Gary Kohn - Vice President of Investor Relations David W. Honeyfield - President and Chief Financial Officer Kelvin G. Feist - Senior Vice President of Sales and Marketing Robert P. Jornayvaz - Co-Founder, Executive Chairman of The Board and Principal Executive Officer

Mark W. Connelly - CLSA Limited, Research Division Michael E. Hoffman - Wunderlich Securities Inc., Research Division Ben Isaacson - Scotiabank Global Banking and Markets, Research Division Thomas Ackerman Donald Carson - Susquehanna Financial Group, LLLP, Research Division Vincent Andrews - Morgan Stanley, Research Division Adam Samuelson - Goldman Sachs Group Inc., Research Division Christopher Perrella - BofA Merrill Lynch, Research Division Joel Jackson - BMO Capital Markets Canada Mark R. Gulley - BGC Partners, Inc., Research Division Matthew J. Korn - Barclays Capital, Research Division Bill Carroll - UBS Investment Bank, Research Division Charles N. Neivert - Cowen and Company, LLC, Research Division

This is the conference operator. Welcome to the Intrepid Potash, Inc. 2013 Third Quarter Conference Call. [Operator Instructions] At this time, I'd like to turn the conference over to Gary Kohn, Vice President Investor Relations. Please go ahead.

Thanks, Brock. Good morning. Thank you, all, for joining us for our third quarter 2013 earnings conference call. Presenting on the call today are Dave Honeyfield, President and Chief Financial Officer; and Kelvin Feist, Senior Vice President of Sales and Marketing. Also in the room with us today are Hugh Harvey, Executive Vice Chairman of the Board; John Mansanti, Senior Vice President of Operations; Martin Litt, Executive Vice President and General Counsel; and Brian Frantz, Vice President of Finance and Chief Accounting Officer. Bob Jornayvaz, our Executive Chairman of the Board is traveling and unable to join us today. I would like to remind everyone that statements made on this call that are not historical fact or that express our belief, expectation or intention, including statements about our financial operational outlook, are forward-looking statements within the meaning of the United States securities laws. These statements are not guarantees of future performance and are based on a number of assumptions, which we believe are reasonable. Forward-looking statements involve risks and uncertainties that could cause actual results to differ from our expectations. You can find more information about these risks and uncertainties in our annual report on Form 10-K and subsequent quarterly reports on Form 10-Q as filed with the SEC. Also during today's call, we may refer to certain non-GAAP financial measures such as adjusted EBITA, adjusted net income and adjusted net income per diluted share. Our earnings press release includes reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures. Our SEC filings and our press releases are available on our website at intrepidpotash.com. I will now turn the call over to Dave.

Thanks, Gary. Good morning, and welcome to everyone who has joined us for today's call. The most important news for the third quarter is the progress we continue to make on our new and upgraded assets that will enhance our operations by lowering cash operating cost per ton, increasing production and providing more flexibility in our processes to allow us to pursue the best margin sales opportunities. This has been a planned multi-year program that is now reaching its desired end goals. In the quarter, our teams brought each project closer to the finish line, setting us up to start realizing the benefits of the investments as we move through 2014. Specifically, we have recently placed the first 2 lines of our new North Compaction facility into service and are happy with the new capabilities that the plant offers. We completed construction of the HB wells, pipeline and pond and, beginning in August, we have filled all the solar evaporation ponds with potash-rich brine. We've continued construction of the HB mill, with the target of beginning our first harvest of potash and delivering first production near the end of this year. We completed the drilling of the third cavern system at Moab and we're set to begin circulating brine. And we continue to make upgrades for improved recovery at our West facility. As we bring these projects into operation, the opportunity to lower our cash operating cost becomes more apparent. As the HB Solar Solution mine progresses, we expect to see increased production and, proportionally, more of our tons, delivered by low-cost solar evaporation, which better positions us for the long-term opportunities. Importantly, the capital to bring these investments to completion has already been earned and raised. Through this phase of substantial capital investment, we have maintained a strong balance…

Thanks, Dave. The long-term drivers of the potash market remain in place. However, and not surprisingly, we were not immune to the recent conditions that have impacted the industry. Our third quarter results with a 37% decline in potash sales volume compared with the same period last year and a 19% decline in Trio sales volumes. Looking at the 9-month results, potash sales volumes were down 17%, while Trio sales volumes improved 17%. We do not believe that these sales are lost but merely postponed. Given the market disruption and the resulting pricing environment, dealers are waiting to place orders until farmers begin making purchases. The positive here is that the product demand still exists, as farmers continue to apply potash, recognizing that it has a key role in the maximization of yields. Today, farmers are busy harvesting their crops and, in the near future, we anticipate that they will complete this task and direct their attention toward fieldwork and fertilizer application. We believe that we are well-positioned in the market to meet the surge in demand with just-in-time delivery of our potash products. We were able to offset some of the potash weakness in the agriculture market through our diversified channels, including the industrial and feed markets. For this reason, we have made a concerted effort during the last few years to grow and diversify our end markets, expand our product flexibility and build on our strong customer relationships. In the third quarter, our net average realized sales price for potash was $363 per ton. We expect ongoing market pressures to continue to move prices downward in the fourth quarter. What won't change, however, is our expectation that we will continue to be the net average realized potash price leader in North America. The keys to our price advantage…

In summary, our strategy remains straightforward and is aimed at margin expansion opportunity by focusing on expanding our low-cost production footprint, with additional tons produced through the combination of solution mining and solar evaporation; by completing our investments in major capital projects to increase production and lower cash cost; by creating the capacity to granulate 100% of our potash to increase our marketing flexibility; and by marketing our products in a responsible manner, focusing on our relationships with our customers and achieving the highest average net realized sales prices in North America. With that, we're ready to turn the call over for questions.

[Operator Instructions] Our first question today comes from Mark Connelly of the CLSA.

Two things. First, with respect to the modifications you're doing at East, can you give us a sense of what you're doing now and how it relates to what you were doing before? And any rough impact on what the total impact that's going to be on total production is going to be in '14? And the second question, you mentioned the $50 million to $75 million spend range, which is not new, but as you think about these incremental opportunities, down the line, at AMAX and at HB, have you started to think about the timing of those projects yet or is it just too early?

Thanks, Mark. I think, maybe a clarification would be helpful. With regards to what's going on at East right now, most of the work at East is actually complete. And I think, you'll recall, that we had quite a bit of discussion over the last year about the -- really, the operating improvements that have been taking place. And the East mill is actually running pretty well right now. What we're focusing on at East right now is the ore grade that's being delivered to the mill and that ore grade has been delivered at a little bit lower percentages than we had put into our budget at the beginning of the year. We're working through mine plans on that right now and expect to see some stabilization around that as we move through 2014. We are making the modifications at the West facility and that's really a combination of what's going on with the mining capacity we've added over the recent years. And the ability to compact that product through the new North mill. Because East, pardon me -- West and North are really a combined system. So I think that's a little bit helpful to understand. On the base production, I think we'll -- as we look forward, I expect -- I would expect to really see things stay fairly steady through 2014, with the exception of the new HB tons that we expect to see coming on during the year. And that will really be set up through the 2 harvests that occur, the one that happened starting this winter and then the one that will happen starting next fall. So we'll see a little bit of additional production coming through the first half of the year and then more of that will be back-end loaded. And then with regards to your second question on the capital range and the timing around the additional sulfur solution mining, we're really going through that evaluation phase right now. I would expect that, that work would probably start sometime during 2015. Right now -- but again, if we can move that forward, we certainly will, based on what we think could be very positive operating characteristics of that associated with solution mining.

The next question comes from Michael Hoffman of Wunderlich.

Dave, I think, if I understood the last one, I wonder, the net into it. How should we model or think about the improvement in cash cost on potash based on your ramp from HB solar, first half '14 and then second half '14? How do we -- how would you think about -- how we should look at that modeling? And I'm assuming -- I'm taking $198 from the third quarter and trending that.

Yes. I think, on that front, Michael, that as we look at cash cost for next year, there's really, probably, 2 major items that I would look at. One is, clearly, we're going through this tie-in phase at our existing operations, which is really largely affected by what's happening at West and focusing on the recoveries there. So I actually see that's improving on our cash operating costs from our base properties, and probably getting back closer to where our original guidance was at the beginning of the year, which was somewhere in that $185 to $195 range, on that. So that would be step 1. Our initial harvest from HB, again, that will happen over -- probably, up through March or April of 2014. And with that being a little bit lower operating rate, that should come in, we hope, a little bit lower than where our average is, but certainly, the $80 per ton cash margin -- or, pardon me, cash cost that we have described, I really see that gradually getting there as we get to full harvest, full solar evaporation season, the ability to have brine circulating in the mines. So that really starts to come into play later in 2015, in the second half year, which is effectively our third harvest, if you think through it. So we'll see improvements coming through as those additional tons come online. But it will really -- that improvement will be a little bit gradual.

Okay. So let me repeat so that I think I understand it. You do -- if you get back to $185 to $195, the first half '14 you would see below that modestly benefiting from the initial harvest. And then there's a sort of continuing gradual improvement as you do second harvest and then you get the max benefit by the third harvest.

I think that's a great way to sum it up.

Okay. And then, with regards to the cash flow, how do we think about the timing of evidence of this improvement in cash flow? When do we get the first real indication that okay, it really is turning?

Well, I think, the most significant benefit of that will probably start to show in third to fourth quarter of 2014, Michael, because what'll happen is we'll start harvesting second harvest sometime around August, September timeframe. So, clearly, those tons will start to get sold in the fourth quarter of 2014, is where you'll to start to see the most significant impact.

Okay. So from a free cash flow standpoint, you, in what I'm hearing, is you'll still be negative in 4Q, 1Q, 2Q, and then you turn positive 3Q, 4Q? Or will you turn positive before that? This is on a free cash basis.

Yes. I expect we'll be -- keep in mind that each of our operating facilities continue to be net-positive cash flow, right now. And when we think of free cash flow, the capital investment will have a little bit of carryover, I think, into the first quarter as we wrap up North. We'll probably have a couple of small items coming on at HB. And that's when -- first and second quarter is when more of our West improvements happen. But I would actually see us, and hope to be, at a free cash flow situation in the second quarter and see that continuing through third and fourth quarter. Thirdly, pricing and sales levels are going to have an impact on that. We all know that impact. It is just something that we're going to have to manage too. But our expectation is we're going to manage to a free cash flow number for '14.

Okay. And then last question for me. Your sales projection for the quarter is a nice improvement, sequentially. So what indications are you getting from the distributors that somebody is going to make the first move and push through the prisoner's dilemma issue and start buying?

Kelvin, can you respond to that one, please?

Sure. Let me try. I guess, what we see in -- and that we're -- we've been seeing here for 1 week or 2 now. As I have indicated, the harvest is just kind of beyond half way, I guess, in the Midwest. And so, what we're seeing is some pretty strong demand going to the field right now on a [ph] plowed-out scenario, on both phosphates and potash. So our expectation is that, that will continue. And so long as we don't have weather issues, we expect that this is going to be a pretty strong fall application season. So the fact that we delayed, relative to last year -- if you remember, last year was very, very early because of drought and -- quickly dried down their crop. This year, we actually got a lot of moisture and they're delayed in their harvest. So now that they're completing that, we expect that they're going to get to fertilizer application. And all indications are that they plan to do a similar or slightly more than they have done historically.

The next question comes from Ben Isaacson of Scotiabank.

Just 2 questions. Dave, when we go to the out year, let's call it 2016, can you talk a little bit about the variability in your cash costs? What will the low be, what will be the high be and what will be proportions of that be? And then my second question would be for Kelvin. Maybe just some commentary on whether you're seeing increased imports of potash into the Gulf. And if so, by who and where is that product moving? And is that a threat to your netback advantage?

Ben, this is Dave. With regards to your first question, when we look forward to 2016, what we envision at that point in time is that about 35% to 40% of our tons will be delivered by solar solution mining. And those tons, as you know, are our most profitable tons, with a cash cost, if you factor in the HB tons, I think, in our most recent investor presentation, we've shown a kind of an indicative example of what that looks like. And I think it took our midpoint down by -- was it 17%?

It ran around 11% or so. But yes.

Oh, that ran 11%. The variability on that -- variability, there's clearly variability in any mining operation. And then, we always see variability in terms of the evaporation seasons, based on was it really a dry year? Was there some moisture involved? And that's -- what we've said historically, is that's a, plus or minus, 20%. And it's just an inherent variability that we need to manage to and accept. But on average, like I said, we'll see 35% to 40% of those tons coming in, in the form of Solar Solution mines. So then overall, very positive effect on cash flows. Kelvin, if you want to take the second half of that?

Sure. Let me try this, Ben. Just with regard to imports, we've seen several vessels recently show up in New Orleans. Our expectation is that it's a similar volume to other years, that we're going to see come in as imports. The rivers are in a competitive environment, and more return than many other markets that we play in. And I guess, that's partly why we don't ship a whole bunch of product to the river. Certainly, the Canadians participate with barge sales on the river. You've got some Russian product and some Israeli product there. And I think everyone is competing for that same opportunity. So as I said, very competitive. I think, the way I see our business is we try to spread our tons across a pretty big geography. When you think about Utah, we're really -- we're playing in the Pacific Northwest and, specifically, there's some -- quite a bit of industrial business up that way. But I think all our -- all of our tons, we've got a pretty good diverse plan there, participating in the feed business, the industrial business and then the ag business. That's Texas, that's Western Corn Belt, that's a number of different areas. So as we spread our tons, we don't see a significant change in terms of keeping that advantage relative to our competitors.

Okay. And maybe just a point of clarification, Dave, in terms of the first question. Sorry, I wasn't asking about the variability of solution mining in cash cost, I wanted to know the variability of overall. So in 2016 are your highest cost tons going to be kind of $20 per ton higher than the solution mining? Or how should we think about that?

Well, Ben, I really do think that, that indicative model that we put together in our IR presentation does a reasonable job of showing what that looks like, because if you look at our overall cash cost per ton over the past couple of years it -- I mean, it's been relatively flat. And the composition of where those tons come from has been pretty consistent. Clearly, with some of the work we're doing at West, we have an expectation that we will see a lower cash cost associated with an overall improvement in per-ton economics. And then we'll be -- we've got the solution mine tons that come in. So I think that, that model actually gives a pretty good example of what things look like going forward.

The next question comes from Christopher Parkinson of Crédit Suisse.

This is, Tom Ackerman filling in for Chris. So on -- as a follow-up to the cash cost questions. For Trio, specifically, you cited a lower ore grade as the primary reason for the increased production costs. Could you provide any additional information as to what run rate we should be looking at for Trio going into 2014?

Yes, Chris -- or, pardon me, Tom. I think, right now I'd probably model in somewhere close to about 50,000 tons a quarter. Like I said, we're going through some of that work in our mine plan. And the piece that we're really trying to drive towards is what's the most effective model for our East facility. As you think about the fact we do have a little bit of flexibility in terms of where we had our miners, whether they're in the more intense sulfide areas of or more intense potash areas or more intense Trio areas. So that's where I would look to. If you put those rates on, relative to some of the past quarters, I think you can get a feel for where that takes cash costs associated with that facility. So I don't know that necessarily third quarter is indicative of that run rate. I'd say, second quarter is probably a little bit more indicative of where we expect to see Trio costs.

Okay, great. And also, can you comment on what you're hearing from your customers regarding product movement? Particularly, looking at the shorter fall application window versus a lack of future pricing visibility?

Sure. Kelvin, do you mind touching on that a little bit?

Sure, Tom. We typically see the farmer having to step in and start applying before we start recharging some of those bins. So right today, we're hearing a good response at the -- I'll call it the farm gate. But we have not seen a significant amount of movement back into those warehouses. So it's starting, but it's just on the very-early stages of that. So the other part of your question was relative to timing. And, I guess, if you look at traditional, we're really not late today. We're late relative to last year. But there's a lot of application that tends to happen after Thanksgiving or in that timeframe. So I guess we're hoping that we have an open window from here through Thanksgiving and beyond, and that will allow all farmers to get the product that they want. But that's really an unknown that I really can't guess that today. They do have a significant amount of moisture that they've gotten, so the drought risk or concerns in many of the areas are somewhat abated. And so things are looking pretty positive at the farm gate today. And so as long as we have decent weather, we're going to have a good run this fall.

The next question comes from Don Carson of Susquehanna Financial.

Dave, a question on the expansions. With more product coming out of Canada, with expansions there, particularly in 2015 when Vanscoy is up and running, do you think you'll be able to have to shut in some of your existing capacity? Or, basically, with these expansions, who do you think you'll be displacing from the market?

Don, this is Dave. Thanks for the question. Without a doubt, and I think Kelvin touched on elements of that earlier, competition is -- it's very robust in the U.S. And I think the advantage for us is that we have made some very intentional steps over the last couple of years and we continue to do so. Where we look at trying to secure space where we can move our tons through, we try to do that over a fairly broad geography. We continue to emphasize the importance of the industrial and the feed business as an ability to diversify our tons. So in a lot of ways, we've already built some of that capacity to move these tons into the system. And my guess is, it still be -- it may touch, a little bit, several people's current tonnage. But we don't expect it to be such a dramatic effect that it would necessarily cause the reaction or much pressure around the market. So I think, it's, again, some of those very key marketing tenants. And, then again, you add on to that, that we've built that flexibility into our production system, where I think we've got a good handle on what the market sizes are for certain products. And we have that ability to flex our production model to sell a certain amount of standard, if that's what we need. And if we need to ramp it up to granulate 100% of our product, we have that capability now. And that's something that is really growing for us over the last couple of years, through our investments.

Just a follow up. I assume one of those tools is consignments sales or price-protected sales. What percentage of the industry now is on some sort of price-protected basis, to induce the dealer to take the product or, as you say, to secure that floor space? And how does that meet the accounting definitions of an actual sale? Or are you still just booking that as inventory?

Sure. The accounting piece is the easy part of that question. Kelvin, if you can maybe think about the market piece on that in terms of the industry. But the accounting fees, I can comment on how we do it and how I think folks should do it. But if you have consignment tons, definitionally, those are still our tons in someone else's space. And those tons stay on our inventory. And we don't recognize those as a sale until that ton is reported sold by the customer. If there is a price protection color or something on those lines that exist on a ton, what we do is when that ton is sold, we recognize revenue to the floor price on that, because that's the piece we know with certainty. And then when that eventually settles up, we adjust it at that point in time. So it's certainly becoming a bigger part of the market than it's been -- it was 5 years ago. And it's one of the tools that we see producers use and they try to make sure their tons are in place. Donald, maybe I'll just add, I mean, a lot of the large warehouses today have some kind of support from a producer. Now those things aren't always static and they don't stay with the same producer forever. So some of those move around year-to-year and what not, depending on what the customer is looking for. But I would say, at the reseller level or a level above the dealer in the field, certainly most of that, the big warehouses, have some type of commitment to them from somebody. We use a number of different tools in our portfolio. And I guess we really ask our customer what they like best and if that's the consignment then we follow that track, if it's something else, we go a different direction. So I think we show a little bit more flexibility than some of the cookie cuter models that are out there today. Just coming back to your question about how we're going to place our tons, we typically see more opportunities than we're able to supply. So the way we see it is some of our key customers have more tons that we may have access to. And so we anticipate growing our business for some of those customers. So, I guess, today we don't see a significant challenge in placing those -- some of those new tons.

The next question comes from Vincent Andrews of Morgan Stanley.

Question on price. Could you kind of just walk us through how price played out during your third quarter? Obviously, there's sort of a before-and-after component of it. And then, I know, your expectation was -- you said earlier, that it's going to be lower in 4Q, and it's a little uncertain out there. But can you talk about what you're seeing now as the -- it sounds like the season is starting to pick up? And what you think will happen to price as we sort of come out of the fall application season over to winter?

I'll touch a little bit on what we saw transpire over the quarter. And, Kelvin, if you can touch a little bit on what you see happening today. Obviously, during the -- we know during the quarter we saw the events unfold in -- right at the end of July. And that just created a major, I'd say, delay or stop in the market. And there were several periods during the quarter that, certainly, the larger Canadian producers took down price. And I don't know if that was in an attempt to try to spur a little bit of demand or such. But it was a couple of decent sidesteps that took place right there in the middle part of August and then again towards the end of September. So I feel pretty good about our ability to hold that where we could. And, certainly, that's one of the advantages of that diversity we have in the sales mixes. Sometimes we see a little bit flatter response across the market, just because the timing of how the industrial and feed pricing adjustments come in as well.

Let me just touch on pricing a little, Vince. We all knew that -- I guess the pricing out there was right on that $400 reference price several months ago. It then slips down to $385 or thereabouts. We are starting to see more stability as we get closer to actual application. And the product is placed ready to go to the farm gate. So I think, there's still some noise and a number of people saying, there's a lot of pressure, still. I would say that's on all fertilizer products and potash hasn't been immune to that. So it's really the broader complex of fertilizer that's seen some pressure here over the last little while. I guess I don't see any significant changes as we get into actual application season and that's the positive. Who knows beyond that if we're going to see some changes. But what we know is we were trading at higher numbers and we've since seen the reference price come down. And that's why we made the comment that there is some downward pressure in the fourth quarter.

Okay. And just as a follow-up, Dave. Just want to make sure we get our cash flow statement in as good a shape as possible. I'm assuming you're going to end the year with -- based on your production sales volume for the fourth quarter, you'll probably end the year with a little bit of an inventory build that reverses in '14 because you should sell some of that deferred volume that didn't get sold in '13 and in '14. Is that's how we should be thinking about that piece of it?

Well, we're -- I mean, frankly, we haven't had a whole lot of inventory build over even the last couple quarters. So we always try to build a little bit going into year-end because we see fairly robust pulls in the spring as you know. And so I don't see any really abnormal cycles for us. But yes, certainly you can look at the numbers and the outlook pieces and it shows that we're producing more tons than we're selling so we will see a little bit. But really that's quite intentional and we think it's quite normal, actually.

Okay. And then -- and do you have an idea of what D&A will be for next year?

Well, I think, overall, for the year, our year-to-date number, we're about $45 million total DD&A for 2013 year-to-date. Annualized, that would get us to about $60 million. And then keep in mind that we have parts of HB and majority of North coming online and into that calculation. So almost $300 million of new capital. And fairly long-lived stuff, but I would expect that DD&A number to go up probably about $10 million more or so next year.

The next question comes from Adam Samuelson of Goldman Sachs.

I was hoping to follow-up maybe on Don's question a little bit. And appreciating some of the different operating costs at some of the different operations in Carlsbad. Just thinking about East then, can you talk about some of the linkages whether that's operationally, share compaction, warehousing, transportation, overhead, between East and some of the other facilities in Carlsbad? And if you were to look at, maybe, prices did fall further, how you'd managed production at East which is extremely the most obvious target?

Adam, I think East is probably the right place to have that focus because we know that, in our own operations, East is, particularly on the potash side, the highest cash operating costs within our system, there is some flexibility out there and, actually, the North Compaction plant that we have built, when we talk about being able to compact 100% of our potash, the geography between the North and the East is a couple miles. And we routinely have the ability to transfer product over there and compact it. So actually, that helps, again, with our flexibility where we don't end up creating situations where we build products that may have a little bit smaller market associated with them. But as we look at the overall operating pieces, what we need to always keep in mind is that we do mine and mill that product on a, basically, a co-product basis with the Trio side. So when we look at overall plant profitability, like I mentioned, East plant continues to be cash generating for us. It is at -- for a variety of different price points. But it's one of the areas that we're looking very closely at in terms of what does that operating model look like if there were to be some significant pricing pressure? I think we touched on it the last quarter call, that it's an evaluation that we're in the middle of. We continue to work through that and develop those next step options. So -- options include things like potentially looking at it as a Trio production facility only. Obviously, that involves some investment of capital, looking at how do we currently process the potassium ore or the potash ore. So they're all steps that we're looking at. We're trying to see where those price points are, that would, some of these model -- optimization models might make more sense. So it's a fairly dynamic question because we actually see a lot of our specialty products come out of that facility. And we get a little bit higher net realized price on them as well. So we'd want to be sensitive to the fact that those specialty products tend to get better pricing and it's actually quite a dynamic system to look through. So I know I'm not giving you a specific answer to your question in terms of step 1 through 10, but hopefully you're getting a feel that we are looking at it, we're looking at it in the right way and we're fully aware of where those levers are in the business.

No, that's some helpful color. And then maybe, maybe, continuing at East on the product side, the Trio. I mean, the price premium, the price gap, between your Trio realized sales price and your potash realized sale price is basically closed at this point. I mean, do you think that you could actually see Trio at a premium to potash, moving forward? And maybe comments on your potash, if your share price is flat and your comments on potash pricing hold true, that would happen in the fourth quarter, presumably, but how sustainable do you think that is, given that the lower prices that you've seen for sulfur and the lower prices that you're seeing for potassium and potash?

So let me touch on it and then, Kelvin, if you can add a little bit more color to it, that'd be helpful. But I think the way you're looking, Adam -- looking at it, Adam, is right, that we may actually see that, next quarter. And the big pieces that the demand profile, particularly for the granular and premium Trio, remains very strong. And people view that as a specialty product, much like you see other specialty products hold their pricing. Because folks first start looking at it from an agronomic perspective. And even with a little bit of pressure in the sulfur market, the mag has a real value associated with it. And we've got some crops that tend to be higher-value crops that these products get applied to. So the economics to a farmer continue to be quite positive.

Yes. I think, Adam, Dave pretty well covered it. And whenever you're short on supply, the demand is out stripping our supply on these materials today. So we're able to kind of keep a firm price there. And I think that's a recognition that the value is there, it gives us that opportunity to price it where we have. So I do see Trio certainly has closed the gap and will probably hold much stronger. Things look pretty good in that regard. So we're comfortable we'll be able to sell all of it and continue at a nice margin like where we're at today.

Okay, that's helpful. Maybe just a quick final one for me. And it's like should come out in the [ph] queue, but what percentage of sales were non-ag in the quarter?

So, during the -- for Q3, our ag sales represented 67% of our total sales, industrial was 25% and feed was 8%. And we've had this situation happen before. I think, really, the industrial and feed markets have remained quite steady. Some of those percentage changes are driven by some of the softness on the ag piece. And in fact, we'll see some of that deferred here into the fourth quarter.

The next question comes from Christopher Perella of Bank of America Merrill Lynch.

Just a little more color, please, on the Trio sales in the third quarter? If demand continues to outstrip supply, I was surprised to see they were down a bit, year-over-year.

Yes. Chris, this is Dave. What we're talking about when we're talking about the demand is really that granular and premium product. If you'll notice, we tend to sell a lot of our standard product into the export market. And we didn't have much in the way of export sales during the third quarter. I think that number was only about 11% of our total Trio sales. So I think that's the place where if there is a little bit of softness on the Trio side, it's around the standard market. And we know that there is some pressure on that piece from a pricing perspective in the export market. All that said, we're continuing to work on pelletization and trying to convert as much of that into granular as we can, to take advantage of the stronger pricing on that premium product.

How much can you granulize or compact now?

We're really in the beginning phases of that, the design of that plant was to essentially be able to compact virtually all of our product there. And we're pretty far from that right now. What we've seen are some pretty major steps on the pelletization. Trying to give you an exact number on that is a little bit challenging for us, but I think we'll probably somewhere, maybe 20% to 25% of our product, at some point, will get to that pelletized range. But it's going to take us a little while as we work through that.

All right. A final question, if I may. What assumptions get you to the high-end and low-end of your sales guidance tonnage for the fourth quarter?

I'll give a quick answer on it and if there's more to it, Kelvin, please add to it. But I think, at the end of the day, Chris, it's just uncertainty as to timing around weather window. And if we see a good weather window here, and guys get into the field, get crops off, like Kelvin described, I think we've got a real opportunity to hit that top end. And if we see continuing moisture across the Midwest or further delay, I think that's where we might see some pressure towards the low end.

That's spot on. I think the industrial business looks good all the way through the rest of the year, so we're not worried about that. And our feed business looks real strong. So I think it really comes down to the question of weather for the next, really, 30 to 45 days.

The next question comes from Joel Jackson of BMO Capital Markets.

I just wanted to follow-up a little bit on East, so I understand the commentary you're giving. Are you talking about, possibly, here changing your mine plan at East to, maybe, high grade and pushing out some of the lower-grade ore to later years in the mine plan?

Joel, actually we've been very intentional in our mine planning and to -- high grade has a pretty negative connotation across the industry. And I would characterize what we're doing quite differently than that. What we're looking at is how do we pursue different -- keep in mind, we've got 9 mining panels that are operating currently at our East mine, so our ability to go in different directions and to approach different parts of the ore body is really where some of that flexibility comes in. We're very keen to make sure that we're not making decisions that cut us off in future years because these are long-lived assets. We intend to develop them in a very prudent and thoughtful way. And we're going to make sure that we look back over areas where we've mined before and see if there is some additional mining that can happen in certain areas. We're going to look at the mix of ore that we're feeding to the mill and work to optimize that. But we've got a commitment to maintaining a certain development ratio in our mining and we're going to stick to that.

Okay, thanks a lot. Now, looking at your CapEx, just so I understand, in Q1 '14, it's really, other than sustaining capital, the only CapEx spend really will be at West and on HB. Is that how we should think about it?

Well, really, 3 areas is the way I would describe it. We're working -- pushing pretty -- pushing as hard as we can on HB to get that mill completed here by the end of the year and see first production. So we'll definitely have HB. With North, we have the third compactor line that's set to be delivered here sometime in November. And there'll be a little bit of remaining installation work that carries into, probably, January, maybe into February. And then, the West work. So those are the 3, if you think of the major projects, the HB steps really tail related, North is really tail. I think, on North, we've already invested about $92 million of our expected capital there. So we don't have much left, and same thing with HB. But it's really -- that will probably be the single largest quarter for us, as I look forward, Chris -- or, pardon me, Joel.

And then the base-sustaining capital rate for next year will be about $50 million?

We'll be lower than that. We're going to crank down pretty hard on that piece of things and just want to make sure that we're certainly going to put the investment in that we need to. But if there is some things that are, I'd say, more discretionary, we just need to make sure we've got a great handle on where pricing is going to shakeout for the industry.

Okay. And in the quarter, potash royalties were actually very low, almost near 0, whereas Trio royalties were about normal. Can you just elaborate on that, please?

Yes. I can and I would look at the year-to-date numbers on the royalty piece, particularly, as you're building your model on that. Our royalties will be somewhere in that kind of 4% to 5% range on annual. We had an adjustment to make a correction in some royalties where we had actually over-accrued a little bit in an earlier quarter. So you're seeing that come through in the quarter. There's been no change in the business, no change in that structure at all, just really a true-up that occurred in the quarter.

Okay. And finally, have you seen any shift, at all, on the revenue last few months? Any, maybe a little more product coming out of Israel, or Germany, or Russia, up the river in the last couple months, you normally would see around this time of the year?

Kelvin, do you want to touch on that one?

Sure, Joel. We really haven't seen a significant change. I think the players are setting up for fall application season. So we've certainly seen, over the last couple of years, more Israeli, and some amount of Russian. So, I guess, we haven't seen any dramatic changes here for this fall and anticipate similar competitive environment from all -- from everybody, Canadians, importers, et cetera.

The next question comes from Mark Gulley of BGC Financial.

Got couple questions left. One, you gave a lot of indicative data in your most recent investor presentation on costs in some of the things that you've talked about today. Are there any changes from the data we would see if we look at that 8-K? Now that the quarter's closed and now that you're looking forward to next year?

Mark, I think you hit the nail on the head that it's indicative, I think it's pretty close. What it's really intended to illustrate is the influence that the new HB Solar Solution tons have on the company as a whole. And that, I think, continues to be very consistent.

Secondly, I want to get back to this -- the premium for Trio over KCL. One of your competitors make, say, a different product. But, nonetheless, they're talking about maintaining some awfully high spreads, given the way they look at things. I just want to return to the subject of why you think that sulfur and magnesium in your product is going to be able to give you that really premium when you look at just the KCL part of it?

You want to touch on that Kelvin?

Yes. Let me start, Mark. I think when you look at our product, we've got the 3 materials in there. And a lot of it is driven by magnesium deficiency in some of these markets. Do you think of the Eastern Seaboard, Florida, and some of those high-value crops, first of all, and soil that tend to have some magnesium deficiencies. So our product fits very nicely in many of those applications and that's where, I guess, we're able to kind of maintain or keep some of our business versus a major company with a chloride component to it. If you look at other areas, we still had success. They built the program around a Trio or a competitor's product. And they'll tend to continue with it if they can. Now, so far, we've had success in keeping that in their mix or in their bins. And I guess if we start seeing that weakening, we have to change strategies. But today, we feel like we can maintain that strategy and be successful.

And finally on CapEx. Just want to make sure I'm clear on sustaining versus growth. So maybe, Dave, you could look at the CapEx next year in that way. Is there any "growth CapEx" left or is the CapEx number you talked about already simply sustaining?

Well, I would characterize the CapEx that's being invested in wrapping up HB and wrapping up North, and wrapping up West as growth CapEx. Certainly, the sustaining level, we've got to be very prudent around that and make sure that we're doing the right things, long term, for the mine. But in terms of brand-new projects coming into play, it will be -- there will be some smaller items outside of those 3 major ones that I mentioned. But really, they're going to be geared more towards that notion of a singular focus on optimizing operations. And I -- candidly, Mark, I think, we need to give our teams a little bit of a break from the intensity of capital investment that has been ongoing at the sites. I think what isn't always appreciated by the people that aren't on the ground every day is that the capital investment we've been making is investment that's been made in existing operating assets. And so, not only have you had capital projects going on within a certain geographic area, and that geographic area is defined by the plant outline, but you've also had -- you're trying to do that while you're operating. So giving our guys the opportunity to essentially see contractors, de-molding, packing up and just allow them that more singular focus, I think it's going to be a huge benefit to our team. And I'm really looking forward to giving the guys the opportunity to shine in that environment.

Okay. Thanks for that color. But just to bottom line that, sustaining CapEx going forward will be?

We've said $40 million or so, historically. I think, that's probably a pretty reasonable baseline level. That can vary, plus or minus, $10 million from year-to-year. So -- but that's a good middle-of-the-road number to target, I think.

The next question comes from Matthew Korn of Barclays.

It seems to me you've maybe pushed back expectations of when the brunt of the impact of the tying-in everything at West that's going hit. I think last quarter we talked about the biggest hit in third quarter and now I'm seeing language to have maybe a more significant impact in 4Q and early next year. Is it taking longer, at all, to kind of bring everything through the testing phase and the tie-in, is there -- have there been more challenges like, a lot of those pieces not working the way we thought it would. Anything like that?

Matt, this is Dave. The -- hopefully, we didn't set expectations too aggressively on that. I think what we started to describe even last quarter is that some of these improvements at West are going to carry us into early part of 2014. I think, year-to-date, we have invested something like -- I think it's about $15 million at West, might be a little bit higher than that. And we expected that investment level is going to be probably closer to $30 million to $40 million, overall. And we're looking at adding thickener capacity and we're looking at making some significant changes in the way we screen product and run it through the rod mills. And each of these items, when you make a change, it has an intended impact on one other area. And to just re-emphasize that point I was making earlier, [ph] West plant's running every day. So you're making some of these changes on your 8-hour shutdown cycles during the week. And I think the other piece we're trying to be very, very thoughtful of is, this is the feed product that goes into our North Compaction facility. And we've turned that on, we've commissioned, we're making some really good product right now. But it's not a compactor that you can just throw the kitchen sink at, it's like any other piece of equipment you expect a certain quality and certain physical characteristics associated with that feed. It's a much, much more robust system than we've had and we're seeing the benefit of it. And having that in place allows us to focus on a more diverse feed to the product that fits within the specs. But we need to still make sure we're delivering product that meets all the quality specs. So it's that interaction, Matt, that takes place. So again, I'm hoping that we haven't set expectations at levels that aren't representative. But I really think that we're going to see some variability in the first part of '14 until we get those recovery improvement projects complete. And we just know the timeframe takes us into the first part of the year.

I appreciate the clarification. And then, kind of given that -- all right. And so after a lot of the CapEx spent on lingering durability issues at West in the first quarter, is this -- I mean it still -- it sounds like, realistically, this is still a collection of assets that x HB is really around 800,000 tons a year of production. And if that's correct -- or if that's wrong, please correct me. But then, also, for the fourth quarter, when HB starts to contribute, how much -- what kind of tonnage, if at all -- what kind of tonnage are you expecting from HB to contribute into your expectations for the fourth quarter?

Sure. I think, on your first question, I'd say that's, probably, a fair starting point in terms of -- think of the core assets is about 800,000 tons a year and that's part of your investment and sustaining capital is to maintain that level. Clearly, the recovery improvement capability at West, I think there is some very real improvement there that we have potential for. And certainly, some of the investment we've made in Moab and other locations, over time, we expect to see a little bit of improvement there. But at the core, you're probably looking at it right. I think, on HB, what we've said is we expect total production during '14 to be somewhere in that -- what did we say, 50,000 to 100,000 ton number, Gary? And that's probably indicative. We'll probably be closer to maybe 1/3, 2/3, 1/4 or 3/4 type of ratio in terms of what comes through in the first half of the year and what comes through in the harvest that starts in the fall, based on what we know right now.

The next question comes from Bill Carroll of UBS.

As you move beyond your heavy CapEx spending period and start generating free cash flow, can you start talking -- can you talk about your capital allocation priorities? Is the plan just to build up cash on the balance sheet to a certain level before you feel comfortable contemplating any shareholder rewards?

Bill, this is Dave. I think on the free cash flow piece of it, that's going to be a major focus for us in 2014. When we -- if we get to that point earlier than later, starting to see the accumulation of cash, then we're going to look at items probably along the following lines: we're going to see what internal opportunities we have and if we've got very, very strong IRR projects, we'll likely consider those first. I think, that's probably where our shareholders would like to see, investment made if they've got adequate rates of return. I think, given some of the pricing scenarios that are -- all the research banks have put out there, I think we'd be silly to say we're going to pick a date to start looking at repurchases, looking at dividends. Because, frankly, there are some models out there that are pretty -- we need to be very mindful of how we're operating the assets. So our focus is, like I mentioned, we're going to be on optimizing the operations through the year. We're going to get to a free-cash scenario and we'll evaluate where we're at in the market. I think we've proven that when we have cash flow available, we're going to make decisions that, we think, appropriately reward our shareholders. And that's a piece that I'd really leave you with on it is -- we've got very good alignment on that and very good recognition of what our relative opportunities are, and we're going to -- I think, we're going to continue to make good decisions around that.

Brock, it looks like at this time we have -- we've gone a little over, we have time for one more question, then we'll wrap up, please.

The last question today comes from Charles Neivert of Cowen.

You've talked about, probably, not a whole lot of change in terms of imported product coming in next year. And yet, what we're looking at is probably a decline in corn acres, for instance, and I don't know if that's all going to get offset. I mean, how do you see your overall acreage, not just corn but the overall acreage in the U.S. doing? What do you see that doing next year? And then how are you going to get growth out of that and start getting into the inventories that you've been building? And it looks like next quarter you're going to have another inventory build on top of -- in both Trio and in potash so how do we sort of get that story together? We've got possibly lower acres, higher inventories, how does that not translate into a cutback in production somehow?

Charles, let me try that, it's Kelvin here. Right now, farmers are going to make decisions -- they're starting to make decisions on which fields they're going to put into corn, beans, whatever else. I think what you got to think about with regard to Intrepid is we're playing in a lot of diverse markets on the ag side. So our Carlsbad product goes not only into the Midwest, but it goes into the Southern Plains, there's a significant amount of pasture ground there. We're seeing a growing herd of cattle, so that demand looks good. The drought is abating so just that, alone, will drive some confidence at the farm gate and likely higher application rates. If you think about the Pacific Northwest, those are very different crops up there and they intend to grow significant -- or decent yields. And really, that drives potash demand up in that region. So I think there's still lots of talk around is it 90 million acres of corn next year or what is that number, I think it's pretty early to tell. And for farmers, they're going to make those decisions as we move forward here over the next couple months. And I guess we see supplying a decent amount to the Midwest, but also into many other areas.

Okay. I guess, that covers that. Again, I just can't reconcile how we had higher numbers on acres so it doesn't look like it's going to change much and maybe has a chance of going down. Certainly, affordability is fine, but I just don't know how I get all those numbers reconciling, especially, if you go through inventory as well.

Yes. And I think a piece I touched on a little bit earlier, Charlie. I'm not sure if you were -- had caught that. But if you look at third quarter or pardon me, fourth quarter, third quarter, that's fine, either one. The difference between our production and our sales numbers, those aren't huge numbers. And it's actually a very purposeful situation that we need to go through each -- towards the end of each year to make sure we're prepared for the next spring. So we're not sitting on lots of inventory. You can look at the IPNI data, that's just not indicative of Intrepid. And so for all the reasons we've touched on, very good diversity in the market, diversity of crops that we serve. I think, frankly, the markets that are close and the ones that we serve continue to represent multiples in the 5 to 6x of what we produce in 1 year. And as Kelvin touched on as well, we're -- we have got those relationships in place and have opportunities to serve additional locations for more customers. So we feel like we're in pretty good position on that. And maybe being more focused on the domestic market and having that marketing plan around it, we really feel it's an advantage for us. We really appreciate everybody taking their time to dial in today, and we appreciate your interest in Intrepid. We look forward to speaking with everyone in the future. Thank you.

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