# Intrepid Potash, Inc.: Form 10-Q for the period ended Mar 31, 2011

- Company: [Intrepid Potash, Inc.](/companies/ipi.md) (CIK 1421461)
- Form: 10-Q
- Filed: 2011-05-05
- Accepted by EDGAR: May 5, 2011, 15:27 ET
- Period: 2011-03-31
- Accession: 0001047469-11-004629
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1421461/000104746911004629/a2203814z10-q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1421461/000104746911004629/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2011-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Gross profit | 3 months, 2011-01-01 to 2011-03-31 | $41.2m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2011-01-01 to 2011-03-31 | $6.9m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2011-01-01 to 2011-03-31 | $46.6m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2011-01-01 to 2011-03-31 | $18.9m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2011-01-01 to 2011-03-31 | $28.3m | us-gaap:ProfitLoss |
| Diluted EPS | 3 months, 2011-01-01 to 2011-03-31 | $0.38 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2011-01-01 to 2011-03-31 | $0.38 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2011-01-01 to 2011-03-31 | 75,263,447 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2011-01-01 to 2011-03-31 | $28.6m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2011-01-01 to 2011-03-31 | $28.6m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2011-03-31 | $69.2m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2011-03-31 | $209.2m | us-gaap:AssetsCurrent |
| Total assets | at 2011-03-31 | $844.3m | us-gaap:Assets |
| Current liabilities | at 2011-03-31 | $43.1m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2011-03-31 | $56.9m | us-gaap:Liabilities |
| Shareholders' equity | at 2011-03-31 | $787.4m | us-gaap:StockholdersEquityIncludingPortionAttributableToNoncontrollingInterest |

## Management's discussion and analysis

As filed, 78,511 characters.

*This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and the Securities Act of 1933, as amended (the "Securities Act"), 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 that limit production of our products; interruptions in railcar or truck transportation services; the ability to hire and retain qualified employees; changes in demand and/or supply for potash or Trio®; changes in our reserve estimates; our ability to successfully execute the projects that are essential to our business strategy, including, but not limited to, the development of the HB Solar Solution Mine as a solution mine and the further development of our langbeinite recovery assets; weather risks affecting net evaporation rates at our solar solution mining operations; changes in the prices of 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; obtaining permitting from applicable federal and state agencies related to the construction and operation of assets; competition in the fertilizer industry; declines in U.S. or world agricultural production; declines in use by the oil and gas industry of potash products in drilling operations; 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, 2010, 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 tonne, which many of our international competitors use, equals 1,000 kilograms or 2,205 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® when we refer to sales and marketing. 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 9.3 percent of annual U.S. consumption. We are one of two producers of sulfate of potash magnesia, a low-chloride fertilizer with the additional benefits of sulfate and magnesium, providing a multi-nutrient product. 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.

Our potash is marketed for sale into three primary markets: 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 sales are focused on the agricultural areas and feed manufacturers west of the Mississippi River, as well as oil and gas drilling areas in the Rocky Mountains and the greater Permian Basin area. We also have domestic sales, primarily of Trio®, across the United States, with a focus on areas with specific nutrient requirements. Our potash production has a geographic concentration in the western United States and is therefore affected by weather and other conditions in this region. We manage our sales and marketing operations centrally which allows us to evaluate the product needs of our customers and then determine which of our production facilities can be utilized to fill customer orders, all of which is designed to realize the highest net realized sales price to Intrepid. We calculate our average net realized sales price by subtracting freight costs from gross sales revenue and then dividing this result by sales tons.

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 approximately 870,000 tons of potash and approximately 200,000 tons of langbeinite annually. Productive capacity is affected by operating rates, recoveries, mining rates and the amount of development work that we do and, therefore, our production results tend to be lower than our productive capacity. We have an active capital investment program that includes investment in process recovery projects such as our Langbeinite Recovery Improvement Project, as well as several projects to increase market flexibility via increased granulation capacity, including our recently completed compaction project in Moab and our planned expansions of compaction capacity in Wendover and at our North facility. In addition, we are actively developing the HB Solar Solution Mine, which is an idled potash mine that we are in the process of permitting to reopen as a solution mine that will utilize solar evaporation techniques in the production of potash. We also have additional opportunities to develop mineralized deposits of potash in New Mexico which could include the reopening of the North Mine, which was operated as a traditional underground mine until the early 1980s, as well as the acceleration of production from our reserves and mineralized deposits of potash through new access points in the area and the potential construction of additional production facilities in the region.

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

### Recent Events and Market Trends

#### 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 margin, excluding costs associated with abnormal production and inventory impairments, derived from potash sales were approximately as follows for the indicated periods.

|  | Contribution from Potash Sales Net Sales | Gross Margin |
| --- | ---: | ---: |
| For the three months ended March 31, 2011 | 89% | 100% |
| For the three months ended March 31, 2010 | 88% | 96% |

Our net income in the first quarter of 2011 was $28.3 million, or $0.38 per share with cash flows from operations of $28.6 million. We had capital investments of $26.9 million in the first quarter of 2011 and ended the quarter with $142.3 million of cash and investments with no debt outstanding. Our production volumes of potash and Trio® increased to a combined 265,000 tons in first quarter of 2011 from 229,000 in the first quarter of 2010 as we were at full operating levels, including the seasonal production from our Moab, UT facility, in the first quarter of 2011.

During the first quarter of 2011, sales demand for potash was consistent with our expectations. The sales levels in the first quarter of 2011 were 196,000 tons of potash and 52,000 tons of Trio® as compared to 243,000 tons of potash and 70,000 tons of Trio® in the first quarter 2010. The reduced 2011 sales volumes reflected the effect of the more robust application levels of potash in 2010 that followed the significant decreased application levels during 2009. Our Trio® sales volumes were impacted negatively in 2011 by the relatively low production levels of granular-sized Trio® during the first part of the quarter which was caused by low recoveries of product from the processing circuit. During the first quarter of 2010, we saw a return in agricultural demand to more historically normal levels during 2010 with increases in sales volumes for the spring 2010 application season. The level of potash and Trio® sales in the first quarter of 2010 was robust, as farmers had not applied as much fertilizer in the 2009 season due to the unfavorable market conditions, and subsequently increased application rates in the spring of 2010. In the first quarter of 2011, certain areas in our primary markets have experienced poor weather conditions and, as such, the spring application season has been delayed in those areas relative to 2010. In addition, as weather conditions were favorable late into last fall, farmers applied nutrients at that time in anticipation of the 2011 planting season. We have experienced an improvement in potash pricing through the fall of 2010 and into the spring of 2011, as crop economics for U.S. farmers strengthened overall. Crop prices, which are driving the strong crop economics, moved up significantly during the second half of 2010 and have remained relatively stable in the first quarter of 2011 due to continued strong demand for grains worldwide. Further, downward revisions in crop yields by the United States Department of Agriculture ("USDA") have resulted in predictions of decreased world grain stocks from 488.7 million metric tons for 2010 to 435.6 million metric tons for 2011. This downward revision in crop yields coupled with historically low levels of ending stocks and stock-to-use ratios for both corn and soybeans have contributed to the overall strength in the agricultural market. Current crop economics suggest that farmers are economically motivated to add incremental marginal production and acreage, which will likely require the application of additional nutrients.

The near-term outlook at the potash producer level appears to be constructive based on several factors, including the following:

declines in stock-to-use ratios of grains in the U.S. and the world, which has driven an increase in grain commodity prices. Estimated global ending stock-to-use ratios for corn are at levels not seen in 37 years while estimated ending stock-to-use ratios for soybeans in the United States are at levels not seen since the mid-1960's;

the profitability outlook for farmers across different commodity types;

the low chance of price shocks from nitrogen which can be attributed to the relatively flat natural gas forward curve; and

dealers and distributors focusing on maintaining adequate product levels to satisfy farmer demand and their willingness to exit the spring season with some inventory as they look forward to the fall application season.

Industrial demand for our standard-sized potash increased in the first quarter of 2011 over the same period in 2010, as we sold 25 percent more in industrial sales volumes compared to the same period in 2010. We expect that industrial demand for our standard-sized product will correlate over the long term with oil and gas pricing, drilling, and well completion activity. However, sales demand for our standard-sized product remains below the levels experienced during 2007 and 2008 due to continued relatively lower levels of oil and gas drilling in the geographic markets served by our Utah facilities. In addition, some drillers have switched to alternatives to standard-sized 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-swelling inhibitor available, and we are promoting potash as the drilling fluid additive of choice in our traditional industrial markets and are working with our key customers to find ways to stimulate demand. The demand for industrial standard-sized potash used in fracture fluids varies by region, 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 sales, which predominately serve Texas, Oklahoma, Louisiana, and New Mexico, have experienced relatively flat sales volumes of industrial standard-sized potash in comparison to the sales volumes from the first quarter of 2010. The relatively lower natural gas prices in the Rocky Mountain region have resulted in a decrease in the rig count of approximately 43 percent from the high in 2008 of the number of rigs drilling for oil and gas in the Colorado, Utah, and Wyoming areas, markets typically served by our Utah operations, which, in turn, has resulted in a lower volume of sales of standard-sized potash relative to 2007 and 2008. Consequently, we have experienced an accumulation of standard-sized potash inventory at our Utah facilities.

As a result of the items noted above, as well as our strategy to have more marketing flexibility to provide multiple market outlets for our products, we have begun investing in additional granulation capacity as evidenced by the successful completion of the compactor at our Moab facility and our further planned investments in additional granulation capacity. In addition, we have taken shorter term actions, such as incentivizing sales of industrial standard-sized product from our Utah locations in an effort to reduce those inventory levels and balancing industrial sales between our Utah and New Mexico production facilities. The new compactor at Moab is designed to provide granular-sized capacity in excess of our anticipated production levels, allowing us to modify our production mix of granular-sized and standard-sized potash, as needed, to meet demand in the agricultural, industrial, and feed markets that we serve. The new Moab compactor was placed into service in December 2010 and has been operating as expected. We anticipate further enhancing our marketing flexibility through our plans to construct a new compactor at our Wendover facility that will provide us the capacity to granulate an amount of product greater than the average annual historical production levels from the Wendover facility beginning in 2012. The feed component of our sales stayed relatively flat from year to year, however the percentage of our overall sales into this market increased in 2011 relative to other markets, primarily as a result of lower sales volumes into the agricultural market. The percentages of our potash sales volumes for each of the markets we serve were approximately as follows for the indicated periods:

|  | Agricultural | Industrial | Feed |
| --- | ---: | ---: | ---: |
| For the three months ended March 31, 2011 | 80% | 13% | 7% |
| For the three months ended March 31, 2010 | 86% | 8% | 6% |

As a result of both supply and demand trends in the general market for potash, as well as crop prices trending upwards, including prices for corn, soy beans, rice, potatoes, hay, cotton, barley, sugar beets and virtually all agricultural commodities, potash prices increased during the first quarter of 2011 on a trend basis from the last two quarters of 2010. Over the long-term, we believe that domestic consumption of fertilizers will remain at 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 consumption for potash has averaged approximately 9.2 million tons with annual volatility of approximately 8 percent through historical periods of low and high agricultural commodity prices, variability in oil and gas drilling, negative farmer margins, and a variety of other macro-economic factors.

#### Trio®

Our Trio® product is marketed both 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. We remain selective in selling into the export market 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. We expect that future growth in Trio® demand will be primarily for granular-sized product. During the first quarter of 2011, 13 percent of our gross sales dollars were related to Trio®, and, of that 13 percent, 31 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 | United States | Export |
| --- | ---: | ---: |
| For the three months ended March 31, 2011 | 63% | 37% |
| For the three months ended March 31, 2010 | 83% | 17% |

We began producing and selling langbeinite in late 2005 and have been marketing it as Trio® since 2007. 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. We are focusing our marketing efforts on increasing the awareness of the benefits of Trio® and working to grow the overall Trio® market. 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. Despite lower available tons of granular-sized Trio®, the sales of our granular-sized Trio® product continued to be solid during the first quarter of 2011 as we sold through our available inventory. The lower availability of product was due to lower than expected recovery levels experienced in recent quarters. We placed an emphasis on restoring recovery levels, by reviewing operating practices against original design specifications, reviewing process equipment selection and operating parameters, improving maintenance practices, and stabilizing process conditions with minor instrumental modification. As a result of these activities, recoveries of Trio® began to increase beginning in March 2011, and the increased recoveries have continued to date.

As noted, demand for Trio® continues to be robust and even with the recent improvement in our recoveries of granular Trio®, we expect that granular-sized Trio® sales demand will exceed our production capabilities for the next few quarters, resulting in the need to sell our granular-sized product on an allocated basis ahead of the completion of our enhanced recovery and granulation projects associated with Trio®. In March 2011, we received the necessary construction permit for the dense media separation plant of our Langbeinite Recovery Improvement Project and we have begun construction on this plant. We have also received notice that the application for the permit for the granulation plant within the Langbeinite Recovery Improvement Project has been declared administratively complete and we plan to commence construction of this plant immediately upon receipt of the associated permit. With the addition of the granulation plant, we will produce a prilled or granular-sized particle that will supplement our granular-sized production capacity resulting in our ability to granulate all of our anticipated Trio® production. The overall Langbeinite Recovery Improvement Project is designed to increase our recoveries of langbeinite from the current design recovery rates of approximately 30-35 percent to approximately 50 percent, and at the same time, reduce our freshwater usage in the production of Trio®.

During the first quarter of 2011, our average net realized sales price of Trio® was negatively impacted by the sales of standard-sized Trio® into the export market. The Langbeinite Recovery Improvement Project is expected to not only increase our overall Trio® production but will also allow us the capability to produce all of our Trio® in the higher value granular form. This will provide us with the opportunity to sell more granular Trio® which currently commands a higher sales price than standard Trio®. The average net realized price for our granular-sized Trio® sold in the United States is approximately $55 to $60 higher than the average net realized price of our standard product sold in the export markets. Even with the increase in our domestic granular price for Trio® that occurred during the quarter, our overall average net realized price for Trio®, including both granular and standard-sized product, decreased as compared to the fourth quarter of 2010 because of the mix of product sold. As our current finishing process for Trio® does not allow us to selectively produce granular or standard-sized product, we continue to make these lower priced export sales of standard-sized Trio to reduce inventory levels of this product so that we can continue to supply the higher-value granular-sized Trio® product to the domestic market.

#### Rail Transportation Interruption

On April 13, 2011, we were notified by Southwestern Railroad Inc. ("Southwestern Railroad") that a railcar derailment (the "Derailment") had occurred on a railroad line operated by the Southwestern Railroad approximately 25 miles north of Carlsbad, New Mexico. The Derailment destroyed a number of railcars that were loaded with Intrepid products which were in transit to Intrepid customers. This short-line track operated by Southwestern Railroad services the Carlsbad Basin and is the sole railroad line into and out of the Carlsbad Basin. In connection with the Derailment, a railroad bridge was destroyed. As a result, this railroad line was not operational for 17 days during which time we were not able to ship products to our customers by rail from our New Mexico operations. During this time period, the Derailment delayed us from making certain sales and timely deliveries to certain of our customers by rail. We have resumed shipments by rail from our New Mexico operations and we do not expect that the Derailment will have a material adverse effect on our future operating results and financial condition.

### 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. Costs associated with abnormal production are excluded from the following analysis.

| Production volume (in thousands of tons): | Three months ended Change between Periods March 31, 2011 | March 31, 2010 | % Change |  |
| --- | ---: | ---: | ---: | ---: |
| Potash | 234 | 172 | 62 | 36% |
| Langbeinite | 31 | 57 | (26) | (46)% |
| Sales volume (in thousands of tons): |  |  |  |  |
| Potash | 196 | 243 | (47) | (19)% |
| Trio® | 52 | 70 | (18) | (26)% |
| Gross sales (in thousands): |  |  |  |  |
| Potash | $91,351 | $91,375 | $(24) | —% |
| Trio® | 13,627 | 15,984 | (2,357) | (15)% |
| Total | 104,978 | 107,359 | (2,381) | (2)% |
| Freight costs (in thousands): |  |  |  |  |
| Potash | 4,883 | 5,379 | (496) | (9)% |
| Trio® | 3,108 | 4,387 | (1,279) | (29)% |
| Total | 7,991 | 9,766 | (1,775) | (18)% |
| Net sales (in thousands): |  |  |  |  |
| Potash | 86,468 | 85,996 | 472 | 1% |
| Trio® | 10,519 | 11,597 | (1,078) | (9)% |
| Total | $96,987 | $97,593 | $(606) | (1)% |
| Potash statistics (per ton): |  |  |  |  |
| Average net realized sales price | $442 | $354 | $88 | 25% |
| Cash operating cost of goods sold, net of by-product credits\* (exclusive of items shown separately below) | 166 | 199 | (33) | (17)% |
| Depreciation, depletion, and amortization | 29 | 24 | 5 | 21% |
| Royalties | 16 | 13 | 3 | 23% |
| Total potash cost of goods sold | 211 | 236 | (25) | (11)% |
| Warehousing and handling costs | 13 | 9 | 4 | 44% |
| Average potash gross margin (exclusive of costs associated with abnormal production) | $218 | $109 | $109 | 100% |
| Trio® statistics (per ton): |  |  |  |  |
| Average net realized sales price | $204 | $167 | $37 | 22% |
| Cash operating cost of goods sold, net of by-product credits\* (exclusive of items shown separately below) | 160 | 119 | 41 | 34% |
| Depreciation, depletion, and amortization | 23 | 17 | 6 | 35% |
| Royalties | 10 | 8 | 2 | 25% |
| Total Trio® cost of goods sold | 193 | 144 | 49 | 34% |
| Warehousing and handling costs | 14 | 9 | 5 | 56% |
| Average Trio® gross margin (exclusive of costs associated with abnormal production) | $(3) | $14 | $(17) | (121)% |

On a per ton basis, by-product credits were $6 and $8 for the first quarter of 2011, and 2010, respectively. By-product credits were $1.3 million and $2.0 million for the first quarter of 2011, and 2010, respectively. Costs associated with abnormal production were zero and $0.5 million for the first quarter of 2011, and 2010, respectively.

### Operating Highlights

Income before income taxes for the first quarter of 2011 and 2010 was $47.1 million and $19.5 million, respectively. The increase in the comparable periods resulted from a higher average net realized sales price per ton of both potash and Trio® and an improvement in gross margin, partially offset by lower sales volumes. We sold 196,000 tons and 52,000 tons of potash and Trio®, respectively, in the first quarter of 2011, as compared to 243,000 and 70,000 tons in the first quarter of 2010. We experienced solid sales levels at the higher prices and overall lower per unit costs of goods sold. Income in the first quarter of 2011 also increased due to the final settlement of an insurance claim, related to the completion of the reconstruction of the East facility warehouses. As weather conditions were favorable late into last fall, farmers applied some nutrients at that time in anticipation of the 2011 planting season. On a comparable basis, the levels of potash and Trio® sales in the first quarter of 2010 were robust and above normal historical demand levels for the first quarter of a year, as farmers had not applied as much fertilizer in the 2009 season due to the unfavorable economic conditions, and subsequently increased application rates in the spring of 2010.

Our average net realized sales price of potash was $442 per ton in the first quarter of 2011, as compared to $354 per ton in the first quarter of 2010. The increase in our average net realized sales price was the result of an improved just-in-time truck market coupled with the overall strength of crop prices across a spectrum of commodities resulting in improved farmer economics, which in turn increased the demand for balanced fertilization as farmers seek to maximize yields. Our average potash gross margin as a percentage of net sales increased to 49 percent for the first quarter of 2011, as compared to 30 percent in the first quarter of 2010, including costs associated with abnormal production, and was largely attributable to the increased average net realized sales price and lower per unit cost of goods sold. In the first quarter of 2011, we had no abnormal production costs, thus our cash operating cost of goods sold, net of by-product credits, for potash was $166 per ton. This result compares to cash operating cost of goods sold, net of by-product credits, for potash of $199 per ton, and the expensing of $0.5 million of costs related to abnormal production for potash in the first quarter of 2010.

Our production volume of potash in the first quarter of 2011 was 234,000 tons, or 62,000 tons more than in the same period of 2010. Our production was higher in 2011 primarily due to the return to full production levels beginning in November of 2010 as we returned to full staffing levels at our facilities at that time following the market driven production reductions that occurred in 2009 through the first half of 2010. In addition, the benefit of the 2010 capital investments was evident as higher production was available from the additional mining panels in Carlsbad. The benefit of the seasonal production from our Moab facility is also reflected in the quarterly production results of potash for the quarter. We increased production throughout 2010 in response to increases in market demand from the reduced levels in 2009, ending the year at similar production rates as we experienced in the first quarter of 2011. Additionally, the new compactor at Moab, which was placed into service in December 2010, was fully operational during the first quarter of 2011 allowing us maximum flexibility as to our production mix of granular-sized and standard-sized potash, as needed, based on market demand.

We increased our average net realized sales price per ton of Trio® from $167 per ton in the first quarter of 2010 to $204 per ton in the same period of 2011, primarily due to the overall increase in potash prices, which similarly affect our Trio® pricing. In February 2011, we increased the posted price of granular-sized Trio® to $256 per ton. As demand for Trio® has resulted in our selling granular-sized product on an allocated basis, we expect to begin realizing the benefit of this price increase for our granular-sized Trio® product almost immediately, yet our average net realized sales price is affected by competitive pricing by our primary competitor and the sales of standard product into the export market. Our cash operating cost of goods sold for Trio®, net of by-product credits, which we define as total cost of goods sold excluding depreciation, depletion, amortization and royalties, increased $41 per ton in the first quarter of 2011 relative to the same period in 2010, due primarily to 26,000 fewer tons produced in 2011 spread over approximately the same fixed costs. Total cost of goods sold and cash operating cost of goods sold, net of by-product credits, for potash and for Trio® can be found in the "*Selected Operations Data*" tables above. This significant increase in cash operating cost of goods sold has reduced our Trio® average gross margin to a loss of $3 per ton for the first quarter of 2011. We expect Trio® average gross margin to be positive during the remainder of 2011 as we expect to begin to realize the impact of our announced price increase beginning in the second quarter of 2011 and expect our production costs to improve with the higher production we expect from the improved recoveries. We expect to further reduce our per ton cash cost of goods sold, due to the expected benefits from our Langbeinite Recovery Improvement Project.

### 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 on only 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 of our revenue as it conveys the sales price of the product that we realize. We manage our sales and marketing operations centrally and we work to achieve the highest average net realized sales price we can by evaluating the product needs of our customers and then determine which of our production facilities can be utilized to fill these needs by considering which facility can produce and deliver the product to the customer to realize the highest net realized sales price to Intrepid.

We continue to focus on the granulation of our potash as the demand for granular-sized product has remained strong into 2011. As a result we are running our granulation facilities at full capacity at all of our locations to meet existing orders and to prepare for the remaining spring season. The forward commodity markets for crops have remained strong, at least through the next crop cycle, which should support a continuation of strong demand in the spring of 2011. In order to service this strength in the granular-sized agricultural market, we placed a new compactor in service at our Moab facility in December 2010, which will provide us additional compaction capacity in 2011 and beyond. Part of our operating strategy is to have flexibility in our product mix in response to changing market demands. We have also begun engineering studies to increase compaction capacity at our Wendover and North facilities. We expect the increase in compaction capability at our Wendover facility beginning in 2012 and the increase in compaction capability at our North facility beginning in 2013. Until the project at Wendover is completed or we develop a market for more standard-sized product sales, we anticipate Wendover operating rates will be lower than productive capacity, but within historical ranges.

The volume of product we sell is 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 same time, we recognize that the operations of our facilities are much more efficient with a steady to increasing operating rate rather than a constantly adjusting rate. Accordingly, the completion of our warehouse project at our East facility, in the first quarter of 2011, and the expansion of our Wendover warehousing capabilities are important to our business. By having adequate warehouse capacity we can maintain production levels during periods of fluctuating product demand.

At the current time, we are working to produce at maximum rates relative to staffing levels, plant capacities, and regularly scheduled maintenance.

Our profitability is directly linked to the sales price of our product, our production rates, and the resulting production costs of our products. The production costs are impacted by 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 run our mining operations and plants at normal operating rates and therefore maintain the lower per unit production costs while at the same time focusing attention on granular-sized capacity. Our sales strategy is to seek to maximize our price by selling tonnage into markets near our facilities in New Mexico and Utah, while at the same time selling selected amounts of product into markets further from our facilities. 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.

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 of potash, 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. With the strengthening of the commodity prices and the overall health of the agricultural sector, we increased our posted pricing of granular-sized potash to $485 per ton in the fourth quarter of 2010 which was effective November 1, 2010. We have increased our posted price of granular-sized potash to $500 per ton effective April 1, 2011, with additional $15 per ton increases taking effect May 1, 2011, and June 1, 2011, resulting in a list price of $530 per ton effective June 1, 2011. We expect the full impact of potash price increases to be realized approximately three months after the effective date as we typically have amounts of product already ordered at the time we announce a price increase. In the first quarter of 2011, we experienced an increase in our just-in-time truck sales which allowed us to realize the increased net sales price earlier. Our average net realized sales price per ton historically has been approximately between 85 and 90 percent of our posted price due to a variety of factors, including, but not limited to, the different competitive markets in which we sell our products, associated customer discounts, and the mix of standard-sized and granular-sized product sold into the market.

To some degree, we consider international prices in determining the prices at which we sell our products. Generally, we benefit from a weakening U.S. dollar. In addition, due to the fact that our sales and costs are denominated in U.S. dollars, changes in the value of the U.S. dollar against other currencies have less of an effect on us compared to our competitors. The strengthening we are seeing in pricing more recently, however, is believed to be much more directly linked to the supply and demand fundamentals of the grain markets and the associated profitability to farmers at today's commodity prices. The table below demonstrates the progression of our average net realized sales price for potash and Trio® in 2011 and 2010.

| Average net realized sales price for the three months ended: | Potash (Per ton) | Trio® |
| --- | ---: | ---: |
| March 31, 2011 | $442 | $204 |
| December 31, 2010 | $386 | $222 |
| September 30, 2010 | $343 | $173 |
| June 30, 2010 | $376 | $162 |
| March 31, 2010 | $354 | $167 |

#### Cost Associated with Abnormal Production

We periodically evaluate our production levels and costs to determine if any such items should be deemed abnormal under accounting principles generally accepted in the United States of America ("GAAP") with respect to inventory costing. In the three months ended March 31, 2010, we determined that approximately $0.5 million of production costs would have been allocated to additional tons produced, assuming we had been operating at normal production rates. There was no such adjustment made in 2011 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 goods sold elements. The assessment of normal production levels requires significant management estimates and is unique to each quarter.

#### Cost of Goods Sold

Our cost of goods sold reflects the costs to produce our potash and Trio® 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 reagents and royalties that are variable, which make up a smaller component 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 and production levels. Inventory levels are a function of previous period ending inventories, production rates, and sales levels. From a total dollar level in the three months ended March 31, 2011, we have seen an increase in our overall production costs as we have mined and produced more tons than the comparable period in 2010. Because of the lower per unit costs and lower volume of sales in 2011 we have seen a decrease in our cost of goods sold compared to the same period in 2010. As the production rates from our mines returned to higher levels in the three months ended March 31, 2011, as compared to 2010, our per unit costs decreased. The dollar value increase in production costs were driven principally by the increased volumes and the operating rates of our mines and mills in the three months ended March 31, 2011, as compared to the same period in 2010. Increased production volumes resulted in higher labor costs, operating supply and reagent costs.

The East mine contains a mixed ore body comprised of muriate of potash and langbeinite. The mix of ore will impact the amount of product tons of potash and langbeinite ultimately produced from the facility, impact our production costs per ton for each product and impact our quarter-to-quarter results. Our production costs per ton are also impacted when our production levels change, such as changes in mine development and downtime for annual maintenance turnarounds, 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. We anticipate normal scheduled maintenance turnarounds in 2011 at our West plant in the second quarter and at our East plant in the third quarter.

Our cash operating cost of goods sold per ton of potash, net of $6 per ton of by-product credits, was $166 per ton in the three months ended March 31, 2011, compared to $199 per ton, net of $8 per ton of by-product credits, in the same period of 2010. Our lower per unit cash operating cost of goods sold per ton during 2011 resulted primarily from higher production rates in the three months ended March 31, 2011.

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 months ended March 31, 2011, and 2010, our royalty rate was 3.9 percent and 3.7 percent, respectively. We expect that future average rates will be relatively consistent with these rates.

#### Income Taxes

We are a subchapter C corporation and, therefore, are subject to federal and state income taxes on our taxable income. For the three months ending March 31, 2011, our effective income tax rate was 40.0 percent compared to 39.3 percent during the corresponding period in 2010. Our effective income 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 months ended March 31, 2011, our total tax expense was $18.9 million. This expense was comprised of $3.5 million of current income tax expense and $15.4 million of deferred income tax expense. For the three months ended March 31, 2010, our total tax expense was $7.7 million. Total tax expense in the first three months ended March 31, 2010 was comprised of $3.1 million of current income tax expense and $4.6 million of deferred income tax expense.

The mix of our current and deferred taxes is subject to changes in future periods. The current and deferred tax mix may change as a result of internal tax planning, and various elections provided within the tax code or changes in tax laws within the jurisdictions where we are subject to taxation.

### Outlook for the Remainder of 2011

The potash market has stabilized compared to the volatility the industry experienced in 2008 and 2009. Corn prices have increased significantly for front month delivery contracts since November 2010, and corn prices have stabilized over the past several months. Accordingly, we continue to believe that farmers should have the economic resources and motivation to replace the nutrients drawn from the soil, and in some cases, increase the nutrient levels in the soil in order to drive production yield for their crops. In addition, the overall commodity prices for grains, sugar, cotton and other commodities remain strong. Cattle and hog prices remain significantly above those from a year ago as the impact of herd liquidations has resulted in smaller herd sizes. This overall strengthening of commodity prices continues to afford an opportunity for farmer economics to improve significantly which should benefit potash producers in the form of solid demand and prices.

The stronger potash market that emerged in 2010 allowed producers to bring back production capacity that was idled in 2008 and 2009. We expect the spring 2011 fertilizer demand season to be more in line with the spring 2010 fertilizer demand, which we believe was indicative of the historical market in North America. We expect 2011 potash demand to be in line with historical norms through the spring and fall seasons as the economics to the farmer are expected to remain favorable. We anticipate being able to realize the announced price increases as the spring application season progresses and we move into the summer months. The pricing outlook will be much more dependent upon the decisions made by the Canadian producers as they supply a significant portion of the demand in the United States. We believe that our strong balance sheet and the strong market conditions for potash will enable us to develop our strategic capital projects designed to increase production and to execute our marketing strategy to maximize margin on the potash and Trio® that we sell.

We have seen solid early spring demand in the markets where farmers have been able to get into their fields. Weather, however, as always, will drive the timing of demand for us as the spring application season progresses. Certain areas in our primary markets have recently experienced challenging weather conditions, including severe flooding, which has delayed spring fertilizer applications in those areas. Additionally, the Texas, Oklahoma, and Kansas markets are experiencing a lack of rainfall which may have a negative impact on demand for us due to decreased consumption by farmers and ranchers in those states.

### Potash Prices

The price for potash has been and will continue to be the most significant driver of profitability for our business. As discussed earlier, prices had contracted from 2008 and 2009 levels, and the $442 per ton average net realized sales price in the first quarter of 2011 was affected by overall market demand and the increase in our just-in-time truck sales. Our average net realized sales price increased in the first quarter of 2011 sequentially from the fourth quarter of 2010 in response to strong demand and favorable commodity prices for corn and other crops. Our strategy for sales continues to emphasize having adequate product available for spots sales that are serviced by the more localized truck markets at our locations, as those tons are reflective of current posted pricing, thereby allowing us to maintain a higher average net realized price than our competitors.

Other factors that may impact pricing for 2011 include the amount and price at which China will continue buying potash during 2011, fertilizer subsidy policy developments in India, how much demand will be satisfied at current prices, and whether increases in crop prices and other crop nutrients can be sustained. The current increase in demand in the United States has allowed us to sell down our granular-sized inventories to historically normal levels for this time of year, and we anticipate sales of granular-sized potash will correspond more closely with our production levels.

We continue to have demand for our granular-sized Trio® in excess of our productive capacity as the demand for this product remains strong. Trio® prices tend to move in relationship to potash. We expect that the continued demand for this product and the improving agronomic understanding of the benefits of the magnesium and sulfur will provide an opportunity to continue to price this product based on the value to the farmer.

### 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 remain at, or exceed, historical levels; therefore, we have developed an investment plan at each of our facilities to maintain safe and reliable production, ensure environmental and regulatory compliance, improve and modernize equipment, increase reliability of the facilities, increase productivity and recoveries in order to decrease per ton production costs, and increase market flexibility. In 2011, we plan to continue executing and accelerate, when appropriate, our capital strategy that is focused on additional granulation capacity, additional mining capacity, and recovery improvement projects. Our strategy to increase granulation capacity is being undertaken for both potash and Trio®. We successfully completed the construction of a new compactor at Moab in 2010, and have plans for additional compaction capacity at our North facility, as well as at our Wendover facility. Our Langbeinite Recovery Improvement Project also includes granulation capacity for all of our Trio® production.

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 months ended March 31, 2011, we invested approximately $26.9 million in capital projects. Based on our expected pace of capital expenditures in 2011 and our current sales forecast, we believe we will have adequate cash to execute our capital plans for the remainder of 2011.

Our Langbeinite Recovery Improvement Project is designed to increase our recoveries of Trio® from the langbeinite ore using dense media processing. As part of this project, we are building a plant that is expected to provide us the flexibility and capacity to granulate all of our standard-sized product, if market conditions warrant, and have it available for sale into the granular-sized 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. 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®, and continue to actively invest in the education of the benefits of the use of our Trio® product.

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 $27.5 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 ("NMED"). The environmental impact statement ("EIS") review being conducted by the Bureau of Land Management ("BLM") continues to progress. On April 15, 2011, the draft EIS report was released for public comment and, with this, the 60-day public comment period began. Based on the schedule provided to us by the BLM's consultant, we currently anticipate that the Record of Decision from the EIS process will be completed in the first quarter of 2012. We continue to be advised by the BLM that the timing will depend on the level and nature of comments received during the public comment period. Once all of the necessary regulatory permits and approvals are obtained, construction will begin promptly and first production is expected to result approximately 18 months later, with ramp up to full production expected in the succeeding year, assuming the benefit of an average annual evaporation cycle applied to full evaporation ponds.

Total capital investment in 2011 is estimated to be between $140 and $165 million. A breakdown of our capital investment plan includes approximately $40 to $44 million to replace assets needed to maintain production and complete compliance projects, $99 to $119 million to increase productive capacity as described more fully below, and $1 to $2 million to continue the replacement of the East facility warehouse. We expect our 2011 capital program to be funded out of cash flow and existing cash and investments.

The following are a few of the projects that are slated for investment and/or completion in 2011 to improve the overall reliability of the operations and to increase productive capacity and compaction capacity:

Our Langbeinite Recovery Improvement Project is a high priority project in 2011 due to the expected increase in langbeinite production and resulting lower average operating cash cost per ton at the East facility. The total capital investment for this project is expected to be between $85 and $90 million, of which approximately $31.9 million has been invested to date and the balance is expected to be invested throughout 2011. In the first quarter of 2011, we received the necessary construction permit for the dense media separation plant, and have now commenced construction. We expect completion and commissioning of the dense media separation plant to occur during the fourth quarter of 2011. The granulation plant continues to move through the permitting process with this permit application being declared administratively complete in April 2011, and we expect to begin construction of this facility as soon as the permit is issued.

We completed engineering work for a new compaction facility in Wendover which will allow us to granulate more of our standard-size production. This project will allow us to better adapt to market demand fluctuations for our standard-sized and granular-sized potash. The project investment is approximately $15 to $19 million. Assuming timely receipt of all necessary government permits and approvals, we expect to be able to increase granular production beginning in 2012.

We have also begun engineering the expansion of our North compaction plant. We are currently evaluating different expansion options on the most effective and efficient design and scope of the North plant. We anticipate finalizing our plans for the project in 2011, and assuming timely receipt of all necessary government permits and approvals, we expect to be able to increase granular production beginning in 2013.

We plan to add new equipment, including miners, shuttle cars and conveyor systems, in order to develop new mine panels at each of our East and West mines for a total investment of approximately $14 to $16 million in 2011.

We continue to implement digital control systems and increased instrumentation at our production facilities, particularly in Carlsbad. A combined capital investment of approximately $6 to $7 million is expected for these projects in 2011.

We plan to drill two new wells at the Moab mine to increase our solution mine ore grade, which is expected to increase our average annual potash production. We expect drilling to commence during the second half of this year assuming timely receipt of permits and project completion during the first half of 2012. The total investment for this project is expected to be approximately $15 to $17 million for this project of which approximately $9 to $12 million is expected to be spent in 2011.

We completed engineering work for a new warehouse at our Wendover facility. The new warehouse will provide additional storage capacity for finished product, both standard-sized and granular-sized potash. We expect to invest approximately $3 to $4 million on this project during 2011 and expect the additional storage capacity to be in place to coincide with the completion of the new Wendover compaction facility described above.

All dollar amounts and timing of future capital investments are estimates that are subject to change as projects are further developed, modified, deferred, or canceled.

### Liquidity and Capital Resources

As of March 31, 2011, we had cash, cash equivalents, and investments of $142.3 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 $1.3 million in cash and $67.9 million in cash equivalent investments, consisting of money market accounts or certificates of deposit with banking institutions for $17.9 million and U.S. Bank National Association ("U.S. Bank") commercial paper of approximately $50.0 million. We had no losses on our cash and cash equivalents during the three months ended March 31, 2011, and all cash equivalents are invested with institutions that we believe to be financially sound. Additionally, as of March 31, 2011, we had $38.7 million and $34.4 million invested in short-term and long-term investments, respectively, comprised of certificates of deposit investments of $8.0 million, and corporate debt securities of $65.1 million.

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)*

|  | Three months ended March 31, 2011 | March 31, 2010 |
| --- | ---: | ---: |
| Cash Flows from Operating Activities | $28,624 | $35,815 |
| Cash Flows from Investing Activities | $(35,666) | $(25,100) |
| Cash Flows from Financing Activities | $139 | $(176) |

38

### Operating Activities

Total cash provided by operating activities was $28.6 million for the three months ended March 31, 2011, compared to $35.8 million for the three months ended March 31, 2010. The $7.2 million decrease in cash provided by operating activities in the three months ended March 31, 2011, was due primarily to the increase in inventory as product sales largely matched production levels, compared to the three months ended March 31, 2010, in which our product sales were in excess of production levels. Additionally, we experienced an increase in accounts receivable as of March 31, 2011, compared to the three months ended March 31, 2010, as sales during the first quarter of 2010 occurred towards the beginning of the quarter compared to sales during the first quarter of 2011 which occurred nearer the later part of the quarter. These changes were offset by higher net income when comparing the three months ended March 31, 2011 to the same period in 2010. For the three months ended March 31, 2011, product inventories increased $0.3 million compared to a decrease of $20.6 million in 2010; the significant decrease in 2010 was due to the increased demand for our products reflected in sales tons after the declines in application rates for much of 2009. Spare parts inventory increased $1.2 million for the three months ended March 31, 2011, compared to an increase of $0.8 million in the same period in 2010, as we brought additional spare parts inventory into our system to support the new equipment at our operating facilities.

### Investing Activities

Total cash used in investing activities was $35.7 million for three months ended March 31, 2011, compared to $25.1 million for the three months ended March 31, 2010. The amount of cash invested in property, plant, and equipment as well as mineral properties and development costs was $29.1 million in the three months ended March 31, 2011, compared to $14.0 million in the same period in 2010. For the three months ended March 31, 2011, we invested excess cash in higher yielding corporate and government agency securities by purchasing $22.3 million of investments and received $15.8 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 March 31, 2011.

Outstanding balances under the revolving senior credit facility bear interest at a floating rate, which, at our option, is either (1) the London Interbank Offered Rate (LIBOR), plus a margin of between 1.25 percent and 2.5 percent, depending upon our leverage ratio, which is equal to the ratio of our total funded debt to our adjusted earnings before income taxes, depreciation and amortization; or (2) an alternative base rate. We must pay a quarterly commitment fee on the outstanding portion of the unused revolving credit facility amount of between 0.25 percent and 0.50 percent, depending on our leverage ratio. Intrepid was in compliance with all covenants with respect to the senior credit facility on March 31, 2011.

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 at the time of the initial public offering, we 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 at that time. Interest rates, however, decreased following the initial public offering, and the liability that we have under these derivative agreements has increased since the date of the initial public offering. 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 March 31, 2011, are displayed below:

*(In thousands)*

| Termination Date | Notional Amount | Weighted Average Fixed Rate |
| --- | ---: | ---: |
| 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 March 31, 2011, and the weighted average 3-month LIBOR rate locked-in via these derivatives are $25.6 million and 5.2 percent, respectively. The interest rate paid under our senior credit facility on any debt varies both with the change in the 3-month LIBOR rate and with our leverage ratio.

### Contractual Obligations

As of March 31, 2011, we had contractual obligations totaling $76.5 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 | Q2-Q4 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | More than 5 years |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Operating lease obligations(1) | $18,280 | $3,252 | $3,177 | $2,992 | $2,702 | $1,427 | $1,385 | $3,345 |
| Purchase commitments(2) | 9,565 | 9,565 | — | — | — | — | — | — |
| Natural gas purchase commitments(3) | 3,594 | 3,594 | — | — | — | — | — | — |
| Pension obligations(4) | 982 | 127 | 171 | 171 | 171 | 171 | 171 | — |
| Asset retirement obligation(5) | 32,694 | — | — | — | — | — | — | 32,694 |
| Minimum royalty payments(6) | 11,433 | 343 | 457 | 457 | 457 | 457 | 457 | 8,805 |
| Total | $76,548 | $16,881 | $3,805 | $3,620 | $3,330 | $2,055 | $2,013 | $44,844 |

(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, which is priced at floating index-dependent rates plus $0.02, estimated based on forward rates. 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 March 31, 2011, 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 unaudited Consolidated Financial Statements in this Quarterly Report on Form 10-Q.

### Results of Operations for the Three Months Ended March 31, 2011, and 2010

### Net Sales and Freight Costs

Net sales of potash increased $0.5 million, or 1 percent, from $86.0 million for the three months ended March 31, 2010, to $86.5 million for the three months ended March 31, 2011. This change was the result of an increase in the average net realized sales price of $88 per ton, or 25 percent, offset by a decrease in sales volume of 19 percent. The decrease in sales volume was driven by the level of potash and Trio® applied in the fall of 2010 due to the favorable weather conditions which allowed farmers to apply nutrients at that time in anticipation of the 2011 planting season. Additionally, the sales in the first three months of 2010 were robust, as farmers had not applied as much fertilizer in the 2009 season due to the unfavorable market conditions, and subsequently increased application rates in the spring of 2010.

Net sales of Trio® decreased $1.1 million, or 9 percent, from $11.6 million for the three months ended March 31, 2010, to $10.5 million for the three months ended March 31, 2011, due to a 26 percent decrease in the volume of sales offset by a 22 percent increase in the average net realized sales price. The volume decrease was driven by the lower recoveries of product experienced in the first two months of 2011.

Freight costs decreased $1.8 million, or 18 percent, for the three months ended March 31, 2011, compared to the three months ended March 31, 2010, due primarily to the significant decrease in sales volume and movement of inventory to distribution warehouses. 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 Change between Periods March 31, 2011 | March 31, 2010 | % Change |  |
| --- | ---: | ---: | ---: | ---: |
| Cost of sales (in millions) | $52.0 | $67.2 | $(15.2) | (23)% |
| Costs associated with abnormal production (in millions) | $— | $0.5 | $(0.5) | (100)% |
| Cost per ton of potash sold(1) | $211 | $236 | $(25) | (11)% |
| Cost per ton of Trio® sold(2) | $193 | $144 | $49 | 34% |

(1)

Per ton potash costs include $29 and $24 of depreciation, depletion, and amortization expense in the three months ended March 31, 2011, and 2010, respectively.

(2)

Per ton Trio® costs include $23 and $17 of depreciation, depletion, and amortization expense in the three months ended March 31, 2011, and 2010, respectively.

Total cost of goods sold per ton, which includes royalties and depreciation, depletion and amortization, of potash decreased $25 per ton, or 11 percent from $236 per ton for the three months ended March 31, 2010, to $211 per ton for the three months ended March 31, 2011. The 2010 per ton results are exclusive of approximately $0.5 million of production costs for potash that were not absorbed into inventory in 2010, due to the determination that our production rates were abnormally low for this period. The per ton improvement in 2011 reflects the fact that the higher operating rates of our facilities result in lower per ton costs as the fixed cost structure of the operations is spread over more produced tons. The cost of goods sold 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 2011 resulted in a decline in cost of goods sold per ton relative to the comparable period in 2010.

Total cost of goods sold of our Trio® increased $49 per ton, or 34 percent, from $144 per ton for the three months ended March 31, 2010, to $193 per ton for the three months ended March 31, 2011. This increase in cost of goods sold on a per ton basis is due to lower production resulting from our lower recoveries of Trio® experienced during the quarter. The result of the low recoveries is that the same costs are spread over lower production tons resulting in higher per ton production costs.

Cost of goods sold decreased $15.2 million, or 23 percent, from $67.2 million in the three months ended March 31, 2010, to $52.0 million in the three months ended March 31, 2011. The decrease in the total expense was driven primarily by the lower volumes of potash and Trio® sold partially offset by an increase in production costs, prior to absorption of costs into inventory. Production cost elements that changed materially during the three months ended March 31, 2011, compared to the three months ended March 31, 2010, included increases in labor, operating supplies, chemicals and depreciation.

On a comparative basis and within our production costs, labor and contract labor costs increased $1.4 million, or 10 percent, in the first three months of 2011 due to the ramp-up of the Carlsbad operations following managed cut-backs in operating rates and maintenance projects that carried over from 2009 into 2010. Operating supplies increased $1.4 million, or 50 percent, in the three months ended March 31, 2011, due principally to increased usage related to returning to full production by 2011 in addition to price increases on major mine operating supplies.

Depreciation, depletion, and amortization increased $1.9 million, or 35 percent, in the three months ended March 31, 2011, as a result of the significant capital investment during 2010. We expect depreciation expense to continue to increase on both an actual dollar basis and on a per ton basis as we continue to invest capital into our operations. We manage capital investments on a basis of evaluating maintenance capital that we believe is necessary to maintain the productivity of our mines and investment capital that is designed to generate a return on invested capital.

Other changes in cost of goods sold followed from increased reagents resulting from higher operating rates and increased benefits and employment taxes, as well as a reduction in by-product credits, partially offset by decreased rental costs.

### Recognition of Income Associated With Deferred Insurance Proceeds

In the three months ended March 31, 2011, we completed the reconstruction and commissioning of our product warehouses at our East facility and finalized insurance settlement amounts related to the associated product inventory warehouse insurance claim that resulted from a wind event that occurred in 2006. As a result, the $11.7 million of deferred insurance proceeds that were recorded as of December 31, 2010, plus approximately $0.8 million of additional insurance proceeds, were recognized as income in the three months ended March 31, 2011. The total of approximately $12.5 million has been recorded as "Insurance settlements from property and business losses" on the consolidated statement of operations in the three months ended March 31, 2011. There was no cash impact associated with this event in the three months ended March 31, 2011, as the previously deferred insurance proceeds was paid to us prior to December 31, 2010, and the final insurance payment of approximately $0.8 million was paid to us in April 2011.

### Income Taxes

Income tax expense increased by $11.2 million in the three months ended March 31, 2011, as compared to the same period in 2010. Income tax expense of $18.9 million was recognized in the three months ended March 31, 2011, at an effective tax rate of 40.0 percent. Income tax expense of $7.7 million was recognized in the three months ended March 31, 2010, at an effective tax rate of 39.3 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, 2010. There have been no significant changes to our critical accounting policies since December 31, 2010.

### Recent Accounting Pronouncements

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

## Market risk

As filed, 326 characters.

There have been no significant changes to our market risk, related to this topic, since December 31, 2010. 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, 2010.

## Controls and procedures

As filed, 3,437 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 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 three months ended March 31, 2011, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, there have been no changes in our internal control over financial reporting that occurred during the three months ended March 31, 2011, 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, 4,214 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, 2010, 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, 2010, 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, 2011.

***Changes in fertilizer application rates may exacerbate the cyclicality of the prices and demand for our products.***

Farmers are able to maximize their economic return by applying optimum amounts of fertilizer. A farmer's decision about the application rate for each fertilizer, or the decision to forego application of a particular fertilizer, particularly potash and langbeinite, varies from year to year depending on a number of factors, such as crop prices, weather patterns, fertilizer and other crop input costs, and the level of crop nutrients remaining in the soil following the previous harvest. Farmers are more likely to increase application rates of fertilizers when crop prices are relatively high, fertilizer and other crop input costs are relatively low, and the level of crop nutrients remaining in the soil is relatively low. Conversely, farmers are likely to reduce or forego application of fertilizers when farm economics are weak or declining or the level of crop nutrients remaining in the soil is relatively high. This variability in application rates can materially aggravate the cyclicality of prices for our products and our sales volumes. One of the specific risks is that farmers may buy and apply potash or Trio® in excess of current crop needs which results in a build-up of potassium in the soil that can be used by crops in subsequent crop years. If this occurs, demand for our products may shift to earlier periods, resulting in decreased demand in later periods.

***A shortage of railcars or trucks for transporting our products, increased transit times or interruptions in railcar or truck transportation services could result in customer dissatisfaction, loss of sales, higher transportation or equipment costs or disruptions in production.***

We rely heavily upon truck and rail transportation to deliver our products to our customers. In addition, the cost of transportation is an important component of the price of our products. Identifying and securing affordable and dependable transportation is important in supplying our customers and, to some extent, in avoiding delays in the delivery to us of reagents and other supplies and equipment for our mining operations. A shortage of railcars for carrying product as well as increased transit time in North America due to congestion in, or accidents affecting the rail system could prevent us from making timely delivery to our customers or lead to higher transportation costs, either of which could result in customer dissatisfaction or loss of sales. In addition, we may have difficulty obtaining access to ships for deliveries of our products to overseas customers. Higher costs for transportation services or interruptions or slowdowns in these transportation services due to railcar derailments, accidents, high demand, labor disputes, adverse weather, changes to rail systems or other events, could negatively affect our ability to produce our products or our ability to deliver our products to our customers, which could have a material adverse effect on our operating results and financial condition. Additionally, rail interruptions have occurred historically as a result of derailments or track or bridge failures. Sustained periods of rail interruptions could have a material impact on our ability to ship product to our customers and therefore adversely impact our sales levels.

Filed May 5, 2011.
Source: SEC EDGAR, the filing index for accession 0001047469-11-004629. Last ingested by Listed: Nov 4, 2026, 14:52 ET. No prices; not investment advice.