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L&L Energy, Inc. (NASDAQ:LLEN)

F1Q 2014 Earnings Call

September 10, 2013 04:00 pm ET

Executives

Dickson Lee – Chairman & Chief Executive Officer

Clayton Fong – Vice President of US Operations

Ian Robinson – Chief Financial Officer

Analysts

David Sheridan – Boenning & Scattergood

[Mark Gold] – Analyst

Matt Stein – Analyst

Rufus Thorpe – Private Investor

Adam Weiss – Private Investor

Kevin McIntyre – Private Investor

Carson Cooper – East Hill Capital

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the L&L Energy Incorporated F1Q 2014 Earnings Conference Call. (Operator instructions.) As a reminder, this conference is being recorded for replay purposes.

With us today are L&L’s Chairman and CEO Dickson Lee, Vice President of US Operations Clayton Fong, and Chief Financial Officer Ian Robinson.

Before I turn the call over to Mr. Lee may I remind our listeners that in this call management’s prepared remarks contain forward-looking statements which are subject to risks and uncertainties and management may make additional forward-looking statements in response to your questions. Information regarding forward-looking statements except for historical facts contained herein are pursuant of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements involve known and unknown risks as well as uncertainties which may cause actual results in future periods to differ materially from forecasted results. Actual results may differ from those discussed today and therefore we refer you to a more detailed discussion of the risks and uncertainties in the company’s filings with the Securities and Exchange Commission.

And now it is my pleasure to turn the call over to Dickson Lee. Mr. Lee, please go ahead.

Dickson Lee

Thank you, Operator, and good afternoon to everyone. I’d like to welcome you to our F1Q earnings call. We are pleased today to share with you our financial results for the quarter and to discuss some of the recent developments.

F1Q 2014 that just ended July 31, 2013, recently was one of growth for L&L. Our coal production increased significantly. Revenue grew impressively and we improved our profitability as we reworked our mix of business for more profitable segments. Our balance sheet remained strong and we believe we are poised for significant growth in the quarters ahead.

Looking at our mix we continued to emphasize our high-margin mining business while deemphasizing lower-margin washing. Our mining segment is now over half of our revenue. During the quarter all our mines were open and in production as planned. We produced about 228,000 tons in our five company-owned mines, an increase of 80,000 tons year-over-year. The increase was due to acquisition of Luozhou and Lashu Mines and continued ramp up of Weishe Mine.

Because we are nearing capacity we are investing to expand these mines. Our goal is to double production upon completion of the expansion projects. The three Guizhou mines which are Luozhou, Lashu and Weishe should be able to produce 1.2 million tons by 2015. The two newest mines, that is Luozhou and Lashu, are now at a capacity of 200,000 and 150,000 tons per year respectively. The Weishe Mine which is increasing is currently rated at 150,000 tons per year and is still expanding to 450,000 tons capacity. Our DaPuAn and Su Stong Mines will be expanded to 300,000 tons per year each.

In addition to the organic growth we expect to continue acquiring attractive mining assets. In addition to Guizhou Province we are considering to expand into North China. We have identified two large mines that are potentially acquisition targets. Each is producing over 1 million tons per year. Of course we cannot guarantee that we will consummate any acquisition since all deals depend on pricing, financing, regulatory approval and other factors.

In order to fund those target acquisitions we formed a three-way strategic alliance with a subsidiary of one of China’s largest enterprises, that is Tianjin Materials and Equipment Company, we have been talking with them for many years; and a private logistics company. Tianjin will provide most of the funding for the mine acquisition as we L&L will presell the coal to Tianjin for the mining targets. The private logistics company would also like to play because of our management capabilities (inaudible). Upon acquiring the controlling interest L&L will operate those target mines.

Regarding the TDR, as you are aware we are preparing a Taiwan Depository Receipt, or TDR, listing to further enhance our ability to raise capital. We expect that the application should be submitted in September which means this month since nearly all of the work is completed.

As announced earlier, the accounting review of our F2012 and F2011 financial statements are completed and the current F2013 review by KBMG should be done shortly. KBMG has indicated that they will issue an unqualified opinion of the F2012 and F2011 financial statements, and it is their customary practice that KBMG does not issue formal written opinions until the entire opinion of the GDR packages is submitted to the Taiwan Stock Exchange because KBMG in Taiwan is also subject to Taiwan regulators.

As is customary with the TDRs, we expect to declare cash dividends. So that is customary to Taiwan TDR shareholders which of course will be paid, the cash dividends if any will be paid to all US shareholders. With that I’d like to turn the call over to our CFO Ian Robinson who will give you details of our F1Q financial results. Ian?

Ian Robinson

Thanks, Dickson. Before I begin the discussion of financial results please note that we will make comparisons only to the continuing operations in the previous quarters. This will aide in your comparing and understanding our results. Last November when we acquired Luohou and Lashu Coal Mines we paid for them in part by transferring our ownership interest in our ZoneLin coking plant and DaPing Mine. The contributions from these operations are classified as discontinued operations and we are excluding them from the F1Q 2013 results when making our comparisons.

This quarter net revenue increased 29% year-over-year to $51.2 million. Our coal mining and wholesale segments contributed to growth while our washing business declined slightly. Note that we had $5.9 million of revenue in F1Q 2013 that is now classified as discontinued and not used in our year-over-year comparison.

Here are the details on each segment. Coal mining revenue was $25.0 million, an increase of 118% year-over-year. The growth was a result mainly of increased production volume as Dickson noted earlier. Coal production in the quarter was up 53% year-over-year to 228,000 tons. Pricing has stabilized for our operations. We have only seen a modest reduction from the winter in line with customary seasonal adjustments.

Our goal wholesaling revenues were $13.0 million, an increase of 5% year-over-year. This segment is expected to grow faster due to greater availability of coal, greater market share and a more long-term contract with both local customers and state-owned enterprises. In particular, we are ramping up sales under the contract of one large customer, [DaPan] which is helpful to drive growth.

Coal washing revenue of $13.2 million was down 26% year-over-year. We idled our Hongxing washing plant late in the quarter as we evaluate the operation on when both long-term and short-term cash can best be deployed.

Gross profit grew 92% year-over-year to $19.1 million representing a gross margin of approximately 37% compared to only 25% in the same quarter last year. Our improved profitability was the result of a better mix of business. Mining is our most profitable business while washing is less profitable.

Mining was nearly half our revenue this quarter compared to 28% in F1Q last year. Conversely washing was only 26% of revenue mix this quarter compared with 43% one year ago. As mining continues to grow we expect to further leverage our fixed costs and improve gross margin even more.

The selling, general and administrative expenses of $4.4 million increased as you would expect for a growing company but declined as a percentage of revenue. The SG&A was only 8.51% of revenue in this quarter which was below the 9.22% in the same quarter for the period in F2013. We will continue to focus on reducing our corporate overhead wherever possible.

Net income attributable to L&L shareholders was $10.7 million, an increase of 133% year-over-year from $4.6 million. This translates into a fully diluted per share amount of $0.27. This represents a growth of 108% when compared to the year earlier quarter’s 13% based on continuing operations. Note that the $2.7 million, our total income this quarter was allocated to non-controlling interests and the discontinued operations contributed $0.04 per share last year.

Our balance sheet remains quite solid. Cash of $9.0 million was slightly down from the April quarter despite increasing our mine and equipment assets significantly. We have total assets of $342 million, nearly all of that is tangible – that is not intangible, goodwill, etc. Total liabilities increased only $3.9 million during the quarter. Operations supplied $23.3 million of cash flow which we invested in acquired property and mine construction. We had investing activities of $25.7 million of cash.

Because of our rapid growth and the capital-intensive nature of our business we do not expect to raise additional funds to sustain our growth. At the moment we are trading at around about or just over 50% of our booked value. Okay, back to you, Operator, for the Q&A.

Question-and-Answer Session

Operator

(Operator instructions.) The first question comes from David Sheridan from Boenning & Scattergood.

David Sheridan – Boenning & Scattergood

Hi, Dickson. I appreciate you being on the conference call. My congratulations on a very impressive quarter especially since seasonally it’s your safest in terms of coal pricing. It seems to me that since the company is going forward with the TDR application, KPMG has basically cleared the last three years of all their financials. Now, will they allow you to make a press release on that achievement or will it just be issued side-by-side with the TDR application?

Clayton Fong

David, this is Clayton Fong. How are you doing?

David Sheridan – Boenning & Scattergood

Alright, Clayton.

Clayton Fong

I appreciate your question. It’s the middle of the night, I think it’s 3:00, 4:00 in the morning for Dickson right now so he read a statement and then he bumped off. But to answer your question, I appreciate your thoughts. With regard to the TDR application as Dickson said we do expect to do it within this month. Probably our goal is to have it submitted within September. And your question with regard to the KPMG, yeah, they have said that they were engaged to issue an opinion for the TDR application and they will submit their work with the application. So it probably won’t be sooner than the actual application is submitted. So side-by-side with the application in other words.

David Sheridan – Boenning & Scattergood

That’s usually the norm, I just wanted to check with you. Well thank you very much and a great quarter, great quarter.

Clayton Fong

Thanks, David.

Operator

The next question comes from [Mark Gold from Sano Value].

[Mark Gold] – Analyst

Hi, Clayton. Congratulations on a strong F1Q. My question is on your year-end conference call you said a few times the Hongxing coal washing business had been trending up during F1Q. I’m surprised you decided to shut down Hongxing since it’s building profit in this segment for you and it’s a key part of the vertically oriented business plan. Can you tell me how you were unaware of the shutdown and how you plan on replacing those revenues?

Ian Robinson

It’s Ian Robinson here. Basically the Hongxing was idled and management are looking at this. But the whole reason for Hongxing, it’s really you’re looking at the short-term and long-term situation over the period. There is a need for cash for the operation of Hongxing. Because it’s a third-party washing venture, operation, we have to buy in stock to actually wash and that’s small-margin and it’s not a big operation. So it was felt at the time, because they started the DaPing contract it was better to put – because that’s a huge contract of 1 million tons it was better to put those funds there and evaluate Hongxing to see what we do going forward.

But the DaPing contract was very important for us and we need to fund that, so just the allocation of funds at the time was more appropriate. There is no intention to sell the operation at this stage until an evaluation is done by management and depending on what happens then we will make the appropriate announcement.

[Mark Gold] – Analyst

Right, but how did we not know it was shut down on July 31? Clayton said that the business was actually trending up on July 31.

Clayton Fong

Let me respond to that. Actually I think what, really it’s kind of a twofold piece of this. I don’t think it was shut down per se; I believe what we said was we were winding down. There’s sort of a twofold process to this. I think what Ian was trying to say is we’ve been marshaling cash for two purposes. I think the strategic wholesale contract of DaPing is a very critical one for a lot of reasons. I won’t get into a lot of detail at this point in time but we’re kind of playing with the bigger boys and it’s sort of a club over there that it’s very important to execute and execute very well.

Both wholesaling and washing require a lot of capital and cash to operate, and so I think from a tradeoff side we moved some of the cash from one place to the other. But it is also true that we wound that down and then we are now evaluating the best way to deploy both short-term and long-term cash from two sides of the coin. One side of the coin is these other wholesale agreements – and remember that Hongxing is in Yunnan Province and a lot of our activity on wholesaling is going to be more focused in the in the Guizhou Province as we really ramp that piece up where the most growth is.

Two, going forward I think we have access to other washing facilities. Part of the winding down of the Ping Yi facility or the sale of the Ping Yi facility gave us access to their washing facilities, and there is another washing facility that our Tai Fung operation has access to. So what happened I believe, and I’m going by memory – in the last call there was a question regarding what the breakdown of the various washing was, and I didn’t have those numbers in front of me.

So overall we have seen a trend down. Year-over-year the trend was up which is what we were talking about for that quarter on the earnings call and I said I didn’t have a quarter-over-quarter number in front of me, just to correct.

[Mark Gold] – Analyst

So your washing was down sequentially but not year-over-year is what you’re saying. Because you said it was trending up but you’re saying from the past year.

Clayton Fong

Year-over-year the trend numbers were up. I had the year-over-year numbers in front of me, I didn’t have the quarter-over-quarter numbers in front of me. And I could go back and take a look right now. It’s not just quarter-over-quarter, it’s quarter-over-quarter for each facility.

[Mark Gold] – Analyst

Okay, I must have misunderstood that. You already touched on my second question a little bit regarding the production of your two newest mines, Luozhou and Lashu. Were they operating at 100% throughout the quarter? I know you said they’re at 100% now but was it throughout F1Q?

Clayton Fong

The two newest mines through F1Q? They ran as expected, recognizing that every mine is subject to sort of slowdowns, ups and downs and what have you. But yes, the end production on all three of our mines is about 228,000 tons which is right on schedule with regards to all of our mines. And that equivocates to a little over 900,000 tons. Our last quarter was I think 196,000 tons I believe and what I stated was there was a little bit of a shutdown for New Years and if you did the math for a week or two shutdown you kind of project forward.

So if you kind of projected forward that would be right in line with expectations, so yes, the point is right in line with expectations. Does every mine operate full speed every single day? Not necessarily. There are a little bit of ups and downs and you kind of have to average them out, average them out over the year, average them out over the quarter. These mines are from a long-term side ahead of schedule of what we had. We kind of ramped that scheduling up a little bit. So we feel very good about those three Union Energy Mines as well as the DaPuAn and Su Stong Mines right now in terms of producing on schedule.

I also warned a little bit on the last call though that as we move into this sort of consolidation period it sometimes is a little hard to predict. So going forward I would say we feel good about it but you always have to have a little… You don’t know when there’s going to be an accident nearby potentially, not in one of our mines but in a nearby mine and they may slow down or decide to inspect a lot of the mines and what have you. You also have to pay attention to the regulatory environment and what have you.

But it would appear at least at this point in time that the government has not been extremely intrusive with regards to both its regulatory stuff and what have you, so it seems to be for lack of a better word a little lenient these days. That may be an indication of just trying to let the economy grow, so to speak. So we’re feeling good about it and we’re feeling good about the production. It’s right on schedule with what we expected.

[Mark Gold] – Analyst

And do you have the production breakdown on each of those for F1Q, of Luozhou and Lashu?

Clayton Fong

We don’t usually do the formal announcement of each individually. I think we do that breakdown usually on annual numbers but we don’t necessarily give it out on the quarterly. So I don’t have the breakdown in front of me for mine but it’s pretty much on target.

[Mark Gold] – Analyst

Okay, thank you very much. Have a great day.

Operator

The next question comes from Matt Stein from [Sano Value].

Matt Stein – Analyst

Hey Clayton, how are you? Thank you. Who are the creditors that sold their receivables to Iron Ridge? What were their names and the amount sold and was Dickson Lee a creditor participating in that deal? And when did L&L disclose this?

Clayton Fong

I think there is a disclosure in the (k) that basically lists all of the information you’re asking for. I don’t recall the exact name of the creditor. I do know that the creditor, there was one primary creditor that was over $4 million, there was another smaller creditor. And then I think Dickson was part of that to the tune of around $800,000 out of over $2 million that he owed. That information is available in both the (k) and I believe in the 8(k) as well.

Matt Stein – Analyst

Great, thank you.

Operator

The next question comes from Rufus Thorpe.

Rufus Thorpe – Private Investor

Gentlemen, I have a comment and also I have a question. My comment is that your management has done such a great job over the last four or five quarters at growing the revenues and earnings, both quarter-over-quarter and year-over-year. And but however, when management takes stock options that are awarded as part of a compensation plan and you sell those shares in the open market at 50% of the booked value you are sending a message to short sellers and the investment community that those shares are going to be worth less in the future. So that’s just my comment.

Now I’d like to follow with a question. From my experience as an investor, most quality shareholder-friendly companies provide earnings guidance for both quarterly and annual earnings guidance. So my question is could you provide revenue and earnings guidance for F2Q 2014? And if not what is blocking management’s vision?

Clayton Fong

Rufus, thanks for the question. Let me throw a little bit out and then I’ll defer to Ian to also comment. I appreciate the compliment. Over the last four to five quarters we have had astounding results at difficult times. Both the capital markets, China markets and coal markets were extremely challenging over the last couple of years and yet we’ve been able to execute our broad business plan overall; and really kind of improve the positioning of the company over that period of time in spite of all of that. So I appreciate that.

With regard to the selling of shares I’m not 100% sure what you’re referring to. Management as a whole has not really sold a lot of shares that I’m aware of, of any substantial number; and I don’t know of anyone who’s selling them at a discount.

Rufus Thorpe – Private Investor

Well according to information that’s widely available, insider transactions are reported at many different places and that is what’s being reported. Over the last year more than 800,000 shares were sold by insiders and there were no purchases other than what was awarded as stock compensation as an option.

Clayton Fong

I’d have to go into the detail for you, and I’m happy to have a second conversation with you. We have trading windows by which when we can basically execute some shares. Some individual management will on occasion file, I think I only know of one manager who subsequently left the company recently who did put a 10B5 plan together and sold some shares. And many people sell shares just because of cash flow and other issues, so they set up those plans and then they get executed regardless of where the market is.

I do know that there was also, there may have been a transfer of shares with our Chairman Dickson Lee when he leant money to the company. But he leant the proceeds of that sale to the company which is even more of a… I would view that as having confidence in the company less than the other way around. And that was probably last year when quite frankly liquidity was extremely difficult. And particularly around the end of the year I do recall when our Chairman Dickson Lee leant money to the company – it was a function to complete the acquisitions that we made with Lashu and Luozhou.

Most of the acquisition was done with a trade of assets but there was a small amount of cash around, I think it was just under $2 million that needed to be paid. And I think in the beginning we thought that we might be able to raise it but at that point in time the stock price was low so Dickson basically sold some of his shares in order to fund that. He takes the hit; not the company and leant the proceeds to the company. That to me is a sign of confidence, not a sign of lack of confidence. So it may just be that it wasn’t explained that well.

With regard to the guidance, and I’ll let Ian add to that, but the reason we haven’t done guidance over the last couple of years is in this consolidation market it has been extremely difficult to predict particularly in 2012 when both pricing was very, very volatile but also so was the operating environment. And so what we’ve done is we’ve not issued guidance because it was a very difficult market to issue that guidance in both from a pricing side and an operational side.

It seems to have stabilized quite a bit at least both from the pricing side and the operational side and we are looking at whether we are more comfortable going forward issuing a guidance range potentially. But in this consolidation environment it has historically been in terms of the operating environment and that’s the main reason. Ian, I didn’t know if you wanted to add anything to that.

Ian Robinson

Not really. But basically we had three quarters of growth and the last three quarters we’re doing well, and we continue that process. Now to issue guidance you’ve got to be certain of what’s going on and we’re certain with the existing mines. We don’t have a crystal ball with respect to what government’s about and what they might want to do; and if they close down mines close to us because of problems in those mines we get affected.

So it is risky to give proper guidance but I think our performance shows that we are determined to make sure that our growth is continuing. And when we make acquisitions we also make them on an accretive basis. We’re very, very aware that we want to improve shareholders’ value and I think that we’ve done that. I think that that is our aim and that’s what we want to do to continue to create more shareholder value.

Rufus Thorpe – Private Investor

Thank you very much, I appreciate the explanation.

Operator

(Operator instructions.) The next question comes from Adam Weiss.

Adam Weiss – Private Investor

Hi. Gentlemen, congratulations on a very strong quarter and of course thank you for staying up so late – with the time difference I appreciate it. My question was actually for Dickson: how come Dickson needed to assign the $800,000 that L&L owed him to Iron Ridge? And how come L&L did not disclose that on the 8(k).

Clayton Fong

Dickson is not on the call anymore since it is so late, and I appreciate the call, Adam. I think as I’ve stated I believe it is disclosed on the 8(k) and you know, I won’t answer the question with regard to why he did so. But it was disclosed in the 8(k).

Adam Weiss – Private Investor

Okay, I read through, I didn’t see it.

Clayton Fong

The attachment has a stipulation and I believe it includes that. The 8(k) has an attachment and the attachment is a stipulation and it includes that.

Adam Weiss – Private Investor

The 8(k)(a), correct but not the original 8(k).

Clayton Fong

Yeah, the original 8(k), there were some technical problems with regard to when they filed it, and so the (k)(a) was done. And then also in the proxy it discloses and discusses it as well.

Adam Weiss – Private Investor

Correct, yeah, I saw that too. And then just a quick follow-up on that: how many shares have you issued to Iron Ridge so far and do you know the average price?

Clayton Fong

I don’t have that number in front of me. I believe we had an issuance initially of about, it was north of 2 million shares is my understanding. I can get back to you with the exact number if you want.

Operator

The next question comes from Kevin McIntyre.

Kevin McIntyre – Private Investor

Hello. My question is where do you see the price of coal going across your products?

Clayton Fong

Yeah, I appreciate that. That’s an important, that’s a very important macro and so let me give… What we’ve been experiencing and what we’ve been seeing on the open market is a little bit of a different animal. Backdrop-wise, clearly last year, early 2012, summer 2012 were very, very tough markets for the coal business. We saw record warm winters here in the United States; we saw shale gas supplies very high and gas actually dropped to under $2 and so it had a pretty devastating impact on coal prices here which translated into worldwide coal prices.

And so where demand did not drop in China – as a matter of fact, demand year-over-year has gone up about 6% in China – what you saw was very inexpensive import coal in China. And so on a delayed basis we saw prices drop pretty precipitously last summer. They’d been rising almost a little too high for several years before and what we saw was a 20%, 30% drop in pricing I guess in the coastal areas of China.

Two things: one, as Ian stated in his comment before we’ve seen quite a stabilization of pricing for us. Now, we’re a little bit mitigated from that. The pressure on pricing is coming mostly from cheap imports; i.e., coming from Australia, to some degree Indonesia and other places. And what happens in our inland area, one, we’re insulated from that somewhat so we actually saw only a very modest reduction in our average price F4Q to F1Q – under 5%. That’s a really good sign for us. I think that was partly that you saw a mitigation but what happens is our pricing, we didn’t get as high a price during the heavy times but we’re also not getting hit as hard and it’s partly because we’re in a coalmining country, we’re not near the coast – we don’t really experience the vicissitudes of the open coal markets and coal trade.

The other point is that the economy in our area, for example in Guizhou Province has been, even though you saw a slowdown in coastal China overall – and by the way, we think to a reasonable number China has taken their growth from the 8.0%, 9.0%, 10.0%, 11.0% number down to 7.5% - we think that’s a positive thing. What you’ve seen in the Guizhou Province in inland China is growth continues to be double digits. You kind of have two Chinas. You have the inland China that still continues to really need to develop and grow infrastructure; and you’ve got coastal China that has grown a lot more. So you’re seeing much stronger growth in those areas.

So that said I think the key is that pricing has been softer for certain areas but for us it’s actually been a lot more stable. We would view that as very positive. So basically the drop in the marketplace has been somewhat in line with what we would expect for seasonal adjustment but for us it’s actually even been less. So we’ve seen a very modest increase.

I want to make a comment about the lower prices though, and I think with the lower prices the way our acquisition model is structured is actually a big plus for us because we have historically bought our mines at a multiple of EBITDA. And so we would much rather make these acquisitions at a, if you want to call it “cyclical low” in terms of pricing. And that’s where we believe we are. We’re seeing a cyclical low, 2012 was an exceptional low and going forward we are kind of modeling conservatively stable pricing that’s in line with seasonal adjustment. And for us it’s been a little better than that but nonetheless we’re modeling that way.

So we feel really good about the broad direction. We think that the softer pricing is actually a good buying opportunity for us and the key for us is to buy good properties with good margins, and if there’s still strong margins at these lower prices we think it’s going to be a good bang for the buck for shareholders. We’re very pleased with the TDR and the strategic alliance with Tianjin Fuhao because those are things that we think will help us to really be able to execute potential deals going forward in a very accretive way. Sorry for the long answer.

Kevin McIntyre – Private Investor

Can I hit you with a follow-up?

Clayton Fong

Sure. I may not have quite answered the question with that long answer so I’d be happy to give you a follow-up.

Kevin McIntyre – Private Investor

I was just looking at the profile of your company on Yahoo. There’s 1300 employees – what’s the breakdown from Washington to China?

Clayton Fong

Our Washington staff is very small – this is our headquarters staff. Our operating divisions are in China. The vast majority of those 1300 employees are mine or washing or facilities on the ground. So what you’ve got, we’ve got I don’t know, a dozen or so people in our office here in the United States and we’ve got a Beijing office with a half a dozen or so. We’ve got a Kunming office with a couple of dozen people. So those are more administrative, headquarters type offices but the vast majority of the staff are actually in our operating divisions at the mines, at the washing facilities and what have you.

Kevin McIntyre – Private Investor

Thank you.

Operator

The next question comes from Carson Cooper from East Hill Capital.

Carson Cooper – East Hill Capital

Hi guys, thanks for the call. I guess my question was on the Iron Ridge transaction – I know there’s been a lot of commentary on that. I just wanted to understand who the creditors were and why there wasn’t another option. If there’s $9 million of cash on the balance sheet and you guys are generating cash sort of before discretionary investment why was this sort of a hurried transaction and who approached who? Did Iron Ridge buy the claims and then sort of accelerate on you guy and you just didn’t know this was happening or did you approach Iron Ridge?

Clayton Fong

Well, I don’t know exactly who approached who but I suspect they approached us. But the point on this is we’re in a place right now where the ramp-up of [DaPan] is a very capital, cash… To give you an example, wherein it is a low margin business – i.e., wholesale we typically make 8% to 10% gross but net say 4% to 5% there are a couple of key things. There’s an incredibly important strategic value to executing with the biggest players in China and what we’ve done in the past and when we first entered into the coal space, in the very beginning of the consolidation we were only able to buy the smallest mines, 150,000 ton mines, 90,000 ton mines that really were run by mom & pop guys.

What we were able to do as we kind of lily pad forward into a higher quality of mine as well as larger end users we’ve begun to really be able to work with the largest mining companies in China. And that’s a pretty small club and execution is very important. In addition to that it’s important, I think as you saw the announcement of the Tianjin Fuhao, part of what we’re doing is trying to utilize the end user in a way that would provide cash on a prepayment basis for that. Well, if we’re not able to execute our wholesaling side with big entities like [DaPan] it might compromise our ability to really convert that opportunity with Tianjin Fuhao. So we saw that as a very critical, critical thing.

The other point is that coal pricing has been a little more volatile this year so it was important to purchase a large block of coal in August which is traditionally the lowest price of the year. So there were a lot of moving parts that went into the timing and why. I think it is a very strategically important time. The good news is the amount was relatively modest and so but…

Carson Cooper – East Hill Capital

What was the approximate cost of the payables?

Clayton Fong

I’m not sure what you mean.

Carson Cooper – East Hill Capital

The cost of funds, the effective cost of funds of the payables.

Clayton Fong

You mean what’s the discount?

Carson Cooper – East Hill Capital

No, what was the cost of funds in terms of did they accrue some sort of interest or they were just basically face?

Clayton Fong

I don’t have in front of me what they paid. I believe they paid face value. Are you talking about did Iron Ridge pay face value for the payables?

Carson Cooper – East Hill Capital

No, the payables on your balance sheet, the liabilities – what was the cost of them?

Clayton Fong

Oh, I don’t have that in front of me. They may have been, I saw 10% on at least one of them, probably in that ballpark.

Carson Cooper – East Hill Capital

So they were like single-digit costs and now what’s happened is effectively you’ve swapped them for equity and the company trades at a couple times cash flow?

Clayton Fong

Yeah, but I think you need to look at the broader strategic piece to that that really was occurring there. I’m happy to talk to you offline and talk more.

Carson Cooper – East Hill Capital

I guess the final question is the shares that are issued looks like it was about 8% of the float to me? Is that about right?

Clayton Fong

I don’t believe so. I don’t believe it’s that much.

Carson Cooper – East Hill Capital

What’s the number?

Clayton Fong

Under 5%.

Carson Cooper – East Hill Capital

Is that of the shares outstanding or of the float?

Clayton Fong

I’d have to take a look. I don’t know the number right offhand.

Carson Cooper – East Hill Capital

And then I guess the final question is it looks like from the present transactions and structure of the deal that their intention is to sell these in relatively short order. Is it true that they have an option to get more shares as the stock depreciates and they sell? Is that how the deal’s structured?

Clayton Fong

There is a forward reset in that project. The good news is what we’ve seen is since closing the deal we saw a reduction straight up but we’ve rebounded quite handsomely as we’ve gone into the earnings. So hopefully what people will do is focus less on a strategically-important modest increase in capital that was necessary to execute some deals internally and focus on the broader, bigger picture side. And I think that’s what we get with the announcement of these earnings. And more importantly how the execution of those deals and the small amount of cash that was necessary for the execution of those deals was with incredibly important strategic partners.

So from a timing side there were a number of things but the bottom line is the company’s doing well from the operational side. Our earnings are growing. Our production is growing and our revenues are growing and that’s really the bottom line. So whereas I appreciate you’re trying to dig into this I’d just refer you to the 8(k) which gives literally the entire doc and then we don’t have to go into kind of too much detail on the call. I appreciate the question.

Operator

Ladies and gentlemen, that is all the time that we have for questions today. I will now turn the call back over to Clayton Fong for closing remarks. Mr. Fong?

Clayton Fong

Thank you, Operator. Before we’d conclude I’d like to give a couple of reminders. First and foremost our 2013 Annual General Shareholder Meeting will be held at the company offices here in Seattle, Washington, on September 16th at 1:00 PM. All shareholders are welcome to attend this event. We encourage you to come and visit with us to meet your management team and take the opportunity to ask questions and learn more about your company. We really enjoy and appreciate the opportunity each year for the General Shareholder Meeting.

Secondly, a replay of this call is available. The number for this replay is 855-859-2056. For international calls it’s 404-537-3046. Please use the conference ID number 55365832. And other than that let me summarize what we talked about today.

F1Q 2014 was one of progress for us. Revenue grew impressively and we improved margins as we reworked our mix of business toward more profitable segments. Coal production increased significantly year-over-year and we have prospects to further grow production both organically as well as through acquisitions. Our balance sheet remains strong. The alliances with our very strong partners and capital structure and changes via the TDR will further enhance our ability to fund growth, particularly accretive opportunities in acquisitions.

We believe we are poised for meaningful success in the quarters ahead, and this concludes our F1Q 2014 Earnings Conference Call. We look forward to updating you on our progress in the next quarterly conference call later this year. Thank you very much, now you may all disconnect.

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