Intrepid Potash Q1 2010 Earnings Call Transcript

123jump.com Staff
30 Jun, 2010
New York City

Sales fell 80% to $107.4 million and net income fell 52% to $11.8 million or 16 cents a share. Gross margin in the first quarter of 2010 for the sale of potash was $109 per short ton or 31%, compared to $435 per short ton or 60% in the three months ended March 31, 2009.

Intrepid Potash Inc. ((IPI))
Q1 2010 Earnings Call Transcript
May 5, 2010 10:00 a.m. ET

Executives

William Kent – Director of Investor Relations
Robert P. Jornayvaz III – Chairman & Chief Executive Officer
John G. Mansanti – Vice President of Operations
R.L. Moore – Senior Vice President of Marketing & Sales
David W. Honeyfield – Executive Vice President & Chief Financial Officer

Analysts

Edlain Rodriguez - Broadpoint AmTech
Robert Koort - Goldman Sachs
Mark Gulley – Soleil - Gulley & Associates
Fai Lee – RBC Capital Markets
Douglas Chudy – KeyBanc Capital Markets
Elaine Yip – Credit Suisse
David Silver – Bank of America/Merrill Lynch
Sandy Klugman – UBS
Horst Hueniken – Thomas Weisel Partners

Presentation

Operator

Good morning and welcome to the Intrepid Potash First Quarter 2010 Earnings Conference Call. At this time, all call participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. I would like to remind everyone that this conference is being recorded today on May 5, 2010 at 8 o’clock a.m. 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

Good morning. Thank you all for joining us for our first quarter 2010 earnings conference call.

I would like to start by introducing today''s participants from the company. We have with us on the call today Bob Jornayvaz, Chairman and Chief Executive Officer; Hugh Harvey, Chief Technology Officer; David Honeyfield, Executive Vice President and Chief Financial Officer; Martin Litt, Executive Vice President and General Counsel; RL Moore, Senior Vice President of Marketing and Sales; and John Mansanti, Vice President of Operations.

I would also 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. 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 material information with respect to the risks, uncertainties and factors which could cause our actual results to differ from our forward-looking statements, we direct you to our news release issued last night and the risk factors described in our filings with the SEC. All forward-looking statements are qualified in their entirety by such factors. Our earnings release which is posted on our website at www.intrepidpotash.com includes a reconciliation of certain non-GAAP financial measures to the most directly comparable GAAP measures including EBITDA which will be used on this call. All references to tons are to short tons of 2,000 pounds.

I will now turn the call over to Bob Jornayvaz.

Robert P. Jornayvaz III

Thanks Will. And thanks to everyone for taking the time today to learn more about Intrepid’s first quarter 2010 results. The first quarter of 2010 Amsterdam would appears to be the return to more normal demand in application levels for potash in the United States. In terms of tons sold, Intrepid had it second best quarter ever, selling 243,000 tons of potash.

We earned $0.16 per diluted share, net income of $11.8 million and generated $26.6 million in EBITDA; and build upon on already solid cash positioned in the quarter with a $129 million of cash and investments. We expect to use these cash in hand along with cash generated from operations in order to fund our capital investment program in 2010, including our recently approved langbeinite recovery improvement project, which we’ll address later in the call.

Our first quarter results confirm the potash demand trend that began to emerge in the fall of 2009. Looking for a moment, in November of 2009, we saw very good volume movement of 66,000 tons at an average net realized price of $405. Clearly, given the volume movement, former saw good value for potash at these higher prices, with the sales volumes, we saw these prices in November, 2009, $51 higher than the price we realized during the first quarter of 2010.

We had anticipated that market pricing had bottomed, however, prices unexpectedly continued to fall in late December, when the Canadian producers reduce the price by approximately $50 a ton. Moving back to the first quarter of 2010, the most significant trend that we have seen is the dealers, who took put the most part last year had only purchased product when they had firm orders from downstream buyers in hand. Have actively been purchasing product for the spring fertilizer application season.

During the first quarter of 2010, some of our distributor customers, purchased product from us at volumes above historic norms, presumably to fill orders and modest inventories for future sales. The robust demand from dealers has substantially drawn down our granular inventory, we are essentially sold out of our red granular production to April and inventory will remain tight through midnight. While we are not allocating product to our customers, we are reserving part of our production to ensure, we have products available to service the needs of our truck customers.

We have adapted our sales strategy to the current potash market environment, in order to operate the business more efficiently. Under this revised strategy, we are committed to participating in the potash sales market at competitive market prices. This strategy lets us maximize production volumes as we bring our mines back to pull production capacities, thereby lowering our per ton production cost and enabling us to concentrate on gross margin realization.

We fully understand, that we’re always subject to larger overall potash market as it relates to pricing, we must actively manage our sales efforts to maximize margin. The buying activity that we observed during the winter and early spring, shows us the farmers in the United States, recognize the value of potassium’ agronomic benefits, we believe that the United States potash market is returning to more historical fertilization rates and at the current market trends should be sustainable, 2010 as an exciting year for Intrepid.

We are moving forward with our langbeinite recovery improvement project, which is designed to increase our overall recovery rate of langbeinite, which we market under the name of Trio to approximately 50% and provide us with the ability to granulate all of our excess standard production and sale more product into the premium granular market. Having this production flexibility is important as we continue to sale out of granular product. We strongly believe in the investment we are making to construct this project and the long term benefits that it should bring.

Further, we believe that is market recognizes the combined value of the nutrients in Trio, we should see our pricing opportunity in the premium market strengthen. Finally, as our minds begin to reach more normal operating rates, we expect to see the benefits of the numerous de-bottlenecking projects that we have invested in and completed over the last two years.

John Mansanti, our Vice President of Operations will take the call from here. John.

John G. Mansanti

Thanks Bob. We produced 172,000 tons of potash during the first quarter of 2010. This ompares to 137,000 tons produced in the first quarter of 2009. We also produced 57,000 tons of Trio during the first quarter of 2010 which compares to 42,000 tons of Trio produced in the first quarter of 2009.

Demand for regular Trio remained very strong during the quarter and given the strengthening potash market we are rebalancing our production profile to supply both the granular Trio and potash markets. We continue to work diligently to bring all of our operations back to historically normal production rates and return our West mine to full staffing.

Even with the extremely tight labor market in Carlsbad, we are making good progress in hiring the people necessary to return to full production levels at the West mine. We remain on track to have the appropriate staffing in place around the middle of the year. Our desire is to hire and train full-time staff in lieu of temporary contract labor as we believe it is important over the long term to have employees with a vested interest in the company''s success. Capital investment in our operating facilities was approximately $19 million in the first quarter.

During this period we completed the final commissioning of the underground stacker reclaim project and the HydroFloat at the West facility. At the East facility we completed the construction and installation of the new wash thickener and began the commissioning process during the month of April. We expect the thickeners to be running at design production rates in the next few weeks.

Moving briefly to the HB solar solution mine, we are now 15 months into the EIS process with the BLM and we continue to remain on schedule. The BLM has issued its scooping summary report for the EIS and is moving forward on preparation of the draft EIS. We have also been working with the New Mexico Environment Department on the issuance of an underground injection permit for the mine. We believe that issuance of this permit should occur shortly.

As Bob mentioned, we have committed to move forward with the langbeinite recovery improvement project. Final engineering of this project will commence this month followed by construction of the new plant. Construction is expected to be completed and the new plant in service by the end of 2011.

The project will increase our overall recovery of langbeinite to approximately 50%. It will reduce process water usage. And the project has been sized to accommodate additional throughput from mine expansions. As part of the project, we will add a granulator whereby we''ll have the ability to granulate our entire production stream of standard size product as required.

By adding the granulation process, we will increase our ability to service a growing market for granular size Trio products. This recovery improvement project is a high priority for Intrepid. By producing more product tons from the same number of ore tons, our per-ton cash operating cost should decrease and we expect to lower our overall operating cost structure at the East facility.

The total project investment is expected to be between $85 and $90 million. Included in this range is $3 million which has already been spent on engineering related services. Approximately $35 million will be invested in the remainder of 2010 and the balance in 2011.

Total capital spending for Intrepid in 2010 is still expected to be in the range of approximately $125 million to $155 million as the langbeinite recovery improvement project was contemplated in our previously announced capital budget. In addition to the langbeinite recovery improvement project and our sustaining and improvement projects, we are working through the engineering phase of a project to add additional compaction capacity at our Moab facility.

This project will allow us to granulate all of our Moab production if needed. This provides us greater marketing flexibility. We expect the 2010 capital program will be funded out of cash flow and the existing cash on hand. Now, I will turn the call over to RL Moore, our Senior Vice President of Marketing and Sales.

R.L. Moore

Thank you, John. We saw our 243,000 tons of potash during the first quarter of 2010. This compares to 99,000 tons sold during the first quarter of 2009. We also sold 70,000 tons of Trio during the first quarter of 2010, compared to 38,000 tons of Trio sold in the first quarter of 2009. As Bob highlighted, sales volume in the first quarter required good for Intrepid. We saw strong demand for potash and Trio throughout the entire quarter.

As we’ve stated on our last call, we have long held the belief, that the under application of potassium fertilizers in United States over the last two years would eventually lead to a more typical demand profile due to the need to replace the nutrients removed from the soil.

During the first quarter, dealers reentered the market and began to purchase their potash requirements out there rather than on consignment or on just-in-time basis, which had been the trend for much of 2009. Although, this demand was a significant change from previous quarters, we believe that dealers are only buying their expected spring demand and we anticipate that they will make every effort to end the spring season carrying limited amounts of inventory end of the summer months.

Adverse weather conditions in late March, lowed sales at the beginning of the spring season, but the month of April saw an increase in demand for potash and Trio by end users creating a more typical turnover of inventory out of the distributor network.

As Bob mentioned, while we are not out of product, demand has remained strong for both the large and small accounts. Additionally, we have recently seen the Trio export market become more active resulting in a number of confirmed export orders yet this year.

Our posted price remains at $390 per ton for red granular potash and we see some positive signs in our local markets that support this price levels. We caution however, that our competitors are much larger and their marketing strategies may put pressure on our average net realized price.

In the industrial segment of our business, the North American drilling rig count has continued a slow recovery upward, especially, in the oil and gas plays proximate to our Carlsbad production facilities and we hope to begin to see industrial sales pickup towards the middle of the year.

As with the previous quarters, the animal feed component of our various markets has seen consistent demand. We should also note that the cattle and hog prices have improved significantly, which should lead to greater demand at the feed lock and producer level.

All things considered this year’s spring season as much more reflective of what I’m experienced in the majority of my 38 years in the fertilizer business. There been some logistical challenges this year due to increased demand and rapid moment of potash and Trio and we are working hard to service our customers’ needs while at the same time balancing our rail and truck sales in order to maximize our net realized prices.

I’ll now pass the call to Dave Honeyfield, our Chief Financial Officer to wrap up our prepared comments.

David W. Honeyfield

Thanks, RL. Potash cash operating cost of goods sold in the first quarter of 2010 net of byproduct credits was $199 per ton, a decrease from the $238 per ton in the first quarter of 2009. While per-ton costs have decreased from a year ago, they were up slightly from last quarter.

The reason for the slight increase over the fourth quarter of last year is actually good news as it means that we sold through large portions of the higher-cost inventory that we produced at our lower operating rates in 2009. The cash benefit of the monetization of our inventory is the primary reason for the increase in our cash and investment balance at the end of this quarter.

Before I wrap up our prepared statements, I want to touch briefly upon average net realized sales price and how average net realized sales price of potash correlates to the price of Trio. It''s instructive to look back over a number of quarters at the relationship between the price of potash and the price of Trio.

What we have seen is that the average net realized price of Trio was between 45% and 53% of potash over the last five quarters. The ratio was 40% in 2008 when potash prices were rising and 61% in 2007 and 60% in 2006. We believe that the mineral content of Trio that includes magnesium and sulfur add significantly more value than what the product has been selling for.

As we continue to develop the premium Trio market and educate buyers to the significant value of the magnesium and sulfur, we believe that growers will recognize the value proposition of Trio. As for potash pricing, we''ll continue to participate in sales of potash based upon the prevailing prices in the markets we serve.

Intrepid remains focused on the long-term fundamentals of the potash market and we remain committed to maximizing margins and investing strategically in our operations to do so. As the market enters what appears to be a more stable pricing and demand environment, we intend to continue to allocate capital to our facilities, invest in our people and maintain a strong balance sheet.

Crop prices have remained fairly stable through the spring season and continue to be supportive of farm incomes. Our solid asset base and view of the long-term fundamentals of the potash industry allow us to approach our growth in a measured manner. We''re encouraged by what we see in the potash market and with margins as our focus we believe we''re positioning Intrepid for future success. We''ll now open the lines for any questions. Rebecca?

Question-and-Answer Session

Edlain Rodriguez – Broadpoint AmTech

Hello?

David W. Honeyfield

Yes, go ahead, please.

Edlain Rodriguez – Broadpoint AmTech

It''s Edlain Rodriguez from Broadpoint AmTech. Good morning, guys. A quick question for you, David. Are you seeing any traction on the price increase you''ve announced? I mean, let''s say -- I mean, essentially are you selling any products in April at the higher price? Because the reason we''re asking is one of the larger players had noted that half of the price increase has been implemented in April. I just wanted to see if you''re seeing similar trends.

Robert P. Jornayvaz III

Edlain, this is Bob. The answer is yes, we are and we''re seeing it in a variety of our markets. We tried to address that, that we''re seeing strength in a whole variety of our markets. And I''ll let RL address some of the specific numbers where we are.

R.L. Moore

I think what we have to look at is in the markets that we serve in our backyard at Carlsbad and our Utah facilities which is a really strong truck market for us, I mentioned in my statements that our red granular potash prices posted at $390 a ton. We are selling truck tons at that level less appropriate discounts to the customer sale and even above that our white granular is posted at $398 a ton. And we''re getting the $398 less a maximum $10 discount on those tons.

Edlain Rodriguez – Broadpoint AmTech

So your reported Q2 numbers in terms of pricing, we should see a slight improvement from the Q1 level prices?

David W. Honeyfield

Edlain, this is Dave. I think that what''s helpful to understand is the progression of our posted price through the first quarter. For the first two months we were at $360 a ton and then that price increase to $390 took place in March. So what we''ll see is a little bit of that benefit I''d expect as we have that posted price throughout the quarter here.

Edlain Rodriguez – Broadpoint AmTech

Okay. Makes sense. Thank you very much.

William Kent

Go ahead. We seem to be having a little bit of difficulty with the Q&A announcement, so if you''re in the queue, go ahead and announce yourself and we''ll respond to your questions.

Operator

Your next question is from the line of Robert Koort.

Robert Koort – Goldman Sachs

Thanks. Good morning, guys. A couple of quick questions. First, you mentioned I think in terms of the market tone that some of your competitors might put some pressure on pricing. I guess I''m trying to figure out the logic that your competitors might be following. It would seem like inventories are low, demand is high. Why wouldn''t there be broader support for price hikes?

Robert P. Jornayvaz III

Bob, I guess I''ll just answer that in terms of what happened last fall. And as we''ve mentioned we were selling potash very briskly in November at higher prices. The price very unexpectedly to us given the demand that we were seeing fell and history is what history is and we want to point out what happened. I''m not going to get into the prognostication business about what might happen.

Robert Koort - Goldman Sachs

Would you caution me against a view that if those Canadians are sending plenty of export tons out, maybe they would be a little bit more tolerant of rising prices in the domestic market?

Robert P. Jornayvaz III

The Canadians are going to do whatever is in their own best interests. We''re seeing great movement in our markets. As we mentioned earlier, we''re virtually out of red granular inventory. All of our truck markets are robust and returning to what we would see as normalized volumes. So we''re very pleased with the volume movement and the health of our customers, the financial health of our customers in our regions.

Robert Koort - Goldman Sachs

Okay. And if I might ask a last one, I think RL said you were getting back to more normalized demand patterns. It doesn''t sound like we''re back to normalized inventory approaches by the dealer channels, so do you think we''ve permanently changed to a hand-to-mouth just-in-time logistic system or is it possible if the industry gets a little bit more confident about pricing we could go back to some inventory accumulation through the dealer channels?

Robert P. Jornayvaz III

I don''t think anything has happened permanently. If we go back and look at what the market looked like in ''04, ''05 and ''06 in terms of dealers buying just-in-time inventory, I think that we''re in a very similar situation to what happened then. RL, I''ll let you add your historical perspective.

R.L. Moore

Bob, my comment, look at where we''re at this spring season. We still have consignment inventories in warehouses in the Midwest. And I can tell you that when the spring application season started, we had locations that within three days were out of product. And I think the just-in-time purchasing that we saw all of last year, customers have actually experienced some trouble getting their product in their house on time this year. I think they will continue to be cautious going into the summer months of 2010, but I think they will do a better job of preparing for the fall season of 2010.

Robert Koort - Goldman Sachs

Great. Thank you.

Robert P. Jornayvaz III

Thanks, Bob.

Operator

Your next question is from the line of Mark Gulley.

Mark Gulley – Soleil - Gulley & Associates

Yes, good morning. A couple questions if I might. First of all, we''ve talked on previous calls about the impact of potash imports into the U.S., particularly for on the river sorts of dealers and distributors. In a market that still has low operating rates, are you still seeing the impact of that product on pricing?

Robert P. Jornayvaz III

Yeah. There is no question that we saw Russian product. And we actually saw a little bit of Israeli product on the river this year. And so given the strong volumes that we saw, I don''t anticipate a lot more pressure from that market because we''re not seeing huge volumes come in. So going into 2010 in the first quarter we saw those volumes. What those companies choose to do in the future is obviously in their own best interests, but right now we''ve seen things settle out quite a bit. RL, is there anything you would like to add to that?

R.L. Moore

I think you hit on it, Bob. I think their pricing levels have been at the -- have been about the same for the last two to three months, no significant change upward or downward. It is tons that come in and move into some of our market areas that we have to compete with. For that reason we can''t sell all of our tons at the $390 less $10 or whatever discount we give. We do have markets that those import tons affect and we have to compete with those tons on a regular basis.

Mark Gulley – Soleil - Gulley & Associates

Okay. That''s helpful. Too, you talked about increasing I think langbeinite recovery to 50%. Can you give us an idea or remind us, please, of what the capacity increase will be from current capacity of lang to the new capacity?

Robert P. Jornayvaz III

Dave, you want to handle the numbers? And then we''ll walk you through some of the incredible benefits that we get from this project.

David W. Honeyfield

Mark, this is Dave. Currently we recover about 35% of the langbeinite that''s in the ore and through the addition of the dense media separation facility that will be added we''ll increase that recovery to about 50%. And then Bob I know is going to touch on the addition of the pelletizer plant which adds an awful lot of flexibility to our product mix.

Robert P. Jornayvaz III

Just to go through a quick list of benefits for this project, I mean it''s got a financial return in the high teens, an internal rate of return in the high teens based on lang prices below the current market. It really helps us maximize the resource. It lowers the cash per-ton cost of our Trio product. It''s very water friendly. It reduces freshwater consumption and creates -- eliminates any water balance issues that we might have. It really helps our product mix. It monetizes existing inventory, increases capacity, makes us more flexible and adds significant revenue without -- with minimal additional cost so it''s a great project for Intrepid.

Mark Gulley – Soleil - Gulley & Associates

Okay. Thanks for that. And then finally I know it will be in the 10-Q, but that huge increase in shipments, can you give us an idea of what the split was for this quarter amongst that strong shipment number on potash?

David W. Honeyfield

Yeah, Mark, I sure can. And you''re talking about the mix amongst the product lines?

Mark Gulley – Soleil - Gulley & Associates

Right.

David W. Honeyfield

Yeah. Into the ag sector, we had 86% of our sales, our industrial oil and gas was 8% of the sales and the feed component was 6%. Again, keep in mind that that feed number has stayed very, very steady. It''s just all relative to the total product mix.

Mark Gulley – Soleil - Gulley & Associates

Okay. Thanks very much.

Operator

Your next question is from the line of Fai Lee.

Fai Lee – RBC capital Markets

Hi, thanks. Maybe I''ll just draw off of the first question. You earlier mentioned the posted price for potash. Can you provide some indication -- sorry, can you provide us with the prices for langbeinite in terms of what -- or Trio, what the posted prices were?

R.L. Moore

It''s currently posted at $196 a ton for our granular product.

Fai Lee – RBC capital Markets

$196, okay.

R.L. Moore

Yes, sir.

Fai Lee – RBC capital Markets

And did that change during the quarter?

Robert P. Jornayvaz III

I believe it did.

R.L. Moore

I think we actually did have a $15 increase during the quarter. Potash prices for the most part took a $30 increase and Trio took a $15 increase in relationship to that $30.

Fai Lee – RBC capital Markets

Okay. Great. Just focusing on the langbeinite pricing, I think earlier there was some commentary about the percentage relative to potash. But when I look at it on a K2O basis, it looks like the premium was about I think around $40 per short ton this quarter when you try and factor in the differential between the K2O content and that seems pretty much in line with the past history. And I''m just wondering do you expect that -- it sounds like you expect that premium to go up over time.

Robert P. Jornayvaz III

Well, first and foremost, throughout the year we ran out of our granular products several times, so there is a good solid demand for our granular product that we''ve actually seen in the market and feel in the market. As we''ve begun to broaden our education and marketing strategies to show the benefits of the magnesium and the sulfur, which are really required in a whole variety of products, we''re seeing more market acceptance. And we''ve really just begun, so we believe that the magnesium and the sulfur in this product isn''t remotely valued properly by the pricing and we intend to undertake and begin a much more vigorous marketing campaign and education campaign which we think will then result in better pricing.

Fai Lee – RBC capital Markets

Okay. So it''s basically better marketing than maybe in the past and that''s going to get you better value than from the magnesium and sulfur portions as a product.

Robert P. Jornayvaz III

Yeah. Literally as we travel around our customers and in areas that we know are needing the magnesium and the sulfur, we''re just seeing great response.

Fai Lee – RBC capital Markets

Okay. Just on the langbeinite recovery, just following up on Bob''s question earlier, going from 35% to 50%, is it, right now I think you can produce effectively about 200,000 moving to 50% if the math is correct it will take you up to 285,000, so an increase of 85,000. Are those numbers about right?

David W. Honeyfield

Hi, this is Dave. I think there is a couple of other bits and pieces to that that I think need to be taken into account and that''s that we are making an investment to increase our mining capacity, as well, at our East mine in Carlsbad, New Mexico. And so I think you''re doing the math right for productivity and more throughput today, but I think as we make those investments over the next couple of years we''ll see higher production numbers that come out of that system.

Fai Lee – RBC capital Markets

Okay. So that''s something…

Robert P. Jornayvaz III

The other, Fai, that''s a great feature of this plant is it''s designed to have a flotation plant added onto it. It''s designed to increase the plant over time and eventually have a significantly higher capacity. So by enhancing it in stages, we''ve created a lot of optionality for ourselves to continue to upgrade this plant and take it up even further.

Fai Lee – RBC capital Markets

Okay. And that''s sort of what I was getting to. So it sounds like maybe you might be able to produce with the project as it stands now maybe about 100,000 product tons and at some future point you could get to the 200,000 I think that you''ve talked -- increase that you''ve talked about in the past if you had this flotation cell. I guess my question is with this flotation cell, how much would it cost to add on and how long would it take?

Robert P. Jornayvaz III

John, you want to answer that?

John G. Mansanti

Yeah. I mean, flotation was one of the options we looked at. I''m not sure how much -- I mean, broad range of capital, it''s kind of a mix. It depends upon, like Bob said, there is a lot of flexibility in how we go about that. But there is other improvements that would come with the flotation facility and so we''re talking maybe…

Robert P. Jornayvaz III

Yeah, Fai, for an additional $60 million to $100 million, we could add a significant flotation plant, additional granulation or pelletizing capacity which would take it up. We still have reserved the option to add these features on as we continue to go. So as we continue to grow our market and strengthen our pricing, we will continue to grow our production capacity.

Fai Lee – RBC capital Markets

Okay. So spending $60 million to $100 million will effectively add another 100,000 tons of additional capacity almost directly?

David W. Honeyfield

Fai, it actually ends up taking recoveries up to about 70% if you end up adding the flotation circuit. So there is a little bit of that education process that Bob described that we believe is prudent to go through here in the near term. And if you go back to the increase that the flotation circuit would add, the majority of that product would be a smaller standard size product which is where we would again increase the granulation capacity even beyond what we''re adding with this leg to handle that. So you end up -- I mean, the numbers end up moving fairly quick for that incremental investment.

Fai Lee – RBC capital Markets

Okay. Great. And I guess the last question I have is on the distributor psychology, I guess in the past they would have ordered more -- held more inventory. And just in terms of your discussions with distributors, is the view -- the concern about being a little bit more cautious is a concern about potash prices declining like they did last year and people were caught off guard, or is it just the view that they feel prices are stable and you''re just trying to minimize the working capital requirements?

Robert P. Jornayvaz III

Well, once again let''s not forget the year we just came off of. I mean, farmers had stock market rides just like the rest of the world. They had -- they went through the recession and we''re now going through a stock market correction as we speak. We''re seeing what''s going on in Greece and in Europe.

Those things all affect farmers'' and dealers'' buying decisions. It''s just not as straight a line as you might think, so I think there''s caution as we see in a lot of other markets. We see the same type caution from our dealers. We have the same type discussions when we talk about their uncertainty, not so much about the agricultural industry but when you look at economics overall.

There is uncertainty out there, so I think it causes people to rein back in a little bit. It''s no different than we see more cash on corporate balance sheets now throughout the entire world. That same kind of caution that we see on corporate balance sheets is occurring on dealers'' balance sheets so I just want to put it in perspective.

Fai Lee – RBC capital Markets

Okay. Great. Thank you.

Operator

Your next question is from the line of Douglas Chudy.

Douglas Chudy – KeyBanc Capital Markets

Hi, good morning. Nice quarter. I guess first off on the production cost per ton, you said it''s going to take a little while to get the West mine fully up and running. Should we expect production costs per ton to pretty much mirror what we saw here in the first quarter until the West mine is fully operational?

David W. Honeyfield

Doug, this is Dave. One thing that I think needs to be kept firmly in mind is that if you look at the concentration of sales that we had in the first quarter, as RL touched on that was in large part a movement of our granular product out of the Carlsbad area where a lot of those tons had been produced out of the West mine when we were running at an operating rate.

We''ve essentially moved through all those tons that were on the books at the end of the year, so as we ramp up we''ll see that benefit coming through. That being said, it''s tough for me to give you an exact number based on the way the product mix shakes out. But I think it would be fair to say that you should start to see that cost coming down as we move through the quarters this year.

Douglas Chudy – KeyBanc Capital Markets

Okay. That''s certainly helpful. And then I guess secondly you mentioned a lag in industrial sales was likely attributable to some lower natural gas pricing in the core Rocky market, Rocky Mountain region. Can demand get back to historical levels if prices stay low or is there kind of a level of natural gas pricing that you would need to get the industrial potash demand back to pre-downturn levels?

Robert P. Jornayvaz III

That''s a great question and a good observation. That''s why we''re building a new compaction plant at our Moab facility. We''re just going through the last stages of design on that and we''ll begin construction on that here in the second quarter. That will enable us to granulate or compact 100% of our product out there in Moab which will allow us to go back and forth between ag markets and industrial markets. We do see Rocky Mountain gas having the opportunity to pick up, but we don''t want to be dependent upon that Rocky Mountain rig count. So I hope that answers your question.

Douglas Chudy – KeyBanc Capital Markets

Yes, thanks. That''s all I''ve got.

David W. Honeyfield

Thank you.

Operator

Your next question is from the line of Elaine Yip.

Elaine Yip – Credit Suisse

Hello, good morning.

Robert P. Jornayvaz III

Good morning.

Elaine Yip – Credit Suisse

Going back to your comments on dealer psychology, given dealer cautiousness this season, has there been any change in interest or the way you market your forward warehousing program?

Robert P. Jornayvaz III

Well, we''ve out forward warehousing program back to just two dealers that we''re dealing with here in the United States. So in terms of how we''re handling it, we''ve got two what we would consider very key relationships as it relates to those forward warehousing programs so we''ve cut it back significantly. At the same time we''re seeing dealers willing to step up and buy smaller amounts of potash. And once again I want to reiterate that they''re being cautious, but I think as is the rest of the world in all their buying activity.

Elaine Yip – Credit Suisse

And then you''re moving forward on your langbeinite recovery project, but can you give us an update on how you''re thinking about some of the other growth projects you''ve talked about like the HB mine and the North mine?

Robert P. Jornayvaz III

Well, the great news is that HB has a very defined schedule as set out by the BLM and we''re right on track. If you were to look at a timeline or a Gantt chart, we''re right where we hoped we would be when we started this process and we don''t see any reason to believe that we will veer off the scheduled course so that''s coming along really well.

We continue the evaluation of reopening the North mine. I think in all fairness given the potash price correction that we saw, you have to go back and really roll up your sleeves on that and we''re looking at other alternatives. Does it make sense to open that mine and run it in conjunction with the East mine to possibly take ore over to the East mine? We''re still very much interested in reopening that mine and looking at the optimum design to handle the ore body that''s there.

So when you go through a price correction like you did, you go back and you roll up your sleeves, you see where you can you cut costs, where can you design the most cost-efficient plant and we''re in the process of doing that. Those are the two biggest projects that I can think of, but don''t forget the second phase or the ability to have a second phase at the lang plant is a very significant option.

Elaine Yip – Credit Suisse

Great. Thank you very much.

Operator

Your next question is from the line of Dave Silver.

David Silver – Bank of America/Merrill Lynch

I have a couple of questions I guess the first one might be kind of an accounting type question. So this has to do with accounting or the net back price you report on your consignment sales. So when I look at your shipments versus production, you sold down about 70,000 tons or so of potash and I’m assuming that includes a very high percentage of your consignment business.

So just hypothetically if you sold to a customer at the same price, but you sold sometimes out of the consignments location versus sometimes out of a company location. Would you still be recognizing the same price or is there some reductions in your net back from an accounting perspective for accounting for the benefits accruing to the dealer who might have had the consignment arrangement, or is that make sense. I’m just trying to get kind of more of the baseline on your $354 price for the first quarter?

David W. Honeyfield

Dave, there’s probably a couple of parts for this. Hopefully, I’ll bring some clarity around that. First part is that R.L. touched on some pieces of this already. One is we have reduced the numbers of consignment locations we have in large part because we started to see dealers take inventory onto their own books. The inventory locations and the consignment locations that we maintain, we believe were pretty important to the business in order to allow us to continue to move product through the system and those consignment inventory locations turned over quite readily. We’re competing with markets up and down the Mississippi River and large part there. So it''s just a highly competitive market. What that allows us to do, frankly it is allows us to produce product at a higher rate and lower our per ton operating rate.

So that’s really the important part of maintaining those relationships from a recognition perspective. I mean without a doubt if all else was equal in the word and we didn’t have those consignment and the tons moved, we might recognize slightly higher realized price, but we think the importance to having product in those locations and some of the logistic constraints that R.L. touched on that existent in the market allowed us to frankly move the product that we did.

Robert P. Jornayvaz III

Yeah. Let''s go back in time a little bit on those warehouse agreements. There was a severe resistance or reluctance on dealers to actually buy product last year. And so it was paramount to work with our customers to be able to get product moved forward so that they could then in turn work with their customers. So it really was a partnership.

I remember the discussions when we first started in 2009 with those that we wanted to partner with our customers to make sure they could take care of their customers. And so as we''ve gotten through 2009, we''ve gotten through that ugly demand market and we''re back in a much more normalized market, we''re seeing our relationships return to more typical standard buying patterns, buying habits, etc. So let''s just never forget the perspective of how those were started and why they were started.

David Silver – Bank of America/Merrill Lynch

Yeah, that''s very fair. I appreciate the detail. Like I say, I was coming at it more from just trying to figure out a baseline price to think about your average selling price moving forward with a price increase flowing through, but thank you for that.

Also you mentioned I guess in the part of the Trio discussion that there were some export orders that you were lining up to fill. I was wondering if with the situation in the U.S. Gulf, I''m assuming the product is going to be exported through the Gulf, but are you aware of any either delays or diversions or different shipping requirements that would apply to these tons as a result of the issues with the oil spill in that area?

R.L. Moore

This is RL. All of our export tons move through the port of Beaumont, Texas. We do not go out of the New Orleans Gulf. And we''re not seeing anything impede our ability to make those shipments right now.

David Silver – Bank of America/Merrill Lynch

Okay. Great. Thank you very much.

Robert P. Jornayvaz III

Thank you.

Operator

Your next question is from the line of Sandy Klugman.

Sandy Klugman – UBS

Hi. Well, struggling a bit to find an unanswered question here, but I guess at a high level, when you formulate your business strategy, how do you view the potential for new entrants such as BHC to pursue large project in Saskatchewan? I mean, with global potash prices still well above vertical norms, the cash cost of the high-cost producer. This just seems -- maybe over the longer term it would seem to create a downside risk. I was wondering how you viewed that.

R.L. Moore

We’re trying to see how BHP views at, if we are looking at it from the current shareholders perspective our next generation of shareholders. We have a very difficult time understanding how they have virtually any rate of return giving the tight dollars they’re talking about spending and when the cash flows would start.

BHPs are very rock solid smart company, when you put the pencil to the paper. It’s very hard to see how they make a return on that investment. So once again we asked the question for which group of shareholders are they building that, or taking about it or evaluating it for.

Let’s not forget that, if that works come online, it wouldn’t come online till 2018, by their own estimates. So we look at it, we watch it, we try to understand their economics we tried to evaluate it and that’s why some of the various projects that we’re engaged and significantly reduced our costs like the BHP solution mine are so important to us, because they drive so far down the cost scale, so that’s how we look at it.

Sandy Klugman – UBS

Okay, understood. And I guess just to return to the issue of cost, I know you''ve indicated that dealers are pretty reluctant to keep stock over the summer months, so now how should we view the likely impact of that reluctance on your operating rates and perhaps your first month production costs?

Robert P. Jornayvaz III

Well, let''s be clear. When we say they''re still reluctant, once again it''s a matter of perspective. They''re nowhere near as reluctant as they were last summer. And they were a whole lot less reluctant in the fall. And now we''re seeing more normalized patterns, but we''re still not seeing the robustness if you will that we saw in ''07 and ''08.

So to keep perspective, we''re seeing dealers step up to the table and buy potash. They''re just not buying it in a way that they would be -- build significant inventories or larger than necessary inventories. So I want to put that word reluctance in its proper perspective. I don''t know if that''s helpful. It''s kind of warm and fuzzy so I apologize.

Sandy Klugman – UBS

No, no, understood.

R.L. Moore

If I could add one more thing, we''re seeing a really good recovery in the livestock market here in our backyard market which grass requires a lot of potash. And this isn''t something they can just apply one time a year. We''re fortunate that we''re in an area where if we''re selling product into California or potash into Texas and Missouri, they do more than one application a year.

We''re not going to reach a point to where we''re not moving anything at all. Our sales are going to continue through the summer months for people that need product right then. And I think as we get into the latter part of summer you''re going to see dealers preparing for a good fall season weather permitting.

Sandy Klugman – UBS

Okay. Great. And just as a last question, I think I remember you having a North American consumption estimate for potash of 8 million product tons. Is that still your estimate or have you provided any additional guidance maybe for next year or beyond?

David W. Honeyfield

I think the historical numbers that we’ve see were about 9.2 million tons and that’s measured over the last 30 years. Currently 2008, 2009 fertilizer year was probably about 60% of that number and this year with started the 2009, 2010 season. We had that the one month very solid demand when the weather provided that opportunity.

So I think it’s kind of hard to know that number down its inductively close to, I think that some of the estimates that folks would put out, but I think there’s rather than anything or some other comments we made that feels like a little more normal cycle overall. So getting back to that, 9.5 million number something overtime we see as getting to here.

Sandy Klugman – UBS

Okay. Thank you very much.

Operator

Your final question is from the line of Horst Hueniken.

Horst Hueniken – Thomas Weisel Partners

Good morning. You’ve made it clear that you do not expect that dealers will carry much inventory as they exit the spring application season. I understand this and agree with it. However, the spring planting season is strong and it''s not over. Moreover, some other industry participants have talked about there being a so-called second wave of inventory restocking to keep up with the growing level of demand. After dealers having stocked up in inventory in January and February, they were thinking that you would see sort of a second round in April and maybe May. My question is this, are you seeing any signs of this second wave of restocking?

Robert P. Jornayvaz III

Yeah, I don''t know that we''d describe it as a second wave as more than something that''s more continual for us. Once again when you look at the markets that we serve, we serve a more diverse market set and we''re seeing just a continual steady demand. RL, if you''d like to add some color to that.

R.L. Moore

Bob, the only thing I could add and I looked at Utah facilities there. We really haven’t seen the heart of this spring season in Pacific North Russia. We still have a spring season to go out there, more sure in water that California has received, which they always need. We’ve seen a delight season start in California. So we still have some spring season ahead of us. Restocking issues. I can tell you that our distributors or customers that we have a consignments with ordering product weekly to go back into those warehouse is continued to cover demand, probably this month perhaps in early June.

Horst Hueniken – Thomas Weisel Partners

Thank you. That''s good color.

William Kent

Well, I think at this point in time we want to say thank you to everyone for joining today''s call and for taking time to learn more about Intrepid. Have a great day.

Operator

This concludes today''s conference call. You may now disconnect.