SinoCoking Coal & Coke Chemical Industries' CEO Discusses Q2 2013 Earnings Results - Earnings Call Transcript

Feb.19.13 | About: SinoCoking Coal (SCOK)

SinoCoking Coal & Coke Chemical Industries, Inc (NASDAQ:SCOK)

Q2 2013 Earnings Call

February 19, 2013 10:00 am ET

Executives

Sam Wu – Chief Financial Officer

Jianhua Lv – Chairman, Chief Executive Officer

Analysts

Thomas Sauve – Private Investor

Richard Keim – Kensington Management

Operator

Greetings, and welcome to the SinoCoking Coal & Coke Chemical Industries Inc’s 2013 Second Quarter Conference Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

I’d like to remind our listeners that this conference call may include items of the forward-looking nature with respect to certain securities regulations. We refer you to the forward-looking statements made in the 10-K in the 10-Q filings with the Securities and Exchange Commission. As well as those forward-looking statements made in the company’s press releases.

I’d now like to turn the conference over to Sam Wu, CFO for SinoCoking. Please go ahead sir.

Sam Wu

Thank you. Welcome to SinoCoking’s fiscal 2013 second quarter operating results conference call. Today with me is Mr. Jianhua Lv, the Chairman CEO of SinoCoking. The details of the fiscal 2013 second quarter results are available in the news release issued this morning and also on the 10-Qs that will be filed on average. If you have not received a copy of our press release, please contact me or (inaudible) at 212-836-9611 and she will e-mail a copy.

Now I will hand the conference call over to Mr. Lv, who will discuss recent developments and then I will review the financial results.

Jianhua Lv

(Interpreted). And thank you everyone for attending today’s conference call. I will start this call by providing a general update on our business and recent developments.

As that has been the case in the last several quarters, due to the ongoing mining moratorium for mid-size coal producers, coal suppliers in Henan province were limited. Operations at our four coal mines remain audit. As for production activities are for all Henan province produces other than state owned enterprises and we have met our coal requirements largely by purchase raw coal from other provinces.

Coking coal price remain on historical high levels and we expect price will remain high until the mining moratorium is lifted some time in 2013 end of the year. Although there can be no occurrence as to exactly when the mining moratorium will end and when we can resume operations.

The government will control the real-estate and then development continues to net dividend affect the country to having industries including ours. As a result of the weak demand for seal, demand for grade to coke and coke byproducts remain soft. But we expect the market to recover in 2013 calendar year.

To take advantage of our purities, that should be a writing from such expected recovery. We plan to complete construction of our new 100,000 metric ton coking facility which will increase our annual production capacity to over 1 million metric tons. The facility will also have the ability to generate power and the seal chemicals get sulphur and ammonium sulphate from the coking process. The plant is also expected to produce purified coal gas which we can sell as the few source tool that they organically 220% lower price than liquid natural gas currently used to local residents.

Occasionally, we are plan operating our existing coke produce at the same time we increase the investment in our coal mines which we expected to resume our production of coke and coal as we soon as see clearing from low cost authorities. Sam will provide more details of these projects. We plan to acquire coal mines in Henan provinces to source through materials.

We are searching for activities to build up long-term strategic business relationships through refining our companies to expand our coal trading business and increase our profitability. We have been exploring the possibility of additional coal resources in North West China and have established strong business relationships with last coal producers that have sat of coal group. And also have few gradations with several other need-to-take coal producers in the Mongolia, Shanxi, Gansu and Shanghai provinces.

Finally, we are in the correct mix. We’re exploring the possibility of extracting formic acid from our mid-core and slurry for producing fertilizer. We’re currently cooperating with the Chinese Academy of Agricultural Science to really study for its possible venture. Due to the staff, we believe that we have well positioned SinoCoking to take advantage of growth opportunities once the market recovers in 2013.

Now I will turn the call over to Sam, who will discuss our results for fiscal 2013 second quarter. I also look forward to your questions later in the call.

Sam Wu

Thank you Mr. Lv. I will now discuss our financial results for the quarter. Our total revenue increased by 22.8% to 21.2% as compared to the 17.3 million for the three months second quarter. The increase in total revenue was mainly due to the higher coke and vertical revenues, due to offset that facility, flexible, vertical integrates of business model we have been able to adjust our mix base of multi-condition.

During the quarter, the decreased production of grade 2 coke in the industry and were produced and coke powder which is suitable for the non-ferrous metal and central steel industries. A market we have shown signs of higher demand, as a result, coke revenue increased by 22% from a year ago, due to higher sales volumes despite lower average selling price.

Local revenue also increased due to higher sales volume and average selling price. Work module decreased to 13.8% as compared to 19% due to product need as we put project more coking coal in the open market for both coking and coal process. Coking coal products remains at very high levels and we expect prices to remain high until the mining moratorium is lifted.

Net income including foreign currency transaction assessment was $1.1 million or $0.04 aside of the share as compared to net income of $3.3 million or $0.013 of added share. To reduce our dependency a high cost to raw material, that has coking coal, the reason we upgraded our exiting coke facility following the co operate we expand our margins to improve as facility can now produce quality coke and coke byproducts using low cost raw coke such as long flame coke. This facility is designed to produce electrical coke and chemical coke using the identical manufacturing process from material WGH6 high coke governs lined up in a row.

In 2012 kind of in the year, we purchased land use rights to expand the facility side and upgrade the other facilities to improve their energy efficiencies. Capture additional byproducts for the refinement into high value added chemical product and safety – safe and satisfied strictly environmental requirements. Once upgrade completes, we will do a 30-day trial run and then reach the full capacity.

We continue to fund our business activities from cash flow from operations and bank loans. As required by the government, we upgrade and safety related system at our coal mines in work to be approved to resume our mining operation and we are also in process of merging the operation of (inaudible) mine into a full integrated mine operation. To date, we have invested a total of approximately $27.9 million in these mines operating consolidated projects as follows.

Mine operating total estimated cost is $35 million. 70% of cost $22.5 million to be paid by federal coking and the remaining coke in gas or joint venture partner, to date, we have paid approximate $17 million for these safety cooperation. It’s expected to be completed in calendar 2013.

Mine consolidation total estimated cost is approximately $32 million. To date, we have paid approximately $10.9 million towards special integration. We expect to complete such integration for the 6 months after we obtain clearance from local authorities to resume our mining operation, which clearly states we expect to receive in calendar year 2013.

Our business remains strong and we believe that through the upgrade of our current facility, we will be able to expand our products offering and customer base and especially in profile top to bottom line in 2013. Additionally, we are well positioned to take advantage of additional opportunities once the coke market recovers. We look forward to report our progress in the coming months.

That concludes our prepared remarks of today’s conference call. At this point, we’d like to open the floor for questions. Operator, please allow callers to place questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is coming from Thomas Sauve, a private investor. Please proceed with your question.

Thomas Sauve – Private Investor

Good morning gentlemen. Good afternoon – good evening to you over there. But I would like some further definition on exactly what the Chinese government is requiring to reopen the mines and where we might stand in meeting those requirements. We’ve been getting the same story for quite some time now that it’s very big, no specifics. Is there any kind of a schedule as to what the requirements are exactly and where we are in meeting those requirements?

Sam Wu

Look, there are several factors that we need to meet. First is for the safety, and had the light doc or some detectors underground, we need to put them in. That’s one requirement. Other requirement is – is for the surface environment because when we are mining, there will be a lot tough to come out I mean on the surface side. So we need to meet that requirement.

And the most important thing for the Henan province is the current authority they are trying to put all the mines together to reopen. Some of the mines are already there, such as ours, we have reported our operating plan for the government. They just lead there because there is some big event – politically our Prime Minister is going to be changed, our Chairman is going to be changed and the government, they don’t want any mine to reopen just in case there is some accident happened so we have to wait there till everything settle down and they will move forward so that’s how kind of our problem here.

But right now we have, we have positively, we are very optimistically about that – our mine to be past all these stuff very soon because the new, the new government can be settled down in March. So basically we believe that the new government can start their process to reopen all these mines after March. So – we expect it there and there is something going to be happening in April that’s our current phase out, our ascending about the timing of the mines reopening and all the requirements that we need to meet.

Thomas Sauve – Private Investor

You remain pretty confident that we will at some point be allowed to reopen. Some of the previous communications if at all, and I haven’t heard that so much of this report and that’s encouraging.

Sam Wu

Yeah. We are very common, if not like before – we operate our mines, ourselves at the private sector. Right now, for the new mines, we cooperate with SinoCoking Sin Gas which is a state owned company they have the power to push the government. So basically we are quite confident that something is going to happen very soon.

Thomas Sauve – Private Investor

That is good to hear because it’s been a long time.

Sam Wu

Yeah, we know.

Thomas Sauve – Private Investor

On the – you mentioned acquiring mines in a neighboring provinces. Is that something that – I presume that some mines in other provinces are open and you are able to procure coal from them. Is that correct?

Sam Wu

Yeah. All our potential targets have to be, they have to be open at the point. We don’t want to buy mines and we do all the research and we apply for the stuff, it takes time, we need some new cash growth immediately.

Thomas Sauve – Private Investor

Are you bringing the coal from the other provinces into your area or – and if so how is it being transported? Is it rail or truck or how are you doing that?

Sam Wu

Well, basically through all those mines under our control we will, sum up the coal we will trade locally. And some of them we will take them back to the province by rail.

Thomas Sauve – Private Investor

Because if you use the older improved coking facility that means you have to physically have the coal brought in to process, right?

Sam Wu

Yeah. We need some of them. And also we believe, what’s our – because currently our 900,000 ton project is slowed down. One of the main reason is our access to the coal is kind of limited. We don’t want to see there is some time that we don’t have any more coal for the coking.

Thomas Sauve – Private Investor

One other question, has there been any consideration given to any kind of a stock, repurchase at the low price that is so important now?

Sam Wu

Yeah, to be honest we are thinking of that.

Thomas Sauve – Private Investor

Good, because it’s – I think that would be a plus for shareholders and at least supportive price because it’s been heading on low it’s been on a downhill skid for a long time now.

Sam Wu

Yeah.

Thomas Sauve – Private Investor

And the only other thing is the communication, I’ve mentioned this a couple of times on other calls, it would sure be very desirable if you could let us know over here what’s going on, you know we don’t really hear anything between conference calls. And sometimes you just get – we have no idea of what’s going on as far as the mines reopening how things are going. Some of an interim press release would certainly be appreciated by most of us so that we have some idea of what’s going on.

I know in Investor Relations sometimes it’s difficult and the communication with stock holders it has its complications. But some sort of information would certainly be appreciated if you guys could let us know what’s going on from time to time. I would certainly appreciate and I’m sure other shareholders would as well.

Sam Wu

Okay, we will improve this.

Thomas Sauve – Private Investor

Okay Sam, I think this report is pretty update compared to what we’ve had in the past. So we’re optimistic that maybe things will start turning around, we hope so.

Sam Wu

Yeah, we think as well, well we really think that this year something is going to happen. We are going to give the investors a good business result.

Thomas Sauve – Private Investor

Okay. Well thank you very much. That’s all I have, thanks.

Sam Wu

All right, thank you.

Operator

Thank you. (Operator Instructions). Our next question comes from Richard Keim from Kensington Management. Please proceed with your question.

Richard Keim – Kensington Management

Thank you, I have two questions. Number one, you mentioned a sit requirements before the mines could be opened. And forget about the combination of smaller mines and the larger ones have the two safety items that you talked about, underground indicators and I forgot that you mentioned, as requirement. Have they been done completed at your mines?

Sam Wu

No, it’s not that exactly we have finished that because the whole procedure, we have to report to the government about our plan. And they approved this plan and we do – we move forward to the next. But basically the fundamental work we have already finished and we passed the let the local authority confirmed our operating plan, safety operating plan. And then we will put the machinery and all these systems in. And then we will report again to let local authority to do the check and once we complete this check the mine will be open.

Richard Keim – Kensington Management

I’m just wondering because of the whole duration of the time that’s been involved in this whole mess, why has it been such a delay in just getting this part, the safety part of it done?

Sam Wu

Well, for the mining, especially the coal mine, it really has some, the risk that there will be some accidents that would happen especially during this kind of period. The Chinese government, the leader is going to be changed and also the prudential, the premier of the province and other high level officers. Once the mine is open, no matter how good these systems are, it has the chance, there could be some risk of the accident. So they don’t want these things to happen during this period so they just do it for the part soon as that mine reopens. So that’s our situation here.

Richard Keim – Kensington Management

Thank you.

Sam Wu

And we mean that this kind of period can be finished in March because all these high level officers they are going to be on their position after March meeting.

Richard Keim – Kensington Management

Well, if you get the approval to open mine, would they give you approval saying pending installation of what we just talked about or will you just get approvals to open the mine?

Sam Wu

Well, first we need to have these kinds of the reports operating or our plan of upgrading. And then as I said it’s going to take several months for us to do all these set ups, the trial and that will be the government officers. They are going to do the check and then the re-open is going to be happening. It’s not a very short time; it’s going to take several months. It’s not immediate reach to capacity.

Richard Keim – Kensington Management

So you can’t tell me that at the end of March, what you said what you’re hoping for. You can turn on a switch and just via the approval and then just get going, you start producing, then you have to do these items. Am I understanding correct?

Sam Wu

Yes.

Richard Keim – Kensington Management

Okay. Second question, are there any coal mines operating in your province?

Sam Wu

Yeah, there are several mines they are all state owned mines. All the mines at the private sector are closed.

Richard Keim – Kensington Management

But the state owned ones, just to be a little caustic about this. Could it perhaps be that the government is helping state owned mines, their business by preventing you guys from being in business? Necessarily the government, I hate to call it a conspiracy, is this perhaps the government’s conspiracy to help what they own?

Sam Wu

Well, we don’t think it is the case because the state owned company they are governed by the government and basically they have to let these mines keep operating otherwise there would be no call from Henan Province, it’s going to affect the whole Chinese industry. So basically that’s the case why state owned mining companies they are still operating.

Richard Keim – Kensington Management

Yeah, I understand that. But hey, if I’m an owner or something and I want to prevent a competitor from be out there producing, I can drag my teeth and prevent you guys from operating.

Sam Wu

All right, it could be the case but we don’t think that government is just simpler helping the state owned companies to try to kill more competitors because they are beaten up, we don’t compete with them.

Richard Keim – Kensington Management

What would you say, how would you answer the demand, the overall industry demand in your area, the coal? Is there excess supply or an under supply going on there?

Sam Wu

Well, right now in Henan provinces itself it’s basically shot of coal.

Richard Keim – Kensington Management

Okay. Which, well, you would start operating you could help sell?

Sam Wu

Yes, we can sell the coal locally and we can sell these to the south but basically we are going to use it to draw our coking.

Richard Keim – Kensington Management

Got you. Thank you.

Sam Wu

Thank you.

Operator

(Operator Instructions). It appears there are no further questions at this time. I’m going to turn the floor back over to management for any closing or further comments.

Sam Wu

Okay, thank you. We’d like to thank all of you to participate in this call. And look forward to speak to you again in mid May when we will be announcing our Fiscal Year 2013 quarter results. Thank you.

Operator

Thank you. This does conclude today’s teleconference. You may disconnect your lines at this time. And have a wonderful day. We thank you for your participation today.

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