Intrepid Reports First-Quarter Results and Announces Annual Guidance for 2008
Intrepid Potash, Inc. (NYSE:IPI), the successor entity to Intrepid Mining LLC, today announced first-quarter 2008 results with net income of $33.1 million, compared to last year’s first quarter net income of $6.4 million and exceeding full-year 2007 net income of $29.7 million. Potash pricing began a steep climb in the fourth quarter of 2007 as global supplies were unable to keep pace with demand. The global demand for food has created strong demand for fertilizers. Intrepid’s earnings demonstrate its leverage to potash pricing.
Chief Executive Officer Bob Jornayvaz commented: “The potash industry is in the midst of an unprecedented demand driven-market, fueled by numerous drivers, including an ever-increasing demand for a more nutritious diet, especially for more protein, resulting from rising populations and growing GDP in developing countries. These factors have led to significant growth in demand for grains, soybeans, rice, palm oil, and sugar cane, to name a few. I believe these demand-driven markets tend to be stronger, last longer and have significant underlying support. Intrepid is focused on investing capital in new capacity and efficiency projects to bring on additional low cost tons to satisfy the needs of our customers.” On a pro forma basis, assuming a 38.5 percent effective tax rate and the pro forma diluted current share count of 74.8 million common shares for Intrepid, pro forma net income per share would have been $0.27 per share in the first quarter of 2008 as compared to $0.05 per share in the first quarter of last year.
Operating income for the quarter increased to $29.3 million as compared to $9.2 million in the first quarter of 2007. Cash from operating activities was $17.1 million, which compared to the $2.2 million in last year’s first quarter demonstrating our ability to generate stronger cash flow as potash prices increase. Adjusted net income, which adjusts for significant non-recurring and non-cash items, was $27.5 million for the quarter versus $5.1 million for the first quarter of 2007. Net income in the first quarter includes $7.0 million of insurance proceeds related to the reconstruction of a damaged warehouse. Earnings before interest, taxes, depreciation and amortization, or EBITDA, grew to $38.9 million from $11.0 million in the prior year period. Adjusted net income, pro forma earning per share and EBITDA are non-GAAP financial measures – please refer to the respective reconciliation in the accompanying Non-GAAP Reconciliation tables towards the end of this release.
Potash Results During the first quarter, Intrepid produced 224,000 short tons of potash, a 3 percent increase over the 218,000 short tons produced during last year’s first quarter. First and fourth quarter production typically exceeds second and third quarter production as a result of the evaporation cycle at our solar facilities that occurs primarily in the spring and summer months.
Intrepid sold 213,000 short tons of potash in the first quarter at an average FOB the mines or net sales price of $295 per ton as compared to 209,000 short tons at an average FOB price of $178 per short ton during the first quarter of 2007. Intrepid reports tons and per ton price and cost data in short tons; converting our $295 per short ton price to metric tonnes (“tonne”) would be the equivalent of a $325 per tonne first quarter average FOB price. The $117 per short ton increase in selling price was achieved despite having committed approximately 70 percent of our first quarter sales volumes at guaranteed prices that were primarily negotiated in September 2007, before the significant increases in potash pricing. Our posted price for red granular FOB Carlsbad has increased progressively in each month of 2008 from $317 per short ton at the end of 2007 to $357, $397, $417, $503, $532, and $582 per short ton for January through June, respectively. We estimate that every $10 per ton increase in the price of potash will have a pro forma annual earnings impact of approximately $0.07 per share.
Production cost of goods sold which excludes depreciation, depletion and amortization, royalties and byproduct credits per short ton of potash sold increased to $136 per short ton in the first quarter of 2008 from $120 per ton in the first quarter of 2007. Most of the increase is due to the addition of a trainee program at our mining operations, the addition of another operating panel in the East Mine, an increase in contract maintenance labor, the addition of personnel to increase our maintenance staff, and higher natural gas prices. Maintenance materials expense also increased, which is consistent with adding contract maintenance workers and maintenance personnel. The addition of new Intrepid employees is designed to minimize the impact of any turnover and maximize the reliability and throughput of the mines at a time when potash supply is needed in the market and margins are at high levels. We anticipate adding some key positions to our maintenance and mining support roles as full-time employees throughout the second and third quarters as well, which will be partially offset by a decrease in contract maintenance expense.
In March 2008, Intrepid completed the installation of an additional operating panel in the East Mine, which allows the mine to operate with five mining crews instead of four. This project will allow us to send more ore to the mill, which has excess capacity. This improvement is expected to result in a combined increase of potash and langbeinite production of 30,000 short tons annually.
Langbeinite Results During the first quarter, Intrepid produced 56,000 short tons of langbeinite, a specialty fertilizer containing potassium, magnesium, and sulfur. Our langbeinite production was 24 percent higher than the 45,000 short tons produced during the first quarter of 2007. The increase in production resulted from an increase in our ore grade and greater throughput of ore through the mill. Langbeinite is mined from our East Mine, and is a mixed ore body containing both potash and langbeinite. In the first quarter of 2008, we have seen the benefit of higher than projected langbeinite ore grade at our East Mine, however this was almost equally offset by lower potash ore grade. This change in ore mixture is consistent with historical results when mining the mixed ore body. In the first quarter of 2008, an underground drilling program was commenced to better predict and control ore feed going to the East mill.
Intrepid sold 93,000 short tons of langbeinite in the first quarter at an average FOB the mines or net sales price of $123 per short ton as compared to 48,000 tons at an average FOB price of $108 per short ton in the prior year’s first quarter. Converting our first quarter 2008 FOB price of $123 per short ton price to metric tonnes would be the equivalent of an average price of $136 per tonne. The large increase in sales volumes of langbeinite was due in part to increased production, but primarily resulted from the sale of inventories that had been intentionally built up in late 2007 to meet export orders. Export sales typically occur at lower FOB prices as freight costs reduce realized FOB prices. Our posted price for granular langbeinite FOB Carlsbad has increased from $156 per ton at the end of 2007 to $171, $211, and then $281 per ton in January, March, and June, respectively. We market our langbeinite under the registered name of Trio®.
The first-quarter production cost of goods sold which excludes depreciation, depletion and amortization, and royalties per ton of langbeinite sold increased to $77 per short ton from $69 per short ton in the first quarter of last year. Langbeinite costs were higher due to increases in labor for personnel additions and maintenance expenses at the East plant as described earlier.
Capital Investment Update Through the first quarter of 2008, Intrepid has invested $11.2 million related to the 2008 capital investment program. This investment includes an upgrade to the mining fleet with the addition of two new underground miners, one replacement miner at the West Mine and one miner to create an additional operating panel in our East Mine that will allow us to increase our ore throughput.
Capital projects related to the storage and hoisting capacity upgrade and coarse tails regrind at the West Mine, the new thickeners and langbeinite recovery improvement project at the East Mine, the horizontal solution mining cavern expansion at our Moab Mine, and the addition of another deep brine well at the Wendover Facility are all progressing as scheduled.
We are continuing to move forward with the permitting process for the HB Mine, which is a solar evaporation solution mining project in Carlsbad. On March 10, 2008, we submitted an application for an Underground Injection Control and Discharge Permit to the New Mexico Environmental Department relating to the HB Mine project, and we recently received the Administrative Completeness Determination for our application. We anticipate approval of the permit later this summer. As various permits are received, we will likely begin applicable phases of construction for the HB Mine. We have had numerous meetings and briefings with the Bureau of Land Management (BLM) on aspects of the project, and we submitted the Mine Plan Modification at the end of May 2008. The Environmental Assessment associated with the HB Mine will be filed in the near future. The timing of the capital expenditures for the development of this project is dependent upon the timing of approval of all necessary permitting and the project will take approximately two years from that date to reach completion and full capacity.
The majority of our capital investment budget is planned for expenditure in the latter part of 2008 and of our total estimated 2008 capital expenditures, approximately $20 - $25 million is related to the HB Mine and will be dependent on the timing of permitting.
Guidance for 2008 Guidance for 2008 related to our production, our capital investment plan, and our production cost of goods sold per short ton which excludes depreciation, royalties and byproduct credit is presented below. The timing of sales and production volumes vary within specific reporting periods and may not be equal to one another as a result of building inventory balances or selling down inventory balances.
Production Forecast: Potash – 870,000 - 890,000 short tons Langbeinite – 210,000 - 230,000 short tons Production Cost of Goods Sold: Potash – $140 - $150 per short ton Langbeinite – $75 - $85 per short ton Capital Investment Program $80 - $95 million In the first quarter and prior to the Company’s initial public offering, the predecessor entity Intrepid Mining LLC, was not subject to income taxes at the Company level, nor were common shares outstanding. Following the initial public offering of common stock the expected effective tax rate for the Company will be approximately 38.5 percent and the effective cash tax rate will be approximately 60 percent of total taxes, or a cash tax rate of between 21 and 23 percent.
Our royalty rate has historically been approximately 3.7 percent of net sales and we expect this to remain relatively constant going forward. Our principal competitors operate primarily in Saskatchewan, Canada. The Saskatchewan tax system for potash producers includes a capital tax and several potash mineral taxes, none of which are imposed on us as a U.S. producer.
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