Intrepid Potash, Inc. (NYSE:IPI) Q3 2023 Earnings Call Transcript
Intrepid Potash, Inc. (NYSE:IPI) Q3 2023 Earnings Call Transcript November 9, 2023
Operator: Thank you for standing by. This is the conference operator. Welcome to the Intrepid Potash, Inc. Third Quarter 2023 Results Conference Call. As a reminder, all participants are in a listen-only mode and the conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Evan Mapes, Investor Relations. Please go ahead.
Evan Mapes: Thank you, Emily. Good morning, everyone. Thanks for joining us to discuss and review Intrepid's third quarter 2023 results. With me today is Intrepid's Co-Founder, Executive Chairman and CEO; Bob Jornayvaz; and CFO, Matt Preston. Also available to answer questions during the Q&A session is our VP of Sales and Marketing, Zachry Adams, and our VP of Operations, John Galassini. 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 really 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. During today's call, we report 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.
Robert Jornayvaz: Thank you, Evan. Good morning, everyone, and we appreciate your interest in Intrepid and your attendance for our third quarter 2023 earnings call. Intrepid's third 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 third quarter represent approximately 95% and 90% of the total we sold in 2022. A couple of reasons for the higher sales include, first, farmers in the United States are finding good value in potash, where 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 third quarter, while also providing the added benefit of increased netbacks.
Looking ahead, we expect continued solid demand in the fourth quarter as harvested corn and soybeans is tracking ahead of the five-year average, which helps provide an open window for the fall application season. 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. farmers are mostly in good shape. They are projected to generate solid profits for the third 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. On the supply side for potash, global markets still face the possibility of constraints or disruptions and third-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 more significant supply additions come on line. Given the constructive outlook, it's paramount that 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.
We do want to remind folks that our production cycle for potash takes time, from the stages from brine injection 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 nine 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 2024. 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.
After that, I'll then go over our project highlights and implications for our production. Throughout the year, we've stressed the importance of 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 of tapping new ore to increase our brine availability, residence time, which results in higher brine growth.
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 we 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 tons 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. 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 six months ago and is operating solidly. When Phase II 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 two other projects at HB that will serve as a bridge to increased potash production, which are also designed to have long-term operationalize. One 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.
The first project was press released last week, the Eddy Shaft Brine Extraction Project. This project targets 270 million 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 2024 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 million gallons of brine.
Once we finish extracting the Eddy Shaft brine, the larger pool will serve as the next brine source for HB. One final comment on HB, while these two 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 are able to keep injecting brine throughout the entire HB Cavern system, including Eddy Cavern and let that brine 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 for the past 10 years.
Over the course of 2023, we've had three key projects at Moab, all of which were commissioned over the summer. They provided modest contributions to our 2023 production and more substantial impacts are expected in 2024. The primary project to highlight is Well 45 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, 2 and 3 in Potash Bed 9 as well as the old mine workings in Potash Bed 5. Given the consistency of production at Moab, and completely new ore in Cavern 4, we expect our Moab production to remain pretty consistent with historic levels with room for upsell. Lastly, at Wendover, which is our smallest potash operation, 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. 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 and we expect to start seeing positive impact beginning in early 2025. Overall, we're confident that we are 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 upcoming quarters. I'll now turn the call over to Matt. Please go ahead.
Matthew Preston: Thanks, Bob. In the third quarter, we generated adjusted EBITDA of $2.2 million and adjusted net loss of $6.8 million. Weighing on this quarter's results was again lower pricing. In Q3, our net realized sales price for potash and Trio averaged $433 per ton and $298 per ton, 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.
To highlight what higher production can mean for our unit economics, we estimate that returning our annual potash production to approximately 350,000 tons will improve our cost per ton by 20% to 30%. Moving on to segment highlights. In potash, our Q3 and first nine months sales volumes totaled 46,000 and 213,000 tons, respectively, with the third quarter volume being flat compared to last year, while the first nine 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 tons into feed markets to ensure we take advantage of premium pricing when possible. Our third quarter potash production totaled 43,000 tons, and we now expect our 2023 calendar year production to come in about 10% lower than our previous guidance of 260,000 tons.
As for the fourth quarter potash outlook, we expect our sales volumes to be in the range of 40,000 to 50,000 tons at an average net realized sales price in the range of $410 to $420 per ton. 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 first nine months sales volume totaled 52,000 and 179,000 tons, respectively, which compares to 39,000 and 169,000 tonnes in the same prior year periods. In the third quarter, we produced 52,000 tons 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.
As for the fourth quarter Trio outlook, we expect our sales volumes to be in the range of 35,000 to 40,000 tons at an average net realized sales price in the range of $290 to $300 per ton. 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.
At the end of October, our liquidity totaled $153 million, 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&A portion of the call.
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