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Executives

Troy Dewar – Director, IR

Joe Scaminace – Chairman and CEO

Ken Haber – CFO

Steve Dunmead – VP and General Manager, Specialties Group

Greg Griffith – VP, Strategic Planning, Development and IR

Analysts

Saul Ludwig – KeyBanc

Steve Schwartz – First Analysis

Mike Judd – Greenwich

OM Group, Inc. (OMG) Q3 2008 Earnings Call Transcript November 6, 2008 10:00 AM ET

Operator

Good morning, my name is Katura, and I will be your conference operator today. At this time, I would like to welcome everyone to the third quarter 2008 results conference call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. (Operator instructions) I would now like to turn the conference over to Troy Dewar. Please go ahead, sir.

Troy Dewar

Thank you, Katura, and good morning, everyone. Thank you for joining us today for a review of OM Group’s 2008 third quarter results. On the call this morning are Joe Scaminace, Chairman and Chief Executive Officer; Ken Haber, Chief Financial Officer; Steve Dunmead, Vice President and General Manager Specialties; and, Greg Griffith, Vice President Strategic Planning & Development in Investor Relations.

If you have not seen a copy of the press release we issued earlier this morning, you can find it as well as the presentation materials that accompany our discussion on the OM Group Web site at www.omgi.com under Investor Relations.

Finally, the comments made this morning by any of the participants on the call may include forward-looking statements based upon specific assumptions and subject to uncertainties and factors, which are difficult to predict. Actual results could differ materially from those expressed or implied. A more complete disclosure regarding forward-looking statements can be found at the bottom of our press release and in our Form 10-K, and applies to this call.

At this time, I will turn the call over to Joe Scaminace.

Joe Scaminace

Thank you, Troy, and good morning, everyone. We appreciate you taking the time out of your busy schedules to join us today. By now, you’ve had time to review the release that we issued this morning on our third quarter and nine months performance for 2008.

I would like to share with you a few observations on our results. From my perspective, today’s announcement reveals three critical facts about the OM Group. First, our business is strong as evidenced by the fact that we continue to generate strong positive cash flow from operations that serve growing and diverse end markets. Second, our long range growth strategy is working. Among other things, our recent acquisitions are already making meaningful contributions to our revenue. Our top line growth was 70% in the quarter. This helped significantly improve our operating profit. And third, we are clearly managing what’s in our control in a very aggressive fashion. We’re focused on reducing costs while driving our key performance metrics.

Over the past two years, we’ve shortened our supply chain and increased the stability and diversity of our cobalt raw material feed sources. We dramatically improved the productivity of our smelter facility in the Democratic Republic of the Congo, along with our working class – our world class refining facility in Kokkola, Finland. And we’re meeting the needs of our customers through operational de-bottlenecking and incremental productivity improvements.

Sales volume within our advanced materials segment grew 26% year-over-year this quarter. With the implementation of our ERP system, we’re better able to manage our inventory to optimize our working capital and still improve our customer service. The steps we’ve taken to strengthen our cobalt business have positioned us to better offset the effective cobalt price volatility on our results.

We’re also benefiting from greater end market and geographic diversity. We are blessed by being a truly global company. We serve dynamic end markets with broad exposure to various domestic and international customers. These end markets provide a good mix of geographic exposure most evident by our growing presence in Japan, Korea, and China. Finally, we have a growing number of businesses in our portfolio that have no exposure to cobalt price volatility, including our electronic technology business that provides materials for printed circuit boards and semi-conductors. Clearly, our company is strong, and our strategy is working.

While we’re pleased with our progress against our strategic agenda, I want to assure you that we have a clear eyed view of reality. We are not immune to a global recession. And while we hope that the effects of the economic downturn to our operations will be minimal, we are preparing for all possibilities. We’re very well aware of the challenges that we face due to this growing economic uncertainty. During this time, we are ever more vigilant on operational excellence, and we’re placing extreme focus on our bottom line performance. We’re working diligently to control our costs and manage through what are likely to be very challenging economic conditions ahead.

On a very positive note, our balance sheet is strong and we’ve accumulated a healthy cash balance. This not only provides stability during this troubled economic environment, but also places us in a position to act on opportunities to advance our growth strategy through acquisitions. Through all this, we remain committed to our strategy and plan to stay the course.

At this point, I’ll turn the call over to Ken Haber to walk you through the details of our financial performance. Following Ken’s comments, Steve Dunmead will take a few minutes to highlight the trends we’re seeing in our end markets as well as offer his view on the cobalt market. Ken?

Ken Haber

Thank you, Joe, and good morning to everyone. Please turn to the presentation materials on our Web site and turn to page three. The 70% revenue growth over the prior year quarter is due to the 2007 acquisitions, strong buying growth in key end markets, and higher selling prices in the advanced materials segment along with increased cobalt metal resale volume. Income from continuing operations of $56 million includes a tax benefit of $25 million related to an election the company made to take foreign tax credits on prior year US tax returns.

As originally filed, such returns claimed these amounts as deductions rather than foreign tax credits because of its net operating loss carry forward position during those years. However, due to income taxes paid in the US in connection with the 2007 repatriation of foreign cash, the company can now utilize these foreign tax credits previously taken as deductions. The $25 million tax benefit is $0.83 per diluted share. Excluding this benefit, diluted EPS from continuing operations is a $1.01 in the third quarter of 2008, compared to $1.40 in the same period last year as adjusted for a special item showing on page five.

A few other comments related to items that impacted the third quarter net income of $56 million, first, excluding the tax benefit just mentioned, the company's effective tax rate would have been 23%, compared to 16% in the third quarter 2007. The major reason for the increase in the effective tax rate is because the third quarter 2008 includes income tax expense related to income earned at the company's joint venture in the DRC, whereas no income tax expense was recorded in the third quarter of 2007. Second, minority partner share of income in the current quarter was $4 million net of tax related to the company's joint venture in the DRC. This compares to $2.5 million reported in the third quarter of 2007, which does not include any tax expense. And finally, net income on a year-over-year comparison was impacted by a drop in other income expense of $8 million, primarily due to a $4 million decrease in interest income and a $4 million decrease in foreign exchange gain as a result of lower average cash balance this year versus last year.

Net income for the third quarter of 2008 was $56 million or $1.85 per diluted share versus $1.26 per diluted share in the third quarter of 2007. Excluding discontinued operations, income from continuing operations for the current quarter was $1.84 versus $1.30 in the third quarter of 2007.

Page four reflects the consolidated revenue by segment and by region. The key drivers behind the $184 million increase in net sales over last year was primarily due to the 2007 acquisitions completed in the fourth quarter, which contributed to $72 million. Higher selling prices and volumes from the advanced materials segment contributed $68 million and $28 million, respectively, and a $19 million increase in the resale of cobalt metal. The $4 million increase in operating profit in the current quarter versus last year's third quarter was due primarily to the 2007 acquisitions, which contributed $7 million, offset by a reduction in the advanced materials segment profit of $4 million, and a $2.5 million increase in corporate expenses.

Also, the third quarter 2007 included a $3.5 million charge to increase an environmental remediation liability and $1.2 million in legal fees for a lawsuit the company filed related to the unauthorized use of proprietary information. Compared to last year, the decrease in the consolidated operating margin percentage was due primarily to the impact of higher cost cobalt raw materials and the effect on selling prices of rapid decline in the cobalt reference price in the third quarter of this year.

On page six is the third quarter 2008 operating results for the advanced materials segment. Revenues were up nearly 60% year-over-year on record sales volume in the battery and power metallurgy end markets, higher product selling prices, and increased global metal resale volume. Record production volumes and strong results from the joint venture due to the operations in the current quarter were offset by a steep drop in the cobalt reference price that squeezed gross margins compared to the third quarter of 2007.

Also contributing to the decrease in operating profit compared to last year were higher manufacturing, distribution, and other operating expenses, and a weaker dollar. The primary factor for the drop of $35 million in the third quarter profit compared to the second quarter of this year is a combination of a rapid decline in the cobalt reference price effect on selling prices and the sale of finished goods manufactured using higher cost cobalt raw materials purchased prior to or during the price decline.

On page seven is the third quarter 2008 operating results for the specialty chemicals segment. Excluding the impact of the 2007 acquisitions on net sales, increased selling prices in advanced organics were offset by lower sales volume in both advanced organics and electronic chemicals, and lower pricing in electronic chemicals. In the third quarter of this year, we saw continued weakness in all the end markets of advanced organics except for additives. Tire volume was down 14% year-over-year as customers are de-stacking based on a global view that has turned bearish.

Coatings and chemicals volumes were down 26% and 17%, respectively, due to customers, we believe, reacting quicker to the weakness in the economic conditions in North America and Europe. We believe these decreases reflect the overall weakness of the end markets and are not related to market share losses. The combined revenue of the other end markets, which includes semiconductors, printed circuit boards, memory disks, and general metal finishing were $73 million. This was a $46 million increase over the third quarter of 2007, of which $54 million was related to the electronics acquisition. Net of the acquisition, revenues were down $8 million related to lower pricing, primarily related to a decline in the nickel price and lower sales volume.

Memory disk volumes were down over last year by 23%. Operating profit in the third quarter of 2008 of $10 million includes $7 million from the 2007 acquisitions. Excluding the acquired businesses, the impact of favorable pricing of $4 million was offset by decreased sales volume, reduction in inventory value of $1.5 million, and higher distribution administrative expenses. As a reminder, the third quarter 2007 includes the previously mentioned environmental remediation charge and legal fees.

On page eight is a summary of the selected financial data and metrics for the current quarter. The financial data metrics, as shown for the third quarter of 2007, exclude the 2007 acquisitions. During the third quarter of this year, operating activities provided

$38 million in cash. The cash balance at the end of the third quarter was $145 million, an increase of $30 million from the second quarter of this year.

Looking at network and capital days, which reflect the cash cycle of the business, the comparable numbers are 105 days this quarter versus 96 days for the second quarter, and 119 days for the third quarter of 2007. Compared to the second quarter this year, a reduction in account payable days by nine days was the cause for the increase in the net working capital days. The reduction from last year's 119 net working capital days was due primarily to a reduction in inventory days, offset for the most part by a drop by payable days.

Turning to page ten, consolidated EBITDA from continuing operations was $56 million for the third quarter of 2008 and $320 million for the last 12 months trailing. At this current level of EBITDA, the company is within its requirement debt covenants under the current $100 million revolver.

This completes my review of the company's third quarter 2008 results. I will now turn it over to Steve.

Steve Dunmead

Thanks, Ken. First, I'll make some comments regarding the cobalt market. In Q3, low grade cobalt prices averaged approximately $32.50 a pound, down more than $13 from Q2. Cobalt prices continued to fall from the unprecedented market peak of approximately $50 a pound in the March/April timeframe through the end of August. Prices reached their 2008 low point at that stage of approximately $24 a pound in mid August. The market rebounded in late August due to tight availability of metal, and continued to move higher throughout September. Prices were poised to move even higher when the financial prices hit and spot demand for metal dried up.

As we look forward, we expect demand across all of OMG's major cobalt markets to remain solid. Spot demand for metal, however, is expected to be soft. Predicting cobalt prices is never easy, but the present uncertainty in the market from both supply and demand standpoints makes it even more difficult. From a demand standpoint, clearly, the financial crisis will have some short term negative impact as businesses look to cut costs, reduce inventory, et cetera. From the supply side, the lack of financing and significantly lower copper and nickel prices will certainly delay and/or reduce future supply coming from copper projects in the DRC and large nickel laterite projects elsewhere.

We expect the cobalt market to remain soft throughout the balance of the year. However, any good news from the global economic front or renewed demand for spot material could result in a rapid increase in the market.

Now, I’d like to cover some of the key end use markets impacting our advanced materials segment. In the rechargeable battery market, even with the recent global economic uncertainty, the lithium ion battery market is expected to grow by 6% to 8% in 2009, about half of the growth rate seen in 2008. This growth is being driven by demand for cylindrical cells going into laptop computers, offset somewhat by lower growth rates for prismatic cells used mostly in cellular phones and other small portable electronic devices. We expect OMG's growth in batteries to be somewhat greater than the market as we continue to gain share and further penetrate the battery precursor market with new products.

After approximately two years of strong growth, demand for fine powders and powder metallurgy has begun to show some signs of softening. The softening is being driven by slowdowns in demand from the construction, automotive, and diamond tool markets. Based upon the strong performance in Q3 and the global economic conditions, we expect OMG sales into this market to be flat for the coming couple of quarters.

In the chemical market, we expect to see steady consumption of petrochemical related catalysts that – in the petrochemical related catalyst applications such as gas to liquid and hydrodesulphurization. Ceramics and pigments will continue to be impacted by the global slowdown in housing and construction.

Now for a few comments on the key markets impacting our specialty chemicals business, as we have discussed in previous conference calls, softness in US housing continues to hurt demand in the coatings and chemicals markets. This softness has also begun to move into Europe. Current expectations are for a slow start to 2009. Global demand for tires is slowing, due to decreased new car sales. Manufacturers have reacted quickly with plant shutdowns in Q4 to adjust inventories. Also, the global financial crisis is further decreasing growth in Asia.

For the electronics related markets, the view offers significant cross currents. The deterioration in the global economy has led to a slowdown in both business and consumer spending especially on big ticket items. Many of our customers are focused on reducing inventories and preserving cash because of concerns associated with both demand and credit availability. Although our businesses have not yet been significantly impacted, we started to see some softening in September, and expect that we will feel the impact of extended shutdowns during Christmas and Chinese New Year.

For the hard drive market, due to the global economic uncertainty, plated aluminum disk demand is expected to be down approximately 10%. Flash memory continues to make inroads in the consumer electronics markets for portable devices, but is not yet competitive for mass storage. We expect that OMG’s sales will be affected by the structural changes associated with Seagate's shutdown of its Limavady, Ireland facility, and the purchase of Komag by Western Digital last year.

The overall general metal finishing market is expected to be up lined with GDP for 2009. Due to market shared gains and new applications, we expect OMG's growth to be approximately twice that of the market. Printed circuit board continues to meet our initial projections. The market is expected, however, to see a 10% to 15% decline for the next couple of quarters, due to weaker demand for electronics amid a slowing world economy. OMG sales should be inline with these expectations.

For the semiconductor market, customers and analysts generally anticipate a substantial, approximately, 10% fall in device demand in the coming six to nine months, as the world economy slows and consumer spending declines. Foundries or toll manufacturers, always the first to be affected, are already suffering. From OMG's standpoint, we expect the ultra pure chemical sales to be in line with the overall market.

The photo mass market is tied to capital spending and new product introductions in the semiconductor industry. We've already seen a very depressed market thus far in 2008, and we believe there is limited further downside in this market. Photronics' recent announcement of its pending closure of their Manchester, UK facility should help take some of the excess capacity out of the European market.

At this point, I would like to turn the call back over to Joe Scaminace.

Joe Scaminace

Well thank you, Steve and Ken, for your reports. At this time, we'd like to turn the call over for your questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Saul Ludwig with KeyBanc.

Saul Ludwig – KeyBanc

Hello there. Ken, I have a couple of financial questions you could help us with. Let me just lay them out. What was the copper byproduct profit change this year? B, was there any mark-to-market inventory markdowns that impacted the advanced materials sector? And three, how much Big Hill profits came into your results in the third quarter? And what was DRC's pretax earnings on their own?

Ken Haber

Okay. Well, let me – you threw a lot there. Copper, I believe, was not material from year-over-year relative to impact on our earnings in the advanced materials. I think the – with regards to mark-to-market, it was very minimal as of the end of the third quarter, probably less than $1 million. I think we saw – a significant drop in the metal price occurred in August, and that's where our margins were affected. And you see that in our quarterly results when you look at the advanced materials operating profit in that regard. And then, as far as the DRC or the GTL operating profits for the third quarter, we recorded approximately $25 million of operating profit in our third quarter results.

Saul Ludwig – KeyBanc

And how’d that compare with a year ago?

Ken Haber

I think a year ago, it was probably about $16 million, $15 million – about $16 million, I believe.

Saul Ludwig – KeyBanc

Okay. And what was Big Hill's pretax profits on their books?

Ken Haber

Oh, there are the numbers. Oh, on the GTL – on the joint ventures itself?

Saul Ludwig – KeyBanc

Right.

Unidentified Company Speaker

You don’t.

Ken Haber

I don't think we break that out.

Saul Ludwig – KeyBanc

Yes, you've given that to us in the past.

Ken Haber

Not pretax.

Saul Ludwig – KeyBanc

Pretax.

Ken Haber

Yes, okay. Yes, we have because when you look at the minority interest, you can back calculate that number.

Saul Ludwig – KeyBanc

With the 42% tax rate?

Ken Haber

Right. I think the pretax earnings for GTL this quarter was approximately $10 million, and last year was about $5.5 million or so.

Saul Ludwig – KeyBanc

Oh, great. Thank you very much.

Ken Haber

Okay.

Operator

(Operator instructions) Your next question comes from the line of Mike Harrison with First Analysis.

Steve Schwartz – First Analysis

Good morning, guys. This is actually Steve Schwartz sitting in for Mike today.

Ken Haber

Hi, Steve.

Joe Scaminace

Good morning.

Steve Schwartz – First Analysis

I guess, looking at the cash flow statement, it looks like working capital is still consuming cash at least through nine months.

Should we expect to see some of that unwind in the fourth quarter?

Ken Haber

I think, yes, we will. We should expect that. But I believe, in the third quarter, we actually did generate – that’s probably a push, I guess, in that regard. It was sort of a push. We did see drops in inventory and receivables, but payables dropped more in dollar terms because usually that's where we see the reflection of the decline in the metal price first with our purchases. So on a net basis, you see a flat net dollars of working capital, but certainly there was a decrease. And if you look at our days, we're managing those, I believe, very well.

Steve Schwartz – First Analysis

So in the fourth quarter, what would you expect to shift?

Ken Haber

I really don't have a number – a specific number. Again, it is a movement. Again, we're only in the beginning of November of the quarter, and there's still a lot of time for what could happen with the metal price in the shift. So it's hard for me to give you a number.

Steve Schwartz – First Analysis

Sure. Okay. In terms of CapEx, where do you expect that’s going be for the year? Are you cutting back on projects right now to conserve cash?

Ken Haber

No. We are not cutting back in any approved projects or any planned projects that we have. I think the drop you saw in the third quarter was just a reflection of us not being able to complete – it’s just a timing thing in that regard and executing against those. Our projection for the fourth quarter is somewhere between $12 million and $17 million.

Steve Schwartz – First Analysis

Okay. And then, Joe, you touched on it in your commentary, but if you could maybe add some more color on the M&A activity you guys are in right now? I mean, we've got, obviously, the credit issues. But we've got reduced valuations in the market as well. How are things working out for you in your search?

Joe Scaminace

Yes. I could tell you that everybody is sort of talking about that this is the time the strategies are coming into their position here. And clearly, we feel very well aligned in that regard. We're kind of – we like where we're at with our balance sheet. We like where we're at with the moves we've made to divest our nickel business, make a couple – a couple of tactical moves, and then a larger move with Rockwood, and those activities are ongoing. I could tell you that right now, we see as many opportunities out there as we have in long time, primarily due to the fact that a slowing economy really puts companies that right now are trying to de-leverage their balance sheets or are under pressure for unlocking their own shareholder value that are considering divestitures that they would otherwise not be considering. So we've been very prudent in terms of what we've walked away from. There have been a couple of opportunities that we felt were out of a range that we were comfortable with and we're staying with that diligence. But we do think there are opportunities out there, and we are continuing on with our strategy.

Steve Schwartz – First Analysis

Okay. When you say you’ve walked away from some – considering that valuations in the market have dropped, what's driving you to walk away from some of those potential deals?

Joe Scaminace

Yes. Let me just rephrase or clarify what we did. That was previous, that was prior to this latest meltdown. We have not, up to this – since that time, engaged in a real serious move up to other than evaluating some of the activities that are out there. So when I made that statement, I talked about deals that prior to this collapse, we were not lured into these incredibly high valuations that were going out at 9, 10, 11 times.

Steve Schwartz – First Analysis

Okay, great. Thank you. I'll get back in queue.

Ken Haber

You’re welcome.

Operator

(Operator instructions) Your next question comes from the line of Mike Judd with Greenwich.

Mike Judd – Greenwich

Yes, just a follow-up to the prior question. I think you had indicated that if you couldn't find the right deal – and this is several months ago, that approximately nine months or a year down the road, you might be willing to consider other things, like a large share repurchase program and a dividend, and things like that. Are those things still off the table at this point because you see a lot of opportunities?

Ken Haber

Well, I would say right now that currently we do see opportunities out there. And the issue of what we do with our shares is always on the table because we're all about unlocking value. And we're constantly evaluating what the opportunities are vis-à-vis other opportunities. So clearly, we're basically evaluating what's happening. And quite frankly, we're seeing valuations right now that are coming into line for where we're at. So when we made the statement about if nothing were available, I don't remember the exact timeframe, but clearly, things have changed in the last few months. And it's no longer a static valuation environment out there. It's incredibly dynamic. And depending on how deep this recession gets and how cash strapped some of our specialty chemical opportunities are, we're staying very, very vigilant to unlock as much value as we can for our shareholders.

Mike Judd – Greenwich

That helps –

Joe Scaminace

I don't think that stock buyback or dividends are never off the table. They're just off to the side at the moment.

Mike Judd – Greenwich

I mean, I completely understand your strategic direction, but can you just help us a little bit in terms of the way that – as you look at some of these opportunities and also look at obviously the other choice that you have is to buy your own shares, what are some of the returns? How does that work out as you balance those two? I'm sure there's our quantitative analysis behind that?

Joe Scaminace

I'm going to let Greg Griffith answer that because Greg fills the role of our corporate planning and development function, and basically could talk to you a little bit about our process.

Greg Griffith

When you break this down, our process is, right now is looking at the opportunities in the space. I can tell you about how we're identifying opportunities, how we're measuring those opportunities. I'm not really in a position to speak as to how we evaluate these opportunities against stock buyback or dividends that would be more keen. But what we're seeing right now is two different categories of opportunities. There's some pressure on private equity owners looking at their own opportunities within their portfolio. And then there are opportunities that Joe alluded to in the space itself where, the strategics are facing their own challenges about streamlining their portfolio, de-levering their balance sheets. And so, from those two fairly broad categories, we're seeing really a target list that is – to Joe's point, much bigger today than it was four, five months ago.

Mike Judd – Greenwich

Are there any forced sellers that you're running into?

Greg Griffith

No. I wouldn't characterize them on that basis.

Mike Judd – Greenwich

All right. Thanks for the help.

Greg Griffith

You're welcome.

Operator

You have a follow up question from the line of Mike Harrison with First Analysis.

Steve Schwartz – First Analysis

Hi, Steve Schwartz again. Steve, if we can go back to one point you made in talking about end markets, for lithium batteries, I think you said expected growth was 6% to 8% in 2009 and that was half the level of 2008. Do I have that right?

Steve Dunmead

Yes, that's what I said.

Steve Schwartz – First Analysis

Okay. And so it sounds like you're expecting to gain share and get further penetration. So for '09, what would you expect your growth rate as a company to be in that market?

Steve Dunmead

Probably two or three points better than the market.

Steve Schwartz – First Analysis

Okay. Okay.

Steve Dunmead

And honestly, when we had the last conference call three months ago, certainly, the expectations were that this market was going to be in the 10% to 12% range again. But certainly, with the economic uncertainty, oil prices coming back down a little bit, we're still seeing solid demand in laptop computer applications, but it may be that there is some kind of an inventory correction associated with cell phones that may be coming. And, so we’ve throttled back a little bit on our expectations due to the recent economic uncertainty.

Steve Schwartz – First Analysis

Okay. Got you. Thanks for that. And then, just talking about cobalt and the DRC we've got some political unrest there once again, and just wondering, what impact do you expect that might have?

Steve Dunmead

It's obviously a worry from our standpoint. It's always a worry when there's – whether it's social unrest or whether there's political problems or whether there's new outbreaks of war taking place. However, from day-to-day operations of our facility, it is 1,500 kilometers. Goma, where the problems are right now up near Rwanda, is about 1,500 kilometers from our facility. We're in daily conversations with the guys down there. And right now, it is certainly not impacting our ability to operate that facility.

Steve Schwartz – First Analysis

Okay. And then you had mentioned, as a result of lower copper and nickel pricing, some projects were being delayed and so forth. What is your current outlook for expanded supply for 2009?

Steve Dunmead

Similar to the conversation we just had about battery – about the battery market, this has changed fairly significantly over the course of the past three months. I've had two trips down there within the past two months and certainly the economic uncertainty and the credit crunch, any of the projects that were leveraged are going to be having some problems. Probably more delays than just simply canceling the projects, but it's still evolving. And so, I believe, that copper dropping from $3.50, $3.75 to less than $2. Nickel from whatever its high was, $25, down to hit a low of $4 something, certainly those lower prices, coupled with credit getting more expensive and costs, whether it's construction costs, capital costs, energy costs all increasing, it certainly doesn't help the economics of some of those big copper and nickel projects.

Steve Schwartz – First Analysis

Okay. Well, then that's certainly supportive for pricing and that's good for you guys. Do you agree?

Steve Dunmead

Yes.

Steve Schwartz – First Analysis

Yes. And then just one last one on Nortel’s [ph], I understand they have a plan to build their own cobalt refinery. Do you expect that that’s going to have any impact on your agreement with them – your supply agreement?

Steve Dunmead

I'll let Greg answer that.

Greg Griffith

First of all, the contracts are in place and they've been adhered to by both parties to the letter. So there's really no reason to take a press release that's come out of Russia and equate that to problems with our supply contracts. And then beyond that, speculating about their plans or how our plans fit with their plans. We're really not in a position to comment on that.

Steve Schwartz – First Analysis

Okay. Understood, Greg. Thanks for taking the questions.

Greg Griffith

You’re welcome.

Operator

You now have a follow up question from Saul Ludwig with KeyBanc.

Saul Ludwig – KeyBanc

How much was the metal resale volume up?

Steve Dunmead

We gave dollars.

Ken Haber

The volumes?

Saul Ludwig – KeyBanc

Volumes.

Steve Dunmead

Dollars.

Ken Haber

I think dollars was the only thing we disclosed.

Saul Ludwig – KeyBanc

What was the dollar interest?

Ken Haber

I think it’s about $19 million, so I have the do the calculation for the percentage. But we don't disclose volumes, just the dollar revenue.

Saul Ludwig – KeyBanc

Okay. And with cobalt now having come down to a low $23, $24, if it were to stay there come December 31st, if that were the price, would there be a much larger mark-to-market influence that would impact – would be incorporated into your results?

Ken Haber

Certainly. But that's only today in November and if it stayed there, we would certainly see that, but then there's always the – and the margins would get squeezed off also from that perspective.

Saul Ludwig – KeyBanc

If the price were to stay where it is today, could that mark-to-market be $10 million or $5 million or $22 million? What planet would it be on?

Ken Haber

Pardon? I'm sorry, Saul.

Saul Ludwig – KeyBanc

What arena would it be in? I realize you can't pinpoint it precisely, but are we talking at $23 cobalt, would we be talking $5 million-ish or $10 million-ish or $15 million-ish in terms of mark-to-market, and we'll take what your answer is as a broad generalization, not a specific number.

Ken Haber

No. I can't even – I wouldn't even put a range on that. I wouldn't speculate the do that. Again, and the primary reason is that between now and the end of the year, even if the prices stayed, the volumes and the mix of the feed –

Steve Dunmead

The inventories.

Ken Haber

The inventory levels, I mean, all – there's probably a half a dozen variables that go into that. So I just don't feel comfortable speculating at this point to that question.

Saul Ludwig – KeyBanc

Did the DRC ever finish all of their contract renewals and what is the aftermath of that whether it affects you or other people? Is there going be any impact to that going forward?

Steve Dunmead

I'll take that. This is Steve. First of all, we – I don't think we're in a position to speculate about what the impact on other companies is. We did have an official meeting finally in October with the government officials, talking about the re-visitation, and similar to what we had said previously in prior Qs, we do not believe that there is going to be any material impact on the joint venture from a financial standpoint. We have – the minutes of the meeting were signed and approved but just at about that time, the Prime Minister resigned and the government was changing out. We understand that the Minister of Mines and the Vice Minister of Mines have remained the same. So we have not gotten any official word from Kinshasa but, again, we don't believe there's going to any material impact on the joint venture from a financial standpoint.

Saul Ludwig – KeyBanc

That's very good news, Steve. While you're on the line, with regard to the new projects over there, I guess, the Camex and Katanga are, like they're alive and working and producing cobalt. I don't know about the Tenka project, but are they – of the ones that are up and running, are they basically been financed and they're going to move forward and create excess capacity, and is the risk on the projects that haven't put the shovel in the ground yet?

Steve Dunmead

That's probably not for me to speculate on projects that either are ongoing – certainly we believe there's going to be an impact on projects and all these projects are at various stages of startup, whether they're just simply now turning dirt in the ground or whether they're actually producing. But certainly the copper prices, the nickel prices, and the credit environment, and the cost environment is not beneficial to any of them whether they're just simply now starting up, whether they're under construction, or whether they're already operating.

Saul Ludwig – KeyBanc

Well, granted that it's tough to forecast this but from a cobalt supply – let's say global cobalt supply, there's all these concerns it will be up 20%, 30%, 40%. What would be your best guess as to what cobalt supply will increase in '08 versus '07 and '09 versus '08?

Steve Dunmead

Things are changing so rapidly. There was speculation – look, if you go back to when I first became associated with the cobalt market in about 2000, there was speculation that we were going to be flooded by cobalt coming out of nickel laterite projects. And then in about 2002, we were going be flooded by material coming out of copper projects. But things are changing so rapidly with this credit environment that I think it is a very fuzzy picture at this point in time.

Greg Griffith

Saul, this is Greg. It would even be difficult for Steve to even estimate whether or not there's increased cobalt feed or increased units of cobalt metal, which is another distinction that gets factored into the analysis.

Joe Scaminace

Saul, if you assume that Adam Smith is alive and well and living in all these markets out there, you look at the Middle East now trying to cut back on oil to try to align supply with demand, if rationality prevails out there, which you have to assume it will, as copper prices tank, as nickel prices have come down from incredibly historic peaks down to the $5 per pound range, it's difficult for us to speculate on how rational these CEOs will be. But you have to assume that they will attempt to act in a way to have supply balance with demand.

Saul Ludwig – KeyBanc

Okay, great. Thank you very much, guys.

Joe Scaminace

Thank you.

Operator

There are no further questions at this time. I would now like the turn the conference over to Joe for closing remarks.

Joe Scaminace

Okay. Well, I'd like to thank everybody for being with us today and I’ll just make a wrap-up comment to tell you, in the tumult that seeing out there in the marketplace, we really are very confident with where we're at. We're not a commodity company as we once were, half the company being involved in nickel. We are moving up the chain here to become more of a specialty company. We believe very strongly that the battle will be won and lost on the balance sheet in this environment that we're in and we feel that we're in growing markets. So we like where we're at. We're continuing on with our strategy. The final comment I'll make, if there was a question that perhaps you think about later and you need to ask, please don't hesitate to contact either Greg or Troy. In the meantime, let me thank you again all for your interest in OMG.

Operator

This concludes today's third quarter 2008 results conference call. You may now disconnect.

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Source: OM Group, Inc. Q3 2008 Earnings Call Transcript
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