Intrepid Potash, Inc. - Quarter Report: 2008 March (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2008

Commission File Number: 001-34025

INTREPID POTASH, INC.

(Exact Name of Registrant as Specified in its Charter)

700 17^th Street, Suite 1700

Denver, Colorado 80202

(303) 296-3006

(Address of Principal Executive Offices, Including Zip Code)

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ¨  Yes    x  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    x  No

As of May 23, 2008, 74,843,124 shares of the registrant’s common stock, par value of $0.001 per share, were outstanding.

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INTREPID POTASH, INC. and INTREPID MINING LLC

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INTREPID POTASH, INC.

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(In thousands, except per share amounts)

See accompanying notes to these consolidated financial statements.

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INTREPID POTASH, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(In thousands, except per share amounts)

See accompanying notes to these consolidated financial statements.

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INTREPID POTASH, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) (UNAUDITED)

(In thousands, except share amounts)

INTREPID MINING LLC AND SUBSIDIARIES (PREDECESSOR)

CONSOLIDATED STATEMENTS OF MEMBERS’ EQUITY (DEFICIT) AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

(In thousands, except share amounts)

See accompanying notes to these consolidated financial statements.

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INTREPID POTASH, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands, except per share amounts)

See accompanying notes to these consolidated financial statements.

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INTREPID POTASH, INC. and INTREPID MINING LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 1—COMPANY BACKGROUND

Intrepid Mining LLC (“Intrepid” or the “Company”) and its subsidiaries produce muriate of potash (MOP, potassium chloride or potash); langbeinite; and byproducts including salt, magnesium chloride and metal recovery salts. Intrepid owns five active potash production facilities, three in New Mexico and two in Utah. Production comes from two underground mines in the Carlsbad region of New Mexico; a solar evaporation solution mine near Moab, Utah; and a solar evaporation shallow brine mine in Wendover, Utah. Intrepid has one operating segment as defined by FAS 131, the extraction and production of potash-related products and its operations are conducted entirely in the continental United States.

Note 2—INITIAL PUBLIC OFFERING OF INTREPID POTASH, INC.

On April 25, 2008, Intrepid Potash, Inc. (“IPI”) closed its initial public offering selling 34,500,000 shares of our common stock in our initial public offering, including 4,500,000 shares sold in connection with the underwriters’ exercise of their over-allotment option. IPI was incorporated in the state of Delaware on November 19, 2007, for the purpose of continuing the business of Intrepid in corporate form after the initial public offering. Prior to April 25, 2008, IPI was a consolidated subsidiary of Intrepid, the predecessor company. Beginning on April 25, 2008, Intrepid’s ongoing business has been conducted by IPI and includes all operations that previously had been conducted by Intrepid. There were no material activities for IPI for the period from its inception to the date of the initial public offering.

All 34,500,000 shares of our common stock sold in the offering were sold at the initial public offering price of $32.00 per share, for an aggregate offering price of $1.104 billion. We received aggregate net proceeds of approximately $1.033 billion, after deducting underwriting discounts, commissions and other transaction costs of approximately $71 million. Pursuant to an Exchange Agreement dated April 21, 2008, by and between IPI and Intrepid, IPI paid approximately $757.4 million of the net proceeds of the offering to Intrepid (together with 40,339,000 shares of our common stock) in exchange for all of Intrepid’s assets other than cash. In connection with the exercise of the underwriters’ option to purchase additional shares, IPI also paid a dividend to Intrepid of approximately $135.4 million, which we refer to herein as the formation distribution. Upon the closing of our initial public offering, IPI replaced Intrepid as the borrower under the senior credit facility. Intrepid repaid $18.9 million of the principal amount outstanding under the senior credit facility, plus fees and accrued interest, and IPI repaid the remaining $86.9 million of principal outstanding, plus fees and accrued interest, using net proceeds from the offering. The remaining approximately $52.7 million of net proceeds from the offering will be used by IPI to fund production expansions and other growth opportunities and for general corporate purposes. Intrepid was dissolved on April 25, 2008. On that date, all of Intrepid’s liabilities were provided for and Intrepid’s remaining cash of approximately $882.8 million and 40,340,000 shares of IPI common stock owned by Intrepid were distributed pro rata to Intrepid’s members.

The transfer of the nonmonetary assets from Intrepid will be accounted for at historical cost because the members of Intrepid received common stock of IPI in connection with its initial public offering in exchange for a controlling interest in Intrepid Potash.

Note 3—BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and Regulation S-X of the Securities and Exchange Commission. They do not include all information and notes required by GAAP for complete financial statements. The accompanying unaudited consolidated financial statements reflect all adjustments, which are normal and recurring in nature, and which, in

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the opinion of management, are necessary for a fair presentation of the financial position as of March 31, 2008, and results of operations for the three month periods ended March 31, 2008 and 2007. These unaudited consolidated financial statements and related notes should be read in conjunction with the audited consolidated financial statements and related notes for the year ended December 31, 2007.

Intrepid is considered the predecessor entity to IPI. IPI is presented separately within these financial statements, and is also included in the consolidated financial statements of Intrepid. There were no material activities for IPI for the first quarter ended March 31, 2008, and IPI did not exist until November, 2007, therefore all discussion is relating to the activities of Intrepid, referred to herein as “Intrepid” or “the Company” unless otherwise specified.

Note 4—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation—The consolidated financial statements of Intrepid include the accounts of Intrepid Mining LLC and its wholly owned subsidiaries: IPI, Intrepid Potash—Moab, LLC (“Moab”), Intrepid Potash—New Mexico, LLC (“NM”), HB Potash, LLC (“HB”), Intrepid Potash—Wendover, LLC (“Wendover”), Moab Pipeline LLC and Intrepid Aviation LLC. All intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates—The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Intrepid bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Accordingly, actual results may differ significantly from these estimates under different assumptions or conditions.

Significant estimates with regard to Intrepid’s consolidated financial statements include the estimate of proved and probable mineral reserve volumes, useful lives of plant assets and the related present value of estimated future net cash flows. There are numerous uncertainties inherent in estimating quantities of proved and probable reserves, projecting future rates of production, and the timing of development expenditures. Future mineral prices may vary significantly from the prices in effect at the time the estimates are made as may estimates of future operating costs. The estimate of proven and probable mineral reserve volumes, useful lives of plant assets and the related present value of estimated future net cash flows can affect depletion, the net carrying value of Intrepid’s mineral properties, and the useful lives of related property, plant and equipment and consequently, depreciation expenses.

Revenue Recognition—Revenue is recognized when evidence of an arrangement exists, risks and rewards of ownership have been transferred to customers, which is when title passes, selling price is fixed and determinable and collection is reasonably assured. Title passes at the shipping point, which can vary. The shipping point may be the plant, a distribution warehouse, or a port. Title transfers for some shipments into Mexico at the border crossing which is the port of exit. Prices are set at the time of or prior to shipment. Intrepid uses few sales contracts, so prices are based on Intrepid’s current published prices or upon negotiated short-term purchase orders from customers. Sales are final with customers not having any right of return.

Sales are reported on a gross basis. Intrepid quotes prices to customers both on a delivered basis and on the basis of pick-up at Intrepid’s plants and warehouses. Intrepid incurs and bills for freight, packaging, and certain other distribution costs only on the portion of its sales for which it is responsible as customers often arrange for and pay for these costs.

Byproduct credits—When byproduct inventories are sold, the Company records these sales of byproducts as a credit to “Cost of Goods Sold”.

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Fair Value of Financial Instruments—Intrepid’s financial instruments include cash and cash equivalents, restricted cash, accounts receivable and accounts payable which are carried at cost and approximate fair value due to the short-term nature of these instruments. The revolving credit facility’s recorded value approximates its fair value as it bears interest at a floating rate. Intrepid’s interest rate and natural gas swaps are recorded at fair value using established counterparty evaluations that are subjected to our review. Since considerable judgment is required to develop estimates of fair value, the estimates provided are not necessarily indicative of the amounts the Company could realize upon the sale or refinancing of such instruments. (See Note 11 regarding derivatives.)

Inventory and Long-Term Parts Inventory—Inventory consists of product and byproduct stocks, which are ready for delivery to market, mined ore, MOP in evaporation ponds and parts and supplies inventory. Product and byproduct inventory cost is determined using the lower of weighted average cost or estimated net realizable value. Product inventory costs include direct costs, operational overhead, depreciation, depletion, amortization, and equipment lease costs applicable to the production process. Direct costs and operational overhead include labor.

Parts inventory, including critical spares, that is not expected to be utilized within a period of one year is classified as non-current. Parts and supply inventory cost is determined using the lower of average acquisition cost or estimated replacement cost.

Intrepid conducts detailed reviews related to the net realizable value of inventory, giving consideration to quality, slow-moving items, obsolescence, excessive levels and other factors. Parts inventories not having turned-over in more than a year, excluding parts classified as critical spares, are reviewed for obsolescence and included in the determination of an allowance for obsolescence.

Property, Plant, and Equipment—Costs of property, plant, and equipment are capitalized when the asset is estimated to have a future economic benefit and a useful and economic life of over one year. Property, plant, and equipment are stated at historical cost or at the allocated values determined upon acquisition of the business entities. Property, plant, and equipment are depreciated under the straight-line method using estimated useful lives. No depreciation is taken on construction in progress until the asset is placed in service. Gains and losses are recorded upon retirement, sale, or disposal of assets. Maintenance and repair costs are expensed as incurred.

Mineral Properties and Development Costs—Mineral properties and development costs, which we refer to collectively as mineral properties, include acquisition costs, the cost of drilling wells and the cost of other development work. Depletion of mineral properties is provided using the units-of-production method over the estimated life of the relevant ore body. The lives of reserves used for accounting purposes are shorter than current reserve life determinations prepared by us and reviewed and independently determined by mine consultants, due to uncertainties inherent in long-term estimates and in order to correlate to estimated building and plant lives of 25 years or less, where appropriate. Certain development costs are depleted over the life of the proven and probable reserves or the life of the facility. Reserve studies and mine plans are updated periodically, and the remaining net balance of the mineral properties is depleted over the updated estimated life. Possible impairment is also considered. Our proven and probable reserves are based on extensive drilling, sampling, mine modeling and mineral recovery from which economic feasibility has been determined. The price sensitivity of reserves depends upon several factors including ore grade, ore thickness and ore mineral composition. The reserves are estimated based on information available at the time the reserves are calculated. Recovery rates vary depending on the mineral properties of each deposit and the production process used. The reserve estimate utilizes the average recovery rate for the deposit, which takes into account the processing methods scheduled to be used. The cutoff grade, or lowest grade of mineralized material considered economic to process, varies with material type, mineral recoveries and operating costs. Proven and probable reserves are based on estimates, and no assurance can be given that the indicated levels of recovery of potash and langbeinite will be realized or that production costs and estimated future development costs will not exceed the net realizable value of the products. Short tons of potash and langbeinite in the proven and probable reserves are expressed in terms of expected finished short tons of product to be realized net of estimated losses. Reserve estimates may require revision based

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on actual production experience. Market price fluctuations of potash or langbeinite, as well as increased production costs or reduced recovery rates, could render proven and probable reserves containing relatively lower grades of mineralization uneconomic to exploit and might result in a reduction of reserves. In addition, the provisions of our mineral leases are subject to periodic readjustment, including royalties payable, by the state and federal government, which could impact the economics of our reserve estimates. Significant changes in the estimated reserves could have a material impact on our results of operations and financial position.

Asset Retirement Obligation—Reclamation costs are allocated to expense over the life of the related assets and are periodically adjusted to reflect changes in the estimates of either the timing or amount of the reclamation and abandonment costs.

Annual Maintenance—Each operation typically shuts-down annually for maintenance. The NM operations typically shut-down for ten to fourteen days. Generally the Moab and Wendover operations cease harvesting potash from our solar ponds during one or more summer months to make the most of the evaporation season. During these summer shut-downs, annual maintenance is performed. Intrepid expenses the cost of the maintenance performed during the shut-downs when it occurs.

Income Taxes—As a limited liability company, Intrepid does not pay federal and state income taxes, except for the Texas franchise tax which is based on gross margin. The taxable income or loss of Intrepid will be included in the state and federal tax returns of the members. IPI is a subchapter C corporation and therefore is subject to federal and state income taxes. The income tax basis of the assets transferred to IPI pursuant to the exchange agreement plus the formation distribution will, in the aggregate, equal Intrepid’s existing tax basis in the assets, increased by the amount of taxable gain recognized by Intrepid—generally, the amount of cash received by Intrepid pursuant to the exchange agreement plus the amount of the formation distribution. We expect to allocate the increase in tax basis to our property, plant and equipment and our mineral leasehold interests. As to the allocation to the mineral leasehold interests, we anticipate that percentage depletion with respect to our mineral leasehold interests will exceed cost depletion in each taxable year. Consequently, we do not expect the increased tax basis to result in any increase in federal cost recovery deductions with respect to our mineral leasehold interests.

As of March 31, 2008, IPI has a long-term deferred tax asset related to the net operating loss generated in the first quarter of 2008. This net operating loss is expected to be fully realizable by IPI following the initial public offering as taxable income is generated.

Discontinued Operations—In 2006, all of the operating properties of Intrepid Oil and Gas LLC (“IOG”) were sold. Initial drilling costs for a well-in-progress and certain unproved oil and gas rights were retained by IOG until January 1, 2007 when the remaining IOG assets, $0.9 million, were distributed to the members.

Redemption of Equity Interest—On December 28, 2006, the members of Intrepid agreed to redeem the membership interest of Long Canyon, LLC, at the time representing 42.5 percent of the membership interests of Intrepid, for a total redemption cost of $100 million, which included a $95 million note paid in March 2007. The $100 million cost to redeem Long Canyon, LLC as well as costs of the redemption transaction were treated as distributions to Long Canyon, LLC resulting in Intrepid having a members’ deficit as of the opening of 2007.

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Note 5—INVENTORY AND LONG-TERM PARTS INVENTORY

The following summarizes Intrepid’s inventory, recorded at the lower of weighted average cost or estimated net realizable value, as of March 31, 2008, and December 31, 2007:

Parts inventories are shown net of obsolescence reserves of $463,000 and $492,000 as of March 31, 2008, and December 31, 2007, respectively. No obsolescence or other reserves were deemed necessary for product or in-process mineral inventory.

Note 6—PROPERTY, PLANT, EQUIPMENT AND MINERAL PROPERTIES

“Property, plant and equipment” and “Mineral properties and development costs” were comprised of the following:

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“Mineral properties and development costs” include the inactive HB mine with costs of approximately $1.7 million and $1.5 million at March 31, 2008, and December 31, 2007. Pending reopening as a solution mine, no depletion is currently being recognized on this property. Intrepid incurred the following costs for depreciation, depletion, amortization and accretion, which included costs capitalized into inventory, for the three months ended March 31, 2008 and 2007.

Note 7—MEMBERSHIP INTERESTS AND RELATED PARTIES

The members of Intrepid as of March 31, 2008, were Intrepid Production Corp. (“IPC”), whose sole shareholder is Robert P. Jornayvaz III (“Jornayvaz”), Harvey Operating and Production Company (“HOPCO”), whose sole shareholder is Hugh E. Harvey, Jr. (“Harvey”), and Potash Acquisition, LLC (“PAL”), controlled by Platte River Ventures Investors I, LLC. In June of 2007, a 20 percent membership interest was sold to PAL, a then unrelated party, for a gross price of $39 million.

At March 31, 2008 and December 31, 2007, related parties accounts receivable balances were approximately $21,000 and $248,000, respectively, and consisted of advances to IOG, members, and employees. The receivable from IOG was repaid in April, 2008, prior to the initial public offering. Non-business expenses initially paid by Intrepid and recognized as a receivable from Jornayvaz and Harvey were approximately $7,000 and $31,000 for the three months ended March 31, 2008, and 2007, respectively. Related party receivable balances were collected subsequent to quarter-end and prior to the initial public offering.

Under Intrepid’s policy, Jornayvaz and Harvey are allowed to use Intrepid’s plane for non-business purposes. This use of the aircraft has been treated as compensation to them at the federal income tax standard rate for such travel. Additionally, members may use the plane under dry-leases and reimburse Intrepid the lesser of the actual cost or the maximum amount chargeable under Federal Aviation Regulation 91-501(d). The amounts recognized as compensation and the reimbursements for the use by members are recorded as offsets to the operating expenses of the plane. Personal use of the airplane is calculated based on occupied seat-miles, rather than flight miles. Flight segments may have passengers for both personal and business purposes. Each seat occupied for personal use is multiplied by the flight-segment miles to calculate the percentage of flight time reported as personal use. Non-business use of the plane treated as compensation was approximately $27,000 and $28,000 for the three months ended March 31, 2008 and 2007, respectively. Additionally estimated plane expenses incurred in excess of the federal rates used to determine compensation were approximately $104,000 and $124,000 for the three months ended March 31, 2008 and 2007, respectively.

In the three months ended March 31, 2008, Pat Avery, President and Chief Operating Officer, and Pat Quinn, Interim Chief Financial Officer, were allowed to use the plane for personal purposes, such use being determined based on occupied seat-miles at the federal income tax standard rate. Combined compensation income to Mr. Avery and Mr. Quinn of $5,800 was reported for this use.

Effective January 1, 2007, the members decided to distribute their remaining interests in IOG. The amount of the equity distribution was approximately $938,000. While IOG continued as a related party, this distribution effectively separated IOG from Intrepid. In 2007, Intrepid funded net expenses of approximately $216,000 for IOG, which same amount was due from IOG at December 31, 2007, and is included in the related parties accounts receivable disclosed above. This $216,000 was repaid to Intrepid in the first quarter of 2008.

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Intrepid’s former interim Chief Financial Officer, who resigned in April 2008, is the primary owner of a firm of certified public accountants, Quinn & Associates, P.C. (“Q&A”) that provides accounting, consulting, and tax services to Intrepid. Q&A billed Intrepid based on actual hours incurred and at standard hourly rates. Q&A billings to Intrepid aggregated $179,000 and $142,000 for the three months ended March 31, 2008 and 2007, respectively.

Note 8—NOTES PAYABLE AND LONG-TERM DEBT

The following summarizes Intrepid’s long-term debt at March 31, 2008, and December 31, 2007:

In conjunction with the initial public offering described previously, all of the balances outstanding under the Company’s credit agreement were repaid on April 25, 2008 with cash generated from the closing of the initial public offering. The classification of the debt as of March 31, 2008 was current only for the required $5.0 million term loan repayments and otherwise was long-term as there were no additional required repayments due as of or subsequent to March 31, 2008. Additionally, as a result of this subsequent repayment, the term loan has been canceled and IPI now has a $125 million revolving credit facility that has a term through March 9, 2012, of which $124.8 million is available for use at March 31, 2008. Prior to the repayment of the term loan, the $50 million term loan required a principal repayment of $1.25 million each quarter beginning June 29, 2007. The net balance of the original bank costs that had been capitalized associated with the term loan of $456,000 was expensed in April 2008. As of March 31, 2008, the Company had $160,000 of letters of credit issued, which reduces the amounts available for borrowing, and is reflected in the amount available for borrowing above.

In conjunction with the closing of the initial public offering, the Company entered into the Fourth Amendment of the Third Amended and Restated Credit Agreement. This amendment replaced Intrepid with IPI, removed IOG from the agreement, and amended the distribution language to provide that IPI may make a distribution at a time when the cash flow leverage ratio (as defined) of IPI shall not be greater than 2.5:1.0 immediately before and immediately after the distribution.

The Third Amended and Restated Credit Agreement was entered into on March 9, 2007. Intrepid and US Bank National Association (the “Bank”) entered into a new credit agreement in part to retire the Note to Long Canyon, LLC, to fund capital projects, and to meet working capital requirements. The current credit agreement, as amended is a syndicated facility led by US Bank National Association (the “Bank”) as the agent bank which provides a total revolving credit facility of $125 million. The lenders have a security interest in substantially all of the assets of Intrepid. Obligations are cross-collateralized between all of Intrepid’s legal entities, parent and subsidiaries.

Capitalized interest for the three months ended March 31, 2008 and 2007 was $41,000 and $9,000, respectively. The weighted average interest rate effective for the three months ended March 31, 2008 and 2007, was 6.3 percent and 7.5 percent, respectively, excluding the impact of derivatives, reflecting market conditions and Intrepid’s use of debt with variable rates. Inclusive of the impact of derivatives, the effective average interest rate for the three months ended March 31, 2008 and 2007 was 11.9 percent and 7.6 percent, respectively, reflecting changes in the market value of underlying interest rate swaps.

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Note 9—ASSET RETIREMENT OBLIGATION

The Company recognizes an estimated liability for future costs associated with the abandonment of its mining properties. A liability for the fair value of an asset retirement obligation and a corresponding increase to the carrying value of the related long-lived asset are recorded as the mining operations occur or the assets are acquired.

The Company’s estimated asset retirement obligation is based on estimated cost to abandon the mining operations, the economic life of the properties, and federal and state regulatory requirements. The liability is discounted using credit-adjusted risk-free rate estimates at the time the liability is incurred or revised. The credit-adjusted risk-free rates used to discount the Company’s abandonment liabilities range from 6.9 percent to 8.5 percent. Revisions to the liability occur due to changes in estimated abandonment costs or economic lives, or if federal or state regulators enact new requirements regarding the abandonment of mines.

Following is a table of the changes to Intrepid’s asset retirement obligations for the three months ended March 31, 2008 and 2007.

Note 10—COMMITMENTS AND CONTINGENCIES

Marketing Agreements—In 2004, NM entered into a marketing agreement appointing Potash Corporation of Saskatchewan (“PCS”) the exclusive sales representative for potash export sales, with the exception of those to Canada and Mexico, and appointing PCS a non-exclusive sales representative for potash sales into Mexico. This agreement is cancelable with thirty days written notice.

In 2004, Wendover and Envirotech Services, Inc. (“ESI”) entered into a sales agreement appointing ESI the exclusive distributor for magnesium chloride, with the exception of up to 15,000 short tons per year sold for applications other than dust control, de-icing, and soil stabilization. This agreement is cancelable with two years’ written notice, unless a breach or other specified special event has occurred. Sales prices were specified to ESI in the agreement subject to cost-based escalators. Wendover also participates in excess profits, as defined by the agreement, earned by ESI upon resale. No excess profits were earned by Intrepid for the three months ended March 31, 2008 and 2007, respectively.

Reclamation Deposits, Surety Bonds and Sinking Fund—Surety bonds were provided the State of Utah and the BLM for Moab reclamation through an agreement between Intrepid and an insurance company (“Insurer”). The terms of the surety-agreement include provisions governing the operation of the Moab mine; provide the Insurer a security interest in approximately 56 percent of the surface land owned by Moab; require the establishment and maintenance of a sinking fund; and require payment of an annual 1.5 percent premium. The sinking fund, a restricted deposit securing Moab’s expected reclamation liability, is included within other long-term assets and had a balance of approximately $2.7 million and $2.9 million as of March 31, 2008, and December 31, 2007, respectively. Intrepid is allowed to invest the sinking fund as the members deem appropriate. Unrealized gains and losses were recognized in the statements of income for the three months ended March 31, 2008 and 2007, on the marketable securities held for trade by the sinking fund in the amount of an approximate $210,000 loss and a $61,000 gain, respectively.

Intrepid had reclamation security deposits outstanding for the NM and HB facilities of $677,000 at March 31, 2008 and December 31, 2007, respectively. Security deposits related to the Wendover facility of $299,000 were outstanding at both March 31, 2008 and December 31, 2007, respectively. These restricted deposits were included within “Other” long term assets.

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As of March 31, 2008 and December 31, 2007, letters of credit in the amount of $115,000 issued through the Bank to the State of Utah were outstanding as security on certain Moab and Wendover obligations. Letters of credit have been issued through the Bank and reduce the amount available to borrow under our line of credit on a dollar-for-dollar basis. Letters of credit involve a fee equal to the LIBOR spread multiplied by the commitment amount.

As of December 31, 2007 and March 31, 2008, two letters of credit totaling $45,000 were outstanding with the State of Utah related to the unproven oil and gas properties held by IOG, a related party. In April, prior to the closing of the initial public offering of IPI, the letters of credit for IOG were canceled.

Intrepid may be required to post additional security to fund future reclamation obligations as reclamation plans are updated or as governmental entities change requirements.

Health Care Costs—Intrepid is self-insured, subject to a stop-loss policy, for its employees’ health care costs. The estimated liability for outstanding medical costs has been based on the historical pattern of claim settlements. The medical-claims liability was approximately $647,000 and $594,000 as of March 31, 2008 and December 31, 2007, respectively.

Future Operating Lease Commitments—Intrepid has certain operating leases for land, mining and other operating equipment, an airplane, offices, railcars, and vehicles, with original terms ranging up to twenty years.

Rental and lease expenses were approximately $1.2 million and $1.2 million for the three months ended March 31, 2008 and 2007, respectively. These rental and lease expenses exclude lease payments for railcars used to deliver product; approximately $108,000 and $63,000 for the three months ended March 31, 2008 and 2007, respectively; and recorded as a freight cost. These stated rental and lease expenses also exclude lease payments for an electrical substation, approximately $38,000 for the three months ended March 31, 2008 and 2007, recorded as a cost of electricity.

Note 11—DERIVATIVE FINANCIAL INSTRUMENTS

Intrepid has historically managed through the use of interest-rate derivative contracts a portion of its floating interest rate exposure. Although the Company has repaid its debt obligations immediately subsequent to the closing of its initial public offering, it has elected to retain the derivative financial instruments and view them as speculative. Intrepid’s forward LIBOR-based contracts reduced Intrepid’s risk from interest rate movements as gains and losses on such contracts partially offset the impact of changes in Intrepid’s variable-rate debt. The interest rate paid under Intrepid’s credit agreement varies both with the change in the 3-month LIBOR rate and with Intrepid’s leverage ratio. The counterparty to the contracts is a large commercial bank and therefore credit risk of counterparty non-performance is unlikely. During the three month period ending March 31, 2008, Intrepid recognized a realized gain of approximately $80,000 and an unrealized loss of approximately $1.5 million. During the three month period ending March 31, 2007, Intrepid recognized a realized gain of approximately $150,000 and an unrealized loss of approximately $180,000. Both realized and unrealized gains and losses on interest rate derivative contracts are included in interest expense.

A tabular presentation of the outstanding interest rate derivatives as of March 31, 2008, follows:

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Intrepid has managed through the use of natural gas derivative contracts a portion of its exposure to movements in the market price of natural gas. Intrepid’s forward Permian-basis contracts reduced Intrepid’s risk from movements in the cost of gas consumed as gains and losses on such financial contracts offset losses and gains on its variable-cost supply contracts. The counterparties to the contracts were credit worthy trading houses and therefore credit risk of counterparty non-performance was unlikely. As of March 31, 2008 and December 31, 2007, Intrepid had no outstanding natural gas derivative contracts. During the three month period ending March 31, 2007, Intrepid recognized a realized loss of approximately $540,000 and an unrealized gain of approximately $1.5 million. Both realized and unrealized gains and losses on natural gas derivative contracts are included in cost of goods sold.

The fair value of financial instruments associated with interest rate derivatives included in the financial statements as of March 31, 2008 and December 31, 2007, are depicted below.

Effective January 1, 2008, Intrepid adopted Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS No. 157”) for all financial assets and liabilities measured at fair value on a recurring basis. The statement establishes a framework for measuring fair value and requires enhanced disclosures about fair value measurements. SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. The statement establishes market or observable inputs as the preferred sources of values, followed by assumptions based on hypothetical transactions in the absence of market inputs. The statement establishes a hierarchy for grouping these assets and liabilities, based on the significance level of the following inputs:

The following is a listing of our liabilities required to be measured at fair value on a recurring basis and where they are classified within the hierarchy as of March 31, 2008 (in thousands):

A financial asset or liability is categorized within the hierarchy based upon the lowest level of input that is significant to the fair value measurement. Following is a description of the valuation methodologies used by Intrepid as well as the general classification of such instruments pursuant to the hierarchy.

Derivatives—Below is a general description of Intrepid’s valuation methodologies for derivative financial assets and liabilities, which are measured at fair value and are included in the accompanying consolidated balance sheets. Intrepid uses Level 2 inputs to measure the fair value of interest rate swaps and natural gas

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swaps. Fair values are based upon interpolated data. Intrepid derives internal valuation estimates taking into consideration the counterparties’ credit rating, certain quoted rates for 3-month LIBOR contracts in the case of interest rate swaps, certain published indices in the case of natural gas swaps and the time value of money and then compares these estimates to the counterparties’ mark-to market statements. The considered factors result in an estimated exit-price for each asset or liability under a marketplace participant’s view. Management believes that this approach provides a reasonable, non-biased, verifiable, and consistent methodology for valuing derivative instruments.

Counterparty credit valuation adjustments may be necessary when the market price of an instrument is not indicative of the fair value due to the credit quality of the counterparty. Generally, market quotes assume that all counterparties have near zero, or low, default rates and have equal credit quality. Therefore, an adjustment may be necessary to reflect the credit quality of a specific counterparty to determine the fair value of the instrument. Intrepid monitors the counterparties’ credit ratings and may ask counterparties to post collateral if their ratings deteriorate. In some instances Intrepid will attempt to novate the trade with a more stable counterparty.

As of March 31, 2008, the only outstanding derivatives were interest rate swaps with a single counterparty, US Bank. We are currently in a net liability position with our counterparty.

The methods described above may result in a fair value estimate that may not be indicative of net realizable value or may not be reflective of future fair values and cash flows. While Intrepid believes that the valuation methods utilized are appropriate and consistent with the requirements of SFAS No. 157 and with other marketplace participants, Intrepid recognizes that third parties may use different methodologies or assumptions to determine the fair value of certain financial instruments that could result in a different estimate of fair value at the reporting date.

Note 12—FUTURE EMPLOYEE BENEFITS

Defined Benefit Pension Plan—

In accordance with the terms of the Moab Purchase Agreement with PCS, in 2000 Intrepid established an Employee Defined Benefit Pension Plan (“Pension Plan”). Pursuant to the terms of the Moab Purchase Agreement, PCS calculated the present value of the future benefits under the Pension Plan as of February 22, 2000 to be approximately $1.5 million and transferred the funds to the Pension Plan. In February 2002, Intrepid froze the benefits to be paid under the Pension Plan in the sense that only employees hired before February 22, 2000 are eligible to participate and only pay and service through February 22, 2002 are included in the calculation of benefits; however, Intrepid is required to maintain the Pension Plan for the existing participants as of that date.

The components of the net periodic pension expense are set forth below:

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The Company previously disclosed in its financial statements for the year ended December 31, 2007, that it expected to contribute $203,000 to its pension plan in 2008. As of March 31, 2008, a contribution of $36,000 has been made. The Company currently anticipates contributing a total of $163,000 to fund its pension plan in 2008.

Note 13—PROPERTY INSURANCE SETTLEMENTS

In April 2006, a wind-shear struck the product warehouse at the East Carlsbad, New Mexico site. The warehouse had a book value of $9,000. Its replacement cost is expected to be approximately $26 million. Damage to the warehouse, damage to the product stored in the warehouse, and alternative handling and storage costs were covered by Intrepid’s insurance policies at replacement value, less a $1 million deductible. Insurance payments to Intrepid for property losses through January 2007 of approximately $9.5 million less the deductible and related costs for a net gain of $6.7 million were recognized as “Insurance settlements in excess of property losses” in 2006 as such payments were considered non-refundable. Additional insurance payments to Intrepid for property losses through December 2007 of approximately $4.6 million less related costs for a net gain of $3.2 million have been recognized as “Insurance settlements in excess of property losses” in 2007. Additional insurance payments to Intrepid for property losses through March 2008 of $7.0 million less related costs for a net gain of approximately $7.0 million have been recognized as “Insurance settlements in excess of property losses” in the first quarter of 2008 as such payments were considered non-refundable. Through March 31, 2008, the Company has received $21.1 million of insurance settlement payments. The warehouse’s replacement cost is expected to be approximately $26.0 million and the Company anticipates completion in 2009. Additional insurance payments to reconstruct the warehousing facilities are still contingent upon review by the insurer and therefore will be recognized in the future as settlements are agreed upon.

Note 14—RECENT ACCOUNTING PRONOUNCEMENTS

During December 2007, the FASB issued Statement of Financial Accounting Standards (“SFAS”) 160, Noncontrolling Interests in Consolidated Financial Statements. The standard requires all entities to report noncontrolling (minority) interests as equity in consolidated financial statements. SFAS No. 160 eliminates the diversity that currently exists in accounting for transactions between an entity and noncontrolling interests by requiring they be treated as equity transactions. This statement is effective for financial statements issued for fiscal years beginning after December 15, 2008. The Company is currently reviewing the guidance to determine the potential impact, if any, on its consolidated financial statements.

During March 2008, the FASB issued SFAS 161, Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133. This interpretation changes the disclosure requirements for derivative instruments and hedging activities including how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounting for under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and how derivative instruments and related hedged items affect and entity’s financial position, financial performance and cash flows. This statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The impact of the enhanced disclosure requirements do not have any effect on Intrepid’s or IPI’s results of operations, financial condition or liquidity.

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Some of the information in this Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts included in this Form 10-Q, including, without limitation, certain statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, may constitute forward-looking statements. In some cases, you can identify these “forward-looking statements” by words like “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of those words and other comparable words. These forward-looking statements involve risks and uncertainties. Our actual results could differ materially from those indicated in these statements as a result of certain factors as more fully discussed under the heading “Risk Factors” beginning on page 38. The following discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and notes thereto included herein.

Our historical financial data discussed below prior to the completion of IPI’s initial public offering(“IPO”) reflects the historical results of operations and financial position of Intrepid. Accordingly, historical financial data does not give effect to the reorganization, the completion of the initial public offering of IPI.

Overview

Presentation

This management discussion and analysis is focused predominately on the operating results of Intrepid Mining LLC (“Intrepid”), the predecessor entity of Intrepid Potash, Inc. (“IPI”). There were no material activities for IPI for the first quarter ended March 31, 2008, and IPI did not exist until November, 2007, therefore all discussion is relating to the activities of Intrepid, referred to herein as “Intrepid”, “the Company” or “we”, unless the context otherwise requires.

On April 25, 2008, IPI closed its initial public offering selling 34,500,000 shares of common stock at $32.00 per share. Net proceeds of the offering were approximately $1.033 billion after underwriting discounts and commissions and transaction costs. IPI was incorporated in the state of Delaware on November 19, 2007, for the purpose of continuing the business of Intrepid in corporate form after the initial public offering. Prior to April 25, 2008, IPI was a consolidated subsidiary of Intrepid, the predecessor company. There were no material activities for IPI for the period from inception to the date of the initial public offering. Beginning on April 25, 2008, Intrepid’s ongoing business has been conducted by IPI and includes all operations that previously had been conducted by Intrepid. In connection with the completion of the initial public offering, IPI received a transfer of all of the assets of Intrepid, other than cash, and assumed all liabilities of Intrepid in excess of $18.9 million of debt, plus accrued interest and fees thereon, in exchange for a distribution of approximately $757.4 million and issuance of 40,339,000 common shares to Intrepid. In connection with the exercise of the underwriters’ option to purchase additional shares, IPI also paid a dividend to Intrepid of approximately $135.4 million on April 25, 2008. Intrepid was dissolved on April 25, 2008, whereby Intrepid’s remaining cash of approximately $882.8 million and 40,340,000 shares of IPI common stock which were owned by Intrepid were distributed pro rata to Intrepid’s members.

Our Company

We are the largest producer of muriate of potash (MOP, potassium chloride or potash) in the United States and are dedicated to the production and marketing of potash and langbeinite (sulfate of potash magnesia), another mineral containing potassium. We market our langbeinite under the registered name of Trio^®. Potassium is one of the three primary nutrients essential to plant formation and growth. Since 2004, we have supplied, on average, 1.5 percent of world potash consumption and 8.5 percent of U.S. consumption annually, and we have supplied a considerably higher proportion of the potash consumed in the southwestern and western U.S., which are our core markets. We are one of two producers of langbeinite, a low-chloride fertilizer that is better suited than MOP for

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chloride-sensitive crops. We also produce salt, magnesium chloride, and metal recovery salts from our potash mining processes. We own five active potash production facilities—three in New Mexico and two in Utah—and we have the nameplate capacity to produce 1,200,000 short tons of potash and 250,000 short tons of langbeinite annually. We own two development assets in New Mexico—the HB Mine, which is an idled potash mine that we are in the process of reopening as a solution mine, and the North Mine. Based on our five-year operating plan, we expect that expansion opportunities at our operating facilities and the HB Mine will increase production by an aggregate of over 370,000 short tons of potash and langbeinite annually.

Our assets comprise the deliberate acquisition first of the Moab operations in 2000, and then the Wendover and Carlsbad operations in 2004. Assembling these assets occurred as a result of observing that the potash markets of Moab shared markets with potash produced in Carlsbad, New Mexico and in Wendover, Utah. Accordingly, we formulated a strategy to acquire assets in those areas in order to consolidate marketing efforts and effect operating synergies.

Our Products and Markets

As mentioned previously, our two primary products are potash and langbeinite. For the three months ending March 31, 2008, we derived 85 percent of our net sales and 94 percent of our gross margin from potash.

Our potash is marketed for sale into three primary markets: the agricultural market as a fertilizer, the industrial market as a component in drilling fluids for oil and gas exploration and the animal feed market as a nutrient. The agricultural market represented approximately 63 percent of our sales for the three months ending March 31, 2008, with sales to industrial and feed markets accounting for 29 percent and 8 percent of our sales, respectively. Our primary regional markets include agricultural areas, feed manufacturers and pet food producers west of the Mississippi River and oil and gas exploration areas in the Rocky Mountains and the Permian Basin. The potash business has a geographic concentration in the western U.S. and is, therefore, affected by weather and other conditions in this region.

We are one of only two companies in the world that have economic reserves of langbeinite and produce langbeinite for export, the other being Mosaic. We began producing langbeinite in late 2005 and are working to expand our production and increase demand. Although Mosaic has sold langbeinite from the Carlsbad, New Mexico region since the 1950s, we believe that our entry into the market as a second producer has increased growers’ willingness to use langbeinite. Langbeinite is marketed into two primary markets: the agricultural market as a fertilizer and the animal feed market as a nutrient. We market langbeinite throughout the world, including through an exclusive marketing agreement with PCS for sales outside North America. For the three months ending March 31, 2008, 36 percent of our langbeinite sales volume was sold in the U.S. and the remaining 64 percent was exported.

Global Factors Affecting our Results

Fertilizer Demand

Global fertilizer demand has been driven primarily by population growth, changes in dietary habits, planted acreage, crop yields, grain inventories, application rates, global economic conditions, weather patterns and farm sector income. We expect these key variables to continue to have a significant impact on fertilizer demand for the foreseeable future. Sustained income growth and agricultural policies in the developing world also affect demand for fertilizer. As incomes grow, diets become more diverse, nutritious and protein-rich, primarily through increased meat consumption. Producing meat from livestock and poultry requires large amounts of grain for feed. Fertilizer demand is also affected by other geopolitical factors like temporary disruptions in fertilizer trade related to government intervention and changes in the buying patterns of key consuming countries. Intrepid is continuing to see ever increasing demand for potash products based on the higher demand for fertilizer as indicated by low global inventory levels of potash which is resulting in customers being allocated product at levels below their requested purchase amounts.

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Potash Supply

Economically recoverable potash deposits occur rarely. Virtually all potash is extracted from twenty commercial deposits located in twelve countries. According to the International Fertilizer Industry Association (“IFA”), in 2007, six of these countries (Canada, Russia, Belarus, Germany, Israel and Jordan) accounted for approximately 87 percent of the world’s aggregate potash production. Companies in Canada and the former Soviet Union lead the global potash market due to the size and grade of their reserves, among other factors. The addition of new potash production is difficult because currently unexploited deposits are rare, deep in the earth and are often located in remote areas which would require significant capital investment to exploit. The most recently constructed operating mine in the world was opened in 1987. New potash supply projects are being developed primarily at areas of existing production, but are expected to take several years to become fully operational. Additional challenges faced by potash producers include mine flooding risks, aging facilities, depleting ore reserves and increasing transportation costs. The Company’s mines are not at significant risk of flooding due to the lack of a substantial water aquifer above our mines. We believe that suppliers of potash are running at full capacity and remain unable to meet world demand.

Energy Demand

Energy prices and consumption affect the potash industry in several ways. Growing demands upon existing energy supplies have supported the development of biofuels, which currently rely upon agricultural products as feedstocks. As demand and prices for these feedstocks increase, the use of fertilizer becomes more economically attractive. In addition, energy prices affect the global levels of oil and gas drilling, which often consumes potash as a drilling fluid additive. Increases in fuel prices increase the cost of transporting potash from producing to consuming regions. Increases in natural gas prices also increase the cost of producing potash. We continue to see a strong demand for our product in the oil and gas industry. On the other hand, we do see some modest pressure on operating costs as a result of higher natural gas prices. We estimate that every $1 per MMBTU increase in the cost of natural gas increases our cost of potash sales by $2 per short ton.

Specific Factors Affecting our Results

Sales

Our gross sales are derived from the sales of potash and langbeinite and are determined by the quantities of fertilizers we sell and the selling price we realize. We quote prices to customers both on a delivered basis and on the basis of pick-up at our plants and warehouses. Freight costs are incurred only on a portion of our sales. Many of our customers arrange and pay for their own freight. When we arrange and pay for freight, our quotes and billings are based on expected freight costs to the points of delivery. Our gross sales include the freight that we bill, but we do not believe gross sales provides an accurate measurement of our performance in the market due to the inclusion of freight billings. We view net sales, which is gross sales less freight costs, as the key performance indicator. We primarily utilize net sales per short ton in the analysis of our sales trends in order to remove the effect of freight costs on pricing.

Our net sales and profitability are determined principally by the price of potash and, to a lesser extent, by the price of natural gas and other commodities used in the production of potash. The price of potash is influenced by agricultural demand and the prices of agricultural commodities. Decreases in agricultural demand or agricultural commodity prices could reduce our agricultural potash sales. If natural gas and oil prices were to decline enough to result in a reduction in drilling activity, our industrial potash sales would decline.

The volumes we sell are determined by our production capabilities and by demand for our products. Our selling prices and product mix are determined by a combination of global and regional supply and demand factors. The domestic price of potash is impacted by international price movements and to a large extent by Canadian and Russian producers that have a dominant share of the world market and that export to the domestic market. We benchmark our prices to international prices and have benefited from the weakening dollar. During 2007 and 2008 to date, we have been able to raise prices because of strong demand.

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Potash prices have rapidly increased starting in the fourth quarter of 2007 due primarily to potash demand increasing faster than potash supply. Fertecon Limited (“Fertecon”), a fertilizer industry consultant, forecasts a total 3.5 percent annual demand growth rate from 2007 to 2011, which would require an average of 1.3 million additional short tons of K₂O (potassium content) every year to meet this future demand. However, potash suppliers are currently producing near their practical limits and announced expansions are not sufficient to keep pace with expected demand. As a result, we believe the global potash market will remain tight through at least 2011.

Domestic potash pricing is influenced by the interaction of global supply and demand; ocean, land and barge freight rates; and currency fluctuations. Our posted price (FOB the mine) for red granular potash in Carlsbad, New Mexico has increased 32 percent from $317 per short ton on December 31, 2007, to $417 per short ton as of March 31, 2008. Our posted price (FOB the mine) of granular langbeinite in Carlsbad has increased 35 percent from $156 per short ton on December 31, 2007 to $211 per short ton as of March 31, 2008.

The table below displays our average net sales prices for potash and langbeinite for the three month periods ended March 31, 2008 and 2007. The table also presents the recent representative trends we are seeing in prices. The reference for our potash is our posted price for our red granular potash for spot delivery, FOB the mine site in Carlsbad. The reference for our langbeinite is our posted price for our granular langbeinite for spot delivery, FOB the mine site is Carlsbad. Our posted price is a list price and may differ to the actual price realized by the Company. The actual price realized may be lower or higher than the posted prices. The actual prices realized in the market vary due to the difference between the timing of receipt of orders and the timing of shipments, among other factors. We are also actively selling product beyond our last posted price for future periods based on customer demand. New prices are posted as market conditions warrant the announcements to our customer base.

Cost of Goods Sold

Our cost of goods sold reflects the costs to produce our potash and langbeinite products, less credits generated from the sale of our by-products. With limited exceptions, our costs do not change proportionally with production volumes, as most of our costs are determined by factors other than incremental production. We refer to this in period-over-period comparisons below as costs being more fixed than variable in nature. Our production costs, however, have increased due to inflation and additions to our fixed costs, primarily in the form of additional labor headcount. Our potash production results in the joint production of by-products, which are salt, magnesium chloride and metal recovery salts. Sales of these by-products are recorded as a by-product credit that reduces the cost of goods sold.

Primary production costs include direct labor and benefits, maintenance materials, contract labor and materials for operating or maintenance projects, natural gas, electricity, operating supplies, chemicals, depreciation and depletion, royalties, leasing costs and plant overhead expenses. The cost of our labor, maintenance materials, operating supplies, and chemicals have increased with inflation in the mining sector. For example, according to Mining Cost Service, published in 2007 by InfoMine USA, Inc., mill operating costs have increased by

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approximately 24 percent from 2004 to 2007. We expect our future production cost inflation to continue to be influenced by inflation in the mining sector, as well as inflation trends for natural gas and electricity. We also expect our labor costs may continue to increase in Carlsbad, New Mexico as long as the demand for skilled labor remains high due to the strength of the potash, oil and gas and nuclear waste storage industries.

From January 2004 through March 2008, we added to our fixed costs primarily at our Carlsbad facilities. We increased our maintenance expenditures due to the age and condition of our plants and equipment and the extent to which prior owners had not performed periodic maintenance. We also added labor to address our maintenance backlog, increase the reliability of our production, and to staff the langbeinite facility. We expect to continue this trend through the balance of 2008 by adding additional personnel to increase the reliability and productivity of our operations.

We pay royalties to federal, state and private lessors under our mineral leases, and such taxes are a percentage of net sales of minerals extracted and sold from the applicable lease. In some cases, federal royalties for potash are paid on a sliding-scale basis that varies with the grade of ore extracted. For the three months ended March 31, 2008 and 2007, the royalties averaged 3.6 percent and 3.9 percent of our net sales.

In the past, we have used operating leases to finance some of our mining equipment. Operating lease payments are accounted for as a cost of goods sold. We do not plan to use operating leases in this manner in the future. As a result, operating lease payments related to production assets will decrease over time as the leases expire or as we make decisions to buy-out the leases. We intend, however, to purchase mining equipment in the future, which would result in higher depreciation expense that would largely offset lower lease costs in our cost of goods sold.

Selling and Administrative Expenses

Our selling and administrative expenses consist primarily of personnel and related costs; company airplane costs; costs related to arranging truck and rail transportation; legal, accounting and other professional fees; sales and public relations expenses; and costs related to our information and technology systems. Because our facilities are difficult to reach by commercial aviation, we operate a company airplane in the management of our facilities.

We anticipate an increase in selling and administrative expenses in an absolute and per short ton basis to include the expense associated with additional legal and corporate governance expenses, additional accounting staff costs, independent director compensation, exchange listing fees, transfer agent and stockholder-related fees and increased premiums for director and officer liability insurance coverage, all of which relate to operating as a public company. We will also have stock based compensation expense associated with equity issued in conjunction with the initial public offering.

Other Income (Expense)

Other income (expense) consists primarily of interest and financing expenses. Other income (expense) also includes insurance proceeds in excess of property losses, gain (loss) on sale or disposition of assets, investment income, unrealized gains (losses) on investments, and other costs that do not relate directly to our core operations. In 2008, we may receive additional insurance proceeds in excess of our property losses related to the reconstruction of the warehouse at our East Mine. We anticipate that interest expense will be reduced significantly beginning in May 2008 as the borrowings under the credit facility were repaid fully after the closing of the initial public offering. The Company anticipates having a net cash balance which it will invest.

Income Taxes

As a limited liability company, Intrepid did not pay federal or state income taxes. The taxable income or loss of Intrepid has historically been included in the state and federal tax returns of its members. IPI is a subchapter C corporation that is required to pay federal and state income taxes on its taxable income. The income

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tax basis of the assets transferred to IPI pursuant to the exchange agreement plus the formation distribution will, in the aggregate, equal Intrepid’s existing tax basis in the assets, increased by the amount of taxable gain recognized by Intrepid—generally, the amount of cash received by Intrepid pursuant to the exchange agreement plus the amount of the formation distribution. We expect to allocate the increase in tax basis to our property, plant and equipment and our mineral leasehold interests. As to the allocation to the mineral leasehold interests, we anticipate that percentage depletion with respect to our mineral leasehold interests will exceed cost depletion in each taxable year. Consequently, we do not expect the increased tax basis to result in any increase in federal cost recovery deductions with respect to our mineral leasehold interests.

First Quarter 2008 Highlights

Net income for the first quarter of 2008 as compared to 2007 was $33.1 million as compared to $6.4 million, a 417 percent increase. We sold 213,000 and 93,000 short tons of potash and langbeinite in the three months ended March 31, 2008, as compared to 209,000 and 48,000 short tons in the same period of 2007. Our net sales price of potash was $295 per short ton ($325/metric short ton) in 2008 as compared to $178 per short ton in 2007 for the first quarter. This net sales price compares to our average first quarter posted price for red granular FOB Carlsbad, NM, of $390 per short ton in 2008, and $195 in 2007. The difference between net sales prices and posted price is a result of product mix, the fact that we have negotiated prices months in advance of postings, and because we hold our prices steady for certain customers for a period of one to three months. Our gross margin in the first quarter of 2008 has increased 189 percent as compared to the first quarter of 2007. This increase in gross margin has been driven as a direct result of commodity pricing.

Production in the first quarter of 2008 was 224,000 and 56,000 short tons of potash and langbeinite compared to 218,000 and 45,000 short tons in the first quarter of 2007. Langbeinite is mined from our East Mine, which is a mixed ore body containing both potash and langbeinite. In the first quarter of 2008, we have seen the benefit of higher than projected langbeinite ore grade at our East Mine, however this was almost equally offset by lower potash ore grade. This change in ore mixture is consistent with historical results when mining the mixed ore body. In the first quarter of 2008, an underground drilling program was commenced to better predict and control ore feed going to the East mill.

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Selected Operations Data

The following table presents selected operations data for the three months ended March 31, 2008 and 2007. Analysis of the details of this information is presented throughout this discussion.