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Intrepid Potash (NYSE:IPI)

Q4 2013 Earnings Call

February 13, 2014 10:00 am ET

Executives

Gary Kohn - Vice President of Investor Relations

Robert P. Jornayvaz - Co-Founder, Executive Chairman of The Board and Principal Executive Officer

Kelvin G. Feist - Senior Vice President of Sales and Marketing

David W. Honeyfield - President and Chief Financial Officer

Analysts

Mark W. Connelly - CLSA Limited, Research Division

Christopher S. Parkinson - Crédit Suisse AG, Research Division

Donald Carson - Susquehanna Financial Group, LLLP, Research Division

Ian Bennett - Morgan Stanley, Research Division

Ben Isaacson - Scotiabank Global Banking and Markets, Research Division

Mark R. Gulley - BGC Partners, Inc., Research Division

Joel Jackson - BMO Capital Markets Canada

Christopher Perrella - BofA Merrill Lynch, Research Division

Andrew D. Wong - RBC Capital Markets, LLC, Research Division

Operator

Welcome to the Intrepid Potash Inc. 2013 Fourth Quarter Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Gary Kohn, Vice President, Investor Relations. Please go ahead, sir.

Gary Kohn

Thanks, Lori. Good morning. Thank you, all, for joining us on our fourth quarter 2013 earnings conference call. Presenting on the call today are Bob Jornayvaz, Executive Chairman of the Board; Dave Honeyfield, President and Chief Financial Officer; and Kelvin Feist, Senior Vice President of Sales and Marketing. Also in the room with us today are 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.

I would like to remind everyone that the statements made on this call that are not historical fact or that express our belief, expectation or intention, including statements about our financial and operational outlook, are forward-looking statements within the meaning of the United States securities laws. These statements are not guarantees of future performance 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 will refer to certain non-GAAP financial measures. Our earnings press release includes reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures. Our SEC filings and press releases are available on our website at intrepidpotash.com.

With that, I will turn the call over to Bob.

Robert P. Jornayvaz

Thanks, Gary. And Good morning, and welcome to our conference call. Thank you for joining us. Since Hugh and I founded Intrepid, we've been investing capital to build new and update existing assets with the objective of lowering our per ton operating costs and increasing production. We are nearing completion of this multi-year major investment phase, and we will significantly reduce the amount we invest in capital projects until we see a sustained improvement in the outlook for the potash market. With the current pricing and supply dynamics, we have taken the difficult but necessary steps during this downturn to reduce our SG&A and operating costs. We will actively manage the balance sheet to ensure that we have the opportunity to see the benefit of our years of investment, as these assets get commissioned and begin performing as designed.

A major advantage for our company, which is beneficial in any market condition, is the proximity of our assets to the market and the diversity of our customer base. Because of this proximity and our diversity, we continue to achieve an on average, higher net realized sales price than our Canadian competitors. In 2013, we made great progress on a multitude of projects we had underway. Each project is essential to building a more durable and competitive company.

Most significantly, we have brought our HB Solar Solution mine into operation. HB was just a division a few years ago, and through our deliberate and persistent efforts, we brought into service a real game changer for Intrepid. At full capacity, which we expect in the 2015-2016 of operation season, HB is designed to increase our potash production by 20% to 25%, and these tons will be produced at a cash operating cost estimated to be nearly half our current rate.

With the addition of the HB tons and the expansion we have completed at Moab, we are improving the overall cost structure of Intrepid. Starting with this year's harvest, and even more so in the coming years, we will have an increasing percentage of our total production coming from our low cash cost Solar Solution method, which in turn, will continue to lower our company-wide per ton cash operating cost.

We've been making improvements to the West to stabilize and increase recovery rates and to remove bottlenecks from the process. We expect to finalize our upgrade of the West in the first half of this year and then begin seeing improved recoveries as much more efficient operations during the second half of the year.

Our new North Compaction facility brings together the HB and the West projects into one system, and we have created the capacity to granulate 100% of the potash we produce in Carlsbad, so that we have the flexibility to choose the best sales opportunities available, whether it's for standard or granulated product.

The new North facility is the final piece in accomplishing an important strategic objective, creating the capacity to granulate 100% of our potash production across all of our mines. We believe that this new facility produces some of the highest quality product in the industry.

As I mentioned earlier, and I want to reiterate, Intrepid enjoys several differentiators that have and will continue to set us apart. We are well situated with production facilities in key markets close to our customers. We serve a diverse customer base with high-quality products. We operate at full production rates and sell what we produce. And as we bring on HB and other major capital projects this year, the result of a multi-year program, we're going to be lowering our per ton cost.

I'd like to have Kelvin add a few comments about our sales and the market.

Kelvin G. Feist

Thanks, Bob. Our fourth quarter net average realized sales price for potash was $338 per ton, remaining well ahead of our North American competitors. During the fourth quarter, price uncertainty caused agriculture buyers to be cautious and they felt no real sense of urgency to place orders, instead counting on just-in-time deliveries and consignment programs offered by major producers.

Fourth quarter ag potash sales were also influenced by weather and the late harvest compared with what was a strong fourth quarter a year ago. As a result, fourth quarter and full year potash sales volumes were both off 18% compared to 2012.

We did grow potash sales volumes sequentially 7% from the third quarter of 2013 and are currently seeing some early field demand materialize, as dealers return to the market in response to commitments from the farm gate. We're also seeing signs of a strengthening in the international markets, with strong demand in Latin America and Chinese contract settlements.

Domestically, the recent $20 per ton price increase announcements would suggest some near-term stability in potash pricing. However, we remain cautiously optimistic with regard to price, recognizing that predicting it beyond the spring is difficult as we still see some supply and demand imbalance, and a risk averse buyer in the marketplace.

The high demand for our premium and granular specialty fertilizer Trio allowed us to have another successful sales year, nearly matching our 2012 Trio sales volume. This was despite most of the fertilizer markets being softer throughout 2013. We also were able to hold pricing steady from a year ago with an average net realized sales price in the fourth quarter of $345 per ton, which is down only $2 a ton from the 2012 fourth quarter.

Customer demand for our premium and granular Trio still exceeds our current and improving production rates. We continue to focus on meeting this demand by producing more premium Trio through operating improvements at the plant. In fact, our team in Carlsbad produced more premium Trio in the fourth quarter than any other quarter in plant's history.

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

David W. Honeyfield

Thank you, Kelvin. In the fourth quarter, the convergence of lower prices, depressed sales volume and estimated cost -- or escalated cost created a net loss. Looking into 2014, we know that our cash flows will be largely impacted by the pricing environment, particularly in the first half of the year, ahead of our lowering cost with our new assets. We've developed a plan to answer these challenges and we've set measurable goals to ensure that we made the necessary progress.

First, it's essential that we achieve our goal, lowering cash operating costs at our Carlsbad operations. This will be achieved by obtaining the benefits of the new lower-cost production from our HB Solar Solution Mine and improvements in our recoveries at West that are now possible because of our new North granulation plant.

Second, we're already benefiting from the steps that we took to reduce our annual expense run rate by over $15 million with the workforce reduction and other specific cost-saving measures.

And third, we are reducing our capital spending by more than $200 million this year, now that the majority of the spending for our major projects is behind us. We are closely managing capital investment spending to maintain liquidity and to generate free cash flow in 2014.

We did operate well in the fourth quarter, crossing several important milestones, which indicates that we have taken strides in the right direction. Most notably, we brought the HB mill into service at year end, making it possible to have our first production run of HB tons early in January. As Kelvin mentioned, we pelletized a record number of Trio tons as well in the fourth Quarter. When you consider the level of disruption to normal operations from the capital investment work that was occurring at the facilities, I view our full year potash production results as a success.

On the cost side, however, both our cash operating and total cost of goods sold per potash increased 8% in 2013 from 2012. This was not unexpected from a directional perspective, yet I don't believe it's indicative of our true run rate. We incurred higher-than-normal expenses related to the work being performed, and the fourth quarter, in particular, showed unusually high per ton cost. We experienced an interruption at one of our mines due to a loss of power from our supplier, we had higher-than-planned maintenance costs, and we had some year-end true-ups and estimates for employee benefits and higher property taxes.

The implementation of the new plants and facilities at HB, at West, at Moab are expected deliver lower per ton potash operating cost for the full year 2014 when you compare it to '13. The benefits from these items will be greater in the back half of the year as the West upgrades are finished, as the second larger annual harvest occurs at HB following the summer of operation season and as the first meaningful product from our new cavern system in Moab is the delivered in the fall of this year.

As our guidance shows, we expect to reduce our cash operating cost per potash in the neighborhood of $20 per ton for the first half to the second half of the year. While we're improving our per ton cash operating costs, total potash cost of goods sold per ton will be relatively flat year-over-year when you consider the additional depreciation expense from the capital projects that are brought online, estimated at approximately $10 per ton.

The Trio results also reflect the hard work that the team has done to execute an improvement plan aimed at increasing production and lowering costs. For the full year, production was up 35% from 2012, helping to drive a 4% improvement in both cash operating and total cost of goods sold for the year. We're confident in the overall trajectory at Trio, and the value of the product to our customers and to farmers. And we expect to grow production and lower costs again in 2014.

While the operational successes that we had and that the steps we took this past year are essential to keeping Intrepid on track to achieve our longer-term goals, I recognize that price always plays a part. We entered 2014 with the majority of the work and the spending on our capital projects complete, putting us in a position to generate free cash flow in 2014. I'm confident that we're on the right path to return to profitability over the course of the year and that we will benefit from diverse end markets, close customer relationships and operating facilities that are favorably located close to the markets that we serve.

Operator, at this time, we're ready for questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question today comes from Mark Connelly of CLSA.

Mark W. Connelly - CLSA Limited, Research Division

Just 2 bigger picture questions. With respect to the new granulation flexibility, is there a meaningful cost when you're swinging hard from one side to the other that we should be aware of as we think about -- I mean obviously, there's a big benefit to being able to be where the market is I'm just wondering whether there's something funny that happens during that swing on the cost side. And the second question, obviously, your Trio volumes and your prices look pretty good. As you pick up more experience with Trio, do you expect that business to be fundamentally less volatile than potash?

David W. Honeyfield

This is Dave. I'll touch based on the granulation question, and Kelvin, if you can address the Trio question, that would be helpful.

Kelvin G. Feist

Sure.

David W. Honeyfield

On the granulation side, Mark, I think the important piece is exactly where you highlighted, that we can look at the markets and look at the relative demands, whether it be industrial feed, ag and move product into those based on the need to compact. Overall, out of our Carlsbad facility, there is a cost to compaction and it's somewhere around $20 to $25 a ton. And what we do is we really take into account the margin on product. So we don't see that number change dramatically if we ramp up or ramp down because we're not usually going 100% compaction 0% compaction. We're always running it at some rate. So it really doesn't fluctuate. I think the important piece is really that we're focusing on the margin associated with the ton that we produce. And we've got the ability to stay focused on the highest margin opportunity.

Robert P. Jornayvaz

Yes, Mark, this is Bob. It really gives us the opportunities we're seeing in Moab and Wendover right now and now in Carlsbad to make the right product for the right market at the right time to achieve the maximum margin. I mean, as we see the industrial market strengthening right now and we've seen some great strength in that market, at certain of our plants, we're not compacting 100% because we're doing well on selling into the industrial market. So it's that flexibility that we really never had before. It also takes you totally out of the realm of any kind of product quality issues, having these new compaction plants. Instead of running a 45-year-old compaction plant that we had stopped investing in that occasionally cause some product quality issues, we're past those. And so those savings go straight to your bottom line and be able to compact a product that has a longer shelf life and gives us the opportunity to move farther out, to get closer to the farmer, with less degradation risk and a much higher product quality standard.

Mark W. Connelly - CLSA Limited, Research Division

That's super helpful.

Kelvin G. Feist

It's Kelvin here, Mark. I'll just try and answer your question around your Trio volume and price question. I think you're asking about the volatility as we bring on more production. And I guess the way we see it is there's such a strong demand well beyond the ability for us to supply today. So we just feel like that market is significantly bigger, and we just don't see any dips or significant change to how that market is acting. We're selling, of course, into premium high-value crops. They want a low-chloride product into those markets. So we really don't see a whole bunch of volatility as we bring on more production.

Robert P. Jornayvaz

Yes, and Mark, this Bob again. Once again, when we entered the Trio market or the langbeinite market, we did with the intention of going out and growing the market rather than trying to buy market share. And as you know, and everybody watched in '12 and '13, as we expanded our langbeinite production, we got a little bit out over our SKUs and we stumbled a few times. But now that we're out there and we continue to increase our palletization, our demand for our granular and our premium products is pretty significant. And so we're very confident that we'll be able to sell all that we can make.

Operator

The next question comes from Chris Parkinson of Crédit Suisse.

Christopher S. Parkinson - Crédit Suisse AG, Research Division

You probably touched a little on this during the beginning of the call, but can you further elaborate on what you're seeing in your specific markets within the U.S. and discuss what you're seeing there from a competitive environment perspective, relative to what some other players may be seeing in other areas farther East in the U.S.?

Robert P. Jornayvaz

Well, I'll let Kelvin give you some color, but we're seeing some good solid demand in our core markets, very strong demand. We've got a good order book. We're seeing a firm demand, and we're very pleased to see it. Given the strategy that we had to try to get some of our product further out in the field and the fact that our new product has a much longer shelf life, we're able to do that. So I'll let Kelvin just talk a little bit about what we're seeing currently, but we're seeing good demand.

Kelvin G. Feist

Sure. Chris, it's Kelvin here. In terms of where we're marketing, I think this past fall was a little bit disappointing. We had a bit of a late harvest and our application window was a little narrower in the Western Corn Belt and some of the other areas that we partake in. We did see a real strong fill here, which is encouraging. I think the reality is when you see some of these contracts signed whether it be Chinese or other, we're starting to see a floor in the marketplace and some confidence come back into the market. So that's some of the reason why we're getting some positive feedback from the field and looking like we're going to have some pretty good success here going forward, at least for the next 3 months or better.

Operator

The next question comes from Adam Samuelson of Goldman Sachs.

Unknown Analyst

This is Jason Brie [ph] standing in for Adam. I just have a quick question. In the release you guided cost at HB Solar to half your current cash cost per ton, which would be around $100 per ton based on your 2013 figure. Whereas previously, you guided them -- or HB to around $80 per ton. We were curious if this was an apples-to-apples comparison. And if so, what was driving the difference?

David W. Honeyfield

Jason, this is Dave. I think that you're probably trying to read into that a little bit too precisely. we continue to see the HB tons be extremely low-cost, utilizing the solar evaporation and the solution mining. I think as we get -- move down the road and we continue to see the benefit of additional harvest seasons, we just know that, that trajectory is lower on the cost side. So the ultimate cost per ton is going to be driven based on whether we're compacting that ton or whether it's being used in a standard market. But that range that we talked about continues to be a very, very solid and very achievable range. And I think the important part of the question is those costs are meaningfully lower, and they're first, second quartile costs. So that's really where the advantage starts to come in.

Operator

The next question comes from Don Carson of Susquehanna Financial.

Donald Carson - Susquehanna Financial Group, LLLP, Research Division

I want to talk a bit more about pricing in the domestic market. Kelvin, you said there's still a supply/demand imbalance. We saw the Canadians very aggressive internationally last year. That appears to be -- they appear to be less aggressive this year. But what are you seeing in the domestic marketplace? Are they trying to place some of that excess capacity there? And is that -- I know that they're willing to sell for $30 to $40 a ton less than you are. And Kelvin, you also mentioned that you've got a risk averse buyer. I'm just wondering do you mean the dealer or you're referring to the grower there?

Robert P. Jornayvaz

Don, this is Bob. I'll answer the first part of that. Having just returned from TFI, we're just seeing a much more solid, firmer demand profile than we've seen in a long time. And so, we're seeing a buyer that's willing to step up to the plate and buy. We're not seeing a market flooded, if you will, for tons of other producers trying to gain market share. We're seeing a much more rational demand-driven market at this point in time that we've seen in quite a while. And so, I guess that's the color. I was in most of the TFI meetings, and that's the atmosphere in which we're operating today, which was a much more optimistic, positive atmosphere to be operating in. Kelvin, if you'd like to give it some more color?

Kelvin G. Feist

Sure. Let me just talk to the question on the competitors first. Certainly, they're as aggressive as they've ever been. I think that's some of what we're seeing on that supply/demand. I think we're also seeing them be successful in the international markets. So I don't know what to expect from that. But what we know is we're holding our own in the markets that we serve, and that's the critical piece that we're worried about. With regard to the risk averse buyer, just I think our view is that they're really trying to find every tool they can to derisk and not take a position without having the support from the farm gates. So meaning, knowing that the farmers come in to get the product and then them purchasing to cover that need, that's sort of the position they've been in for -- I'm going to say, extended period of time, probably 12 months now. So do we see that changing? It feels like it's starting to shift, but I guess we want to see a few more months in front of us before we're absolutely sure that that's changing.

Donald Carson - Susquehanna Financial Group, LLLP, Research Division

Just to follow up on that, I know there's been more consignment selling, particularly by your competitors. I mean, what percentage of your domestic sales are on a consignment basis? And do you think that as the market is in fact firming with better demand that some of this consignment selling may decline as a percentage of your overall business?

Robert P. Jornayvaz

Well, what we saw in the first quarter was -- this is Bob again. Fourth quarter and what we're seeing in the market now are dealers stepping up and buying their consignment tons. And so, that's something that has created a firmness in the market. So while there are consignment tons out there and continued consignment programs, I don't know that we know the exact percentage today because we're switching over. We have to respond to what one of the producers is doing in the consignment realm. We don't like consignment. It's one of the realities of the market that we're having to deal with. The good news is that we have seen dealers buy their consignment tons. So we're seeing a bit of that market shifting and changing literally as we speak. And so our view is that we don't like the consignment. And when the market was falling, the consignment was something that one of our competitors put kind of on the market. So Kelvin, I'll let you give some color to that.

Kelvin G. Feist

Sure. We use several different programs to try and work with our customer and I guess derisk and still manage our business. I guess I don't see a significant change in our position there. One thing that we do see is, as the confidence comes back into the market, I believe the consignment is less critical to the customer. So as Bob suggests, when -- as they start buying more, they don't feel like they need that backstop as to the same degree. So that's our expectation is it becomes a less critical piece of the business. And as Bob suggested, it's not something that we like, but we certainly need to partake in, in some cases to secure the volume that we need to secure.

Operator

The next question comes from Vincent Andrews of Morgan Stanley.

Ian Bennett - Morgan Stanley, Research Division

This is Ian in for Vincent. Could you talk about the CapEx outlook for 2014, if that's a reasonable estimate of sustaining CapEx? And then secondly, if pricing was to accelerate from here and we had more free cash flow generation, what projects could potentially be you deploy that capital to in 2015? And similarly, if pricing were to degrade from here, if there's any areas within the CapEx budget that could be trimmed?

David W. Honeyfield

Ian, this is Dave Honeyfield. Let's see, on the -- our range on the capital side, you can see that that's significantly lower and we've got a few wrap-up projects that are out there. The sustaining capital that's being invested is at significantly lower levels than it has been in the past, and a big part of that is that as we've invested in the plants, you upgrade and you've got newer equipment and such. So I think the piece to keep in mind there is that we have probably more flexibility today than we have ever had in terms of what that level is. And certainly, there have been historical periods out there where sustaining capital has really been shrunk down to whatever level is necessary to operate the business. So I think the takeaways there that I would ask people to think about is, effectively, a very new and updated asset base, knowing that we're through the majority of the large capital spend, the fact that we're focused on delivering free cash flow and that we've got the ability to flex somewhat on our sustaining needs.

Operator

The next question comes from Ben Isaacson of Scotiabank.

Ben Isaacson - Scotiabank Global Banking and Markets, Research Division

Just a question on your market share. Can you just talk a little bit about whether you've seen any pressure from exporters outside of North America, bringing product into the Gulf, Uralkali or maybe the Germana or Chileans, et cetera?

Robert P. Jornayvaz

We'll let Kelvin address that in a second. But once again, in a historical perspective, we're seeing volumes in those historic ranges. We've seen sort of attempts to come into the market, and we've competed very diligently as have other Canadian producers up and down the river to secure geography, if you will. We've seen some try to come in, but we haven't seen as much as you might think. Kelvin, if you want to give some color too?

Kelvin G. Feist

Sure. I guess I would say that, as Bob suggests, I don't believe we're seeing a significant change in the overall volume. We are seeing different players showing up in New Orleans, trying to market their products. So I would say more players but not a significant change in volume. The one thing that's interesting, especially this year, is how the weather might play out. We all know that we've got a pretty late spring developing here and what will that create in terms of delays and potentially demerge on barges, et cetera. So I would say the customer today is quite concerned if they have a strong position with some of these folks. And we're getting lots of questions asked about how we can maybe support some of that.

Robert P. Jornayvaz

Given the river's condition and the railroad's condition, we're having lots of discussions around logistics. And so, there have been Canadian railroad issues, there's issues with cars, and we've all read the headlines in terms of railroad traffic in obtaining cars, and we all know the status of the river. So Intrepid cannot be better situated to take advantage of any logistical problems that arise from those 3 areas.

Operator

The next question comes from Mark Gulley of BGC Partners.

Mark R. Gulley - BGC Partners, Inc., Research Division

So I wanted to follow up on the logistics question. I had that on my list. While it does sound like there might be delays in getting product to their destination, with the very cold weather and the big snow cover, there could also be big delays in fieldwork as well, and the 2 might coincide. Do you have any thoughts along those lines?

Robert P. Jornayvaz

Kelvin, do you want to touch base with some of the feedback we've had from customers?

Kelvin G. Feist

Sure, we've actually -- I think that's top of mind for not only farmers but our retail chain and certainly ourselves. So I think the one positive, we did see a pretty good run in terms of application on frozen ground here recently. They covered some significant acres. So I think every farmer is worried about maybe catching up what they didn't get done last fall. But to your point, in terms of application window for spring, these guys can cover a lot of ground in a very short period of time. So I would say that there's -- today, there's not a concern. If things continue for an extended period of time here, it will become more crucial. But all we can do is best position our product to try and accommodate the customer need, and we feel like we're doing that as well as we can. We're talking regularly with the railroad and other folks that handle our logistics to try and help us be successful this spring. So I guess, beyond that, I guess I don't have a really good answer as to exactly how the spring is going to play out, but our hope is that we're positioned as well as we can be, in light of how late we think it might be.

Mark R. Gulley - BGC Partners, Inc., Research Division

Kelvin, I want to come back also on pricing. One of your competitors talked about the fact that they had already priced maybe 2/3 of their shipments for the first half of 2014. So while demand might be good converting consignment tons to real tons, invoice tons, is it also possible that, that has been already priced at fairly low levels that persisted maybe early in 2014?

Kelvin G. Feist

I think when we know about price today is there's typically an announcement of price and then an opportunity to take a fill prior to that. So we know that our competitors have done some of that, and I guess we've got a very good book, and so we're quite comfortable with our position as well. And I guess the expectation is that, that customers and farmers are comfortable with where the market is going and that they're going to step in and apply nutrients in a balanced fashion.

David W. Honeyfield

Mark, this is Dave. I guess one other piece to add to that, and I think -- I mean, you usually highlight this as well. But you really do need to look at what our mix of end markets are, much more so than our competitors. And the fact that we continue to supply a decent amount of our product into the industrial market, a decent amount into the feed market, I think it just highlights why we continue to achieve a higher net realized price because, as you mentioned, the announcements of price increases are always interesting and the realization of that is another thing. And we're just uniquely positioned to be able to act on those items in a much more effective way.

Robert P. Jornayvaz

Yes, and just to give it a really simple context, I mean, the fact that we've broken the drop in the State of Texas in some of our very national truck markets gives us the opportunity to service those markets on a truck basis that our competitors just don't have the opportunity to service. And so when we look at our national truck markets, both in the Pacific Northwest and in Texas, Oklahoma, New Mexico, Southern Colorado, we see great opportunities developing just because of the moisture and the precipitation that we're seeing.

Mark R. Gulley - BGC Partners, Inc., Research Division

Bob, if I can wrap up with kind of a longer-term question. This maybe the last thing you want to think about given all the CapEx you've poured into your Carlsbad facility recently, but your neighbor across the road seems to be souring a little bit on MLP production there, even if they like -- their product competes with your Trio. Are there any opportunities to expand your footprint in Carlsbad if that unfolds as it might?

Robert P. Jornayvaz

We watch with interest their rising costs at their Carlsbad facilities that they talk about very publicly. And whether or not they shut down their MLP side or not, we're very aware of and we watch. That's the only langbeinite deposit in the world, and we're both mining from the same deposit. So we're just very aware, I guess, is how I'd leave that.

Operator

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

Joel Jackson - BMO Capital Markets Canada

I'm just trying to understand some of your guidance. So you're modeling in 50,000 to 100,000 tons from HB each this year. Your cost seems to be flat on a per ton basis to 2013. It looks like your base asset production, you expect to be a little bit lower, adding the new HB tons, which should lower cost, but you guiding to flat. Can you just talk a little bit about that?

David W. Honeyfield

Joel, this is Dave. I think the pieces that I think you just need to recognize is that majority of the new HB tons start to come on with the second harvest. That happens beginning in September. And so the sales of those tons will realistically start to occur in October and November timeframe. Without a doubt, there's an acceleration as we bring on additional HB tons of the lower cost nature of those. And I think overall, on our base operations, we'll see our costs really get back to where they were on a historical basis. So I just see everything directionally going the right way. You've got the continued contribution out of the Utah assets and we know we always have a little bit of variability in production there. But, Joel, I would say overall things are going absolutely in the right direction, and that's the piece I would take away from it.

Robert P. Jornayvaz

Joel, this is Bob. Once again, to reiterate, is that each harvest grows a little bit by a little bit because your saturations in the mine as we continue to fill up the mine, we have more residence time of the brines underground. We come out with a higher ore grade or a higher brine saturation as time goes on because we're mining a greater area and we just have more residence time than more surface area that we contact with our brines. So as each harvest occurs, we produce more tons and that volume going through the same fixed cost, if you will, reduces our cost structure as time goes on. So that's the beauty of this facility. As it grows, we increase more surface area. I think you just have to understand that it's harvest after harvest after harvest.

Joel Jackson - BMO Capital Markets Canada

Okay. I just want to ask a question. I don't know if I'm going to be off-base on this, but in the last -- if you look at 2013 and what you're guiding for '14, your langbeinite production is going to be a good deal bigger, larger than your Trio sales volume. Is there something going on where you require more raw material to produce Trio?

David W. Honeyfield

Joel, this is Dave. The highlight I'd point out of that is that as we continue to increase our pellet production in that area, that's where our additional opportunities on the Trio side will be. What we've built into our sales plan right now is essentially that the rate at which we have been pelletizing on average, -- we've actually seen our recent months' pellet production be higher than that, than that near-term average. I think there's a fair bit of upside potential there. But we've still got to get there on the pelletization front and we're seeing some good progress. So I think the takeaway is that any granular, any premium Trio ton we feel really good about and we just know that that's our opportunity is to continue to increase our rate on that front.

Robert P. Jornayvaz

The only -- Joel, this is Bob again. The only part in the Trio market that we see that can be erratic is the standard side of that market. And so 2 years ago, we were selling all the standard that we could produce and we've always been able to sell all the granular that we could produce. So the standard market is a little bit more erratic. We are seeing increased interest in Africa in the standard product. That's why we're so focused on as we have successfully done at all of our other plants and being able to granulate 100% of our potash product, that's why it's so important for us to have the same strategy with our Trio product to gradually ramp up and ramp up our ability to create natural granular and to continue to pelletize on that Trio product.

Operator

The next question comes from Chris Perrella of Bank of America Merrill Lynch.

Christopher Perrella - BofA Merrill Lynch, Research Division

A question on the inventory levels. They've basically doubled since the end of 2012. How much of that is structural or due to the delayed fall application season? And when do you expect those inventory levels to get worked down to more normal?

David W. Honeyfield

Chris, this Dave. I'll touch on that and Kelvin, if there's something that I don't cover off, feel free to jump in. I think the -- how soft it was in Q3 and Q4, we built a little bit more, I'd say sylvite inventory than we had planned on. I think Kelvin really already hit on upon that piece. Chris, when you think about the level of fill activity that's taking place here, I think on the potash side, that will come down pretty quickly. And third, without a doubt, it's a small component of that. It's somewhat structural in that we continue to try to move product forward in the system and make sure it's available because we know how quickly farmers will get into field, do work and they want to make sure that their product is available at a moment's notice. And we were very tight when we're going into the spring last year, if you remember, because the fall of 2012 was a pretty darn good fall. So I think somewhere in the middle of those numbers is a pretty good number for us to manage to.

Christopher Perrella - BofA Merrill Lynch, Research Division

All right. And a quick follow-up on the power outage that you took in the fourth quarter. How much did that drive up the per ton cost?

Kelvin G. Feist

It ended up taking us out for, I think, it was 3 or 4 days at the end of the day. The challenge with it is that as you bring product or bring plants back up after those exercises, hard stops on motors and everything else just creates some real operating challenges. So it was probably $3 or $4 when you factor in that and a couple of accounting items. It was probably $10 a ton overall that came through the quarter directly.

Operator

The next question comes from Andrew Wong of RBC Capital Markets.

Andrew D. Wong - RBC Capital Markets, LLC, Research Division

A question. So with regards to Trio production, I think in the past, you had mentioned that the Agrium [ph] project was expected to grow production by about 100,000 tons. Can you talk about when we'll expect to see an acceleration in production?

David W. Honeyfield

Andrew, this is Dave again. A big function of our Trio production is going to be the grade of the material that's coming out of the mine. I think as we touched on a little bit earlier in the year, we've experienced a little bit lower grades come through than we had anticipated. We've made adjustments in our mining plant to address that. And so we've taken into account what we think that operation can do. Certainly, higher grades result in higher recoveries, which results in higher product volumes. So without a doubt, we know that the plant design and capacity is there. And it's just a matter of wetness Managed through the mining side of that to makes sure that we've got the right ore coming into the plan.

Andrew D. Wong - RBC Capital Markets, LLC, Research Division

Okay. And then just a little bit on the cost, the elevated potash cost during the past quarter. With a bit of build up in inventory, are these additional costs also impacting the first half 2014 cost? And are any of these issues something we could be concerned with going forward?

David W. Honeyfield

Well, the outlook numbers that we put out there really take all that into account. They take into account the improvement on the recoveries at West in the second half, bringing on additional HB tons. So I think that the numbers that we put out there pretty well speak for themselves at this point.

Operator

There are no further questions at this time. I will now turn the call back over to Bob Jornayvaz for closing comments.

Robert P. Jornayvaz

I just want to thank everyone for their interest in and dialing in. We appreciate your interest in Intrepid Potash. We look forward to speaking with you in the near future. Thank you very much.

Operator

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

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