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Diana Shipping, Inc. (NYSE:DSX)

Q4 2012 Earnings Call

March 14, 2013 9:00 AM ET

Executives

Ed Nebb – IR

Simeon Palios – Chairman and CEO

Stacy Margaronis – President

Andreas Michalopoulos – CFO

Ioannis Zafirakis – EVP and Secretary

Analysts

Michael Webber – Wells Fargo Advisors

Nishant Mani – JP Morgan

Gregory Lewis – Credit Suisse

Fotis Giannakoulis – Morgan Stanley

Joshua Katzeff – Deutsche Bank

Herman Hildan – RS Platou Markets

Operator

Greetings and welcome to the Diana Shipping Fourth Quarter 2012 Conference Call and Webcast. 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.

It is now my pleasure to introduce your host, Ed Nebb, Investor Relations for Diana Shipping. Thank you, Mr. Nebb. You may begin.

Ed Nebb

Thank you, Kevin and thanks to all of you who have joined us today for the Diana Shipping, Inc. 2012 fourth quarter and year-end conference call. The members of the Diana Shipping management team who are with us today are Mr. Simeon Palios, Chairman and Chief Executive Officer; Mr. Anastasios Margaronis, President; Mr. Andreas Michalopoulos, Chief Financial Officer; Mr. Ioannis Zafirakis, Executive Vice President and Secretary; and Ms. Maria Dede, Chief Accounting Officer.

Before management begins their remarks, let me briefly summarize the Safe Harbor notice. Certain statements made during this conference call, which are not statements of historical facts, are forward-looking statements pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act.

Such forward-looking statements are based on assumptions, expectations, projections and beliefs as to future events that may not prove to be accurate. For a description of the risks, uncertainties, and other factors that may cause future results to differ materially from the forward-looking statements, please refer to the company’s filings with the Securities and Exchange Commission.

And with that, let me turn the call over to Mr. Simeon Palios, Chairman and Chief Executive Officer of Diana Shipping.

Simeon Palios

Thank you, Ed. Good morning and thank you for joining us. 2012, Diana Shipping continued to pursue a strategic cost designed to produce stable operational and financial performance despite the current challenging industry cycle by also strongly positioning the company for future opportunities as conditions in dry bulk shipping marketplace gradually improve.

A key accomplishment during the year was the significant expansion and diversification of our fleet. This was made possible by our solid balance sheet and ample financial capacity. At the same time, we maintained our balanced and prudent approach to chartering and continued do business with well-established and high-quality charterers.

I would like to expand on the progress we have made thus far in expanding our fleet both in numbers and types of large bulk carriers. Between January 2012 and February 2013, Diana Shipping either acquired or announced contracts for 10 vessels. That represents a dramatic increase from the 24 vessels in our fleet as of year-end 2011. These new additions included two Panamax vessels, two post-Panamax vessels, two Newcastlemax vessels, two Kamsarmax vessels and two Ice Class Panamax vessels currently under construction and scheduled for delivery in the 2013 fourth quarter.

Through these actions we have positioned the company with a young diversified fleet which now consists of 32 dry bulk carriers. The delivery of the two Ice Class Panamax vessels later this year will bring the size of our fleet to 34 vessels. We’ll continue to manage the fleet in a prudent manner that promotes a balance of time charter maturities and produces a predictable revenue stream. Currently, our fixed-revenue days are 92% for 2013. The majority of our vessels are chartered for periods ranging from 2013 through 2015 and beyond.

Our balance sheet remains one of the strongest in our industry. The company’s cash position at December 31, 2012 was nearly $447 million or about $30 million higher than the year-end 2011. We’ll continue to operate with a very manageable degree of leverage. Long-term debt including current portion was $460.9 million of principal balance outstanding compared to shareholders’ equity of nearly $1.3 billion.

Now, let me review some of the key prospects of our financial results for the fourth quarter and full-year 2012. Net income to Diana Shipping, Inc. was $5 million for the fourth quarter of 2012 and reached $54.6 million for the full year. Time charter revenues total $49.4 million for the fourth quarter of 2012 and $220.8 million for the full year. Time charter rates averaged $17,681 for the 2012 fourth quarter, or approximately 2.5 times daily vessel operating expenses.

In summary, Diana Shipping is continuing to pursue the strategies that have maintained our stability and financial flexibility in a volatile industry environment while investing in the assets that will generate long-term growth. We will continue our program of selectively and gradually adding to our fleet as market conditions permit us to acquire vessels at attractive prices.

We will operate our fleet according to balanced and prudent chartering policies and promote a predictable revenue stream and enable us to sustain profitable operations. And we will continue to manage our balance sheet to provide financial flexibility, provide the capacity to support growth and maintain an acceptable degree of leverage.

With that, I will now turn the call over to our President, Stacy Margaronis, for a perspective on industry conditions. He will then be followed by our Chief Financial Officer, Andreas Michalopoulos, who will provide a financial overview. Thank you.

Stacy Margaronis

Thank you, Simeon, and apologies in advance to those participating in those conference call who may have expected us to be more optimistic about the medium-term fortunes of the bulk carrier market. This is, after all, one of the most cyclical industries. Things improve as unexpectedly as they go down.

Starting as we usually do, from the Baltic Dry Index, I would like remind ourselves that we were up 777 points at the beginning of the fourth quarter of 2012. And by yesterday, the index had moved to 875 points. The Baltic Panamax Index started the fourth quarter in 2012 at a dismal 439 points, and yesterday closed at 1,138 points. As for the Baltic Cape Index, we started the fourth quarter at 1,660 only to move to 1,314 yesterday, March 13.

The IMF certifies the global growth forecast for 2013 onwards. Global economic growth is now forecast to be 3.6% in 2013. Advanced economies are expected to grow by 1.5% in 2013, while forecast for the emerging economies in 2013 were cut by 0.2 percentage points to 5.6%.

According to a report issued by the OECD, the main reason for the weaker outlook is a drop in confidence due to fiscal consolidation, weaker global trade growth, and rising unemployment. The Euro area recession deepened in the fourth quarter of 2012 as the group’s gross domestic products fell 0.6% quarter-on-quarter, which is the largest drop since the first quarter of 2009. Year-on-year, the Eurozone’s GDP shrunk 0.5% in 2012, while the German economy expanded by an anemic 0.7% during that year after growing by 3% in 2011. In the United States, the manufacturing sector expanded in January this year for the second consecutive month. The PMI increased from 50.2% in December to 53.2% in January. During those months, unemployment remained steady at 7.9%, down from 8.3% a year ago.

Pareto Shipping research reports that Chinese authorities are using state-controlled media to convey the message that economic growth this year will be about 8.2%, up from 7.7% last year. The stimulus package reported to be RMB1.8 trillion could prop up fixed asset investments by 20% in 2013 according to Chinese media.

China’s manufacturing continues to expand in January but at a slower pace than in December. The China Federation of Logistics and Purchasing Managers Index was at 50.4% in January, down from 50.6% in December.

Let’s turn to the earnings development now for dry bulks. Last year was, according to the Baltic Dry Index, the weakest year for the dry bulk market in some 26 years with an average Baltic Dry Index value of 920 points, down 41% year-on-year and 67% lower than the 2010 average, as oversupply continues to negatively affect rates across their bulk carrier sectors.

Plus, some reminders, that while there was a short-lived improvement in Capesize rates during the fourth quarter of last year, overall, 2012 was still the worst year for Capesize owners in 2002. Four consecutive years of double-digit fleet growth have caused the Capesize fleet to double since the start of 2009. Since growth in the iron ore trade is expected to reach 6% in 2013, fleet growth predicted at 7%, the gap between Capesize supply and demand growth in 2013 is likely to be the smallest for several years.

Clarksons continue by saying that once deliveries have slowed down, it becomes possible for existing oversupply to be gradually absorbed rather than added on a monthly basis. However, shipping analyst, RS Platou foresee market conditions to remain difficult in 2013 for all segments of the bulk market.

However, they hope that with shipping retaining its cyclicality through this difficult period, it will be able to benefit from many improvements in the world economy relatively quickly. We agree with this prediction provided, however, scrapping continues at its present state and newbuilding orders do not once more take off and strangle any effort by the market to absorb certain capacity through increased demand.

Let’s look at steel now. According to Howe Robinson, world steel production in 2012 was 1.5 billion tons, up 1.2% from 2011. This is a record number with growth coming mainly from Asia and North America, while the European Union and South America decrease their respective production in 2012 compared to 2011. Annual production of crude steel in Asia was 1,012.7 million tons, an increase of 2.6% compared to 2011.

As far as Chinese steel production is concerned, a forecast released last November by the China Metallurgical Industry Planning and Research Institute predicted that both demand and output in the sector will see growth rates below 4.5% in 2013. Demand is expected to grow by 4.1% to 666 million tons and production may exceed 746 million tons, which is far in excess of demand.

Iron ore now. according to Clarksons, in 2013, global seaborne iron ore trade is expected to expand by 6% year-on-year and reach about 1,179 million metric tons with Chinese imports projected to increase by 8%. Clarksons goes on to say that assuming that Brazilian exports don’t expand notably in 2013, much of China’s demand growth is expected to be met by greater Australian exports. This is not particularly good news for Cape as regards the Panama demand for transporting iron ore.

According to shipping analyst, Banchero Costa, China produced 1.2 billion tons of iron ore during the first 11 months of 2012, which was up only 1% compared to 2011 while production increased by 27% compared to 2010. According to Commodore Research, in China, port iron ore stockpiles have dropped approximately 67.8 million tons in January this year. These have declined steadily since the end of September 2012 and are now at their lowest level since April 2010. However, in the middle of last month, iron ore stockpile increased to 69.4 million tons or about 3% in just one week. Even so, stockpiles are currently at their low level since November 2010.

Let’s turn to coking coal. According to Clarksons, total exports of coking coal are projected to grow by 3% in 2013, reaching 258 million metric tons. It has also been projected that China may import more coking coal if they succeed in exporting more of their own products on advantageous terms to countries such as Japan and South Korea. However, if such imports are sourced from Mongolia, the benefit to seaborne trade volumes would be limited.

Thermal coal now. Clarkson’s predict that total world export of thermal coal during this year may increase by 5% to reach a total volume of 841 million metric tons. Chinese imports are projected to grow by 11% this year. However, this projection is still subject to considerable uncertainty as much will depend on price arbitrage opportunities throughout the year. The major target for Chinese authorities according to Banchero Costa is to increase energy efficiency.

During the 2012 five-year plan, covering the period 2011 to 2015, the country’s energy consumption will be capped at 4 billion tons of standard coal and power use will be below 6.15 trillion kilowatt hours by 2015. Energy consumption per unit of GDP will be capped by 16% compared with 2010 levels, while energy efficiency will be based by 38%. Even though this is excellent news for the environment, it is not very encouraging as regard to the future coal imports.

Australia and Indonesia are expected to remain the main suppliers of coal to China for the foreseeable future. Additional volumes will have to come from Mongolia, Russia, South Africa and the United States. As earlier on, we had to carefully monitor future exports upon the full-year as they are all land-driven and reduced rate of increase of seaborne coal. In 2012, Mongolian exports were able to expand as much as expected given some logistical and financial strength. These constraints will eventually be resolved, hence, our above comment.

Let’s turn to grain. According to Commodore Research, only 285.8 million tons of grains are expected to be exported worldwide during the current 2012/2013 marketing year. If this materializes, it will be approximately 57 million metric tons less than was exported in the 2011/2012 across the year, a drop of 17%. This significant decline in global grain exports, which has occurred in large parts due to drought-related production decrease in the United States and the decreasing unit, continues to negatively affect Panamax as well as smaller-sized bulkers. The Clarksons’ projection is less than by estimating that the drop in worldwide grain exports will be about 6% during this grain season compared with the last one.

Let’s turn to the supplier fleet. The newbuilding order book has 48.1 million deadweight tons of Capes on order, from which nearly 33 million deadweight tons are scheduled for delivery in 2013. The total order book represents about 17.1% of the existing fleet. As for Panamaxes, there are 49 million deadweight tons on order, representing about 27.4% of the existing fleet. It is important to note that out of this total, $34.8 million deadweight tons are scheduled for delivery in 2013.

According to Fearnley Research, in 2012, the world dry-bulk carrier fleet increased by about 11%. While in 2013, the overall increase is expected to drop to 6.4%. There will be large variations among different size ranges, however. For some, the Capesize fleet which grew by about 7% in 2012 is expected to grow by around only 1% in 2013. However, the picture becomes slightly complicated by the fact that VLOC expected to grow by 20% in 2013 after increasing by 29% in 2012.

Things look more worrying in the Panamax fleet project. There, the fleet increased by about 13% in 2012, likely to increase by a further 10% in 2013. A staggering 413 Panamaxes 2,369,000 tons deadweight are scheduled for delivery this year alone. Even with the large percentage of slippage, this will be a strong delivery year for the Panamax fleet.

Let’s look at congestion. According to Commodore Research, in the middle of it approximately 119 vessels were waiting to load grain cargoes. In comparison, about 90 vessels were waiting for the same purpose about a year ago. Overall, heavy increases. It will take a fair amount of time before this type of congestion returns to more normal level.

Commodore Research continued by saying that of the 175 vessels congested at major Australian and Brazilian coal and iron ore ports, approximately 115 of them are Capesize.

Our scrapping, according to Howe Robinson, last year, 610 dry bulk carriers representing approximately 36 million deadweight tons headed for the scrapyard. Out of this total, 12.873 million tons were Capesize bulkers while 133 vessels or 9.1 million tons deadweight were Panamax.

It is worth noting that the average age of bulk carriers scrap during 2012 came down to 27 years from 30 years in 2011. So far, this year, the pace has eased due to seasonal factors. About 1.8 million deadweight tons of Capes have been scrapped and the rather disappointing 0.8 million deadweight of Panamax tonnage have headed for the scrapyard. The age of the large bulk carrier fleet is a concern as regard to future scrapping. For example, according to Maersk Broker, only 11% of the Panamax fleet is 20 years or older, while a mere 6% of the Capesize fleet is over 20 years old. As you got practice offer by scrapyards, not surprisingly, they have been drifting down steadily for a while now. In February, they were between $400 and 450 per light displacement ton.

What is the outlook now for the industry? We agree with the company by shipping and energy. That would ship building deliveries, gradually reducing in number, 2014 should see bulk carrier earnings improve. The problem with the sector, however, is that even though a decent level of demolition is expected this year, after 2013, there just aren’t enough vessels over 20 years old left to make serious inroads at least into the Capsize fleet.

Furthermore, things look worst for Panamaxes. The amount of new capacity coming on this year is difficult to see how demand for these ships and scrapping and to absorb the extra capacity. Based on statistics, Panamaxes will suffer from overcapacity for a while longer.

However, on a more positive note, MAR-ECO Shipping Research predicts that in the course of 2013 the stimulus-driven Chinese demand reported above would exceed supply growth of vessels. This may the market balance and offer confidence to both the market and the investor base especially during the second half of the year. Yet again, the risk from such a development if it comes to pass is that newbuilding contracting could once again take off and push back any recovery in earnings and the asset values.

According to Howe Robinson, shipyards are hungry for work and are offering ships at the lowest price for a decade. There is no realistic prospect to derive in demand outpacing shipyard capacity for a long time, according to Howe Robinson. They predict that this fact alone will bring through a protracted return to the rate levels cycle. Instead, Clarksons anticipates after we will – something like a return to the long-term levels of earnings.

Approximately two years ago, we have unfortunately foreseen and publicly expressed the negative development we have been witnessing for the last 18 months or so. Admittedly, we were a bit early in our business. However, we have always mentioned in our call and presentation that it is impossible to predict the exact timing of the freight market downturn or, for that matter, upturn. And exactly for this reason – can support a steady schedule of activation through the down cycle at progressively more competitive prices. We continue to believe that the strategy of financing new acquisitions with cash and conservative borrowing will ensure the steady growth of our bulk carrier fleet without jeopardizing the financial strength and integrity of our balance sheet.

Sooner or later, the recession in shipping will end. That moment, we’ll find Diana Shipping with a modern, high-quality bulk carrier fleet, excellent prospects to generate cash and support the dividend for our shareholders, payments of which were interrupted years ago to beef up our balance sheet. This shows the support the acquisition strategy referred to above. Asset values will eventually also increase and we will ensure that we’ll take advantage of this through selective sales of assets.

I will now pass you to our CFO, Andreas Michalopoulos, who will provide us with the financial highlights of the fourth quarter 2012 and the whole year 2012. Thanks.

Andreas Michalopoulos

Thank you, Stacy, and good morning. I’m pleased to be discussing today with you Diana’s operational results for the fourth quarter of 2012 and year ended December 2012. Fourth quarter 2012 net income for Diana Shipping, Inc. for the fourth quarter 2012 amounted to $5 million and the EPS was $0.06. Time charter revenues decreased to $49.4 million compared to $57.4 million in 2011.

The decrease is attributable to decreased average time charter rates that we achieved for our vessels during the fourth quarter compared with the same quarter of 2011. This decrease was partly offset by revenues derived from the vessels Leto, delivered in January 2012; Los Angeles, delivered in February 2012; Philadelphia and Melia, delivered in May 2012; Amphitrite, delivered in August 2012; and Polymnia, delivered in November 2012.

Ownership days were 2,710 for the fourth quarter of 2012, compared to 2,208 in the same period of 2011. Fleet utilization was 96.3% in the fourth quarter 2012, compared to 99.2% in 2011. The daily time charter equivalent rate for the fourth quarter of 2012 was $17,681, compared to $25,714 in 2011.

Other revenues for the fourth quarter of 2012 amounted to $0.6 million. The voyage expenses were $2.1 million for the quarter. Vessel operating expenses amounted to $19.3 million, compared to $14.9 million in 2011. The increase was due to the enlargement of this fleet, with six vessels during 2012, and also due to increased crew costs. The increase in operating expenses was partly offset by decrease in insurance, spares and other maintenance costs.

Daily operating expenses were $7,128 for the fourth quarter of 2012, compared to $6,734 in 2011, representing an increase of 6%. Depreciation and amortization of deferred charges amounted to $16.1 million. General and administrative expenses decreased to $6 million compared to $6.3 million in 2011. Interest and finance costs were $2.1 million for the quarter compared to $1.2 million in 2011. This increase is attributable to increased average interest rates and average debt in the fourth quarter of 2012 compared to the same quarter in 2011.

Loss from derivative instruments amounted to $3,000 for the quarter compared to a gain of $0.2 million in 2011 and includes both realized and unrealized interest cost rate into our $100 million of notional amount, zero collar swap agreement terminating in May 2014. Income from investment in Diana Containerships Inc. amounted $45,000 for the quarter.

The year ended December 31, 2012, now. Net income from Diana Shipping, Inc. in 2012 amounted to $54.6 million and the EPS was $0.67. Time charter revenues in 2012 decreased to $220.8 million compared to $255.7 million in 2011. The decrease is attributable to decreased average hire rates during 2012 compared to 2011 and was partly offset by revenues derived from one vessel delivered in July 2011 and six vessels delivered in 2012.

Ownership days were 10,119 in 2012 compared to 8,609 in 2011. Fleet – were 98.7% in 2012 and 99.3% in 2011. And the daily time charter equivalent rate was $21,255 compared to $28,920 in 2011. Other revenues amounted to $2.4 million. Voyage expenses were $8.3 million 2012.

Vessel operating expenses amounted to $66.3 million, an increase by 20%. The increase was attributable to the 18% increase in ownership days resulting from the delivery of six vessels in 2012 and one vessel in 2011. The increase was due to increased crew costs by decreased insurances in repairs and maintenance. Daily operating expenses were $6,551 in 2012 compared to $6,432 in 2011.

Depreciation and amortization of deferred charges amounted to $62 million in 2012. General and administrative expenses amounted to $24.9 million compared to $25.1 million in 2011. Interest and finance costs increased by $2.7 million to $7.6 million compared to $4.9 million in 2011. This increase was attributable to increased average interest rates and increased average debt during 2012 compared to 2011.

Loss from derivative instruments amounted to almost compared to $0.7 million in 2011 and increased both realized and unrealized interest costs. Loss from investment in Diana Containerships, Inc. amounted to $1.8 million and was due to the decrease of our ownership in the – after a follow-on offering of Diana Containerships in 2012.

Thank you for your attention. We would be pleased to respond to your question now. And I will turn the call to the operator who will instruct you as to the procedure for asking questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question is coming from Michael Webber from Wells Fargo Advisors. Please proceed with your question.

Michael Webber – Wells Fargo Advisors

Hey, guys. How are you?

Stacy Margaronis

Hi, Mike. Hi.

Michael Webber – Wells Fargo Advisors

The first question is just kind of on the market, and Stacy, as always, you give a very thorough and solid overview of the market. But I just wanted kind of boil it down a bit more simply. And we’ve certainly seen a run of recent optimism in this space. So, maybe just kind of on a very high level basis, do you think rates on average will be materially better this year than last, and do you think this kind of recent round of optimism is more of a headtaker or the start of a real recovery?

Stacy Margaronis

That’s a – you may have guessed from my quoting various analyst reports, we try to avoid doing this. We wouldn’t be surprised if we had on average better rates this year than last, but we would not consider that as meaning that the difference would be material in the sense that we are going to have a huge double-digit increases.

Having said that, when you start from a very low base, if you have a double-digit percentage increase in the rate is not very difficult, but yet it might not be meaningful in the sense that it will create a difference in the ability of an owner to pay debt in the sense of principal and interest charges. So, in that respect, we don’t think anything will change materially but, yes, we might have, on average, better rates this year than we saw last year across the price ranges. So, there’s more question mark on Panamax strictly.

Michael Webber – Wells Fargo Advisors

Got you. No, no, no, that’s helpful. And clearly, from your remarks, it seems like you think the drop is going to persist, to some degree, over the intermediate term. As you look at that kind of a landscape, and you guys have obviously been pretty active in acquiring assets, to what degree can you pick up your acquisition pace? And then when you look at across the major asset categories, is there one specific category you think you’re going to be more active in, be it Capes, Panas or Kamsarmaxes?

Ioannis Zafirakis

Hi, Mike. This is Ioannis Zafirakis speaking.

Michael Webber – Wells Fargo Advisors

Hey, Ioannis.

Ioannis Zafirakis

We have stated in the past that our pace of purchases assets do not change based on our strategy. Our strategy dictates the company to buy assets for the next two-year period without being influenced by the short-term events that are happening around us.

We are strong believers of the hedging strategy not being amended based on what is happening around. Otherwise, this hedging strategy ceases to be a hedging strategy. So, our pace of purchases is not supposed to change.

As regards to the preferable losses at the moment, based on what Stacy also told you, as a fine-tuning, nothing more than this, Capesize are preferable and the bigger vessels are preferable today than the Panamaxes.

Michael Webber – Wells Fargo Advisors

Okay. That’s helpful. And then also, the pace of acquisition is also going to be a function of what’s available to you in the market. And it’s not always perfectly liquid. When you think about what’s out there for you guys to do right now, is there more to do right now on the Cape side? I mean, can you give a little color in terms of what that liquidity is like from an S&P perspective?

Simeon Palios

Well, regarding the second-hand tonnage, admittedly, there is not a lot in the market for the old quality ships. Don’t forget that you have the ability of ordering new tonnage also. So, in our spectrum, it’s also not only the sales or second-half tonnage, but we have the newbuilding charge-offs. So, we are looking in all segments of the pipeline.

Michael Webber – Wells Fargo Advisors

No. That’s helpful. Just one more for me and I’ll turn it over. Given the cash balance you guys are carrying and you’ve got a sub that’s filling off pretty significant yield, any thoughts around potential increase in your stake in DCIX, especially as it looks to continue to grow and to develop its liquidity?

Stacy Margaronis

We have no such plan. We have not discussed that with the Board of Directors.

Michael Webber – Wells Fargo Advisors

Okay. That’s helpful. I’ll turn it over. Thanks, guys.

Simeon Palios

Thank you.

Operator

Thank you. Our next question is coming from Chris Combe from JP Morgan. Please proceed with your question.

Nishant Mani – JP Morgan

Hey. This is actually Nish Mani on the phone for Chris. Good afternoon, guys. Thanks for taking the time. Just a couple of quick questions. I notice that there are several vessels that are coming up in the next six months, one in May and kind of the rest in the summer. I kind of want to get some thoughts on our chartering strategy. I know you guys have stated the hedging strategy where you have charters of various durations, but would you really consider going along at this low end of the market, or is kind of the 12 to 24 months, the sweet spot, that we should be thinking about from these vessels?

Simeon Palios

Well, the governing factor is not how long we are going to charter the vessel. But the governing factor is when we have opened ships. So, we have to look on balance when the vessels expires, the other vessels. So, we are going to open the next ships we have to charter at a period that we have no other ship’s time charters expiring. Trying to have one particular ship every so – one month or one-and-a-half months open at any time. That’s the key issue here, not the duration, and we would like to go not more than two years.

Nishant Mani – JP Morgan

Got it. Okay. And that’s consistent with what you guys have done recently. I mean, I’ve noticed a lot of kind of in between the 18 and 24 months, and that makes sense. And thinking about kind of, I guess, the coming months in terms of recovery, I know you guys don’t necessarily think there’s going to be a meaningful recovery in 2013, but would there be any consideration of the profit share agreements or anything of the sort for any of the charters?

Andreas Michalopoulos

We do not like this type of charters. We want to have as transparent as possible deals and easy to be understood from our shareholders. The profit sharing is for those people that they have only few vessels, and they want to get the upside when that comes. We are getting our better, you said earlier differently, physically by having so many vessels. We can take the upside potential of the market by chartering another vessel. So, we feel that the 50/50 arrangement is for the benefit more of the charter as anybody else.

Nishant Mani – JP Morgan

Yes.

Simeon Palios

And so, over and above, it’s not very easy for you to calculate what our income will be under circumstances. So, clarity and transparency is of the utmost importance and we would like to keep it for you to be easy to calculate what we are doing.

Nishant Mani – JP Morgan

Yes. I actually understand. And then just finally, I guess, we noticed that OpEx this quarter is kind of above $7,000 a day. It was higher than prior quarters both on a quarter-by-quarter and year-over-year basis. Just want to get some thoughts as to is that kind of the new normal of the $7,000 range or if we’re going to see a reversion back to kind of the $6,500, $6,600 range that we saw previously?

Andreas Michalopoulos

I think it’s a seasonal fluctuation or if you can call it like this. And the best proof of that is that, if you look at the daily OpEx for the year, and I’m sure you saw it, it’s only 2% up. So, the overall idea would be to keep at the $6,500, $6,700 level a day per vessel.

Nishant Mani – JP Morgan

Okay. That’s your kind of 2013 target on a yearly basis?

Andreas Michalopoulos

Yes, that’s what – yes.

Nishant Mani – JP Morgan

Got it. Okay. That’s it for me. Thank you so much to the team.

Simeon Palios

Thank you.

Stacy Margaronis

Thank you.

Operator

Thank you. Our next question is coming from Gregory Lewis from Credit Suisse. Please proceed with your question.

Gregory Lewis – Credit Suisse

Yes. Thank you. Good morning, gentlemen.

Simeon Palios

Hi, Greg.

Stacy Margaronis

Hi.

Ioannis Zafirakis

Hi.

Andreas Michalopoulos

Hi, Greg.

Gregory Lewis – Credit Suisse

Hey, Stacy, I just have two questions for you. The first is more on the market and then – and really and so – when we think about shipowners in distress, and clearly there are a lot of them now in the dry bulk market, are you seeing, like, firsthand discrimination of vessels owned by distressed companies and they – simply they’re getting excluded from the spot market. In other words, are there – is there a pool of vessels that are idle or having real difficulty getting work just simply because cargo – movers of cargo were afraid those vessels are going to be getting arrested?

Stacy Margaronis

You are correct. This has been recently a very big concern of the charterers for two reasons. So, one is the one you mentioned as regard to potential arrest of such vessels. They don’t want to end up at a place somewhere in the world with a vessel full of cargo being arrested by someone. And the second reason also has to do with the fact that it is a rather common for companies that they have financial difficulties to not to maintain properly their vessels. And that has an effect with regards to the off-hire days and unforeseen repairs, et cetera, something that destroyed basically and completely takes out of schedule those companies – chartering companies.

Gregory Lewis – Credit Suisse

Okay, great. And then just – I just had one other question. I mean, clearly rates are pretty low and you kind of mentioned that right now we’re in a period where we’re not seeing much scrapping, is there some seasonality in the demolition market just simply because when you think about a special survey, it’s something where, once the calendar year starts, you have a couple – you have a window where you can watch the market before you make that decision in scraps. And I guess what I’m wondering is, is it – if we see rates where they are today, is it sort of plausible to think that maybe we’ll see a pickup in scrap in maybe in the middle and back half of the year?

Simeon Palios

Well, if you can consider seasonality, the period of typhoon season in India and in that sort of area, there is a seasonality. But the seasonality comes from the supply and demand of the scrapping deals. And I think that the scrapping will help to increase for the next few months. And of course, the rate of the scrap value will decrease, too.

Stacy Margaronis

Yes. And something else has mentioned is that scrap buyers tend to temporize the beginning of each year trying to, in a way, digest the deals that were booked that year before and to try and also put pressure on prices which they have partially succeeded in doing now as we have seen. So, there is a kind of a lulling January and February more influenced by year demand side for the ships to be scrapped rather than the of the supply.

Gregory Lewis – Credit Suisse

Okay, guys. Hey, thank you very much for the time.

Stacy Margaronis

You’re welcome. Thank you.

Operator

Thank you. Our next question is coming from Fotis Giannakoulis from Morgan Stanley. Please proceed with your question.

Fotis Giannakoulis – Morgan Stanley

Yes. Hello, guys, and thank you.

Stacy Margaronis

Hi, Fotis.

Fotis Giannakoulis – Morgan Stanley

I have a couple of questions. The first is about durability to operate additional vessels. You have a fleet of 34, 35 ships right now. How many ships can you operate under your current establishments?

Simeon Palios

I think we are organized in a way where at the moment if we add a few headcounts, we could without any major issue go up to 50 vessels operated by Diana Shipping Services. So, you have seen that operating more vessels has kept nevertheless our G&A’s impact, which proves the fact that we’re getting economies of scale from a bigger fleet. And on the contrary, we will have also diminished the G&A for that matter. So, that’s your answer, I guess.

Fotis Giannakoulis – Morgan Stanley

Thank you. In addition to that, you have approximately $450 million cash in your balance sheet. This has been the case for the last 12 months. If I understand well, you expect that at some point in 2014, we’re going to see some improvement either smaller or a greater, but there is going to be an improvement. Regardless the degree of improvement, your cash flow is pretty much fixed for the next 12 months. Is there a time that you might start considering or introducing or reintroducing dividend to the company?

Andreas Michalopoulos

Dividend partly is going to be reintroduced when we feel comfortable that we have reached the upper part of our cycle, and we are moving towards the next peak. We think that we are still far away from that point. You understand that the dividend, this reduction is going to happen at the middle of the cycle moving upwards. Now we are at the bottom.

Simeon Palios

And what is we are questioning whether we have, as a matter of fact, reached the absolute bottom because at the moment, you are at a forward running expenses. It was only a few days that we reached the running expenses of the ships as time charter rates. So, I’m wondering whether the bottom has gone. So, we have to be careful there.

Fotis Giannakoulis – Morgan Stanley

Noted. Thank you. That was all I have.

Simeon Palios

Thank you, Fotis.

Operator

Thank you. Our next question is coming from Justin Yagerman from Deutsche Bank. Please proceed with your question.

Joshua Katzeff – Deutsche Bank

Hi, good afternoon, guys. It’s Joshua on for Justin.

Simeon Palios

Hi, Josh.

Andreas Michalopoulos

Hi.

Joshua Katzeff – Deutsche Bank

I just want to follow up on some of the acquisitions and potential vessel sizes. You mentioned the kind of newer-age profile of some of the bigger ships and there’s a lot of older ships in the kind of Handysize segment. I guess, why not consider some of the Supermaxes or Handysize ships just given the ability for scrapping rates to pick up in this segment and, I guess, maybe for rates to be a bit more stable, although maybe lesser upside in those segments? Why not bring in a channel into the smaller sizes?

Stacy Margaronis

Well, there are various reasons. First of all, it’s the quality of the charters that you have to deal with when you deal with smaller ships, which is something that has always bothered us in the sense that we want to deal with the best charters in the industry. And you have huge difficulty in doing that when you’re dealing with Handysize vessels. You have to have a pretty large number of operators and relatively unknown charters to charter your ships. Otherwise, you won’t be able to have a steady business flow.

That in the Handymax sector, we have significant order book. And we are quite convinced that the way that the cascade effect has worked on it. It’s easier for it to work down the size ranges in the bulk area sectors. And lot of the larger Handysizes are going to be displaced by the more modern and economical Handymaxes.

So, the only real question that we have in our minds and have not managed to get a proper answer to it is why not invest in small Handysize – between 20,000 and 30,000 tons. But that’s a different market – and the trades that they do are really trades that, and we really don’t want to have much to do with mainly because of the – and mainly because of the volatility that the business attracts. So, that sector is being underbuilt. There is no doubt about it. And we’d rather leave that sector to people who are more geared up in trading ships in that small-size range than we are. Our operation is set in a way that we are best in operating larger-bulk carriers.

Andreas Michalopoulos

Don’t forget also that our model depends on the high volatility. The model that we have takes advantage of high volatility on the charter rates and prices for the benefit of our –that we have a vessel that it is, the bigger the volatility in the cycle.

Joshua Katzeff – Deutsche Bank

Got it. That’s fair enough. Kind of moving up to the larger segments, I guess, when you look at acquisitions, how do you feel about a more Post-Panamaxes, I saw you did the recent Kamsarmax, but kind of the bigger odd-sized segments versus the more traditional at a Panamax at 75,000, 76,000 deadweight tons and the Capes have 180,000 or so versus maybe going to Newcastlemaxes and the post-Panamaxes?

Simeon Palios

Well, I think that you have to understand that when the market is good, every ship is a good one, and when the market is bad, every ship is a bad one. But what we have to think and be careful is how much it costs to move one ton of cargo from A to B? And I feel that today, with the increase of vim even in the Panama Canal and the efficiency of the shipyards, you can get a very good productivity of how much it will cost you to move one ton of cargo with the big ships. And I think that they have an edge, the Newcastlemaxes, for example, from the 180,000 Panamaxes – 180,000 Capes. And that’s why I think we have to focus on those ships.

Joshua Katzeff – Deutsche Bank

Got it. Then just maybe switching over to your balance sheet, you have a lot of cash. In the past, you’ve talked about funding acquisitions with kind of 40%, 50% debt going forward. But I guess, why not just fund new acquisitions with just all cash now, maybe reduce some of the interest expense going forward and then lever up maybe in the better part of the cycle and just maybe turning some of that cash balance down?

Andreas Michalopoulos

It’s part of the scattered strategy of buying vessels basically. At the moment, we easily when we buy a vessel, we have a finance of 50% of that vessel. And we feel it’s – and we have cost-efficient finance. The risk is that you spend all the cash as you save or save little on interest. Okay, I guarantee that one. But then when you need to lever up because it’s part of strategy and it’s at this time of the cycle that you lever up, when you need to do that, nobody is there anymore to lend you money.

So, this is the reason why and we have proven that and we will continue doing that way. As soon as we have an acquisition, we try to have a conservative level that you mentioned of 40% to 50% on the particular vessel and gradually build up the leverage and a bit less gradually, of course, spend the cash.

Joshua Katzeff – Deutsche Bank

I appreciate the time, guys. Thanks.

Andreas Michalopoulos

Thank you.

Simeon Palios

Thank you.

Operator

Thank you. Our final question today is coming from Herman Hildan from RS Platou Markets. Please proceed with your question.

Herman Hildan – RS Platou Markets

Good morning. And thank you very much. I just have a quick question on asset values. I mean, you have five-year-old Panamaxes, 10-year-old Panamaxes at historically low levels versus newbuilds. Newbuild prices are historically at low levels as well, and you mentioned that there is, call it, scarcity in the secondhand market for (inaudible) and you’re actually seeing like recently quite high interest for buying secondhand. Could you shed some light on how you think about why you choose secondhand versus newbuild prices and, yes, basically how you conclude on that?

Simeon Palios

First of all, we have discussed in the past that we strongly believe that market prevails and there is a reason why the newbuilding cost so much and the secondhand don’t cost so much, and everything is incorporated in the price, but that’s trying to explain what we have just said. And the benefits and disadvantage to both – if you look at the optimum return that someone should expect from an investment today, a vessel in the – a vessel being aged in the vicinity of 5 to 10 years, it is more likely that will produce a better return on equity invested if the market turns after, let’s say, two years from today.

On the other hand, the newbuildings, they have the attraction of waiting for two years without burning any cash but, at the same time, they are adding to the existing supply of vessels. And a prudent – we just all believe that a prudent owner should do both carefully.

Herman Hildan – RS Platou Markets

So, just to kind of ask a question, if you’re – when you’re talking about newbuilds, are you talking about adding to the order book, not buying existing orders.

Andreas Michalopoulos

No, of course, you can buy the resale. But usually, resales, they do not go forward two or three years if they are prone to vessels.

Herman Hildan – RS Platou Markets

Yes. Okay. That’s all for me. Thank you.

Simeon Palios

Thank you.

Operator

Thank you. We have reached the end of our question-and-answer session. I would like to turn the floor back over to management for any further or closing comments.

Simeon Palios

Thank you again for your interest in and support of Diana Shipping. We look forward to speaking with you in the months ahead. 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.

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