Intrepid Potash Q2 2023 Earnings Call Transcript

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Provided by Quartr
August 3, 2023

There are 6 speakers on the call.

Operator

You for standing by. This is the conference operator. Welcome to the Interpret Potash Inc. 2nd Quarter 2023 Results Conference Call. As a reminder, all participants are in a listen only mode and the conference is being recorded.

Operator

After the presentation, there will be an 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, Kayla. Good morning, everyone. Thanks for joining us to discuss and review Intrepid's Q2 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 following our prepared remarks is our VP of Sales and Marketing, Zachary Adams.

Speaker 1

Please be advised that our remarks today, including answers to your questions, include forward looking statements as defined by U. S. These forward looking statements are subject to risks and uncertainties that could cause actual results to materially different These risks and uncertainties are described in periodic reports filed with the SEC, which are incorporated here by reference. During today's call, We refer to certain non GAAP financial and operational measures. Reconciliations of these measures to the most directly comparable GAAP measures are included in yesterday's press release.

Speaker 1

Our SEC filings and press releases are available on our website at intrepidpotish.com. I'll now pass the call to Bob.

Speaker 2

Thank you, Evan, and good morning, everyone. We appreciate your interest in Intrepid and attendance for our Q2 2023 earnings call. Positive company and industry fundamentals Drove another solid quarter of results with our 2nd quarter adjusted EBITDA totaling just under $16,000,000 Bringing our first half figure to approximately $32,000,000 Strong sales were again a key highlight for Intrepid and in the 2nd quarter our potash sales volumes We're approximately 40% higher than the Q2 of last year. And for the first half of twenty twenty three, Our potash sales of 167,000 tons already represents about 3 quarters of the total volume we sold in 2022. Behind this improvement was increased potash demand from agricultural markets with feed also remaining a very important market for us, comprising just under 20% of our potash sales in the first half of this year.

Speaker 2

Combination of our geographic and logistical advantages, Along with sales into premium markets continues to support robust netbacks and in the second quarter Our average net realized sales price per ton for potash was approximately $4.80 or roughly 25% higher And average NOLA pricing in Q2. While we recently saw the announcement of a summer fill program resetting prices, We think the trend of strong netbacks for us will continue, which Matt will touch on in more detail in the call. As we look back As we look into the back half of twenty twenty three and into 2024, the key theme of agricultural markets is that it continues to enjoy a positive backdrop In a market very much still intact with higher income levels. New crop futures for corn and soybeans Trade meaningfully higher than levels seen over the last decade, with futures for both markets seeing strength into 2025. Other key international commodities tell a similar story.

Speaker 2

Sugar and cocoa both currently trade at decade highs, Our palm oil futures are roughly 30% higher than the recent 10 year average. Overall, Farmers around the world will likely enjoy a 3rd consecutive year of very good profitability. Moreover, hot and dry weather in the United States, Unabated war in Eastern Europe, collapsing grain deals, I. E. The Russian wheat deal and now this report disruptions All continue to contribute to supply risk and help drive home the importance of having reliable access to commodities such as potash.

Speaker 2

We do want to acknowledge that it's certainly not uncommon for agricultural markets to normalize after several years of close to record profitability. On this note, the market has been looking for parallel trends with a common comparison being to the 2012 drought and the period thereafter. To offer some context, as the drop peaked in the late summer of 2020 12, key crop futures traded at historic highs And aggregate U. S. Farm incomes, what was then record levels the following year into 2013.

Speaker 2

However, annual profitability slowly declined and by 2016, U. S. Farm incomes had decreased to about half the levels from 2013. As for potash during 2013 to 2016, demand in the U. S.

Speaker 2

Actually still showed very solid growth. Over this period, U. S. Potash demand experienced a cumulative annual growth rate of approximately 4%, Our global potash demand grew at 3% CAGR. While this is just one historical example and recognizing that there are certainly different market forces This can help inform a potential scenario for when we do eventually see a period of more normal farm profitability.

Speaker 2

That said, we again emphasize that we remain optimistic on the outlook and agree with 3rd party forecasts that Project steady potash demand growth for the U. S. And the rest of the world in the coming years. I'll now end my prepared remarks with some commentary around our potash growth projects. As a reminder, these projects Are designed to revitalize our potash operations by maximizing our brine availability and brine residence time underground, which will positively impact our business in 2 primary ways.

Speaker 2

1st, higher and more consistent production will increase revenue and cash flow From simply selling more product tons and byproducts. 2nd, higher potash Production will significantly improve our unit economics. We firmly believe that our 3 potash assets are top tier operations And when each facility experiences maximum brine availability, sufficient residence time and normal evaporation, Production at each facility can be significantly higher and more consistent than where we stand today. For reference, within the last decade or so, peak annual potash production at HB was approximately 175,000 tons, Moab was approximately 120,000 tons and Wendover was approximately 105,000 tons for a total of approximately 400,000 tons We're almost 50% higher than our 2023 guidance of 260,000 tons. This helps frame while we've been investing Higher levels of capital, our excitement for the business outlook and why we have created these achievable goals.

Speaker 2

As for recent highlights, we successfully completed Phase 1 of the HB injection pipeline at our HB facility in Carlsbad, As well as well 45, cavern 4 and well 46 various potash projects in Moa. At HB for Phase 1, the installation of a new 21 mile injection pipeline, we've proven injection rates at up to 2,000 gallons per minute, Which is almost triple the average injection of approximately 700 gallons per minute over the previous 5 years. For the remainder of 2023, we'll continue to focus on Phase 2, which is the installation of a pigging system Help reduce scaling and ensure consistent flow rates. Until the completion of Phase 2, we anticipate operating at average injection rates of approximately 1100 gallons per minute, which is still roughly 55% higher than rates prior to starting the project. Also at HB, we recently received the green light on permitting our HB Eddy shaft project The target is an already measured high grade brine pool.

Speaker 2

We expect to start putting brine from this project into our ponds in early Q4 this year. At Moab, the Well forty 5 project or cavern 4 is a newly designed single well cavern system With 3 interlocking laterals that targets completely new ore in potash bed 9 and was commissioned successfully in July. Cavern 4 is designed to have a long operational life and brine measurements so far have shown a solid availability of high grade ore. Well forty six is an additional horizontal drilling project designed to target high grade brine in

Speaker 3

a pool

Speaker 2

The original mine workings in potash bed 5 was also recently commissioned. Well 46 serves 3 key purposes. 1st, to contribute to our 2023 potash production when harvest begins in the Q3. 2nd, create a medium to longer term Reliable wellbore access to drill additional laterals to target unmined ore or access other stranded brine poles. And 3rd, serve as a backup for other injection extraction wells.

Speaker 2

At Moab, after successfully commissioning wells 45 and 6, We kept the rig and crew on-site to drill 1 more horizontal lateral. For this last effort, We used an existing vertical well as an access point and then horizontally drilled a lateral or whipstock from the vertical well With this new lateral designed to provide better access and brine circulations to one of our other horizontal caverns. Similar to oil and gas well workovers, our horizontal caverns at Moab occasionally need revitalization, reworking We've demonstrated so far this year. We remain confident that the capital we're spending will position our revitalized potash assets For higher and more consistent production and in turn help ensure that we fully capitalize on the magnitude of the opportunity in developing our long life potash reserves for many decades to come, as well as a strong attempt to reduce the cyclicality that can be a result of lesser brine availability. I'll now turn the call over

Speaker 4

to Matt. Please go ahead. Thanks, Bob. In the second quarter, we generated adjusted EBITDA of $15,900,000 And adjusted net income of $4,300,000 Fertilizer pricing has continued to trend lower following peak seasonal demand And our average net realized sales prices in Q2 for potash and Trio were $4.79 per ton and $3.33 per ton respectively, which compares to last year's figures of $7.38 $4.93 per ton. While fertilizer pricing has seen the expected reset, The market clearly found good value in the quarter and our Q2 sales volumes of potash and Trio came in ahead of our expectations in early May.

Speaker 4

In our potash segment, our 2nd quarter and first half twenty twenty three sales volumes totaled 79,000 and 167,000 tons respectively, which represents respective increases of approximately 41% 33% compared to last year. Agricultural customers comprised roughly 80% of our total sales, up from 72% in the first half of last year, While feed comprised 18% of our potash sales. In July, we saw the announcement of a summer fill program at $3.70 After a very positive response during the order window, The price is now up $30 for spot tons in the 3rd quarter. In Trio, our second quarter and first half twenty twenty three sales Volumes totaled 63,000 and 128,000 tons respectively, roughly in line with how our sales were tracking last year. The first of 2 new continuous miners began operating during Q2, which drove improved production in the back half of the quarter.

Speaker 4

We also recently took delivery of the 2nd new miner and expect to put it into operation by the end of August. Going forward, we plan to produce at Quarterly run rate of approximately 60,000 tons, although we should see higher efficiencies in getting to that figure with both new miners operating. Before moving on to our second half guidance and capital program, I'll quickly touch on the Oilfield Solutions segment. During the first half of twenty twenty three, we sold less water owing to fewer large frac jobs and saw reduced surface use agreement revenue, which were the key drivers of the lower margins compared to last year. Our activity calendar currently looks better for the second half of the year and we continue to make progress On our project to capitalize on the extensive sand resource at Intrepid South.

Speaker 4

As for the outlook for the remainder of the year, We expect a combination of attractive fertilizer pricing, solid agricultural fundamentals and a potentially earlier harvest to drive a strong fall application season in the U. S. For the second half of twenty twenty three, we currently expect our potash sales volumes to be in the range of 85,000 to 95,000 tons At an average net realized sales price in the range of $3.95 to $4.15 per ton. For Trio, we expect our sales volumes to be in the range 75,000 to 85,000 tons at an average net realized sales price between $2.90 to $300 per ton. Moving on to our capital program.

Speaker 4

In the 2nd quarter, our capital expenditures of $21,000,000 brings our first 6 months spend to approximately $42,000,000 with the bulk of our spend being directed to our major potash projects at the Moab and HPE Solar Solution Mines. We expect our full year capital program will be in the range of $65,000,000 to $75,000,000 which will be dependent on market conditions and permitting process timelines. Key projects for the remainder of 2023 build on recent project successes and include Phase 2 of the HB injection pipeline And Eddie Schaff project at HB and continued development of our sand project at Intrepid South. For our capital allocation priorities, We remain committed to maintaining a strong balance sheet and our current net cash balance sheet and liquidity of approximately $165,000,000 Puts Intrepid in a position of strength. As we finish the remaining major capital projects we've discussed over the past year, we'll assess the production impacts And make further investments as needed, but we're very encouraged by our execution and already seeing positive impacts to our business.

Speaker 4

Operator, we're now ready for the Q and A portion of the call.

Operator

We will now begin with the question and answer session. And your first question comes from the line of Joshua Sachter with UBS. Your line is open.

Speaker 3

Hi, guys. It's Lucas Berman on for Josh. So just wanted to sort of start on the potash volumes. So it Sounds like that's from your guide that second half is basically going to kind of be flat year on year. I mean, you made a lot of progress during the quarter with the initiatives to improve So I just wonder if you could kind of give us your kind of lightest view there on how that's actually going to flow through the volumes next year and in 2025?

Speaker 3

Thanks.

Speaker 4

Yes. I appreciate the question. As far as volumes 2024, 2025, certainly I'm not prepared to give guidance on that just yet, but I think the execution of CAVERN 4, the Well forty 5 project and Well 46 certainly puts us in A great position to see an increased brine, increased residence time and you'll start to kind of move back up that trend line towards the 350,000, 390,000 tons of potash that we're certainly capable of?

Speaker 2

Yes. Really want to just go by facility by facility. If you look at the HP We're now injecting at rates 50% to 60% higher than we were just a few years ago. So by injecting more brine into the mine itself, we'll be completing We just started construction on the HB shaft, which will be an additional withdrawal point as well as IP30B is targeted for the Q4, Q1 As a replacement to the failed IP30A well. And then we move on to Moab, cavern 4, which is well 45, Well 46, the whipstock off the existing vertical well and the existing cavern 3, All have been very successful executions of pretty complex technological issues revolving around drilling.

Speaker 2

So each one has been executed successfully. Each one is now producing and has brine additional brine online. And so the common theme that we'd really like you to take away is that each place we're injecting more brine, We're on a path to withdraw more brine at HB, the same thing at Moab and you'll be hearing about updates at Wendover here very shortly. So thank you for the question.

Speaker 3

Thanks. And then just wanted to sort of touch on your Capital expenditure on the projects and sort of the free cash flow. So I was just wondering if you could kind of give us an idea of sort of what you're thinking for free cash flow in the second half of this year. And then just on the CapEx side, obviously, your spend has been sort of executing on the project. So I was just wondering how you're expecting that to kind of trend The next couple of years as you kind of continue to work through that there and sort of stay around the kind of $70,000,000 a year Or sort of drop back Laura as that rolls off.

Speaker 3

Thanks.

Speaker 4

Certainly not going to get out too far Ahead of ourselves for the back half of the year. I think from the guidance we've given, you're spending $42,000,000 of our $65,000,000 to $75,000,000 in the first half. I mean, we'll certainly see sales slow down as is normal for the back half of the year. And so cash flow from operations will slow down in the second half. That's why we have Our credit facility and a strong balance sheet to continue to execute the projects we need to.

Speaker 4

As far as I'm sorry, the second half of your question, do you mind repeating that? I apologize.

Speaker 3

Sorry, the CapEx. Yes, the CapEx side, I was just trying to understand like what is basically spend is I mean, you're engaging in the project, so I shouldn't spend as reasonably fixed the next couple of years while you execute on that, right? So just trying to understand what you think is your, I guess more normalized maintenance level going forward versus what you're spending near term to kind of execute on the Potash expansions.

Speaker 4

Yes. Our sustaining capital trends anywhere from $20,000,000 to $30,000,000 per year, just depending on kind of major replacement projects. We've executed a lot of the big opportunity projects this year with our HB pipeline and our Moab caverns. And like I said, we'll see kind of how those Projects progress and the improvement we get here in the next evaporation season as we continue to increase residence time and brine availability, but we do expect that capital Number to come down in 2024 2025, kind of the big slug of capital here in 2023 for kind of that low hanging fruit in Moab and HB. And never know exactly what the future holds, but expect the opportunity capital side to be less in the coming years.

Speaker 3

All right. Thanks. And then maybe just lastly on processing. Sorry, was the processing number that you got at Potash, was that the 3rd quarter or second half?

Speaker 4

That was second half for both Potash and Trio.

Speaker 3

Okay. Yes, so I was just going to kind of ask about your expectations there Relative to kind of I guess your competitors have sort of been talking about very strong kind of summer fill program here in the 3rd quarter with pricing kind of Potentially then moving up into the Q4. I mean benchmarks have also sort of stabilized and started to move higher in recent weeks. So I mean it sounds like if I was going to kind of take your second half number, you're probably are you expecting any reset at all in the 3rd quarter there and a move up or I mean it seems like it's going to be pretty shallow to kind of get to that average overall?

Speaker 2

You're You're talking about a shallow correction or when you say shallow?

Speaker 3

Sorry, yes. So your realized pricing was $480,000,000 in 2Q. You're expecting sort of $395,000,000 to $415,000,000 in the second half. I assume we'll get a seasonal uptick in the 4th quarter. So just trying to kind of understand how you're thinking about the 3rd and 4th quarter sequential dynamics there on potash pricing?

Speaker 2

Well, the fundamentals are extremely strong. So if you can separate fundamentals from reality, if we look at the entire Commodity cycle, it's extremely strong. If we want to look at crude oil pricing, Copper pricing, we want to look at cocoa, sugar, coffee. We see corn, wheat, Soybeans at elevated prices. So if we look at the entire commodity cycle, there is no reason to believe that the entire commodity cycle Shouldn't continue to be strong and given global farmer economics, there is no reason From a supply demand standpoint and fundamental economics for the farmer income for prices to deteriorate Very significantly from the levels where they exist today.

Speaker 2

So now markets are markets and different Producers may choose to do different things, but the underlying fundamentals of both the commodity markets And especially the agricultural markets remain quite firm, which justifies current fertilizer pricing.

Speaker 3

All right. Thank you.

Operator

And your next Question comes from the line of Jason Ursiner with Bumbershoot Holdings. Your line is open.

Speaker 5

Good afternoon. Thanks for taking the questions. Just to follow-up, I wanted to try to get, I guess, some more of your thoughts on the summer fill, just because it's a little confusing. And I know you guys don't set it, you're kind of continuing with it. But Kind of to your point on the fundamentals, it felt like pricing had really strengthened significantly in 2021 before the invasion.

Speaker 5

Then the invasion of Ukraine happened. There was a big spill at the distributor level where they were kind of getting ready. Farmers, I guess, balked on price a little bit, took the potash holiday demand disruption distributors and then really ran down inventory. And now you're kind of in this situation where the fundamentals have kind of come right where I think people thought, which is that Farmer yield was being impacted and distributors inventory is super low. So I guess What are your thoughts on why is the summer fill kind of happening the way it is?

Speaker 5

I mean, they seem surprised that demand is Extraordinary for the Summerfield, but it almost feels like they're kind of rewarding people for Taking the time off, just trying to get your thoughts on how that summer fill is playing out.

Speaker 2

Jason, it's a great question. As you've listened in over the years, you know that I'm not a proponent of fill programs. I think especially this summer, there was no need for a fill program. However, we don't drive that market. And so the producers that chose to have fill programs Saw the demand that they knew that we're so I think they've simply conditioned farmers to wait for and then participate in a fill program.

Speaker 2

And so I think it's a question better asked of some of the other producers why they choose that route because given the robust economics, We don't think it was necessary.

Speaker 5

Okay. And then just on the cost side, you gave Some great details on the revitalization programs. And I know you haven't communicated in terms Cash cost in a number of years and I'm not asking specifically on that. But just to the extent you do have this common theme of more prime, Withdrawing more brine, more time underground and just kind of a normal a more normalized year in general, how what is kind of the magnitude of What consistency could mean to the cost side of your operation given where you are today, which seems pretty elevated?

Speaker 2

I hate to just drop percentages, but if you increase your production by 50% at a fixed cost operation, You should enjoy a cost reduction, not literally dollar for dollar, but you should see cost reduction. And then once again, I'm going Draw ballparks in the 20% to 30%. And so, as we as these projects continue to successfully come online And deliver the high quality brine into the ponds. We measure the precipitates. We fully intend to be able to give much more Targeted guidance is to what those production levels look like and then allow us to address what kind of cost reductions we've achieved.

Speaker 5

Okay. And just with the capital CapEx Program opportunity capital, not going back to maintenance, but being less than where we are now. If pricing stays Roughly where it is, which obviously isn't in your control, but if it does and your costs are coming down, it seems like just kind of the model you're going to be making pretty good cash flow. You're already in a net cash position. So when you start to think about capital allocation longer term, I guess where does that kind of lead you to thinking?

Speaker 2

We always want to maintain a verbal Our strong balance sheet, we've said that year after year and we've been able to do so. Once you've achieved The production levels that we feel we can get back to, then you can put leverage, a reasonable amount of leverage Back on the balance sheet, once you've achieved the consistent sustainable production that we want to achieve. So right now, our leverage profile, if and when we take on leverage, it's going to be at a very modest levels. And once we finish out this capital program and are able to clearly evaluate the results, Then you can begin to look at leverage in a different way. We've already shown our willingness to have a pretty significant stock buyback program And we hope to get back to that and be on a much more regular basis.

Speaker 2

But I think we demonstrated in 2022, our willingness to buy back stock and that willingness remains.

Speaker 5

Okay, great. I appreciate the time. Thanks.

Operator

And this concludes the question and answer session. I would now like to turn the conference back over to Bob Jornavaz for any closing remarks.

Speaker 2

I want to thank everyone for taking the time to be on the line today. We appreciate the questions and the interest in Intrepid and look forward to seeing each of you on the road. Have a great day.

Operator

And this concludes today's conference call. You may now disconnect your lines. Thank you for participating and have a pleasant day.

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Intrepid Potash Q2 2023
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