Intrepid Potash Q3 2023 Earnings Call Transcript

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November 9, 2023

There are 7 speakers on the call.

Operator

Welcome to the Intrepiditas Incorporated Third Quarter 2023 Results Conference Call. As a reminder, all participants are in a listen only mode and the conference is being recorded. After the presentation, there will be the opportunity to ask questions. I would now like to turn the conference over to Evan Mapes, Investor Relations. Please go ahead.

Speaker 1

Thank you, Emily. Good morning, everyone. Thank you for joining us to discuss and review Intrepid's Q3 2023 results. With me today is Intrepid's Co Founder, Executive Chairman and CEO, Bob Dornavas and CFO, Matt Preston. Also available to answer questions during the Q and A session is our VP of Sales and Marketing, Zachary Adams And our VP of Operations, John Galasini.

Speaker 1

Please be advised that our remarks today, including answers to your questions, include forward looking statements as defined by U. S. Securities laws. These forward looking statements are subject to risks and uncertainties that could cause actual results to be materially different from those currently anticipated and are based on information available to us today and we assume no obligation to update them. These risks and uncertainties are described in our periodic reports filed with the SEC, which are incorporated here by reference.

Speaker 1

During today's call, we will refer to certain non GAAP financial and operational measures. Reconciliations to the mostly directly comparable GAAP measures are included in yesterday's press release. Our SEC filings and press releases are available on our website intrepidpotash.com. I'll now turn the call to Bob.

Speaker 2

Thank you, Evan. Good morning, everyone. We appreciate your interest in Intrepid and your attendance for our Q3 2023 earnings call. Intrepid's 3rd quarter was highlighted by strong sales with our volumes remaining well ahead of last year's pace. For Potash and Trio, our respective volumes through the Q3 represent approximately 95% 90% of the total we sold in 2022.

Speaker 2

A couple of reasons for the higher sales include: 1st, farmers in the United States are finding good value in potash, U. S. Demand is projected to increase by about 10% to 15% year over year. And second, the premium feed market remains very important for Intrepid With this market comprising just over 30% of our potash sales mix in the 3rd quarter, while also providing the Added benefit of increased netbacks. Looking ahead, we expect continued solid demand in the 4th quarter as harvest for corn and soybeans Tracking ahead of the 5 year average, which helps provide an open window for the fall application season.

Speaker 2

While our volumes have seen a nice rebound from 2022, owing to the impacts from last year's failed extraction well, We've had fewer tons available to sell in 2023 versus what our markets could support, and correcting our potash production trend has been the key strategic priority for Intrepid. Our capital program has been directly focused On revitalizing our potash assets and owing to our strong project execution, we feel very confident that we are well on the way to increasing our production To the high end of our historical range. Before diving into project details, I wanted to provide Some commentary on the outlook for the agricultural markets and potash. Starting with the agricultural markets, as we've been highlighting for several quarters, U. S.

Speaker 2

Farmers are mostly in good shape. They're projected to generate solid profits for the 3rd consecutive year, Have healthy balance sheets, farmland values are close to record highs and futures for soybeans and corn remain supportive. In addition, key international commodities like palm oil, sugar, cocoa and coffee are all still trading at levels That are either higher than historic averages or pushing for record highs. For potash, current pricing, Which is still being impacted by more supply from continued imports of Russian tons into the United States has led to much better value for farmers. This has served as a key catalyst for stronger demand with this trend expected to continue for the rest of 2023 and into 2024.

Speaker 2

On the supply side for potash, global markets still face the possibility of constraints or disruptions. And 3rd party forecasts show that about 40% of the world's potash exports will come from regions with heightened geopolitical risks. Until these risks are resolved, we think we should see a higher floor for pricing in the near to medium term or at least until some of the Where significant supply additions come online. Given the constructive outlook, it's paramount The Intrepid returned our annual potash production back to the high end of our historical range. As I mentioned earlier in my remarks, I'm very pleased to share that our recent project execution makes us quite confident that we are well on our way to meeting our production goals.

Speaker 2

We do want to remind folks that our production cycle for potash takes time. From the stages From Brian Jackson to eventual harvest typically being an 18 to 24 month process. However, The impact from the projects we've undertaken has reduced this time frame to 9 to 12 months at HB and 12 to 15 months at our Moab facility for the long foreseeable future. Moreover, since most of the growth projects were started well over a year ago, with several already having been commissioned, We will start to see more significant incremental production benefits beginning in the second half of twenty twenty four. I now want to quickly touch on some of the key concepts and drivers of our potash production, which will hopefully add some clarity to the technical aspects of our business.

Speaker 2

After that, I'll then go over our project highlights and implications for our production. Throughout the year, we've stressed the importance Two key goals, maximizing our brine availability and maximizing our underground residence time. Maximizing brine availability Essentially means we need to inject as much brine as possible into our caverns at HB. At Moab, We need consistent injection and good brine circulation in the caverns as well as access to new ore and reserves over time. These reserves have multi decade lives with significantly higher resource potential and our drilling projects at Moab are designed to accelerate the process Tapping new ore to increase our brine availability, residence time, which results in higher brine grade.

Speaker 2

For Wendover, we need to ensure that we have as much brine as possible to transport through our canal system, which totals approximately 120 miles in length With the brine then being stored and upgraded in our large scale surface ponds, which have total evaporative surface area of approximately 11,000 acres. In terms of maximizing residence time, this implies letting the brine we inject stay in contact with ore For long enough time to enhance potassium chloride concentration of that brine so that that will eventually extract. By achieving both goals of maximizing brine availability and residence time, the resulting effect is having more volume of higher grade brine to extract, which drives increased production and more tonnes to sell and improves our unit economics. Moving on to project highlights. At HB, limited brine availability has been a key driver of the lower production in 2023.

Speaker 2

This is first and foremost being addressed by the new injection pipeline project, HB1. With this phase, the installation of the pipeline was commissioned roughly 6 months ago and is operating solidly. When Phase 2 of the pipeline is complete, which we expect to occur in the spring of 2024, our injection rates and residence times Should be the highest in company history. However, in the near term, we have 2 other projects at HP that will serve as a bridge To increase potash production, which are also designed to have long term operational life. 1 was recently commissioned in October, Where we were already extracting a very high grade brine into our ponds, with the second project expected to be commissioned in the first half of next year.

Speaker 2

The first project was press released last week, the Eddy Shaft Brine Extraction Project. This project targets 270,000,000 gallons of high grade brine in the Eddy cavern, and we expect all of this brine to be pumped into our ponds ahead of the 2024 summer evaporation season. As for production impacts, we estimate this brine source corresponds to incrementally 85,000 to 100,000 tons of potash product tons, which will be evident in our production figures starting in the second half of twenty twenty four and continuing into 2025. The second project is the replacement extraction well, IP30B, which targets an additional high grade brine pool in the Eddy cavern That the shaft can't access. With this brine pool estimated to contain approximately 333,000,000 gallons of brine.

Speaker 2

Once we finish extracting the Eddie Shaft brine, the larger pool will serve as the next brine source for HB. For one final comment on HB, while these 2 Eddy cavern projects will contribute to higher potash production in 2024 and 2025, they serve another key purpose. By extracting the already enriched brine pools in the near and medium term, we're able to keep injecting brine throughout the entire HP cavern system, including exit Eddie cavern and let that mine build and develop into other sources of high grade brine pools. This is crucial for driving sustained higher production over the longer term as we look to 2025 and beyond. Moving on to our most consistent potash asset, Moab, which has seen an average annual production of approximately 105,000 to 110,000 tons Over the course of 2023, we've had 3 key projects at Moab, all of which were commissioned over the summer.

Speaker 2

They provided modest contributions to our 2023 production and more substantial impacts are expected in 2024. The primary project to highlight is 1245 or cavern 4 project, which created brand new ore for us to target through at least the next decade. Cavern 4 will supplement our brine injection into caverns 1, 23 in potash bed 9 as well as the old mine workings Given the consistency of production at Moab in completely new ore in cavern 4, We expect our Moab production to remain pretty consistent with historic levels with room for upside. Lastly, at Wendover, which is our smallest Our production in recent years has been negatively impacted by multiple weather events, with those being compounded by a lack of brine storage. To mitigate this, we recently commenced the construction of a new primary pond.

Speaker 2

The new primary pond will help increase the amount of brine we can store and evaporate, which is key to improving our production. This project is on track to be commissioned in the summer of 2024. We expect to start seeing positive impacts beginning in early 2025. Overall, we're confident that we're well on our way to returning our annual potash production back to the high end of our historical range. And we look forward to updating the market as we continue to make progress on our potash projects in the coming quarters.

Speaker 2

I'll now turn the call over to Matt. Please go ahead.

Speaker 3

Thanks, Bob. In the Q3, we generated adjusted EBITDA of $2,200,000 And adjusted net loss of $6,800,000 Weighing on this quarter's results was again lower pricing. In Q3, our net realized sales price for potash and Trio averaged $4.33 per tonne $2.98 per tonne respectively with both figures down roughly 40% compared to Q3 of 2022. As Bob noted, while our sales volumes have remained quite strong this year, lower fertilizer pricing as well as elevated carrying costs Are proving to be headwinds for our margins in the near term. That said, pricing for potash and Trio has seen modest increases since our last earnings call And improving our unit economics by means of higher production remains the number one priority for Intrepid.

Speaker 3

To highlight what higher production can mean for our unit economics, We estimate that returning our annual potash production to approximately 350,000 tonnes will improve our cost per tonne by 20% to 30%. Moving on to segment highlights. In potash, our Q3 and 1st 9 months sales volumes totaled 46,000,213,000 tonnes respectively, With the Q3 volume being flat compared to last year, while the 1st 9 months volumes represent an increase of just under 25% versus the prior year period. We've seen strong demand from agricultural customers throughout the year and we've also been selling more tonnes in the feed markets to ensure we take advantage of premium pricing when possible. Our 3rd quarter potash production totaled 43,000 tonnes and we now expect our 2023 calendar year production To come in about 10% lower than our previous guidance of 260,000 tonnes.

Speaker 3

As for the 4th quarter potash outlook, We expect our sales volumes to be in the range of 40,000 to 50,000 tonnes at an average net realized sales price in the range of $4.10 to $4.20 per tonne. This implies second half volumes at roughly the midpoint of the guidance we gave a few months back with pricing likely coming in slightly higher than we previously expected. In Trio, our Q3 and 1st 9 month sales volumes totaled 52,000,000 and 179,000 tonnes respectively, which compares to 39,000,000 and 169,000 tonnes in the same prior year periods. In the Q3, we produced 52,000 tonnes flat compared to the prior year, But we did experience unplanned downtime during underground mining and at the mill. While we achieved higher efficiencies from the new continuous miners, the downtime in Q3 offset these gains.

Speaker 3

As for the Q4 Trio outlook, we expect our sales volumes to be in the range of 35,000 to 40,000 tonnes At an average net realized sales price in the range of $2.90 to $300 per tonne. This implies second half volumes at the upper end of our previous guidance with pricing right in line. In Oilfield Solutions, the primary driver of the lower revenue in Q3 was fewer sales of third party water, which also resulted in lower cost of goods sold. Partially offsetting the lower water sales was higher surface use agreement revenue with the net effect being a modest increase in our quarterly gross margin figure. Lastly, on capital allocation, our priorities remain the same, investing to return our potash production to historical highs, while maintaining our strong balance sheet and liquidity position.

Speaker 3

At the end of October, our liquidity totaled $153,000,000 And while that will decrease as trailing earnings compress compared to 2022, we remain focused on effectively managing our working capital As we continue to execute on key projects ahead of what we expect will be a strong spring fertilizer season. Operator, we're now ready for the Q and A portion of the call.

Operator

Thank you. We will now begin the question and answer session. We will pause for a moment as call has joined the queue. Our first question comes from the line of Joshua Spector with UBS. Joshua, please go ahead.

Operator

Your line is open.

Speaker 4

Hi, good morning, everyone. It's Christopher Perrella on for Josh. With all the projects that you're doing, I know the longer term goal is to get back up to the historic higher than the historical range. What are the near term impacts on 2024 production? What's your outlook for next year in terms of volumes you'll be able to produce?

Speaker 2

Matt, you want to take that?

Speaker 3

Sure. Thanks for the question, Christopher. We're continuing You'll pull that high grade Eddie shaft brine into our ponds right now. And we just started kind of the 2023, 2024 harvest season. I mean, Quick summary, Christopher.

Speaker 3

We're not ready to give guidance on 'twenty four calendar year production just yet, but we certainly think we'll see a nice bump Year over year as we continue to see the effects of this high grade brine, get the effects of the Moab projects we completed in the summer of 2023 and start to see that in the back half Of 2024. So given the variability in weather and evaporation, not ready to put a number out there yet, but we certainly think we'll take a big step towards that 350,000 tonnes as we move forward into the next evaporation season.

Speaker 4

As a follow-up, as I think about Eddie and you've sized it as 85 KT of potash products or incremental product potash tons, does about half of that hit in 2024? And Where do costs go from here given the higher production rates or the potential higher production rates next year?

Speaker 3

Yes. So as far as half of it hitting in 2024, We'll put this 85,000 to 110,000 tons of potash into our ponds for the 24 evaporation season. We'll start harvesting in the fall of 'twenty four there, which we expect will be a much higher feed grade into our mill. That brine will be mixed with brine from the other portions of our Our HB Potash Mine and caverns. And so we'll see just a general increase every month as we Millie higher grade feedstock into our HB mill.

Speaker 3

And so kind of the timing of which ponds we're in at certain times It's variable and can't say what exact grade will be in the fall of 'twenty four, but we'll kind of see that benefit all the way throughout the 'twenty four and 'twenty five harvest season.

Speaker 4

All right. And then one quick follow-up on Trio. You had higher costs in the Q3 from the unplanned downtime. How much were they and do they all reverse out in the Q4 here?

Speaker 3

Yes. From a cost per tonne standpoint in the Q3, I think we're right about $3.40 per tonne. We certainly think we'll see some marginal improvement into the 4th quarter anywhere maybe in the 5% range. We have a pretty big inventory of Trio and so kind of that weighted average cost does take some time to turn over in our COGS. So you won't see that impact immediately in But we think we'll see some incremental improvement in the Q4 compared to the Q3.

Speaker 4

All right. Thank you very much. Appreciate the time.

Operator

Our next question comes from Joel Jackson with BMO Capital Markets. Joel, please go ahead. Your line is open.

Speaker 5

Hi, good morning. A few questions for me. I'll do one at I noticed like in the last few years like Trio, Trio's price as a percentage of kind of potash So they've kind of gone together. It seems like the Trio value relative to potash has been quite stable relatively wise for years when maybe It's been more volatile. Can you explain the value of Trio and Potash that sort of really trade together and care for the last few years, maybe different than prior Cycles, does that make any sense?

Speaker 2

Zach, you want to

Speaker 4

take a

Speaker 2

stab at that first?

Speaker 6

Yes. Thanks for the question, Joel. I think Part of that could be related to our Trio sales today and certainly over the last year have been a higher percentage for our domestic markets. And those typically carry a higher price point than international sales. So that could be related to what you're seeing there as far as it tracking closer to potash With all of our potash sales be in domestic markets as well.

Speaker 5

Okay. Thank you for that. Now if you can get a big chunk, So you have a goal to get the 350,000,000 of potash sales with all the operational expansions you're doing improvements. If You can get a big chunk of the way towards 350. What can we do for costs?

Speaker 5

Like you say you can get 20% to 30% cost improvement. Do you think you can get half the distance to the goal line in 2024? Or what should we think about it?

Speaker 3

Yes. It's like I said, Joel, it's certainly hard to say. We've seen some really good results from the Moab project so far And the brine grade we're pulling out into our ponds. Obviously, the Eddy shaft has been very strong so far. We have no expectations for that decreasing here as we continue to pump out of that And then start pumping out of the IP30B, the replacement extraction well towards the spring early summer.

Speaker 3

That being said, I think kind of just take it to the midpoint. If we can get kind of halfway there, we'll get half of those cost benefits in the 2024, 2025 season and then That full 20% to 30% and we're back towards the 350,000 ton range.

Speaker 5

Okay. Then I mean you've seen a lot of your peers, your potash producer peers over the last week during earnings season really boost up now Expectations for 'twenty four potash demand, 3,000,000, 4,000,000 tonnes. A lot of questions about who's going to supply the extra 3, 4,000,000, 5,000,000 tonnes globally And people different assumptions around what Belarus and Russia can do and what CapEx can do with some of the logistics and logistics constraints. You Obviously, a smaller player in the market, but you and see the lost strength in North America, nutrient raised list prices. How do you see the market right now in potash?

Speaker 5

Anything you open question and how are you seeing more exports come on the river from the FSU? Are you seeing anything in the last Couple of months, making you more excited about the outlook for next year and maybe talk about demand, supply, anything you want within a very broad question.

Speaker 2

Joel, thanks for the question. I think the previous earnings calls you've heard the same story. We expect a pretty robust demand, especially at these values. We continue to see Fertilizer imports out of Russia in all fertilizer products, which is somewhat surprising given the magnitude of the imports We're seeing from Russia, but they're there. We agree with the demand figures that you threw out.

Speaker 2

We anticipate robust demand And that's why we are so laser focused on getting our production back to the high end of our historical ranges. Zach, I don't know if you want to add any color, but we did see a robust 2024.

Speaker 6

Yes, I would just echo that Bob. All signs Fall application has been good across the geographies that we participate in that in. And our expectation is we'll see that continue into the spring. And And obviously the crop commodity prices, they incentivize growers to maximize yields. And not only those Joel, a lot of our markets, We provide nutrients to forage and grass markets and cattle pricing is at historical highs as well.

Speaker 6

And so we see really good demand On the pasture and hay ground across those markets as ranchers look to kind of reinvest in their grass and their acres there as well.

Speaker 5

Okay. Finally, did that

Speaker 2

answer your very broad question?

Speaker 5

Yes, I did. I know Bob you talked about I can't remember what forums whether it was print media or on these conference calls about You can surprise I don't want to put words in your mouth about Russian imports in the States. So, yes. I guess one more question for me on Oilfield Solutions. What kind of expectations directionally like should we expect in 2024 from that business?

Speaker 5

Is it A little higher, a lot higher. If you can give us some of the puts and takes to expect in 24th in that business.

Speaker 2

Most of that business, I would say that the large majority of that business is centered in New Mexico. And so the fundamentals of servicing the oil and gas industry are very strong, But we continue to navigate the regulatory environment. So for example, our Sandman project, we're still waiting on one more permit That we should have had months ago. So we continue to navigate the Continuing complexity of the New Mexico regulatory environment. So it's really hard to give really solid guidance Based on the number of projects that we have teed up and ready to go, that we just continue to wait on permitting.

Speaker 2

So it's hard to give specific guidance when we can't get Specific answers as to when certain permits will come out of regulatory agencies. So I hate to make excuses, But that's the reality of life in Southeast New Mexico right now.

Speaker 5

So if you were like someone like me asked about your company, would you then assume Kind of a similar like base case, balancing all the risks, kind of a similar profitability or similar business size in 2024 versus 2023?

Speaker 3

Yes. I mean, I think that's a good place to start, Joel. We certainly have some opportunities there from the SAM project Bob mentioned. You'll continue to look to increase the high margin sales we have around our fresh water and 10 pound brine that we've had great Success selling and kind of growing that business over the last couple of years. So, I think it's a good place to start.

Speaker 3

It's pretty consistent. You do see and we've talked about this on past calls, Some quarter to quarter variabilities, particularly in our South Ranch where we sell 1 or 2 large fracs a year. And so that variability in Timing of sales can cause some of the quarterly fluctuations, but from a calendar year perspective, it's a good place to start is being consistent with prior year Activity continues to be strong down there.

Speaker 5

Thank you very much. Thanks,

Operator

We have a follow-up question from Joshua Spector with UBS. Please go ahead.

Speaker 4

Hi, yes. Just a quick one. With all the moving parts here in the 4th quarter, is there incremental EBITDA that you're expecting To generate in 4Q here.

Speaker 3

I mean, Christopher, do you mind Maybe rephrasing that, we say incremental to what?

Speaker 4

I'm sorry. Yes. So sequentially, I mean, with better pricing here and And volumes looking a little bit better and maybe cost coming down a little bit. I mean, what's a reasonable range for EBITDA for the 4th quarter? Thanks for taking the questions.

Speaker 4

Yes, we're

Speaker 3

not going to give guidance as far as quarterly EBITDA. But yes, certainly Q3 historically is a low point Sales pickup from just a volume standpoint in the 4th quarter. We had some LCM we took in the 3rd quarter, roughly $3,400,000 And We expect an increase kind of quarter to quarter, but not going to provide a number there.

Speaker 4

All right. The 3 okay. No, that's fair. I was just looking for any other one time items that maybe as I think about modeling this thing modeling Profitability sequentially, you would call out or should be aware of?

Speaker 3

No, I'd say certainly no one time items that we expect right now. And I just kind of reiterate, certainly sales we expect will pick up here in Q4 a little bit, Given kind of the rough guidance on pricing and volumes, hopefully that kind of can help get you there.

Speaker 4

No, I appreciate that. Thank you very much.

Operator

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

Speaker 2

I want to thank everyone in your interest in Intrepid And appreciate your interest. And thank you and have a great day.

Operator

Thank you everyone for joining us today. This concludes our call and you may now disconnect your lines.

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Intrepid Potash Q3 2023
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