# Intrepid Potash, Inc.: Form 10-Q for the period ended Sep 30, 2009

- Company: [Intrepid Potash, Inc.](/companies/ipi.md) (CIK 1421461)
- Form: 10-Q
- Filed: 2009-11-06
- Accepted by EDGAR: Nov 6, 2009, 16:28 ET
- Period: 2009-09-30
- Accession: 0001047469-09-009743
- Inline XBRL: no
- Main document: https://www.sec.gov/Archives/edgar/data/1421461/000104746909009743/a2195325z10-q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1421461/000104746909009743/

## Management's discussion and analysis

As filed, 99,278 characters.

*This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Securities Exchange Act of 1934 and the Securities Act of 1933, which are subject to risks, uncertainties and assumptions that are difficult to predict. All statements in this Quarterly Report on Form 10-Q, other than statements of historical fact, are forward-looking statements. These forward-looking statements are made pursuant to safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements include statements, among other things, concerning our business strategy, including anticipated trends and developments in and management plans for our business and the markets in which we operate; future financial results, operating results, revenues, gross margin, cost of goods sold, operating expenses, products, projected costs and capital expenditures; sales; and competition. In some cases, you can identify these statements by forward-looking words, such as "estimate," "expect," "anticipate," "project," "plan," "intend," "believe," "forecast," "foresee," "likely," "may," "should," "goal," "target," "might," "will," "could," "predict" and "continue," the negative or plural of these words and other comparable terminology. Forward-looking statements are only predictions based on our current expectations and our projections about future events. All forward-looking statements included in this Quarterly Report on Form 10-Q are based upon information available to us as of the filing date of this Quarterly Report on Form 10-Q. You should not place undue reliance on these forward-looking statements. We undertake no obligation to update any of these forward-looking statements for any reason.*

*These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance, or achievements to differ materially from those expressed or implied by these statements. These risks and uncertainties include changes in the price of potash or Trio™; operational difficulties at our facilities; changes in demand and/or supply for potash or Trio™; changes in our reserve estimates; our ability to achieve the initiatives of our business strategy, including but not limited to the development of the HB Mine as a solution mine; changes in the prices of our raw materials, including but not limited to the price of natural gas; fluctuations in the costs of transporting our products to customers; changes in labor costs and availability of labor with mining expertise; the impact of federal, state or local government regulations, including but not limited to environmental and mining regulations; competition in the fertilizer industry; declines in U.S. or world agricultural production; declines in oil and gas drilling; changes in economic conditions; adverse weather events at our facilities; our ability to comply with covenants inherent in our current and future debt obligations to avoid defaulting under those agreements; continued disruption in credit markets; and governmental policy changes that may adversely affect our business. These factors also include the matters discussed and referenced in the section entitled "Risk Factors" described in our Annual Report on Form 10-K for the year ended December 31, 2008, and elsewhere in this Quarterly Report on Form 10-Q.*

*The historical financial data discussed below prior to the completion of the initial public offering of Intrepid Potash, Inc. reflects the historical results of operations and financial position of Intrepid Mining LLC as a predecessor entity. Accordingly, historical financial data does not, unless otherwise noted, give effect to the completion of the initial public offering of Intrepid Potash, Inc. or the exchange transaction between Intrepid Potash, Inc. and Intrepid Mining LLC.*

*Unless expressly stated otherwise or the context otherwise requires, the terms "we," "our," "us," and "Intrepid" refer to Intrepid Potash, Inc. and its subsidiaries. References to "Mining" refer to Intrepid Mining LLC, our predecessor. Unless expressly stated otherwise or the context otherwise requires, references to "tons" in this Quarterly Report on Form 10-Q refer to short tons. One short ton equals 2,000 pounds. One metric ton, which many of our international competitors use, equals 2,204.68 pounds.*

### Overview

### Our Company

We are the largest producer of muriate of potash ("potassium chloride" or "potash") in the United States and are dedicated to the production and marketing of potash and langbeinite ("sulfate of potash magnesia"), another mineral containing potassium. Our revenues are generated exclusively from the sale of potash and langbeinite. We market our langbeinite under the name of Trio™. Potassium is one of the three primary nutrients essential to plant formation and growth. We are one of two producers of langbeinite, a low-chloride fertilizer that is well-suited for chloride-sensitive crops and has the added benefit of magnesium. We also produce salt, magnesium chloride, and metal recovery salts from our potash mining processes, the sales of which are accounted for as by-product credits to our cost of sales. We own five active potash production facilities—three in New Mexico (referenced collectively below as "Carlsbad" or individually as "West," "East," and "North") and two in Utah ("Moab" and "Wendover")—and we have the nameplate capacity to produce 1,200,000 short tons of potash and 250,000 short tons of langbeinite annually. We own two development assets in New Mexico—the HB mine, which is an idled potash mine that we are in the process of reopening as a solution mine that will utilize solar evaporation techniques in the production of potash, and the North Mine, which was operated as a traditional underground mine until the early 1980s. Since 2005, we have supplied, on average, approximately 1.6 percent of world potash consumption and 9.4 percent of U.S. consumption annually.

We routinely post important information about us on our website under the Investor Relations tab. Our website address is *www.intrepidpotash.com.*

Our asset base was built through the acquisition first of the Moab operations in 2000, and then the Wendover and Carlsbad operations in 2004. We assembled these assets after observing that the Moab mine sold potash into the same geographic regions as the Carlsbad, New Mexico and Wendover, Utah mines. We recognized that acquiring assets in those areas could allow for consolidated marketing efforts and effect operating synergies.

Intrepid was incorporated in the state of Delaware on November 19, 2007, for the purpose of continuing the business of Mining in corporate form after Intrepid's initial public offering ("IPO"). On April 25, 2008, Intrepid closed its IPO by selling 34,500,000 shares of common stock at $32.00 per share. Net proceeds of the offering were approximately $1.032 billion after underwriting discounts and commissions and transaction costs. Prior to April 25, 2008, Intrepid was a consolidated subsidiary of Mining, its predecessor. Since April 25, 2008, Mining's ongoing business has been conducted by Intrepid and includes all operations that previously had been conducted by Mining. On April 25, 2008, pursuant to the Exchange Agreement, Mining assigned all of its assets other than approximately $9.4 million of cash to Intrepid in exchange for 40,339,000 shares of Intrepid's common stock and approximately $757.4 million of the net proceeds of the IPO. In connection with the exercise of the underwriters' over-allotment option, Intrepid also distributed to Mining approximately $135.4 million on April 25, 2008. For more information concerning our IPO and Formation Transactions, please see the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations"—Overview—Our Company contained in our Annual Report filed on Form 10-K for the year ended December 31, 2008.

### Presentation of Information

The activity presented for and after April 25, 2008, is for Intrepid, and the period presented prior to April 25, 2008, relates to Mining as the predecessor entity. The results of operations data for the three months ended September 30, 2009 and 2008, the nine months ended September 30, 2009, the period April 25, 2008, through September 30, 2008 (the successor period), and the balance sheet data as of September 30, 2009, presented herein, were derived from the unaudited consolidated financial results of Intrepid. Balance sheet data as of December 31, 2008, was derived from Intrepid's audited consolidated financial statements. The results of operations data for the period from January 1, 2008, through April 24, 2008 (the predecessor period), presented herein, were derived from the historical financial statements of Mining. The financial statements for the predecessor period give effect to identified revenues, estimated expenses, discrete events, substantiation of assets and liabilities and other methods management considered to provide a reasonable reflection of the results for such period. The historical financial data of Mining may not be indicative of Intrepid's future performance nor will such data reflect what Intrepid's financial position and results of operations would have been had Mining operated as an independent, publicly-traded company during the historical periods presented.

Pro forma consolidated results of operations data are presented and discussed within this management's discussion and analysis to provide meaningful information for comparison purposes. Analytical information for the non-comparative period will be discussed and analyzed where meaningful information is deemed to exist and will be presented in the position of greatest prominence. We will additionally provide comparative analytical discussion about the nine month comparative period ended September 30, 2009, on a pro forma basis consistent with the form and content standards set forth in Article 11-02(b) of Regulation S-X under the Securities Exchange Act of 1934, as amended. The pro forma adjustments to the nine month period ended September 30, 2008, relate only to additional expense associated with stock compensation expense, adjustments to reduce interest expense resulting from the repayment of debt, income taxes provided at the statutory rate for the period related to Mining since it was a limited liability company plus the aggregate impact of pro forma adjustments, and for any adjustments associated with weighted average common shares used in the calculation of both basic and diluted earnings per share. Because the same assets were utilized in Mining and Intrepid before and after Intrepid's IPO and since there was no material activity in Intrepid from its formation in November 2007 until the closing of the IPO on April 25, 2008, there are no adjustments necessary to the production or sales results of the period related to Mining in order to create a comparative presentation for the nine months ended September 30, 2009. Because of this, discussion of the nine month comparative operating statistics is unaffected, and the actual historical results of the successor and predecessor period are presented.

### Our Products and Markets

Our two primary products are potash, and sulfate of potash magnesia or langbeinite which is marketed as Trio™ and may be referred to as such throughout this document. The majority of our revenues and gross margin are derived from the production and sales of potash. The percentage of our sales of Trio™ in recent quarters has increased relative to our total sales, as sales of Trio™ have been less impacted than potash sales in the current economic environment. The percentages of our net sales, which is defined below in the section titled ***Specific Factors Affecting our Results—****Sales*, and gross margins from potash were approximately as follows for the indicated periods.

| 2009 | Contribution from Potash Sales Net Sales | Gross Margin |
| --- | ---: | ---: |
| For the three months ended September 30, 2009 | 84% | 90% |
| For the nine months ended September 30, 2009 | 82% | 87% |
| 2008 |  |  |
| For the three months ended September 30, 2008 | 90% | 91% |
| For the period from April 25, 2008 through September 30, 2008 | 91% | 91% |
| For the period from January 1, 2008 through April 24, 2008 | 86% | 93% |

38

Our potash is marketed for sale into three primary markets which are the agricultural market as a fertilizer, the industrial market as a component in drilling and fracturing fluids for oil and gas drilling, and the animal feed market as a nutrient. Our primary regional markets include agricultural areas and feed manufacturers west of the Mississippi River, as well as oil and gas exploration areas in the Rocky Mountains and the Permian Basin. We do, however, have domestic sales that go into the southeastern and eastern United States. Our potash production has a geographic concentration in the western United States and is therefore affected by weather and other conditions in this region. Demand for granular potash began to decline in the fall of 2008 due primarily to the interaction of potash prices being held at then historically high levels combined with the economic backdrop of falling prices for agricultural commodities. Variability in other input costs for the farm producer, as well as uncertainty resulting from the current U.S. and global financial market conditions, were also contributing factors. The relative decrease in demand has continued through the third quarter of 2009, as many farmers elected to apply granular potash at lower rates than historical application rates and hesitation continued by fertilizer dealers to hold inventory. The demand for our standard potash has also declined from historical levels, as there was a decrease in oil and gas drilling and completion of such wells due to lower oil and gas commodity prices, in conjunction with the fact that some drillers experimented with alternatives to standard potash or attempted to forego the use of potash altogether in drilling and completing their wells.

This downturn continues to negatively affect our sales volumes. Similar to the previous three quarters, our third quarter 2009 sales of potash were approximately half of our historical quarterly sales volumes. While we saw some strengthening in our September 2009 sales relative to previous months, we are continuing to see that the delay of the harvest throughout the United States, due to precipitation levels and the farmers' reduced ability to get into the fields, is also delaying fall applications of potash.

We believe that agricultural demand for fertilizers in the long-term will track population growth, meat consumption, and biofuel production, but demand may remain contracted during the current period of price and economic uncertainty. Our long-term view is based on data generated by Fertecon Limited, a fertilizer industry consultant, showing that over the past twenty-five years the domestic apparent consumption for potash has averaged approximately 9.3 million short tons with annual volatility of less than 10 percent through historical periods of low agricultural commodity prices, depressed oil and gas drilling, negative farmer margins, and a variety of other negative factors. While the 2008 / 2009 agricultural year consumption of potash was reduced by an estimated 40 percent, it remains to be seen what the 2009 / 2010 agricultural year application rates will be for potash. There is a continuing risk that potash application rates will be below historical levels. Over the longer term, we believe that domestic apparent consumption will eventually return to historical averages as the replacement of potassium in the soils is critical to continued high-yield agricultural production. We recognize, however, that farmers may continue to defer potash purchases as a reaction to the price of potash until their soil fertility suffers declines in potassium that are not acceptable to the farmers.

After the large North American producers lowered their list prices at the beginning of the third quarter of 2009, according to publicly-available data, we also reduced our list prices for potash in order to remain competitive. These price reductions, combined with the early fall fertilizer season, began to have a positive impact on the sales of our products by the end of the third quarter; however, due to continued overall pricing and demand uncertainty in the marketplace, further reductions in our sales prices may be necessary to remain competitive, as well as to bring sales volumes back to historical levels. Some current factors that may impact pricing and demand include when and at what price will China begin buying potash again on a larger scale, whether an unusually late harvest in the United States will negatively impact the fall fertilizer season, and whether future crop prices rise or fall. The settlement of contracts by large international potash producers in the third quarter of 2009 with India and Brazil resulted in adjustments in potash pricing in the world markets. According to Fertecon data, after some purchases in the third quarter, Brazil has pulled back and may not purchase significant volumes for the remainder of the year. The international potash market is, however, still looking to a purchase contract from China for future price developments. We expect the eventual settlement of contracts with China to be another key price point in the broader international potash market which may clarify where potash prices settle in the near future.

It is unknown how soon sales of potash in the United States will increase or return to historical levels. It is possible that these lower prices for potash will not stimulate demand in the near future, as farm producers may continue to choose to limit their potash applications for a period of time and our customers may choose to keep their inventories low until potash prices further stabilize.

Industrial demand for our standard product will likely continue to correlate with oil and gas pricing and drilling and well completion activity, which has shown some signs of a mild recovery during the third quarter of 2009. Through industry publications, we monitor the oil and gas drilling rig count in the United States as an indicator of activity. In the event that demand for our standard potash product does not recover with industrial demand, we have the ability to convert some of the potash produced for the industrial market into product available for sale into the agricultural market by compacting our standard industrial potash into granular potash.

The feed component of our sales mix has increased on a relative basis, as we generally have not seen a downturn in that market. The recent decrease in the percentage of our sales attributable to the feed market was due to the mild improvement in overall sales levels in the third quarter of 2009. Overall, our feed sales have remained generally consistent from prior periods. The percentages of our potash sales volumes for all of our markets were approximately as follows for the indicated periods:

| 2009 | Agricultural | Industrial | Feed |
| --- | ---: | ---: | ---: |
| For the three months ended September 30, 2009 | 70% | 17% | 13% |
| For the nine months ended September 30, 2009 | 65% | 20% | 15% |
| 2008 |  |  |  |
| For the three months ended September 30, 2008 | 66% | 27% | 7% |
| For the period from April 25, 2008 through September 30, 2008 | 65% | 28% | 7% |
| For the period from January 1, 2008 through April 24, 2008 | 63% | 29% | 8% |

We are one of only two companies in the world that have economic reserves of langbeinite and produce sulfate of potash magnesia (Trio™). We began producing and marketing Trio™ in late 2005, and we are working to expand our production of this product to meet increasing demand, particularly for the granular-sized product. Trio™ is marketed into two primary markets, the agricultural market as a fertilizer and the animal feed market as a nutrient. We market Trio™ throughout the world through an exclusive marketing agreement with PCS Sales for sales outside North America. Increasing the market awareness of the benefits of Trio™ is a focus of our marketing efforts. Sales of Trio™ on an international basis tend to be larger bulk shipments and vary as to when such shipments take place; therefore, we see greater variability in our sales volumes from period to period when compared to our domestic sales. The percentages of our Trio™ sales volumes shipped to destinations in the United States and exported were as follows for the indicated periods:

| Trio™ only 2009 | United States | Export |
| --- | ---: | ---: |
| For the three months ended September 30, 2009 | 39% | 61% |
| For the nine months ended September 30, 2009 | 59% | 41% |
| 2008 |  |  |
| For the three months ended September 30, 2008 | 35% | 65% |
| For the period from April 25, 2008 through September 30, 2008 | 48% | 52% |
| For the period from January 1, 2008 through April 24, 2008 | 43% | 57% |

### Global Factors Affecting our Results

#### Fertilizer Demand

Long-term global fertilizer demand has been driven primarily by population growth, changes in dietary habits, planted acreage, agricultural commodity yields and prices, grain inventories, application rates, global economic conditions, weather patterns and farm sector income. We expect these key variables to continue to have a significant impact on fertilizer demand for the foreseeable future. Sustained income growth and agricultural policies in the developing world also affect demand for fertilizer. Fertilizer demand is also affected by other geopolitical factors such as temporary disruptions in fertilizer trade related to government intervention and changes in the buying patterns of key consuming countries. In the near term, we note that the U.S. and world economic crisis has led to volatility in agricultural commodity prices, which may have an impact on the decisions farmers make related to their fertilization program. Our sales levels are well below those of a year ago, and prices have now fallen to levels that were last seen during the second and third quarters of 2008. Also, the wholesale prices of nitrogen and phosphate fertilizers, the two other primary crop nutrients, have declined relative to pricing in 2008 due primarily to a reduction in the cost of natural gas feedstocks required to produce those products and also due to supply dynamics in those industries. The combination of economic volatility and buyer hesitation has resulted in reduced demand for potash. Consequently, this has resulted in, and may continue to result in, our reduction of production levels of our products and the building of inventory in our warehouses.

#### Potash Supply

Economically recoverable potash deposits are relatively rare and are well established. Virtually all potash is extracted from approximately twenty commercial deposits located in twelve countries. According to Fertecon Limited, the International Fertilizer Industry Association ("IFA"), and actual data published by potash mining companies, for all of 2008, six countries (Canada, Russia, Belarus, Germany, Israel and China) accounted for approximately 88 percent of the world's aggregate potash production. Companies in Canada and the former Soviet Union lead the global potash market due to the size and grade of their reserves, among other factors. As reported publicly, many of the larger potash producers have curtailed production in 2009 in an effort to more closely match global demand. Since much of the demand for potash from these producers comes from Brazil, India and China, the decrease in purchases by these countries has led to reported production declines by some of the world's largest potash producers. We believe that, when significant international demand does return, the Canadian, Russian, Belarusian, and German potash producers that curtailed production may recommence producing at higher rates at some of their idled plants.

#### Energy Demand and Cost

Energy prices and consumption affect the potash industry in several ways. Energy policies in the United States have supported the development of biofuels, which currently rely upon agricultural products as feedstocks. As demand and prices for these feedstocks increase (or decrease), the use of fertilizer becomes more (or less) economically attractive. The economics of this industry are also impacted by input prices, and the relatively lower corn price through the summer of 2009 created demand for these inputs in the biofuel industry. In addition, energy prices affect the global levels of oil and gas drilling, and such drilling often consumes potash as a fluid additive as a means to reduce the risk of swelling clays in the formation. We believe that the positive benefit of potassium chloride in drilling and fracturing fluids has been well established in the oil and gas industry. According to drilling rig count data compiled by Baker Hughes, the number of rigs drilling for oil and gas in North America has increased slightly from its low point during the second quarter of 2009, resulting in a potential increase in demand for drilling fluids.

Changes in fuel prices directly impact the cost of transporting potash from producing to consuming regions. Changes in natural gas prices also impact the cost of processing potash. The average cost per MMBTU of natural gas for the nine months ended September 30, 2009, was lower than the average rate for the nine months ended September 30, 2008, contributing to a decrease in our energy costs. We estimate that every $1 per MMBTU change in the cost of natural gas changes our cost of potash by approximately $3 per short ton, in part dependent on our volume of production.

### Specific Factors Affecting our Results

#### Sales

Our gross sales are derived from the sales of potash and Trio™ and are determined by the quantities of product we sell and the selling prices we realize. We quote prices to customers both on a delivered basis and on the basis of pick-up at our plants and warehouses. Freight costs are incurred only on a portion of our sales. Many of our customers arrange and pay for their own freight directly. When we arrange and pay for freight, our quotes and billings are based on expected freight costs to the points of delivery. Our gross sales include the freight that we bill, but we do not believe gross sales provide a representative measurement of our performance in the market due to the inclusion of freight billings for some sales at a variety of rates. We view net sales, which are gross sales less freight costs, as the key performance indicator. We primarily utilize net sales per short ton in the analysis of our sales trends in order to remove the effect of freight on pricing.

During the third quarter, we saw the first signs of a modest recovery in demand, as sales volumes increased late in the quarter. Our consignment and forward warehousing efforts and ability to provide just-in-time inventory to our customers allowed us to participate actively in such sales. However, the U.S. harvest is unusually late this fall, leaving a small window of time for a fall application of fertilizer, and is therefore likely to result in below-average sales volumes for us this fall fertilizer season. As a result, we expect our fourth quarter sales volumes for potash to be somewhat similar to third quarter sales volumes. The spring of 2010 is now starting to look like the next period when sales volumes could improve.

Prior to the fourth quarter of 2008, the price of potash was the principal factor affecting our net sales. Thus far in 2009, the principal factor has been the volumes of our sales, although price has declined in each quarter this year. The volumes of product we sell are determined by demand for our products and by our production capabilities. We have been actively managing our production levels in response to market demand with a view toward managing inventory levels in the near term and ensuring that our balance sheet remains strong. Our profitability is directly linked to the sales price of our product and, to a lesser extent, to the variable cost elements associated with the price of natural gas and other commodities used in the production of potash.

We consider international prices in the determination of our selling price, and we have benefited from the weakening U.S. dollar in prior periods. During 2009, this trend has continued as the Canadian dollar has strengthened relative to the U.S. dollar. The potential impact of a weaker U.S. dollar is that Canadian suppliers may adjust their sales price in U.S. dollars upward in order to retain their local currency equivalent sales price, potentially allowing for increases in the net realized prices we can obtain for our products. Mitigating the impact of a weaker U.S. dollar is the fact that our sales and costs are denominated in U.S. dollars; therefore, the change in the value of the U.S. dollar against other currencies has less of an effect on us as opposed to our competitors.

Domestic pricing of our products is influenced by, among other things, the interaction of global supply and demand; ocean, land and barge freight rates; and currency fluctuations. Any of these factors could have a positive or negative impact on the price of our products. Average net realized sales prices ("net sales price" or "net sales per short ton") for the last seven quarters are shown below. The net sales prices are derived by subtracting freight costs from gross sales revenue and then dividing this result by sales tons. The decrease in the price from the fourth quarter of 2008 to the third quarter of 2009 has been driven by an overall decrease in competitive producer sales prices, by low demand in the market, and by the fact that during the first half of 2009 there was substantial product in distributors' warehouses that needed to be sold. Much of the distributors' inventories were reduced during the spring fertilizer season. During the last few quarters, we have put in place consignment and forward warehousing agreements that position our tons where customers can access them quickly when they are ready to buy potash. These consignment and forward warehousing agreements help mitigate price risk for our wholesale customers and, at the same time, position us for a potential recovery in demand. However, with the recent downward trend in the market price of potash, our net realized price could decrease further relative to the quarter ended September 30, 2009.

| Average net realized sales price for the three months ended: | Potash (Per short ton) | Trio™ |
| --- | ---: | ---: |
| March 31, 2008 | $295 | $123 |
| June 30, 2008 | $425 | $188 |
| September 30, 2008 | $623 | $283 |
| December 31, 2008 | $762 | $323 |
| March 31, 2009 | $727 | $330 |
| June 30, 2009 | $674 | $338 |
| September 30, 2009 | $458 | $246 |

#### Cost Associated with Abnormal Production

We periodically evaluate our production levels and costs to determine if any should be deemed abnormal under authoritative GAAP with respect to inventory costing. In the three quarters ended September 30, 2009, June 30, 2009, and March 31, 2009, we determined that approximately $5.8 million, $5.2 million and $1.2 million, respectively, of production costs would have been allocated to additional tons produced, assuming Intrepid had been operating at normal production rates. As a result, these costs have been excluded from our inventory value and instead expensed in the respective quarters. The result is an acceleration of the recognition of this expense and the exclusion of these costs from cost of sales. The assessment of normal production levels is highly judgmental and is unique to each quarter. We compared actual production relative to what we estimated could have been produced if we had not elected market-related shutdowns and lower operating rates in order to determine the abnormal cost adjustment.

#### Cost of Goods Sold

Our cost of goods sold reflects the costs to produce our potash and langbeinite products, less credits generated from the sale of our by-products. Many of our production costs are fixed and, therefore, our costs of sales per short ton are largely going to move inversely with the number of short tons we produce. There is an element of our cost structure associated with labor and consumable operating supplies and chemicals that is variable, which makes up approximately 20 percent of our cost base. Production costs per short ton are also impacted when our production levels change such as for annual maintenance turnarounds, for mine development, or for voluntary shutdowns to manage inventory levels. Excluding the effect of the direct expensing of costs associated with abnormally low production rates, our cash cost per short ton decreased in the third quarter of 2009 relative to the third quarter of 2008. Our cash cost per short ton, net of $16 per short ton of by-product credits, was $177 per short ton in the quarter ended September 30, 2009, compared to $182 per short ton, net of $8 per short ton of by-product credits, in the same quarter of 2008. Our normal production costs are first absorbed into inventory, and the inventory will take some time to turn over due to current market conditions. Our expensing of a portion of our production costs directly in the period excludes such costs from the cost of sales results. We continue to produce at lower rates than in previous periods with much the same cost structure, so, considering the impact of production costs and costs considered abnormal, our overall margins are negatively affected when we produce at a lower rate. Our lower production rates were largely caused by voluntary plant shutdowns and reduced operating rates during the first nine months of 2009 and annual maintenance turnarounds at our New Mexico facilities in the fourth quarter of 2008. So long as demand remains depressed, we expect to operate at reduced production levels to manage inventory, and our operating costs are expected to continue to be adversely affected.

Our principal production costs include direct labor and employee benefits, maintenance materials, contract labor and materials for operating or maintenance projects, natural gas, electricity, operating supplies, chemicals, depreciation and depletion, royalties, leasing costs and plant overhead expenses. In absolute dollars, production-related spending decreased by $7.0 million during the first nine months of 2009 compared to the first nine months of 2008. This overall decrease resulted primarily from decreased natural gas and electricity costs, the use of less contract labor, and reduced royalties. These decreased expenditures were partially offset by increases in maintenance, property tax, insurance, depreciation, and labor expenses and a decrease in by-product credits.

We pay royalties to federal, state and private lessors under our mineral leases, and such payments are typically a percentage of net sales of minerals extracted and sold under the applicable lease. In some cases, federal royalties for potash are paid on a sliding-scale basis that varies with the grade of ore extracted. In the three month periods ending September 30, 2009 and 2008, the nine month period ending September 30, 2009, the period from April 25, 2008, through September 30, 2008, and the period from January 1, 2008, through April 24, 2008, our royalty rate was 4.1 percent, 3.5 percent, 3.8 percent, 3.5 percent, and 3.5 percent, respectively. We expect that future average rates will be relatively consistent with these average historical rates.

#### Income Taxes

Intrepid is a subchapter C corporation and therefore is subject to federal and state income taxes on its taxable income, whereas its predecessor entity, Mining, was a limited liability company, which was not directly liable for the payment of federal or state income taxes.

The tax basis of the assets and liabilities transferred to Intrepid pursuant to the Exchange Agreement was, in the aggregate, equal to Mining's adjusted tax basis in the assets as of the date of the exchange, increased by the amount of taxable gain recognized by Mining in connection with the Formation Transactions. Therefore, the tax basis in the assets and liabilities transferred to Intrepid was significantly higher than the book basis in the same assets and liabilities. The basis difference between book and tax generated a net deferred tax asset for Intrepid immediately following the transaction. The net deferred tax asset recorded as of the date of exchange was approximately $358 million, with a corresponding increase to additional paid-in capital. The majority of Intrepid's deferred tax asset has been assigned to mineral properties, and the anticipated use of percentage depletion to reduce our taxable income, relative to book income, is expected to provide full realization of this asset over time. Currently, we anticipate that, for federal income tax purposes, percentage depletion allowed with respect to our mineral properties will exceed cost depletion in each taxable year.

For the three months ended September 30, 2009 and 2008, the nine months ended September 30, 2009, and for the post-IPO period April 25, 2008, through September 30, 2008, Intrepid's effective tax rates were 40.2 percent, 37.2 percent, 41.6 percent, and 37.7 percent, respectively.

For the three months ended September 30, 2009 and 2008, the nine months ended September 30, 2009, and for the post-IPO period April 25, 2008, through September 30, 2008, our total tax expense was $6.4 million, $29.5 million, $34.6 million, and $45.7 million, respectively. For the three months ended September 30, 2009 and 2008, the nine months ended September 30, 2009, and for the post-IPO period April 25, 2008, through September 30, 2008, total tax expense was comprised of $1.7 million of tax benefit, $22.4 million of tax expense, $8.5 million of tax expense, and $29.7 million of tax expense, respectively, of current income tax (benefit) expense. The remaining tax provision is comprised of deferred income taxes. Our current tax (benefit) expense for these periods is less than our total tax expense in large part because Intrepid has tax basis associated with mineral properties and property, plant, and equipment in excess of book basis. Generally, the effect of tax basis in excess of book basis is that taxable income, both currently and in future periods, will be lower than book income to the extent of the basis difference. At September 30, 2009, we had a net deferred tax asset of $302.5 million. The majority of this deferred tax asset is due to Intrepid's tax basis exceeding its book basis for property, plant, and equipment and mineral properties. We have evaluated our deferred tax assets to determine if the need for a valuation allowance exists, and we have concluded that no valuation allowance is necessary. We base this conclusion on the expectation that future taxable income should allow us to fully realize these deferred tax assets.

Intrepid is required to evaluate its deferred tax assets and liabilities each reporting period using the enacted tax rates expected to apply to taxable income in the periods in which the deferred tax liability or asset is expected to be settled or realized. The estimated statutory income tax rates that are applied to Intrepid's current and deferred income tax calculations are impacted most significantly by the states in which Intrepid is doing business. Changing business conditions for normal business transactions and operations, as well as changes to state tax rate and apportionment laws, potentially alter Intrepid's allocation and apportionment of income among the states for income tax purposes. These changes in allocations and apportionment will result in changes in the calculation of Intrepid's current and deferred income tax calculations, including the valuation of its deferred tax assets and liabilities. The effects of any such changes are recorded in the period of the adjustment. Such adjustments can increase or decrease the net deferred tax asset on the balance sheet and impact the corresponding deferred tax benefit or deferred tax expense on the income statement.

A decrease of our blended state tax rate decreases the value of our deferred tax asset, resulting in additional deferred tax expense being recorded in the income statement. Conversely, an increase in our blended state income tax rate would increase the value of the deferred tax asset, resulting in an increase in our deferred tax benefit. Because of the magnitude of the temporary differences between book and tax basis in the assets of Intrepid, relatively small changes in the blended state tax rate may have a pronounced impact on the value of the net deferred tax asset.

We have also seen an increase in our tax deductions for depreciable property because of the impact of bonus depreciation on selected asset categories placed in service during the period, and this larger depreciation deduction has resulted in lower taxable income.

### Operating Highlights

### Three Months Ended September 30, 2009, and 2008

Income before taxes for the three months ended September 30, 2009 and 2008, was $15.9 million and $79.2 million, respectively. The decrease in the comparable periods followed principally from lower sales volumes and lower net realized prices of both potash and Trio™. We sold 111,000 and 40,000 short tons of potash and Trio™ in the three months ended September 30, 2009, as compared to 204,000 and 50,000 short tons in the same period of 2008. The decrease in sales volumes has resulted from lower sales of potash as farmers defer potash applications in reaction to general economic conditions, the rise in potash prices that peaked in 2008, and declines in agricultural commodity prices relative to the peaks reached in 2008. Also, industrial-grade potash sales have slowed as the oil and gas drilling rig count average for North America, per data compiled by Baker Hughes, for the quarter ended September 30, 2009, was approximately half of the average count from a year ago, due to the decline in natural gas and oil prices. The Trio™ sales decrease was driven largely by postponed export shipments, along with somewhat reduced general agricultural demand. Trio™ export shipments are comparatively large bulk sales that tend to vary when they take place throughout the year; therefore, the timing of these sales can lead to large variances in sales tons from quarter to quarter.

Our production volume of potash in the third quarter of 2009 was 112,000 short tons, or 88,000 short tons less than in the third quarter of 2008. Our production was primarily lower due to actions we took to slow production in order to more closely align our supply with market demand.

Our net realized sales price of potash was $458 per short ton ($505 per metric ton) in the three months ended September 30, 2009, as compared to $623 per short ton in the three months ended September 30, 2008. The decrease in pricing was the result of price reductions by our international competitors, following settlement of new contracts at lower prices with large importing countries, such as India and Brazil. Given the significant changes in market demand during 2009, average prices have declined from the peak quarterly average of $762 per short ton in the fourth quarter of 2008 and could move lower in the near future. The long-term trends in population growth and tight global food supplies have not changed materially as a result of the financial crisis, which leads us to believe that robust demand for potash should return in the future. Excluding costs associated with abnormal production, our potash gross margin as a percentage of net sales was 50 percent for the three months ended September 30, 2009, as compared to 65 percent in the three months ended September 30, 2008. The change in gross margin has occurred as a result of falling potash prices and higher per short ton production costs. Production costs in the third quarter of 2009 relative to the third quarter of 2008 decreased in absolute dollars by $7.1 million with decreased spending on natural gas, electricity, royalties, and contract labor, being partially offset by increased costs of production and maintenance labor. We expensed $5.8 million of production costs directly in the third quarter of 2009, and our cost of goods sold was $177 per short ton, net of by-product credits. This compares to a per short ton cost of goods sold for potash in the third quarter of 2008 of $182 per short ton, net of by-product credits. The per short ton cost of goods sold is somewhat comparable as a result of the direct expensing of production costs; therefore, the inventory carrying values do not bear the burden of these costs. Our cost of goods sold per short ton of Trio™ increased in the third quarter of 2009 relative to the third quarter of 2008 as we have been producing relatively more Trio™ than potash at our East mine than we have in prior periods, so more of the production costs were allocated to this product.

### Selected Operations Data

The following table presents selected operations data for the periods presented below. Analysis of the details of this information is presented throughout this discussion. We present this table as a summary of information relating to key indicators of financial condition and operating performance that we believe are important. Net sales prices below are derived from the elements in the table presented in the forward section titled **Results of Operations—*****Net Sales and Freight Costs*** for the same periods as presented below.

| Production volume (in thousands of short tons): | Three months ended September 30, 2009 | Three months ended September 30, 2008 | Change between Periods |
| --- | ---: | ---: | ---: |
| Potash | 112 | 200 | (88) |
| Langbeinite | 60 | 50 | 10 |
| Sales volume (in thousands of short tons): |  |  |  |
| Potash | 111 | 204 | (93) |
| Trio™ | 40 | 50 | (10) |
| Gross sales (in thousands) |  |  |  |
| U.S. | $52,790 | $132,843 | $(80,053) |
| International | 13,659 | 13,414 | 245 |
| Total | 66,449 | 146,257 | (79,808) |
| Freight costs (in thousands) |  |  |  |
| U.S. | 4,084 | 3,371 | 713 |
| International | 1,509 | 1,683 | (174) |
| Total | 5,593 | 5,054 | 539 |
| Net sales (in thousands) |  |  |  |
| U.S. | 48,706 | 129,472 | (80,766) |
| International | 12,150 | 11,731 | 419 |
| Total | $60,856 | $141,203 | $(80,347) |
| Potash statistics (per short ton): |  |  |  |
| Net sales price | $458 | $623 | $(165) |
| Cost of goods sold, net of by-product credits\* (exclusive of items shown separately below) | 177 | 182 | (5) |
| Depreciation, depletion and amortization | 19 | 10 | 9 |
| Royalties | 18 | 21 | (3) |
| Total potash cost of goods sold | $214 | $213 | $1 |
| Warehousing and handling costs | 13 | 7 | 6 |
| Average potash gross margin (exclusive of costs associated with abnormal production) | $231 | $403 | $(172) |
| Trio™ statistics (per short ton): |  |  |  |
| Net sales price | $246 | $283 | $(37) |
| Cost of goods sold (exclusive of items shown separately below) | 131 | 87 | 44 |
| Depreciation, depletion and amortization | 12 | 12 | — |
| Royalties | 12 | 14 | (2) |
| Total Trio™ cost of goods sold | $155 | $113 | $42 |
| Warehousing and handling costs | 17 | 10 | 7 |
| Average Trio™ gross margin | $74 | $160 | $(86) |

On a per short ton basis, by-product credits were $16 and $8 for the three month period ended September 30, 2009, and 2008, respectively. By-product credits were $1.7 million and $1.6 million for the three month period ended September 30, 2009, and 2008, respectively.

***Nine Months Ended September 30, 2009, and the Period April 25, 2008, through September 30, 2008, and the Period January 1, 2008, through April 24, 2008 (predecessor)***

Income before taxes for the nine months ended September 30, 2009, was $83.2 million. Income before taxes for the period from April 25, 2008, to September 30, 2008, was $121.1 million. Income before taxes for the predecessor entity for the period January 1, 2008, through April 24, 2008, was $44.5 million. The decrease from the combined prior year periods followed principally from lower sales volumes of each of our products and was partially offset by increased average prices for potash and Trio™. We sold 290,000 and 123,000 short tons of potash and Trio™ in the nine months ended September 30, 2009, as compared to 630,000 and 191,000 short tons in the same period of 2008. As described previously, the Trio™ sales decrease was driven largely by a large export sale of standard product to China in 2008. These export shipments are comparatively much larger bulk sales that tend to vary when they take place throughout the year; therefore, the timing of these sales can lead to large variances in sales tons from period to period.

Our production volume of potash in the nine months ended September 30, 2009, was 381,000 short tons, or 254,000 short tons less than in the same period in 2008. Our production was primarily lower due to actions we took to slow production in order to more closely align our supply with market demand.

Our net sales price of potash was $610 per short ton ($672 per metric ton) in the nine months ended September 30, 2009, as compared to $547 per short ton for the period from April 25, 2008, to September 30, 2008, and $309 per short ton for the period January 1, 2008, through April 24, 2008. The net sales price of potash was $445 per short ton for the combined nine months ended September 30, 2008. The increase in average pricing was achieved as a result of tight supply and demand conditions and strong agricultural prices through the first three quarters of 2008 and our ability to hold some of this price increase for a period of time in the first nine months of 2009. Excluding costs associated with abnormal production, our potash gross margin as a percentage of net sales was 58 percent for the nine months ended September 30, 2009, as compared to 63 percent in the period from April 25, 2008, through September 30, 2008, and 52 percent in the period from January 1, 2008, through April 24, 2008. The change in gross margin has occurred as a result of lower potash prices and higher per short ton production costs. Production costs in the first nine months of 2009 relative to the first nine months of 2008 decreased in absolute dollars by $7.0 million with decreased spending on natural gas, electricity, contract labor, royalties, and fuel, being partially offset by increased costs of maintenance, depreciation, property taxes, insurance, and labor and decreased by-product credits. Due to the fact that we expensed $12.2 million of production costs directly in 2009 rather than absorb these costs into inventory, our cost of goods sold per short ton of $200, net of by-product credits, for the nine months ended September 30, 2009, is more comparable to the combined period's $146 per short ton, net of by-product credits. This increase was driven principally by the lower production levels maintained through 2009. Additionally, the increase in royalty cost per short ton is driven by the increase in sales prices between periods. Our cost of goods sold per short ton of Trio™ increased in the first nine months of 2009 relative to the first nine months of 2008, as we have been producing relatively more Trio™ than potash at our East mine than we have in prior periods, so more of the production costs have been allocated to this product.

### Selected Operations Data

The following table presents selected operations data for the periods presented below. Analysis of the details of this information is presented throughout this discussion. We present this table as a summary of information relating to key indicators of financial condition and operating performance that we believe are important. Had the cost of sales numbers from the pro forma information as described in Part I, Item 1A. of this document been presented in this table the pro forma cost per short ton of potash would have been higher in the first nine months of 2008 by less than $1 per short ton.

| Production volume (in thousands of short tons): | Intrepid Potash, Inc. Combined Nine months ended September 30, 2008 Nine months ended September 30, 2009 | April 25, 2008 through September 30, 2008 | Intrepid Mining LLC (Predecessor) January 1, 2008 through April 24, 2008 | Change between Periods |  |
| --- | ---: | ---: | ---: | ---: | ---: |
| Potash | 381 | 355 | 280 | 635 | (254) |
| Langbeinite | 147 | 90 | 74 | 164 | (17) |
| Sales volume (in thousands of short tons): |  |  |  |  |  |
| Potash | 290 | 361 | 269 | 630 | (340) |
| Trio™ | 123 | 84 | 107 | 191 | (68) |
| Gross sales (in thousands) |  |  |  |  |  |
| U.S. | $202,142 | $208,676 | $96,359 | $305,035 | $(102,893) |
| International | 26,600 | 17,744 | 13,061 | 30,805 | (4,205) |
| Total | 228,742 | 226,420 | 109,420 | 335,840 | (107,098) |
| Freight costs (in thousands) |  |  |  |  |  |
| U.S. | 11,709 | 6,427 | 8,168 | 14,595 | (2,886) |
| International | 2,713 | 2,164 | 4,191 | 6,355 | (3,642) |
| Total | 14,422 | 8,591 | 12,359 | 20,950 | (6,528) |
| Net sales (in thousands) |  |  |  |  |  |
| U.S. | 190,433 | 202,249 | 88,191 | 290,440 | (100,007) |
| International | 23,887 | 15,580 | 8,870 | 24,450 | (563) |
| Total | $214,320 | $217,829 | $97,061 | $314,890 | $(100,570) |
| Potash statistics (per short ton): |  |  |  |  |  |
| Net sales price | $610 | $547 | $309 | $445 | $165 |
| Cost of goods sold, net of by-product credits\* (exclusive of items shown separately below) | 200 | 165 | 125 | 146 | 54 |
| Depreciation, depletion and amortization | 19 | 9 | 8 | 9 | 10 |
| Royalties | 22 | 19 | 10 | 15 | 7 |
| Total potash cost of goods sold | $241 | $193 | $143 | $170 | $71 |
| Warehousing and handling costs | 14 | 7 | 6 | 6 | 8 |
| Average potash gross margin (exclusive of costs associated with abnormal production) | $355 | $347 | $160 | $269 | $86 |
| Trio™ statistics (per short ton): |  |  |  |  |  |
| Net sales price | $306 | $246 | $130 | $181 | $125 |
| Cost of goods sold (exclusive of items shown separately below) | 143 | 68 | 77 | 80 | 63 |
| Depreciation, depletion and amortization | 14 | 9 | 10 | 11 | 3 |
| Royalties | 15 | 12 | 7 | 9 | 6 |
| Total Trio™ cost of goods sold | $172 | $89 | $94 | $100 | $72 |
| Warehousing and handling costs | 14 | 9 | 6 | 8 | 6 |
| Average Trio™ gross margin (exclusive of costs associated with abnormal production) | $120 | $148 | $30 | $73 | $47 |

On a per short ton basis, by-product credits were $17, $8, and $13 for the nine month period ended September 30, 2009, the period from April 25, 2008, through September 30, 2008, and the period from January 1, 2008, through April 24, 2008, respectively. By-product credits were $4.9 million, $3.0 million, and $3.6 million for the nine month period ended September 30, 2009, the period from April 25, 2008, through September 30, 2008, and the period from January 1, 2008, through April 24, 2008, respectively.

### Outlook for the Remainder of 2009

We believe that farmers and distributors are still hesitant to return to robust purchasing of potash because potash prices have not fully stabilized and, in fact, continued to fall during the third quarter of 2009. The month of September saw some increase in domestic potash demand, which has since moderated due to the unusually late fall harvest in the U.S. that was the result of a delayed spring planting and poor weather conditions this fall. These conditions are contributing to a reduction in the amount of potash applied by farmers from historical normal fall application rates. Furthermore, with potash prices decreasing and the outlook for crop prices remaining uncertain, we expect farmers may delay making their fertilizer purchases. This continued purchasing delay by farmers to obtain more potash pricing clarity and crop pricing visibility may continue to have a moderating effect on the pace of any demand recovery for potash as we transition into 2010.

It is unknown how long it will take for the potash market to return to more historical levels of demand. We believe that it is likely that our sales volumes will not change substantially until sometime in 2010, even with the decreases in the prices of our products. We continue to expect that application rates for potash fertilizers will be lower in total for the full year 2009, relative to 2008. We, however, do not expect this decline to be permanent as fertilizer plays a vital role in ensuring that world agricultural production meets the needs of a growing population.

The difference, however, in the inventory levels this fall as compared to last spring is that the inventory in the supply system is now largely comprised of producer inventory rather than dealer inventory. We believe fertilizer dealers have continued to be cautious in the current market environment by limiting the amount of inventory that they keep on hand. This trend could continue to keep sales levels lower as dealers attempt to maintain decreased levels of inventory or reduce inventory. The implication of this could be a larger peak in seasonal demand for agricultural product as the application seasons tend to be concentrated in the spring and fall. We may benefit from this trend however, as we believe we are well-positioned to provide just-in-time product in certain key agricultural markets when demand does materialize. If a decreased application rate is sustained for the remainder of 2009, we will continue to manage our production levels so that inventory levels do not exceed the available capacity of our warehouses.

### Potash Prices

The commodity price for potash has been and will continue to be the most significant driver of the profitability of our business. As discussed earlier, we have sold significantly lower volumes of potash since the fourth quarter of 2008, and we expect this trend of lower sales volumes to continue for the remainder of 2009, and possibly into 2010. Potash pricing is discussed in more detail in the preceding section titled *Our Products and Markets.*

### Capital Investment

We operate in a capital-intensive industry that requires consistent capital expenditures to replace assets necessary to sustain safe and reliable production. At each of our facilities, we have developed an investment plan to maintain safe and reliable production, improve and modernize equipment, increase production, ensure environmental compliance and decrease per unit production costs. We have identified key projects at each of our facilities that we believe will allow us to increase our potash and langbeinite production capacity and efficiency of operations over time. This operational focus on continuing to enhance the reliability of our production is particularly directed at our Carlsbad facilities and is designed to lower our operating cost per short ton with production efficiency and debottlenecking projects. In the three and nine months ended September 30, 2009, we have invested $33.2 million and $82.4 million, respectively, in capital projects. As we continue to invest in our facilities, we proactively manage our projects in order to manage cash investment with the need to maintain an appropriate cash level on our balance sheet that will allow us to react strategically to market conditions. We recognize, however, that the current period of lower production rates is an excellent time to implement improvements to our facilities. Based on our current pace of capital expenditures and our active management of our balance sheet in this environment of decreased demand for our products, we believe we can maintain a sufficient amount of cash on our balance sheet to work though this period of lower relative sales.

We continue to prepare for construction of the HB solar solution mine, a project to develop and build a solar evaporation solution mine. In January 2009, the Bureau of Land Management ("BLM") informed Intrepid that it determined that an Environmental Impact Statement ("EIS") is required to evaluate the environmental impacts of the proposed HB solar solution mine. As a consequence, final permitting and approval of the HB solar solution mine will be delayed and most capital expenditures for it deferred while the EIS is completed. We currently anticipate that the EIS process will be completed by the end of the summer of 2011. Once the necessary regulatory approvals are obtained, construction will begin and first production should result approximately one year later with full production anticipated approximately two years after approvals are obtained and construction begins. We expect our total investment to be between $11 million to $13 million in 2009, and we have invested approximately $8.9 million on a year-to-date basis.

Total capital investment in 2009 is expected to be between $100 and $110 million, with the majority of the spending having already taken place by the end of the third quarter. A breakdown of our current capital investment plan includes approximately $38 to $41 million to replace assets needed to maintain production, $9 to $11 million to improve and modernize equipment, $50 to $55 million to increase productive capacity as described more fully below, and $3 million to continue the replacement of the East mine warehouse, a portion of which has been reimbursed and another portion of which we expect to be reimbursed by our insurer. The 2009 capital program will continue to be funded out of cash flow and existing cash on hand. We believe that, in the long term, demand for potash and Trio™ will at least return to historical levels; therefore, we are making capital investments at our facilities that are designed to increase our production capabilities of potash and langbeinite and lower our per short ton operating cost.

The following are a few examples of projects in which we expect to invest capital for the remainder of 2009, or that have been completed in 2009:

Complete the installation of the horizontal stacker or storage and hoisting system, as well as implement a project to improve potash recoveries at the West mine, with total project costs of $21 to $23 million. Construction is underway on the underground storage project with completion and debottlenecking expected in the fourth quarter of 2009. We are also progressing on our potash recovery project at the West mine related to extracting more potash from the coarse portion of our ore and expect to have the new system installed in 2009;

Install new thickeners to improve potash recoveries at our East mine. We are in the final stages of assembly on the project and expect to complete the project and begin commissioning in 2009. We expect this project will have a total estimated cost of approximately $11 to $12 million;

Advance the engineering associated with an enhanced langbeinite recovery project at the East mine. We continue to make progress on the system design and anticipate this project may include three stages, including coarse recovery, fine recovery, and granulation technology. This project is a high priority due to the potential increase in langbeinite production from the same amount of current ore feed, which would result in a lower average cost structure at the East mine. We have accelerated the engineering investment in this project appropriately to ensure we are able to move into construction as expeditiously as is prudent. The total estimated costs will be determined following a detailed engineering design review at which time it will be presented to Intrepid's Board of Directors for approval;

Added a series of solution mining caverns at the Moab mine. During the third quarter of 2009, we finished the drilling and completion of the last of 5 new wells as planned for solution mining extraction at our Moab mine. These wells will be operated to supply brine as needed in preparation for the 2010 evaporation season; and

We have engaged a qualified engineering and design firm to continue work related to the reopening of the idle North mine. During the 1980s, the North mine produced potash at a rate of approximately 300,000 tons per year. Reopening the North mine will require, among other things, the refurbishing of hoisting equipment, installation of underground mining systems, the rebuilding of the ore processing facility, and increasing compaction capacity. We currently expect to invest capital of less than $1 million during 2009 for design work to assess the possible reopening of the North mine as we have slowed the work associated with this project in light of the current economic environment.

All dollar amounts for future capital spending are estimates that are subject to change as projects are further developed, modified, deferred, or canceled.

### Liquidity and Capital Resources

As of September 30, 2009, we had cash, cash equivalents, and investments of $94.9 million, we had no debt, and we had availability of $124.9 million under our senior credit facility. Included in cash and cash equivalents were $2.3 million in cash and $84.9 million in cash equivalent investments, consisting of money market accounts or certificates of deposit with banking institutions for $14.9 million, U.S. treasuries with daily liquidity of approximately $30.3 million, and U.S. Bank commercial paper of approximately $39.7 million. We had no losses on our cash and cash equivalents during the first nine months of 2009, and all cash equivalents are invested with institutions that we believe to be financially sound. Additionally, as of September 30, 2009, we had $7.7 million invested in short-term and long-term certificate of deposit investments.

Our operations are primarily funded from cash generated by operations, and, if necessary, we have the ability to borrow under our senior credit facility. For the foreseeable future, we believe that our cash balances, cash flow from operations, and available borrowings under our senior credit facility will be sufficient to fund our operations, our working capital requirements, and our presently planned capital investments.

*(In thousands)*

|  | Intrepid Potash, Inc. Nine months ended September 30, 2009 | April 25, 2008 through September 30, 2008 | Intrepid Mining LLC (Predecessor) January 1, 2008 through April 24, 2008 |
| --- | ---: | ---: | ---: |
| Cash Flows from Operating Activities | $57,990 | $109,812 | $26,011 |
| Cash Flows from Investing Activities | $(86,033) | $(23,642) | $(7,774) |
| Cash Flows from Financing Activities | $(1,283) | $52,648 | $(10,506) |

### Operating Activities

There are no directly comparable periods for an analysis of operating activities on a year-to-date basis due to the date of our IPO in April 2008. The discussion, therefore, will focus on significant trends in each historical period presented. Total cash provided by operating activities was $58.0 million for the nine months ended September 30, 2009, $109.8 million for the period from April 25, 2008, through September 30, 2008, and $26.0 million for the period from January 1, 2008, through April 24, 2008. The $77.8 million decrease in cash provided by operating activities in the year-to-date period in 2009 compared to the combined prior year periods is due primarily to a decrease in net income because of lower sales, but also due to an increase in product inventory and a decrease in income taxes payable, relative to the first nine months of 2008. The lower sales and higher product inventory are reflective of the general business conditions in our industry that have existed in the first nine months of 2009 when compared to the first nine months of 2008. These changes were partially offset by an increase in depreciation, depletion, amortization and accretion expenses, resulting from our increased capital purchases, as well as an increase in deferred income tax expense and a decrease in prepaid expenses and other assets, relative to the first nine months of 2008. The change in trade accounts receivable relative to the same period in 2008 further offset the decrease in cash, as trade accounts receivable increased $15.7 million in the first nine months of 2009 relative to an increase of $24.1 million in the first nine months of 2008. For the nine months ended September 30, 2009, inventories increased $19.9 million relative to an increase of $5.0 million in the same period in 2008, reflecting the decrease in demand for our products due to the global economic slowdown when compared to the same time period last year.

### Investing Activities

Total cash used in investing activities was $86.0 million for the nine months ended September 30, 2009, compared to $31.4 million in the combined nine months ended September 30, 2008. The $31.4 million in cash used in investing activities for the nine months ended September 30, 2008, was comprised of $23.6 million for the period from April 25, 2008, through September 30, 2008, and $7.8 million for the period from January 1, 2008, through April 24, 2008. Cash invested in property, plant and equipment as well as mineral properties and development costs increased to $82.4 million in the first nine months of 2009, from $38.8 million in the first nine months of 2008, reflecting the continued progress of our capital plan. For the nine months ended September 30, 2009, we purchased $7.7 million of certificate of deposit investments in an effort to earn a higher return and liquidated $2.1 million in investments related to the bond sinking fund. For the nine months ended September 30, 2009 and 2008, we received $2.0 million and $7.0 million, respectively, of insurance settlements related to property damage, which we used toward the construction of warehousing facilities at the East mine.

### Financing Activities

Total cash used in financing activities was $1.3 million for the nine months ended September 30, 2009, compared to $42.1 million in cash provided by financing activities in the combined nine months ended September 30, 2008. The $42.1 million in cash provided by financing activities for the nine months ended September 30, 2008, was comprised of $52.6 million received during the period from April 25, 2008, through September 30, 2008, and $10.5 million used during the period from January 1, 2008, through April 24, 2008. For the nine months ended September 30, 2009, $1.3 million was paid by Intrepid for employees' tax withholdings upon the vesting of certain restricted common stock awards for employees who elected to net share settle their awards. For the period from January 1, 2008, through April 24, 2008, the predecessor period, net proceeds from long-term debt totaled $4.5 million and distributions to members of Mining totaled $15.0 million. This distribution had no net impact to Intrepid following the IPO, since Mining retained all cash balances at the time of the initial public offering. The distribution was paid out of cash on hand; no amounts were drawn against the senior credit facility to make this distribution. Net proceeds related to the IPO of $1.032 billion were received in the period from April 25, 2008, through September 30, 2008. Of the total cash received related to the IPO, $892.8 million was distributed to Mining, in connection with the Formation Transactions described previously, and debt of $86.9 million was repaid.

### Senior Credit Facility

Intrepid's senior credit facility, as amended, is a syndicated facility led by U.S. Bank as the agent bank, which provides a total revolving credit facility of $125 million. The lenders have a security interest in substantially all of the assets of Intrepid and certain of its subsidiaries. Obligations under the senior credit facility are cross-collateralized between Intrepid and certain of its subsidiaries. Intrepid has a $125 million revolving credit facility that has a term through March 9, 2012, of which $124.9 million is available for use as of September 30, 2009. As of September 30, 2009, Intrepid had $0.1 million restricted for a letter of credit issued, which reduced the amounts available for borrowing and is reflected in the net amount available for borrowing above.

Our senior credit facility requires us to maintain interest rate derivative agreements to fix the interest rate for at least 75 percent of the projected outstanding balance of the term loan. Historically, we maintained derivative hedging agreements that were swaps of variable rate interest for fixed rate payments. Despite repaying the amounts outstanding under the senior credit facility at the time of the IPO, we have left the interest rate swap agreements in place taking the view that interest rates will rise and that the cost of settling the derivatives will be relatively beneficial as compared to closing out the contracts. Interest rates, however, have decreased, and the liability that we have under these derivative agreements has increased since the date of the IPO. We review our derivative positions from the perspective of counterparty risk when we are in an asset position and believe that we continue to transact with strong, creditworthy institutions. Notional amounts for which the rate has been fixed as of September 30, 2009, are displayed below:

*(In thousands)*

| Termination Date | Notional Amount | Weighted Average Fixed Rate |
| --- | ---: | ---: |
| December 31, 2009 | $20,400 | 4.9% |
| March 1, 2010 | $17,500 | 5.3% |
| December 31, 2010 | $34,750 | 5.0% |
| December 31, 2011 | $29,400 | 5.2% |
| December 31, 2012 | $22,800 | 5.3% |

The weighted average notional amount outstanding as of September 30, 2009, and the weighted average 3-month LIBOR rate locked-in via these derivatives was $30.5 million and 5.15 percent, respectively. The interest rate paid under our senior credit facility on any debt varies both with the change in the 3-month LIBOR rate and with our leverage ratio.

See Note 8 of the Consolidated Financial Statements in this Quarterly Report on Form 10-Q for more information relating to our financing arrangements, including our indebtedness. A more detailed description of our financing arrangements is also included in Management's Discussion and Analysis of Results of Operations and Financial Condition and Note 8 of the Notes to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2008.

### Contractual Obligations

As of September 30, 2009, we had contractual obligations totaling $83.6 million, as indicated below. Contractual commitments shown are for the full calendar year indicated unless otherwise indicated. The associated imputed interest matches the presentation in this table.

*(In thousands)*

|  | Payments due by period Total | Q4, 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | More than 5 years |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Operating lease obligations(1) | $22,456 | $1,327 | $5,096 | $4,434 | $2,062 | $1,824 | $1,653 | $6,060 |
| Purchase commitments(2) | 10,661 | 10,661 | — | — | — | — | — | — |
| Pension obligations(3) | 7,765 | 82 | 150 | 188 | 204 | 210 | 234 | 6,697 |
| Asset retirement obligation(4) | 31,289 | — | — | — | — | — | — | 31,289 |
| Minimum royalty payments(5) | 11,433 | 114 | 457 | 457 | 457 | 457 | 457 | 9,034 |
| Total | $83,604 | $12,184 | $5,703 | $5,079 | $2,723 | $2,491 | $2,344 | $53,080 |

(1)

Includes all operating lease payments, inclusive of sales tax, for leases for office space, an airplane, railcars and other equipment.

(2)

Purchase contractual commitments include the approximate amount due vendors for non-cancelable purchase commitments for materials and services.

(3)

Pension contributions as estimated by our actuaries. Estimated contributions represent additional funds Intrepid expects to pay into the pension plan and excludes amounts Intrepid has placed in trust as plan assets to fund the pension obligation, as well as the future direct payments by the pension plan to participants.

(4)

We are obligated to reclaim and remediate lands which our operations have disturbed, but, because of the long-term nature of our reserves and facilities, we estimate that none of those expenditures will be required until after 2014. Commitments shown are in today's dollars and are undiscounted.

(5)

Estimated annual minimum royalties due under mineral leases, assuming approximately a 25-year life, consistent with estimated useful lives of plant assets.

Payments related to derivative contracts cannot be reasonably estimated due to variable market conditions and are not included in the above tables.

### Off-Balance Sheet Arrangements

As of September 30, 2009, we had no off-balance sheet arrangements aside from the operating leases described under the section titled ***Contractual Obligations*** above and bonding obligations described in the Notes of the Consolidated Financial Statements in this Quarterly Report on Form 10-Q.

### Results of Operations for the Three Months Ended September 30, 2009, and 2008

### Net Sales and Freight Costs

The following table presents potash and Trio™ sales and production for the subject periods.

| Production volume (in thousands of short tons): | Three months ended September 30, 2009 | Three months ended September 30, 2008 | Change between Periods | % Change |
| --- | ---: | ---: | ---: | ---: |
| Potash | 112 | 200 | (88) | (44)% |
| Langbeinite | 60 | 50 | 10 | 20% |
| Sales volume (in thousands of short tons): |  |  |  |  |
| Potash | 111 | 204 | (93) | (46)% |
| Trio™ | 40 | 50 | (10) | (20)% |
| Gross Sales (in millions): |  |  |  |  |
| Potash | $54.5 | $129.3 | $(74.8) | (58)% |
| Trio™ | $11.9 | $16.9 | $(5.0) | (30)% |
| Freight Costs (in millions): |  |  |  |  |
| Potash | $3.6 | $2.2 | $1.4 | 64% |
| Trio™ | $2.0 | $2.8 | $(0.8) | (29)% |
| Net Sales (in millions): |  |  |  |  |
| Potash | $50.9 | $127.1 | $(76.2) | (60)% |
| Trio™ | $9.9 | $14.1 | $(4.2) | (30)% |
| Net sales (per short ton): |  |  |  |  |
| Potash | $458 | $623 | $(165) | (26)% |
| Trio™ | $246 | $283 | $(37) | (13)% |

Net sales of potash decreased $76.2 million, or 60 percent, from $127.1 million for the three months ended September 30, 2008, to $50.9 million for the three months ended September 30, 2009; this change being the result of an average decrease in sales price of $165 per short ton, or 26 percent, and a decrease in volume of 46 percent. Beginning in the fourth quarter of 2008, a reduction in the demand for potash and Trio™ resulted in a lower total volume of sales in the third quarter of 2009 compared to 2008 and resulted in the building of inventories compared to historical averages. Our production volume of potash in the three months ended September 30, 2009, was 112,000 short tons, or 88,000 short tons less than in the third quarter of 2008. Our potash production was less in 2009 than in 2008 principally due to our decision to decrease production in order to better match supply to demand. For the duration of the third quarter, we continued to operate with three operating shifts instead of four shifts at our Carlsbad West facility and at a reduced level at our Wendover facility as part of an effort to reduce production in response to lower current demand. Moab took its normal summer shutdown in the third quarter for maintenance and to enhance the concentration of ore in our solar ponds. Our Carlsbad East facility returned to normal production levels in the third quarter.

Net sales of Trio™ decreased $4.2 million, or 30 percent, from $14.1 million for the three months ended September 30, 2008, to $9.9 million for the three months ended September 30, 2009, due to a 13 percent decrease in the average price and a 20 percent decrease in the volume of sales. Production of langbeinite increased 20 percent in the third quarter of 2009 compared to the same period in 2008, due primarily to both the mining of ore with a higher concentration of langbeinite and improved recoveries through operating efficiencies.

Freight costs increased $0.5 million, or 11 percent, for the three months ended September 30, 2009, compared to the three months ended September 30, 2008, due primarily to increased movement of inventory to distribution warehouses pending sale; however, this increase was partially offset due to lower sales volumes. As usual, the mix of customers paying for their own freight affects the freight costs incurred by Intrepid and gross sales. We believe that our net realized price is a more meaningful number to evaluate product revenues.

### Costs Associated with Abnormal Production

Approximately $5.8 million was excluded from the calculation of inventory and instead expensed in the third quarter of 2009 for potash production costs that would have been allocated to additional tons produced, assuming Intrepid had been operating at normal production rates in the third quarter of 2009. Included in the $5.8 million was approximately $0.4 million related to depreciation expense. There was no similar abnormal cost adjustment related to Trio™, as production was at normal rates during the third quarter of 2009 for Trio™. There were also no similar abnormal cost adjustments in 2008.

### Cost of Goods Sold

The following table presents our cost of goods sold for potash and Trio™ for the subject periods.

|  | Three months ended September 30, 2009 | Three months ended September 30, 2008 | Change between Periods | % Change |
| --- | ---: | ---: | ---: | ---: |
| Cost of sales (in millions) | $30.0 | $49.1 | $(19.1) | (39)% |
| Cost per short ton of potash sold(1) | $214 | $213 | $1 | 0% |
| Cost per short ton of Trio™ sold(2) | $155 | $113 | $42 | 37% |

(1)

Per short ton potash costs include $19 and $10 of depreciation expense in the third quarter of 2009 and 2008, respectively.

(2)

Per short ton Trio™ costs include $12 of depreciation expense in both the third quarter of 2009 and 2008.

Total cost of goods sold per short ton of potash increased $1 per short ton, or less than one percent, from $213 per short ton for the three months ended September 30, 2008, to $214 per short ton for the three months ended September 30, 2009. These results are exclusive of the fact that there was approximately $5.8 million of production costs that were not absorbed into inventory as a result of the conclusion that our production rates were abnormally low for this period. The cost of sales numbers reflect only those costs that have been first absorbed into inventory and then subsequently recognized as the product tons are sold. As noted earlier, decreased production expenditures of approximately $7.1 million were essentially offset on a relative basis as the production costs were allocated to a lower production volume. The total cost of goods sold of our Trio™ increased $42 per short ton, or 37 percent, from $113 per short ton for the three months ended September 30, 2008, to $155 per short ton for the three months ended September 30, 2009. The overall 37 percent increase in Trio™ costs of goods sold was comprised of an increase in cost, principally resulting from a greater allocation of costs to Trio™ based on its proportionally greater level of production relative to potash produced at our East mine, offset by a decrease in the per unit cost driven by higher production.

Cost of goods sold decreased $19.1 million, or 39 percent, from $49.1 million in the three months ended September 30, 2008, to $30.0 million in the three months ended September 30, 2009. The decrease in the total expense was driven by the lower volumes sold and by a reduction in spending, prior to absorption of costs into inventory. Costs that changed materially during the three months ended September 30, 2009, compared to the three months ended September 30, 2008, included decreases in natural gas, royalties, electricity, and contract labor.

Labor and contractor costs decreased $1.2 million, or 8 percent, in the third quarter of 2009 due to reduced labor following managed cut-backs in operating rates and contract projects.

Natural gas expense decreased $2.9 million, or 67 percent, in the three months ended September 30, 2009, due principally to lower market rates for this commodity. Lower rates drove $2.5 million of the decrease, and lower volumes drove $0.4 million of the decrease. Electricity costs decreased $1.6 million, or 43 percent, in the three months ended September 30, 2009, due principally to lower rates.

Royalty expense decreased $2.4 million, or 50 percent, from the three months ended September 30, 2008, which corresponds to the reduction in net sales. Other changes in cost of goods sold followed from decreased fuels and increased depreciation and "other" production costs.

By-product sales credits reduced cost of goods sold by $1.7 million and $1.6 million in the three months ended September 30, 2009, and 2008, respectively.

### Selling and Administrative Expenses

Selling and administrative expenses decreased $2.9 million in the third quarter of 2009 as compared to the same period in 2008. This represents a 31 percent decrease from $9.4 million for the three months ended September 30, 2008, to $6.5 million for the three months ended September 30, 2009. The decrease largely related to lower stock compensation expense in the second year of being a public company, with many contractors having received awards only in 2008, and to a decrease in legal and aviation expenses from the prior period.

### Income Taxes

Income taxes decreased by $23.1 million in the third quarter of 2009 as compared to the same period in 2008. Income taxes of $29.5 million were recognized in the three months ended September 30, 2008, at an effective tax rate of 37.2 percent. Income taxes of $6.4 million were recognized in the three months ended September 30, 2009, at an effective tax rate of 40.2 percent. Changes to permanent book to tax differences, such as the domestic production activities deduction, can have an impact on the effective tax rate during given periods. During the third quarter of 2009, such a change caused an increase in our effective tax rate.

### Results of Operations for the Nine Months Ended September 30, 2009, and Pro Forma Results of Operations for the Nine Months Ended September 30, 2008

### Net Sales and Freight Costs

The following table presents potash and Trio™ sales and production for the subject periods.

| Production volume (in thousands of short tons): | Intrepid Potash, Inc. Nine months ended September 30, 2009 | April 25, 2008 through September 30, 2008 | Intrepid Mining LLC (Predecessor) Pro forma for the Nine months ended September 30, 2008 January 1, 2008 through April 24, 2008 | Change between Periods | % Change |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Potash | 381 | 355 | 280 | 635 | (254) | (40)% |
| Langbeinite | 147 | 90 | 74 | 164 | (17) | (10)% |
| Sales volume (in thousands of short tons): |  |  |  |  |  |  |
| Potash | 290 | 361 | 269 | 630 | (340) | (54)% |
| Trio™ | 123 | 84 | 107 | 191 | (68) | (36)% |
| Gross Sales (in millions): |  |  |  |  |  |  |
| Potash | $184.6 | $201.1 | $88.5 | $289.6 | $(105.0) | (36)% |
| Trio™ | $44.1 | $25.3 | $20.9 | $46.2 | $(2.1) | (5)% |
| Freight Costs (in millions): |  |  |  |  |  |  |
| Potash | $8.0 | $3.9 | $5.2 | $9.1 | $(1.1) | (12)% |
| Trio™ | $6.4 | $4.7 | $7.1 | $11.8 | $(5.4) | (46)% |
| Net Sales (in millions): |  |  |  |  |  |  |
| Potash | $176.6 | $197.2 | $83.3 | $280.5 | $(103.9) | (37)% |
| Trio™ | $37.7 | $20.6 | $13.8 | $34.4 | $3.3 | 10% |
| Net sales (per short ton): |  |  |  |  |  |  |
| Potash | $610 | $547 | $309 | $445 | $165 | 37% |
| Trio™ | $306 | $246 | $130 | $181 | $125 | 69% |

Net sales of potash decreased $103.9 million, or 37 percent, from $280.5 million for the nine months ended September 30, 2008, to $176.6 million for the nine months ended September 30, 2009; this change being the net result of an average increase in sales price of $165 per short ton, or 37 percent, and a decrease in volume of 54 percent. Beginning in the fourth quarter of 2008, a reduction in the demand for potash and Trio™ led to a continuing lower total volume of sales in the first nine months of 2009 than in 2008 and resulted in the building of inventories compared to historical averages. Our production volume of potash in the nine months ended September 30, 2009, was 381,000 short tons, or 254,000 short tons less than in the first nine months of 2008. Our potash production was less in 2009 than in 2008, principally due to our decision to decrease production in response to lower demand. As part of these efforts, we shut down the West and East production facilities for two weeks each in the first quarter of 2009, and we continued to operate with three operating shifts instead of four shifts at our Carlsbad West facility. Wendover also has been operated at lower than normal rates throughout most of the first three quarters of 2009. Our Carlsbad East facility, however, returned to normal production levels in the third quarter.

Net sales of Trio™ increased $3.3 million, or 10 percent, from $34.4 million for the nine months ended September 30, 2008, to $37.7 million for the nine months ended September 30, 2009, due to a 69 percent increase in the average price, partially offset by a 36 percent decrease in the volume of sales. The first quarter of 2008 had a single sale of approximately 47,000 tons to an international customer. As international shipments are large and vary when they take place throughout the year, quarter-to-quarter variances in sales tons are not uncommon. Production of langbeinite decreased 10 percent in the first nine months of 2009 compared to the same period in 2008, due primarily to the previously mentioned efforts to reduce production in response to lower demand.

Freight costs decreased $6.5 million, or 31 percent, for the nine months ended September 30, 2009, compared to the nine months ended September 30, 2008, due primarily to lower sales volumes; however, freight expense increased approximately $3.5 million as a result of increased movement of inventory to distribution warehouses pending sale. As usual, the mix of customers paying for their own freight affects the freight costs incurred by Intrepid and gross sales. We believe that our net realized price is a more meaningful number to evaluate product revenues.

### Costs Associated with Abnormal Production

Approximately $12.0 million was excluded from the calculation of inventory and instead expensed in the first nine months of 2009 for potash production costs that would have been allocated to additional tons produced, assuming Intrepid had been operating at normal production rates in the first nine months of 2009. Included in the $12.0 million was approximately $1.1 million related to depreciation expense. Additionally, approximately $0.2 million was excluded from the calculation of inventory and instead expensed in the first nine months of 2009 for Trio™ production costs that would have been allocated to additional tons produced, assuming Intrepid had been operating at normal production rates in the first nine months of 2009. There were no similar cost adjustments in 2008.

### Cost of Goods Sold

The following table presents our cost of goods sold for potash and Trio™ for the subject periods.

|  | Intrepid Potash, Inc. Nine months ended September 30, 2009 | April 25, 2008 through September 30, 2008 | Intrepid Mining LLC (Predecessor) Pro forma for the Nine months ended September 30, 2008 January 1, 2008 through April 24, 2008 | Change between Periods | % Change |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Cost of sales (in millions) | $90.9 | $77.1 | $48.6 | $126.3 | $(35.4) | (28)% |
| Cost per short ton of potash sold(1) | $241 | $193 | $143 | $170 | $71 | 42% |
| Cost per short ton of Trio™ sold(2) | $172 | $89 | $94 | $100 | $72 | 72% |

(1)

Per short ton potash costs include $19 and $9 of depreciation expense in the first nine months of 2009 and 2008, respectively.

(2)

Per short ton Trio™ costs include $14 and $11 of depreciation expense in the first nine months of 2009 and 2008, respectively.

Considering the aforementioned abnormal production expense that is excluded from inventory costs, the total cost of goods sold per short ton of potash increased $71 per short ton, or 42 percent, from $170 per short ton on a pro forma basis for the nine months ended September 30, 2008, to $241 per short ton for the nine months ended September 30, 2009. While production expenditures declined by $7.0 million, the decrease in production levels, even after the abnormal production adjustment described above, led to the relative increase in the cost per short ton. The total cost of goods sold of our Trio™ increased $72 per short ton, or 72 percent, from $100 per pro forma short ton for the nine months ended September 30, 2008, to $172 per short ton for the nine months ended September 30, 2009. The overall 72 percent increase in Trio™ costs of goods sold was comprised of an increase in cost, principally resulting from a greater allocation of costs to Trio™ based on its proportionally greater level of production relative to potash produced at our East mine, and an increase driven by lower production.

Cost of goods sold decreased $35.4 million, or 28 percent, from $126.3 million on a pro forma basis in the nine months ended September 30, 2008, to $90.9 million in the nine months ended September 30, 2009. The decrease in the total expense was driven by the lower volumes sold. Production costs in the first nine months of 2009 relative to the first nine months of 2008 decreased by approximately 6 percent in total. There were decreases in spending on natural gas, royalties, contract labor, electricity, and fuel; partially offset by increased costs of maintenance materials, property taxes, insurance, depreciation, and a reduction in by-product credits.

Labor and contractor costs decreased $1.6 million, or 4 percent, in the first nine months of 2009 due to reduced labor following the voluntary shutdowns in the first quarter of 2009 and continued reductions in operating rates to manage inventory levels, including reduced contract labor and overtime. Maintenance material costs increased $3.0 million, or 14 percent, in the nine months ended September 30, 2009, principally due to increased cost of materials and the increased level of maintenance projects.

Natural gas expense decreased $8.8 million, or 66 percent, in the nine months ended September 30, 2009. Lower rates drove $6.6 million of the decrease and lower volumes drove $2.4 million of the decrease. Additionally, realized and unrealized gains and losses on natural gas derivatives caused a $0.2 million increase in the expense. Electricity costs decreased $2.2 million, or 24 percent, in the nine months ended September 30, 2009, due principally to lower rates.

Royalty expense decreased $3.0 million, or 27 percent, from the nine months ended September 30, 2008, which corresponds to the reduction in net sales. Property tax expense increased $1.5 million, or 98 percent, from the nine months ended September 30, 2008, due to increased property valuations based on revenue generated in prior periods. Insurance expense increased $1.6 million, or 60 percent, in the first nine months of 2009 due to higher insurance premiums. Other changes in cost of goods sold followed from decreased fuels and increased depreciation.

By-product sales credits reduced cost of goods sold by $4.9 million and $6.6 million in the nine months ended September 30, 2009, and 2008, respectively.

### Selling and Administrative Expenses

Selling and administrative expenses decreased $2.7 million in the first nine months of 2009 as compared to the pro forma expenses for the same period in 2008. This represents an 11 percent decrease from $23.7 million for the nine months ended September 30, 2008, to $21.0 million for the nine months ended September 30, 2009. An increase driven by increased administrative and management staff associated with becoming a publicly-traded company, as well as increased professional service costs attributed to increased legal, audit, tax, appraisal, consulting and travel services, was more than offset by lower expected bonus expense for 2009 and a decrease in stock compensation expense due to the higher relative prior year pro forma compensation expense for awards issued in connection with the IPO that vested seven months after grant.

### Other Income (Expense)

Pro forma other income (expense) was a net income of $6.1 million for the nine months ended September 30, 2008, and a net expense of $0.1 million for the nine months ended September 30, 2009. The change was due primarily to insurance settlements of $7.0 million in excess of property losses during the nine months ended September 30, 2008, and the effect of gains and losses on interest rate swaps and the bond sinking fund investments. A pro forma adjustment assuming an earlier IPO date and earlier debt repayment largely eliminated the impacts in the above comparison of the repayment of debt and increase in invested cash in the third quarter of 2008.

For the nine months ended September 30, 2008, insurance settlements in excess of property losses of $7.0 million were recognized as proceeds received in connection with the East mine wind-shear claim. Through September 30, 2009, Intrepid has received $24.4 million of insurance settlement payments on the related claim; $2.0 million of this being received in March 2009 and being reported as a liability at September 30, 2009, pending the insurer's agreement to the related claims. Additional insurance payments to reconstruct the warehousing facilities are still contingent upon review by the insurer and therefore will be recognized in other income as settlements are agreed upon.

### Income Taxes

Income taxes of $34.6 million were recognized in the nine months ended September 30, 2009, at an effective tax rate of 41.6 percent. As a limited liability company, Mining, our predecessor, did not have an income tax expense, so there is no comparable figure for 2008.

### Critical Accounting Policies and Estimates

For a description of the critical accounting policies that affect our more significant judgments and estimates used in the preparation of our consolidated financial statements, refer to our most recent Annual Report on Form 10-K for the year ended December 31, 2008, and our Quarterly Reports on Form 10-Q for the quarterly periods ended March 31 and June 30, 2009. There have been no significant changes to our critical accounting policies since June 30, 2009.

### Recent Accounting Pronouncements

Please see Note 18 of the Consolidated Financial Statements in this Quarterly Report on Form 10-Q for information relating to recent accounting pronouncements that will have an impact on our consolidated financial statements.

## Market risk

As filed, 4,342 characters.

Our operations may be impacted by commodity prices, geographic concentration, changes in interest rates and foreign currency exchange rates.

### Commodity Prices

Potash and Trio™, our principal products, are commodities, but are not traded on any commodity exchange. As such, direct hedging of the prices for future production cannot be undertaken. Generally, we do not enter into long-term sales contracts with customers, so prices will vary with each particular transaction and the individual bids that we receive. Our potash is marketed for sale into three primary markets which are the agricultural market as a fertilizer, the industrial market as a component in drilling fluids for oil and gas exploration, and the animal feed market as a nutrient. Prices will vary based upon the demand from these different markets.

Our net sales and profitability are determined principally by the price of potash and Trio™ and, to a lesser extent, by the price of natural gas and other commodities used in the production of potash and langbeinite. The price of potash and Trio™ is influenced by agricultural demand and the prices of agricultural commodities. Decreases in agricultural demand or agricultural commodity prices could reduce our agricultural potash and Trio™ sales. If natural gas and oil prices were to decline enough to result in a reduction in drilling activity, our industrial potash sales would decline.

Our costs and capital investments are subject to market movements in other commodities such as natural gas, steel and chemicals. We have entered into derivative transactions for the purchase of natural gas in the past. As of September 30, 2009, we had no natural gas derivative contracts.

In a typical commodity swap agreement, if the agreed-upon published, third-party index price were lower than the swap fixed price, we would receive the difference between the index price per unit and the contracted swap fixed price. If the index price were higher than the swap fixed price, we would pay the difference.

Please see Note 13—Derivative Financial Instruments in Part 1, Item 1 of this Quarterly Report on Form 10-Q for additional information regarding our natural gas derivative transactions.

### Geographic Concentration

We primarily sell potash into the regions that include agricultural areas west of the Mississippi River, oil and gas exploration areas in the Rocky Mountains and the Permian Basin, and feedlots in Texas and other southwestern and western states. Our potash mines and many of our customers are concentrated in the western United States and are, therefore, affected by weather and other conditions in this region.

### Interest Rate Fluctuations

Our senior credit facility requires us to fix a portion of our interest rate exposure through the use of derivatives when we have long-term debt outstanding. Although we currently have no long-term debt outstanding, we have left in place certain derivative contracts that were entered into at a time when we did have long-term debt outstanding. The weighted average notional amount outstanding as of September 30, 2009, and the weighted average 3-month LIBOR rate locked-in via these derivatives through December 2012 were $30.5 million and 5.15 percent, respectively.

### Foreign Currency Exchange Rates

We typically have low balances of accounts receivable denominated in Canadian dollars, and, as a result, we have minimal direct foreign exchange risk. There is an indirect foreign exchange risk as described below.

The United States imports the majority of its potash from Canada and Russia. If the Canadian dollar and the Russian ruble strengthen in comparison to the U.S. dollar, foreign suppliers realize a smaller margin as measured in their local currencies unless they increase their nominal U.S. dollar prices. Strengthening of the Canadian dollar and Russian ruble therefore tend to support higher U.S. potash prices as Canadian and Russian potash producers attempt to maintain their margins. However, if the Canadian dollar and Russian ruble weaken in comparison to the U.S. dollar, foreign competitors may choose to lower prices significantly to increase sales volumes while again maintaining margins as measured in their local currencies. A decrease in the net realized sales price of our potash would adversely affect our operating results.

## Controls and procedures

As filed, 2,334 characters.

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit to the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended (the "Exchange Act") is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission's rules and forms, and that information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. As of September 30, 2009, our management evaluated, with the participation of the Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2009.

It should be noted that any system of controls, however well designed and operated, can provide only reasonable assurance regarding management's control objectives. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

Our management, including our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of our "internal control over financial reporting" as defined in Rule 13a-15(f) of the Exchange Act to determine whether any changes in our internal control over financial reporting occurred during the three months ended September 30, 2009, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, there have been no such changes in our internal control over financial reporting that occurred during the three months ended September 30, 2009, that have materially affected, or are likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 7,146 characters.

*You should read this unaudited pro forma consolidated financial information together with the other information contained in this Quarterly Report on Form 10-Q, as well as information contained in Intrepid's Annual Report filed on Form 10-K for the year ended December 31, 2008, and with its unaudited historical financial statements and the notes thereto included elsewhere in this document. This discussion contains forward-looking statements that are subject to known and unknown risks and uncertainties. Actual results and the timing of events may differ significantly from those expressed or implied in such forward-looking statements due to a number of factors, including those set forth in the section entitled "Risk Factors" and elsewhere in this Quarterly Report on Form 10-Q.*

The following unaudited pro forma consolidated statement of operations for the nine months ended September 30, 2008, present the consolidated results of operations of Intrepid and assume that the Formation Transactions (including the initial public offering of Intrepid, or IPO, the transactions under the Exchange Agreement, and the Formation Distribution) and the amendment to the senior credit facility transactions, all of which are discussed in detail in Intrepid's Annual Report on Form 10-K for the year ended December 31, 2008, occurred at the beginning of the period indicated below. The pro forma adjustments are based on available information and upon assumptions that management believes are reasonable in order to reflect, on a pro forma basis, the impact of the historical adjustments listed below and the transaction adjustments listed below on Intrepid's operating results. The pro forma statement of operations does not include the full impact of additional administrative costs associated with being a public company which are estimated to be between $2 and $3 million per year, not including the impact of any stock-based compensation, and does not include the implied interest income accrued on the cash proceeds related to the IPO. The adjustments as set forth below are described in detail in the notes to the unaudited pro forma consolidated statement of operations and principally include the matters set forth below.

The pro forma adjustments result from:

the issuance of shares in connection with the IPO;

the non-vested restricted common stock grants entered into in connection with the completion of the IPO;

the completion of the financing transaction, pursuant to which all the balances outstanding under Mining's credit agreement were repaid on the date of closing on April 25, 2008; and

an income tax provision to account for Intrepid's status as a taxable entity.

The unaudited pro forma consolidated financial information is included for informational purposes only and does not purport to reflect the results of operations or financial position of Intrepid that would have occurred had it operated as a separate, independent company during the period presented. The pro forma presentation for Intrepid, as the successor entity, has been prepared assuming that the IPO and the Formation Transitions including the Exchange Agreement had occurred on January 1, 2008. In addition, the pro forma consolidated financial information should not be relied upon as being indicative of Intrepid's results of operations for this period. The unaudited pro forma consolidated financial information also does not project the results of operations or financial position for any future period or date.

### Pro Forma Consolidated Statement of Operations (Unaudited)

### Nine Months Ended September 30, 2008

### (In thousands, except share and per share amounts)

|  | Intrepid Potash, Inc. April 25, 2008 through September 30, 2008 | Intrepid Mining LLC (Predecessor) Pro Forma Adjusted for the Nine months ended September 30, 2008 January 1, 2008 through April 24, 2008 | Pro Forma Adjustments |  |
| --- | ---: | ---: | ---: | ---: |
| **Sales** | $226,420 | $109,420 | $— | $335,840 |
| Less: |  |  |  |  |
| Freight costs | 8,591 | 12,359 | — | 20,950 |
| Warehousing and handling costs | 3,216 | 2,235 | — | 5,451 |
| Cost of goods sold | 77,084 | 48,647 | 546 (1) | 126,277 |
| **Gross Margin** | 137,529 | 46,179 | (546) | 183,162 |
| Selling and administrative | 14,708 | 6,034 | 2,973 (1) | 23,715 |
| Accretion of asset retirement obligation | 299 | 198 | — | 497 |
| Other | 936 | 5 | — | 941 |
| **Operating Income** | 121,586 | 39,942 | (3,519) | 158,009 |
| **Other Income (Expense)** |  |  |  |  |
| Interest expense, including derivatives | (457) | (2,456) | 2,038 (2) | (875) |
| Interest income | 664 | 23 | — | 687 |
| Insurance settlements in excess of |  |  |  |  |
| property losses | (33) | 6,998 | — | 6,965 |
| Other expense | (612) | (14) | — | (626) |
| **Income Before Income Taxes** | 121,148 | 44,493 | (1,481) | 164,160 |
| **Income Tax (Expense) Benefit** | (45,665) | 4 | (17,050 )(3) | (62,711) |
| **Net Income** | $75,483 | $44,497 | $(18,531) | $101,449 |
| Weighted Average Shares Outstanding: |  |  |  |  |
| Basic | 74,843,124 |  | — (4) | 74,843,124 |
| Diluted | 74,991,166 |  | 54,949 (4) | 75,046,115 |
| Earnings Per Share: |  |  |  |  |
| Basic | $1.01 |  |  | $1.36 |
| Diluted | $1.01 |  |  | $1.35 |

34

### Notes to the Pro Forma Consolidated Statement of Operations:

(1)

In conjunction with the closing of the IPO, Intrepid issued 472,018 shares of non-vested restricted common stock awards. The non-vested restricted common stock awards vest over variable periods. The following adjustments reflect the incremental stock compensation expense that would have been recorded to cost of sales and selling and administrative expense for the period presented assuming the transaction closed as of January 1, 2008 (in thousands):

|  | Cost of goods sold | Selling and administrative |
| --- | ---: | ---: |
| Nine months ended September 30, 2008 | $546 | $2,973 |

(2)

Upon closing of the IPO, all of the balances outstanding under Intrepid's senior credit facility were repaid. The amounts repaid were comprised of $18.9 million plus fees and accrued interest by Mining, from the amounts Mining received under the Exchange Agreement; and $86.9 million plus fees and accrued interest by Intrepid, using net proceeds from the IPO. As a result, $2.0 million was the adjustment related to the elimination of interest expense associated with any outstanding balances for the period presented assuming the transaction closed as of January 1, 2008.

(3)

Represents the adjustment necessary for the period to record estimated federal and state income taxes on the income of the predecessor entity had Mining been a taxable entity during the period. The assumed tax rate is the statutory tax rate of 39.6 percent, not adjusted for any permanent differences.

(4)

The weighted average share count adjustment was based on evaluation of the pro forma basic and diluted share amounts assuming the shares issued at the IPO and the non-vested restricted common stock awards were issued on January 1, 2008. The treasury stock method was applied to the diluted weighted share calculation for the period.

Filed Nov 6, 2009.
Source: SEC EDGAR, the filing index for accession 0001047469-09-009743. Last ingested by Listed: Nov 4, 2026, 14:52 ET. No prices; not investment advice.