Intrepid Potash, Inc. (NYSE:IPI)
Bank of America Merrill Lynch Global Agriculture Conference Call
February 28, 2013, 10:30 am ET
Brian Frantz - VP & Chief Accounting Officer
From Intrepid Potash; Brian joined the company in July of 2010 as Controller and Chief Accounting Officer. He was recently promoted just last year to Vice President of Finance. He continues in the same role with additional responsibilities. Intrepid Potash is a pure-play North American potash company.
And without further ado, Brian, take it away.
Good morning and thank you for joining us today. I am Brian Frantz, Vice President of Finance for Intrepid Potash. Joining me today is Gary Kohn our Vice President of Investor Relations. I want to take a brief moment to remind everyone that today's presentation has forward-looking information. We would be remiss if we didn't point everybody to the cautionary language included in this presentation.
Intrepid is a geographically advantaged US 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 achieved the highest average net realized sales price and we earned the highest average cash margin among North American potash producers. Our commitment is to reinvest in our business through capital investments that are focused on production growth 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 US market. We are also one of the two global producers of langbeinite; a unique high value mineral containing potassium, magnesium, sulfate and it has virtually no chlorides. We currently have five active production facilities, each with an excellent capital investment opportunity that's focused on growth, flexibility and margin. We've begun construction of our sixth facility, the HB Solar Solution mine that when completed is expected to increase our overall potash production by 20% to 25%. We will talk more about HB in a few minutes. Further, the strength of our balance sheet, capital structure provides the ability to execute on a robust capital investment program and a disciplined business development activity.
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 which supports a positive demand environment as farmers look to maximize yields. Balanced fertilization application remains a cornerstone to achieving these higher yields. The USDA recently announced the forecast predicting 2013 results in the highest farmer income season in the last 40 years; when you think about the good years the farmers have had over the last five years that really puts things in perspective. The USDA outlook is supported by tight stocks to use ratio, strong commodity prices and planning intention numbers at the highest levels that we've seen. We saw farmers apply healthy volumes of potash during the fall application season. Generally, a strong fall season precedes a strong spring season as well.
Demand remains strong for all grades of our specialty product Trio. We've been proactive educating the market about the benefits of this product and customers are realizing the agronomic value of the product. This supports a favorable price and demand trend as evidenced by the $93 per ton increase in our average net realized sales price for Trio in 2012 over 2011. Essentially, all of our expected production of Trio is committed to customer accounts in 2013.
Intrepid is differentiated from our competitors because 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 five times our annual production. We’ve built the capacity and flexibility into our production system to maximize our margin opportunities by meeting different product demands of the end markets we serve from both our Carlsbad and our Utah facilities.
So what does the diverse product offering and geographically advantaged mean? Quite simply, that 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 simply closer to the market. Based on our calculations, when we look at the average and net realize sales price for potash and we compare it to our North American peers, we consistently earn a higher sales price per ton. In 2012, this advantage was $55 a ton, representing a 14% premium over our competitors. This $55 per ton net realized sales price advantage them turns into a $30 per ton cash margin advantage in 2012. 2012 was not a one year aberration. Year after year, we consistently delivered more cash margin per ton on every ton of potash we’ve sold than our North American competitors. In fact, over the last five years, we delivered an average of $41 per ton cash margin advantage.
How do we do this? It's not just one specific factor, but many factors. Our locations give us a geographic advantage, putting us closer to our customers. We serve diverse markets and crops. We sell diverse products in to the Ag, industrial and feed markets. We deploy a well developed marketing strategy. The cash margin advantage is simply value creation for our stockholders. As we increase production volumes of lower cost tons, we expect to continue to expand our margins.
The key differentiator for Intrepid is that we have a diverse cross section of customers that we serve in the Ag, industrial and animal feed market. The diversity in the Ag market means, we are serving not only the corn market, but we also supply product to the hay, barley, cotton, soybean, citrus, vegetable, potato and wheat markets over a wide geography. Of equal importance, we’ve built flexibility into our production process to serve other end markets for our products as well. What’s important to recognize is that we have the ability to granulate approximately 80% of our current production providing us the flexibility to meet end-market demand, this percentage we expect to grow to nearly 90% over the next year through the investments we are making in our North Compaction facility. Outside of the domestic agricultural market, we continue to see solid demand in the industrial and animal feed market.
A foundation for our growth strategy is our long life reserve growth. We have extended the reserve life at our mines over the last year through lease hold acquisitions, better definition to the ore body and investments in geology group that use a disciplined core vault drilling program. As you can see, we are growing our langbeinite reserve base. The increase in our langbeinite reserves underscores the importance of investing in our langbeinite processing facilities.
Our capital investment strategy at Intrepid is focused on three things, growth, flexibility and margin. We are executing on this investment strategy by expanding our Solar Solution Mining capacity which produce more lower cost tons. We are also adding granulation capacity which provides us flexibility in our marketing program.
Lastly, we are 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 and greater return on each ton of products that we sell.
Capital execution is foundational to Intrepid’s growth; since the inception of Intrepid back in 2000 we have invested over three quarters of $1 billion in to our facilitates; approximately one third of that come in 2012. We have accomplished the major milestones over the last 10 years dating back to our initial growth project of the horizontal potash caverns in Moab.
Our 2013 major capital projects include completion of the HB Solar Solution Mine, the new multi-well cavern system Moab and the North Compaction project. The ability to execute on these capital investment projects is a direct result of the focus and resources we have acquired in developing an impressive internal engineering technical and operating team.
Let's talk a little bit about the HB Solar Solution Mine; it presents some unprecedented opportunity for Intrepid to expand our potash production base using the low cost solar operation and will provide production growth through incrementally lower cost tons. The HB Solar Solution Mine has 5 million tons of reserves. We expect the total capital investment will be between $225 million and $245 million; using the same proven Solar Solution Mining technology that we use at our Moab and Wendover facilities. We expect HB to produce between the 150 and 200 tons of potash per year. What's noteworthy about this is the expected cash operating cost for HB are estimated to be below $80 per ton. That's less than half of our current company average cash cost of $180 a ton.
So you can see the cash margin opportunity 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 opportunities for additional expansion.
This is particularly exciting given the recent acquisition of additional leases in the area which are going to be suitable for Solar Solution mining. We began construction of this project almost a year ago. This is a unique and attractive project that we are using in idle potash mines, non-potable water source and the Sun’s energy to mine and produce potash at very low cost.
We've invested about $128 million in this project through the end of 2012. We achieved a significant milestone in the fourth quarter when we began pumping brine into our solar ponds. At this point, project is progressing well with the initial well drilling is being completed, pipeline construction is done, pond construction progressing is planned and nearing completion and mill construction is now underway.
HB is a game changer for Intrepid. We expected to increase our potash production by 20% to 25% and to improve our overall cost profile and the margin opportunity. HB is expected to be one of the low cost potash mines in North America. It leverages our solution mining and solar evaporation expertise that we’ve gained from our Moab and Wendover operations.
We expect the first production at HB to begin late in 2013, ramp up in 2014 and increase the full production beginning in 2015. A lot of the design and development work that went into our HB project was based on the success we had at our Moab solar solution mine.
Moab has been so successful that we've been investing to expand the mining area to increase the production of these already low cost tonnes. Having Moab production increase as a percentage of the annual tonnes we produced in south, we will few improve our overall cash margins even more.
We currently have two operating cavern systems in Moab. The first was built in 2002 and was recently expanded in the last year. We began and completed construction of the second cavern in 2012. We are now working on cavern three which we expect to be completed in 2013.
We are utilizing a complex horizontal drilling technique that creates intersecting caverns. We've got 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 use steering techniques with the drills to accomplish amazing results in a complex geologic setting.
Additional granulation capacity is also key to our marketing and production flexibility and that's why we focus on upgrading our capacity at each one of our operating sites. We recently completed granulation expansions in Moab and Wendover and we now have one underway at our north facility in Carlsbad.
The North compaction project upgrade will increase our capacity and further improve product quality. The project is sized to handle new production from our HB Solar Solution mine as well as expected increased production capacity from our West mine.
Total capital investment for this project is expected to be approximately $95 million to $100 million. We expect to bring the compactors online in phases beginning with the first one in mid-2013. Ultimately, this increase flexibility, additional capacity and quality improvement will allow us to ship the production and meet demand for the highest margin product in the market.
In summary, Intrepid Finance is unique because we're the only western world pure play potash company. We're in the highest per ton margins of any 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 our capital investment program of growing production through incremental low cost cash tonnes from our growing reserve base. We're confident that as these projects come on line and deliver those lower cost tonnes, we will create an opportunity where our EBITDA growth curve will be steeper than our revenue growth curve.
Thank you for your time today and for joining us. We're happy to take any questions at this time.
Thank you for the presentation. Your capital spending program, what would be sustainable base CapEx level going forward and when do you see this above average or accelerated larger capital spending program winding down?
That’s a good question. As you know, we spent around $253 million in capital 2012. Current year estimate for CapEx program is between $235 million and $285 million. We do expect that to drop off in 2014. In 2013, we will complete Hunt Blair, North compaction and the Moab facility. So you will see that number come down. We don’t have a solid estimate yet in terms of where that it will be. It should drop below $200 million. I would expect it to be probably north of a $100 million. So somewhere you got a pretty wide range there but we are looking at different projects and capital that we will be deploying sometime in ‘14 or ‘15.
I guess, a follow-up question, how would you characterize your freight advantage into the Midwest last versus Saskatchewan or other key markets and how does the royalty or the taxes you pay on resource compared to Canadian competitors?
Sure. Both of those things factor into one of the best, the highest average net realized sales price and then secondly the margin component of that. Our royalties are averaging around 3.5% to 3.7% which is significantly lower than what the Canadians are doing up there.
So we have a significant advantage there. On the freight side of things, there is a lot of different components, but the primary one that we deal with here is we are just closer to the market. We ship a lot of our tonnes via rail. We are on the (inaudible) down in Carlsbad; we are in the up in Utah and allow us to have direct shots in the lot of the significant corn markets that are there and the green market crops.
The other thing we have got the advantage of is the truck tonnes that we service. Trucks are coming into our facility at all times. Obviously, they have a lower quantity that they can put into each truck. But that’s a spot market. So we generally get a little bit better pricing on the truck tonnes than we have from anywhere else. So, those couple of things are two of the factors at least go into the highest price and the highest margins.
You comment on recent Potash market activity in the United States, a few with the other presenters here at the conference pointed to resurgence of demand in particular following the settlement with India, some US buyers would have step into the market apparently to replenish the (inaudible), what have you observe domestically with regard to recent volume trends and also you care to comment on pricing as well? Thank you.
We came back from the TFI conference earlier this month, I guess it was first part of February, there seem to be a real change in sentiment, right prior to TFI, the India contract is settled, the Chinese contract is settled I think at the end of December, and we went to TFI we were expecting things to be an okay environment in mood but when we get there to the meetings that we participated in, the sentiment had improved significantly at the TFI conference.
Since then, settlement continues to be positive and we got some moisture that is rolled across the United States in the last couple of weeks that also helps farmers feel better about their prospects and where they are going and what is going to happen with the crops, so yeah the sentiment has continue to improve over the month of February.
On the demand side of things, we are looking at right now a $97 million acre corn crop, one of the highest crops ever down the planning intention side. So you are going to have, you know, we never try to service $97 million acre crop before. So there is going to be we expect to be a significant demand in order to meet that those planning intentions. So, we will kind of see how that unfolds here over the next two or three months. The key always is in the spring what the weather is going to be like and when is all this potash going to move, because obviously the farmers have to have a weather window opened for them. They've got to have a certain amount of moisture on the fields before they can plant and get the soil ready but they can't be too much moisture at the same time. So we will see how all that plays out.
On the pricing side of things, I think that the commodity prices that are out there right now as well as the demand that I was just talking about on the corn planting intention. They seem and the Chinese and India contracts all of those factors seem to have reduced that downward pressure on price. We are not seeing that if you look at green markets in fact over the last two to three weeks, that price has been holding firm at that 460 maybe 470 level. So that seems to have firmed out at the present time.
Can you just comment on apart from the acres planted if there is growth coming in potash application in the states or is US essentially applying potash and as fully as they need to.
That's a good question and the answer to that is probably pretty specific on literally a field by field basis. But the farmers have become much more sophisticated over the years and in doing their soil testing analysis. So they go in and they take a look at what are the new trends left in the soil from the prior year. We saw a strong fall application season. There's a lot of question over last summer with the drought going on in terms of nutrient removal and how much nutrient was still left in the soil.
From a potash perspective when you think about what potash is used for its plant to grow, it’s in that root ball and it’s in that stock. And most of that potash that was in the soil at that point in time was consumed by the plant in order to get it up out of the ground. The drought obviously increased in severity as the summer went on and then when the farmers went in and did their analysis they felt like the potash left in the soil, potassium left in the soil was deficient and so that's why we saw a pretty strong fall application season. Again when we've seen those strong fall demand periods generally they have preceded a strong spring season as well.
How would you compare your capital costs for the expansion compared to the Canadian if you want and your operating costs on business expansion compared to 15 Canadian production?
Okay, that's on the HB project?
We increased our capital range on the HB project up to the 225 to 245 range. If you look at the midpoint of that range compared to the midpoint of our previous range, that's an increase of 9%. Those increased capital costs really come from primarily two major areas. The first one is on our flotation plants, the flotation cells within the project. We have been looking at some columnar flotation processes in there. It was a little bit more out of the box and as we looked at it and studied a little bit more we felt like there was some risk in going with that and so we decided let's go back to the proven technology that we operate right now at the east and our west facilities, Moab and Wendover to go back to those type of flotation cells.
So we have a little bit additional cost to go with those type of rotation cells, but we're confident that those are going to give us better operating results in the end. The other significant piece on the capital increase related to our decision to drill some additional water wells on the project, and what those are going to do is provide us additional opportunity to access the water that we need in order to do the additional expansions and the addition phases of the HB project.
Right now, our first phase of HB is only flooding approximately 20% of the acres that’s available to us. And so we talked about those additional leasehold that we acquired. These additional wells give us the capacity to one; do those other phase as well as these additional leasehold acquisitions that we've acquired in order do additional solar mining operations.
The great part about HB which I talked a little bit about earlier is we expect the cash cost of these to be $80 a ton, less than 80 bucks. That's a pretty good number that we're pretty confident on. Remember we operate the Moab facility and the same technology, the process, the operation that we use in Moab is what we're doing here at HB. So we understand how this works and what needs to happen. So we're pretty confident that we will be able to bring this ton at $80 or less. The great part about that is our current average cash cost is $180 a ton. So we expect that our margin on those HB ton should be around $100 more than what we're doing right now for existing mining operations.
I am trying to understand how does that compare to potash or our Canadian mine? In terms of expansion and in terms of the operating cost going forward?
I don't have those numbers with me, right now at this point to figure out what their operating cost are going to be. I can tell you that going back to that margin slide that we have talked about. If you look at where our cash cost are relative to where their cash costs are and I would specifically encourage you to go back and look at where those cash cost have been in 2010, 2011 and 2012, look at those trend lines that are going on. You will see our trend line is going to be little flatter than what you are going to see from the Canadian side. The best part about that factor in these additional tons that I am telling you 20% to 25%, $80, you are going to see our cash cost profile come down. Okay I can't speak to their capital cost per ton hopefully you got an opportunity to ask those questions of those other companies.
Two questions can you comment on what percentage of your cost is fixed?
You know that’s a difficult one to answer. We’ve got obviously a lot of equipment, particularly at our underground operations. So you got a significant component there, but when you look at what goes on at our solar solution mining opportunities, those costs are significantly less. So it kind of depends on the different facilities. We tend to operate our facilities full out 100%. Because we have learned overtime that operating those at a 100% produces obviously more tons but it also keeps our cost down. We are not as able as some of the Canadians are to increase and decrease production to meet demand. What we typically do is we sell every ton of potash that we produce.
Turning to my second question, given that over the next three to five years supply is suppose to exit demand for the industry, how are you positioning your company to adjust to that or address that?
Couple of different factors there; yeah you are right some of the proposed expansion plans that are out there from the global funds, they are going to potentially add to the additional capacity. We generally do not participate in international market, so the Potash company 100% of our Potash goes into the US market, okay. We are supplying about 9% of the US market. The US market has been very consistent between 9 and 10 million tons. A lot of the demand that we were talking about in the international market, the capacity increases are going to be to serve some international demand as well. If you look at the CAGR that potash [corp.] was talking about yesterday and some of that materials, they are looking about 3.5%. All of that production should be consumed on the demand side as well, that is our expectation. In the US market though again we are about 1 million ton off of 10 million give or take, and our immediate area and our backyard close to our mines demand as five to six times our annual production.
If I may ask question about the Langbeinite market maybe the competitive market landscape there, any products that could be substitute to apply that sulfur for the field and the pricing outlook for Langbeinite?
Langbeinite market is one that we worked really hard on. When you go back to when we first acquired the mines particularly the east mines is where this comes from, the pervious some of that property literally was taking the Langbeinite and throwing it away putting it on the tails piles. We develop the process at that point in time to recover 25% to 35% of that. The langbeinite market was okay at that point in time. We built in our langbeinite recovery improvement project, which we completed late in 2011, and that project was designed to increase recoveries of potash from that 25% to 35% range up into the 45% to 50% range.
So the plan there is to increase the capacity through recovery. As you all know during 2012 we didn't execute very well on that. We put in place an improvement plan at our east facility in order to get that facility to run more efficiently and more effectively. On the front side of that project is the potash side of that, and we've had great success in increasing our potash production there quarter-over-quarter-over-quarter in 2012.
So as that has now happened we are increasing the feedstock that we are going to have into the lang plant which should give us a greater opportunity to increase the production on the lang side. While we were building the langbeinite recovery project, our sales and marketing team went out and talked to additional customers and really grew the market, in terms of which customers could potentially use that product and so they have been very successful as they've gone through and literally grown the market versus taking share away. So, again two producers of langbeinite in the world, they both come from the same reserve base down in Carlsbad, New Mexico.
What's been interesting to watch on the price side of thing to your point is the langbeinite, our trio price has gone up year-over-year by $93; the potash price has come down by about $50 on our side. So there's been a little bit of a decoupling that's happened. It’s because of the value that comes with those three minerals in one product. Yes there's opportunity probably for application of three different applications and different blends. The advantage that we've got is its one product, its got all those nutrients in it and its applied very simply and very easily. With no chlorides in it, it gives a real advantage to those green leafy crops in particular that are really chloride sensitive.
Thank you for your time. It’s been a great presentation.
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