Intrepid Potash Q4 Earnings Call Transcript

123jump.com Staff
14 Mar, 2009
New York City

Intrepid Potash fourth quarter sales increased 41.2% to $ 79.49 million with net income growing four fold at $22.7 million, from prior year quarter due to average potash price shooting 243% to $840 per metric ton. Earnings per share were 30 cents.

Intrepid Potash Inc. ((IPI))
Q4 2008 Earnings Call Transcript
March 6 2009 11:00 a.m. ET

Executives

David Honeyfield – Chief Financial Officer and Treasurer
Bob Jornayvaz – Chairman and Chief Executive Officer
R.L. Moore – Senior VP of Marketing and Sales
Hugh Harvey – Executive Vice President of Technology
William Kent – Director of Investor Relations

Analysts

Steve Byrne – Merrill Lynch
Don Carson – UBS
Joseph Gomes – Oppenheimer & Co
Christopher Willis – Impala Asset Management
Mark Gulley – Soleil Securities
Robert Koort – Goldman Sachs
Vincent Andrews – Morgan Stanley
Fai Lee – RBC Capital Markets
Jason Votruba – UMB
David Silver – UBS

Presentation

Operator

Good morning. My name is Thea and I’ll be the conference operator today. At this time I’d like to welcome everyone to the fourth quarter and year end 2008 earnings conference call. (Operator Instructions) All lines have been placed on mute to prevent any background noise. After the speaker’s remarks there will be a question-and-answer session. If you’d like to ask a question at that time simply press “*1” on your telephone keypad. If you’d like to withdraw the question press the pound key. At this time, I would like to turn the conference over to William Kent, Director of Investor Relations. Sir, please go ahead.

William Kent – Director of Investor Relations

Good morning, Thea. Thank you all for joining us for Intrepid Potash’s fourth quarter and year end 2008 earnings conference call. I’d like to start by introducing today’s participants from the company. We have with us, Bob Jornayvaz, the Chairman and Chief Executive Officer, Hugh Harvey, Chief Technology Officer, David Honeyfield, Executive Vice President and Chief Financial Officer and Treasurer, and R.L. Moore, Senior Vice President of Marketing and Sales. I would also like to remind everyone that statements made in this call, which express the belief, expectation or intention, as well as those that are not historical facts, are forward-looking statements within the meaning of the United States securities laws. A number of assumptions, which we believe are reasonable or 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.

The news release, which is posted on our website, includes a reconciliation of certain non-GAAP financial measures to the most directly comparable GAAP measures. All reference to tons are short tons of 2000 pounds. As a reminder, this conference call is being recorded today Friday, March 6, 2009 at 9:00 am mountain time.

I will now turn the call over to Bob Jornayvaz.

Bob Jornayvaz

Thanks Bill and thanks to those who’ve taking this time this morning to learn more about our fourth quarter and our year end results. Our fourth quarter realized potash price, rose nearly $140 per ton, from our third quarter average to $762 per ton, and our fourth quarter realized price per Trio, our langbeinite product, rose 14% as compared to our third quarter realized price to $323 per ton. Our balance sheet remains very solid with $98 million in cash at the beginning of March, zero debt and $125 million available through our credit facility. Our fourth quarter 2008 EBITDA was $41.4 million, which is a 251% increase over the same quarter last year. EBITDA for the full year was $215.1 million, which equates to an EBITDA margin of greater than 50%. Potash sales volumes in the fourth quarter declined 54% compared to the third quarter of this year due to a slowdown in both our agricultural and industrials segments. Further, during the fourth quarter in response to a slowing market demand, we made the decision to reduce production in order to manage inventory more closely.

Our net sales price advantage in the fourth quarter expanded as we realized the best net sales price per ton of potash amongst the North American producers and we continue to benefit from a more favorable royalty and tax structure. We believe that the long-term fundamentals of our business remain quite strong as the world continues to need potash to produce enough food to feed a growing population. That being said, the fourth quarter was challenging for Intrepid as it was for many other fertilizer producers. We began to see the reduction and deferral of sales in the quarter and these conditions have somewhat persisted into the current year. In response to this, we have taken elective production curtailments with a view towards managing production to maximize margin. We have deferred certain discretionary capital and maintenance investments and are actively managing costs in this environment.

You will hear me say this repeatedly, but I want to emphasize that through this market turmoil we are committed to maintaining our strong balance sheet because we truly believe that balance sheet strength gives Intrepid, marketing and operational flexibility as we navigate these unpredictable times. I look forward to walking you through our results this morning with other members of our management team. Let’s begin with our fourth quarter and full year financial results. In the fourth quarter of 2008, our net income was $22.7 million, which represents a greater than four-fold increase from last year’s fourth quarter pro forma net income of $4.7 million. For the full year, pro forma net income grew to $124.1 million. Our net sales price advantage relative to our North American competitors, expanded in 2008 to $88 per ton compared to $39 per ton in 2007. Our continued ability to obtain higher net realized prices compared to our North American competitors by capitalizing on the location of our mines demonstrates one of Intrepid’s unique attributes.

As a company, we remain focused on our internal growth opportunities. Additionally, we believe that our location in the southwest Untied States affords us a certain financial advantage. First, we market potash primarily in the United States, a sophisticated and normally consistent agricultural market. The core area in which we market typically consumes multiples of what we produce allowing us to target sales to customers close to our mines and thereby lower transportation cost that otherwise reduce our net sales revenue per ton. This, coupled with our market effort, has increased our net realized sales price of our North American peers to greater than $200 per ton in the fourth quarter of 2008. We continue today as we speak to execute on this strategy.

Next, I’d like to address the current market for potash in the United States and our outlook. We make a concerted effort to talk to our customers on a daily basis. The health of the American farmer is a key metric we monitor. When we look at our consumer base, the farm producer is one of the healthiest groups of consumers in the world today. Farmers are coming off two record income years in a row. We believe they’re balance sheets, as well as the balance sheets of agricultural lenders, are reasonably strong. In addition, the availability of farm credit in the United States appears to be fairly stable, especially when compared to other markets. Farmers do remain hesitant. Further, we cannot ignore the fact the impact of raw motion and many have not yet made their key planting decisions. The farmer does not need a lot of convincing in terms of the value products he brings to his bottom lines, especially in terms of yields. Farmers are sophisticated businessmen but they’re farmers like any other buyer in the world today.

I don’t care if you’re buying iPods, computers, cars or real estate, if you have cash in today’s market and you’re buying something, you feel entitled to a lower price. That’s just the way the world is working today. Farmers are waiting because they believe they will be able to buy their raw materials at lower prices in the future. I would like to take a moment to briefly address application rates, which are also an unknown. There’s been talk about reduced application rates around the country and the farmer’s opportunity to mine the soil for nutrients this year. We have every indication that application rates will be lower in 2009. We just don’t know how much lower.

We also know that it’s going to be an erratic and unpredictable spring and that we’re going to have to work hard to manage the business and production levels in response to the market. Now having said that, we continue to ship product quite regularly, if not daily, at prices we believe to be quite attractive. In spite of this near-term uncertainty, long-term industry fundamentals are strong because population growth continues and we have to feed the world on a fixed amount of land. Potash as part of a balanced fertilization program enables the higher yields necessary to feed the world. There is no way to ignore the fact that we have seen a demand slowdown. This spring season is taking longer to develop but in the coming weeks spring will come, crops will be planted, farmers will farm, farmers will fertilize. The inventory that is in the dealer warehouses will eventually be applied. And finally, I can assure you that Intrepid will continue to focus on margin. By focusing on margin, we believe we can create the most value for our stockholders.

Before I hand the call over to other members of our team, I want to reinforce that as stockholders we cannot lose sight of how remarkable a year 2008 was for Intrepid Potash as our first year as a public company. During 2008, we made significant improvements to our facilities, realized significant growth and profitability, and exhibited strong EBITDA growth.

I’ll turn this call over to Hugh Harvey, our Chief Technology Officer and Co-Founder of Intrepid and he’ll take the call from here.

Hugh Harvey

Thank you, Bob. First of all, I’d like to talk about some of our production and inventories and our capital investment. We continue to execute on our capital investment program at our various mines. We have made progress in addressing maintenance projects that have long-term benefits at our facilities. As an example, during the fourth quarter we made great strides at upgrading and replacing our underground and surface electrical systems at our Carlsbad facilities. Regarding production, we produced 201,000 tons of potash in the fourth quarter of 2008, which was 7% less than the 217,000 tons produced in the fourth quarter of 2007. The production decline in the fourth quarter year-over-year was attributable to lower production at both the east and west mines related primarily to our annual maintenance turnarounds and our elective downtime, during which we performed electrical upgrades and other maintenance work.

Additionally, we elected to reduce some production at our Wendover facility and our east mine in the fourth quarter in response to prevailing market conditions. For the full year of 2008, we produced 836,000 tons of potash approximately 5% less than the 877,000 tons we produced the prior year 2007. Decreased production for 2008 was partially driven by the longer shutdowns to perform the electrical upgrades I mentioned earlier at both of our Carlsbad, and New Mexico mines. It is important, however, to recognize that both of our Utah facilities produced at terrific levels during 2008 and we are seeing the benefits of our investments and the increased reliabilities at our west mine in our north compaction facility. The east surface plant is also meeting our expectations. However, we still have further improvements to accomplish at our east underground mine.

On the langbeinite part of our business, we saw langbeinite production of 34,000 tons in the fourth quarter. For the full year, Lang production increased to 197,000 tons, an increase of 11% from the 177,000 tons we produced last year in 2007. In 2009, we anticipate higher demand for langbeinite and continue to focus our production efforts accordingly. Regarding capital investments, capital investment in our operating facilities was approximately $43.9 million in the fourth quarter. During the quarter, we moved forward on a number of our de-bottlenecking projects at each of our facilities, including the ore storage projects, coarse sale recovery project at our west mine, improved thickeners at the east mine, new potash solution mining caverns at the Moab mine, and two more deep rhine wells at our Wendover facility.

As we had previously reported, the fourth quarter was a key capital investment period for us as two of our plants had their annual maintenance turnarounds, which is typically when major capital components are installed. This year in 2009, given the prevailing market conditions, we are looking at all of our proposed capital programs and prioritizing those that provide the greatest return in terms of enhancing productivity. We have built a matrix of capital projects, which we can adjust, both in terms of scope and investment, throughout the year based on the condition of the potash market. Some highlights of this year’s capital plan include the installation of the horizontal stacker at the west mine, the installation of new thickeners to improve potash recoveries at the east mine, continued pilot plant work and engineering related to increasing langbeinite recovery at the east mine, drilling additional solution mining caverns at the Moab mine, and the continuation of engineering and design work related to potentially reopening our north underground mine.

I also want to take this chance to give you a progress report on our HB Solar Solution mining project. Although we were disappointed with the delay caused by the BLM’s decision in January to require an environmental impact statement for the project, during 2009 we intend to complete as much preconstruction work as possible so that when we do get the permit we can move quickly. Through our discussions with the BLM, we currently anticipate it could take 18 to 24 months to complete the EIS process. During 2009, we anticipate investing approximately $10 million towards the HB project. The HB mine is expected to ramp up production approximately one year after the start of construction, and it will be at full capacity after approximately two years. We are confident that our ability to take this asset and utilizing non-potable brine solution we can produce a product, which is ultimately used to support the agricultural industry, at the same time utilizing solar evaporation and it’s just the type of project we need in this current economic environment. We have budgeted approximately $100 to $140 million of capital projects in 2009 and we will adjust these levels based on market conditions. Of this total, $45 to $65 million is scheduled to be invested in projects that add sustainability and improve the overall efficiency of our operations. The remaining $55 to $75 million will be focused on investments in opportunity projects related to expansions.

Now, I’ll turn the call over to R.L. Moore, our Senior Vice President of Sales.

R.L. Moore

Thank you, Hugh. As previously mentioned, our net realized price for potash increased to $762 per ton in the fourth quarter. Our Trio pricing increased to $323 during the quarter, which is approximately a 117% of the price of potash on a potassium nutrient basis. The continued strong price of Trio indicates that growers value the magnesium and sulfur nutrients in the product. As Bob addressed, fertilizer buyers remain extremely cautious due to continued uncertainty created by the financial crisis. From our perspective, it is important to understand the role that dealers play in the current market situation. Due to the fact that there were greatly reduced fall applications of fertilizer, dealer inventories grew through the end of the fourth quarter.

Continued buyer hesitation since the beginning of the year has left quite high inventories at the dealer level. Once the dealers are able to sell their current inventories, we expect purchasing to resume but we cannot predict how robust buying will be in the near-term. The charge that we’ve given to our sales staff is to get into the field, visit our customers warehouse locations and determine current inventory levels. We are doing this first and foremost as we need to be prepared for the spring season, and secondarily we want to be on top of the restocking process. It’s our belief that the whole supply system will turnover. We are currently making sales at price levels that are quite attractive. Sales are continuing on a regular basis albeit at much more modest volumes than last year.

Before wrapping up, I wanted to talk about the industrial segment of our business. Industrial demand from the oil and gas drilling industry has historically accounted for approximately 30% of our sales volumes. During the fourth quarter, we saw a significant slowdown in our industrial sales as the REIT account began to decline. We fully expect that reduced demand for industrial product will continue through at least the first two quarters of this year, if not beyond. We believe demand for industrial product should track the REIT account long-term, which historically tracked the future prices of oil and gas. With the reduction in demand for our white standard industrial product, we have shifted some of the production to the agricultural market.

I will now hand the call over to Dave Honeyfield, our Chief Financial Officer to wrap up our prepared comments.

David Honeyfield

Thanks R.L. First, a comment on our fourth quarter and year end financial statement presentation. I know I’ve mentioned this in previous calls, but I want to reiterate that as a result of the consummation of our IPO we’re required to report the results of operations for 2008 in two separate pieces. The period from January 1st through April 24 related to Intrepid Mining LLC is known as the predecessor period and the period from April 25th through December 31, 2008 for Intrepid Potash is called the successor period.

In the press release, we presented the pro forma comparative results for the fourth quarter 2008 and 2007, and the full year periods of 2008 and 2007 to aid in your analysis. You can refer to previous press releases for historical quarterly information going back to 2007. The pro forma results are presented on a comparative basis, including the adjustments necessary for the stock compensation expense associated with the IPO to reflect repayment of other bank borrowings following the offering, the pro forma impact of income taxes, and a calculation of earnings per share.

Now I’ll move to our actual results. The cash production cost per ton of potash sold in the fourth quarter of 2008 was $267 per ton. Due to our largely fixed cost structure, as production rates decline, as they did in the fourth quarter because of the scheduled turnaround maintenance performed in Carlsbad, our costs go up. We’ll manage this cost to the best of our ability. However, the market should expect our cost per ton to remain near fourth quarter levels for a period of time, as we lower our operating rates in response to current market conditions. Much of this higher cost production is in our inventory and it may take several quarters to work through. Based on our current budgeted production models, we expect our annual per ton cash operating costs will be approximately 25% higher in the full year 2009 than the annual amounts for 2008. We also expect, with the shutdowns and the reduced number of operating shifts at our Carlsbad facilities, that our total production volumes of potash will be more in the range of 600,000 to 650,000 tons this year, as we work to manage our inventory levels.

We’re really not setting this range as guidance, rather we just want to continue to emphasize how unpredictable and erratic the market for potash sales will be this year. That being said, we have the ability to quickly respond to an up-tick in demand when the market opportunity arises. Suffice it to say, given the current market uncertainty, this will be a very dramatic year and we’ll adapt accordingly. Switching over to our Trio product, our cash production cost in the fourth quarter of 2008 was $101 per ton resulting in a margin of $171 per ton. The benefit of the langbeinite circuit to the company’s margin continues to be evidenced by the highly profitable nature of the Trio sales relative to its cost. Most of the operating highlights for the company have already been presented by the rest of the team. There are a couple of items, however, that we believe need to be reiterated about the quality of our balance sheet.

Our balance sheet remains exceptionally strong. As of the beginning of March, we had $98 million of cash in the bank, zero debt outstanding, and $125 million available under our line of credit. As we’ve said before, our capital projects will have the first call on our cash, as we believe we can generate excellent returns investing in the expansion of our existing facilities and bringing back idle potash capacity. We’ll balance this capital investment with our desire to maintain a strong balance sheet by keeping a close watch on the broader potash and fertilizer markets in order to maximize margin and prioritize projects that provide the greatest investment opportunities for Intrepid.

We’d now like to open the lines for any questions.

Operator

(Operator Instructions) At this time I’d like to remind everyone that if you’d like to ask a question you press * followed by the number 1 on your telephone keypad now. Once again ladies and gentlemen if you’d like to ask a question please press “81” at this time. We’ll pause for just a moment to compile the Q&A roster. Your first question will come from Steve Byrne with Merrill Lynch.

Steve Byrne – Merrill Lynch

Hi, these current prices that you’re selling the potash at now, how do they compare to the fourth quarter average?

Bob Jornayvaz

Steve, this is Bob, thanks for that question. Some are higher and some are lower. We are seeing diversity in the sideways selling that’s going on at the dealer and warehouse level, and so we have some very advantageous pricing for some products that we’re taking advantage of. And, as we pick and chose the sales that we’re making, we’re seeing attractive levels. We are seeing, in certain regions pricing moderating.

Steve Byrne – Merrill Lynch

Bob, do you believe that that price needs to moderate further to attract the recovery and demand?

Bob Jornayvaz

I think it’s going to play out, Steve. I don’t know that a price decrease is necessarily going to stimulate demand right now. I think we need to work through the inventory that exists at the dealer level, and then participate very actively in the restocking process. And so we’re seeing erratic pricing throughout the country, as dealers have inventory levels that they’re holding that they purchased at different levels. And so as those holes fill, we’re choosing to take advantage of specific opportunities as they arise. Therein, we’re seeing the lesser volumes that we’re moving. That’s Intrepid’s strategy for now.

Steve Byrne – Merrill Lynch

And as you fill those holes, Bob, do you have the ability to just sell further away? I mean your share of the U.S. potash market is 10% or so, so why not just sell further when demand recovers and, even if it’s below normal, would you not be able to maintain fairly consistent volumes just to sell a little bit further?

Bob Jornayvaz

That’s certainly one strategy that we’re evaluating. Steve, as you know, we are just so margin driven, and we believe that if we are patient that we are seeing holes develop, albeit more slowly than in years past, and as we pick and chose the appropriate locations and sales to be made that we can truly maximize margin, because we’re trying to move a lesser volume into a pretty significantly sized market. If we’re careful about it and we’re patient about it, we believe we can continue to maximize margin. And so I hope that answers your question.

Steve Byrne – Merrill Lynch

And the drilling and market that you have are volumes roughly half normal in line with drill rate counts?

Bob Jornayvaz

That’s fair right now. We’re seeing pockets where it’s not off quite that far, but as the rate count has fallen, we’ve seen a slack off in demand, and we’re compacting that product to turn it into agricultural product.

Steve Byrne – Merrill Lynch

Okay thank you.

Operator

The next question will come from Don Carson with UBS.

Don Carson – UBS

Yes thank you. First, just a clarification question, how much inventory do you have sitting around at this $267 cost? And I have a follow-up on pricing.

David Honeyfield

Sure. Don, this is Dave. That inventory level is obviously significantly higher than where it’s been. We’re probably a little bit hesitant to give specifics on that, as you can appreciate. But I think if you look at the math on it, where our production volumes were at for the fourth quarter, where our sales volumes were at, and then consider a little bit of normal inventory build, it gets you over 100,000 tons at the end of the year.

Bob Jornayvaz

I will say, Don, that we have significantly more capacity to store product, if we need it. But I will reiterate that we continue to move product quite regularly, if not daily, as well.

Don Carson – UBS

Bob, just to clarify what you said on pricing to Steve, when you say some prices are better some are worse, I mean what’s your average price versus the $762, and what are you seeing in various markets? I mean we’re seeing posted prices of around $700 in the Midwest and truck sales in the $650 to $700 range. What do you think the market clearing price in the Midwest is today?

Bob Jornayvaz

Don, it’s just not that simple. There isn’t one number out there that’s representative of the market. And so what we are seeing is that there are individual holes that are opening up that provide better opportunities and that’s where we’re focused. The range that you stated is an applicable range and so we’re trying to focus where we can get higher netbacks and stay away from the area where there would be lower netbacks, and given our location, that’s one of the unique abilities that we have.

Don Carson – UBS

And what’s your average realization currently relative to that fourth quarter $762?

Bob Jornayvaz

I’m just not going to go into where we are right now in the first quarter, other than to say that we’re taking the prices that we think are plenty attractive.

Don Carson – UBS

Okay and then just a broader question, a lot of dealers bought at relatively high prices, they’re sitting on some inventory losses. Is there pressure on you to sort of provide some assistance to them? I mean, I’m wondering are you invoicing them at any lower prices and, within your inventory costs, do you have some sort of sales discounts and allowance costs in that high priced inventory as well or that you’re contemplating.

Bob Jornayvaz

Yeah right now we’re not having to make any special deals or terms for anyone. We continue to watch credit extremely closely, but we haven’t had to help any dealers right now with carrying their inventory, if you will. I mean, that’s what creating this diversity in the marketplace, is that you have dealers that have purchased inventories at prices all over the place. And, as I mentioned earlier, that''s where we''re really trying to focus on the unique situations that we can get into to get higher prices.

Don Carson – UBS

So finally how do you see this impasse breaking then? I mean, you''ve got a game of chicken between the farmers and the dealers, or it just breaks once they actually need the product?
Bob Jornayvaz

Well, Don, it''s breaking every day as we see it. I mean, I just can''t emphasize enough that by having our sales staff out in the field, visiting customers, checking on warehousing, we''re able to see where the holes are popping up, if you will, and then trying to take advantage so we''re negotiating on a restocking situation, rather than trying to push on a rope, trying to make a dealer take a product when he doesn''t have room. So it''s playing out as we speak. Now it''s just not playing out as quickly as it has in years past, but it is playing out.

Don Carson – UBS

Okay thank you.

Operator

Your next question comes from Joe Gomes with Oppenheimer.

Joseph Gomes – Oppenheimer & Co

Good morning. I was wondering if you guys might be able to comment or give your views, at least, of the recent announcement on the Uralkali price from Brazil. What you guys were thinking on that?

Bob Jornayvaz

Well, clearly, we saw it. We don''t service the Brazilian market. It wasn''t, I really can''t comment on if that''s going to stimulate the demand that they apparently felt they needed to move product. It''s certainly not something that we would have done. But that''s what they did and we''ll watch with interest to see how it plays out.

Joseph Gomes – Oppenheimer & Co

Okay. Right and when you say have significantly more ability to store more inventory can you kind of give us a little flavor of size? I mean how much more capacity you have available to store?

Bob Jornayvaz

Hugh, do you want to address that?

Hugh Harvey

Yes. Of course, we have quite a number of different products in our repertoire, if you will, and they vary a little bit. But overall we''re at about 50% of our storage capacity. It varies by facility, but certainly within a comfortable working level.

Joseph Gomes – Oppenheimer & Co

Okay. And I know you guys talked today about the desire to maintain a strong balance sheet, but given where the stock price is trading today, has it given you any more thoughts about buying back some shares?

Bob Jornayvaz

Well it certainly causes you to think about it. These are very attractive levels. I just want to get through whatever this financial crisis is that we''re clearly in the middle of. I think we''ll know it. We''re on the back side of it. It''s much more important to get through it and to maintain the marketing flexibility that we''ve currently got and have clearly exhibited. And we believe it''s our balance sheet''s strength that allows us to say no to a sale on a price that we don''t find attractive. So we just want to continue to get through this situation.

Joseph Gomes – Oppenheimer & Co

Okay thanks.

Operator

Your next question will come from Chris Willis with Impala Asset Management.

Christopher Willis – Impala Asset Management

Thanks very much. I had a couple of questions, but they were asked earlier in the queue so I''m all set. Thanks.

Bob Jornayvaz

Okay Chris, thanks for the call.

Operator

The next question comes from Mark Gulley with Soleil Securities.

Mark Gulley – Soleil Securities

Hey good morning guys. You certainly talked a lot about the fact that you''re talking to your customers, your dealers about what''s going on out there in the marketplace. Have they given you feedback on what they think is ultimately going to be the application rate decline for potash between the fall of last year and the spring this year when all is said and done as we go into the planting for ''09?

Bob Jornayvaz

Well, we see it being really different throughout the country depending upon the crop you''re talking about. We don''t service just the Midwest corn crop. We service the hay crops in Texas, which right now we don''t really see significantly lower application rates. There in Texas what they need is rain, the same thing in California. We''ve seen some rain developing. We''ve seen our markets pickup in our Pacific Northwest markets where we''re servicing the potato crop. We''re seeing a very, very modest discussion of decline in application rates there. So it really, I think the big talk that we hear about is in the Midwest corn market. And we don''t know how much of that is a function of negotiation, waiting procrastination, if you will, versus sincere beliefs that they''re going to have significant drop-offs in application rates. When we look at our Trio product, our langbeinite product, we''re not seeing any drop-off in application rates for that type of a product. So I wish I could give you a very simple percentage that equates to the United States, but it really is a function of which specific crop we''re talking about in a specific geographic area.

Mark Gulley – Soleil Securities

Okay. Let''s talk a little bit about the new price for potash, $750 per metric ton in Brazil would equate to, let''s say, $680. I''m not going to factor netbacks in for the purpose of this discussion. If I understand it correctly, your current list price is $800 I believe. So when do you think you need to move down your list price to reflect what''s going on in various geographic markets? I guess wzhen will all the netbacks get factored in?

Bob Jornayvaz

I think we would choose to move down our price when we believe that it would truly stimulate demand. And so I don''t think it''s productive to arbitrarily lower price when I don''t believe it''s going to stimulate demand today. This market is clearly developing. We''re moving product, albeit at more modest rates, and we''re filling the holes. And so there''s going to be a period of time out there in the next 30 to 60 days where price is going to have a bigger impact on stimulating demand, and we''re going to cross that bridge when we get there. We''re very aware of what the market is doing. We''re very on top of the market, but we are really focused on the places where we can achieve the maximum netbacks and maximum margin.

Mark Gulley – Soleil Securities

And finally, you talked I think about 600,000 to 650,000 pounds of production this year. Given the need to maintain some kind of reasonable inventory levels, can I interpret that to mean that could also be close to your sales volume levels as well?

David Honeyfield

Mark, this is Dave. Clearly, we''re managing production to reflect what we see as demand in the market place. I anticipate that we''ll try to work down the inventory a little bit through the year. But those numbers, keep in mind they''re just very indicative and they''re very reflective of what we''re seeing in the market right now. If and when the market changes and there''s an up-tick, like I said before, we have the ability to change that and react appropriately.

Mark Gulley – Soleil Securities

And, Bob, I just want to go back to the pricing discussion. If I think I heard you correctly and at the risk of saying something a little bit different, it sounds like you recognize the need to move price down, just not now?

Bob Jornayvaz

I''m just not going to go there.

Mark Gulley – Soleil Securities

Okay thank you.

Operator

Your next question will come from Bob Koort with Goldman.

Robert Koort – Goldman Sachs

Right, good morning, Bob, I was just curious. You talk about refilling holes and I''m wondering if you can give us a little sense of your typical customer. How many times they would turn their inventory over at the peak of the spring season? And then what motivation they would have to refill those holes, given they got caught a little bit when they did so last summer?

Bob Jornayvaz

R.L., do you want to talk to how many times they might turn it over, and I''ll talk to the motivation?

R.L. Moore

Yeah I think the type of customer that we''re servicing shipping to their large warehouses in the Midwest along the river system, most of them will probably, historically, turn those warehouses over I would say, at least, somewhere between four to six times on an annual basis. If they''ve got storage for 5,000 tons of potash, they''re probably going to move anywhere from 20,000 to 40,000 tons through there depending on what demand is in any certain year.

Bob Jornayvaz

And, Bob, as to motivation what we clearly see is that if people are going to reduce application rates or choose to mine the soil, so to speak, they all say that they''ve got to come back and then buy potash in either the next year. And given the significantly reduced fall application rates that we saw, we then get back to a situation where the farmer has got to put his potash down. So the motivation is we now have a farmer that has potentially reduced or skipped and he''s back in the market having to buy. So that’s how we see the motivation coming back in and we see in different crops where last year, for example, in the Texas hay crop where people chose last year and a little bit the year before to reduce the application rates and we’re now seeing where they need to come back and apply because we need more hay. So the motivation is the guys that have already skipped need to come back into the market.

Robert Koort – Goldman Sachs

I guess, Bob, in the hardcore Midwest, corn farmer wasn’t reducing application last year and they had reasonable good yields. I’m guessing they’ll wait until they validate whether their yields are penalized in ’09 before they decide to buy. So, again, I’m wondering is this setup a case where the summer fill season and the fall application season can still be pretty modest, or what gives you the confidence about that sort of second half recovery?

Bob Jornayvaz

Well, once again you mentioned the Midwest corn farmer and the Midwest corn farmer represents to our specific market 20% to 30%, if not a little bit more, of our overall market place. So I would agree with how you describe the situation. However that’s why we’re going to focus on the entirety of the country looking for the holes where we can put our product in most effectively. There are other crops than just the Midwest corn farmer.

Robert Koort – Goldman Sachs

Can you give us some indication I mean obviously you guys have a different selling radius than the guys up in Canada. Do you guys track customer retention or something like that? In other words, can you have a fairly high degree of confidence when that guy in Idaho or somewhere in California is going to put in an order that it’s going to go to you? Or should we start to get concerned about competitive intensity increasing as the row crop markets in the Midwest are a little bit slack?

Bob Jornayvaz

Well our markets have always been competitive, Bob. I would say we have the benefit of just in time inventory. We have the benefit of knowing our customers quite well and being out there. You ask a very fair question and we’re just going to have to see how this spring and summer plays out. I mean, as we know there are other parts of the world they are going to have an impact on the potash market. And so we’re just in the beginnings of watching how the year is going to play out. I imagine it’s going to be a highly competitive year as it generally has been. I mean it’s just been the last two years that we’ve been out of product virtually every day up until the end of September. So I don’t know if that answers your question but it’s a fair observation.

Robert Koort – Goldman Sachs

Okay thank you.

Operator

Your next question will come from Megan Davis with Morgan Stanley.

Vincent Andrews – Morgan Stanley

Hi, it’s actually Vincent Andrews. Bob, maybe I could try asking the question a little differently and that would be what two or three things are you looking at, or maybe it’s four things, that’s going to be the determining factors in which you decide whether or not you’d lower price?

Bob Jornayvaz

Well, first of all thanks for the question. I don’t think that we are the guys that are necessarily driving the price in the United States. We are out there, as I continue to say, picking and choosing situations that really work for us, and each week we are seeing situations arise, albeit not at the volumes that have occurred in past years. We are watching the market daily. I just can’t stress the degree in which we are on top of the market, seeing what’s occurring, and recognizing that there will be a point in time at which we need to study to make a sale, we get there. So I just don’t thing that I can create a situation out there where I can tell you exactly what it’s going to look like that would cause our specific marketing strategy to change.

Vincent Andrews – Morgan Stanley

Okay, but isn’t there one or two things that are viewed more than some of the things that you’re watching on a daily basis?

Bob Jornayvaz

Well, clearly we’re watching the latest development. We’re watching what our inventories are. We’re watching what pricing is occurring throughout the rest of the world and in our own market. So it’s a very dynamic market that is developing each and every day, and there isn’t one factor that’s going to cause us to change our strategy. It’s a combination of all those factors.

Vincent Andrews – Morgan Stanley

Okay. And, Dave, if I could just as you looking at your cash flow statement for the quarter, your cash flow from operations you had an inventory build that was, from working capital perspective, it was offset by accounts receivable reversal. I just want to make sure I understand the dynamic that occurred in the quarter, and then how should we think about cash flow from operations and working capital through this year given all the puts and takes that are going to take place in the market.

David Honeyfield

Vince, this is Dave. What you noticed on the accounts receivable is spot on. Clearly, with the lower sales level we collected a lot of that cash in the quarter and our balance at the end of the year was lower on a comparative basis. As Bob has touched on before, we’re monitoring the receivable very, very closely and we’re not seeing any issues there. Some of the cash flow during the quarter basically we converted cash into inventory, which was part of the movement. We made some significant income tax payments. So that’s gives you a little bit of color on the quarter. I think for the year, we’re fully anticipating that we’re going to generate a healthy amount of cash flow and we’re going to invest that into the business in the opportunities that we think we can. So hopefully that answers your question.

Vincent Andrews – Morgan Stanley

Yeah. Good luck. Thanks so much.

Operator

The next question will come from Fai Lee with RBC Capital Markets.

Fai Lee – RBC Capital Markets

Thanks. Bob, just had a question on your outlook. Given your outlook right now, I know it’s uncertain spring, but do you expect after the spring is over, you’ll have higher than normal inventory levels, or do you expect to have them drawn down to more normal levels?

Bob Jornayvaz

Well, our goal is to work them down to more normal levels, if you will. For the last two years we’ve operated with no inventory, and so it’s better to operate with some working inventory so that you can take advantage of sales when they arrive in different parts of the country. It’s clearly our goal to work off some of that inventory, if we can do it and maintain very acceptable margins. So I don’t want to talk in a roundabout way. Clearly, we would prefer to work down to a lower inventory level. But I just can’t stress the degree which we are focused on our margins.

Fai Lee – RBC Capital Markets

Right. Now I was just wondering if I could say this spring is a little weaker and if you feel pretty confident about the fall demand returning at that point because demand has been down since last fall, whether you want to keep a little, I guess, dry powder for the fall?

Bob Jornayvaz

Well, I guess we’d rather just keep a more normal level of an inventory for the fall. We see that there are good reasons out there why fall application rates should return, very good agronomic reasons. Now, do we want to bet the ranch and try to keep a bigger inventory for betting on the fall, I would say no. We prefer to have a much more normal level going into fall.

Fai Lee – RBC Capital Markets

Okay great and can you comment a little bit, I know your target agricultural markets are a little different than the Midwest? Can you comment a little about current farm economics in your target market?

Bob Jornayvaz

Yeah, I would say if we start in California and we look at the areas that have received more rain recently we’re seeing more solid economics. The potato farmer has good margins right now. When we look at hay throughout the southwest part of the United States, we’re seeing a real need for more hay, I mean, if you look at where we are in terms of hay supply. When we then go over to Florida and look at the citrus crops, were seeing some strong demand there for our langbeinite. There is no questions wheat and beans are going to be a function of where commodity prices wind up pretty quickly. I still think there are a lot of decisions that need to be made, whether the farmer is going to plant what level of corn and what level of beans. I don’t think anyone is comfortable with where those acreage calculations or predictions are right now. The farmer is still holding his cards pretty close to the vest.

Fai Lee – RBC Capital Markets

Right, but it sounds like for the other crops that may be more important for your markets they still seem reasonably profitable?

Bob Jornayvaz

That’s a good way to put it.

Fai Lee – RBC Capital Markets

Okay thank you.

Operator

Our next question will come from Jason Votruba with UMB.

Jason Votruba – UMB

Hi guys, thanks for taking my questions. First question I have is given that cash is king right now and you have a commitment to maintaining a strong balance sheet, is there a certain amount of cash on your balance sheet we could expect you to maintain?

David Honeyfield

Jason, this is Dave. What we''ve done in looking at that is through our budget process we''ve really run a lot of different scenarios, and we think making sure that we have capital on hand to invest in those sustaining an improvement sort of projects, is really where we would like to maintain as a floor at the current time. So, Hugh had given some specifics around what level of investment that is in 2009 and that''d be pretty representative.

Jason Votruba – UMB

Okay. Given that you just made $44 million in CapEx in the fourth quarter and I guess appears some in year-to-date, how could we expect the CapEx to span out through the rest of the year? Should we expect it to be more backend loaded or are you going to aggressively continue to expand?

David Honeyfield

It probably will not be as backend loaded as it was last year certainly, but we are managing it quite closely right now. So we are deferring some projects until we have some more clarity in the market, but directionally it will be more consistent than it was in 2007. It''ll have an upward trend would be the direction, just not nearly as dramatic.

Jason Votruba – UMB

I guess could you give me a little more detail on your metrics? If this market continues be saturated with potash, could you maybe maintain, just spend $25 million, $30 million or is there a minimum level that you would throw out there?

David Honeyfield

Yeah there are absolutely cases that we could cut capital, but we''re not going to cut capital to a level where it would really impact the reliability of the operations. So probably somewhere around a $45 million a year number would be a floor on that, but I don''t know if I''m answering your questions spot on there.

Jason Votruba – UMB

Sure. Yeah, I was just trying to figure out what your minimum level for maintenance would be, so that does answer it. Another question you''ve got a deferred tax asset that''s about 46% of your total assets, could you explain what''s in that number and your ability to recognize that asset?

David Honeyfield

Sure. Yeah, I''m glad you asked that actually. The deferred tax asset was generated at the time of the IPO. The way the transaction was structured, it was a taxable transaction to the selling shareholders. So the selling shareholders, when they received their distribution were taxed and as a result, the other side of that transaction we get tax basis. We have approximately $850 million of net tax assets, and that''s comprised of bases in mineral properties, and bases in our plant and equipment. So the way we will realize that effectively is by getting depletion adjustments, depletion expense, each year, depreciation expense and those amounts are greatly in excess of our book bases. So, I mean it''s really a great thing because it lowers our cash taxes that we have to pay every year. Keep in mind, as a mining company you get 14% percentage depletion, and so we''ll just continue to take that every year until we exceed our bases, and then at that point in time, you get excess percentage depletion. So it''s an asset we''re thrilled to have on the books and we think given the outlook for the company on a long-term basis, we get over any of the accounting thresholds in terms of a valuation allowance.

Jason Votruba – UMB

Okay. Would you anticipate you will be free cash flow positive this year?

David Honeyfield

We do anticipate that.

Jason Votruba – UMB

Okay. Finally, one more question, with the lawsuits that have popped up do you have directors and officers insurance that could cover that?

David Honeyfield

Yeah we have D&O insurance that we put in place at the time of the IPO.
Jason Votruba – UMB

Okay thanks.

Operator

The next question will come from David Silver with UBS.

David Silver – UBS

Hi. I had a question, maybe a follow-up on your comments both in the release and here about capital spending. So, a little bit new to the company but my understanding is that a lot of your mines have been operating a long time and up until recently I guess, you might say there''s been some underinvestment over a longer period of time. So, you''re pretty good at clarifying or identifying what you consider high value capital projects, but I was wondering if you could put some financial metrics around them. In other words, for a lot of the projects that you''ve identified for 2009, do you look at it on a simple payback period or an IRR, or what are some of your hurdle rates and what are some of your expectations for either cost improvement or other profitability measures that you anticipate from your capital program?

Bob Jornayvaz

David, this is Bob, I''m going to give you just a little color and then let Hugh and David go into more specifics about potential rates of return. Anywhere that we have the opportunity to really get an efficiency or productivity recovery enhancement, so that where we have already spent significant amount of money mining a ton or hoisting a ton, and then we have an opportunity to recover more tons so they don''t potentially go to tailings. Those opportunities have significant rates of return, not to mention the fact that they just make us a much more profitable company. I''ll let Hugh go into some of the specifics of what some of those projects look like, but some of them have very, very attractive rates of return. Hugh you want to…?

Hugh Harvey

Sure. First of all, I just want to start and just mention that our Utah facilities, which are already using solar evaporation and solution mine technology, are some of the lowest cost facilities in North America, and so our sustaining investments there are quite modest and so we''re not focusing a lot there. We''re doing some drilling at our Utah facility this year to create new solution mining caverns. Outside of that, the majority of our investments and capital spending is down at our Carlsbad underground mines, and for the last five years we''ve made enormous strides in bringing those mines back from where they were when we purchased them. They were not in the best of shape. However, now they''re in good shape and we do have significant opportunities, as Bob mentioned, to increase recovery as an example. The payouts on many of those projects are less than one-year, and I''m not sure exactly what rate of return that is, but it’s very healthy, as you can imagine. And since our cost of capital is quite low, we really are aggressively pursuing every opportunity that we can. Most of our constraints honestly, are on the permitting side. As an example, at our HB Solutions Mine, we encountered a two-year delay there on a project that again had a very high rate of return on the investment.

David Honeyfield

David, I don''t know that we have any other real specific comments on there, other than, I think you touched on the relevant fact that we look at it on an IRR basis. We look at it on a payback basis. We look at places where we need to invest capital to kind of break bottlenecks in the system. These are all projects that we know are going to make Intrepid that much more valuable in the future.

David Silver – UBS

Okay, thank you for that and I guess where I was going with that was, other than the HB Mine, which I guess is delayed for the environmental impact statement, you do have a very strong balance sheet and you do anticipate free cash flow generation this year. You''re not paying a dividend or special distribution. So I was just wondering, is it a hurdle rate or is it just over arching the amount of caution. In other words, why is there so much flexibility in your capital budget year if these are really across the board kind of necessary and high return or quick payback projects?

Bob Jornayvaz

I guess having witnessed what we just witnessed in the stock markets, I think now is the time to have an overabundance of caution. And first and foremost, we want to just navigate the waters that we''re in right now. I think in all markets we’re seeing a bundle of unpredictability and it’s a strong balance sheet that allows you to just get through it and get through it unscathed. And not only get through it, but get through it with the ability to execute on opportunities. So I hear you about an overabundance of caution, but we would suggest that now is the time to be that cautious.

David Silver – UBS

Sure. One other question on your taxes, can you give us some guidance on what accrual rate for your taxes might be I guess it was in the high 30s for this past year. And then what might be a cash tax rate that we might assume?

David Honeyfield

Sure Dave. The accrual rate is 37.3% was the annual number for 2008. That’s pretty representative. Keep in mind we get a little bit of benefit for the manufacturer’s deduction that lowers it from a full statutory rate. And then on the cash tax piece, for one of the items I mentioned earlier, the depletion deduction that we get on our mineral properties. What that does is it basically lowers our cash tax rate to about 60% on average of our total tax rate.

David Silver – UBS

That’s very helpful. Thank you.

Operator

Ladies and gentlemen, we reached the end of the allotted time for the question and answer session. Gentlemen, would you like to have any closing remarks?

Bob Jornayvaz

We really just want to thank everyone that dialed into the call and we really appreciate the questions and your interest. Thanks so much and have a great day.

Operator

Ladies and gentlemen, you may now disconnect.