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Intrepid Potash, Inc. (IPI)

Q3 2015 Earnings Call· Tue, Oct 27, 2015

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Transcript

Operator

Operator

Thank you for standing by. This is the Chorus Call conference operator. Welcome to the Intrepid Potash Third Quarter 2015 Earnings Conference Call. As a reminder, all participants are in a listen-only mode, and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions] At this time, I’d like to turn the conference over to Gary Kohn, Vice President, Investor Relations. Please go ahead, Mr. Kohn.

Gary Kohn

Analyst

Thanks, Thomas. Good morning, everyone, and welcome to our call today. I will remind you the parts of our discussion will include forward-looking statements, as defined by the U.S. Securities Laws. These statements are not guarantees of future performance and are based on a number of assumptions, which we believe are reasonable. These statements are based on the information available to us today, and we are not assuming any obligation to update them. You can find more information about risks and uncertainties to our future performance in our periodic reports filed with the SEC. During today’s call, we will refer to certain non-GAAP financial and operational measures. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures are included in this morning’s press release. Our SEC filings and press releases are available on our website at intrepidpotash.com. Presenting on the call today are Bob Jornayvaz, our Co-founder, Executive Chairman, President and CEO; and Brian Frantz, Senior Vice President and Chief Accounting Officer. Kelvin Feist, our Senior Vice President of Sales and Marketing is also available for Q&A. With that, I’ll turn the call over to Bob.

Bob Jornayvaz

Analyst

Thank you, Gary, and good morning, everybody. We clearly had some challenges in the third quarter. The agricultural market remained soft, which impacted potash and Trio movement and was felt in pricing and demand. We believe in the longer term demand fundamentals of the potash market and continue to see our Trio opportunity is compelling. Over the years, we have been successful in selling our potash at a premium to other North American producers and we believe this will be the case again this quarter. Part of this advantage is attributed to our ability to serve premium niche market opportunities. We planned to continue to supply a mix of potash products and grades. We understand the challenges in front of us and we have a clear plan forward for Intrepid. The plan is consistent with our previously articulated strategy. We are working towards converting our East facility into a Trio-only plant. This is a central to both lowering our potash operating costs and increasing our ability to sell more Trio in the future. Converting East has the potential to meaningfully expand our cash flow generation as we will stop producing potash at our most expensive plant, while creating the opportunity to replace those high cost tons with Trio tons. Also in concert with conversion, we are developing plants to utilize our low cost solar solution HB operation to make the specialty potash products currently produced at East that our industrial and feed customers rely upon. Trio is a unique product that only two companies produced and there is just a single commercial deposit in the world. Our strategy will allow us to be cost competitive as we serve the market demand for Trio that we believe is larger than the supply of the two producers. The market demand for low-chloride,…

Brian Frantz

Analyst

Thanks Bob and good morning everyone. In the third quarter, our adjusted net loss was $4 million or $0.06 a share. Our adjusted EBITDA for the third quarter was $6 million making the total for the first nine months of 2015 about $53 million. The year-over-year decreases in our profitability were driven mostly by lower pricing and sales volume for potash. During the first nine months of this year, we generated $44 million of cash flow from operations and have paid $37 million of cash for capital expenditures so our free cash flow through September 30th is about $7 million. Our inventory levels increased during the third quarter as the fall application season was slow to develop. We anticipate a healthy spring application season which would provide us the opportunity to reduce our inventory levels and increase our cash flow from operation. Our ability to stay free cash flow positive this year depends on pricing and sales volume in the fourth quarter. We still anticipate our 2015 capital expenditures to be approximately $45 million to $55 million. As of September 30th, we had $94 million of cash and equivalents on hand and we have $187 million available to us under our credit facility. Availability under our credit facility is a function of our financial covenants. We're in compliance with our financial covenants of both our credit facility and our senior notes as of September 30th but we may not be able to maintain compliance with our fixed charge ratio in mid 2016. We’re proactively working on plans and options to work with our financial partners to avoid any issues. We remain focused on and understand that our strong balance sheet was essential in today's environment. In the third quarter results, there are two items of note that I’d like to…

Operator

Operator

[Operator Instructions] First question comes from Mark Connelly of CLSA. Please go ahead, Mark.

Mark Connelly

Analyst

Thank you. Bob, two questions, first on East, how much operational risk is there in this Trio conversion? I am just wondering whether this project carries any other risks that we saw with LRIP in terms of how long it takes to get where you are planning to go?

Bob Jornayvaz

Analyst

The first part is, I think there is always operational risks. But I think we’ve substantially reduced it given the plant tests that we’ve run. LRIP was built on running laboratory tests and then trying to scale up all of the equipment, rather than actual -- having a plan to run. We've invested the time and capital to run these by-pass tests. So, we run the equipment at the right size at the right rates so that we know what potential problems we face. With each successive test, we’ve tested the problems and the opportunities and we've seen excellent results. So, we think our ability to execute on this is quite high given the investment that we've made to run plant test versus lab tests that then need to be scaled up. There is a huge difference.

Mark Connelly

Analyst

Sure. Very helpful. And just one more question. Obviously, with East and West, you’ve got operational issues but can you talk about some of the mines that you didn't talk about and what's happening there and what’s your feeling is for the fourth quarter?

Bob Jornayvaz

Analyst

Well, the great news about Wendover, Moab and HB is they are running extremely well. They are all running at or above budget. HB continues to run at greater than a 95% availability rate. So the reason we didn’t talk about him is quite frankly, they are running extremely well. So, I'll leave it at that.

Mark Connelly

Analyst

Very good. Thank you.

Operator

Operator

The next question comes from Adam Samuelson of Goldman Sachs. Go ahead, Adam.

Adam Samuelson

Analyst

Yeah. Thanks. Good morning, everyone. First on Trio and East. Bob, any color you can provide on the standalone cost structure for Trio once the conversion is fully complete. And along those lines, I want to make sure I understand what you are talking about capacity. East is producing about 200,000 tons of MOP today. So, is the plan that you can get East, Trio production close to 400,000 tons once this conversion is fully complete?

Bob Jornayvaz

Analyst

That's correct. And our goal is to provide pretty detailed cost guidance in our next earnings call. We’ve run numerous tests and we’ve got some more tests to run in November and December so that we can come up with some cost guidance that we can rely upon. But we know that’s going to be substantially cheaper than our potash costs. So, we are very -- we are just convinced that it’s the absolute right thing to do.

Brian Frantz

Analyst

Plus we could have such. The great part is having the higher ore grades, that we have the opportunity to access. Because when you're processing higher ore grades through a much, much simpler process, I just can't describe we are going from one of the most complex mineralogical complex processing plants in the world, which is why it’s one of the highest cost plants in the world to a very basic plant operation that is much more similar to the other plans that we run. So, reducing the complexity gives us an opportunity to greatly reduce the cost.

Adam Samuelson

Analyst

Okay. And I guess on that point, can you talk about where you think the price elasticity for Trio is and the confidence that you have in actually placing those incremental tons? When you look at the second half this year, your production can only be 7,500 tons lower than what you thought at the end of July. But your sales are going to be down 22,000 tons so and your price going with that $4 sequentially. So, I’m just trying to think about, if you try to put 2,000 more tons of Trio into the market, what’s that going to do to price? You can see in the second half when -- yes, the markets are bad but you haven’t been able to sell the tons that you have today.

Bob Jornayvaz

Analyst

Well, I think all products across the agricultural mix are seeing the same kind of lack of demand, slow movement, et cetera. I think the entire agricultural market. I hate to use the word chaotic but it’s definitely in a disrupted state in the third and fourth quarters. We are just not seeing normalized behavior. And when we talk to our Trio distributors, the geography that we intend to market into, our biggest problems has been reliability of the marketing Trio. So, we've had several people that over the years have wanted it, but because of our unreliability of supply -- the small supply, it's been difficult to move it into geographies that wanted. So, our confidence level is very high as we look at it and the fact that there's only two producers of this product and they are both dollar-based producers and they are both producing out of the same basic ore body. We are going into high grade untapped ore zones, whereas the other producer has had declining ore grades for years now. So, I think it's the right time. I think the conversion makes a lot of sense both from a cost standpoint and from how we see the broader market. So, I would agree that this quarter and these two quarters were anomalous, but they are anomalous for just about every segment of the agricultural industry.

Adam Samuelson

Analyst

Okay. And I guess maybe as a quick last one. On the potash guidance, it looks like at midpoint, you are guiding that you are going to be building your potash inventories about 65,000 tons in the fourth quarter, which would be the single biggest quarterly inventory build than last five years or so. Can you talk about kind of how your confidence and your storage capacity, both on-site and in market to handle those tons, especially after the inventory build that you saw in the third quarter?

Bob Jornayvaz

Analyst

Yeah. We’ve got plenty of room, plenty of storage for both on-site and off-site. Storing it certainly isn’t a problem. And so we try to be extremely conservative in how we've described all the potential pitfalls. So storing is just not an issue.

Adam Samuelson

Analyst

All right. Great. Thanks. I will pass it on.

Operator

Operator

The next question comes from Chris Parkinson of Credit Suisse. Go ahead, Chris.

Chris Parkinson

Analyst

Perfect. Thank you. Assuming, you are 100% to Trio at East, how should we think about your key potash markets going forward? Is there enough demand in the local markets such as west Texas and areas close proximity to West that you don’t need to ship extensive distances? I’m just trying to parse out the effects of everything that’s happened in local, industrial demand to get a better hold of your future transportation costs, markets, et cetera?

Bob Jornayvaz

Analyst

Are you asking about Trio, or for the specialty industrial white products?

Chris Parkinson

Analyst

For the remainder potash production from West, so not East?

Bob Jornayvaz

Analyst

Well, West produces a red granular that primarily goes into the agricultural markets that we continue to serve and serve well and we’ve got a good strong truck market and rail market for those tons. And the beauty is we will now be able to produce the same industrial and feed products that we are producing at East over HB at a much lower cost. So, I’m still not understanding your question.

Chris Parkinson

Analyst

It’s fine. I can follow-up on that. And just very quickly, you mentioned some deferral in the U.S. fall, vacation season, was that exclusive to a key U.S. region or across the board because some of the nitrogen producers have indicated that it’s just started picking up during the last few weeks?

Bob Jornayvaz

Analyst

Well, there is no question it’s picked up in the last 10 days to two weeks pretty significantly, but it's just been a different quarter than it has been historically. So we’re seeing darn good movement over the last week, 10 days, I would agree with that, but I would say that overall the quarter was just different, was very anomalous.

Chris Parkinson

Analyst

Perfect. Thank you very much for the color.

Operator

Operator

The next question comes from Andrew Wong of RBC Capital Markets. Go ahead, Andrew.

Andrew Wong

Analyst

Hey, thanks for taking my questions. In the previous conference call, I think you stated the plan at Carlsbad East was to continue potash production until the potash tons no longer generates positive cash flow. So is that the case today, or is that what you expect in the future, or is there like some other reason that you just decided to accelerate the plan at Carlsbad East?

Bob Jornayvaz

Analyst

The economics are pretty compelling. I think that we would be remiss if we didn't see the volatility that we’re seeing in the potash market and go ahead and take proactive steps for what we think is a more compelling opportunity to generate more cash flow and higher margins. And so given the plan that we’ve developed in our ability to transition, we believe it’s a much better economic decision. I think we would still have the opportunity to produce potash, but we think it's a much more compelling investment opportunity to make the conversion.

Andrew Wong

Analyst

Okay. And then just switching over to the covenants, the fixed charge coverage ratio could you just tell us what the ratio is currently and what the sensitivity is to potash prices and volumes?

Bob Jornayvaz

Analyst

Yeah, I will let Brian answer that.

Brian Frantz

Analyst

Andrew, this is Brian. We continue -- we’re in compliance with that right now. We’re very comfortable that we’re going to remain in compliance with that. It’s the issue in the middle part of 2016. And then as we see the increased cash flow and EBITDA start to come in from the East facility, we would expect to bring ourselves back into compliance late in '16 and into '17 is kind of what we’re looking at right now.

Bob Jornayvaz

Analyst

Andrew, there are several components of that charge. And so we have a lot of levers, we feel we have a lot of levers to pull to work our way through that, but we felt that it was prudent to let people know that there's that possibility out there.

Andrew Wong

Analyst

Okay. Thank you.

Operator

Operator

The next question comes from Don Carson of Susquehanna Financial. Please go ahead, Don.

Don Carson

Analyst

Yes, I want to go back to the last few weeks and fall demand, I mean we’re hearing that there has been a pretty good response to the year-over-year price decline and yet you seem a little more cautious. Can you comment on the behavior of some of your Canadian competitors, or are you losing market share because they're getting more aggressive and trying to place some of their additional volumes?

Bob Jornayvaz

Analyst

Kelvin, do you want to…

Kelvin Feist

Analyst

Sure, Don. I will take some of these on. I guess I would say that initially we saw a very slow response, some of that being the inventory that they got in place and then some of that being the price declines that we’ve all witnessed in the potash business. So no one wanted to jump in the market as we’re seeing the market values decrease. I would say that in general we haven’t seen anything significant in terms of market share. We still have a similar distribution system. We’re supplying a number of warehouses which we will continue to supply. So essentially we're just seeing a slow development of the market because of those other things that I had mentioned. So that’s our view today. And I guess what we’re seeing is some pretty good crops coming off in various areas. So we think there's decent amount of nutrient removal and that should bode well for longer-term potash demand.

Don Carson

Analyst

And a clarification on your price comment, you talked about lower pricing in Q4, is that just an average to average comparison, do you see prices stabilizing where they are now and sort of the 315 corn belt region?

Kelvin Feist

Analyst

I would say yes. I guess what we’re seeing is continued price pressure from a number of different avenues both up the River Canadians etcetera. So I think we’re now getting into application season so we should see that stabilizing here in the very near future as we speak. And so we’re -- I would say we’re getting very near floor but not out of floor today.

Don Carson

Analyst

Okay. Then final question. What happened to your efforts to restrict Belarus imports, do you ever get any satisfaction out of Congress because they seem to have brought some more loads in recently?

Kelvin Feist

Analyst

We’re definitely still working on it. I guess I would say stay tuned.

Don Carson

Analyst

Okay. All right. Thank you.

Operator

Operator

The next question comes from Vincent Andrews of Morgan Stanley. Go ahead, Vincent.

Neel Kumar

Analyst

This is Neel Kumar calling in for Vincent. So I just had a couple quick questions. First, you mentioned obviously a pressure on potash pricing in the fourth quarter. I was just wondering what’s your outlook on fuel pricing, how you the pricing premium continue to shape out for 4Q? And then also for 2016, is there any additional CapEx need as you make the switch to Trio-only production at East facility?

Bob Jornayvaz

Analyst

Fortunately, the CapEx is pretty minimal and it’s built into our guidance. It really is minimal, that’s why the conversion opportunity is so compelling. I mean, we’re talking about less than $10 million and some of which of that has already been spent. So from a capital standpoint, it's extremely compelling to make conversion in the ore grades that we can initially start producing at that we believe we can after the transition easily exceed our current production rates. I’m sorry, what was the second part of your question?

Neel Kumar

Analyst

I was just asking about your Trio pricing outlook for 4Q because you mentioned the weakness in potash pricing?

Bob Jornayvaz

Analyst

Yeah, we don’t see a lot more erosion in Trio pricing. What we saw at the very end of the second quarter and throughout the third quarter was a market where we had lots of importers pushing on the rope if you will. And so they didn’t increase demand at a time when they just kept pushing on a rope and that funnel itself through I think all the agricultural markets. And so in the last 10 days to two weeks, we've seen good solid movement, good solid demand, but two weeks doesn’t make a quarter. And so we like what we’re seeing in the very short-term, but we’re trying to be cautious as to how we describe how the third quarter was and looking for through the fourth.

Neel Kumar

Analyst

Great. Thanks.

Operator

Operator

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

Joel Jackson

Analyst

Thanks. Good morning. Just following it up on Trio, can you maybe elaborate on some of the geographies, maybe end crop applications that you see can push next year couple hundred thousand tons of Trio over the next couple of years?

Bob Jornayvaz

Analyst

Well, I would say into the markets that we are currently serving where we’re not -- generally we haven’t been keeping up with the order book that we’ve had. So I would say that there is increased tonnage opportunities in our existing markets. In terms of giving you specific geographies as to where we’re going to push other tons, we’re just really not interested in sharing that with our competitor as to where we’re going with it, but we’re confident that we have that ability across United States. And then there’s international markets that we have just flat stayed out of where we have some good opportunities. Kelvin, I don’t know if you want to add any color to that?

Kelvin Feist

Analyst

Joel, maybe I’ll just add, we did -- I think being a consistent supplier is important because when you can always be there for your retailer or dealer, they’ll grow your that market and we believe that there is lots of opportunity in just growing the markets with our existing customer. I think if you look at the deficiency maps specifically magnesium, you will see that’s growing as well. So we believe there is a lot of upside to that as a result of some of the deficiencies that have developed across the Eastern seaboard and throughout North America.

Joel Jackson

Analyst

Okay. And next on Amax, I mean, is that project should we say it’s on hold now, or is there any reason why you would could see you with that project and seeing what you see right now?

Bob Jornayvaz

Analyst

Well, I think the first thing is to finish up with our bankers and make sure that we have our credit facilities and financial house well in order which we perceive we can accomplish. So that’s number one is to get that situated properly so that we can put back together our capital budget and move forward on the projects that generate the most return. So I would say it's on hold for very temporary basis because those are pretty compelling low-cost tons.

Joel Jackson

Analyst

Okay. And then what I would like to get a sense of is, as we get into 2017 start doing a better run rate of more Trio and less potash east, no potash at East. I mean what is sort of the cost we could see, could we see run rate $20 a ton lowering cash costs as you coupled the depreciation but jut on the cash cost, could we see the same thing with Trio? Maybe you can just give us a sense little more granularity.

Bob Jornayvaz

Analyst

No, we are going to just tell you it’s economically compelling and we’ll have some guidance for you that you can rely upon in the near future.

Joel Jackson

Analyst

So when you give your guidance in three months, will you give just '16 or you give '17 as well?

Brian Frantz

Analyst

Joel, this is Brian. What we have traditionally done is when we put out our fourth quarter earnings report we’ll have our guidance that will be in there for 2016. In the past, we’ve not guided more than one year from that and we’ll try to provide color to the extent we can. But look for that information to come out from us in mid February.

Joel Jackson

Analyst

The reason why I’m saying is because judiciously you correctly raised the issue of potentially being having some covenant problems. So if investors really want to mold you out and see all the changes you’re making you’ve seen the positive impact and that you won’t have any covenant problems. That would be a very helpful.

Brian Frantz

Analyst

I totally agree, it’s a difficult time to model we recognize that. We felt it was much more important to be able to articulate the conversion strategy both for our customers, for our investors, for our employees so that we can begin building some timelines around that and we thought it was extremely important is, that’s the decision that we’ve made to get that out there. So, I think, that was the first step we've made it and we believe it's very compelling.

Joel Jackson

Analyst

Okay. My final question would be just on West? So, if the trends of lower potash prices continued here, at what point would you be thinking about shutting down production at West or is that nowhere -- we nowhere near that?

Bob Jornayvaz

Analyst

I think we are a long way from that, given the recent run rates that we’ve had, had we not have the shaft incident. We are running at historic recovery rates, and so I feel very comfortable that that's just not going to be an issue at West. So, I think, have we not have that shaft issue, we would be showing you some pretty numbers that we would be proud of.

Joel Jackson

Analyst

Thank you very much.

Operator

Operator

The next question comes from Ben Isaacson of Scotia Capital. Please go ahead.

Carl Chen

Analyst

Hi. This is Carl Chen stepping in for Ben. Thank you for taking my question. So, Bob, other than the East facility, are there any more potential cost cutting opportunities that Intrepid could tap into and if so what's the magnitude of this cost saving?

Bob Jornayvaz

Analyst

It’s a great question. We’ve had an internal cost savings program, within Intrepid that's internally based, that we've identified several million dollars that we begun to execute on and we hired an outside cost consulting firm, professional firm to come in and they start work next week or we feel like we have significantly more dollars to save as well. So we serious about rolling up our slaves and taking it several steps further down the line where we already are in terms of cost cutting.

Carl Chen

Analyst

Great. Thank you.

Operator

Operator

The next question comes from Sandy Klugman of Vertical Research Partners. Please go ahead.

Sandy Klugman

Analyst

Yeah. Good morning. So somebody could comment on what your perception is of where we stand in terms of average soil potassium rates across the U.S. And then you mentioned that you expect the healthy spring demand? Could delve into what’s driving that expectation, is it a function of weaker fall, just translating into a better spring, which is a normalization of ag environment?

Bob Jornayvaz

Analyst

Well, first and foremost, we removed the tremendous amount of nutrients from the crops that we are harvesting today. I mean, if you look at the yields and the acres and the nutrients that are being removed. Just do the math and you see what is necessary to plant crops and once we get a better acreage figures around the spring, whatever those acres are, they are going to require a significant amount of balanced fertilization. Kelvin, do you want to give some color to that?

Kelvin Feist

Analyst

Yeah. I think, if you think about the trends, we are seeing sliding potassium levels in the soil for a number of years now. So, I think that everyone knows with the removing and they recognize that in order to grow the crop they need to replenish. So we feel like that’s a long-term trend that this is in our favor. I think with regard to weaker fall, stronger spring. I guess, we’ve been witnessing a decreasing price environment and that’s probably scared some folks off, because they don’t want to pay too much for the potash or in their eyes pay too much for the potash. So, I think that’s pushed back the demand at the farm gate today and so, I believe there is some folk, the smaller farmer maybe that might be able to move a fall application to spring application instead of doing it all this in the next month and a half. So, I guess we will see how it develops. But we believe that there are some markets that are going to go pretty strong this fall and are already and the remainder will go in the spring. But we don't believe that they’re going to cut significantly and I think they’re going to try and optimize their yields in 2016.

Sandy Klugman

Analyst

Okay. Great. Thank you. And then as a follow-up, how do you think about long-term supply additions given the current market dynamics? Is there an offset to the weaker environment in the sense that perhaps we see less capacity coming on line over the long-term?

Bob Jornayvaz

Analyst

Well, the potash market has been -- has had overcapacity for many decades. And that overcapacity in the last couple years has turned into oversupply, which hasn’t always happened. So, I can’t really -- I think that’s a better question for some of the much larger producers in terms of how they see their existing capacity and to what degree they choose to produce to the extent that we are oversupplied. So, I just don’t think we’re the right guys to ask about that oversupply situation.

Sandy Klugman

Analyst

Thank you.

Operator

Operator

The next question comes from Brett Wong of Piper Jaffray. Please go ahead.

Brett Wong

Analyst

Hey, guys. Thanks for taking my questions. So just wondering, you can provide a little more color around the timing of when you expect HB tons and potash to help offset the decline in the East tons, once you make the final conversion.

Bob Jornayvaz

Analyst

Well, I don’t see HB making up ton for ton. I think that it’s just -- it can supply those markets if that make sense. Right now, it's got the ability because of the way the plant was built and the nature of the facility to provide those specialty higher priced industrial and feed products. We expect replacing potash tons with Trio tons at East. So, I don’t know if I’m answering your question or not. But the markets that the East production served, we now have the ability to serve them from East, I mean from HB. So, we see it as a seamless transaction and transition in terms of being able to service those customers in the industrial and feed markets.

Brett Wong

Analyst

That makes sense. But you can ramp HB though, is that correct? I mean, I guess the follow-up question to that would be what kind of capacity do you still have in HB with the current investments that you have in place and what other investments will be needed to continue to ramp production there?

Bob Jornayvaz

Analyst

Well, going back to Joel’s earlier question about the status of Amax, we have several opportunities to ramp up HB production. And so, I think the first thing we're doing is managing our capital to make sure that we manage our capital properly and we’re in line with our banks and that we’re all on the same strategy and same game plan there. So, we have significant capacity that we can bring on in bite size pieces of capital. And so our first goal is to get this transition well underway and then get back to some of those solar investments because they are so compelling from the rate of return standpoint.

Brett Wong

Analyst

Okay. That’s helpful. Thanks. And then you made a comment about potentially looking at international markets for Trio. Just wondering if that’s a focus and what markets you maybe targeting?

Bob Jornayvaz

Analyst

Well, we’ve shipped internationally for years now. I mean, Trio, we’ve been part of that export market for years, so we’re aware of it. And there have been a lot of markets that we haven’t had the supply to serve as well as serve our domestic customers. So it's simply been a lack of supply to actively participate in those markets. So I mean, they’re very, very geographically diverse but I don’t think it's appropriate for us to describe specific markets that we’re going to go, attack given that there’s only two producers in this product.

Brett Wong

Analyst

Fair enough. Thanks a lot.

Bob Jornayvaz

Analyst

Thomas, I see we have one last question please.

Operator

Operator

The next question comes from Brian MaCarthur of UBS.

Brian MaCarthur

Analyst

Good morning. I just want to go back to the conversion. You talked a bit obviously how cost will come down but does it help your sustaining capital, once you get rid of that complex East plant on a sustainable basis going forward?

Brian Frantz

Analyst

Yeah. That’s a great question. If you look at just one of the many levers involved in our fixed charge issue with the bank, we’re way under -- historically we’ve been significantly under the sustaining capital number that's laid out in that -- that potentially creates that problem. So the good news is that if we look at sustaining capital of each of the plants that we've built and improved upon, those numbers come down very significantly. So that's why we feel like we have many options and levers to pull on that covenant issue. But Brian, you hit the nail right on the head by having much simpler plants. They become much more reliable, you get much more uptime, which decreases your COGS and increases your reliability.

Brian MaCarthur

Analyst

And you would want to comment on how much that saving would be versus your historical run rate of sustaining, is that $10 million or $5 million?

Brian Frantz

Analyst

I think that we’d be happy -- you’re going to hear those numbers in our fourth quarter call. So we’re happy to give you that guidance but directionally, its lower.

Brian MaCarthur

Analyst

Fair enough. Second part, just so I fully understand the depreciation problem, I realize this is all accounting. So when you convert mid next year, you obviously have high depreciation up, you short your lives on East. I assume that’s mine as well as asset. Does your depreciation start to drop massively at that point or are those assets still going to go out for four, five years, so that higher depreciation rate run for that period of time? Just trying to figure out what’s happening on that side of equation.

Bob Jornayvaz

Analyst

It’s not the mine. It’s not the mine at all. Its really certain pieces of equipment that we’re now looking at saying, what pieces of equipment can we use in other parts of the plant -- other parts of the Carlsbad region. So if you think about it, we have the HB plant, the West plant, the North plant. And so there's an opportunity to take some of that equipment and move it around. In the short-term, we try to identify certain pieces that we’re going to accelerate depreciation on. And I’ll let Brian elaborate on that a little more.

Brian Frantz

Analyst

Yeah. Brian, this is Brian. I think that’s a good summary. So these certain pieces of equipment that we’re not going to be using post-transition, those are the ones that get accelerated. The remaining assets that we have at East will continue to be depreciated on their normal lives. And so I think, oppose to transition you'll see that depreciation number drop back down to probably closer to historical level. So it’s just kind of a little short-term issue here as we work through that transition.

Brian MaCarthur

Analyst

Great. That helps a lot. Thank you very much.

Bob Jornayvaz

Analyst

Brian, thank you. And I want to thank everybody for taking the time to dial-in. We really appreciate your interest in Intrepid. We look forward to speaking with everybody in the near future and thank you again for your interest.

Operator

Operator

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