IPI

Business Context and Reporting Period

Company: Intrepid Potash, Inc.
Filing Type: Form 10-Q (Unaudited)
Period Ended: June 30, 2009
Business Overview: Intrepid is the largest producer of muriate of potash (MOP) in the United States, operating five active facilities in New Mexico and Utah. The company produces potash, langbeinite (marketed as Intrepid Trio™), and by-products including salt and magnesium chloride. The company operates as a single segment focused on the extraction and production of potash-related products.

Key Financial Metrics

Material Changes vs. Prior Comparable Period

• Revenue Decline: Net sales decreased significantly compared to the prior year periods due to a sharp reduction in sales volumes. Potash sales volumes dropped 62% in the quarter and 58% in the six-month period compared to 2008. This was driven by deferred agricultural purchases due to economic conditions and reduced industrial demand from lower oil and gas drilling activity.
• Price Increases: Despite volume declines, average net sales prices increased substantially. Potash net sales price rose to $674 per short ton in Q2 2009 (up from $425 in Q2 2008) and $703 per short ton for the six months (up from $360 in 2008).
• Cost Per Ton Increase: Cost of goods sold per short ton increased significantly (88% for potash in Q2) primarily due to lower production volumes spreading fixed costs over fewer tons. Additionally, the company expensed approximately $5.2 million in abnormal production costs in Q2 2009 under SFAS 151 due to voluntary production shutdowns.
• Inventory Build-up: Inventory levels increased by $14.2 million in the first six months of 2009 as production exceeded sales volumes.

Guidance, Outlook, and Risks

• Market Outlook: Management expects lower sales volumes to continue into the second half of 2009 as growers defer fertilizer applications and dealers reduce inventory levels. The company recently reduced its posted price for red granular potash to $482 per short ton (effective July 27, 2009) to remain competitive, though the impact on demand remains uncertain.
• Capital Investment: Total capital investment for 2009 is expected to be between $120 million and $135 million, with the majority scheduled for the second half of the year. Projects include expanding capacity at the West and East mines and developing the HB solar solution mine.
• Regulatory Delays: The Bureau of Land Management (BLM) determined that an Environmental Impact Statement (EIS) is required for the HB solar solution mine, delaying final permitting and construction until approximately September 2011.
• Legal Proceedings: The company is involved in litigation regarding oil and gas drilling permits near its New Mexico mines, which could impact future mining operations if permits are granted. A securities class action lawsuit regarding the CEO's academic credentials was voluntarily dismissed with prejudice in July 2009.
• Derivative Liabilities: Although the company has no debt, it maintains interest rate swap agreements with a total notional amount of approximately $125 million, resulting in a fair value liability of $3.2 million on the balance sheet.

Key Facts for Investor Verification

• Production vs. Sales Mismatch: Verify the sustainability of inventory levels given the significant gap between production (131k tons potash in Q2) and sales (80k tons potash in Q2).
• Price Sensitivity: Monitor the impact of the recent price reduction to $482/ton on sales volume recovery and gross margins.
• Abnormal Costs: Review the application of SFAS 151 regarding the $5.2 million expensed production costs and the company's definition of "normal" production rates.
• Capital Expenditure Execution: Track the $120-$135 million capital plan, specifically the timeline for the HB mine EIS and the West mine storage project.
• Liquidity Position: Confirm the company's ability to fund operations and capital projects solely from cash flow and existing cash ($118.7 million) without drawing on the credit facility.