Q2 2022 Intrepid Potash Inc Earnings Call

crop prices.

As expected, any time fertilizer prices are at elevated levels. We expect a chopper sales or the book, specifically for P and K.

outside the spring season, as farmers manage working capital by delaying application decisions whenever possible.

and buyers do their best to move to just-in-time purchasing.

The positive difference in today's market, if you're comparing the potash prices from year past, is that both the underlying economics remain very supportive while the supply disruptions that are causing unmet fertilizer demand to have known near-term fix despite the marginal announced production increases.

by a few small producers.

As a relatively smaller pot-ash producer, with a distinct geographic advantage that serves a diverse set of markets, in addition to agricultural, feed, industrial, organic, and drug markets.

We expect a good solid second half of the year.

Moving on to financial highlights, our second quarter consolidated adjusted EBITDA totalled $41.5 million, bringing our first half, 22 adjusted EBITDA to $91.6 million.

Overall, we're on track to put in the best year in a decade.

And to put in perspective just how strong our financial performance has been, the $91.6 million in the first half of 2022 alone.

We've been the best player EBITDA since 2014.

In the second quarter, our average net realized sales price for potash was $738 per ton, and for trio was $493 per ton.

These were year-over-year increases of roughly 130% and 82% were spent respectively. We officially2020

In second quarter, our gross margin in the Pada segment came in at roughly 25 million, 15 million dollar improvement versus the prior year.

While our trio gross margin total 13 million, a roughly $10 million improvement over the second quarter of 2021.

In step with strong EBITDA performance, we delivered 83 million in cash flow from operations to the first half of the year. From operations to the first half of the year.

which is allowing us to invest in our core mining assets to help drive more reliable and higher production.

which in turn produced this cost.

We've touched on growth projects at our Utah and New Mexico assets in recent earnings calls, but today we're also excited to talk about a sand opportunity we're developing at our Intrepid South Ranch.

As a reminder, this property comprises roughly 59,000 acres, strategically located in the heart of the Permian Well-Filled Activity in the Northern Delaware Basin.

As we stand today, the Permian has just under 50% of all U.S. land rigs operating today, as well as more than 1,200 drilled but uncompleted wells, commonly known as ducts.

As for the initial scope of the project, we estimate that the total capital investment will be approximately $16 million.

Split equally between dollars already spent in 2022, and those that will be spent in the fourth quarter of 2022, in early 2023.

We've already purchased the major long lead time pieces of equipment, which are now manufactured and ready for delivery.

We are further making progress on what should be a relatively simple and permitting and regulatory process.

Our goal is to begin operations and sales in the first quarter of 2023, with the initial production potential of the above 600,000 tons annually. The above 600,000 tons annually.

In our first focus area on the ranch, which we defined by the drilling of 43 core holes,

which comprise less than 5% of the total range. We have to make for just this preliminary area, at least 10 years of commercial reserves.

And given the scale of our property, as well as additional core holes, we can serverally estimate that the underlying resource potential it in trepid cell could be significantly higher than 10 years, which could support decades of sand production. 10 years

Moreover, we thank that...

Our South Ranch location, which is literally surrounded by New Mexico oil filled activity, will give in trumpet a key competitive advantage with Permins and Sourcing and Supply having recently been key headwinds for the EMP companies.

One of our primary corporate goals has been to continue to unlock value at intrepid south and increase the revenue, cash flow, contribution from our oil field segment solution. And we think the well-defined sand resource presents a tremendous opportunity to help achieve these goals.

In summary, Intrepid is delivered exceptionally strong results in the first two quarters of the year, as we head into the fall applications. In summary, Intrepid is delivered exceptionally strong results in the first two quarters of the year, as we head into the fall applications. In summary, Intrepid is delivered exceptionally strong results in the first two quarters of the year, as we head into the fall applications.

We still see a long runway for robust, strong, firm fertilizer prices given the global supply issues that may persist for the next few years.

I'll now turn the call over to Matt for a more detailed review of our financial results and a bit more color on the output for the visors.

Thanks, Bob.

As Bob discussed, Intrepid delivered another quarter of strong financial performance, primarily owing to strong AVRG net realized sales prices for Potash and TRIO.

Reviewing our potash segment, in the second quarter we generated $25 million of gross margin on 56,000 tons sold.

Sales volume was below prior year as we simply had less potash available to sell after our 2021 evaporation season.

and with fewer tons in inventory to start the year.

We also saw customers more reluctant to replenish potash inventory after the spring season, instead choosing to wait for field programs to be announced.

In late July , an MOP program was announced, and early response to the program had been measured. In early response to the program had been measured.

As the city's work through carry over inventory from the spring and customers remain cautious around credit and inventory exposure.

As a result, it's still too early to guide to potash sales figures for second half 2022, but we expect activity to pick up as harvest progresses and as we move into the fall application season.

In our trio segment, second quarter was another period of good application and owing to very good demand over the past 12 months, our granular inventories were near the floor at the end of the second quarter. We experienced more seasonality with our trio product with sales weighted towards the spring. So unsurprisingly, we expect customers to be cautious in the near term and look to re-engage on needs as we move into the latter part of the year.

Production rates remain steady and with inventory space available, we expect to maintain our increased operating shifts and production rates for the remainder of the year.

Putting this all together for a forward outlook, while it's still too early to guide to more precise levels of demand and sales figures, we expect the strong financial performance to continue, which should drive continued high levels of cash generation and allow us to fund our capital program and other initiatives through cash from operations. And other initiatives through cash from operations.

Moving on to capital allocation and liquidity, our priorities are unchanged.

reinvesting in the core business and internal growth projects, opportunistically returning capital to shareholders, and maintaining a strong balance sheet.

We incurred approximately $17 million of capital expenditures in the second quarter, and now expect our full-year investment of between $65 million and $75 million, as we accelerate more sustaining projects into this year, and with the addition of the San Project Bob Disgust.

As for liquidity, yesterday we closed on an amendment to a revolving credit facility.

which increase the size of our facility from $75 million to $150 million and extended the maturity by three years to August 20, 20, 27.

With much uncertainty in the financial and capital markets, we felt this was a prudent move to help ensure strong liquidity and access to capital. To help ensure strong liquidity and access to capital.

This concludes our prepared remarks. Operator, we're ready for the Q&A session.

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The first question comes from Joe Old Jackson with BMO Capital Markets.

Hi there, this is Alex, I'm from Virtual Jackson. Thanks for taking my questions. I have a couple of my mail, I'll start one by one. Given the stronger financial results that we've seen, and much more cash building on the balance sheet, can you maybe walk through what your plans are with the cash and how are you thinking about the pace of shared buybacks for the remainder of the year? I'm sure you're going to be able to share buybacks for the remainder of the year. The remainder of the year.

I guess all I can say is that we're gonna be very opportunistic. We think that our stock is a great value right now, given everything that is going on.

and our ability to invest in organic projects has compared to Fongstock allows us both opportunities, given our strong pre-cash flow generation. WE

in terms of talking about the pace of it.

Our primary concern is to make sure that we're opportunistic because we're in a volatile stock market environment.

So Matt, I don't know if you wanna add to that at all, but...

That's a good question, Alex. I mean, kind of just go back to my prepared remarks. We certainly have a big capital investment program for the second half of the year, roughly. Go and get up to that $65 to $75 million. And then as Bob said, we'll just remain opportunistic. We're not going to provide specific guidance on timing for share repurchases, but see great value in that and look forward to executing that program as the months progress.

Okay, I appreciate that. And for my second question, could you maybe provide a bit of color on some of the evaporation issues, like if the situation has changed or has improved, and maybe can we expect similar sales volumes in that case?

for the rest of the year.

Yeah, go back to just the evaporation issues. I mean, we certainly been clear on our last few calls around 2021 and significant rain we had at our Carlsbad facility. For those familiar with our story, we've had it so far in great 2022 with good early season evaporation. And as we get into the late season, we never want to get too far ahead of ourselves given some of the monsoon rains that can happen at our Carlsbad facility. So so far it's been a good year. We'll wait to see where it ends up.

I mean, all things being equal, we should return to more normal levels of production with this 2022 evaporation season.

As far as sales, like I said with my prepared remarks, we're not going to guide on second half, just given where the market is today. But certainly expect.

You know, pretty strong demand when sales pick up and then, you know, very positive outlook heading in the fall and spring of next year.

Got it. And lastly, maybe you can comment a bit on what you think pricing will be in Q3 given what you're seeing today and maybe how I'm going to change to Q4 as some of you know, or other other.

competitors have noted some increase in Q3 and is wondering if you're expecting the same or average time price. M-11 was up to 33 per kg.

You know, we're just seeing a very strong market and given our size, we're trying to be as selective in our sales to always achieve the best netback.

opportunities that's out there.

By being a smaller player, I would hope that we can continue to

I don't want to say cherry pick, but stay on the higher end of the market that's out there. I think everyone in the fertilizer production business believes that we're in for...

Several quarters, if not, I don't want to go so far as to say years, but definitely several quarters ahead of us.

of continued firm pricing.

Thanks so much.

The next question comes from Vincent Andrews with Morgan Stanley .

Hey guys, this is Will Tang on for Vincent. Thanks for taking my question. So you made some comments on the press release about credit slash possible inventory exposure for customers contributing to demand headwinds. I'm wondering if you could give us a little bit more color on what's happening there and then possibly what that means.

for I guess trough demand season, I guess in between peak demand seasons, as we exit this fall, you know between you know that this fall and next spring.

Yeah, and this is Matt, we're coming off really 18 months of very strong demand in our potash trio markets.

So, you know, a compressed spring here, certainly high prices, like I said in the paper, remarks everyone's gonna delay application decisions, look to move everything back to back just in time as they can. So, you know, July time period, it's a normal wall in the market, maybe a little bit more than we've seen in past years, just given like I said, 18 months of really strong demand. So, I would say it's not unexpected, you know, guys wanna just be cautious, see what they can do on a just in time basis, as harvest progresses in the U.S., we certainly think.

The overall farmer demand, the distributed demand will pick up significantly, and it's just a matter of time given underlying crop economics and overall very supportive environment.

I guess to add, it's not like we're saying a.

Pull back in

stated demand that will occur. What we are saying is just-in-time purchasing.

And so we're just trying to make the market aware, as we said in our remarks, that it's gonna be a chopper order book.

because people are managing working capital.

in spite of generating very, very high margins.

And so.

There is a young and young, but we are seeing people manage working kept.

And that's, I wouldn't call it a debt crisis, a debt limit, a debt constraint. I wouldn't use any of those terms other than we're seeing more people focus on the management of their working capital.

Gotcha. Okay, and then I guess we're coming up on some of those stated potash capacity expansion slash cost reduction projects coming into service over the next few months. Could you give us an update on where you are in the construction process for each of them and then particularly with respect to Wendover, which I believe got pushed back from being in service from the third quarter to the fourth quarter now?

Yeah, they're out there as we speak on that deep brine well.

And so we've got operations staff that are out there as we speak.

Quite frankly, I don't know if we're actually drilling or moving and demoving.

And so, but it's happening any day now is the best way to put it.

Yeah, I'll probably a little bit more color our MOAB cavern. We expect to have that again in service at the end of the year. Very perceptive on the the Wendover deep brine wells. We did move that from Q3 to Q4. That's really like a late September into an early to mid-October. So not a significant push back there as we see just really getting the electrical in. That's the main thing we're on site doing the drilling either I've already started or just about to. So it's a very minor delay just from like said late September into October .

Then at our HB facility, yeah, remain on track there. First half 2023 with kind of the full system. I think we'll look to kind of piecemeal that in with some replacement pipeline, hopefully by the end of this year and get that full system in by mid next year. I hope we by the end of this year and get that full system in by mid next year.

Got it, thank you.

I wouldn't say there's any major delays. You know, we're looking at a few weeks here and there, but nothing as it relates to the.

that we feel our current significant in terms of the lies.

you

Yep, thank you. I appreciate the color.

The next question comes from Josh Specter with UBS.

Hey guys, thanks for taking my question. Just thinking about Potash production and given the levels you've been at, what would be the max production you think you could actually have available to sell for the second half? And I guess related with some of the timing and the questions around Summerville and just in time demand. I just thought we could get back and forth.

Is it actually better for you if you build inventories that sell later if prices are higher you avoid that summer filter counter is that worse for you? I'm curious about that dynamic thanks. I'm curious about that dynamic thanks.

Well, from production availability, I mean, we're starting up at HB Facility this week. We'll start our Utah Facilities towards the end of August , early September . Towards the end of August , early September .

Given the way the overall solar evaporation process works, we'll be producing at our standard normal rates from start-up until

The end of our harvest when you have an evaporation season.

If it's – whether above or below, it just sort of extends how long your harvest will last into the spring of the following year. So, production will be normal levels here in the back half of the year, just given the dynamics of producing out of our solar evaporation ponds. And then – sorry, Josh – the other half of your question was?

It was more just a dynamic of summer fill versus selling later. So to the extent that you guys only have so much production, I was just curious if potash prices stay stable, is it actually a better earnings outcome if those tons are delayed into the fall when prices – when you'd avoid the summer fill discount? I mean, obviously, there's working capital ramifications there, but curious if – does that logic check out or is there something I'm missing in that thought process?

it's going to happen. But I don't want to make it out like that's going to be a huge mover. It's definitely a benefit. It's definitely positive, but I can't really quantify.

the size of the potential increase.

No, that's fair. And I guess just curious on, if you have a normal production season in the fall, you have your projects in place. If you were to think about your pot-ash costs per ton this year versus next year, what would be kind of the buckets of what those things would add or I guess reduce your cost versus this here? I guess reduce your cost versus this here.

It's fair question. Certainly one we've touched on in the past. You know, we've, and we still believe you, we should see our cost for ton on pod ash to start to decrease here in Q3 and Q4s. We get back through those tons we produced during our down 2020 evaporation season. You know, as far as dollar numbers for next year, just still too early to guide on that. We'll see where this evaporation season ends up. But we do expect, as we said on previous calls, we'll see some improvement in there.

As we start to sell off of our 2022 evaporations season here in August and September , with the recent start-up of our solar operation facilities.

Okay, if I get squeezed in, I guess one more, just the Fraxam project. Is there any way to size what that could be in terms of revenue and earnings? It's frankly that I'm market I'm super familiar with, but that should look like. Thank you.

Yeah, given the fact that we are in basin and literally the...

Our sand mine is going to be surrounded by active rigs.

I think it is very very fair to say that we should see minimum margins generated in the 20 to 30 dollars a ton in terms of margin generated.

As you know, sand pricing ranges anywhere from...

$60 to $70 all the way up to $150 a ton depending upon where you are the majority that is in logistics costs

So once we're in the market, we know that prices are going...

Very, very high. That's why we'd like to focus on sort of minimum margins. We feel very comfortable that we're gonna generate these minimum margins.

I don't know if that answer is your question or not.

Yeah, no, that's really helpful. Appreciate it. Thanks.

This concludes the question and answer session. I would like to turn the conference back over to Bob Trenovus for any closing remarks.

I just want to thank your body for participating for their interest in intrepid and wish our body a pleasant day. Thank you.

This concludes today's conference. You may disconnect your lawns. Thank you for participating and have a pleasant day.

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