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Executives

Herman Billung – Chief Executive Director

Birgitte Ringstad Vartdal – Chief Financial Officer

Analysts

Dan Togo Jensen – Svenska Handelsbanken AB

Golden Ocean Group Limited (OTCPK:GDOCF) Q2 2013 Earnings Conference Call August 23, 2013 9:00 AM ET

Operator

Good day and welcome to the Q2 2013, Golden Ocean Group Limited Earnings Conference Call. Today’s conference is being recorded, and at this time I’d like to turn the conference over to Mr. Herman Billung. Please go ahead.

Herman Billung

Thank you, very much and welcome to the second quarter 2013 webcast. We do as we usually do that Birgitte, will take you through the highlights; financial and operations, and then I will go quickly through the macro, and maybe a little bit about, how we consider to position ourselves going forward. Then please Birgitte, go ahead.

Birgitte Ringstad Vartdal

Thank you, Herman. Golden Ocean had a result for the second quarter of 2013 with a profit of $43.5 million and an EBITDA of $49.5 million. This is the equivalent earnings per share of $0.10. The Board of Golden Ocean has decided to declare a dividend of $0.01 per share for the second quarter of 2013. Since the last report, we have three firm and three optional Supramax newbuilding contracts concluded with Chengxi. In addition, we have received $30 million as the settlement for a dispute in relation to a 10 year charter contract.

If we go to the financial numbers, we have an increase of $50 million in operating revenues. This is the $30 million in settlement as well as $20 million related to higher activity on the short-term trading. In parallel, voyage expenses and charter hire expenses are up while operating expenses are stable.

The administrative expense is slightly off due to legal cost related to the claim. Depreciation and amortization is stable and other gain losses net are negative. These are mainly related to derivative that structured in our book mark-to-market every quarter. When it comes to the interest income and expenses these are stable while they are booked to profit on interest swaps in the quarter, and this gives a net profit of $43.5 million.

As you may know the Company holds some shares in Korea Line, these became freely tradable during the second quarter, and we have therefore booked the income that’s available for sale financial assets under other comprehensive income. This goes through the balance sheet and not directly on the P&L. Changes in the balance sheet since last quarter is related to vessel purchases and cancellations of newbuildings.

In Q2, which is delivery of Golden Pearl, one of the ice class Panamaxes that we agreed to purchase that are constructed at Pipavav shipyard, this increased vessels and equipments.

In Q2, we’ve also canceled two newbuilding contracts from Jinhaiwan, which leads to a reclassification between long-term – non-current assets and current assets, where we have increased refundable installments for canceled newbuildings, and reduced vessels on the construction.

In June, we also took delivery of the Capesize Golden Magnum that was brought in a joint venture with a partner (inaudible) investment in joint venture, which is increased during Q2. In addition, there is a small investment in UFC that is part of that number.

We are working on the financing of the vessel, and we expect to draw this within a month or two, so that will reduce the investment in joint venture, with approximately $12 million.

If we look at the equity and liabilities, we still have a high current portion of the long-term debt. This is related to the canceled newbuildings at Jinhaiwan, a debt of $43 million is classified as short-term.

In addition, one facility of $82.5 million is due for refinancing in January, and also classified as short-term. We have the same commitment from the current lender to refinance the facility at par. And this will be done within a month or two at last. The equity ratio is 51.1%.

I mentioned the Company took delivery in June and the committed financing is 70% for the Capesize. For the vessels from build at Pipavav, which is delivery of the first one in June, and we expect delivery of the second one in second half of 2013, most likely October or November. The financing is in place for that facility and we’ve drawn 65% of the purchase price from a bank and 30% of the seller’s credit for the first vessel.

There has been no major changes to our coverage going forward, the vessels, the charters that expire are replaced by soft or short-term time charter contracts. For the Capesizes we have 80% open exposure in 2014, and basically all our vessels are spot in 2015. For the Panamaxes we have increased our coverage this year somewhat due to some three to five months charters. But we have no changes to the 2014 and 2015 coverage, as opposed to the case there are still some long, near-term contracts on Panamaxes from our 10 year from the start and three or five years, there is still some coverage going forward.

As mentioned, we canceled two construction contracts at Jinhaiwan in the second quarter. In addition, we have canceled one contract so far in the third quarter. Thus there is only one remaining newbuilding contract with the yard.

In aggregate, for the nine vessels we have paid in $175 million and we have drawn loan of $43 million.

Then we have, in addition to the two Supramax vessels contracted in Japan in the first quarter, we have contracted three further at Chengxi in China in the second quarter. In addition, we have three optional contracts that will have to be declared in October. The firm contracts will be delivered within the first half of 2015. If we declare the three options they will also be delivered in 2015.

The graph shows the CapEx in relation to the Supramax contracts. We have paid a signing installment on all contracts. Except for that you can see that most of the payments are due in 2015 either close to or on delivery. This schedule is an estimate and may change depending on the construction program at the yards.

I’ve commented earlier on the settlement as well as the commitment to refinance the facility that is due in January. In addition, the Korea Line shares that are freely tradable have been booked. There are some shares that will be released from the second restructuring, most likely released in November and we will book the value of them in Q4 on our balance sheet then.

When it comes to operations of the fleet, there is no unexpected of hire on the fleet. The OpEx for Panamaxes was a bit high in Q1 with lower now and it averages out to 5,300 for the first half of 2013, while Capes are stable at around 5,500 so far this year. We have two dockings in the second half of 2013, which are five years docking on some of our ice class vessels.

Herman Billung

Okay. Thank you very much, Birgitte. Then I really take you through some macro slides. We have paid quite a lot of attention to oversupply over the last, say, two, three years, but you’ll see on this graph, we are through the worse and the tendency is that net fleet growth is in decline. Looking at the first seven months of this year, net fleet growth has been around 25 million deadweight and if the same tendency persists net fleet growth will be 43 million deadweight, but we don’t really foresee that due to the fact that January was very high and that fourth quarter is expected to be equally low. So we could end up with a net fleet growth very close to 5% this year.

Breakdown on these segments; we see that in particular Capes are on a steep decline from, say, a 25% net fleet growth in Q1 2010. We are now down to around 5% and also on the handys, which have been low throughout the whole period, mainly due to the age profile and good strapping. We are at a very low net fleet growth.

Panamax, however are still having – have to face a fairly high net fleet growth, which presently is at around 10%. For quite some time, and we continue to talk about China and obviously knowing that 80% of incremental growth in dry bulk trade over the last 10 years derive from China. We really need to follow that very closely. Over the first six months of the year demand growth was around 7.5% into the country, but the tendency both in July and August seems to be fairly positive.

Quite a few analysts and observers following the Chinese macro economics in particular, they have been, say, raising concerns about the development, in particular local government debts have been a big issue. Another issue has been that people are being concerned about housing.

We have seen, however, last couple of months that housing starts are on the rise, and compared to a lot of negative macro, say, leading indicators in May, June and early part of July. Lately we have seen some more positive news and as an example the HSBC’s PMI index, which was issued yesterday came out at 50 plus. But all in all, we believe in lower growth in China, but not hard landing. I mean, in our best case based on what we see from analysts in general, we expect GDP growth of around 7% in coming years.

Another positive thing, which has been the case since, say, over the last two months is that we have seen an increase in steel prices and inventories are still not that high, and with higher steel prices they are [better steel] margins for the steam-ins in spite of recent spikes in iron ore prices.

Why we believe that, this is kind of made by Platou, which is quite an interesting win. We also use historical data back to, say, from the mid-90s and based on that they plug-in in their estimated 7% GDP growth throughout 2020, which based again on the historical data should imply a steel demand growth or steel consumption growth of 3.5%, which in turn will mean 5% increase in dry bulk imports to China.

And have in mind that this is coming on top of really huge volume compared to the mid-90s. We expect China to import more than 800 million tons of iron ore this year and say, 5% growth on 800 million tons, this is obviously quite different from 10% on top of say, 100 million tons or 200 million tons.

Another issue is pricing of the commodity of iron ore, and this is a graph or a foil made by Fortescue, one of the big iron ore producers. What you see to the right is the cost of domestically produced. The red there is domestically produced iron ore in China. In spite of increased volumes, say, of domestic produced iron ore, what they really get out of if you then take into account the Fe content have been more or less stable in 2008, and we also see that some Chinese authorities say that they will closed on some of the mining capacity and also cement industry. We don’t really believe that will have a big impact on the iron ore imports because it will remain to be say, the less efficient all the steel mills that will be closed on who are mostly using domestically produced iron ore.

Here is the same exercise for India that was done previously shown for China. Right now, India is struggling somewhat, both with their currency and with their growth numbers, but I think from census that they will have the 6% growth over the next seven years, which in turn will mean that steel consumption will increase by 6.5%, and the drydocking ports will increase by 9.5% over the next say six to seven years. And for India, it’s coal that is moving and with a lot of ongoing projects that cater for increased imports to India, but obviously at much lower numbers than what we saw in China.

This is another, just talking about new iron ore capacity this (inaudible) on its own will increase its capacity by 40 million tones over the next 15 months, which in turn will make it into Cape equivalents that’s about 50 capes.

Talking about global iron ore capacity increase between now and 2016, analysts are expecting that increase in capacity will be in the region of 300 million tons to 400 million tons, which should cater for definitely more transportation of iron ore in the next few years.

Grain, we already see that the shippings out of the Black Sea are quite strong. Having a positive impact on Supramaxes in particular, both looking into also the coming season in the U.S. We believe that this season will be better compared to the last season, which should give some support to Panamaxes and Supramaxes.

Going back to the order book, we look at 2013 I mentioned that the 5% growth and this could be reduced to say 3%, 3.5%, 4% in the next two years. And I’m of the opinion that there’s not much spare capacity out there among say, the good yards to deliver ships in 2015, obviously the duly probably out into 2016, if the market should recover strongly, we will see more orders being placed for 2016.

Then, looking into what the (inaudible) is saying on demand and supply growth. Finally we will see that demand growth will out turn be stronger than supply growth in the next two to three years, based on the assumptions already mentioned to you. And which should end result in higher utilization of the dry bulk fleet, from presently say 85%, 86% it could improve to close to 80% – close to 90%

All-in-all, we are quite surprised of the recent development in Capesize rates. We have experienced particular now in August, which is kind of surprising having in mind that this is kind of holiday season, and in historic perspective August is not that strong. But it just tells us that underlying demand particularly for iron ore is quite strong. We also see that asset prices are on the rise. We’ve also Capesized back in, together with a joint venture partner a few months back, 33.7 something, the sister vessel was sold this week after 36.25, and we also sold retail – no not retail sorry, but 2012 built Japanese Cape, were sold at 41.2, at least that has been reported this week.

And also on top of that, we also see that the yards are hiking their ideas, and we are not able to kind of repeat, what was done and what we did back in Q2 of this year. So generally, I will say that both second hand prices and newbuilding prices indeed should have gone up by something between 5% and 10%.

So that kind of concludes our presentation, and if you have any questions, you’re – please go ahead and ask your questions.

Question-and-Answer Session

Operator

(Operator Instructions) We will take our first question from Dan Togo of Handelsbanken. Please go ahead, your line is now open.

Dan Togo Jensen – Svenska Handelsbanken AB

Yes, hello, could you remind us of, or give some guidance on your coverage after 2015, how many days in the Panamax segment is sort of say covered?

Birgitte Ringstad Vartdal

2016 should be about the same as 2015. Some of the charters are requiring 2017. So beyond 2017 until 2020 we have four vessels, which would then, say that will have 20% coverage.

Dan Togo Jensen – Svenska Handelsbanken AB

At more or less the same rate that you indicate for 2015?

Birgitte Ringstad Vartdal

Yes, for 2016 it’s the same. Yes, it’s more or less the same rate, differs maybe with the 1,000 or 2,000.

Dan Togo Jensen – Svenska Handelsbanken AB

Okay.

Birgitte Ringstad Vartdal

You can look at our website. There we have all the charters listed.

Dan Togo Jensen – Svenska Handelsbanken AB

Right.

Birgitte Ringstad Vartdal

Yeah.

Dan Togo Jensen – Svenska Handelsbanken AB

Okay. And then on Korea Line, could you just remind me how much was released here in Q2 and how much will be released here during Q3?

Birgitte Ringstad Vartdal

Approximately 20,000 shares in Q2 and 150,000 more in Q4.

Dan Togo Jensen – Svenska Handelsbanken AB

Q4?

Birgitte Ringstad Vartdal

But what is important is that when we get release 150.000 there are also other creditors. So I think the free flow, so to say, will increase quite dramatically in November.

Dan Togo Jensen – Svenska Handelsbanken AB

Right. Okay. Thank you.

Operator

We have no further questions at this time. (Operator Instructions) Our next question comes from Hans Klaas who is a private investor. Please go ahead. Your line is now open.

Unidentified Analyst

Good afternoon Mr. Billung, good afternoon Birgitte. I only have one question for you. In 2013, what ripe out tonnage was purchased in on of 2012, combined. Does it concern you?

Herman Billung

I will say not really, I mean 2012 was absolutely basically. I mean, it was so little of obvious reasons. I think it’s positive right now still within controllable based on our demand. We are still not concerned, but we did obviously, we do not want to see a massive ordering end of the year, but right now it doesn’t look like that is going to happen.

Unidentified Analyst

Thank you.

Herman Billung

Thank you.

Operator

We have no further questions. (Operator Instructions) As we have no further questions, I’d like to hand back to our speaker for any additional remarks.

Herman Billung

We have no additional remarks from here. We just try to continue the same way we have done. We don’t foresee to take much contract coverage at the moment unless forward curve will say, it’s improving. And so I think you will see us being little bit more exposed at least for the 2014 more than you are being used in the past, and we will continue to search for investment opportunities, and that is kind of summarizing our strategy at the moment. And thank you everybody for listening in and we wish you all a pleasant weekend. Thank you, so much.

Operator

That will conclude today’s conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.

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