Intrepid Potash's Management Presents at Goldman Sachs 17th Annual Agribusiness Conference (Transcript)

Feb.26.13 | About: Intrepid Potash, (IPI)

Intrepid Potash, Inc. (NYSE:IPI)

February 26, 2013 12:15 pm ET

Executives

Brian D. Frantz - Chief Accounting Officer, Vice President of Finance and Controller

Analysts

Adam Samuelson - Goldman Sachs Group Inc., Research Division

Adam Samuelson - Goldman Sachs Group Inc., Research Division

Staying reasonably close to schedule, right now, I'm very happy to have Intrepid Potash here to present. From the company this morning -- or afternoon, rather, is Brian Frantz, their Vice President of Finance and Chief Accounting Officer, to do some prepared remarks and slide deck, and then we will go into Q&A. Brian?

Brian D. Frantz

Thank you for joining us here today. I'm Brian Frantz, Vice President of Finance for Intrepid Potash. With me today are Bob Jornayvaz, our Executive Chairman of the Board; and Gary Kohn, our new Vice President of Investor Relations. No presentation would be complete without a word about the forward-looking statements that are in our presentation today, so I'd urge everyone to consider those as we walk through the presentation today.

Intrepid is a geographically advantaged U.S.-based company. We've designed and implemented a growth strategy with an intense margin-driven focus. Using strategic marketing to participate in our markets and production flexibility to our advantage, we achieve the highest net realized sales price and then we earn the highest average cash margin among our North American producers. Our commitment is to reinvest in our business through capital investments that are focused on production and through incremental, low-cost tons, flexible production facilities and delivering an excellent rate of return on our invested capital.

Intrepid is the largest potash producer in the United States. We supply approximately 9% of the U.S. market. We're also 1 of 2 global producers of langbeinite, which is a unique high-value mineral containing potassium, magnesium, sulfate and has virtually no chlorides. We currently have 5 active production facilities, each with an excellent capital investment opportunity that are focused on growth, flexibility and margin. We begun construction of our sixth facility, the HB Solar Solution mine, when that is completed -- which is expected to increase our potash production by about 25%. Further, the strength of our balance sheet and our capital structure provides us with the ability to execute on our robust capital investment program and our disciplined business development activities.

Turning to the current potash market for a moment. Domestic agricultural market fundamentals remain solid as we head into the spring. Farmer economics are favorable when it [ph] supports a positive demand environment as farmers look to maximize yields. Balanced fertilization application remains the cornerstone to achieving those high yields.

The USDA recently released a forecast predicting 2013 will result in the highest farmer income over the last 4 years. When you think about the good years farmers have had over the last 5 years, it really puts this in perspective. The USDA outlook is supported by tight stocks-to-use ratio, strong commodity prices and planting intention numbers are at the highest levels that we've ever seen.

We saw farmers apply healthy amount -- healthy volumes of potash during the fall application season. Generally, that suggests a strong spring season as well. Demand remained strong for all grades of our specialty product, Trio. We've been proactively educating the market about the benefits of this product, and customers are realizing the agronomic value of the product. This is supporting a favorable price and demand trend, as evidenced by the $93 increase in the average net realized sales price for Trio in 2012 compared to 2011. Essentially, all of our expected production of Trio is committed to customer accounts in 2013.

Intrepid is differentiated from our competitors because of our assets and our commitment to invest in our people, facilities and production growth. Our mine sites are geographically advantaged, located in the heart of the market that consumes approximately 5x our annual production. We have built the capacity and flexibility into our production system to maximize our margin opportunities by meeting the differing product demands of our end markets that we serve from both our Carlsbad, New Mexico, and our Utah facilities.

So what does a diverse product offering and a geographically advantaged mean? Quite simply, it means we generate more cash than our competitors on each ton of potash that we produce and sell, because we've invested in production flexibility and we're closer to the market. Based on our calculations, when we look at the average net realized sales price for potash and we compare it to our North American peers, we consistently earn a high, higher sales price per ton. In 2012, this advantage was $55 a ton, representing a 14% premium over our competitors.

This $55 a ton net realized sales price advantage also turns into a $30 per ton cash margin advantage in 2012. This is not just a 1-year aberration. Year after year, we've consistently delivered more cash margin per ton on every ton we sold than our North American competitors. In fact, over the last 5 years, we've delivered a $41 per ton cash margin advantage.

How do we do that? It's not just one specific factor, but it's many factors. Our locations provide us with a geographic advantage, putting us closer to our customers. We serve diverse markets and diverse crops. We sell diverse products into the ag, industrial and animal feed markets, and we also deploy a well-developed marketing strategy. The cash margin advantage is simply value creation for our stockholders. And as we increase production volumes of our lower cost ton, we expect to continue to expand our margin advantage.

A key differentiator for Intrepid is that we have a diverse cross section of customers that we serve in the ag, industrial and animal feed markets. The diversity in our agricultural markets means we're serving not only the corn market, but we also supply product to the hay, barley, cotton, soy bean, citrus, vegetable, potatoes and wheat markets, all of this over a broad geography. Of equal importance, we built flexibility into our production process to serve other end markets for our products as well. What's important to recognize is, right now, we have the ability to granulate approximately 80% of our current production, providing us that flexibility to meet end-market demand. This percentage is expected to grow to 90% over the next year through the investments we're making in our North compaction facility. Outside of the domestic agricultural market, we continue to see demand in the industrial and animal feed markets.

A foundation of our growth strategy is our long-lived reserve base. We've extended the reserve life at our mines over the last year through acquiring new leaseholds, further defining the ore body, investments in our geology group, who've been using a disciplined core hole drilling program. As you can see, we're growing our langbeinite reserve base. The increase in this reserve base underscores the importance of investing in our langbeinite processing facilities.

Our capital investment strategy at Intrepid is focused on 3 things: growth, flexibility and margin. And we're executing on this capital investment strategy by expanding our Solar Solution mining capacity and producing more, lower-cost tons. We're also adding granulation capacity, which provides us the flexibility in our marketing program. And we're increasing recovery through improvement projects that ultimately lower our per ton operating costs. Our capital projects will positively change the profile of Intrepid and enable us to earn a greater return on each ton of product that we sell.

Capital execution is foundational to our growth. Since the inception of Intrepid in 2000, we've invested over $0.75 billion into our facilities. What's interesting to know is about 1/3 of that happened in 2012. We have accomplished some major milestone over the last 10 years, dating back to our initial growth project of the horizontal potash caverns in Moab. The 2013 major capital investments we have on our plate include completion of the HB Solar Solution Mine, the new multi-well cavern system in Moab and the North compaction project. The ability to execute on these capital investment projects is a direct result of the focus in resources we implied [ph] in developing an impressive internal engineering, technical and operational team.

Let's talk about the HB Solar Solution Mine for a minute. This presents an unprecedented opportunity for Intrepid to expand our potash production base using low-cost solar evaporation and will provide production growth through incrementally lower cost tons. The HB Solar Solution Mine is 5 million tons of reserves. We expect the total capital investment in this project to be between $225 million and $245 million. Using the same, proven solar technology -- or mining technology that we used at our Moab and Wendover facilities, we expect HB to produce between 150,000 and 200,000 tons of potash per year. What's noteworthy about the expected operating cost for HB is that they're expected to be below $80 a ton. Compare that -- which is less than half of our current cash operating cost of $180 per ton. As you can see, the cash margin associated with this project is very significant.

The initial injection area for HB represents only a fraction of the total acreage of approximately 30 square miles, providing significant opportunity for additional expansion, particularly considering the recent acquisition of some additional leases in the area that are also suitable for solution mining.

We began construction of this project just about a year ago. This is a unique and attractive project in that we're taking an idled mine, using a non-potable water source and the sun's energy to mine and produce potash at low cost. Through the end of December, we've invested about $128 million in the project. We achieved a significant milestone in the fourth quarter when we began pumping potash-enriched brine into the solar ponds. At this point, the project is progressing very well with the initial well drilling complete, pipeline construction is done, pond construction is progressing as planned and nearing completion, and now mill construction is well underway.

HB is a game changer for Intrepid. We expect it to increase our potash production by 20% to 25%, improve our overall cost profile and increase our margin advantage. HB is expected to be one of the low-cost potash mines in North America. It leverages our solar solution mining and evaporation expertise that we have gained from our Moab and Wendover facilities. We expect HB production to begin late in 2013, ramp up in 2014 and increase to full production beginning in 2015.

A lot of the design and development work that went into the HB project was based on the success we've had at our Moab Solar Solution Mine. Moab has been very successful, and we've been investing to expand the mining area to increase the production of these already low-cost tons. Having Moab production increase, as a percentage of the total annual tons we produce and sell, will also improve our overall cash margin. We currently have 2 operating cavern systems in Moab. The first was built in 2002 and was recently expanded in the last year. We began and completed construction on a second cavern in 2012, and we're now working on a third cavern, which we expect to be completed in 2013.

We're utilizing a complex horizontal drilling technique that creates intersecting caverns. We've had a high degree of success toward our goal of increasing the surface area from which we extract the potash. We have an excellent team of geologists and drilling experts who are using steering techniques with the drills to accomplish amazing results in this complex geological setting.

Additional granulation capacity is also key to our marketing and production flexibility and why we are focused on upgrading our capacity at each of our operating sites. We've recently completed granulation expansions at Moab and at Wendover, and now we have one under construction at our North facility in Carlsbad. The North compaction upgrade project will increase capacity and further improve product quality. The project is sized to handle new production from our HB Solar Solution Mine and increased production from our West mine, as well.

Total capital investment for this project is estimated to be approximately $95 million to $100 million, and we expect to bring the 3 compactor lines in service beginning in mid-2013. Ultimately, this increased flexibility, additional capacity and quality improvement will allow us to shift production and meet demand for the highest margin products in our markets.

In summary, Intrepid Potash is unique because we're the only western world pure play potash company. We earn the highest per margin ton of North American potash producers. Our assets are geographically advantaged, and we built the capabilities to service diversified markets and customers. We intentionally focus on growth, flexibility and margin.

Finally, we're executing on a capital investment program of growing production through incremental, low cost tons from our growing reserve base. We're confident that as these projects come online and deliver lower cost tons, we'll create an opportunity for EBITDA growth curve to be even steeper than our revenue growth curve.

Thank you for your time today. And we have some time for a few questions.

Question-and-Answer Session

Adam Samuelson - Goldman Sachs Group Inc., Research Division

Great. I'll start off and maybe go from there. Maybe first, any new thoughts or update on the outlook for spring potash demand in what you're seeing? We had Mosaic here earlier today commenting that February seems to have been tracking pretty good in North America, maybe any thoughts there?

Brian D. Frantz

I think as we came back from the TFI conference a few weeks ago, there really seemed to be a sentiment change that was beginning to happen there, that spring was looking good. And so as you look at the economic opportunity that is in front of the farmer right now in terms of where grain prices are, stocks-to-use ratios, his opportunity for profit potential is good and I think we're going to see farmers apply potash in order to try to maximize their yields.

Adam Samuelson - Goldman Sachs Group Inc., Research Division

Okay. I mean, in that context, I think, among your North American competitors, I think you've seen, in the potash markets, a much more -- you lose from the slides, a much more risk aversion on part of customers and that's been filled by more consignment product from some of your competitors. How do you think that's impacted the market and impeded or changed your kind of your route to market in some of your core geographies?

Brian D. Frantz

I think as you look at the pressures that are on the industry and on the farmers right now, a lot of the uncertainty related to price came off the table once you had the Chinese and the Indians come into the market. That cloud of uncertainty was lifted and so that downward pressure on price seems to have alleviated quite a bit, and so we're expecting as that product begins to move, I mean, we're talking about 97 million acres of corn, which has never been done before. And in order to do that, you're going to have to apply significant amounts of potash in order to make that happen.

Adam Samuelson - Goldman Sachs Group Inc., Research Division

Okay. I mean -- on a kind of medium-term basis, one of the questions I get frequently in the industry is the outlook on supply and just the amount of supply growth. And obviously, Intrepid has their expansion projects, your Canadian competitors have their expansion projects and there's a lot of capacity coming on in Saskatchewan, clearly, that's intended for export markets. But you will -- talk about where that brownfield capacity coming on in Saskatchewan relative to your position as a North American pure play? And how North American market dynamics can evolve over the next few years, where some of that product -- I mean, Agrium talks the value in their retail business part is -- gives their potash expansion a home in North America and how that impacts Intrepid?

Brian D. Frantz

Well, I think you've got a lot of different factors coming into play and clearly, you're right, a lot of those expansion projects are looking at -- are targeted toward the export market. But you also have some projects that are up there and you've got some tons at risk. I mean, when you look at what's going on with Esterhazy and the amount of water incursion that they've got there, clearly, they've got to make sure that they can manage some of their obligations that are there. But I think in terms of the overall market, the demand is going to be there. You continue to watch what's going on with India and trying to feed those people over there and where is that going to come from. They're going to have to have potash on there. That's going to be coming from a lot of these expansion projects that they're looking at. So the demand is going to be there. There's going to be some pressure on the North American side, but you got to look at it from a perspective that, as I was talking about earlier, we've got 5x our annual production is consumed in the markets right around where we're at. Okay. We can service those customers, provide the service, provide quality product to those customers on an almost just-in-time basis, a lot better than what the Canadians do, because we're simply closer to where they're at. So we're still going to be able to place our tons and continue with our margin advantage and our sales price advantage.

Adam Samuelson - Goldman Sachs Group Inc., Research Division

Okay. And maybe talking about going into some of the capital projects then. The HB -- can you talk on where we are with the HB Solar mine, specifically as kind of the most high profile of those projects. I think the capital budget, the range shifted upwards with the most recent earnings report, and talk about the drivers of that and what advantage down the road with some of that incremental spending could -- can accrue?

Brian D. Frantz

Sure. Happy to do that. I mean, the current range right now that we've got for the HB project is 225 to 245. And you're right, that's an increase from where we had it before. As we finished up the mill design for the project, we looked at a couple of different things. We went back to the same proven technology in the float cells that we use at our West facility, our Moab facility, and our Wendover facility. We're using the same technology there that we have, so we had some cost increases related to that. There's also some expansion opportunities here because we also looked at the injection, the water supply, that we have, and we have authorized an additional water wells to go with that project. As I was talking about earlier, we're just looking at the initial phase of the project right now and we're only doing a fraction, about 20% of the initial acreage that we're able to flood. Additional capital we're investing in these projects allows us, one, it derisked the project a little bit, and then two, is going to allow us significant opportunity to expand that for the additional leases we've acquired, as well as flooding the additional acreage that we have on the HB side. So it does a couple of different things to it. But all in all, the project is moving along great. We've got brine in, in about 5 or 6 of the ponds right now. So we're -- construction of the pond is nearly complete and we're looking at -- the mill is coming up out of the ground, we should have that ready to go here in the fourth quarter, and we should have some incremental production that starts hitting the market late in 2013. When you get into 2014, we're going to ramp that up between 150,000 to 200,000 tons and then in 2014 and beyond, we should be that 200,000 number, maybe even a little north of that. The great part about this is those tons are coming on with an operating cost of around -- or less than $80 a ton. And when you compare that to our current cash operating cost, the $180 a ton, you can really see where that margin opportunity comes into play and that's going to expand our margin advantage.

Adam Samuelson - Goldman Sachs Group Inc., Research Division

Got it. Maybe taking the next level there, and you alluded to some of the opportunities beyond the initial phase of HB Solar. CapEx last year and this year running at elevated levels relative to IPI's history. Maybe talk about the progression of CapEx looking out to 2014 and beyond. And as we think about alternative uses of capital, what some of the projects that are being contemplated there, opportunities for additional investments within the company are?

Brian D. Frantz

I think it ties into what we're talking about. I mean, we'd love to expand our solar operations. We've acquired some additional leases down at Carlsbad, which would allow us to do that. We're going try to get those leases and that acreage production approved via the government agencies that need to do that, just as quickly as we can, because we've got that infrastructure in place in order to make that happen and capitalize on that opportunity there. We don't have any cost estimates for what those are, we're going through that right now. But I mean, clearly, that's going to be one of those opportunities that we'll be looking at into 2014 and beyond. We've also looked in at some other investment projects that are a result of some of the business development activities that we're doing that are very exciting, and we could also commit some capital to in '14 and beyond.

Adam Samuelson - Goldman Sachs Group Inc., Research Division

And so as we think about those additional capital opportunities versus a more consistent return of cash to shareholders, how should we, at a high level, think about that as we kind of get off this CapEx peak here?

Brian D. Frantz

We always look at where's the best capital return. And if we can generate excellent capital returns with the money within the business, we're going to do that. If we don't see those same opportunities, you'll see us starting to consider some of the -- return of capital to shareholders. Bob Jornayvaz, is one of our Executive Chairmen, he's the largest shareholder of the company. His interests are very much aligned with everyone else's interest, and so we're always looking at where is the best use of that capital going forward.

Adam Samuelson - Goldman Sachs Group Inc., Research Division

Okay. Happy to open it up to the audience. We've got a question here.

Unknown Analyst

On the HB Solar Solution Mine, you mentioned cash cost of $80 a ton. If you're factoring in D&A and then your rate of return, what potash price does it work at? I imagine it's very low, but any numbers you can talk about as far as rate of return?

Brian D. Frantz

No, you're absolutely right. I mean, obviously, there's a lot of room on the margin side of that. I don't have those numbers in front of me, but when we modeled the project using much lower prices than where we're at now, we would -- had a very attractive rate of return that is significantly higher than where we're at today. So even though you've got an increase in cost to this thing, again, your rate of return on those tons, I mean, you can just do the math yourself between current potash prices of where we're at right now and that $80 cash cost, layer on some D&A [ph] on top of that, you still have some outstanding returns on the project.

Unknown Analyst

Can you address the cash cost guidance for 2013? It came in a little bit higher than what I was expecting and especially on the Trio. If there's any way you can explain how controllable those costs would be going forward and how close you could control those, that would be great.

Brian D. Frantz

On the Trio side or on the potash side?

Unknown Analyst

Both. But the delta was bigger on the Trio side, so I guess more interested in that.

Brian D. Frantz

Sure. Let me talk about the potash side first. I mean, potash side, we were $180 cash cost COGS for 2012. We're looking at $170 to $190 for the range for full year '13. So I mean, obviously, that's about as flat as you can get right there. If you're looking at on the Trio side of things, clearly, we were at $209 last year. The guidance is coming in at $175 to $190. We have been working really hard, as we've been talking about for a while, on the long-term improvement plan at the East facility. And you've got 2 different things going on there: one, you've got to increase the sylvite side of that plant first, because that provides some of the feedstock that goes into the lang Plant. We've had -- done a lot of work on that, and we've had some good success in terms of our quarter-over-quarter production growth on the sylvite side. If you remember on some of our calls, Q2 over Q1, we had a 20% increase; Q3 over Q2, we went to 24%; Q4 to Q3, we went up another 10%. So we're going the right direction on that, we've made some significant improvements. And I think our plan right now is to continue to increase that potash production at the East facility, which is going to have a beneficial impact to the overall company. That then translates into what we're going to do on the lang side of things as well. Again, we've made those improvements on the lang side of things, and so I think as we continue to consistently apply the things we've learned day after day after day, our lang production is going to be there, which is going to further reduce some of those costs.

Adam Samuelson - Goldman Sachs Group Inc., Research Division

Maybe continuing on the Trio side. You've seen a meaningful change in pricing in Trio relative to potash over the last, really, 18, 24 months. So certainly, very clear in the last 12. Where can Trio pricing ultimately go relative to potash prices and just the value of the product and how much do you think is -- how much room is there?

Brian D. Frantz

We've done a great job. Our sales and marketing team has done a great job going out and growing and expanding that market. Talking to customers about the value of the product with the sulfur and the magnesium and the potassium. Those 3 nutrients in there provide significant value, particularly to leafy crops and things like that, that have a real sensitivity to chlorides. Well, we don't have any of those in the Trio market -- or in the Trio product. And so we're able to really grow that market. We can sell every ton of Trio that we produce, plain and simple. We can sell them at the price of where we're at right now. Even though you've seen some downward pressure on the potash side of things, you've seen that Trio price not only hold firm, but actually increased by over 30% in 2012. We'll see if we can hold in to that in 2013, but I think given the value that their product has from its customers, we're not seeing the price pressure that you would see on the potash side.

Adam Samuelson - Goldman Sachs Group Inc., Research Division

And how do you view the competitive environment in Trio. Obviously, Mosaic has got a similar product with K-Mag. But beyond Mosaic, I mean, other sources of sulfur just...

Brian D. Frantz

There's 2 of us in the market in the world that produce that product, and it's us and Mosaic. And it's from the same reserve base. So there's not a lot of direct competitors in terms of producing that. In one single product, you can do some different things to blend it, but right now we're the only 2 in the world from that only 1 reserve base in the entire world.

Adam Samuelson - Goldman Sachs Group Inc., Research Division

Okay. Other questions from the audience. Okay, here you go.

Unknown Analyst

Just a pro forma for this new CapEx your spending. What is the total reserve life in years that you guys will have for potash? And then secondly, I'm assuming not, but is there any bottleneck associated with your source of supply of water?

Brian D. Frantz

I'm sorry, source of supply of?

Unknown Analyst

Of water. Or is that infinite, no problem at all?

Brian D. Frantz

No. I'm going to flip back here on the reserve base structure, that question first. We have done a great job in further delineating our reserve base. And if you'll look, all of our facilities have increases in reserve, with the exception of Wendover. I'll speak to that just for a moment. Wendover has been in consistent operation since the 1930s. And if you looked at our numbers, the way that we have to calculate our reserve base, the SEC caps us, so it's got a 30-year reserve life and it's had a 30-year reserve life, for I don't how long, but a long time. If you look at the other facilities we've had, the West mine has got about 165 years left. The East mine has got 61 years left of just -- on the potash side of things. Moab has got 134 years left. Wendover, we spoke about. The East side on the langbeinite side, we've gone from 65 years last year to 115 years this year. And that is really a better definition of results of the drilling programs we've done, defining where that ore body is and how we're going to access that mineral. So reserve life is something we're not worried about running out of. The questions and discussions we have is, how do we accelerate those reserve production that comes out of that?

Unknown Analyst

The water [ph]?

Brian D. Frantz

The water issues? We've got the non-potable water that we need in order to manage our operations and increase production. Like I mentioned earlier, we're going to be drilling some additional wells on the HB project so that we can continue the injection process and expand that injection process, so that we can get that brine down into the mines, back up and produce the potash that we need. But we've got no concerns at all in terms of the water we need in order to produce.

Adam Samuelson - Goldman Sachs Group Inc., Research Division

Okay. Great. Unless there's any other questions, I think we will -- we'll leave it there. Brian, thank you very much.

Brian D. Frantz

All right. Thank you.

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