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Intrepid Potash (NYSE:IPI)

Q2 2011 Earnings Call

August 04, 2011 10:00 am ET

Executives

Robert Jornayvaz - Co-founder, Executive Chairman of the Board and Principal Executive Officer

John Mansanti - Vice President of Operations

William Kent - Director of Investor Relations

Kelvin Feist - Vice President of Marketing & Sales

David Honeyfield - President and Chief Financial Officer

Analysts

Horst Hueniken - Stifel, Nicolaus & Co., Inc.

Ted Drangula

Ben Isaacson - Scotia Capital Inc.

Elaine Yip - Crédit Suisse AG

Mark Connelly - Credit Agricole Securities (NYSE:USA) Inc.

David Silver - BofA Merrill Lynch

Lindsay Mann - Goldman Sachs Group Inc.

Edlain Rodriguez - Gleacher & Company, Inc.

Unknown Analyst -

Operator

Good morning, and welcome to the Intrepid Potash Second Quarter 2011 Earnings Conference Call. [Operator Instructions] I would like to remind everyone that this conference is being recorded today, August 4, 2011, at 8:00 am, Mountain Time. It is my pleasure to turn the conference over to William Kent, Director of Investor Relations. Mr. Kent, please go ahead.

William Kent

Thank you, Brock, and thank you all for joining us for our second quarter 2011 earnings conference call. I'd like to start by introducing today's participants from the company. Participants include Bob Jornayvaz, Executive Chairman of the Board; Hugh Harvey, Executive Vice Chairman; David Honeyfield, President and Chief Financial Officer; Martin Litt, Executive Vice President and General Counsel; John Mansanti, Vice President of Operations; and Kelvin Feist, Vice President of Marketing and Sales.

I would like to remind everyone that statements made on this call which express a belief, expectation or intention, as well as those that are not historical fact, are forward-looking statements within the meaning of the United States Securities Laws. These statements are not guarantees of future performance. A number of assumptions which we believe are reasonable were made in connection with the expectations reflected in such forward-looking statements. The forward-looking statements involve risks and uncertainties which could cause actual results to differ from our expectations.

For more information with respect to risks, uncertainties and other factors which could cause our actual results to differ from our forward-looking statements, we direct you to the news release we issued last night and the risk factors and management's discussion and analysis of financial conditions and results of operation in our most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q as filed with the SEC. All forward-looking-statements are qualified in their entirety by such factors.

Our earnings news release, which is posted on our website at intrepidpotash.com, includes a reconciliation of certain non-GAAP financial measures to the most directly comparable GAAP measures, including adjusted net income and adjusted EBITDA, both of which will be used on this call today. All references to tons are the short tons of 2,000 pounds. I'll now turn the call over to Bob Jornayvaz.

Robert Jornayvaz

Thanks, Will. And thanks to everyone for joining us today to learn more about Intrepid Second Quarter 2011 Results. During the second quarter, we saw a continued strength in the overall commodities markets which helped us deliver a strong quarter of sales. Further, we continue to execute our operating plan and are realizing the benefits of our capital investments with both improved reliability and marketing flexibility.

During the quarter, we earned $0.41 per diluted share on net income of $30.7 million, and our adjusted EBITDA was $59.9 million. And we grew our cash and investment positions from the first quarter to $158 million as of June 30. To put this in perspective, our adjusted net income increased over 7x this quarter compared to the same quarter in 2010.

The outlook for potash continues to be one of confidence, with strong crop prices for almost every agricultural commodity. It is supportive of farmer economics. The current agricultural commodities markets are additionally supported by the forecast for global demand for both corn and soybeans and tight stocks-to-use ratios for these staples. Put it very simply, there is confidence all across the worldwide agricultural economy. This confidence can be seen at all levels of the supply chain, from producers to dealers to retailers, and to the end user, the farmer.

The fundamentals for the agricultural economy are very good, and we believe we have entered a period of sustained strength. The overall market strength is clearly reflected in the price of potash during the second quarter. We realized a $20 per ton sequential improvement from the first quarter, with our average net realized sales price results for potash coming in at $462 per ton for the second quarter.

Our strong quarterly results, focused to volume and pricing, were achieved in spite of the fact that there was flooding in the Midwest and severe drought conditions in the Southwest. As a result of the drought, very little product moved in areas such as Oklahoma, Kansas and Texas. It will eventually rain again in these states, and we look forward to adding back sales in these high-quality markets.

Our second quarter results demonstrate that the capital investments we have made to improve flexibility and increase our granulation capacity have improved our ability to respond to changing market conditions. Our successful Moab, Utah compactor project demonstrates the advantages of building flexibility into our operations, which has allowed us to rightsize our production to meet changing market demands. We are working diligently to build upon that success that we have realized with the Moab Compaction Project, with planned projects to increase our granulation capacities at both our Carlsbad and Wendover operations.

As a result of the capital projects we have underway, which are focused on increasing recoveries and production while lowering our per ton cost, the next 12 months have the potential to substantially enhance Intrepid's profile by better positioning us to compete in the domestic and global agricultural economy.

Finally, we're also seeing the significant returns on the investments we have made in our operating management team. From Dave Honeyfield's role as President to John Mansanti as Vice President of Operations and Kelvin Feist as our VP of Marketing and Sales, we are seeing the rewards of hiring some of the best and the brightest. We have brought on numerous engineers who have also helped us to creatively solve problems, add value and execute consistently on our multi-year growth strategy. Hugh and I are very proud of this team. By far and away, our employees, continue to be our strongest asset.

I'll now turn the call over to John Mansanti, our Vice President of Operations.

John Mansanti

Thanks, Bob. Our potash production of 209,000 tons in the second quarter of 2011 represents a 27% increase relative to the second quarter of 2010. During the quarter, we realized a benefit of our capital investments and our increased staffing, both of which enabled us to deliver strong production to all our sites. In addition, our Moab production benefited from a good solar evaporation cycle, which allowed a harvest season one month longer than normal. We produced 44,000 tons of langbeinite during the second quarter of 2011. This compares to 39,000 tons produced in the second quarter of last year. Langbeinite production was higher due to increased mill throughputs, higher grades and the restoration recoveries to near-historical levels.

As we highlighted during the first quarter call, we began to see a sustained improvement in recoveries beginning in March 2011, and we will focus on maintaining this level of recovery in advance of commissioning the Langbeinite Recovery Improvement Project.

Now a few comments on the significant progress on our 2011 capital investment program. Having received all the necessary construction permits for the dense media separation plant and the granulation plan, the Langbeinite Recovery Improvement Project is progressing well. Construction remains on track, with concrete work complete, most of the structural steel in place and a significant amount of equipment delivered and being assembled.

Similar to 2010, we are commissioning one additional mine path at each of our underground mines to increase overall mine production. The additional West Mine panel is now operational and the additional East Mine panel is scheduled to be operational in the fourth quarter of 2011.

Also during the quarter, we started construction on a new compaction facility in the new product warehouse in Wendover. We've made significant progress. Foundations are complete for the compactor and compactor building. The excavation is complete and concrete work started for the new warehouse. These projects will enable us to better adapt to market fluctuations and to respond to specific demand. All of these projects are geared towards increasing recoveries, increasing production and decreasing per-ton costs.

In 2011, we expect to invest between $140 million and $165 million in our capital investment projects. Based on the receipt of permits for certain significant capital projects, most specifically LRIP, and the overall progress on our capital program, we believe that we will be closer to the top of this range in terms of capital investment for 2011.

I'll turn the call over to Kelvin Feist, our Vice President of Marketing and Sales.

Kelvin Feist

Thank you, John. As noted, our sales results for the second quarter were strong, despite extreme drought in the Southern markets and flooding across areas of the Midwest. We sold 225,000 tons of potash during the second quarter. This compares to 129,000 tons of potash sold in the second quarter of 2010. We also sold 39,000 tons of Trio as compared to 63,000 tons of Trio sold in the second quarter of 2010. The year-to-year decrease in Trio sales is primarily a result of having more product available for sale a year ago than this year.

On June 1, our posted price for Carlsbad red granular potash moved to $530 per ton FOB the mine. Based on continued steady demand for the product, we raised our posted price for our red granular potash on July 8 to the current price of $560 per ton.

Demand for all grades of Trio remained strong during the quarter, and we expect continued Trio strength through the balance of 2011. Due to this strong demand for Trio, we also raised our posted price for granular-sized Trio on August 1 by $20 per ton to $291 per ton FOB our Carlsbad mine.

We're seeing more confidence at the dealer level in the market than a year ago. We saw this at the Southwest Fertilizer Conference 2 weeks ago, where the majority of the fertilizer dealers we met with were primarily focused on future product availability. Many dealers entered the summer carrying inventory, which is a significant departure from the hand-to-mouth type consumption that we saw from dealers in the spring of 2010. The distribution system confidence did not stop at the dealer level, but extends all the way through the supply chain to retailers and farmers. Strong order activity has us substantially sold out for potash on a rail-delivered basis for the third quarter.

Dave Honeyfield will take the call from here and wrap up our prepared comments.

David Honeyfield

Thanks, Kelvin. Potash production at all of our facilities in the quarter was quite strong, which benefited our cash operating cost of goods sold, demonstrating the benefit of improved reliability of the facilities. Please remember that the cash operating COGS number has some variability from quarter-to-quarter. These variances are somewhat driven by the location from which tons are sold, as well as the timing of turnaround maintenance work.

Specifically, we anticipate higher cash operating cost of goods sold per ton in the third and fourth quarters this year based on scheduled plant downtime for maintenance and the tie-in of new plant and equipment. Consistent with our view expressed since the beginning of the year, we expect to deliver an annual cash operating cost of goods sold for potash in a range of $170 to $180 per ton.

I want to bring folks up-to-date as to the progress around our HB Solar Solution Mine. The current schedule for receiving the Record of Decision from the BLM remains in the first quarter of 2012. We also just received from the New Mexico Environment Department the air quality permit associated with the mill for the HB project. As we move closer to the Record of Decision date on the project, we continue to update the cost estimates based on the dynamic permitting process and consideration of project design refinements.

Further, we're not insulated from the cost escalation trends being experienced throughout the mining industry. Based on these factors, we anticipate that the total capital investment requirements for the HB Solar Solution Mine will be higher, possibly significantly higher than the previously disclosed range of $120 million to $130 million. We have not finalized our estimates, so I don't have an investment number today.

Nonetheless, we continue to see the HB project as an important and very attractive financial investment that fits squarely within our overall capital strategy of increased productivity and decreased cash operating cost per ton.

On the modeling front, I want to reemphasize an item that I covered last quarter concerning depreciation, depletion and amortization. Over the next few years, as we place new equipment into service, DD&A in total dollars and on a per ton basis will increase for potash in proportion to our cumulative invested capital. Similarly for Trio, you should also expect DD&A to be higher once the LRIP project is completed and we see the benefits of higher recoveries flowthrough lower cash cost to goods sold per ton.

I also want to remind folks that you're estimating net realized sales price -- that our reported average net realized sales price per ton for potash typically has been about 85% to 90% of our posted red granular sales price because of the different markets in which we sell our products, competitive customer discounts and the mix between standard and granular sales. Additionally, it takes approximately 75 to 90 days to see the full effect of a new posted price on average net realized sales price.

Moving to the financing front, please note that we closed on a new 5-year revolving credit facility yesterday with $250 million of available capacity. The new facility not only represents a doubling of availability under the facility but also reflects a positive view of the market in that the facility is unsecured.

In closing, the second quarter of 2011 demonstrated how focusing on the reliability of our mines and plants and building flexibility into our production system allows us to quickly adapt to changing or challenging market conditions. Our focus is on continually driving our core goals of increased recoveries, increased reliability, increased productivity and reduced per-ton costs.

As highlighted previously, the next year should result in achieving a number of major milestones aligned with these objectives, including the commissioning of the Langbeinite Recovery Improvement Project, the completion of the Wendover Compaction Project and, importantly, the permitting of the HB Solar Solution Mine. These projects are all well within reach, and should ultimately lead to increased volumes of lower-cost tons and opportunity for increased margin.

We believe that when you combine the advantages of our facilities' locations and the strategic marketing of our products, together with the ability to effectively fund and execute on our significant capital investments, that we are well-positioned to benefit from the strong agricultural fundamentals and to capitalize on future opportunities.

We'll now open the lines for any questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question today comes from Edlain Rodriguez of Gleacher & Company.

Edlain Rodriguez - Gleacher & Company, Inc.

Just quick question on potash prices. I mean, are you lagging in terms of your pricing announcements in terms of the posted price? Because some of the larger players, they already have $590 -- they've already announced a $590 price since we reported fourth quarter. So are you going to catch up with that? I mean, especially given that you're saying there's like a 75 to 90 days for those prices to take effect.

Robert Jornayvaz

I'm going to let Kelvin address where we are on pricing and how we're quickly monitoring the market and keeping our flexibility to raise prices as the market allows us to. Kelvin, you want to address that?

Kelvin Feist

Sure. Edlain, with regard to potash prices, what we saw is some of the stuff you're referencing, I believe, is the delivered price, probably into the Midwest, Edlain. That's normally where most people are looking. And that was some of those numbers in the $590 to $600 ,whether it be warehouse or rail-delivered. I guess I was referencing an FOB price out of Carlsbad, so that's the differential that you see.

David Honeyfield

This is Dave. Just to make clear on that, we believe we're at least caught up to where the rest of the market is. But like Kelvin said, you really have to take what delivery point and make sure you're comparing apples-to-apples when you're looking at that posted price.

Edlain Rodriguez - Gleacher & Company, Inc.

Okay. Makes sense. Another quick question on potash production. If we were to assume that potash demand comes in as strong as expected and you can sell everything that you produce, like how much can you really produce for a year? I mean, you're already at, like, what? 443,000 tons? Like what's the capacity -- what's the production capacity for the full year?

David Honeyfield

Edlain, this is Dave. Pretty consistent with what we've been saying since the beginning of the year. That number I think we've referenced on the last call was approximately 800,000 tons. Please keep in mind the variability that we have, and you'll see it here in the third quarter where we don't have production numbers coming in from Moab, because we're in the evaporation cycle. So we're certainly seeing the benefit of the plants running well, very good reliability, the plants operating at full capacity. But I don't think I'd get too far ahead of kind of where we've said right now. John's already mentioned the additional mining panels that are coming online, and we'll start to see the benefit of that a little bit throughout the year here. But I think, just keeping in perspective, that is some new equipment coming in, and don't think we're ready to go out any further than we have at this point on some of those estimates.

Robert Jornayvaz

The other thing to always remember, Edlain, is that as we bring on some of these new projects, we have to turn things off to tie new projects in. And so some, especially the LRIP project, which is a project that is very significant to us, we want to make sure we get it right, and that we get it up and installed. And so we're going to do our best to do it in as short a time period as we can, but we've tried to be very realistic in -- when you take a plant down to add new capacity, the fact of the matter is, you're taking something offline to bring a bigger project online.

Operator

The next question comes from Ben Isaacson of Scotia Capital.

Ben Isaacson - Scotia Capital Inc.

My first question is just on your inventory levels. Your potash sales quarter-over-quarter increased by 15% and your production went down by 11%. So I'll assume that there's a bit of a draw on inventory. Can you just tell us where you stand right now, heading into the fall? My second question is on Moab. You had what you call excellent brine levels and favorable harvest conditions. Can you just distinguish between [indiscernible] and how much each one of those contributed to the extra production?

David Honeyfield

Ben, this is Dave. I'll take the question on inventory. And John, if you can touch on Moab, that'd be great. On the inventory piece, I'd say we're at -- we feel very good about the inventory levels. One of the things we've been doing, certainly on the sales side, is making sure that we have product available for truck deliveries at the plant, and then scheduling out some of the larger rail shipments. Pretty consistent with the market demand and making sure we're getting the benefit of market pricing on that. So inventories are getting, I'd say, are getting tighter at the producer level, and I think you've seen that through some of the data that's been put out into the market right now. But overall, I'd say we still continue to believe that we can take care of our customer needs and we feel pretty good about where we're at on inventory and production levels.

John Mansanti

Could you repeat the question on brine again, or on Moab?

Ben Isaacson - Scotia Capital Inc.

So you mentioned that the Moab's solar solution mine benefited during the quarter from both excellent brine levels and from favorable harvest conditions. I just wanted to kind of understand how much each of those contributed to the improved level of production in the quarter.

John Mansanti

I think the statement was we benefited from a better solar evaporation season and then an extended harvest. To have the extended harvest, you have to have the beneficial season. And so because there was a good solar year last year, we put down more product which allowed us to extend our harvest season this spring.

Operator

The next question comes from Elaine Yip from Credit Suisse.

Elaine Yip - Crédit Suisse AG

So on your HB Solar Solution Mine project, can you provide a bit more color on what's driving the higher capital cost outlook? Is it simply about rising cost for equipment? Or is there something else to it? Whether or not the project is more complicated than you thought? Or there are more regulatory requirements? If you could provide a bit more color that would be helpful.

Robert Jornayvaz

You bet. This is Bob. Thanks for the question. It's a combination of all of the above. First, we are upsizing our pond size. And so part of that has been negotiations, for a lack of a better term, with the BLM in terms of upsizing and increasing the pond capacity. The second is kind of ongoing negotiations in terms of how much of the piping will be buried versus not buried, how much in the way of monitoring wells -- how many monitoring wells we're going to have to provide. We have seen some inflation in some of the core costs. So if everything goes right, we're going to see slightly increased capacities in the ability to run at a higher level because of a larger sizing of the project. But please remember that it's all iterative and part of an EIS process, so there's negotiation. So we're not sure which -- if we're going to have to bury all piping, some piping. And so what we're trying to tell the market is that as we get closer and closer to the final outcome, we don't know what that answer's going to be. And so we're trying to make you aware that if we had to do everything that they might want us to do, that we're going to see potentially significantly higher costs, but we're also trying to rightsize or upsize the project within the confines of the EIS and trying to get it as big as we can within the confines of the EIS so that there will also be potential rewards from that. But just please keep in mind that when you're in EIS process and you're negotiating with governmental regulatory agencies, it's not as clear a black-and-white line until you kind of get to closer to the Record of Decision. Dave or John, would like to add anything to that?

David Honeyfield

This is Dave. Elaine, even though I've commented that I don't have a number to give you right now. I can tell you that we have run an awful lot of sensitivities, and like I mentioned, this is still a very, very strong financial return on the capital investment, really throughout a range of costs. And given the production tons that will come on and the low-cost nature of those, this is just still a darn good project for us and one that we're anxious to get permitted and to get started on.

Elaine Yip - Crédit Suisse AG

And then in the langbeinite business, are the issues that drove the below-normal recovery rates fixed now or is there more room to improve? And then with respect to the LRIP project itself, are the capital costs still in line with your original estimate of, I believe, $85 million?

David Honeyfield

Elaine, this is Dave again. Yes, really since March of this year, we've seen a nice stabilization of the recovery rates. And I think we've largely addressed what we need to, to get back to kind of that historical production level. So you shouldn't see too much variability through the remainder couple of quarters on that. In terms of the LRIP project, like John touched on, we got the permit for the pelletization plant in the second quarter. Construction is moving along very well. It's pretty incredible to see all the steel that's been hung and the foundations and the electrical equipment that's been put in place and the number of pieces of processing equipment that are being delivered and on-site. So we still anticipate that coming in on time in the fourth quarter, like we've described. And on the capital cost side, we're squarely within that range that we've provided. And as long as -- staying on schedule is a big part of helping meet those objectives. So everything on that front is continuing to progress on a positive basis.

Operator

The next question comes from Mark Connelly of CLSA.

Mark Connelly - Credit Agricole Securities (USA) Inc.

Two questions. First, last quarter, you talked about weather impacting timing and location of sales. It sounds like that's more or less true this quarter. I'm curious if it's making much difference to your profitability. I mean, you talked about building in flexibility, but has it made a meaningful difference, or are you trying to just get your costs down in distribution flexibility, in general? Also curious if you're selling anything through Canpotex at this point. And then the second question -- I know that's a long question, is with respect to Carlsbad. Given the projects that you've got underway, how close to what you would consider your own practical capacity are you running at this point? Are you pretty much doing everything that you can do there?

Robert Jornayvaz

Mark, thanks for the question. Let me handle a couple of different parts of it. First, Canpotex is an organization comprised of Canadian producers. And so we don't have any affiliation whatsoever with Canpotex.

Mark Connelly - Credit Agricole Securities (USA) Inc.

But you do sell some tons through them once in a while in the export market, right?

Robert Jornayvaz

No. We absolutely do not. PotashCorp. represents us on our potash sales outside the United States. We don't sell any -- we rarely sell any potash outside the United States. We do sell Trio outside the United States, and it's through PCS Sales, not Canpotex.

Mark Connelly - Credit Agricole Securities (USA) Inc.

Sorry about that.

Robert Jornayvaz

No, no, no. We just need to make it clear. As to weather impacting us, I think the one thing that we have continued to do is to monitor the weather, monitor where farmers are farming the most, and where we have the greatest margin opportunities, and I think it's clearly -- the strength of our marketing staff, clearly has done a great job and is reflected in our realized net sales prices. So weather will always impact our markets. And I guess our location being proximate to the market really helps us with that flexibility piece. Kelvin, you want to add something to that as well?

Kelvin Feist

Mark, I just wanted to add that our bigger challenge is really on the logistics side. There was a number of rail embargoes, for example, in the Midwest, where we're trying to work around and supply product just in time to those markets. So it was really a logistics challenge that we're dealing with when we refer to some of that weather impacting our business. And I guess, what we're looking at from a netback perspective is we're looking at all the markets. Certainly, some are better netbacks than others, and we continue to try to maximize our return based on what's available or what areas have strong demand.

Robert Jornayvaz

And I just want to emphasize what a great job the marketing team did, because Texas, Oklahoma and Southern Kansas were basically out of the market. And yet we still had a significant performance. So as I've said in my comments, we believe it will eventually rain in Texas and those markets will return. And we look forward to that because it just shows the strength of the overall markets, in spite of the fact that those states couldn't participate. As to Carlsbad and our effective operating level, we continue to look at every place where we can tweak recoveries, tweak production, improve production. But I just can't stress, as we -- there's a whole list of small projects that we continue to add onto that we don't describe, that -- sometimes you take a plant down to keep adding something onto it. So we're still in that stage of bringing projects on. Dave, I don't know if there's anything you'd like to add as to current capacity levels?

David Honeyfield

No, no, I think that's pretty fair. Bob and Mark, we really are, we're running those plants at full staffing levels. And like I said before, we're seeing the benefit of a very reliable production base. And that, in conjunction with the projects Bob described, I think it's helpful to appreciate the sheer number of projects. It's not a list of 10. It's a list of a couple hundred. And I think sometimes, when you take a step back and put that into perspective, it gives you a good appreciation for all the work that's been going on day-to-day, particularly at the Carlsbad location. So I think we're running at pretty full capacity right now and we'll start to see the increasing benefits here as some of these things continue to get put in place.

Robert Jornayvaz

Mark, did we cover all your questions?

Mark Connelly - Credit Agricole Securities (USA) Inc.

Yes. I still don't really have an answer to the first question about whether it affected your results. I mean, it sounds like your netbacks are all over the place, and that's fine, but I'm just trying to get a sense of whether you're -- it's hurting you. I mean, logistics -- when I hear somebody say logistics and rail issues, it sounds to me like your costs should be up and your netbacks should be down. But you don't want to tell us this, right?

Robert Jornayvaz

Well, Mark, I guess I would ask you to ask your question again. Because I felt like we had a very unique weather year in the floods in the Midwest, the rail embargoes that occurred, the tracks that were actually washed out, the fact that we had droughts in some of our most localized markets, yet we still had a great quarter of sales and we achieved higher netbacks than our competitors. So I don't really know that I understand your question.

Mark Connelly - Credit Agricole Securities (USA) Inc.

Bob, I'm just trying to understand how much those issues affected you. I mean, clearly, your results are good. The question is, are you being severely affected by these changes or is it minor? And is this masking how good they could have even been? l mean, we're just trying to get to what might be more normal when these issues go away.

Robert Jornayvaz

I see where you're going. And I guess I would just ask you to consider -- Texas is a great market for us in terms of being a very diverse agricultural market. And they would have the same profitability opportunities to grow various crops in Texas, and those are our truck markets. So had we had our truck market, which is typically our highest netbacks, yes, the answer is: we could have had a better quarter, because we just simply didn't have a truck market this quarter. So we're very proud of the fact that we were able to work around the fact that our truck market, because of drought and flooding, didn't exist. So I hope I'm -- maybe I'm not understanding your question right, but I hope I'm trying to give you a feel for it.

Operator

The next question is from Vincent Andrews of Morgan Stanley.

Ted Drangula

This is Ted Drangula sitting in for Vincent. A couple of questions on the global supply-demand outlook. I mean, we've heard anywhere from kind of 55 to 60 million metric tons, which we're also starting to hear the high end of that range is probably not going to be achievable. I guess, first, where do you guys see 2011 shipments for potash shaking out? And then, where do you see kind of nameplate and operational capacity as it stands as we get to the end of 2011? And maybe a little color on 2012, especially as it looks like there's going to be some flowover of demand from India and possibly China?

Robert Jornayvaz

Well, when we look at demand worldwide, I think the first thing we want to look at is just underlying commodity price strength. And so whether or not it's in sugar -- coffee has seen a bit of a correction, yet it's corrected to very, very significant high levels. Cotton market is still quite strong. The corn market, despite very, very significant volatility is still extremely strong by any historic standard. Soybeans continue to be priced at the upper levels of historic ranges. Wheat, we're going to see and have seen more of a correction as there's more wheat available on the market. The rice market has firmed. So we're seeing strength in the rice market. The palm oil market is quite strong. And so as we see this incredible spectrum of strength across the commodity markets, there's every reason to believe that demand is going to stay strong again next year, because farmers worldwide have great margin and profit opportunities. So we're not seeing anything out there on the worldwide horizon that leads us to believe that we're going to see a drop-off in the next 12 to 18 months. In fact, the indicators are pointing towards more continued fundamental strength. As to a volume prediction, I'm going to stay away from a worldwide volume prediction. The Canadian guys do a better job of providing those numbers because they're much more active in the world market. But from our standpoint and the discussions that we're having with the farmers in all of our markets, we continue to believe that the balance of 2011 and looking into 2012, we're going to see continued strength in the potash market. As to, once again, a capacity -- second part of your question, I think, revolved around capacity. I'll let Dave add any color to that, that he'd like to add.

David Honeyfield

Yes. I think we've already really addressed that relative to Intrepid and, Ted, I wasn't sure if that was tied into kind of global supply. My sense is it was. So again, we probably don't have a response for you on that front. But I think we've already addressed our capacity and where we think we're going to be for the year here.

Operator

Next question is from Lindsay Drucker Mann of Goldman Sachs.

Lindsay Mann - Goldman Sachs Group Inc.

Just wanted to follow up on your comment that you are seeing some dealers having built inventory over the summertime. Curious if you could just compare where you think inventory levels might be, relative to historically what had been held? And also if you think that further inventory build might be a demand tailwind into next year, or if we're generally appropriate or maybe even overextended?

Robert Jornayvaz

Lindsay, great question. I think the one thing that caught us by surprise going back to 2008 was all the inventory that was stored away in every cubbyhole on the retailer, the dealer -- I mean, there was just so much more inventory if we go back and look at September of 2008. One of the things that we're trying to do is to monitor -- we're trying to get out in the field as much as we can and poke our heads in as many warehouses as we can to make sure that we're not caught by surprise by any excess demand that exists out there. We're not seeing any right now. We're seeing product that is generally going straight from the dealer into the farmer's hands. And we are seeing dealers wanting to -- I would say, right now, dealers are relatively empty. But they are wanting to buy product and they're wanting to buy product into the fall, and we're seeing our competitors willing to sell forward into the fall, so we're going to -- not stay out of the market, but we're going to participate in the market. We're not seeing anything from an inventory level that would remotely concern us. We learned our lesson in 2008 by not monitoring inventories at all levels along the supply chain. And this time, we are doing it very closely. And with that, I'll let Kelvin add any color.

Kelvin Feist

In 2010, I think most of the dealers and, consequently, the farmers got somewhat caught on lack of supply of potash specifically. And so I think in 2011, what we see them is taking positions because they really believe that there's demand out there to fulfill for the fall season. So they're committing further forward than they did previously. And I guess that's the comment. In terms of physical inventory in the field out there, traditionally, the dealer group or the inventory at the field level will be 100% by the time we hit fall. So there's some selling into that, and some inventories are going to steadily increase until farmers get into the fields, which is likely October, November time frame. So between now and then, there will be a summer fill of all the, I guess, warehouse space, if you will, at the field level. So does that answer your question?

Lindsay Mann - Goldman Sachs Group Inc.

Yes. Just maybe following along those lines, how do you guys -- I know it's still a bit early, but what's your feel on the pace of price increases we might see sequentially into application season?

Robert Jornayvaz

I think we're going to continue to see the price increases that have been announced realized. Everything that we have announced, I don't think we're going to see any problem realizing. I think, once again, rather than talking about where our specific pricing is going, I just want to comment on the underlying fundamental strength of the ag markets and the markets that we're serving, in spite of the absence of very significant [indiscernible] like Texas, Southern Kansas and Oklahoma because of the drought. So we're seeing a very, very strong fundamental foundation in spite of the fact that big parts of the market are absent. So we think that there's reason to believe that these -- we're just going to continue to see strength, assuming Texas, Oklahoma and Kansas see some rain. I just want to make it clear that we're not relying on rain in those states. We're seeing a great market with those states out of the market.

Lindsay Mann - Goldman Sachs Group Inc.

And then lastly, I know that it's early to give numbers around the HB Solution Mine CapEx, the ultimate number there. But you talked about some of the reasons, can you maybe just put some buckets around what the largest piece of the CapEx will be? Or something else to help us dimensionalize where the big pieces of spending or the big increases in spending relative to your expectation are going to be?

Robert Jornayvaz

We're going to get there pretty soon, as we continue to negotiate with the BLM in terms of pond size. Because let's not forget, if we get to increase pond capacity, then we increase production. And so let's always keep in mind that it's not just a cost element but what additional production do we see from that. So it's just a little premature. We don't know exactly how many monitoring wells, for example, we're going to have to drill. We don't know how much pipeline we're actually going to have to bury. So it's just a little premature. We're just trying to tell you what we know as quickly as we know it, and you're just going to have to bear with us on that.

Operator

The next question is from David Silver of Bank of America Merrill Lynch.

David Silver - BofA Merrill Lynch

I have a question on pricing and I had a question on kind of maybe hurdle rates and returns. But in the second quarter, your average realized potash price was $462 and I guess that's always a big mix of prepay and spot tons. But I guess in the calendar third quarter, my sense is that there's not much prepaid business. So I'm just scratching my head and I'm wondering, how close to, let's call it, the $560 FOB Carlsbad price do you think we might see in the third quarter relative to the $462 you reported in the second quarter? Is that an apples-to-apples question or am I missing something there?

David Honeyfield

David, this is Dave Honeyfield. I think what we'd ask you to look at are some of the comments that we've said pretty consistently over the years in that it usually takes about 75 to 90 days to start to see those price increases be reflected. And then we tend to be about 85% to 90% just because of all the reasons that I listed in our comments. So directionally, yes, you should expect to see price -- our net realized price improve from where it was here in the second quarter. And you'll see that continue to flow through in the fourth quarter as well, as we start to see the benefit of the July 8 price increase that we talked about. So I think that using those historical sideboards should give you a pretty good feel for where we can get to.

David Silver - BofA Merrill Lynch

I've just been hearing from other folks that the normal summer discounting was not in effect this year just due to tight market conditions.

Robert Jornayvaz

Dave, I think you're actually spot on that front, too. You didn't see what, historically -- I mean, historically is always season to season, it feels like. But if you look at last summer, for example, there was a price decrease that came through in summer fill. And you didn't see that at all this year. Rather, you saw the increases take place. So I think that you just see a little bit steadier trajectory here.

David Silver - BofA Merrill Lynch

I know you've touched on it several times on this call. But now the other thing I wanted to ask you is maybe also related to some of your earlier answers, but having to do with the LRIP and the HB questions. And I guess, in particular, maybe you could just refresh, if you could just refresh my memory on how you view hurdle rates or returns? So I mean, Dave, you're the CFO, but in the room there, you have the founders, couple of founders and large shareholders. And they might look at the investments or the projects just slightly differently. So I'm guessing -- I'm trying to get away from somebody in a cubicle looking at maybe delays in the HB mine due to the permitting issues or increased labor costs and just trying to get a sense of how comfortable you are or what kind of margins for error there is in your thinking about those LRIP and the HB mine projects, as you acknowledge there are still some remaining uncertainties before you can finalize cost estimates and, I guess, production expectations.

Robert Jornayvaz

Dave, this is Bob. On the HB project, let's not forget that when it's completed, we're going to be producing potash at cash costs somewhere in the $75 to $85 per ton. And so those are very, very potentially profitable tons to produce. And the HB project is a great project that we feel has -- it's a great potential game changer for Intrepid to be able to produce tons that inexpensively. That's why we're so focused on getting the first phase as right as we can, within the confines of the EIS agreement, and the return of very, very significant and very, very attractive returns that I would make and invest in the area of my business anywhere in the world. So from a founder's perspective, we think it's potentially -- it's just a very significantly good project for us. LRIP is the same way. Let's not forget at LRIP that we're already spending the money to mine those tons, hoist those tons, process those tons. And that the LRIP project occurs on the backside of the process flow. So it's all about recovery. So once again, it's also a very attractive investment because of the fact that you're already spending so much money to get the ore into the plant and to get it processed. Very, very unique opportunity to add tons or pick up tons, produce tons, from the recovery side of a plant. It's very unique. And we're seeing the demand for Trio consistently get better and better. We're seeing -- that market is just one of our best and most prolific markets, if we had more product to sell into it. But once again, we believe it's one of the better projects that we can invest in anywhere. We're very, very proud of that project. And we think that project has room for growth as well. It also -- the project, the LRIP project handles water balance issues. It solves operating issues at the East plant that has significant synergistic benefits with how we run that plant. So it's halfway through completion. It's going along very well. It's on budget. Everything looks pretty darn good. So from a founder's perspective, and as a major stockholder, I can't tell you how excited we are about those projects. I hope that's the kind of color you're looking for.

David Silver - BofA Merrill Lynch

Yes. That's very helpful.

Operator

The next question comes from Horst Hueniken from Stifel Nicholas.

Horst Hueniken - Stifel, Nicolaus & Co., Inc.

Good morning. Are you able to quantify the effect of the scheduled turnarounds over the next 2 quarters potentially in the form of the number of weeks you will not be producing?

David Honeyfield

Horst, this is Dave. I think at the East plant, you should expect that it'll be a couple of weeks, mostly towards the end of the third quarter here. And you really don't see the effect of that on your cost of goods sold really until the next quarter. Similarly, we'll have some -- the effect of turnaround from the West plant that will be reflected here in the third quarter. In terms of giving you spot-on numbers, please don't forget the fact that you're not going to see much in the way of Moab production coming in this quarter. So I wouldn't just take the math to East and West and extend it from there. And then you've got the commissioning of the LRIP plant that will largely take place in the fourth quarter this year. So we'll see a little bit of tie-in time as we tie those pieces of equipment in as well. So it's a little tricky to give you just spot-on numbers for each one of those. But just recognize that you'll see a little bit of dip here on the production front here in the third quarter, and we'll get you updated on fourth quarter when we get closer to it.

Operator

The next question is from Fai Lee [ph], an independent analyst.

Unknown Analyst -

My question relates to the reopening of the idle North Mine -- it seems in the past that the market sense of the project was progress depended on market condition. I'm just wondering where this project stands, given the current market conditions.

David Honeyfield

Fai, this is Dave. We have longer-term initiatives around a number of projects, and one of them is the North Mine area. It continues to be in our evaluation sites, and we're looking at a number of items around timing, the characterization of the ore, sizing of facility. So it's certainly on the task list and there's work going on around it. As we sit here right now, there's not a date certain or anything along those lines to, I think, update folks on. I think just recognize that it's still on the sites. And I think, like you mentioned, certainly when you see longer-term stability on the potash side, these projects just become more and more attractive, and a big part of our challenge and a big part of our charge is to figure out ways to accelerate the reserve life and bring some of that production onboard sooner than later. Because it just makes all the sense in the world from a net present value perspective.

Unknown Analyst -

I guess, maybe I'll just follow-up with a question regarding pricing. Are current market prices, in your opinion, sufficient to potentially justify reopening of the idle North Mine? I know there's a lot of work still to be done. But I think at the time, the comment was the project was almost put on hold because of pricing concerns. And have we seen a rebound in pricing that's sufficient to justify the project?

Robert Jornayvaz

Fai, let me jump in here and add -- one of the things that we're really trying to do at Carlsbad is to look at the Carlsbad mines as an operating system. And so if we look at how the North Mine used to operate -- let's not forget, it closed down in 1982. It's got several ore zones that are open to us, and we're looking at how can we combine -- if we were to reopen the North Mine with some of the production streams at the East Mine to handle different orders that we're currently not mining in the capacity that we have. So when we look at reopening the North Mine, it's also in the context of how do we create an entire potash-producing system, given the whole variety of assets that exist within the fence down at Carlsbad. So it's not just -- we don't view it as a stand-alone project. We view it as an integral puzzle piece to a much larger system that we are trying to create out there. And by viewing it that way, we think we can greatly reduce overall production costs over time. And I think that, that's a better way to view it than opening it as a stand-alone facility. I know that sounds a bit esoteric, but when you look at it from an engineering standpoint and its proximity to our East and West Mines, and how it could potentially fit into the HB Solar Solution Mine system, there's just tremendous opportunities in how you potentially design that. Technologies have come a long way, especially potash processing technologies. And so given the significant ores that exist out there, there's just a lot of opportunity. But right now, we are focused on the projects that are in front of us, which were the stacker that we built, the thickeners that we built, the new mine panels that we've added, the entire shaft system that we've rebuilt at West. We look at what we're doing, the new flow plant we built at West as well. Each one of these things is part of a much bigger, more integrated system. And so as you hear every quarter, we just keep executing on each one of those pieces of this giant puzzle. I'm glad you brought up the North Mine again, because it too is part of this big system, if you will, that continues to get moved forward. So thank you for bringing it up.

Operator

There are no further questions at this time. I'll turn the call back over to Mr. David Honeyfield for any closing comments.

David Honeyfield

Thank you, Brock. Since we don't see any other questions at this time, we'd like to thank everyone for joining today's call and for your interest in Intrepid. Have a great rest of the day. Thanks.

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