# Intrepid Potash, Inc.: Form 10-Q for the period ended Jun 30, 2010

- Company: [Intrepid Potash, Inc.](/companies/ipi.md) (CIK 1421461)
- Form: 10-Q
- Filed: 2010-08-05
- Accepted by EDGAR: Aug 5, 2010, 15:16 ET
- Period: 2010-06-30
- Accession: 0001047469-10-007056
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1421461/000104746910007056/a2199591z10-q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1421461/000104746910007056/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2010-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Gross profit | 3 months, 2010-04-01 to 2010-06-30 | $14.7m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2010-01-01 to 2010-06-30 | $41.6m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2010-04-01 to 2010-06-30 | $8.0m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2010-01-01 to 2010-06-30 | $14.6m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2010-04-01 to 2010-06-30 | $6.3m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2010-01-01 to 2010-06-30 | $26.2m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2010-04-01 to 2010-06-30 | $2.5m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2010-01-01 to 2010-06-30 | $10.2m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2010-04-01 to 2010-06-30 | $3.6m | us-gaap:ProfitLoss |
| Net income | 6 months, 2010-01-01 to 2010-06-30 | $15.4m | us-gaap:ProfitLoss |
| Diluted EPS | 3 months, 2010-04-01 to 2010-06-30 | $0.05 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2010-01-01 to 2010-06-30 | $0.21 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2010-04-01 to 2010-06-30 | $0.05 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2010-01-01 to 2010-06-30 | $0.21 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2010-04-01 to 2010-06-30 | 75,125,620 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2010-01-01 to 2010-06-30 | 75,128,691 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2010-01-01 to 2010-06-30 | $67.9m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2010-01-01 to 2010-06-30 | $37.7m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2010-06-30 | $98.0m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2010-06-30 | $190.9m | us-gaap:AssetsCurrent |
| Total assets | at 2010-06-30 | $781.2m | us-gaap:Assets |
| Current liabilities | at 2010-06-30 | $30.8m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2010-06-30 | $55.1m | us-gaap:Liabilities |
| Shareholders' equity | at 2010-06-30 | $726.1m | us-gaap:StockholdersEquityIncludingPortionAttributableToNoncontrollingInterest |

## Management's discussion and analysis

As filed, 82,241 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; the ability to hire and retain qualified employees; changes in demand and/or production of potash or Trio™/langbeinite; 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 Solar Solution Mine and the further development of our langbeinite recovery assets; changes in the prices of our raw materials, including, but not limited to, the price of chemicals, natural gas and power; 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, and the enforcement of such 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; disruptions in credit markets; our ability to secure additional federal and state potash leases to expand our existing mining operations; 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, 2009, and elsewhere in this Quarterly Report on Form 10-Q.*

*Unless expressly stated otherwise or the context otherwise requires, the terms "we," "our," "us," and "Intrepid" refer to Intrepid Potash, Inc. and its subsidiaries. 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 1,000 kilograms or 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 that is produced from langbeinite ore and which we will generally describe as langbeinite when we refer to production and as Trio™ or Intrepid Trio® when we refer to sales. Our revenues are generated exclusively from the sale of potash and Trio™. Potassium is one of the three primary nutrients essential to plant formation and growth. Since 2005, we have supplied, on average, approximately 1.6 percent of annual world potassium consumption and 9.8 percent of annual U.S. consumption. 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 sulfur and 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 a current estimated productive capacity to produce 910,000 tons of potash and 210,000 tons of langbeinite annually. We own two development assets in New Mexico—the HB Solar Solution 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.

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

### Our Products and Markets

#### Potash

The majority of our revenues and gross margin are derived from the production and sales of potash. The percentages of our net sales, which we calculate as gross sales less freight costs, and gross margins derived from potash sales were approximately as follows for the indicated periods.

| 2010 | Contribution from Potash Sales Net Sales | Gross Margin |
| --- | ---: | ---: |
| For the three months ended June 30, 2010 | 83% | 99% |
| For the six months ended June 30, 2010 | 86% | 97% |
| 2009 |  |  |
| For the three months ended June 30, 2009 | 78% | 84% |
| For the six months ended June 30, 2009 | 82% | 87% |

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 wells, 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 drilling areas in the Rocky Mountains and the Permian Basin. We also have domestic sales in 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.

An unprecedented decline in the agricultural demand for potash began in the fall of 2008 and persisted through much of 2009. The demand for fertilizer, however, began a recovery late in 2009. This recovery was driven by several factors. Agricultural commodity prices stabilized at economically beneficial prices for farmers, and potash price negotiations between potash producers and large international buyers in China and India were concluded for standard potash, which provided some actual pricing points as a reference for other buyers and sellers in the potash industry. We also believe farmers became concerned about the risk of yield losses resulting from large cuts in fertilizer applications during the prior two growing seasons. Our sales into the agricultural sector during 2010 thus far have been more in line with historical sales levels, with strong sales during the spring fertilizer application season followed by a typical lull during the summer growing season. We expect the fall fertilizer application season to be consistent with historical fall application levels.

In the first quarter of 2010, sales volumes of potash were higher than any quarter in the last two years as dealers and retailers prepared for the spring application season. Second quarter sales contracted, as is typical after a strong spring fertilizer application season, as dealers waited to start replenishing inventories for the fall season in order to see how pricing developed. Dealers generally decided to avoid carrying inventory during the summer until summer price incentive programs went into effect in early July. As a result, during July we have seen an increase in sales orders in anticipation of the fall fertilizer application which reinforces our view that we are currently in a more historically normal agricultural seasonal sales pattern. Often, after the spring fertilizer application season and before fertilizer product is needed for the fall, producers offer their customers discounts or lower pricing to incentivize purchasing during the summer growing season. This practice occurred again this year, resulting in an uptick in demand beginning early in the third quarter. Historically, these lower summer price incentive programs have been offered by producers only for a limited time in order to correspond with the beginning of the fall fertilizer season.

Over the long-term, we believe that domestic apparent consumption of fertilizers will return to historical averages as the replacement of potassium in the soils is critical to continued high-yield agricultural production. This view is supported by data generated by Fertecon Limited, a fertilizer industry consultant, showing that over the past 25 years the domestic apparent consumption for potash has averaged approximately 9.2 million tons with annual volatility of approximately 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.

We realized a $22 per ton increase in our average net realized sales price for potash in the second quarter of 2010 compared to the first quarter of 2010. The average net realized sales prices are calculated by subtracting freight costs from gross sales revenue and then dividing this result by the number of tons sold. However, as a result of the summer price incentive programs instituted by some of our competitors and our intention to compete at those price levels in certain geographic areas, we expect that we will realize a decrease in our average net realized sales price in the third quarter, as compared to the second quarter of this year, of approximately $35 per ton. Our belief is that the agricultural market has returned to a more historically normal sales cycle, and, as a result, we will market our product to continue to strive to achieve a higher average net realized sales price than our Canadian competitors, as reflected in the average $74 per ton advantage we achieved in the second quarter of 2010.

Industrial demand for our standard-sized potash increased, as we sold 43 percent more in sales volumes into this market in the second quarter of 2010 compared to a year ago, yet demand remains below the levels experienced during 2007 and 2008, due to continued lower levels of oil and especially gas drilling in the markets we serve. In addition, some drillers have switched to alternatives to standard potash or have attempted to forego the use of potash altogether in drilling and completing their wells in an effort to reduce costs. We believe that potash is the most effective clay inhibitor available, and we are promoting potash as the drilling fluid additive of choice in our traditional industrial markets and working with our key customers to find ways to stimulate demand. The market for the industrial standard potash used in fracture fluids is somewhat regional, and we have experienced differences in demand for our product with respect to the markets served by our Carlsbad operations and our Utah operations. Our Carlsbad operations, which predominately serve Texas, Oklahoma, Louisiana, and New Mexico, have experienced higher sales in comparison to the level of sales of standard potash from our Utah operations. The relatively lower natural gas prices in the Rocky Mountain region, together with a decreased level of permitting for oil and gas wells in the Colorado, Utah, and Wyoming areas, have resulted in a significantly lower level of sales of standard-sized potash than we have seen historically, and an accumulation of standard-sized potash inventory has occurred at our Utah facilities.

We expect that industrial demand for our standard product will correlate over the long-term with oil and gas pricing, drilling, and well completion activity. Through industry publications, we monitor the oil and gas drilling rig count in the United States as an indicator of drilling activity. In order to address the accumulation of standard-sized inventory at our Utah operations, we are taking steps to ensure we can convert more of our standard product to granular product, for sale into the agricultural market, by running our compactor in Moab seven days a week through the summer evaporation season. The compaction process takes standard-sized potash product and, through the use of heat and pressure, granulates it to produce what is commonly referred to as granular-sized potash product. We are also proceeding with the installation of the new Moab compaction facility that will be able to granulate all of our annual potash production at Moab in order to ensure our production mix can be modified, as needed, to meet demand in the agricultural, industrial, and feed markets that we serve. We expect the new Moab compaction facility to be operational in early 2011.

The tons of product sold to our feed markets remained steady during the second quarter of 2010, although its percentage of our overall sales mix changed when compared to the same period in 2009. This was driven, not by a decrease in feed sales, but rather by a stronger overall sales market for potash. The percentages of our potash sales volumes for each of the markets we serve were approximately as follows for the indicated periods:

| 2010 | Agricultural | Industrial | Feed |
| --- | ---: | ---: | ---: |
| For the three months ended June 30, 2010 | 72% | 18% | 10% |
| For the six months ended June 30, 2010 | 81% | 12% | 7% |
| 2009 |  |  |  |
| For the three months ended June 30, 2009 | 63% | 20% | 17% |
| For the six months ended June 30, 2009 | 62% | 21% | 17% |

#### Trio™

We began producing and selling langbeinite in late 2005 and have been marketing it as Trio™ since 2007. We have approved a capital project to expand our production to meet increasing demand, particularly for the granular-sized Trio™ 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™ internationally through an exclusive marketing agreement with PCS Sales (USA), Inc. for sales outside the United States and Canada and via a non-exclusive agreement for sales into Mexico. Increasing the 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 international sales volumes from period to period when compared to our domestic sales. Sales of our granular-sized Trio™ product continued to be solid during the second quarter of 2010 as we sold through our available inventory. In early May 2010, the Board of Directors approved a capital project to expand our production of langbeinite to meet increasing demand, particularly for the granular-sized Trio™ product. This capital project is designed to increase our recoveries of langbeinite from approximately 35 percent to approximately 50 percent, while, at the same time, reducing process water usage and providing us the flexibility to produce a smoother premium granulated, or prilled, product, thereby allowing us to sell all of our production into the granular market.

Demand for granular Trio™ continues to be robust, and we expect Trio™ sales demand will exceed our production for the next few quarters, resulting in the need to sell our granular product on an allocated basis. Part of the reason that we need to allocate tonnage to our Trio™ customers is that during July 2010, we shut down our langbeinite plant at our East facility for a total of 14 days due to unusually heavy rainfall. The Carlsbad, New Mexico region received approximately nine inches of rain during late June and July 2010. For perspective, average total precipitation in Carlsbad is approximately 14 inches per year, and the recent rains put Carlsbad on track to have one of the five wettest years on record since 1912. This aberrant weather in Carlsbad highlights the importance of our Langbeinite Recovery Improvement Project, which is designed to reduce our freshwater usage in the production of langbeinite, thereby reducing the risk of impacts from significant or unusual weather events like those just experienced. The recent weather event caused us to curtail langbeinite production so that we could reduce our water consumption, maintain the brine storage capacity of our tailings ponds, and preserve some additional pond storage capacity for future rainfall. Langbeinite production did resume during portions of July. We are currently operating at the East facility, yet we will be subject to the impact of any significant precipitation levels until the new plant is operational. In the interim, we have committed additional resources to the already ongoing construction of increased storm water management capacity and are making improvements in storm water controls to minimize weather exposure until the benefits of the Langbeinite Recovery Improvement Project are realized.

Our Trio™ product is marketed domestically and internationally. In contrast, virtually all of our potash is sold in the United States. The mix of our U.S. and export Trio™ sales volumes has changed as domestic demand has remained strong for granular-sized Trio™ product, while the export market for our standard-sized Trio™ product has lagged the strong results experienced in 2007 and 2008. As the export market for granular Trio™ has been strengthening, we have elected only to take selected opportunities of these sales as domestic product sales of granular Trio™ yield a higher average net realized sales price. International standard Trio™ customers are slowly converting to granular customers as the technology for spreading fertilizer develops internationally. While we did have some significant export sales of standard Trio™ during the second quarter of 2010, we expect that future growth in Trio™ demand will be primarily for granular-sized product. During the six months ended June 30, 2010, 17 percent of our gross sales dollars were related to Trio™, and, of that 17 percent, 27 percent were export sales, resulting in less than five percent of our overall gross sales being sold outside the United States. 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 2010 | United States | Export |
| --- | ---: | ---: |
| For the three months ended June 30, 2010 | 55% | 45% |
| For the six months ended June 30, 2010 | 70% | 30% |
| 2009 |  |  |
| For the three months ended June 30, 2009 | 75% | 25% |
| For the six months ended June 30, 2009 | 68% | 32% |

### 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 sales 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 that gross sales provide a representative measurement of our performance in the market due to variations caused by ongoing changes in the proportion of customers paying for their own freight, in the geographic distribution of our products, and in freight rates. We view net sales, which are gross sales less freight costs, as the key performance indicator as it conveys the sales price of the product that we realize.

During the second quarter of 2010, we began to accumulate a modest amount of granular potash inventory in anticipation of the upcoming fall fertilizer application season. In addition to the rail orders that were generated in July, our commitment to supply our consignment warehouse customers and ongoing truck demand will come close to depleting existing granular inventories and production through the end of the third quarter. We are compacting product at full capacity at all of our facilities to prepare for the fall season. The volumes of product we sell are determined by demand for our products and by our production capabilities. We manage our production levels, as needed, in response to market demand with a view toward managing inventory levels in the near term while ensuring that our balance sheet remains strong. At the current time, we are working to produce at maximum rates relative to staffing levels, mining rates, and plant capacities, while also balancing the needs for scheduled downtime for larger maintenance turnaround projects. Our profitability is directly linked to the sales price of our product, our production rates, and, to a lesser extent, the price of natural gas and other commodities used in the production of potash that affect our variable costs. Our current operating strategy is to participate in the potash sales markets at market-based prices and to ramp-up production to full productive capacity levels, which, in turn, is intended to lower our per ton costs and improve our gross margins. Because of the location of our assets and the regional markets we serve, we see different market prices throughout the United States and actively manage our sales to take advantage of the pricing available in different regions.

To some degree, we consider international prices in determining the prices at which we sell our products. Generally, we have benefited from the weakening U.S. dollar in prior periods. 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 average 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 pricing established by the Canadian producers and other large world producers, 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. The $30 per ton price increase that we implemented during the first quarter resulted in an increase in our average net realized sales price from the first quarter to the second quarter of 2010. As previously mentioned, we expect our average net realized sales price to decrease in the third quarter as a result of the summer price incentive programs instituted by some of our competitors and our intention to compete at these lower prices in certain geographic areas. Relative to a year ago, the outlook for pricing appears to be less volatile at this time, as our most significant domestic competitors have publicly announced that their summer price incentive programs will end approximately October 1, 2010, and prices will likely return to levels near those experienced this past spring. The table below demonstrates the progression of our average net realized sales price for potash and Trio™ in 2009 and 2010.

| Average net realized sales price for the three months ended: | Potash (Per ton) | Trio™ |
| --- | ---: | ---: |
| June 30, 2010 | $376 | $162 |
| March 31, 2010 | $354 | $167 |
| December 31, 2009 | $408 | $190 |
| September 30, 2009 | $458 | $246 |
| June 30, 2009 | $674 | $338 |
| March 31, 2009 | $727 | $330 |

32

#### Cost Associated with Abnormal Production

We periodically evaluate our production levels and costs to determine if any such items should be deemed abnormal under authoritative accounting principles generally accepted in the United States ("GAAP") with respect to inventory costing. In the first quarter of 2010, we determined that approximately $0.5 million of production costs would have been allocated to additional tons produced, assuming Intrepid had been operating at normal production rates. There was no such adjustment made in the second quarter of 2010 as we believe we were producing within our normal ranges of production. When such adjustments are recorded, the result is an acceleration of the recognition of this expense and the exclusion of these costs from the accumulated inventory costs and the resulting cost of sales elements. The assessment of normal production levels requires significant management estimates 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. The staffing programs at our Carlsbad mines have allowed us to produce ore at levels that we consider within a normal range. We continue to produce below capacity at our Wendover facility; however, we are doing so in response to what we believe is lower sustained demand for standard potash. Therefore, we have adjusted our assessment of normal production for the Wendover facility at the current time. We are working on options to move standard tons into other markets and grow the existing market, but, until we identify those opportunities, we consider operation of the Wendover facility below its productive capacity in order to control inventory levels as a normal response to this market. We also recognize that our Wendover facility will therefore have a higher per-unit cost of production. In addition, the Moab Compaction Project we have begun will allow us to shift more standard sales to Wendover, but, until that project is completed or we develop a market for more standard sales, we anticipate lower operating rates and, as a result, higher costs at our Wendover facility.

#### Cost of Goods Sold

Our cost of goods sold reflects the transfer, from inventory, of the accumulated costs to produce our potash and langbeinite products, less credits generated from the sale of our by-products. Many of our production costs are largely fixed, and, consequently, our costs of sales per ton move inversely with the number of tons we produce, within the context of normal production levels. 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. There are elements of our cost structure associated with contract labor, consumable operating supplies, and chemicals that are variable, which make up approximately 20 percent of our cost base. Our periodic production costs and costs of goods sold will not necessarily match one another from period to period based on the fluctuation of inventory levels. Inventory levels are a function of previous period ending inventories, production rates, and sales levels. In 2010, we have seen an increase in both our overall production costs and our cost of goods sold compared to 2009. Production-related costs increased during the quarter ended June 30, 2010, compared to the same period in 2009, resulting primarily from increased production volumes. Increased production volumes resulted in higher labor costs, maintenance spending, natural gas costs and chemicals. The increase in cost of goods sold is a reflection of the increase in sales volumes in 2010, compared to 2009, as well as the resulting lower inventory levels in 2010, when compared to 2009.

Our production costs per ton are also impacted when our production levels change, such as for annual maintenance turnarounds, mine development, or voluntary shutdowns to manage inventory levels. Our labor and contract labor costs in Carlsbad may continue to be influenced by the demand for labor in the local potash, oil and gas, and nuclear waste storage industries.

Excluding the effects of the direct expensing of costs associated with abnormally low production rates in the second quarter of 2009, our potash cost of goods sold per ton increased in the second quarter of 2010 relative to the second quarter of 2009. Our potash cost of goods sold per ton, net of $11 per ton of by-product credits, was $206 per ton in the quarter ended June 30, 2010, exclusive of depreciation, depletion, amortization and royalties, compared to $188 per ton, net of $20 per ton of by-product credits, in the same quarter of 2009 and $199 per ton, net of $8 per ton of by-product credits, in the first quarter of 2010. Our higher cost of goods sold per ton during the second quarter of 2010 resulted primarily from higher per ton operating costs from our East surface facility in Carlsbad, New Mexico. While the underground mining operations have been operating as expected and delivering the tons to the mill, the cost side of our East surface facility was a challenge in the second quarter with higher than planned maintenance costs, chemical costs and lower energy efficiency, which drives our utility costs. As we actively rebuild the East surface plant, construct and improve its facilities, make staffing changes, develop new maintenance systems, commission new equipment and, in general, undertake the hard work of refurbishing and modernizing this asset, we may experience a few additional operational challenges at our East surface plant. Also contributing to the higher per ton costs for potash was the reduced operating rate at our Wendover facility, driven by the overall decreased demand profile for standard-sized potash.

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. For the three and six months ended June 30, 2010, our royalty rates were 3.9 percent and 3.8 percent, respectively. For the three and six months ended June 30, 2009, our royalty rate was 3.7 percent in both periods. We expect that future average rates will be relatively consistent with these rates.

#### Income Taxes

Intrepid is a subchapter C corporation and, therefore, is subject to federal and state income taxes on its taxable income. For the three and six month periods ending June 30, 2010, our effective income tax rates were 40.9 percent and 39.7 percent, respectively. For the three and six month periods ending June 30, 2009, our effective income tax rates were 47.4 percent and 41.9 percent, respectively. Our effective tax rate is impacted primarily by the amount of taxable income associated with each state jurisdiction in which our income is subject to tax, permanent differences between the financial statement carrying amounts and tax bases of assets and liabilities, and the benefit associated with the estimated effect of the domestic production activities deduction.

For the three and six months ended June 30, 2010, our total tax expense was $2.5 million and $10.2 million, respectively. Total tax expense for the quarter ended June 30, 2010, was comprised of $0.1 million of current income tax benefit and $2.6 million of deferred income tax expense. There was $3.0 million of current income tax expense and $7.2 million of deferred income tax expense for the six months ended June 30, 2010. For the three and six months ended June 30, 2009, our total tax expense was $13.0 million and $28.2 million, respectively. For these periods, total tax expense was comprised of $1.7 million and $10.2 million, respectively, of current income tax expense and $11.3 million and $18.0 million, respectively, of deferred income tax expense.

### Operating Highlights

### Three Months Ended June 30, 2010, and 2009

Even with higher sales volumes during the second quarter of 2010 compared to the second quarter of 2009, income before income taxes was lower at $6.1 million for the three months ended June 30, 2010, compared to $27.5 million for the same period in 2009. The decrease in the comparable periods principally followed from a lower average net realized sales price per ton of both potash and Trio™ driven by competitive market pricing, as described previously. We sold 129,000 and 63,000 tons of potash and Trio™ in the three months ended June 30, 2010, as compared to 80,000 and 45,000 tons in the same period of 2009. The increase in sales volumes resulted from the continuation of the same factors that contributed to higher sales in the first quarter, including more historically normal demand from farmers because of improved economic and weather conditions, the decline in potash prices from their high point in 2009, and the need to replace the nutrients depleted by crops in 2008 and 2009 after lower potash fertilizer application rates in those periods. Industrial-grade potash sales volumes in the second quarter of 2010 also increased by approximately 43 percent from sales volumes in the second quarter of 2009, which were at a very low level. The vast majority of this increase was from standard sales from our Carlsbad East facility. The Trio™ sales volume increase was driven largely by some large export orders in the second quarter of 2010 and increased domestic sales.

Our production volume of potash in the second quarter of 2010 was 165,000 tons, or 34,000 tons more than in the second quarter of 2009. Our production was lower in 2009 primarily due to actions we took to slow production in order to more closely align our supply with market demand and to manage our inventory. As demand increased through the fourth quarter of 2009 and into 2010, we have increased production and believe that we will be at full production levels in Moab and at all Carlsbad facilities in the fourth quarter of 2010.

Our average net realized sales price of potash was $376 per ton ($414 per metric ton) in the three months ended June 30, 2010, as compared to $674 per ton in the three months ended June 30, 2009. The decrease in our average net realized sales price was the result of price reductions across our industry, including those by our international competitors following their settlements of new contracts at lower prices with large importing countries, such as China, India and Brazil. Of note, however, is that our second quarter 2010 average net realized sales price increased relative to our first quarter 2010 average net realized sales price, due in large part to a price increase that went into effect during March 2010. We anticipate that the lower pricing instituted by our competitors in the form of summer price incentive programs designed to incentivize movement of product in the summer, and our intention to compete in certain geographic markets at these lower prices, will result in a decrease in our average net realized sales price in the third quarter of 2010 compared to the second quarter of 2010. Excluding costs associated with abnormal production in 2009, our average potash gross margin as a percentage of net sales was 30 percent for the three months ended June 30, 2010, as compared to 63 percent in the three months ended June 30, 2009.

In the second quarter of 2010, our potash cost of goods sold was $206 per ton, net of by-product credits. This compares to cost of goods sold for potash in the second quarter of 2009 of $188 per ton, net of by-product credits and excluding costs associated with abnormal production. This increase was primarily attributable to higher maintenance spending, natural gas costs and disruptions in production at our East facility, as described previously.

Our cost of goods sold for Trio™ decreased $25 per ton in the second quarter of 2010 relative to the second quarter of 2009. The lower per ton cost in 2010 resulted primarily from a lower average carrying cost of inventory in 2010 as a result of higher production rates during the first half of 2010 relative to 2009.

### 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. Average net realized sales prices below are derived from the elements in the table presented below.

| Production volume (in thousands of tons): | Three months ended June 30, 2010 | June 30, 2009 | Change between Periods | % Change |
| --- | ---: | ---: | ---: | ---: |
| Potash | 165 | 131 | 34 | 26% |
| Langbeinite | 39 | 45 | (6) | (13)% |
| Sales volume (in thousands of tons): |  |  |  |  |
| Potash | 129 | 80 | 49 | 61% |
| Trio™ | 63 | 45 | 18 | 40% |
| Gross sales (in thousands): |  |  |  |  |
| Potash | $50,900 | $56,052 | $(5,152) | (9)% |
| Trio™ | 13,418 | 17,340 | (3,922) | (23)% |
| Total | 64,318 | 73,392 | (9,074) | (12)% |
| Freight costs (in thousands): |  |  |  |  |
| Potash | 2,334 | 2,034 | 300 | 15% |
| Trio™ | 3,239 | 2,088 | 1,151 | 55% |
| Total | 5,573 | 4,122 | 1,451 | 35% |
| Net sales (in thousands): |  |  |  |  |
| Potash | 48,566 | 54,018 | (5,452) | (10)% |
| Trio™ | 10,179 | 15,252 | (5,073) | (33)% |
| Total | $58,745 | $69,270 | $(10,525) | (15)% |
| Potash statistics (per ton): |  |  |  |  |
| Average net realized sales price | $376 | $674 | $(298) | (44)% |
| Cost of goods sold, net of by-product credits\* (exclusive of items shown separately below) | 206 | 188 | 18 | 10% |
| Depreciation, depletion and amortization | 29 | 20 | 9 | 45% |
| Royalties | 14 | 22 | (8) | (36)% |
| Total potash cost of goods sold | 249 | 230 | 19 | 8% |
| Warehousing and handling costs | 13 | 18 | (5) | (28)% |
| Average potash gross margin (exclusive of costs associated with abnormal production) | $114 | $426 | $(312) | (73)% |
| Trio™ statistics (per ton): |  |  |  |  |
| Average net realized sales price | $162 | $338 | $(176) | (52)% |
| Cost of goods sold (exclusive of items shown separately below) | 125 | 150 | (25) | (17)% |
| Depreciation, depletion and amortization | 16 | 14 | 2 | 14% |
| Royalties | 8 | 17 | (9) | (53)% |
| Total Trio™ cost of goods sold | 149 | 181 | (32) | (18)% |
| Warehousing and handling costs | 10 | 15 | (5) | (33)% |
| Average Trio™ gross margin (exclusive of costs associated with abnormal production) | $3 | $142 | $(139) | (98)% |

On a per ton basis, by-product credits were $11 and $20 for the three month period ended June 30, 2010, and 2009, respectively. By-product credits were $1.4 million and $1.6 million for the three month period ended June 30, 2010, and 2009, respectively. Costs associated with abnormal production were zero and $5.2 million for the three month period ended June 30, 2010, and 2009, respectively.

### Six Months Ended June 30, 2010, and 2009

Income before income taxes for the six months ended June 30, 2010, and 2009, was $25.6 million and $67.3 million, respectively. The decrease in the comparable periods again followed from a lower average net realized sales price per ton of both potash and Trio™. We sold 372,000 and 132,000 tons of potash and Trio™ in the six months ended June 30, 2010, as compared to 179,000 and 83,000 tons in the same period of 2009. The 108 percent increase in potash sales volumes resulted primarily from the surge in sales during the first quarter of 2010 that has continued, although at a slower rate, into the second quarter of 2010. Continued demand from farmers related to the need to replace the nutrients depleted by crops in 2008 and 2009 because of lower potash fertilizer application rates in those periods, in conjunction with less volatile pricing, has been the impetus behind demand. Industrial-grade potash sales volumes in the six months ended June 30, 2010, however, were relatively comparable to the same period in 2009. The 59 percent increase in Trio™ sales volumes was driven largely by a continued increase in domestic sales combined with a relative recovery in export demand, especially for granular product.

Our production volume of potash in the six months ended June 30, 2010, was 337,000 tons, or 69,000 tons more than in the first six months of 2009. Our production was primarily lower in 2009 due to actions we took to slow production in order to more closely align our supply with market demand and to manage our inventory. As demand increased through the fourth quarter of 2009 and into 2010, we have increased production levels.

Our average net realized sales price of potash was $361 per ton ($398 per metric ton) in the six months ended June 30, 2010, as compared to $703 per ton in the six months ended June 30, 2009. The decrease in our average net realized sales price was the result of price reductions across our industry, including those by our international competitors following their settlements of new contracts at lower prices with large importing countries, such as China, India and Brazil. Given the significant changes in market demand during 2009, average prices have declined from the peak quarterly average of $762 per ton in the fourth quarter of 2008. 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 demand for potash should continue to increase in the future. Excluding costs associated with abnormal production, our average potash gross margin as a percentage of net sales was reduced to 31 percent for the six months ended June 30, 2010, as compared to 61 percent in the six months ended June 30, 2009, and was largely attributable to the lower average net realized sales price.

In the first six months of 2010, we directly expensed $0.5 million of costs related to abnormal production, and our potash cost of goods sold was $201 per ton, net of by-product credits. This compares to cost of goods sold for potash in the first six months of 2009 of $215 per ton, net of by-product credits, and the expensing of $6.2 million of costs related to abnormal production.

Our cost of goods sold for Trio™ decreased $25 per ton in the first six months of 2010 relative to the first six months of 2009, as we produced and sold more tons in the first six months of 2010 relative to the same period in 2009. Therefore, costs were spread over more tons in 2010, lowering the costs of goods sold per ton for Trio™.

### 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. Average net realized sales prices below are derived from the elements in the table presented below.

| Production volume (in thousands of tons): | Six months ended June 30, 2010 | June 30, 2009 | Change between Periods | % Change |
| --- | ---: | ---: | ---: | ---: |
| Potash | 337 | 268 | 69 | 26% |
| Langbeinite | 96 | 87 | 9 | 10% |
| Sales volume (in thousands of tons): |  |  |  |  |
| Potash | 372 | 179 | 193 | 108% |
| Trio™ | 132 | 83 | 49 | 59% |
| Gross sales (in thousands): |  |  |  |  |
| Potash | $142,275 | $130,081 | $12,194 | 9% |
| Trio™ | 29,402 | 32,212 | (2,810) | (9)% |
| Total | 171,677 | 162,293 | 9,384 | 6% |
| Freight costs (in thousands): |  |  |  |  |
| Potash | 7,714 | 4,399 | 3,315 | 75% |
| Trio™ | 7,625 | 4,430 | 3,195 | 72% |
| Total | 15,339 | 8,829 | 6,510 | 74% |
| Net sales (in thousands): |  |  |  |  |
| Potash | 134,561 | 125,682 | 8,879 | 7% |
| Trio™ | 21,777 | 27,782 | (6,005) | (22)% |
| Total | $156,338 | $153,464 | $2,874 | 2% |
| Potash statistics (per ton): |  |  |  |  |
| Average net realized sales price | $361 | $703 | $(342) | (49)% |
| Cost of goods sold, net of by-product credits\* (exclusive of items shown separately below) | 201 | 215 | (14) | (7)% |
| Depreciation, depletion and amortization | 26 | 19 | 7 | 37% |
| Royalties | 13 | 24 | (11) | (46)% |
| Total potash cost of goods sold | 240 | 258 | (18) | (7)% |
| Warehousing and handling costs | 10 | 14 | (4) | (29)% |
| Average potash gross margin (exclusive of costs associated with abnormal production) | $111 | $431 | $(320) | (74)% |
| Trio™ statistics (per ton): |  |  |  |  |
| Average net realized sales price | $165 | $335 | $(170) | (51)% |
| Cost of goods sold (exclusive of items shown separately below) | 122 | 147 | (25) | (17)% |
| Depreciation, depletion and amortization | 16 | 15 | 1 | 7% |
| Royalties | 8 | 17 | (9) | (53)% |
| Total Trio™ cost of goods sold | 146 | 179 | (33) | (18)% |
| Warehousing and handling costs | 9 | 14 | (5) | (36)% |
| Average Trio™ gross margin (exclusive of costs associated with abnormal production) | $10 | $142 | $(132) | (93)% |

On a per ton basis, by-product credits were $9 and $18 for the six month period ended June 30, 2010, and 2009, respectively. By-product credits were $3.4 million and $3.2 million for the six month period ended

June 30, 2010, and 2009, respectively. Costs associated with abnormal production were $0.5 million and $6.4 million for the six month period ended June 30, 2010, and 2009, respectively.

### Outlook for the Remainder of 2010

The potash market has stabilized markedly compared to the volatility the industry experienced in 2008 and 2009. Spring 2010 fertilizer demand was indicative of the historical market in North America, with farmers applying at rates that were in line with historical rates. Indicatively, the price of corn has recently increased to over $4.00 per bushel for December 2010 delivery, adding confidence that farmers should have the economic resources to replace the nutrients drawn from the soil. Crops in North America were planted earlier than the last two years and growing conditions have been favorable. If these events continue as expected, farmers may experience good income and a wider fall application window, assuming weather cooperates. We expect the remainder of 2010 to be in line with historical norms in the form of higher sales volumes as we approach and enter the fall season. After the fall, we would expect to experience a decline in sales volumes toward the end of the year as winter weather closes the fertilizer application window. Our key agricultural customers understand these cycles as well and, as always, are seeking to maximize their returns by strategically choosing when to replenish their inventories. The price reductions and incentives offered for the summer season by our North American competitors have stimulated demand in the near-term, as customers generally appear to believe that the lowered price represents a competitive price for this summer and upcoming fall, largely because of competitors' public announcements of a $20 per ton price increase due to take effect in October 2010. Many customers are taking delivery of tons at these price levels in preparation for the fall and before any fall season price increases take effect. We expect demand to increase as the fall fertilizer application season approaches.

### Potash Prices

The commodity price for potash has been and will continue to be the most significant driver of profitability for our business. As discussed earlier, prices have contracted from 2008 and 2009 levels, but this trend appears to have abated as pricing has improved relative to the first quarter and remains stable, with normal price discounts for summer price incentive programs in the second quarter that likely carryover into the coming fall season.

Other factors that may impact pricing for the remainder of 2010 include the amount and price at which China will continue buying during 2010, how much current and latent demand will be satiated at current prices, and whether increases in crop prices and other crop nutrients can be sustained. The current uptick in demand has allowed us to sell down our granular inventories to historical levels for this time of year, indicating a strong likelihood that our granular sales for the remainder of 2010 will match, and in some cases exceed, our granular production rates. Summer price incentive programs that went into effect at the beginning of July 2010 stimulated early fill, or inventory replenishment, programs and will also affect our average net realized sales price in the third quarter, as described previously.

### Capital Investment

We operate in a capital-intensive industry that requires consistent capital expenditures to replace assets necessary to sustain safe and reliable production. We believe that, in the long-term, demand for potash will return to, or exceed, historical levels; therefore, we have developed an investment plan at each of our facilities to maintain safe and reliable production, ensure environmental compliance, improve and modernize equipment, and increase productivity and recoveries in order to decrease per ton production costs. This focus on continuing to enhance the operational reliability of our production is particularly directed at our Carlsbad facilities with production efficiency, instrumentation, and debottlenecking 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. In the three and six months ended June 30, 2010, we invested approximately $9.8 million and $28.9 million, respectively, in capital projects. Based on our expected pace of capital expenditures in 2010 and our current sales forecast, we believe we will have adequate cash to execute our capital plans for the remainder of 2010.

At the start of May 2010, our Board of Directors approved the Langbeinite Recovery Improvement Project, which is designed to increase our recoveries of Trio™ from the langbeinite ore. As part of this project, we are investing in a plant to allow us the flexibility to granulate all of our standard-sized product, if market conditions warrant, and have it available for sale into the robust granular market. In addition, this project is designed to reduce our water usage as it relates to our langbeinite production facility and therefore reduce the need to invest additional capital in water management equipment and storage capacity. The final engineering commenced in May 2010. We anticipate construction will begin in the fourth quarter of 2010, and completion and operation of the project are expected by the end of 2011. The total capital investment for this project is expected to be between $85 and $90 million. We are committed to the expansion of our langbeinite production and to increasing our marketing efforts to educate farmers about the agronomic benefits of Trio™.

We continue to prepare for construction of the HB Solar Solution Mine, a project to develop and build a solution mine combined with solar evaporation ponds. Project cost estimates remain in the range of $120 and $130 million, of which $30.7 million has been invested to date. We expect to invest the bulk of this capital after we receive all of the necessary approvals and permits from the state and federal regulatory agencies. In July 2010, a ground water discharge permit for the HB Solar Solution Mine was approved by the New Mexico Environment Department, which represented the achievement of an important regulatory milestone. The Environmental Impact Statement ("EIS") review being undertaken by the Bureau of Land Management ("BLM") is progressing on schedule. We currently anticipate that the EIS process will be completed in the third or fourth quarter of 2011. Once all of the necessary regulatory permits and approvals are obtained, construction will begin promptly and first production should result approximately twelve to eighteen months later, with full production anticipated approximately two years after approvals are obtained and construction begins. We have budgeted $4 million to $8 million for this project in 2010 that will be used for continued permitting activities, engineering, and some advance purchases of materials.

Total revised capital investment in 2010 is estimated to be between $105 and $125 million. A breakdown of our capital investment plan includes approximately $39 to $45 million to replace assets needed to maintain production, $9 to $11 million to improve and modernize equipment, $50 to $60 million to increase productive capacity as described more fully below, and $7 to $9 million to continue the replacement of the East facility warehouse. A portion of the East facility warehouse investment has already been reimbursed, and the remainder we expect to be reimbursed by our insurer. The 2010 capital program will be funded out of cash flow and existing cash on hand.

The following are a few of the projects that are slated for investment and/or completion in 2010 to improve the overall reliability of the operations and increase productive capacity:

We completed the full commissioning of the underground horizontal stacker, storage, and hoisting system in the first quarter of 2010;

We completed the thickener installation and commissioning at the East facility to improve potash recoveries during the second quarter of 2010;

As mentioned previously, our Board of Directors approved the Langbeinite Recovery Improvement Project in May 2010. Of the total capital investment for the project, approximately $4.3 million has been invested to date on engineering work, approximately $25 to $35 million will be invested during the remainder of 2010, and the balance will be invested in 2011.

Variability in the timing of the fabrication of materials for this project could have an impact on the timing of investment in the project in 2010. This project is a high priority due to the expected increase in langbeinite production due to higher recoveries from the same amount of ore throughput from the East facility, which is expected to result in a lower average cash cost structure at the East facility;

Expand compaction capacity through our Moab Compaction Project by installing a new compaction facility that can granulate all of our Moab production. This project will allow us to better adapt to market fluctuations associated with standard and granular potash demand in order to better serve the agricultural market and also to have more production flexibility. The longer lead-time equipment is already on site, and the project is proceeding as planned. The project investment is approximately $16 million, and the Moab compaction facility is scheduled to be operational by early 2011;

Replace the wind-damaged warehouse capacity at the Carlsbad East facility for approximately $7 to $9 million. In addition, new warehouse capacity for approximately $2 to $3 million is planned at Wendover to provide increased operational flexibility;

Continue to improve our distribution control systems and overall monitoring instrumentation at our production facilities. These projects continue to demonstrate their necessity and potential benefits as we experience operational challenges, like those that took place in the second quarter of 2010 at our East facility and described previously; and

Add new equipment, including miners and conveyors, to develop new mine panels at the Carlsbad mines at costs of approximately $7 to $8 million.

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 June 30, 2010, we had cash, cash equivalents, and investments of $136.3 million, we had no debt, and we had availability of $125.0 million under our senior credit facility. Included in cash and cash equivalents were $1.4 million in cash and $96.6 million in cash equivalent investments. The cash equivalents consisted of approximately $10.2 million in money market accounts or certificates of deposit with banking institutions, approximately $30.3 million in U.S. treasuries with daily liquidity, and approximately $56.1 million in U.S. Bank National Association ("U.S. Bank") overnight commercial paper. We had no losses on our cash and cash equivalents during the first six months of 2010, and all cash equivalents are invested with institutions that we believe to be financially sound. Additionally, as of June 30, 2010, we had $17.9 million and $20.4 million, respectively, invested in short-term and long-term certificate of deposit and U.S. government agency bond investments.

Our operations are primarily funded from cash on hand and 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 and investment 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)*

|  | Six months ended June 30, 2010 | June 30, 2009 |
| --- | ---: | ---: |
| Cash Flows from Operating Activities | $67,895 | $51,374 |
| Cash Flows from Investing Activities | $(59,015) | $(47,991) |
| Cash Flows from Financing Activities | $(663) | $(1,283) |

41

### Operating Activities

Total cash provided by operating activities was $67.9 million for the six months ended June 30, 2010, compared to $51.4 million for the six months ended June 30, 2009. The $16.5 million increase in cash provided by operating activities in the first six months of 2010 was due primarily to a decrease in product inventory because of higher sales during the first six months of 2010 compared to 2009 and a decrease in trade accounts receivable because of lower sales in the second quarter of 2010, when compared to the second quarter of 2009. These changes were offset by lower net income and lower non-cash deferred tax expense when comparing the first six months of 2010 to 2009. The lower net income and decreased product inventory are reflective of the continued business conditions in our industry, as producers are selling more products than in the first half of 2009, although at much lower prices. For the six months ended June 30, 2010, inventories decreased $11.3 million relative to an increase of $14.2 million in the same period in 2009, due to increased demand for our products reflected in sales tons after the declines in application rates for much of 2009. The change in trade accounts receivable relative to the same period in 2009 further contributed to the overall increase in cash provided by operating activities, as trade accounts receivable decreased $6.9 million in the first six months of 2010 relative to an increase of $3.8 million in the first six months of 2009.

### Investing Activities

Total cash used in investing activities was $59.0 million for the six months ended June 30, 2010, compared to $48.0 million for the six months ended June 30, 2009. The amount of cash invested in property, plant, and equipment as well as mineral properties and development costs decreased to $38.1 million in the first six months of 2010 from $49.2 million in the first six months of 2009, reflecting the continued monitoring of our capital plan and the ongoing focus on ramping up production levels. As noted previously, our two largest planned capital projects, the HB Solar Solution Mine project and the Langbeinite Recovery Improvement Project, are still in their early stages of development and investment. For the six months ended June 30, 2010, we purchased $23.6 million of investments and received $2.7 million in proceeds from maturing investments.

### 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's $125 million revolving credit facility has a term through March 9, 2012, and the entire amount of the revolving credit facility was available for use as of June 30, 2010.

Our senior credit facility required us to maintain interest rate derivative agreements to fix the interest rate for at least 75 percent of the projected outstanding balance of our term loan, when we had debt outstanding. 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, we have left the interest rate swap agreements in place taking the view that interest rates would rise and that the cost of settling the derivatives would 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 debt repayment. 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 June 30, 2010, are displayed below:

*(In thousands)*

| Termination Date | Notional Amount | Weighted Average Fixed Rate |
| --- | ---: | ---: |
| 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 for these derivatives as of June 30, 2010, and the weighted average 3-month LIBOR rate locked-in via these derivatives are $27.8 million and 5.18 percent. 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 the Notes to 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 the Notes to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2009.

### Contractual Obligations

As of June 30, 2010, we had contractual obligations totaling $70.6 million on an undiscounted basis, as indicated below. Contractual commitments shown are for the full calendar year indicated unless otherwise indicated.

*(In thousands)*

|  | Payments due by period Total | Q3-Q4 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | More than 5 years |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Operating lease obligations(1) | $21,809 | $2,540 | $4,618 | $3,120 | $2,876 | $2,595 | $1,362 | $4,698 |
| Purchase commitments(2) | 1,099 | 1,099 | — | — | — | — | — | — |
| Natural gas purchase commitments(3) | 2,964 | 2,964 | — | — | — | — | — | — |
| Pension obligations(4) | 1,079 | 138 | 157 | 157 | 157 | 157 | 157 | 156 |
| Asset retirement obligation(5) | 32,252 | — | — | — | — | — | — | 32,252 |
| Minimum royalty payments(6) | 11,434 | 229 | 457 | 457 | 457 | 457 | 457 | 8,920 |
| Total | $70,637 | $6,970 | $5,232 | $3,734 | $3,490 | $3,209 | $1,976 | $46,026 |

(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)

We have committed to purchase a minimum quantity of natural gas, 87.5 percent of which is priced at contractually fixed rates and 12.5 percent of which is priced at floating index-dependent rates, the latter being estimated based on forward rates as of July 19, 2010. Amounts are inclusive of estimated transportation costs and sales tax.

(4)

Minimum required 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.

(5)

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 2015. Commitments shown are in today's dollars and are undiscounted.

(6)

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 June 30, 2010, 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 to the Consolidated Financial Statements in this Quarterly Report on Form 10-Q.

### Results of Operations for the Three Months Ended June 30, 2010, and 2009

### Net Sales and Freight Costs

Net sales of potash decreased $5.4 million, or 10 percent, from $54.0 million for the three months ended June 30, 2009, to $48.6 million for the three months ended June 30, 2010; this change being the result of a decrease in the average net realized sales price of $298 per ton, or 44 percent, offset by an increase in sales volume of 61 percent. An increase in the demand for potash and Trio™ resulted in a higher total volume of sales in the second quarter of 2010 compared to 2009 and resulted in the sell-off of inventories, including some higher cost inventory we had built throughout 2009. Our production volume of potash in the three months ended June 30, 2010, was 165,000 tons, or 34,000 tons more than in the second quarter of 2009. Our potash production was more in 2010 than in 2009 principally due to our decision to increase production to satisfy the more robust demand currently being experienced. During the first quarter of 2009, we shut down the West and East production facilities for two weeks each and continued to operate with three operating shifts instead of four shifts at our Carlsbad facilities as part of an effort to reduce production in response to lower demand. Our East production facility returned to normal production levels in the third quarter of 2009, and our West production facility has returned to full staffing in the third quarter of 2010 to enable us to produce closer to our current estimated productive capacity.

Net sales of Trio™ decreased $5.1 million, or 33 percent, from $15.3 million for the three months ended June 30, 2009, to $10.2 million for the three months ended June 30, 2010, due to a 52 percent decrease in the average net realized sales price offset by an 40 percent increase in the volume of sales. Production of langbeinite decreased 13 percent in the second quarter of 2010 compared to the same period in 2009, due primarily to lower recoveries and lower ore grade, which were partially offset by increased mine productivity in terms of higher ore production. Recoveries and ore grade are variable items and will cause production differences from time to time, as they are a normal part of operations.

Freight costs increased $1.5 million, or 35 percent, for the three months ended June 30, 2010, compared to the three months ended June 30, 2009, due primarily to the increase in sales volume as well as increased movement of inventory to distribution warehouses. As usual, the mix of customers paying for their own freight is highly variable and affects the freight costs incurred by Intrepid and our gross sales. Fluctuations in freight costs are not a key indicator of any business trends or our operating performance, as freight costs are largely borne by our customers, either as part of the cost of the product delivered or as arranged directly by the customer.

### Cost of Goods Sold

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

|  | Three months ended June 30, 2010 | June 30, 2009 | Change between Periods | % Change |
| --- | ---: | ---: | ---: | ---: |
| Cost of sales (in millions) | $41.4 | $26.6 | $14.8 | 56% |
| Cost per ton of potash sold(1) | $249 | $230 | $19 | 8% |
| Cost per ton of Trio™ sold(2) | $149 | $181 | $(32) | (18)% |

(1)

Per ton potash costs include $29 and $20 of depreciation expense in the second quarter of 2010 and 2009, respectively.

(2)

Per ton Trio™ costs include $16 and $14 of depreciation expense in the second quarter of 2010 and 2009, respectively.

Total cost of goods sold increased as we sold 61 percent more tons of potash and 40 percent more tons of Trio™, therefore resulting in more total costs being recognized in cost of goods sold. On a unit basis, cost of goods sold per ton of potash increased $19 per ton, or 8 percent, from $230 per ton for the three months ended June 30, 2009, to $249 per ton for the three months ended June 30, 2010. These results are exclusive of approximately $5.0 million of production costs that were not absorbed into inventory in the second quarter of 2009 due to the determination 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. Higher maintenance spending, natural gas costs and costs attributable to disruptions in production at our East facility in the second quarter of 2010 are the primary reasons that cost of sales per ton increased relative to the comparable period in 2009.

Total cost of goods sold of our Trio™ decreased $32 per ton, or 18 percent, from $181 per ton for the three months ended June 30, 2009, to $149 per ton for the three months ended June 30, 2010. A lower percentage of shared costs at our East mine was allocated to langbeinite in the second quarter of 2010 compared to the same period in the prior year, which contributed to the lower per ton costs.

Cost of goods sold increased $14.8 million, or 56 percent, from $26.6 million in the three months ended June 30, 2009, to $41.4 million in the three months ended June 30, 2010. The increase in the total expense was driven by the higher volumes sold and an increase in spending primarily to support higher production and sales volumes, prior to absorption of costs into inventory. Costs that changed materially during the three months ended June 30, 2010, compared to the three months ended June 30, 2009, included increases in labor, maintenance spending, natural gas costs and depreciation.

Labor and contract labor costs increased $4.6 million, or 42 percent, in the second three months of 2010 due to increased labor following managed cut-backs in operating rates and maintenance projects during the second three months of 2009. Natural gas costs increased $1.4 million, or 124 percent, in the three months ended June 30, 2010, due principally to higher market rates for this commodity. Higher market rates drove $1.1 million of the increase, and higher natural gas consumption primarily at our East facility drove $0.3 million of the increase. Other changes in cost of goods sold followed from increased depreciation and chemicals.

### Income Taxes

Income taxes decreased by $10.5 million in the second quarter of 2010 as compared to the same period in 2009. Income taxes of $2.5 million were recognized in the three months ended June 30, 2010, at an effective tax rate of 40.9 percent. Income taxes of $13.0 million were recognized in the three months ended June 30, 2009, at an effective tax rate of 47.4 percent.

### Results of Operations for the Six Months Ended June 30, 2010, and 2009

### Net Sales and Freight Costs

Net sales of potash increased $8.9 million, or 7 percent, from $125.7 million for the six months ended June 30, 2009, to $134.6 million for the six months ended June 30, 2010; this change being the result of an increase in sales volume of 108 percent offset by a decrease in the average net realized sales price of $342 per ton, or 49 percent. An increase in the demand for potash and Trio™ resulted in a higher total volume of sales in the first six months of 2010 compared to 2009 and resulted in the sell-off of inventories, including some higher cost inventory we had built throughout 2009. Our production volume of potash in the six months ended June 30, 2010, was 337,000 tons, or 69,000 tons more than in the first six months of 2009. Our potash production was higher in 2010 than in 2009 principally due to our decision to increase production to satisfy the more robust demand currently being experienced. During the first quarter of 2009, we shut down the West and East production facilities for two weeks each and continued to operate with three operating shifts instead of four shifts at our Carlsbad facilities as part of an effort to reduce production in response to lower demand. Our East production facility returned to normal production levels in the third quarter of 2009, and our West production facility has returned to full staffing in the third quarter of 2010 to enable us to produce closer to our current estimated productive capacity.

Net sales of Trio™ decreased $6.0 million, or 22 percent, from $27.8 million for the six months ended June 30, 2009, to $21.8 million for the six months ended June 30, 2010, due to a 51 percent decrease in the average net realized sales price offset by a 59 percent increase in the volume of sales. Production of langbeinite increased 10 percent in the first six months of 2010 compared to the same period in 2009, due primarily to our decision to increase production in order to better match granular-sized product supply to demand.

Freight costs increased $6.5 million, or 74 percent, for the six months ended June 30, 2010, compared to the six months ended June 30, 2009, due primarily to the significant increase in sales volume as well as increased movement of inventory to distribution warehouses. As usual, the mix of customers paying for their own freight is highly variable and affects the freight costs incurred by Intrepid and our gross sales. Fluctuations in freight costs are not a key indicator of any business trends or our operating performance, as freight costs are largely borne by our customers, either as part of the cost of the product delivered or as arranged directly by the customer.

### Cost of Goods Sold

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

|  | Six months ended June 30, 2010 | June 30, 2009 | Change between Periods | % Change |
| --- | ---: | ---: | ---: | ---: |
| Cost of sales (in millions) | $108.7 | $60.9 | $47.8 | 78% |
| Cost per ton of potash sold(1) | $240 | $258 | $(18) | (7)% |
| Cost per ton of Trio™ sold(2) | $146 | $179 | $(33) | (18)% |

(1)

Per ton potash costs include $26 and $19 of depreciation expense in the first six months of 2010 and 2009, respectively.

(2)

Per ton Trio™ costs include $16 and $15 of depreciation expense in the first six months of 2010 and 2009, respectively.

Total cost of goods sold per ton of potash decreased $18 per ton, or 7 percent, from $258 per ton for the six months ended June 30, 2009, to $240 per ton for the six months ended June 30, 2010. These results are exclusive of approximately $0.5 million and $6.2 million of production costs that were not absorbed into inventory in the first six months of 2010 and 2009, respectively, due to the determination that our production rates were abnormally low for these periods. 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. Higher production rates in the first six months of 2010 are the primary reason that cost of sales per ton declined relative to the comparable period in 2009.

Total cost of goods sold of our Trio™ decreased $33 per ton, or 18 percent, from $179 per ton for the six months ended June 30, 2009, to $146 per ton for the six months ended June 30, 2010. A lower percentage of shared costs at our East mine was allocated to langbeinite in the first six months of 2010 compared to the same period in the prior year, which contributed to the lower per ton costs.

Cost of goods sold increased $47.8 million, or 78 percent, from $60.9 million in the six months ended June 30, 2009, to $108.7 million in the six months ended June 30, 2010. The increase in the total expense was driven by the higher volumes sold and an increase in spending primarily to support higher production and sales volumes, prior to absorption of costs into inventory. Costs that changed materially during the six months ended June 30, 2010, compared to the six months ended June 30, 2009, included increases in labor, maintenance spending, natural gas costs, operating supplies, and depreciation.

Labor and contract costs increased $6.7 million, or 29 percent, in the first six months of 2010 due to increased labor following managed cut-backs in operating rates and maintenance projects during the first six months of 2009. Operating supplies also increased $0.9 million, or 20 percent, in the six months ended June 30, 2010, due to increased production volumes following these managed cut-backs in operations the first six months of 2009.

Natural gas costs increased $2.5 million, or 82 percent, in the six months ended June 30, 2010, due principally to higher market rates for this commodity. Higher market rates drove $1.9 million of the increase, and higher natural gas consumption at our East facility drove $0.8 million of the increase. Additionally, realized and unrealized gains and losses on natural gas derivatives in the first six months of 2009 accounted for $0.2 million of the decrease in the expense from period to period.

Other changes in cost of goods sold followed from increased depreciation, chemicals, rental costs and benefits and employment taxes, partially offset by decreased insurance and property taxes.

### Income Taxes

Income taxes decreased by $18.0 million in the first six months of 2010 as compared to the same period in 2009. Income taxes of $10.2 million were recognized in the six months ended June 30, 2010, at an effective tax rate of 39.7 percent. Income taxes of $28.2 million were recognized in the six months ended June 30, 2009, at an effective tax rate of 41.9 percent.

### 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, 2009. There have been no significant changes to our critical accounting policies since December 31, 2009.

### Recent Accounting Pronouncements

There are no recent accounting pronouncements that will have an impact on our consolidated financial statements.

### Rulemaking

On June 21, 2010, the Environmental Improvement Board of the New Mexico Environment Department released proposed cap and trade regulations designed to regulate greenhouse gas emissions in the state of New Mexico (Proposed 20.2.350 NMAC—Greenhouse Gas Cap and Trade Provisions). The Environmental Improvement Board has scheduled a hearing for September 20, 2010, to consider the proposed regulations. As currently drafted, the proposed regulations would apply to Intrepid's East facility in New Mexico. At this time, it is unclear whether the proposed regulations will be approved and, if approved, what the terms of the final regulations would require of Intrepid. The regulations proposed by the Environmental Improvement Board of the New Mexico Environment Department on June 21, 2010, if approved, would have a negative effect on our business and operations due to the costs associated with compliance.

## Market risk

As filed, 302 characters.

There have been no significant changes to our market risk since December 31, 2009. For a discussion of our exposure to market risk, refer to Part II, Item 7A., "Quantitative and Qualitative Disclosure About Market Risk," contained in our Annual Report on Form 10-K for the year ended December 31, 2009.

## Controls and procedures

As filed, 3,482 characters.

### (a) Evaluation of Disclosure Controls and Procedures

We maintain "disclosure controls and procedures," as such term is defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Executive Chairman of the Board and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based on their evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, our Executive Chairman of the Board and Chief Financial Officer have concluded that our disclosure controls and procedures were effective at the reasonable assurance level.

### (b) Changes in Internal Control over Financial Reporting

Our management, including our Executive Chairman of the Board 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 quarter ended June 30, 2010, 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 quarter ended June 30, 2010, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

### (c) Inherent Limitations on Effectiveness of Controls

Our management, including our Executive Chairman of the Board and Chief Financial Officer, do not expect that our disclosure controls or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Intrepid have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

## Risk factors

As filed, 2,673 characters.

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part I, "Item 1A: Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2009, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K for the year ended December 31, 2009, are not the only risks facing our company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results. Other than as supplemented below, there have been no material changes in the risk factors contained in our Annual Report on Form 10-K for the year ended December 31, 2009.

***Climate change legislation and the physical effects of climate change may have a negative effect on our business and operations.***

There is a growing discussion that emissions of greenhouse gases ("GHG") may be altering the composition of the global atmosphere in ways that may be affecting, and may continue to affect, the global climate. Legislators and regulators are considering ways to reduce GHG emissions. There is also a growing possibility that some form of GHG emissions regulation will be forthcoming at the federal level, and possibly also at the state level. Such regulation could result in the creation of substantial additional costs for us. The effect of any future mandatory GHG legislative, regulatory, or product standard requirements on our business and products is dependent on the details of the mandate or standard, and we are therefore unable to predict the potential effects at this time. Moreover, the potential physical effects of climate change on our customers, and subsequently on our business and operations, are highly uncertain and will be particular to the circumstances developing in various geographical regions where our facilities and customers are located. These effects may include changes in weather patterns (including drought and rainfall levels), water availability, storm patterns and intensities, and temperature levels. Droughts or floods in certain geographic areas could cause demand for our products to decline and the amount of arable land in one or more of our markets to decrease. Extreme or unusual weather conditions have occurred in the past at our facilities, causing production disruptions, and could occur again in the future. Physical effects of climate change, if any, may adversely impact the costs, production, sales, and financial performance of our business and operations.

Filed Aug 5, 2010.
Source: SEC EDGAR, the filing index for accession 0001047469-10-007056. Last ingested by Listed: Nov 4, 2026, 14:52 ET. No prices; not investment advice.