, and I think the advantage for us is that we have made some very intentional steps over the last couple of years and we continue to do so where we look at trying to secure space where we can move our tons through. We try to do that over a fairly broad geography. We continue to emphasize the importance of the industrial and the feed business as an ability to diversify our tons. So in a lot of ways, we've already built some of that capacity to move these tons into the system. And my guess is that they'll be, you know, it may touch a little bit of several people's current tonnage but we don't expect it to be such a dramatic effect that it would necessarily cause a reaction or of pressure around the market.

So I think it's again some of those very key marketing tenets, and then again you add on to that that we've built that flexibility into our production system where I think we've got a good handle on what the market sizes are for certain products. And we have that ability to flex our production model to sell a certain amount of standard if that's what we need, and if we need to ramp it up, to granulate 100% of our product, we have that capability now. And that's something that is really grown for us over the last couple years through our investments.

Just a follow-up. I assume one of those tools is consignment sales or price-protected sales. You know, what percentage of the industry now is on some sort of price-protected basis to induce the dealer to take the product or as you say, to secure that floor space? And how does that meet the accounting definitions of an actual sale or are you still booking that as inventory?

sure. The accounting piece is the easy part of that question. Kelvin, if you can maybe think about the market piece on that in terms of the industry.

But the accounting piece, I can comment on how much we do it and how I think folks should do it that if you is have consignment tons, those are still our tons in someone else's space and those tons stay on our inventory and we don't recognize those as a sale until that ton is reported sold by the customer. If there's a price protection collar or something along those lines that exists on a ton, what we do, when that tonight is sold, we recognize revenue to the floor price on that because that's the piece we know with certainty and when that eventually settles up, we adjust it at that point in time. It's certainly becoming, you know, bigger part of the market than it was five years ago and it's one of the tools we seep see producers using to make sure their tons are in place.

Don, maybe I'm just add. A lot of the large warehouses today have some kind of a support from a producer. Now those things aren't always static and they don't stay with the same producer forever, so some of those move around year-to-year and whatnot, depending on what the customer is looking for.

But I would say at the reseller level or level above the dealer in the field, there's certainly most of the big warehouses have some type of commitment to them from somebody. We use a number of different tools in our portfolio and I guess we really ask our customer what they like best and if that's consignment, then we follow that track. If it's something else, we go a different direction. I think we show a little bit more flexibility than some of the cookie cutter models that are out there today.

Just coming back to your question about how we're going to place our tons, we typically see more opportunities than we're able to supply. The way we see it is some of our key customers have more tons that we may have access to. And so we anticipate growing our business with some of those customers. And so I guess today we don't see a significant challenge in placing those -- some of those new tons.

Thank you.

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

Thanks. A question on price. Could you just kind of just walk us through how price played out during your third quarter? Obviously there's sort of a before and after incumbent of component of it. And then, I know your expectation was you said this is going to be lower in 4Q and there's a little uncertainty, but could you talk about what you're seeing now? It sounds like the season is starting to pick up and what you think will happen to prices as we come out of the fall application season over the winter.

I'll touch a little bit on what we saw transpire over the quarter and Kelvin, if you can touch a little bit on what you see happening today.

Obviously during the -- we know during the quarter we saw the events unfold right at the end of July and that just created a major I would say delay or stop in the market. And there were several periods during the quarter that certainly the larger Canadian producers took down price. I don't know if that was in an attempt to try to spur a little bit of demand or such. But it was a couple of decent-sized steps that took place right there in the middle part of August and then again toward the end of September.

So I feel pretty good about our ability to hold that where we could. And certainly that's one of the advantages of that diversity we have in the sales mix is sometimes we see a little bit flatter response across the market just because the timing of how the industrial and feed pricing adjustments come in as well.

Let me just touch on price, Vincent. We all knew that I guess the pricing out there was right around that $400 reference price several months ago. It's since slipped some to $385 or thereabouts. We are starting to see more stability as we get closer to actual application. And the product is placed ready to go to the farm gate. So I think there's still some noise, a number of people saying there's a lot of pressure still. I would say that's on all fertilizer products and potash hasn't been immune to that. It's really the broader complex of fertilizer that's seeing some pressure here over the last little while.

I guess I don't see any significant changes as we get into actual application season, and that's the positive. Who knows beyond that if we're going to see some changes? But what we know is we were trading at higher numbers and we've since seen the reference price come down and that's why we made the comment that there's some downward pressure in the fourth quarter

Just some follow-up, Dave. I just want to make sure we get our cash flow statement as good as possible. I'm assuming you're going to end the year based on your production sales volume for the fourth quarter, you'll probably end the year with a little bit of inventory build that reverses in 2014 because you should sell some of that deferred volume that didn't get sold in 2013 and in 2014, is that how we should be thinking about that piece of it?

well, frankly we haven't had a whole lot of the inventory billed over the last couple quarters. So we always try to build a little bit going into year-end because we see fairly robust polls in the spring as you know, and so I don't see any really abnormal cycles for us. Certainly you can look at the numbers in the outlook pieces and it shows that we're producing more tons that we're selling so we will see a little bit. But really that's quite intentional. And we think it's quite normal actually.

okay. And then do you have an idea of what the D&A will be for next year?

well, I think overall for the year, our year-to-date number we're about $45 million total DD&A for 2013 year-to-date. Annualized, that would get to us about $60 million, and then, I think, keep in mind that we have parts of HB and majority of North coming online and into that calculation. So almost $300 million of new capital and fairly long-lived stuff buff I would expect that DD&A number to go up probably about $10 million more or so next year.

Okay. Great. I'll pass it along. Thanks so much.

Thank you.

The next question comes from Adam Samuelson of Goldman Sachs. Please go ahead.

Thanks, good morning. I was hoping to follow up on Don's question a little bit and appreciating some of the different operating costs at some of the different operations in Carlsbad. Just thinking about East, and can you talk about some of the linkages whether it's operationally, share compaction, warehousing, transportation, overhead, between East and some of the other facilities in Carlsbad, and if you were to look at maybe pricing did fall further, how you would manage production at East which is the most obvious target?

Adam, I think East is probably the right place to have that focus because we know that in our own operations, East is particularly on the potash side, the highest cash operating costs within our system. There is some flexibility out there and actually the North compaction plant that we have built when we talk about being able to compact 100% of our potash, the geography between the North and the East is a couple miles. And we routinely have the ability to transfer product over there and compact it. So actually that helps again with our flexibility where we don't end up creating situations where we build products that may have a little bit smaller market associated with them.

But as we look at the overall operating pieces, what we need to always keep in mind is that we do mine and mill that product on a basically a co-product basis with the Trio side. So when we look at overall plant profitability, like I mentioned, East plant continues to be a cash generating for us. It is for a variety of different price points.

But it's one of the areas that we're looking very closely at in terms of what does that operating model look like if there were to be some significant pricing pressure. I think we touched on the last quarter call that it's an evaluation that we're in the middle of. We continue to work through that and develop those next step options. So options include things like potentially looking at it as a Trio production facility only. Obviously that involves some investment of capital, looking at how do we apparently process the potassium ore or the potash ore. So they're all steps that we're looking at. We're trying to see where those price points are that would some much these model optimization models might make more sense.

It's a fairly dynamic question because we actually see a lot of our specialty products come out of that facility. And we get a little bit higher net realized price on them as well. We want to be sensitive to the fact that those specialty products tend to get better pricing and it's actually quite a dynamic system to look through. So I know I'm not giving you a specific answer to your question in terms of step one through ten, but hopefully you're getting a feel that we are looking at it. We're looking at it in the right way and we're fully aware of where those levers are in the business.

That's some helpful color. And maybe just continuing at East, and on the product side of Trio, I mean the price premium or the price gap between your Trio realized sales price and your potash realized the sales price is basically closed at this point. I mean do you think that you could actually see Trio at a premium to potash moving forward? And make the comments on your potash, if your Trio price is flat and your comments on potash pricing hold true, that would happen in the fourth quarter presumably. But how sustainable do you think that is, given that the lower prices that you've seen for sulfur and the lower prices that you're seeing for potassium in potash?

Well, let me touch on it and then Kelvin, if you can add a little bit more color to it, that would be helpful. I think the way you're looking at it, Adam, is right. That we may have actually see that next quarter. And the big piece is that the demand profile, particularly for the granular and premium Trio remains very strong. And people view that as a specialty product, much like you see other specialty products hold their pricing because folks first start looking at it from an agronomic perspective. And even with a little bit of pressure in the sulfur market, you know, the mag has a real value associated with it. And we've got some crops that tend to be higher-value crops that these products get applied to. So the economics to a farmer continue to be quite positive.

Yes, I think, Adam, Dave pretty well covered it. Whenever you're short only supply, the demand is outstripping our supply on these materials today. So we're able to kind of keep a firm price there. And I think customer recognition that the value is there gives us that opportunity to price it where we have. So I do see Trio certainly has closed the gap and will probably hold much stronger, and things look pretty good had that regard. So we're comfortable we'll be able to sell all of it continue at a nice margin like we're at today.

Okay, that's helpful. Maybe just a quick final one from me, and this should come out in the Q, but what percentage of sales were non-ag in the quarter?

During the for Q3, our ag sales represented 67% of our total sales. Industrial was 25% and feed was 8%.

Okay.

And we've had this situation happen before. I think, really, the industrial and feed markets have remained quite steady. Some of those percentage changes are driven by some of the softness on the ag piece and the fact that we'll see some of that deferred here at the end of the fourth quarter.

Okay, great. Thanks very much.

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

Good morning. Just a little more color on the Trio sales on the third quarter. If demand continues to outstrip supply, I was surprised to see they were down a bit year-over-year.

Yes, Chris, this is Dave. What we're talking about when we're talking about that demand is really that granular and premium product. If you notice, we tend to sell a lot of our standard product into the export market, and we didn't have much in the way of export sales during the third quarter. I think that number was only about 11% of our total Trio sales. So I think that's the place where if there is a little bit of softness on the Trio side, it's around the standard market.

And we know that there is some pressure on that piece from a pricing perspective in the export market. All that said, we're continuing to work on pelletization and trying to convert as much of that into granular as we can to try to take advantage of the stronger pricing on that premium product.

How much can you granulize or compact now?

We're really in the beginning phases of that. The design of that plant was to essentially be able to compact virtually all of our product there. We're pretty far from that right now. What we've seen are some pretty major steps on the pelletization. Trying to give you an exact number on that is a little bit challenging for us, but I think we'll probably be somewhere maybe 20% to 25% of our product at some point will get to that pelletized range, but it's going to take us a little while as we work through that.

All right, a final question if I may. What assumptions gets you to the high end and low end of your sales guidance tonnage for the fourth quarter?

I'll give a quick answer on it, and if there's more to it, Kelvin, please add to it. But I think, at the end of the day, Chris, it's just uncertainty as to timing around a weather window. And if we see a good weather window here and guys get into the field and get crops off like Kelvin described, I think we've got a real opportunity to hit that top end and if we see continuing moisture across the Midwest or further delay, I think that's where we might see some pressure toward the low end.

That's spot on. I think the industrial business looks good all the way of through the rest of the year, so we're not worried about that. And our feed business looks real strong. I think it really comes down to the question of whether for the next really 30 to 45 days.

great, Thank you.

The next question comes from Joel Jackson of BMO capital markets. Please go ahead.

Hi, good morning. I just wanted to follow up a little bit on East so much I understand the commentary you're giving. Are you talking about possibly changing your mine play to high-grade and pushing out some of the lower-grade ore to later years in the mine plan?

Joel, actually we've been very intentional in our mind planning and to high-grade has a pretty negative connotation across the industry and I would characterize what we're doing quite differently than that. What we're looking at is how do we pursue different -- keep in mind we've got nine mining panels that are operating currently at our East mine. So our ability to go in different directions and to approach different parts of the ore body is really where some of that flexibility comes in.

We're very keen to make sure that we're not making decisions that cut us off in future years, because these are long-lived assets. We intend to develop them in a very prudent and thoughtful way. And we're going to make sure that we look back over areas where we've mined before and see if there's some additional mining that can happen in certain areas. We're going to look at the mix of ore that we're feeding to the mill and work it optimize that. We've got a commitment to maintaining a certain development ratio in our mining and we're going to stick to that.

Okay. Thanks for that. Now looking at your CapEx, just so I understand. In Q1 2014, is really other than sustaining capital, the only CapEx spend will be at West and on HB. Is that how we should think about it?

We're really three years is the way I have would describe it. We're pushing as hard as we can on HB to get that mill completed here by the end of the year and see first production. So we'll definitely have HB. With North, we have the third compactor line that's set to be delivered here sometime in November and there will be a little bit of remaining installation work that carries into probably January, maybe into February. And then the West work.

So those are the three if you think of the major products. The HB stuff is really tail-related. North is really tail. I think on North we've already invested about $92 million of our expected capital there. So we don't have much left, and same thing with HB. But it's really -- that will probably be the single largest quarter for us as I look forward, Chris or pardon me, Joel.

And then a base sustaining capital rate for next year would be about 50 million?

We'll be lower than that. We're going to crank down pretty hard on that, that piece of things, and just want to make sure that we're certainly going to put the investment in that we need to. But if there's some things that are, I would say more discretionary, we just need to make sure we've got a great handle on where pricing is going shake out for the industry.

Okay. And in the quarter, potash royalties were actually very low, almost near zero whereas Trio royalties were about normal. Can you just elaborate on that, please?

Yes I can. I would look to the year-to-date numbers on the royalty piece, particularly as you're building your model on that. Our royalties will be somewhere in that kind of 4% to 5% range on annual. We had an adjustment to make a correction in some royalties where we had actually overaccrued a little bit in an earlier quarter. You're seeing that come through in the quarter. There's been no change in the business, no change in that structure at all just really a true-up that occurred in the quarter.

And finally, have you seen any shift at all in the river in the last few months? Any maybe a little more product coming out of Israel or Germany or Russia up the river in the last couple months than you normally would see this time of year?

Kelvin, do you want to touch on that one?

Sure. Joel, we really haven't seen a significant change. I think the players are setting up for fall application season. So we've certainly seen, over the last couple years, more Israeli and similar amount of Russian. I guess we haven't seen any dramatic changes here for this fall. And I anticipate similar competitive environment from everybody, Canadians, the importers, etc.

Thank you very much.

Thank you.

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

A couple questions left. One, you give a lot of indicative data in your most recent investor presentation at cost, some of the things we've talked about today. Are there any changes from the data that we would see if we look at that 8-K now that the quarter's closed and now that you are looking forward to next year?

Mark, I think you hit the nail on the head that it's indicative. I think it's pretty close. What it's really intended to illustrate is the influence that the new HB solar solution tons have on the company as a whole. And that I think continues to be very consistent.

Secondly I want to go back to this premium for Trio over KCl. One of your competitors make as different product but nonetheless, they're talking about maintaining some awfully high spreads given the way they look at things. I just want to return to the subject of why you think that sulfur and magnesium in your product is going to be able to give you that really premium when you look at just the K2O part of it.

Do you want to touch on that, Kelvin?

Let me start, Mark. When I can you look at our product, we've got the three materials in there, and a lot of it is driven by magnesium deficiency in some of these markets. If you think of the Eastern Seaboard, Florida and some of those high-value crops first of all and soils that tend to have some magnesium deficiencies. So our product fits very nicely in many of those applications and that's where I guess we are an able to kind of maintain or keep some of our business versus a competitor company with a chloride component to it.

If you look at other areas, we still had success. They build a program around a Trio or a competitor's product and they'll tend to continue with it if they can. Now so far, we've had success in keeping that in their mix or in their bins, and I guess if we start seeing that weakening, we have to change strategies. But today we have think we can maintain that strategy and be successful.

And finally on CapEx, I just want to make sure I'm clear on sustaining versus growth. Maybe Dave you could look at CapEx next year in that way. Is there any "growth CapEx" left or is the CapEx number you talked about already simply sustaining?

I would characterize the CapEx that's being invested in wrapping up HB and wrapping up North and wrapping up West as growth CapEx. Certainly the sustainable level we've got to be very prudent around that and make sure that we're doing the right things long-term for the mine.

But in terms of brand new projects coming into play, it will be -- there will be some smaller items outside of those three major ones that I mentioned. But really they're going to be geared more towards that notion of a singular focus on optimizing operations and I -- candidly, Mark, I think we need to give our teams a little bit of a break from the intensity of capital investment that has been ongoing at the sites.

I think what isn't always appreciated by the people that aren't on the ground every day is that the capital investment we've been making is investment that's been made in existing operating assets. And so not only have you had capital projects going on within a certain geographic area, and that geographic area is defined by the plant outline, but you've also had, you're trying to do that while you're operating. So giving our guys the opportunity to essentially secretors demobing, packing up, and just allowing that more singular focus I think is going to be a huge benefit to our team and I'm really looking forward to giving the guys the opportunity to shine in that environment.

Okay. Thanks for that color. But just to bottom line that -- sustaining CapEx going forward will be?

We've said $40 million or so historically. I think that's probably a pretty reasonable baseline level. That can vary plus or minus $10 million from year-to-year. So that's a good middle of the road number to target I think.

Thanks, David.

You bet.

The next question comes from Matthew Korn of Barclays. Please go ahead.

Hey, good morning, everyone. It seems you've maybe pushed back expectations of when the brunt of the impact of the tying in at everything at West is going to hit. I think last quarter we talked about the third quarter. Now I'm seeing language even more significant impact in 4Q and early next year. Is it taking longer at all to bring everything through the testing phase and the tie-in? Have there been more challenges. This piece isn't working the way we thought it would be, anything like that?

Matt, this is Dave. Hopefully we didn't set expectations too aggressively on that. I think what we started to describe, even last quarter, is that some of these improvements at West are going to carry us into early part of 2014. I think year-to-date we've invested something like I think it's about $15 million at West, might be a little bit higher than that. And we expect that that investment level is going to probably be closer to $30 million to $40 million overall. We're looking at adding thickener capacity. We are looking at making some significant changes in the way we screen product, run it through the rod mill. And each of these items when you make a change, it has an attendant impact on one other area.

And to just re-emphasize that point I was making earlier, West plant's running every day so you're making some of these changes on your eight-hour shutdown cycles during the week. And I think the other piece we're trying to very, very thoughtful of is this is the feed product that goes into our North compaction facility. And we've turned that on. We've commissioned. We're making some really good product right now. It's not a compactor that you can just throw the kitchen sink at. It's like any other piece of equipment. You expect a certain quality and certain physical characteristics associated with that feed. It's a much, much, much more robust system than we've had and we're seeing the benefit of it and having that in place in allows us to focus on a more diverse feed to the product that fits within the specs.

But we need to still make sure we're delivering product that meets all the quality specs. So it's that interaction, Matt, that takes place. So again I'm hoping that we haven't set expectations at levels that aren't representative, but I really think that we're going to see some variability in the first part of 2014 until we get those recovery improvement projects complete. And we just know the timeframe takes us into the first part of the year.

All right. I appreciate the clarification. And then, kind of given that, so after a lot of the CapEx lingering on variability issues at West in the first quarter, it sound like realistically this is still a collection of assets that, ex HB, is really around 800,000 tons year of production. And if that's correct or if that's wrong, please correct me. But then also for the fourth quarter, when HB starts to contribute, you know, how much, what kind of tonnage if at all, what kind of tonnage are you expecting from HB to con tribute in the fourth quarter?

Sure. I think on your first question, I think that's probably a fair starting point in terms of think of the core assets is about 800,000 tons a year. And that's part of your investment as sustaining capital is to maintain that level. Clearly the recovery improvement capability at West, I think there is some very real improvement there that we have potential for. And certainly some of the investment we've made in Moab and other locations over time we expect to see a little bit of improvement there.

But at the core, you're probably looking at it right. I think on HB what we've said is we expect total production during 2014 to be somewhere in that 50,000 to 100,000 ton number, Gary? And that's probably indicative. We'll probably be closer to maybe a third, two-thirds, a quarter, three-quarters type of ratio in terms of what comes through in the first half of the year and what comes through in the harvest that start in the fall, based on what we know right now.

Thanks for taking my question, guys.

You bet.

The next question comes from Bill Carroll of UBS. Please go ahead.

Good morning. Thanks. As you move beyond your heavy CapEx spending period and start generating free cash flow, can you start -- can you talk about your capital allocation priorities? Is that plan to build up cash to a balance sheet to a certain level before you feel comfortable contemplating any shareholder rewards?

Bill, this is Dave. I think on the free cash flow piece of it, that's going to be a major focus for us in 2014. If we get to that point earlier than later, starting to see the accumulation of cash, then we're going to look at items probably along the following lines. We're going to see what internal opportunities we have and if we've got very, very strong IRR projects, we'll likely consider those first. I think that's probably where our shareholders would like to see investment made if they've got adequate rates of return.

I think given some of the pricing scenarios that are all the research banks have put out there, I think we would be silly to say we're going to pick a date to start looking at repurchases, looking at dividends. Because frankly, there are some models out there that are pretty -- we need to be very mindful of how we're operating the assets.

So our focus is, like I mentioned, we're going to be on optimizing the operations through the year. We're going to get to a free cash scenario. And we'll evaluate where we're at in the market. I think we've proven that when we have cash flow available, we're going to make decisions that we think appropriately reward our shareholders. And that's the piece that I would really leave you a thought -- it is we've got very good alignment on that and very good recognition of what our relative opportunities are and we're going to continue to make good decisions around that.

Thanks.

Brock, it be looks like that time we've gone a little over. We have time for one more question and then we'll wrap up.

Thank you. The last question today comes from Charles Neivert from Cohen. Please go ahead.

Thanks very much, guys. You've talked about probably not a whole lot of change in terms of imported product coming in next year. And yet what we're looking at is probably a decline in corn acres for instance and I don't know if that's all going to get offset. How do you see your overall acreage, not just corn but the overall acreage in the US doing? What do you see that doing next year? And then how are you going to get growth out of that and start getting into the inventories that you've been building? And it looks like next quarter you're going to have another inventory build on top of it in both Trio and in potash.

How do we sort of get that story together? We've got possibly lower acres, higher inventories. How does that not translate into a cutback in production somehow?

Charles, let me try that. It's Kelvin here. You know, right now farmers are going to make decisions, or starting to make decisions on which fields they're going to put into corn, beans, whatever else. I think what you have to think about with regard to Intrepid is we're playing in a lot of diverse markets on the ag side. So our Carlsbad product goes not only into the Midwest but if goes into the Southern plains. There's a significant on pasture ground there. We're seeing a growing herd of cattle so that demand looks good. The drought is abating so just that alone will drive some confidence at the farm gate and likely higher application rates.

If you think about the Pacific Northwest, those are very different crops up there and they intend to grow significant or decent yields. And really that drives potash demand up in that region. So I think there's still lots of talk around is it 90 million acres corn next year or what is that number? I think it's too early to tell. Farmers are going to make those decisions as we move forward here over the next couple months and we see supplying a decent amount of the Midwest but also into many other areas.

Okay. I guess that covers it. I just can't reconcile how we get higher numbers on acres that doesn't look like it's going to change much, and maybe has a chance of going down. Certainly affordability is fine, but I just don't know how I get all those numbers reconciling, especially if you've got to go through inventory as well.

Yes, I think a piece I touched tonight a little bit earlier, Charlie, I'm not sure if you had caught that. But if you look at third quarter or pardon me, fourth quarter, third quarter, that's fine, either one, the difference between our production and our sales numbers, those aren't huge numbers. And it's actually a very purposeful situation that we need to go through each toward the end of each year to make sure we're prepared for the next spring.

So we're not sitting on lots of inventory. You can look at the IPNI data. That's just not indicative of Intrepid. And for all the reasons we've touched on, very good diversity of market. Diversity of crops that we serve. I mean frankly, the markets that are close and the ones that we serve continue to represent multiples in the five to six times of what we produce in a year.

And as Kelvin touched on as well, we've got those relationships in place and have opportunities to serve additional locations for more customers. We feel like we're in pretty good position on that and maybe being more focused on the domestic market and having that marketing plan around it, we really feel is an advantage for us.

Okay. Thanks very much, guys. I appreciate it.

Thank you. We really appreciate everybody taking the time to dial in today and we appreciate your interest in Intrepid. We look forward to speaking with everyone in the future. Thank you.

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