SinoCoking Coal and Coke Chemical Industries' CEO Discusses F3Q2013 Results - Earnings Call Transcript

| About: SinoCoking Coal (SCOK)

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

F3Q2013 Earnings Conference Call

May 16, 2013 10:00 AM ET

Executives

Zan (Sam) Wu - CFO

Jianhau Lv - Founder, Chairman and CEO

Analysts

Operator

Greetings, and welcome to the SinoCoking Coal & Coke Chemical Industries Inc's 2013 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 statement disclaimers 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.

Zan (Sam) Wu

Thank you, everyone and welcome to SinoCoking's fiscal 2013 third quarter operating results conference call. Today with me is Mr. Jianhau Lv, Chairman and CEO of SinoCoking. The details of the fiscal 2013 third quarter results are available in the news release issued this morning, and also Form 10-Q that we filed on May 14. If you have not received a copy of our press release, please contact Lena Cati of The Equity Group at 212-836-9611, and she will email a copy.

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

Jianhau Lv

(Interpreted).

Thank you everyone for attending today's conference call. I will start with this call by providing a general update of our business and recent developments.

Over the last several quarters, we have seen a slight steady improvement in coal demand, mainly from steel mills. Thus, since the beginning of fiscal 2013, we have taken steps to position SinoCoking to take advantage of the market opportunities that may arise, if demand for coal, coke and coke byproducts recover in fiscal 2014.

I will briefly highlight our most important [development], while Sam will provide additional details later during this call. Recently, we upgraded technical capacity of our existing 250,000 metric tons coking facility, and signed a leasing agreement to operate 200,000 metric tons coking facility for a period of one year. As a result, we currently have a combined coke production capacity of 450,000 metric tons annually, and resuming construction of the new coking facility, as we seek approval to increase capacity of approximately 1.2 million metric tons per year.

We also continue to invest in improving safety of our coal mines to be approved, to resume mining activities. Our long term business plan includes the following initiatives; we plan to acquire coal mines in other province to source more materials. We are searching for opportunities, to build out long term strategic business relations with quality mining companies to expand our coal trading business.

In that regard, we plan to establish additional strong business relationship with large scale coal producers such as Falcon Coal Group and strengthened our relationships with several other medium scale coal producers in Inner Mongolia, Shanxi, Gansu and Qinghai Provinces.

Finally, we are working to expand our product mix. We are exploring the possibility of extracting humic acid from our mid-coals and slurry for producing fertilizers. We're currently cooperating with the Chinese Academy of Agricultural Sciences to do the feasibility study for this [possible venture].

Due to the recent steps taken to increase production of coke and coke byproducts, we expect our top and bottom lines to improve in the final quarter of fiscal 2013 and in fiscal 2014.

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

Zan (Sam) Wu

Thank you, Mr. Lv. During the quarter, we continued to meet our raw coal requirements from the other provinces as ongoing mining moratorium continues to limit raw coal supply in Henan. Mining operations at our four coal mines, still remains idle. As our production activities for all Henan provinces producers, (inaudible).

For the fiscal 2013 third quarter, as compared with fiscal 2012 third quarter, total revenue decreased by 17.3% to $13.9 million as compared to $16.8 million. The decrease was due to approximately $2 million decrease in washed coal revenue, resulting from lower sales of volumes, despite a slight increased average selling price.

Approximately $0.6 million decrease in raw coal revenue due to limited supply, as well as a decreased average selling price, and approximately $0.4 million decrease in coke revenue, mainly due to lower average selling prices, by the higher sales volumes.

Of note, decreases in washed coal, raw coal, and coke revenue was slightly offset by an increase in coal tar revenue, due to higher average selling price, despite a decreased sales volume.

Gross margin for fiscal 2013 third quarter was 15%, as compared to 15.7% in third quarter of last year, due to product mix, as we purchased more coke, coking coke in the open market, for both coking and coke processing.

Net income including foreign currency transaction adjustment was $1.2 million or $0.02 per diluted share in the current third quarter, as compared to net income of $2.1 million or $0.07 per diluted share in the same period of fiscal 2012.

Regarding our recent initiatives, starting with our existing facility, at the end of this calendar year 2012. We completed upgrade of technical capacity at our existing coking facility, which has an annual production of 250,000 metric tons. Due to the upgrades, we were able to reduce our dependency on high cost of raw materials, such as coking coke. The facility can now produce high quality coke and coke byproducts using low cost raw coal, such as long flame coal.

We also operated other capacities to improve the capacity to improve the energy efficiency, capture additional byproducts for refinement into a high value-added chemical products, and satisfy strict environmental requirements. Last month, we resumed construction activities at our new coking facility, which we plan to complete before fiscal 2014 year end.

During the next couple of months, we will install the coke pusher, tamping machine, wash coke car and guide car, and smoke and dust cars. We will also complete gas purification and chimney waste heat utilization section and coal blending and coke sieving section.

Additionally, we will complete construction of drum cold, coal tar recovery, crude benzol and sulfur ammonia sections, which will be needed to recapture additional coke byproducts, with refinement into high value-added chemical products. This fits well with our business plan to focus on increasing our market share in China's coal-chemical industry, which has been growing rapidly.

Finally, we will build a dedicated rail freight yard, which will connect our new facility with our existing rail system. Trial production should start in April 2014, which will be followed by a gradual increase of production for full capacity.

Additionally, we received approval from local authorities to increase the facility designed annual production capacity from 90,000 metric tons to 1.2 million metric tons. Since the coke market showed signs of recovery, we took advantage of this opportunity by leasing a 200,000 metric ton coking facility for a period of one year. Trial production and leasing production of the facility began on April 24, 2013. This facility is approximately three miles from our existing coking facility, and rail yard.

We started working to improve the efficiency of the coke ovens and the quality of the coke producing facility, and we will gradually increase production to full capacity. Coke byproducts such as crude benzol, sulfur, sulfur ammonia section and purified coal gas will be produced at the same time, thereby increasing our production portfolio.

Through operating this facility, we aim to gain and hone the skills needed to operate and manage our new type of coking ovens, which will be a valuable experience once our state-of-the-art coking facility is completed and becomes operational.

Finally, we are continuing our investment to improve safety of our coal mines. As required by the Henan government, we are upgrading the safety-related system at our coal mines, in order to be approved, to resume our mine operations. To date, we have invested approximately $17 million for this upgrade, which are expected to complete in calendar year 2013. Mine upgrades totaling approximately $35 million, 70% or approximately $24.5 million to be paid by SinoCoking, and the remainder by Henan Coal Seam Gas, our joint venture partner.

We are also in the process of merging the operation of Hongchang Mine, Shunli Mine, Shuangrui mine. To date, we have paid approximately $10.9 million towards such integration. We expect to complete such integration four to six months after we obtain clearance to resume our mining operations, which clearance we expect to receive in calendar year 2013. We are excited about these new developments at SinoCoking, and we look forward to report our progress in the coming months.

That concludes our prepared remarks on today's conference call. At this point, we would like to open the floor to questions. The operator, can you allow callers to place questions now.

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions]. Our first question is coming from Tom McDuffy, a private investor. Please proceed with your question.

Unidentified Analyst

Good evening gentlemen. I am somewhat frustrated with the slowness of the -- getting the mines reopened. We started to do something 18 months ago, or something like that, and we have been kicking the can down the road, quarter, most per average, it seems and you know, the last time when we talked, the political situation in China was solidifying, and now that it has, but everything just keeps going down the road, and we have absolutely no visibility other than somewhere out there in the very distant future, that we may get these things reopened. But I don't think -- it doesn't appear to me that the company is going to go anywhere, until we get those mines reopened and we have no visibility into that ever happening. Is there any information that you can provide like -- where is the government in this approval process, little bit more clarity on that would certainly be useful to me and I think most other investors don't have much visibility at this point. Can you add anything to that?

Zan (Sam) Wu

Yeah. Well currently we have already reported our technical upgrade to the government, and we have done some part of [leveling work] underground to combining three mines, and from the information from the government, they are under the negotiation or between the different departments, to giving the approval to all the small scale mines, including -- still, we don't know the time, but we did see the government, they made some movements on that.

Currently, our strategy is -- we still think that our mine could be open, kind of in the most recent times. But right now, the company's strategy as you can see -- we are not just relying on reopening old mines. We started rebuilding our coking facility, because we are confident that we have safely secured our resource from other provinces. Although, the [upgrade] costs maybe higher than the mines, but we still think that we can make profit, by upgrading our new facility and the existing facilities.

Unidentified Analyst

Has the political situation pretty much stabilized? I know Xi Jinping is now President and so I guess the local governments and everything are more politically stabilized now. Is that true?

Zan (Sam) Wu

Yes. The central government, all positions are (inaudible) and in Henan province, the new minister of the province will -- that gentleman was in some position one month ago, and all the new government departments now -- I believe their personnel changing almost were finished. So I think the whole government system is on the way working properly now.

Unidentified Analyst

Are you relatively confident that the mines will eventually reopen?

Zan (Sam) Wu

Yes. Because you know, although the mines -- we only have the right to extract mines. But there is a law in China there. We have invested in these mines, so they have to let us keep (inaudible); because although we only have the right to extract, but we have this kind of this contract, the government permits us to do that, and we have invested the money. There is no reason the government kick us out.

Unidentified Analyst

Okay. And one other minor point, the press release that we got, you had a link to SinoCoking China that's broken. That's not really -- not a big point, but when you release that to investors, I clicked on it, and it apparently has been deactivated since the 5th of May. So I don't know who your IP person is, but they probably ought to check those things out, before they put that in the press release.

Zan (Sam) Wu

We will do the check. Although this is the first time, because we cannot log on to our own website, because the server that we rent is in the U.S., and we cannot browse any website in the U.S., because of the government regulation stuff. I will check it. I will check it.

Unidentified Analyst

The site, www.ir-site.com/sinocoking works, but the SinoCoking China does not. Apparently, that goes to GoDaddy or something and it says that it hasn't been updated or something. I don't know. You might have your IP guys check that out, and see what's going on there.

Zan (Sam) Wu

Sure. We will do that.

Unidentified Analyst

Okay. Thank you very much.

Zan (Sam) Wu

Thank you.

Operator

Thank you. [Operator Instructions]. It appears there are no further questions at this time. I'd like to turn the floor back over to management for any further or closing comments.

Zan (Sam) Wu

We would like to thank all of you for participating on this call, and look forward to speak to you again in mid-September, when we will be announcing our fiscal 2013 full year results, and at the same time, if there are news, either from the mines, where new (inaudible) or if there is any new information, we are going to let investors know, as soon as possible. Thank you very much.

Operator

Thank you. That concludes 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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