Gulf Resources: Cashing in on Bromine

Gulf Resources (GFRE.OB) is a leading provider of bromine and specialty chemical products in China, producing bromine, crude salt and other chemical products made from bromine.

Bromine and related chemical products are widely used in oil and gas exploration, papermaking and as industrial refrigeration chemicals, among other uses.

Some Background:

1. Where do you obtain bromine?

Bromine is never naturally found in its elemental form, but rather in compounds with other substances. The element is extracted from natural brine of halogen water.

2. How’s the distribution of global bromine reserves

When we talk about bromine reserves, it is actually about halogen water. Halogen water is not found in normal rivers or lakes. It is actually concentrated in three regions of the world: the U.S., Israel and China. And in China, halogen water concentrates in Shandong province, where GFRE is located.

3. What industries need bromine or its chemical products?

Basically, oil and gas field exploration, drilling, water processing, papermaking chemical agents and inorganic chemicals, agricultural applications and industrial refrigeration.

4. How do you define reserves in terms of available halogen water?

Halogen water is not like iron ore, coal mine or even oil. It flows under the ground in a relative large area. So it is hard to define whether the company really owns the reserve like iron or coal miners. Thus, usually the government would issue license and land use rights to explorers. The company with license and longer land use rights that cover larger areas would be a clear winner.

5. What is the price trend of bromine?

The peak of Bromine price was in August 2008 at 18,000RMB/ton. It dropped to 11,000RMB/ton in January 2009, but jumped back to 15,000RMB/ton in September 2009. The most recent press release from GFRE showed that Bromine price has increased again.

Based on this rudimentary knowledge of bromine, it is clear that bromine is in great demand from diversified industries and users. Then, the special situation of Chinese bromine reserve and government made GFRE more interesting.

China now has only issued six license for bromine exploration in Shandong province. In 2006, the government announced that no additional licenses would be issued and started to close down unlicensed producers. As the largest bromine producer in the market with about 25% share, GFRE has a strong position in the market. And as the largest player in the field, GFRE can leverage the policy to consolidate other smaller players to expand production and production and achieve the economies of scale.

The strong market demand is another positive factor for GFRE. China has remained a net importer of bromine due to strong domestic consumption. In 2008, China produced 170,000 tons of bromine to meet the demand of 200,000 tons. Domestic production is falling short of meeting this growing demand.

Company Highlights

GFRE recently completed an acquisition deal and is ramping up production to begin at the end of November. It now has 50-year mineral and land use rights on 23,109 acres of the richest bromine reserve land in China and access to more than 2.11 million tons of non-reserve mineralized materials.

Currently, bromine production revenue make up about 60% of GFRE’s total revenue. Other bromine chemical products account for 30%, while crude salt, the by-product of bromine production and a basic material in the chemical industry, accounts for a little less than 10%.

GFRE has stable demand from some major state owned companies like PetroChina (PTR) and Sinopec (SHI). These large customers have long term relationship with GFRE and GFRE usually gives them 90 days credit. Transactions with smaller customers, on the other hand, are most often simply cash deals.

The company seeks to grow itself through acquisition and organic growth. The company is looking to acquire smaller explorers to expand its bromine reserves and also to upgrade its older chemical production line to produce more value-added bromine chemical products.

Financials

Strong revenue growth: Revenue grew from $31.7 million in 2006 to $87.5 million in 2008.

Strong profitability: Gross margin increased from 11.2% in 2006 to 35.2% in 2008; Net income margin increased from 3.8% in 2006 to 22.4% in 2008.

Strong balance sheet: $37.96 million cash and only $5.68 current short term/current portion of debt. No long term debt. Accounts payable is just $17,791 million. So, the company can sufficiently self-finance its growth after paying off all its liabilities.

Positive operations cash flow: The company generates positive operations cash flow that, in the past, has been good enough to cover its Capital expenditure.

Finally, let’s do a simple valuation.

Enterprise value = market cap + Debt + Preferred Stock – Cash

It has 31.6 million outstanding shares. Current market cap is around $285 millions.

So the Enterprise Value = 285 + 5.68 – 37.96 = $262.72 millions.

GFRE currently produces 37,000 tons bromine/year. Considering its 50-year mineral and land use rights, in total it has about 50 x 37,000 ton = 1.85 million tons available in reserve (this is just a rough estimate, not including future acquisition).

So you are paying $262.72 million to purchase 1.85 million tons of bromine, which represents $142/ton of Bromine. If we use 1$ = 6.9 RMB, it is actually around 980 RMB/ton.

At the current price, this is a huge bargain. If we consider future expansion and its monopoly position, it is worth much more than its current price.

Comments

[jarco:]

Is this the old Gulf Resources & Chemical who mined lead in Idaho, salts in Salt Lake, Utah, etc?

Oct 30 11:02 AM

[Mark Situ:]

no


On Oct 30 11:02 AM jarco wrote:

> Is this the old Gulf Resources & Chemical who mined lead in Idaho,
> salts in Salt Lake, Utah, etc?

Oct 30 07:00 PM

[Rai:]

Dont forget the chemical division of GFRE, which is growing at over 50% yoy!

Oct 31 02:29 PM