Q4 2022 Intrepid Potash Inc Earnings Call
Thank you for standing by this is the conference operator, welcome to the Intrepid Potash, Inc. Fourth quarter 2022 results conference call.
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I'd now like to turn the conference over to oven Mitts Investor Relations. Please go ahead.
Thank you Chris Good morning, everyone. Thanks for joining us to discuss and review Intrepid fourth quarter 'twenty to 2022 results with me today is <unk> co founder executive Chairman and CEO , Bob <unk> and CFO , Matt Preston.
Also with me today and available to answer questions. During the Q&A session. Following our prepared remarks is our vice president of sales and marketing Zachary items.
Please be advised that our remarks today, including answers to your questions include forward looking statements as defined by U S Securities laws.
These forward looking statements are subject to risks and uncertainties that could arise that could cause actual results to be materially different from those currently anticipated.
These statements are based upon information available to us today, and we assume no obligation to update them.
These risks and uncertainties are described in our periodic reports filed with the SEC, which are incorporated here by reference.
During today's call, we will refer to certain non-GAAP financial and operational measures.
<unk> that these non-GAAP financial measures to the mostly directly comparable GAAP measures are included in yesterday's press release.
Our SEC filings and press releases are available on our website at Intrepid potash Dot com.
I will now turn the call over to Bob. Thank you Ivan and good morning to everyone. Joining our fourth quarter 2022 earnings call. We appreciate your attendance and your interest in Intrepid.
Before getting to our fourth quarter results I'll begin my remarks with some commentary on the current state of the potash market over.
Over the past 18 months, we've witnessed several extraordinary events.
Two rounds of U S sanctions targeting the Belo Russian potash industry.
The EU and other countries adopting comparable measures effectively removing belorussian potash from western markets.
And three Russians invasion of Ukraine and continued conflict.
The resulting effect on the potash market, there's been high volatility in pricing uncertainty around global production and exports and a good reminder of the importance of having access to reliable supplies.
While the second half of 2022 was slower than expected we want to emphasize that we begin 2023 with the supply constrained potash market.
An estimated 25% to 30% of global 2023, potash production is still coming from higher risk regions in eastern Europe , which is showing minimal signs of de escalation.
In the 2023 potash supply demand equation supply is still tight we think demand will show a solid rebound.
Following that market overview.
I'll now provide a quick recap of our 2022 financial performance.
During 2022, we generated adjusted EBITDA of approximately $142 million, while our adjusted net income totaled approximately $80 million.
This financial performance is among the best in company history with the key driver, obviously being higher prices for our fertilizer products.
Our 2022 average net realized sales price for potash was $713 per ton up over 100% compared to the prior year and.
For trio, our average net realized sales price was $479 per ton up over 60% compared to 2021.
In 2022, our cash flow from operations totaled $89 million, which is net of the third quarter $33 million customer refund.
Our approach to using this strong cash generation was number one to begin investments in numerous of our potash growth projects with the goal of increasing our production and improving our per unit economics directly benefiting from our solar solution mines, the HB Moab and Wendover.
Secondly to reward our shareholders with some of the cash returning roughly $22 million in capital in the form of share repurchases, which reduced our shares outstanding by roughly 5%.
For 2023, we plan to continue to invest in our potash assets to help ensure that our solar solution mines have more reliable high grade Brian .
That's a higher fixed cost business increased potash production can drive significant improvements on the cost side of our unit economics and more reliable higher grade, Brian will help reduce production variances and sustained cash generation throughout the cycle.
Which will allow us to fully take advantage of our potash assets, which have remaining reserve lives measured in many decades we.
We strongly believe now is the time to invest in these high quality assets.
As for where we stand today potash pricing is back at levels, where buyers finding good value and we've seen a strong start to 2023 as farmers prepare for the spring application season.
During the back half of 2022 fertilizer affordability was a primary concern for farmers. However, their economics today look very good, particularly in the context of where futures have been trading.
The forward curve for most commodities look extremely strong.
That's a start.
January new crop futures for corn traded at just over $6 per bushel, which is the highest level in the last 20 years for the first trading day of the year soybeans were similar with new crop soybeans trading just under $14 per bushel.
So at the highest level in 20 years for the first trading day of the year.
Current futures prices for corn, and soybeans are even higher trading at roughly $6 50 per bushel at $15 50 per bushel.
Prospectively with the new crop futures still trading at similar levels that we saw at the beginning of January 2023.
Offering further support futures prices global and U S crop inventory levels are both at historically low levels. One region. The market has been closely watching this year is Argentina, and Brazil, corn and soybean production.
While Brazil is still projected to have a very strong production year, Argentina has been experiencing a severe drought and even soft frost in the middle of February which is putting downward pressure on the country's production estimates.
Lastly, given where potash is now trading compared to crop prices. We're now seeing fertilizer affordability ratios back in line to more normal levels, which we believe will lead to strong application rates throughout the spring.
To summarize my prepared remarks global potash supply demand is still a supply constrained markets with supply concerns and higher risk areas like eastern Europe , obviously pricing.
The futures market today for key crops is very strong and much better than we've seen historically.
Three potash affordability looks fine in the eyes of the U S farmer.
Farmer, we believe is ready to buy.
Consequently, these farmers should be highly incentivized to maximize their yields this year, which in turn should drive steady demand for our key products throughout 2023.
I'll now turn the call over to Matt. Please go ahead.
Thanks, Bob.
Solid financial performance at Intrepid delivered throughout 2022 continued into the fourth quarter with the company generating adjusted net income of approximately $11 million and adjusted EBITDA of $23 million as noted in our press release yesterday fourth quarter results were impacted by the failure and resulting plug and abandonment.
Our new extraction well at HB. This.
This will reduce the quality of Brian available at our HB facility for the upcoming summer evaporation season, and we estimate our calendar year 2023 production will be similar to 2022 at approximately 260000 tons.
As Bob noted the key driver behind our strong performance continues to be high prices for potash and trio than in the fourth quarter. Our average net realized sales price for potash was $693 per ton for trio at average $461 per ton.
We saw some of our agricultural customers to FERC fertilizer purchase decisions until the announcement of a fill program in early January 2023.
Our diverse sales mix in the feed and industrial helped drive another quarter of strong net backs for intrepid.
In our potash segment, our fourth quarter 2022 sales volumes totaled 50000 tonnes, while our production totaled 106000 tonnes, which compares to a year ago figures of 61000 tons and 86000 tons respectively.
For 2022, our sales volumes totaled 222000 tons, while our production totaled 270000 tons, which compares to 331000 tons and 280 287000 tons of production last year.
In our potash segment, our weighted average carrying cost per ton increased due to reduced production rates increase per ton royalty expense and other general inflationary pressures.
In terms of potash guidance for the first quarter of 'twenty three we expect Q1 sales volumes in the range of 80 to 90000 tonnes with an average net realized sales price $4 70 to $480 per ton.
And our trio segment, our fourth quarter 2022 sales volumes totaled 28000 tons down from 48000 tons in the prior year period as buyers remain reluctant to commit to volumes in anticipation of declining prices.
Production totaled 51000 tons down slightly from 53000 tons in the fourth quarter of 'twenty one for.
For full year 'twenty two our production was down just slightly at 226000 tons. While total sales volumes of 197000 tons were down about 80% year over year.
As for three year guidance, we expect first quarter 2023 sales volumes will fall in the range of $55 to 65000 tons with an average net realized sales price between $3 35, and $3 45 per ton.
In oilfield solutions or total sales increase from approximately $23 million and $21 million to $29 million in 2022, with our 2022 gross margin coming in at $7 5 million up from $3 $5 million in the prior year.
In general performance in this segment correlates closely with oilfield activity in the Permian.
Last year, we saw horizontal Permian rigs increase from about 275 rigs at the beginning of 2022 to roughly 335 by the end of the year and monthly completion activity increased from 409 wells in January of 'twenty to peak at 449 in June and end the year at 431 wells completed in December .
So far in 'twenty, three Permian activity has been trending flat to slightly up.
Moving to our 2023 capital program as Bob mentioned, our focus remains on increasing the production and reliability at our solar solution mines are 2023 capital budget range of $60 million to $75 million with approximately 25% to $35 million for sustaining capital and the remainder for growth projects.
At our HB facility the installation of an improved pipeline system is progressing well and after some small permitting delays due to rail crossings. We expect the first set of infrastructure to be in place in the second quarter, which will increase our injection rate capabilities into the mine.
The second phase of the project, which includes an inline cleanup process to help maintain injection rates is currently being permitted and we hope to begin installation of that infrastructure near the end of the year.
We also expect to drill another extraction well in the second half of 2023 to access a significant pool of high grade brine that we originally targeted in the fourth quarter of 2022.
At Moab, the additional potash Catherine is also on track and by mid March we expect the first of four laterals will be complete.
We made the decision to expand the well design from two horizontal laterals to four laterals, which slightly extended the timeline, although we still expect Brian in time for the summer evaporation season.
Once the cavern is complete we anticipate moving the drilling rig over to drill multiple wells to access additional high grade Brian for the summer evaporation season.
As a final reminder, while we progress through our potash growth projects given the cycle of Brian injection residents time underground and summer evaporation harvest. This does take some time before we see these investments pay off in the form of sustained higher production and ultimately increased tons sold.
Operator, we're now ready to take for the Q&A portion of the call.
We'll now begin the question and answer session to join the question queue. You May Press Star then one on your telephone keypad.
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The first question is from Joshua Spector with UBS. Your line is open.
Hi, Good morning. This is Lucas on for Josh, Yes, Im just wondering Scott on the potash production. So you sort of mentioned that Youre expecting $2 60 accounted this year now.
But I think <unk> got the projects that are coming in the second half to try and sort of improve the realization. So could you maybe just kind of walk us through how you're seeing your pathway now over the next couple of years to kind of get back to that so that <unk> 20, <unk> 30.
<unk> set a ton production range that you had historically.
Yes. This is Bob I'll walk you through at HB.
The building of the pipeline injection system, which allows us to increase injected witty witching into.
In turn <unk>.
Increases the.
The mining that.
It happens underground and the abandon potash mines.
Which in turn increases the Brian Greg.
As we said we drilled a.
Bob.
Dry hole, if you will.
It was a mechanical failure and so we will replace that well in the third quarter and we believe we will have that Brian back on we know that there is 800 to 1 billion barrels of 10%, Brian sitting in that pool, and so we simply need to access it that's at HB. So the combination of the infrastructure and the.
Additional wells.
Get us where we need to be with the Brian at HB at Moab, We're drilling caverns for right now which is a four lateral cavern system first platters complete it's been a very successful Katherine in terms of being in the potash will begin the undercutting of that here within days start pumping brine into the.
Into the ponds before we start on with lateral too.
We will move from that drill.
What are some pretty significant stumps and potash five in the original Texas Gulf mine.
<unk>.
So we'll drill those well keep that Aztec rig and just scattered over and drill four laterals into the old mine to collect.
Some high grade Brian that we know exists there and then we've made the investments at Wendover. We've had the precipitation of wind over that we need to have the Brian to have a successful.
Production season at Wendover.
Extremely focused on our solution, our solar slip, but solar solution facilities.
At HB, Moab, and Wendover to get our Brian grades as high as they can be to take out as much variability increase that production.
Great. Thanks, and then.
From your outlook comments, it sounds like Youre generally agree that.
Global market is going to remain structurally challenged this year.
We estimate it's going to be short at least 5 million tons and likely lower selling depending how you kind of measure demand.
I was just wondering how are you guys thinking about that flowing through into seasonal pricing trends. This ESI, you've kind of outperformed on pricing in the fourth quarter. It seems like that's going to sort of reset.
In the third quarter here.
Are you are you expecting spot pricing to move up between sort of here in may.
And how do you kind of say the outlet progressing through the year.
As you know, we're a price taker and so but if we look at fundamentals. If we look at the supply constrained nature of the market and the incredible economics that farmers had a record year in 2022 and I'm talking globally.
And globally farmers have an opportunity given the forward price curves to have a great 2023.
So they've got every justification and reason to maximize yields.
When we look at our underlying fundamentals farmers that have great economics, regardless of the crop that we're talking about.
And we've got a supply constrained market. There is no reason for this market not to remain.
As strong as it is today, if not have upward pressure on pricing.
We're just in a bullish supply demand situation.
The fundamentals are strong.
Just that's what we believe and.
I think the statistics back us up on that.
Great. Thanks, maybe just one more on the cost side that I'll pass it on.
Just trying to think through Saturday.
Steph upset in potash cash cost after the last set of 10 seven minutes no job kind of about $80 a ton.
I mean, obviously a large portion of this is just kind of on the absorption issues on the water volume that im assuming as with everyone else you guys are probably having some.
Structural inflation cost components in there as well I was just wondering if you could kind of break that out for us somehow set of between sort of what you think is sort of absorption versus a structural kind of increasing costs and then what you think is kind of recoverable as we sort of move out a year or two and you kind of get your production set it back.
Back to more traditional levels.
Yes, great question, there's certainly a lot of that increase in cost as has been due to the fixed cost nature of some of our mines and just that lower production rate, we're seeing and certainly we're not going to see much abatement on that in 2023 as we continue to see some minor inflationary pressures continuing into early 'twenty three and then obviously also.
A little bit by reduced royalty expense kind of as we move out not ready to give a whole lot of guidance as far as pricing, but certainly as that overall production number continues to increase into the low three hundreds mid three hundreds we should see a pretty sizable improvement in our per ton kind of unit economics.
Great. Thank you.
Yeah.
The next question is from Vincent Andrews with Morgan Stanley . Your line is open.
Hi, guys. This is will hang on for Vincent Thanks for taking my question here I'm.
I am wondering if you could walk us through what youre seeing in the Frac sand market, that's giving you confidence to increase the size of the plant there are a million tons per year and then I believe previously you were targeting something like 20 to $30 per ton of margin.
And is that still how we should be thinking about it.
From a frac sand.
Right now.
We have defined the reserve with additional core holes and so the reserve is bigger than we originally thought at dependant location.
In terms of demand for that sand, we've had numerous discussions with supply companies frac companies et cetera.
And are currently negotiating with those companies.
Off take agreements if you will.
We're still waiting on permitting.
<unk> being the first frac sand operation in southeast New Mexico, the permitting is taking much longer than we thought but it's the reliability of the reserves that.
Okay.
We feel so confident about because we've drilled.
Approximately a 100 plus core holes.
As well, it's gone out there and done tremendous amount of work.
With <unk> et cetera, identifying the reserve and making sure. The reserve is as big as we had hoped so in terms of.
Margin opportunity.
That's going to be a function of what kind of a deal we make at the end with weather, whether or not we sign a longer term off take agreement or if we choose to participate in the spot market in terms of what our what our margins are going to be but.
I think we have every opportunity based on the spot market to achieve the margins that you've discussed.
Got it and then I guess the follow up to that you mentioned kind of permitting.
Elaine.
The progress of construction there I am wondering is that hadn't been that last major signpost decade further delayed for about like first.
Production, there or are there other things that you should be able to look out for you guys. Eventually.
And yet the sales there.
We believe it's just permitting we are literally dealing with agencies that have never permitted a frac sand facility before.
And originally when they gave us guidance as to what permits they felt we needed required et cetera.
Had regulatory agencies new to this industry.
Come up with additional things that they would like to see and trying to maintain our relationships with the regulatory agencies. We are trying to be amenable as amenable as we can to meeting there.
Their needs. So it's it's just southeast of Mexico, I hate to blame things on southeast New Mexico, but it's.
It's an ever changing regulatory environment I'll leave it at that.
Got it thank you.
The next question is from Joel Jackson with BMO capital markets. Your line is open.
Hi, good morning, good afternoon.
Bob maybe I think you've maybe like to waste conversation. So what we see in the potash market right. Now is all of the producers I guess that includes yourselves and one of them based on your comments today, saying the.
The potash market is going to be strong it's a supply constrained market. We just know reason why farmers aren't going to buy it normal strength and we all know what commodity prices crop price sorry in the current dynamic and then when you kind of get into the weeds of at the trade journals are all bear ash and the commentary is kind of mix. When you go deep into the channel can you.
Third question Mchugh, we interact debate a bit producers non producers why there's so much debate.
Well, we've got two big farmers too big commercial farmers on our board for a reason.
Extremely large commercial farmers.
And they bought all of their fertilizer on prepay in in December of 2022, feeling like they were getting good value knowing what they were seeing going forward.
Each of these individuals.
Our major league farmers. So we go to lots of farmers to get their opinions on what they're actually doing in the marketplace.
I would say four out of five of the farmers that we spoke to that are major.
Farming.
Tens of thousands of acres. If you will all bought their fertilizer and felt like there were they were fine paying the prices that they were Pratt.
There is no doubt that the potash market globally is up call. It a 65 to 70 million ton metric ton market.
What we're going to seek out go down on the ground. This year is still up in the air I don't see how anyone can suggest.
That the United States market.
Some somewhat tight when it comes to where the production is coming from especially Bellrose, Belarus and the Russians the Russians have done a great job of acquiring distribution assets.
And bringing their potash into the distribution assets that they bought.
So when you talk to a lot of politicians there are a lot of politicians that are highly unaware of how much Russian potash is actually coming into the United States through their distribution assets they bought.
So I think as the Russian situation continues to escalate and be a conflict.
Do think that there are politicians that are not only aware, but concerned about the amount of Russian fertilizer.
The American farmers are buying and have access to.
So I do think that there's a good reason for debate.
Im not saying its clear cut but theres, a very bullish case to be made.
I'd love to hear your Youre Bear case Joel.
I didn't say it was a.
Bob I was just asking for your opinion of the debate.
I wanted to ask also if I understand your math.
You said, you'll do 200, if you think you would be about 250000 tonnes of potash production. This year and that's about similar to last year. Your team said that today correct.
Okay.
Alright, yes.
Can you help me figure out if you were to sell like.
What does that imply for kind of your maximum.
Potash sales this year like how much you because of your dropdown inventory reasonable.
Still a reasonable level and we're able to match that demand was there how much could you push potash sales volume this year and a bulk case.
Yes, I mean, I know, what you're getting at Joel It's always I mean, it's not something we would like to talk about just given that variability for Q4, and just how much that can swing.
Asleep for them in 2022, we built about 50000 tons of inventory.
272000 tons of production on 222000 tons of sales. So we can certainly push more sales in 'twenty three if we'd like but it just it all comes down to what the spring looks like for 'twenty four and how much you want to commit ahead of historical volumes and so I think it is a number you can kind of pretty easily back into if you kind of look at just our overall inventory.
Change over the years based on production and sales numbers so sorry.
So I don't have a great answer for your question, but.
And just to put out a number there on the high side sales.
Go ahead.
Sorry, sorry, I interrupted.
And then turning to lithium I know, it's something you looked at a number of years ago before the lithium crash now lithium boomed again and I think your prior commentary had been you'd wait for some others to start test out some daily technology, and see where that takes them and then maybe reassess. So we are seeing some competitors in Utah. They are now trialing are putting together some commercial units, we'll see some <unk>.
Next year, we're seeing other DLA technologies, maybe having results next year as well around the world. We know the dose even the Dod is throwing money around for almost anything lithium in this in this market is there is there something you want to do here maybe to see if.
You can monetize demographics, yes.
Just to cut to the chase we've got several suitors that we believe have finally.
Broken the code if you will on separating lithium from magnesium.
And so as we said all along we know we've got a.
Nice lithium reserve.
And so.
We now have suitors that we think have actually tested and.
Gone beyond been scaling.
Certain technologies. So I think we're at a different place than we were a couple of years ago. We began to talk about lithium we always said the technology needed to evolve.
It's there and we're.
Tenet that we've got people that want to talk to us about our lithium assets.
And invest in those assets.
Once we make a deal and can give you more concrete ideas of what that deal looks like be more than happy to share.
And would that look like Trialing, a DLT technology, helping to that effect.
Well Theres a couple of different technologies as you know and so I.
I am not going to get into which one which technology we prefer.
We've got a.
Ph D J T Mayo that we've hired on a research side that has done a tremendous amount of work with three different lithium companies to evaluate their technologies and to look at which one we think best suits us.
Because magnesium is what our lithium is attached to <unk>.
So without going into a lot of details. The good news is the technology has evolved over the years and we do have lithium.
Our wendover assets and we look forward to continuing to discuss with.
People that are moving down the lithium education chain and testing chain and doing a better job of developing technology that would work for us a window.
Thanks, Bob.
Yeah.
This concludes the question and answer session I'd like to turn the conference back over to Bob Jordan for any closing remarks.
I just wanted to thank everyone for your time and interested in intrepid today, we really appreciate it and look forward to answering your questions later on.
Great day, Thank you.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.